UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

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

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

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

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

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

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

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

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

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

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

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

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

Based on the closing sale price for shares on June 30, 2011, the aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant was $28,316,770.

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

Common stock, $5 par value	9,154,936 Shares
Title of Class	Shares Outstanding at January 31, 2012

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement dated March 14, 2012, are incorporated by reference into Part III of the Form 10-K report.

FIRST M&F CORPORATION AND SUBSIDIARY

CROSS REFERENCE INDEX

PART I		Page
Item 1	Business	3
Item 1A	Risk Factors	15
Item 1B	Unresolved Staff Comments	17
Item 2	Properties	17
Item 3	Legal Proceedings	17
Item 4	Mine Safety Disclosures	17
PART II
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	18
Item 6	Selected Financial Data	21
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	51
Item 8	Financial Statements and Supplementary Data	52
Item 9	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	111
Item 9A	Controls and Procedures	111
Item 9B	Other Information	111
PART III
Item 10	Directors, Executive Officers and Corporate Governance	112
Item 11	Executive Compensation	112
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	112
Item 13	Certain Relationships and Related Transactions and Director Independence	112
Item 14	Principal Accounting Fees and Services	112
PART IV
Item 15	Exhibits, Financial Statement Schedules	113

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

2

FIRST M&F CORPORATION AND SUBSIDIARY

PART I

BUSINESS

General

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

The Bank was chartered and organized under the laws of the State of Mississippi in 1890, and accounts for substantially all of the total assets and revenues of the Company. The Bank is the sixth largest bank in the state, having total assets of approximately $1.569 billion at December 31, 2011. The Bank offers a complete range of commercial and consumer services at its main office and two branches in Kosciusko and its branches within central and north Mississippi, including Ackerman, Brandon, Bruce, Canton, Cleveland, Clinton, Durant, Flowood, Grenada, Madison, Olive Branch, Oxford, Pearl, Philadelphia, Ridgeland, Southaven, Starkville, and Tupelo. The Bank also has banking locations in southwest Tennessee in Bells and Cordova. The Bank also has banking locations in central Alabama in Chelsea, Columbiana, Inverness and Pelham. The Bank also has a banking location in Niceville, Florida.

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

The Bank offers a variety of deposit, investment and credit products to customers. In 2010 the Bank became certified by the U.S. Treasury Department as a Community Development Financial Institution (CDFI). Therefore, the primary mission of the Bank became the promoting of community development, which means that the activities of the Bank are purposefully directed toward improving the social and/or economic conditions of underserved people (which may include low-income persons and persons who lack adequate access to capital and/or financial services) and/or residents of economically distressed communities. As a CDFI, the Bank is required to serve certain investment areas and targeted populations, generally defined by Federal regulations in quantitative terms as low-income or underserved. The Bank provides financial products and development services to these investment areas and targeted populations. These investment areas and target populations are enveloped within the Bank’s current geographical service footprint. Therefore, the Bank will continue to provide full commercial banking products and services to all of its current markets, but will place a special emphasis on providing development services and financial products and services designed for its CDFI-related investment areas and targeted populations. The financial services offered by the Bank include a variety of checking accounts, debit cards, automated teller machine access, an overdraft protection plan, money orders, official checks, check cashing services, safe deposit box services, internet banking and bill paying services, image checking statements, savings accounts, certificates of deposit, Individual Retirement Accounts, business checking, remote deposit capture/imaging services, treasury management services, ACH and direct deposit origination, sweep accounts, letters of credit, and secured and unsecured lines of credit with an emphasis on small business, consumer and agricultural loans. Development services that are offered include financial and credit counseling to individuals to facilitate home ownership, promoting self-employment, providing counseling and assistance with Small Business Administration loan applications, enhancing consumer financial management skills, and technical assistance to borrowers to enhance their business planning, marketing and management skills. Wealth management and Trust services are offered through the Kosciusko and Madison offices in Mississippi and discount brokerage services are offered through the Madison and Tupelo offices in Mississippi.

As of December 31, 2011, the Company and its subsidiary employed 460 full-time equivalent employees.

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

Certain of the information included in these discussions contains forward looking financial data and information that is based upon management’s belief as well as certain assumptions made by, and information currently available to management. Specifically, these discussions include statements with respect to the adequacy of the allowance for loan losses, the effect of legal proceedings against the Company’s financial condition, results of operations and liquidity, and market risk disclosures. Should one or more of these risks materialize or the assumptions prove to be significantly different, actual results may vary from those estimated, anticipated, projected or expected.

3

FIRST M&F CORPORATION AND SUBSIDIARY

Overview

In the opinion of First M&F Corporation’s management, the Company’s highlights during 2011 were as follows:

Facilities

• In December 2011 closed and sold a limited service branch in Ridgeland, Mississippi

• In December 2011 closed a full service branch in Jackson, Mississippi

• In December 2011 closed and sold a full service branch in Tupelo, Mississippi

• In December 2011 closed and sold a limited service branch in Oxford, Mississippi

• In December 2011 closed a limited service branch in Wilsonville, Alabama

Earnings

• Return on assets for 2011 was 0.27% while the return on equity was 4.00%. Return on assets for 2010 was 0.25% while the return on equity was 3.74%.

• Debit card revenues grew by 17.86%, composing 31.55% of deposit revenues

• Mortgage banking revenues increased by 15.18% in 2011 after decreasing by 13.27% in 2010

• Mortgage originations were $92.009 million in 2011 as compared to $80.139 million in 2010

• Property, casualty, life and health insurance commissions decreased from $3.796 million in 2010 to $3.618 million in 2011

Credit

• Loans held for investment decreased by 6.02% in 2011 due to the continuing effects of the general economic slowdown

• Net charge offs, as a percentage of average loans, were 1.05% for 2011 compared to 1.65% for 2010

• Nonaccrual loans as a percentage of loans decreased to 1.68% at the end of 2011 from 3.11% at the end of 2010

• 90 day past due accruing loans as a percentage of loans decreased to 0.06% at the end of 2011 from 0.09% at the end of 2010

• Foreclosed real estate balances were $36.952 million at the end of 2011 as compared to $31.125 million at the end of 2010

• Foreclosed real estate of $10.510 million was sold during 2011

• Expenses related to foreclosed properties were $1.477 million in 2011 while losses incurred on foreclosed properties through sales and write-downs were $5.874 million as compared to expenses of $1.373 million and losses of $1.573 million in 2010

Other

• As a result of branch closings and other cost-saving initiatives, full-time equivalent employees dropped from 499 at the end of 2010 to 460 at the end of 2011

• The Company remained well capitalized with a total risk-based capital ratio of 12.09% at the end of 2011 as compared to 11.30% at the end of 2010

CDCI

On September 29, 2010, and pursuant to the terms of the letter agreement (the "Letter Agreement") between the Corporation and the United States Department of the Treasury (“Treasury”), the Corporation closed a transaction (the “Exchange”) whereby Treasury exchanged its 30,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Class B Non-Voting, Series A, (the “CPP Preferred Shares”) for 30,000 shares of a new series of preferred stock designated Fixed Rate Cumulative Perpetual Preferred Stock, Class B Non-Voting, Series CD (the “CDCI Preferred Shares”). As a result of the Exchange, the Corporation is no longer participating in the TARP Capital Purchase Program being administered by Treasury and is now participating in Treasury’s TARP Community Development Capital Initiative (the “CDCI”). The terms of the Exchange are more fully set forth in the Letter Agreement.

The most significant difference in terms between the CDCI Preferred Shares and the CPP Preferred Shares is the dividend rate applicable to each. The CDCI Preferred Shares entitle the holder to an annual dividend of 2% of the liquidation value of the shares, payable quarterly in arrears, whereas the CPP Preferred Shares previously entitled the holder to an annual dividend of 5% of the liquidation value of the shares, payable quarterly in arrears. Other differences in terms between the CDCI Preferred Shares and the CPP Preferred Shares, including, without limitation, the restrictions on common stock dividends and on redemption of common stock and other securities, exist. The terms of the CDCI Preferred Shares are more fully set forth in the Articles of Amendment creating the CDCI Preferred Shares, which Articles of Amendment were filed with the Mississippi Secretary of State on September 27, 2010.

The transaction closed on September 29, 2010 (the “Closing Date”). The exchange of the Preferred Shares was a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. Under the terms of the Letter Agreement, the Company has agreed to register the Preferred Shares if requested by the Treasury. In addition, the Preferred Shares may be required to be listed on a national exchange if requested by the Treasury.

The Letter Agreement, pursuant to which the Preferred Shares were exchanged, contains limitations on the payment of dividends on the common stock (including with respect to the payment of cash dividends in excess of $0.04 per share annually) and on the Company’s ability to repurchase its common stock, and continues to subject the Company to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (EESA) as previously disclosed by the Company.

4

FIRST M&F CORPORATION AND SUBSIDIARY

As a condition to its participation in the CDCI, the Company was required to obtain certification as a Community Development Financial Institution (a “CDFI”) from Treasury’s Community Development Financial Institutions Fund (the “Fund”). On September 28, 2010, the Company was notified that its application for CDFI certification had been approved. 

In the opinion of management, the challenges and opportunities facing the Company going forward from December 31, 2011, are as follows:

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

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

• Build the capital strength and funding flexibility of the organization

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

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

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

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

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

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

• Enhance product offerings to and develop relationships with small business customers

• Leverage our CDFI status to improve services and products offered to gain penetration in the Company’s target market

• Develop corporate banking, especially in the purchased participations and SBA loan portfolios

Competition

The Company competes generally with other banking institutions, savings associations, credit unions, mortgage banking firms, consumer finance companies, mutual funds, insurance companies, securities brokerage firms, and other finance related institutions; many of which have greater resources than those available to the Company. We compete primarily on the basis of product and service quality and availability and the pricing of those services and products. The Company’s philosophy is that of a community bank in which personal service and responsiveness are of primary importance.

The Company has been certified as a Community Development Financial Institution and as such attempts to differentiate itself from competitors by providing community development services to a target market within its overall service area, thereby promoting growth in traditionally underserved markets. Community development services include such activities as educational seminars and presentations on financial literacy, banking and credit fundamentals offered to individuals, small businesses and various community groups.

Supervision and Regulation

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

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

5

FIRST M&F CORPORATION AND SUBSIDIARY

The Company is required to file annual reports with the Federal Reserve Board, and such additional information as the Federal Reserve Board may require pursuant to the Bank Holding Company Act. The Federal Reserve Board may examine a bank holding company or any of its subsidiaries, and charge the company for the cost of such examination. The Dodd-Frank Wall Street Reform and Consumer Protection Act (discussed in more detail below under “Recent Developments”) has removed many limitations on the Federal Reserve Board’s authority to make examinations of banks that are subsidiaries of bank holding companies. Under the Dodd-Frank Act, the Federal Reserve Board will generally be permitted to examine bank holding companies and their subsidiaries, provided that the Federal Reserve Board must rely on reports submitted directly by the institution and examination reports of the appropriate regulators (such as the FDIC and the Mississippi Department of Banking and Consumer Finance) to the fullest extent possible; must provide reasonable notice to, and consult with, the appropriate regulators before commencing an examination of a bank holding company subsidiary; and, to the fullest extent possible, must avoid duplication of examination activities, reporting requirements, and requests for information.

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

USA Patriot Act

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

Sarbanes-Oxley Act

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

Legislative and Regulatory Initiatives to Address Financial and Economic Crises

The Congress, Treasury Department and the federal banking regulators, including the FDIC, have taken broad action since early September, 2008 to address volatility in the U.S. banking system, including the passage of legislation, the provision of other direct and indirect assistance to financial institutions, assistance by the banking authorities in arranging acquisitions of weakened banks and broker-dealers, implementation of programs by the Federal Reserve Board to provide liquidity to the commercial paper markets and expansion of deposit insurance coverage.

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

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

6

FIRST M&F CORPORATION AND SUBSIDIARY

On September 29, 2010, as part of the TARP CDCI, the Company entered into a Letter Agreement with the Treasury Department, pursuant to which the Company exchanged 30,000 shares of a new series of Fixed Rate Cumulative Perpetual Preferred Stock, Class B Nonvoting, Series CD for 30,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Class B Non-Voting, Series A. As a result of the exchange, the Company is no longer participating in the TARP Capital Purchase Program being administered by the Treasury Department and is now participating in the Treasury Department’s TARP Community Development Capital Initiative.

The new administration and Congress have pursued a number of initiatives in an effort to stimulate the economy and stabilize the financial markets, including the enactment of the American Recovery and Reinvestment Act of 2009 and the Small Business Jobs Act of 2010, among others, and have altered the terms of some previously announced policies and programs.

Capital

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

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

The minimum guideline for the total capital to risk-weighted assets, including certain off-balance sheet items such as standby letters of credit ("total capital ratio") is 8.0%. At least half of total capital must be composed of common equity, undivided profits, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less goodwill and certain other intangible assets ("Tier 1 capital"). The remainder may consist of subordinated debt, other preferred stock, a limited amount of loan loss reserves, and unrealized gains on equity securities subject to limitations ("Tier 2 capital"). At December 31, 2011, the Company and the Bank were in compliance with the total capital ratio and the Tier 1 capital ratio requirements. Note 20 - Regulatory Matters of the Notes to Consolidated Financial Statements presents the Company's and the Bank's capital ratios.

Deposit Insurance Assessments

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

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

The Transaction Account Guarantee Program was set to expire on December 31, 2010. However, with the passage of the Dodd-Frank Act, the insurance coverage provided under the Transaction Account Guarantee Program has in effect been extended until December 31, 2012, with some changes. Perhaps the most significant differences between the current version of the Transaction Account Guarantee Program and the Dodd-Frank extension of the program are (i) that all banks are required to participate in the new coverage, with no opt-out available, and (ii) that interest-bearing NOW accounts will no longer benefit from the unlimited insurance coverage beginning January 1, 2011 (although IOLTA accounts will continue to benefit from the unlimited coverage).

7

FIRST M&F CORPORATION AND SUBSIDIARY

The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) changed the method of calculation for FDIC insurance assessments. Under the old system, the assessment base was domestic deposits minus a few allowable exclusions, such as pass-through reserve balances. Under the Dodd-Frank Act, assessments are calculated based on the depository institution’s average consolidated total assets, less its average amount of tangible equity. On February 9, 2011, the FDIC published final regulations implementing these changes. In addition to providing for the required change in assessment base, the FDIC has modified or eliminated the assessment adjustments based on unsecured debt, secured liabilities, and brokered deposits; added a new adjustment for holding unsecured debt issued by another insured depository institution; and lowered the initial base assessment rate schedule in order to collect approximately the same amount of revenue under the new base as under the old base, among other changes. Due to the expanded assessment base the new initial base assessment rates range from 5 to 35 basis points, and total base assessment rates range from 2.5 to 45 basis points after adjustments. These final regulations became effective April 1, 2011.

The enactment of the Emergency Economic Stabilization Act of 2008 temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. However, with the passage of the Dodd-Frank Act, this increase in the basic coverage limit has been made permanent.

Recent Developments

The enactment during 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) will likely result in increased regulation of the financial services industry. Provisions likely to affect the activities of the Company and the Bank include, without limitation, the following:

• Asset-based deposit insurance assessments.  FDIC deposit insurance premium assessments will be based on bank assets rather than domestic deposits.

• Deposit insurance limit increase.  The deposit insurance coverage limit has been permanently increased from $100,000 to $250,000.

• Extension ofTransaction Account Guarantee Program.  Unlimited deposit insurance coverage is extended for noninterest-bearing transaction accounts and certain other accounts for two years. This applies to all banks; there is no opt-in or opt-out requirement.

• Establishment of the Bureau of Consumer Financial Protection (CFPB).  The CFPB will be housed within the Federal Reserve and, in consultation with the Federal banking agencies, will make rules relating to consumer protection. The CFPB has the authority, should it wish to do so, to rewrite virtually all of the consumer protection regulations governing banks, including those implementing the Truth in Lending Act, the Real Estate Settlement Procedures Act (or RESPA), the Truth in Savings Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the S.A.F.E. Mortgage Licensing Act, the Fair Credit Reporting Act (except Sections 615(e) and 628), the Fair Debt Collection Practices Act, and the Gramm-Leach-Bliley Act (sections 502 through 509 relating to privacy), among others.

• Risk-retention rule.  Banks originating loans for sale on the secondary market or securitization must retain 5 percent of any loan they sell or securitize, except for mortgages that meet low-risk standards to be developed by regulators.

• Limitation on federal preemption.  Limitations have been imposed on the ability of national bank regulators to preempt state law. Formerly, the national bank and federal thrift regulators possessed preemption powers with regard to transactions, operating subsidiaries and attorney general civil enforcement authority. These preemption requirements have been limited by the Dodd-Frank Act, which will likely impact state banks by affecting activities previously permitted through parity with national banks.

• Changes to regulation of bank holding companies.  Under Dodd-Frank, bank holding companies must be well-capitalized and well-managed to engage in interstate transactions. In the past, only the subsidiary banks were required to meet those standards. The Federal Reserve Board’s “source of strength doctrine” has now been codified, mandating that bank holding companies such as the Company serve as a source of strength for their subsidiary banks, meaning that the bank holding company must be able to provide financial assistance in the event the subsidiary bank experiences financial distress.

• Executive compensation limitations.  The Dodd-Frank Act codified executive compensation limitations similar to those previously imposed on TARP recipients.

This new legislation contained 16 different titles, was over 800 pages long, and calls for the completion of dozens of studies and reports and hundreds of new regulations. The information provided herein regarding the effect of the Dodd-Frank Act is intended merely for illustration and is not exhaustive, as the full impact of the legislation on banks and bank holding companies is still being studied and in any event cannot be fully known until the completion of hundreds of new federal agency rulemakings over the next few years. Interested shareholders should refer directly to the Dodd-Frank Act itself for additional information.

The Dodd-Frank Act is one of a number of legislative initiatives that have been proposed in recent months due to the ongoing national and global financial crisis. It is not possible to predict whether any other similar legislation may be adopted that would significantly affect the operations and performance of the Company and the Bank.

8

FIRST M&F CORPORATION AND SUBSIDIARY

Debit Interchange Fees

Effective June 29, 2011, the Federal Reserve issued a final rule to implement the “Durbin Amendment” to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The rule included standards for assessing whether debit card interchange fees received by debit card issuers are reasonable and proportional to the costs incurred by issuers for electronic debit transactions. Interchange fees, or "swipe" fees, are charges that merchants pay to us and other credit card companies and card-issuing banks for processing electronic payment transactions. Under the final rule, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction is the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction. The rule further allows for an upward adjustment of 1 cent to the interchange fee if an issuer certifies that it has implemented policies and procedures reasonably designed to achieve the fraud-prevention standards set forth by the Federal Reserve.

In addition, the legislation prohibits card issuers and networks from entering into exclusive arrangements requiring that debit card transactions be processed on a single network or only two affiliated networks, and allows merchants to determine transaction routing. The limits that the Dodd-Frank Act and Federal Reserve rules place on debit interchange fees may significantly reduce our debit card interchange revenues. The rule became effective October 1, 2011.

Summary

The foregoing is a brief summary of certain statutes, rules and regulations affecting the Company and the Bank. It is not intended to be an exhaustive discussion of all the statutes and regulations having an impact on the operations of such entities.

Additional bills may be introduced in the future in the United States Congress and state legislatures to alter the structure, regulation and competitive relationships of financial institutions. It cannot be predicted whether and what form any of these proposals will be adopted or the extent to which the business of the Company and the Bank may be affected thereby.

Available Information

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

9

FIRST M&F CORPORATION AND SUBSIDIARY

STATISTICAL DISCLOSURE

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

Table 1: AVERAGE BALANCE SHEETS/YIELDS

	2011						2010						2009
(Dollars in thousands)	Average Balance		Interest		Yield/ Cost		Average Balance		Interest		Yield/ Cost		Average Balance		Interest		Yield/ Cost
Interest-bearing bank balances	$	70,998	$	179	0.25	%	$	60,894	$	143	0.23	%	$	25,151	$	42	0.17	%
Federal funds sold	25,000		63		0.25		35,642		82		0.23		43,871		95		0.22
Taxable investments	265,446		6,745		2.54		236,046		7,616		3.23		234,942		9,531		4.06
Tax-exempt investments	33,390		1,997		5.98		41,347		2,470		5.97		56,021		3,357		5.99
Loans	1,040,703		60,632		5.83		1,052,883		62,501		5.94		1,130,428		67,290		5.95
Total earning assets	1,435,537		69,616		4.85		1,426,812		72,812		5.10		1,490,413		80,315		5.39
Nonearning assets	158,747						164,130						154,747
Total average assets	$	1,594,284					$	1,590,942					$	1,645,160
NOW & MMDA	562,030		3,696		0.66		473,011		5,062		1.07		447,909		5,839		1.30
Savings deposits	117,686		1,318		1.12		114,358		1,467		1.28		113,397		1,679		1.48
Certificates of deposit	489,199		8,487		1.73		544,192		12,280		2.26		569,623		16,183		2.84
Short-term borrowings	10,855		36		0.33		19,112		66		0.35		10,448		97		0.93
Other borrowings	76,923		3,314		4.31		102,112		5,016		4.91		165,548		7,441		4.49
Total interest-bearing liabilities	1,256,693		16,851		1.34		1,252,785		23,891		1.91		1,306,925		31,239		2.39
Noninterest-bearing deposits	220,369						222,082						190,541
Noninterest-bearing liabilities	7,852						8,909						8,538
Capital	109,370						107,166						139,156
Total avg. liabilities & equity	$	1,594,284					$	1,590,942					$	1,645,160
Net interest margin			52,765		3.68				48,921		3.43				49,076		3.29
Less tax equivalent adjustment
Investments			745		0.05				921		0.06				1,252		0.08
Loans			156		0.02				199		0.02				230		0.02
Reported book net interest margin			$	51,864	3.61	%			$	47,801	3.35	%			$	47,594	3.19	%

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

Nonaccrual loans are included in the average loan balances.

Table 2: RATE/VOLUME VARIANCES

	2011 Compared To 2010									2010 Compared To 2009
	Increase (Decrease) Due To									Increase (Decrease) Due To
(Dollars in thousands)	Volume			Yield/Cost			Net			Volume			Yield/Cost			Net
Interest earned on:
Interest-bearing bank balances	$	25		$	11		$	36		$	72		$	29		$	101
Federal funds sold	(26		)	7			(19		)	(18		)	5			(13		)
Taxable investments	848			(1,719		)	(871		)	40			(1,955		)	(1,915		)
Tax-exempt investments	(476		)	3			(473		)	(878		)	(9		)	(887		)
Loans	(716		)	(1,153		)	(1,869		)	(4,610		)	(179		)	(4,789		)
Total earning assets	434			(3,630		)	(3,196		)	(3,336		)	(4,167		)	(7,503		)
Interest paid on:
NOW & MMDA	769			(2,135		)	(1,366		)	298			(1,075		)	(777		)
Savings deposits	40			(189		)	(149		)	13			(225		)	(212		)
Certificates of deposit	(1,098		)	(2,695		)	(3,793		)	(648		)	(3,255		)	(3,903		)
Short-term borrowings	(28		)	(2		)	(30		)	55			(86		)	(31		)
Other borrowings	(1,161		)	(541		)	(1,702		)	(2,984		)	559			(2,425		)
Total interest-bearing liabilities	63			(7,103		)	(7,040		)	(1,163		)	(6,185		)	(7,348		)
Change in net interest income on a tax-equivalent basis	$	371		$	3,473		$	3,844		$	(2,173	)	$	2,018		$	(155	)

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

10

FIRST M&F CORPORATION AND SUBSIDIARY

Table 3: SECURITIES AVAILABLE FOR SALE

	Carrying Value of Securities
	December 31
(Dollars in thousands)	2011		2010		2009
Securities Available For Sale
U.S. Treasury	$	—	$	—	$	517
U.S. Government sponsored entities	58,792		58,611		55,161
Mortgage-backed securities	203,686		173,921		167,875
Obligations of states and political subdivisions	54,142		41,828		56,586
Other securities	4,154		2,569		4,411
Total securities available for sale	$	320,774	$	276,929	$	284,550

	Amortized Cost of Securities
	December 31
	2011		2010		2009
Securities Available For Sale
U.S. Treasury	$	—	$	—	$	503
U.S. Government sponsored entities	58,714		58,152		54,746
Mortgage-backed securities	198,832		170,039		162,647
Obligations of states and political subdivisions	51,763		40,924		55,153
Other securities	6,581		5,306		7,421
Total securities available for sale	$	315,890	$	274,421	$	280,470

Table 4: MATURITY DISTRIBUTION AND YIELDS OF SECURITIES AVAILABLE FOR SALE

(Dollars in thousands)	Within One Year		Yield		After One But Within Five Years		Yield		After Five But Within Ten Years		Yield		Over Ten Years		Yield		Total		Yield
Securities Available For Sale
U.S. Government sponsored  entities	$	23,366	1.95	%	$	35,426	0.83	%	$	—	—	%	$	—	—	%	$	58,792	1.27	%
Mortgage-backed securities	81,202		2.61		99,165		2.94		16,867		3.12		6,452		3.16		203,686		2.83
Obligations of states and  political subdivisions	4,481		6.02		21,645		6.12		26,010		5.84		2,006		7.03		54,142		6.01
Other debt securities	—		—		3,335		2.55		—		—		819		1.64		4,154		2.37
Total debt securities available  for sale	$	109,049	2.61	%	$	159,571	2.89	%	$	42,877	4.77	%	$	9,277	3.86	%	$	320,774	3.07	%

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

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

11

FIRST M&F CORPORATION AND SUBSIDIARY

Table 5: COMPOSITION OF THE LOAN PORTFOLIO

	2011				2010				2009				2008				2007
(Dollars in thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total
Held For Investment:
Commercial, financial  and agricultural	$	155,330	15.59	%	$	133,226	12.57	%	$	129,571	12.24	%	$	136,795	11.63	%	$	176,747	14.49	%
Non-residential real  estate	574,505		57.66		646,731		61.00		643,804		60.83		745,699		63.38		731,595		59.99
Residential real estate	223,839		22.47		235,489		22.21		239,921		22.67		255,488		21.71		269,601		22.11
Consumer loans	42,666		4.28		44,700		4.22		45,044		4.26		38,613		3.28		41,492		3.40
Total loans	$	996,340	100.00	%	$	1,060,146	100.00	%	$	1,058,340	100.00	%	$	1,176,595	100.00	%	$	1,219,435	100.00	%
Loans held for sale	$	26,073			$	6,242			$	10,266			$	7,698			$	5,571

Table 6: LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES

Maturity distribution of loans at December 31, 2011
(Dollars in thousands)	Within One Year		One to Five Years		After Five Years		Total
Commercial, financial and agricultural	$	77,756	$	74,997	$	2,577	$	155,330
Non-residential real estate	136,271		365,291		72,943		574,505
Residential real estate	26,759		89,073		108,007		223,839
Consumer loans	10,885		30,664		1,117		42,666
Total loans	$	251,671	$	560,025	$	184,644	$	996,340

Rate sensitivity of loans at December 31, 2011
	One to Five Years		After Five Years		Total
Fixed rate loans	$	499,988	$	172,667	$	672,655
Floating rate loans	60,037		11,977		72,014
Total	$	560,025	$	184,644	$	744,669

Table 7: NONPERFORMING ASSETS AND PAST DUE LOANS

(Dollars in thousands)	2011		2010		2009		2008		2007
Nonaccrual loans	$	17,177	$	33,127	$	44,549	$	20,564	$	6,524
Other real estate owned	36,952		31,125		23,578		11,061		6,232
Investment securities	599		698		825		—		—
Total nonperforming assets	$	54,728	$	64,950	$	68,952	$	31,625	$	12,756
Accruing loans past due 90 days or more	$	602	$	951	$	2,479	$	5,686	$	1,093
Restructured loans (accruing)	$	19,662	$	18,052	$	4,620	$	3,664	$	—
Interest income that would have been recorded on  nonaccrual loans if they had been current and accruing	$	1,509
Interest that was recorded in the financial statements for  loans that were on nonaccrual status	$	185

12

FIRST M&F CORPORATION AND SUBSIDIARY

Table 8: ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

(Dollars in thousands)	2011			2010			2009			2008			2007
Balance at beginning of year	$	16,025		$	24,014		$	24,918		$	14,217		$	14,950
Charge offs:
Commercial, financial and agricultural	(2,534		)	(3,617		)	(4,605		)	(993		)	(762		)
Real estate – nonresidential	(7,381		)	(13,325		)	(42,133		)	(5,235		)	(1,223		)
Real estate – residential	(2,142		)	(1,854		)	(3,409		)	(1,968		)	(1,581		)
Consumer	(952		)	(859		)	(1,093		)	(1,510		)	(1,178		)
Total	(13,009		)	(19,655		)	(51,240		)	(9,706		)	(4,744		)
Recoveries:
Commercial, financial and agricultural	468			281			169			75			373
Real estate – nonresidential	1,413			1,798			174			135			666
Real estate – residential	144			121			47			67			25
Consumer	192			246			345			396			427
Total	2,217			2,446			735			673			1,491
Net charge-offs	(10,792		)	(17,209		)	(50,505		)	(9,033		)	(3,253		)
Provision for loan losses	9,720			9,220			49,601			19,734			2,520
Balance at end of year	$	14,953		$	16,025		$	24,014		$	24,918		$	14,217
Net Charge-Offs To Average Loans	1.05		%	1.65		%	4.50		%	0.75		%	0.28		%

Table 9: ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

	December 31
(Dollars in thousands)	2011			2010			2009			2008			2007
Commercial, financial and agricultural	$	3,347		$	4,442		$	5,893		$	6,815		$	6,953
Non-residential real estate	8,204			6,705			13,375			13,129			3,094
Residential real estate	2,607			3,701			3,407			1,634			1,936
Consumer loans	795			1,177			1,339			3,340			2,234
Total loans	$	14,953		$	16,025		$	24,014		$	24,918		$	14,217
	December 31
Allowance As A Percentage Of Loan Type	2011			2010			2009			2008			2007
Commercial, financial and agricultural	2.15		%	3.33		%	4.55		%	4.98		%	3.93		%
Non-residential real estate	1.43			1.04			2.08			1.76			0.42
Residential real estate	1.16			1.57			1.42			0.64			0.72
Consumer loans	1.86			2.63			2.97			8.65			5.38
Total loans	1.50		%	1.51		%	2.27		%	2.12		%	1.17		%
Net Charge-Offs As A Percent Of Year End	December 31
Loans Outstanding, By Type	2011			2010			2009			2008			2007
Commercial, financial and agricultural	1.33		%	2.50		%	3.42		%	0.67		%	0.22		%
Non-residential real estate	1.04			1.78			6.52			0.68			0.08
Residential real estate	0.89			0.74			1.40			0.74			0.58
Consumer loans	1.78			1.37			1.66			2.89			1.81
Total loans	1.08		%	1.62		%	4.77		%	0.77		%	0.27		%

13

FIRST M&F CORPORATION AND SUBSIDIARY

Table 10: TIME DEPOSITS OF $100,000 OR MORE

The table below shows maturities of outstanding time deposits of $100,000 or more at December 31, 2011 (dollars in thousands):

Three months or less	$	48,904
Over three months through six months	20,392
Over six months through twelve months	43,297
Over one year	87,948
Total	$	200,541

Table 11: SELECTED RATIOS

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

	2011		2010		2009
Return on average assets	0.27	%	0.25	%	(3.63	)%
Return on average equity	4.00		3.74		(42.97	)
Dividend payout ratio	14.29		2.41		—
Average equity to assets ratio	6.86		6.74		8.46

Table 12: SHORT-TERM BORROWINGS

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

(Dollars in thousands)	2011			2010			2009
Securities sold under agreements to repurchase
Outstanding at end of period	$	4,398		$	33,481		$	8,642
Maximum outstanding at any month-end during the period	27,082			41,897			12,985
Average outstanding during the period	10,855			19,112			10,331
Interest paid	36			66			96
Weighted average rate during each period	0.33		%	0.35		%	0.93		%
Federal funds purchased
Outstanding at end of period	$	—		$	—		$	—
Maximum outstanding at any month-end during the period	—			—			—
Average outstanding during the period	—			—			117
Interest paid	—			—			1
Weighted average rate during each period	—		%	—		%	0.80		%

14

FIRST M&F CORPORATION AND SUBSIDIARY

RISK FACTORS

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

The Company may be vulnerable to economic uncertainty.

• The Company owns $36.952 million in foreclosed other real estate properties. The ability of the Company to dispose of other real estate without incurring severe losses depends on the strength of the economy and especially the strength and liquidity of the real estate market. If the economy remains weak, the Company may not be able to sell some properties. A lack of sales of properties may prompt further write-downs in their values as they become stagnant and less marketable. An inability to sell foreclosed properties also impacts liquidity through a lack of positive cash flows. If properties take longer than expected to sell or become difficult to market, expenses related to the maintenance of those properties may continue or possibly increase.

• The credit quality of the loan portfolio depends on a strengthened economy, as the primary source of repayment for many loans is sales revenue. If the economy stagnates, then customers will have to turn to secondary sources of repayment which may be limited. This could lead to additional loan impairments and possible increases in loan charge-offs.

• The Company has a 58% concentration of commercial real estate loans in the loan portfolio. These loans are vulnerable to fluctuations and economic disruptions in the real estate-related sectors of the economy. Also included in the commercial real estate loan portfolio, representing 2.17% of the Company’s loan portfolio, is a group of predominately out-of-market purchased loan participations secured by church properties. The Company is vulnerable to economic or social events that could hurt the cash flows of the underlying church organizations.

• Within the commercial loan portfolio the Company has a group of asset-based loans, some of which are outside of the Company’s banking markets, representing 3.77% of the Company’s loan portfolio. These loans are secured primarily by inventory and accounts receivable, are dependent on daily sales and accounts receivable collections, and require significant monitoring by the asset-based lending staff. Deterioration in economic conditions could significantly affect the collateral cash flows and result in impairments on these loans.

The Company is exposed to fluctuations in interest rates.

• Deposits generally reprice faster than loans. If interest rates increase significantly the Company may be vulnerable to interest expenses rising faster than interest revenues.

• Another effect of rising interest rates is that fixed income securities will decrease in value. This could limit the Company’s ability to raise cash through investment security sales without incurring losses.

• Increased interest rates may also slow down mortgage origination volumes, as mortgages become less affordable, resulting in lower noninterest revenues from mortgage activities.

The Company is subject to various litigation risks.

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

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

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

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

The Company is subject to competition from various sources.

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

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

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

15

FIRST M&F CORPORATION AND SUBSIDIARY

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

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

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

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

The Company is subject to regulation by various entities.

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

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

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

The Company was certified in 2010 as a Community Development Financial Institution (CDFI) and participates in the U.S. Treasury’s Community Development Capital Initiative (CDCI) Program.

• In 2010 the Company redeemed its $30 million in preferred stock issued under the Capital Purchase Program (CPP) with $30 million in preferred stock issued under the CDCI program. Participation in this program constrains the Company’s ability to raise dividends and repurchase equity securities and also places certain constraints on executive compensation arrangements. The new funding, which carries a 2% dividend rate, takes the place of the CPP funding which provided assurance that the Company can maintain its minimum regulatory capital ratios in the face of possible future credit-related losses. The Company will have to repay these funds by raising capital within the next seven years to keep its dividend costs from increasing to 9% per annum.

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

• Our participation in the CDCI limits our annual dividend to no more than $.04 per share as long as the CDCI preferred stock remains outstanding and up until the eighth anniversary date of its issuance. Beginning on the eighth anniversary date and as long as the CDCI preferred stock is outstanding, the Company may not pay a corporate dividend without the consent of the Treasury Department. Our ability to repurchase our common stock is also restricted.

• The Company must be re-certified as a CDFI every three years by the Community Development Financial Institution Fund of the U.S. Treasury Department. In the event that the Company is not re-certified, and continues to be uncertified for 180 days, the dividend rate shall increase to 5%. If the Company continues to be uncertified for an additional 90 days, then the dividend rate shall increase to 9% until the Company becomes certified, at which time the dividend rate shall revert to its original 2% per annum.

The Company is operating under an informal MOU entered into with the Federal Reserve Bank of St. Louis (the “Federal Reserve”) in November 2009.

• The Company must receive prior approval from the Federal Reserve to pay dividends on its common stock, to pay interest on outstanding trust preferred securities, to pay dividends on the CDCI preferred stock and to incur any additional debt. If the Company does not produce adequate financial performance then it is at risk of losing approval to make one or more of these payments or to obtain new borrowings. The loss of any of these permissions would subject the Company to much regulatory scrutiny and also impede its ability to obtain funding in the capital market.

16

FIRST M&F CORPORATION AND SUBSIDIARY

The Company incurred $38.353 million in Federal net operating losses (NOLs) and $34.371 million in Mississippi NOLs in 2009. Approximately $23.653 million of Federal and $15.366 million of Mississippi NOLs were carried back to 2007 and 2008. The Company incurred $4.321 million in Federal and $4.707 million in Mississippi NOLs in 2010.

• The Company has 20 years to generate net taxable earnings sufficient to absorb the $19.021 million in Federal and $23.712 million in Mississippi NOLs remaining after the 2009 carrybacks and 2010 NOLs. If the Company cannot generate sufficient taxable earnings, then the NOLs will be lost.

The Company depends on information technology and telecommunications networks to sustain the information needs of the Company and its customers.

• A disruption in the telecommunications network could interrupt the Company’s business for an unforeseeable amount of time in that it depends on these networks, which are outside of its control, to communicate information with its customers.

• Hackers and others beyond the Company’s control could disrupt the Company’s information systems. Natural disasters, fires or electrical disasters could disrupt the Company’s information systems for an unforeseen time until its disaster recovery system could be initiated.

The Company is subject to certain debt covenants related to its borrowings from a correspondent bank.

• If the Company does not meet certain covenants related to capital ratios and asset quality, then it is considered technically in default unless it receives a waiver from the correspondent bank. If the Company were to technically default under the covenants and not receive the waiver then it would be subject to immediate repayment of the debt, potential regulatory scrutiny, the possible loss of financial reputation and negative financial repercussion arising from its inability to perform up to the level of the covenants.

The Standard & Poor's downgrade in the U.S. government's sovereign credit rating, and in the credit ratings of instruments issued, insured or guaranteed by certain related institutions, agencies and instrumentalities, could result in risks to the Company and general economic conditions that we are not able to predict.

• On August 5, 2011, Standard & Poor's downgraded the United States long-term debt rating from its AAA rating to AA+. On August 8, 2011, Standard & Poor's downgraded the credit ratings of certain long-term debt instruments issued by Fannie Mae and Freddie Mac and other U.S. government agencies linked to long-term U.S. debt. Although these downgrades did not have a significant effect on the Company's operations, any future additional downgrades could have a significant effect on the value of the Company's U.S. government-related investments and on lending and other programs that are dependent on the credit standing of the U.S. government.

UNRESOLVED STAFF COMMENTS

Not Applicable.

PROPERTIES

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

The Bank owns its main office building and 33 of its branch facilities and leases three of its locations. The Bank’s insurance agency subsidiary owns four of its locations and leases one. The Bank’s asset-based lending subsidiary leases one office.  The facilities occupied under lease agreements have terms which range from month to month to six years.

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.

MINE SAFETY DISCLOSURES

Not Applicable.

17

FIRST M&F CORPORATION AND SUBSIDIARY

PART II

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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

At December 31, 2011, there were 1,118 shareholders of record of the Company's common stock. On December 31, 2011, the Company's stock closed at $2.84 per share.

The following table summarizes the trading ranges and dividend payouts for the two years ended December 31, 2011:

	Quarterly Closing Common Stock Price Ranges and Dividends Paid - Common
	First		Second		Third		Fourth
2011:
High	$	4.48	$	4.34	$	4.14	$	3.00
Low	3.52		3.42		2.99		2.49
Close	4.08		3.78		3.16		2.84
Dividend	.01		.01		.01		.01		*
2010:
High	$	3.50	$	5.90	$	4.50	$	4.15
Low	2.16		3.00		2.95		3.42
Close	3.15		3.86		3.38		3.74
Dividend	.01		.01		.01		.01		*

The following table summarizes common stock and dividend performance ratios for the five years ended December 31, 2011:

	Common Stock and Dividend Performance
	2011			2010			2009			2008			2007
Price/earnings ratio	10.14x			2.25x			—			141.00x			9.88x
Price/book value ratio	0.28x			0.38x			0.26x			0.56x			1.02x
Book value/share	$	10.05		$	9.96		$	8.36		$	15.00		$	15.45
Dividend payout ratio	14.29		%	2.41		%	—		%	866.67		%	32.50		%
Historical dividend yield	1.07		%	1.81		%	1.89		%	3.29		%	2.65		%

*The Company entered into a transaction with the Department of the Treasury under the TARP Community Development Capital Initiative discussed in Part I above. Under the terms of the Securities Purchase Agreement, for as long as the CDCI preferred stock is outstanding and up until the eighth anniversary date of its issuance, the Company will not be able to increase dividends above $0.01 per share of common stock on a quarterly basis. Additionally, the Company may not repurchase any of its shares without Treasury approval, with limited exceptions, most significantly purchases in connection with benefit plans. Subsequent to the eighth anniversary of the issuance of the CDCI preferred stock, the Company must receive approval for the payment of its quarterly dividends from the Treasury. Under an informal Memorandum of Understanding entered into in November 2009 with the Federal Reserve Bank of St. Louis the Company must receive approval from the Federal Reserve prior to paying a quarterly dividend.

18

FIRST M&F CORPORATION AND SUBSIDIARY

The following table provides information regarding securities issued under our equity compensation plans that were in effect during 2011:

	Plan Name	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights	Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available for Future Issuance
Equity compensation plans approved by security holders	1999 Stock Option Plan	15,800	$	16.02	—
	2005 Equity Incentive Plan	17,800	10.53		613,434
Equity compensation plans not approved by security holders	None	—	—		—
Total		33,600	$	13.11	613,434

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

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

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

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

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

In 2011, under the 2005 Equity Incentive Plan, there were forfeitures of 11,000 shares and vestings of 6,000 shares of restricted stock. Also in 2011, under the 2005 Equity Incentive Plan, the Company issued 3,000 shares of stock options to directors with a grant date strike price of $4.12, which was the grant date fair value of the underlying stock.

19

FIRST M&F CORPORATION AND SUBSIDIARY

Five Year Shareholder Return Comparison

Set forth below is a line graph comparing the yearly percentage change in the cumulative total stockholder return on the Company’s Common Stock against the cumulative total return of the NASDAQ Market US Index and the NASDAQ Bank Index which consists of the period of five (5) years beginning in 2006.

	12/06	12/07	12/08	12/09	12/10	12/11
First M&F Corporation	100.00	83.07	46.65	12.60	21.56	16.57
NASDAQ Composite	100.00	110.26	65.65	95.19	112.10	110.81
NASDAQ Bank	100.00	76.94	64.14	53.93	61.47	54.83

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

20

FIRST M&F CORPORATION AND SUBSIDIARY

SELECTED FINANCIAL DATA

(Thousands, except per share data)	2011			2010			2009			2008			2007
EARNINGS
Interest income	$	68,715		$	71,692		$	78,833		$	93,288		$	101,916
Interest expense	16,851			23,891			31,239			41,292			47,876
Net interest income	51,864			47,801			47,594			51,996			54,040
Provision for loan losses	9,720			9,220			49,601			19,734			2,520
Noninterest income	21,574			20,521			19,970			21,131			21,320
Noninterest expense	58,334			54,490			95,872			54,284			51,373
Income taxes	1,011			602			(18,104		)	(1,436		)	6,976
Noncontrolling interests	—			(1		)	(6		)	19			33
Net income (loss)	$	4,373		$	4,011		$	(59,799	)	$	526		$	14,458
Net interest income, taxable equivalent	$	52,765		$	48,921		$	49,076		$	53,469		$	55,277
Cash dividends paid on common stock	$	368		$	366		$	1,466		$	4,772		$	4,772
Dividends paid and accretion on preferred stock	$	1,774		$	1,692		$	1,464		$	—		$	—
PER COMMON SHARE
Net income (loss) – basic	$	0.28		$	1.66		$	(6.69	)	$	0.06		$	1.58
Cash dividends paid – common	.04			.04			.16			.52			.52
Book value – common	10.05			9.96			8.36			15.00			15.45
Closing stock price – common	2.84			3.74			2.21			8.46			15.80
SELECTED AVERAGE BALANCES
Assets	$	1,594,284		$	1,590,942		$	1,645,160		$	1,621,703		$	1,573,630
Earning assets, amortized cost	1,435,537			1,426,812			1,490,413			1,455,836			1,407,559
Loans held for investment	1,032,137			1,045,467			1,122,307			1,200,628			1,148,275
Investments, amortized cost	298,836			277,393			290,963			232,274			243,042
Total deposits	1,389,284			1,353,643			1,321,470			1,270,547			1,208,007
Equity	109,370			107,166			139,156			142,024			134,102
SELECTED YEAR-END BALANCES
Assets	$	1,568,651		$	1,603,964		$	1,662,967		$	1,596,865		$	1,653,751
Earning assets, carrying value	1,407,578			1,440,420			1,507,966			1,427,344			1,467,624
Loans held for investment	996,340			1,060,146			1,058,340			1,176,595			1,219,435
Investments, carrying value	320,774			276,929			284,550			227,145			237,138
Total deposits	1,371,463			1,375,412			1,388,263			1,261,386			1,262,455
Equity	109,596			107,065			104,630			135,968			140,098
SELECTED RATIOS
Return on average assets	0.27		%	0.25		%	(3.63		)%	0.03		%	0.92		%
Return on average equity	4.00			3.74			(42.97		)	0.37			10.78
Average equity to average assets	6.86			6.74			8.46			8.76			8.52
Dividend payout ratio	14.29			2.41			—			866.67			32.50
Price to earnings	10.14x			2.25x			—			141.00x			9.88x
Price to book	0.28x			0.38x			0.26x			0.56x			1.02x

21

FIRST M&F CORPORATION AND SUBSIDIARY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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

SUMMARY

The net income for 2011 was $4.373 million, or $.28 basic and diluted earnings per share as compared to net income of $4.011 million, or $1.66 basic and diluted earnings per share in 2010 and a net loss of $59.799 million, or $6.69 basic and diluted loss per share in 2009. The major factors contributing to the increase in 2011 were (1) an increase of $3.563 million in net interest income after provision for loan loss, (2) net gains of approximately $534 thousand on closings and disposals of branch properties and (3) an increase of $4.405 million in foreclosed property expenses. The major factors contributing to the earnings increase in 2010 were (1) a decrease of $40.381 million in loan loss accruals in 2010, (2) an increase in net gains on sales of investment securities of $1.799 million (3) a decrease of $41.382 million in noninterest expenses as compared to 2009 as a result of goodwill impairment charges of $32.572 million in 2009 and additional intangible asset impairment charges of $1.248 million during 2009 and (4) a decrease of $4.337 million in foreclosed property expenses.

Earnings per share for 2010 include the effect of a $12.867 million gain on the swap of newly issued $30 million par value preferred stock with an initial coupon of 2% issued in the TARP Community Development Capital Initiative program for $30 million par value preferred stock with an initial coupon of 5% that was issued by the Company in the TARP Capital Purchase Program (CPP) in 2009. In September 2010 the Company received certification by the U.S. Treasury Department as a Community Development Financial Institution (CDFI). As a CDFI, the Company gained access to a source of funding program for CDFIs within the TARP program. This program, the Community Development Capital Initiative, allows CDFIs to issue preferred stock with a coupon of 2% to the U.S. Treasury to fund community development activities. The Company issued the $30 million par value, 2% preferred stock in September 2010 and effectively paid off the $30 million par value, 5% coupon preferred stock that it had issued to the U.S. Treasury in February 2009 in the TARP CPP program. Accounting principles require that the issued preferred stock be recorded at its fair value. The difference between the fair value of the new preferred stock issued and the remaining book value of the preferred stock that was paid off must be recorded in retained earnings as a gain or loss. The fair value of the new preferred stock that was issued was $16.159 million. The book value of the old CPP preferred stock that was paid off was $29.026 million. The difference, a $12.867 million gain, was credited to retained earnings. For purposes of calculating earnings per share, the gain on the exchange of the preferred stock was required to be added to net income in determining the amount of earnings attributable to common stockholders. Therefore, the net income of $4.011 million resulted in $1.66 in basic and diluted earnings per share. Note 19 to the consolidated financial statements shows the calculation of basic and diluted earnings per share.

In December 2011 the Company closed five individual branches in Ridgeland, Jackson, Tupelo and Oxford, Mississippi and in Wilsonville, Alabama and consolidated their operations with other branches in those general markets. The Company also sold the branch properties of the Ridgeland, Tupelo and Oxford branches for a net gain of $534 thousand. The Wilsonville, Alabama property was transferred into other real estate at a value of $98 thousand with no impairment charge required. The Jackson office is subject to a lease that expires in April 2013. The Company incurred a $67 thousand exit cost in 2011 for the lease. Since the Company did not fully exit any markets, no discontinued operations were reported.

In January 2010, the Company closed individual branches in the Memphis and Germantown, Tennessee and Birmingham, Alabama markets and consolidated their operations into the remaining branches in each market.

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

Total assets decreased by 2.20% in 2011, ending the year at $1.569 billion. Total assets decreased by 3.55% in 2010, ending the year at $1.604 billion. The compounded annual growth rate for total assets for the last five (5) years was 0.37%, while the compounded growth rate for deposits was 2.95%.

22

FIRST M&F CORPORATION AND SUBSIDIARY

RESULTS OF OPERATIONS

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

	2011		2010		2009
Net interest margin	3.68	%	3.43	%	3.29	%
Efficiency ratio	78.47		78.47		89.87
Return on assets	0.27		0.25		(3.63	)
Return on equity	4.00		3.74		(42.97	)
Noninterest income to avg. assets	1.35		1.29		1.21
Noninterest income to revenues (1)	29.02		29.55		28.92
Noninterest expense to avg. assets	3.66		3.43		5.83
Salaries and benefits to total noninterest expense	48.80		50.11		29.53
Nonaccrual loans to loans	1.68		3.11		4.17
90 day past due loans to loans	0.06		0.09		0.23
Net charge-offs as a percent of average loans	1.05		1.65		4.50

(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 three years:

(Dollars in thousands)	2011		2010		2009
Mortgage originations	$	92,009	$	80,139	$	97,741
Treasury and electronic banking services revenues	98		100		119
Trust and retail investment revenues	584		526		489
Revenues per FTE employee	150		140		131
Agency commissions per agency FTE employee (2)	93		99		99

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

Net Interest Income

Net interest income before loan loss expenses for 2011 was $51.864 million as compared to $47.801 million for 2010. For 2011 compared to 2010: earning asset yields decreased by 25 basis points, liability costs decreased by 57 basis points, the net interest spread increased by 31 basis points and the net interest margin increased by 25 basis points.

Net interest income before loan loss expenses for 2010 was $47.801 million as compared to $47.594 million for 2009. For 2010 compared to 2009: earning asset yields decreased by 29 basis points, liability costs decreased by 48 basis points, the net interest spread increased by 20 basis points and the net interest margin increased by 14 basis points.

Balance sheet dynamics affecting the comparative net interest margins for 2011 compared to 2010 include (1) a decrease of 1.28% in average loans held for investment, (2) a decrease in average loans as a percentage of earning assets from 73.27% in 2010 to 71.90% in 2011, (3) a decrease in average certificates of deposits of 10.11%, (4) a decrease in average other borrowings of 24.67% and (5) a decrease in average noninterest-bearing deposits as a percentage of total assets from 13.96% in 2010 to 13.82% in 2011.

Balance sheet dynamics affecting the comparative net interest margins for 2010 compared to 2009 include (1) a decrease of 6.85% in average loans held for investment, (2) a decrease in average loans as a percentage of earning assets from 75.30% in 2009 to 73.27% in 2010, (3) a decrease in average certificates of deposits of 4.46%, (4) a decrease in average other borrowings of 38.32% and (5) an increase in average noninterest-bearing deposits as a percentage of total assets from 11.58% in 2009 to 13.96% in 2010.

Yield and cost dynamics affecting the comparative net interest margins for 2011 compared to 2010 include (1) a decrease of 11 basis points in yields on loans held for investment and for sale, (2) a decrease of 48 basis points in investment and short-term funds yields, (3) a decrease of 50 basis points in costs of deposits and (4) a decrease of 37 basis points in costs of borrowings.

Yield and cost dynamics affecting the comparative net interest margins for 2010 compared to 2009 include (1) a decrease of 1 basis point in yields on loans held for investment and for sale, (2) a decrease of 86 basis points in investment and short-term funds yields, (3) a decrease of 44 basis points in costs of deposits and (4) a decrease of 9 basis points in costs of borrowings.

23

FIRST M&F CORPORATION AND SUBSIDIARY

Interest income decreased from 2010 to 2011 as the decrease in earning asset yields out-weighed the increase in average earning assets. The mix of earning assets continued to move more heavily toward investments and other liquid assets as the loan portfolio continued its decreasing trend from 2010. The driving force behind the improvement in net interest margin and net interest income during 2011 was the continued decrease in the cost of deposits, a trend that was carried over from 2010. Deposit costs decreased from 1.66% in 2010 to 1.16% in 2011. Another factor in the improved net interest income in 2011 was the decrease in the cost of other borrowings from 4.91% in 2010 to 4.31% in 2011. The overall borrowing cost decrease resulted primarily from the transition of the Company's subordinated debentures from a fixed rate of 6.44% to a floating rate of three-month LIBOR plus 1.33% beginning in March 2011. Additionally, the Company entered into an interest rate swap in March 2011 to effectively fix the cost of the debentures at 3.795%. The dynamic of liability costs falling faster than earning asset yields resulted in higher net interest income and an improved net interest margin of 3.68% for 2011 over 3.43% for 2010. Market interest rates declined throughout 2011 as three-month Treasury rates fell to .01% in December 2011 from .14% in December 2010. Ten-year Treasury rates fell to 1.98% in December 2011 from 3.29% in December 2010 while AAA corporate bond rates also fell by over 100 basis points during 2011. Given the anticipated slow pace of economic recovery, management does not expect any significant change in market rates during 2012.

Although interest income and asset yields decreased from 2009 to 2010, net interest income increased while the net interest margin increased from 3.29% in 2009 to 3.43% in 2010. Asset yields decreased from 5.39% in 2009 to 5.10% in 2010. Although loan yields remained steady from 2009 to 2010, average loan balances decreased from 75.85% of earning assets in 2009 to 73.79% of earning assets in 2010. The resulting increase in other earning assets, coupled with a decrease in other earning asset yields from 3.62% in 2009 to 2.76% in 2010, resulted in lower interest revenues for 2010. Average balances of interest-bearing bank balances and Federal funds sold increased from $69.022 million in 2009 to $96.536 million in 2010 as liquidity provided by average deposit growth of 2.43% and a reduction in average loan balances gravitated to these assets, which yielded 0.23% during 2010. The lower average loan balances in 2010 resulted from the removal of non-earning loans from the portfolio through charge-offs and foreclosures and also from a lack of loan demand as the economy remained weak. Net interest income improved from 2009 to 2010 as a result of (1) a decrease in deposit costs from 2.10% in 2009 to 1.66% in 2010, (2) a decrease in borrowing costs from 4.28% in 2009 to 4.19% in 2010 and (3) an increase in funding from non-interest bearing deposits as average balances increased from $190.541 million in 2009 to $222.083 million in 2010. Deposit costs, which are generally more sensitive than loan yields to interest rate changes, decreased in 2010 as the general interest rate environment declined. Although Fed funds rates remained relatively unchanged from 2009 to 2010, the average 2-year and average 5-year Treasury rates both decreased by 26 basis points.

Management expects loan demand to remain modest in 2012. Therefore, four challenges for 2012 will be to (1) manage the earning asset mix by utilizing loan purchase opportunities and SBA lending programs to improve overall asset yields, (2) improve interest income quality by continuing to move non-performing assets off of the balance sheet and redeploy funds into earning assets (3) take advantage of opportunities to decrease deposit costs or to leverage new deposit relationships with sales of related fee-based services and (4) manage the funding mix to emphasize checking accounts and interest-bearing deposits and further reduce dependence on borrowed funds.

Provision for Loan Losses

The accrual for the provision for loan losses for 2011 was $9.720 million as compared to $9.220 million for 2010 and $49.601 million for 2009. Net charge-offs were $10.792 million for 2011 as compared to $17.209 million for 2010 and $50.505 million for 2009. The decreasing trend in net charge-offs is indicative of the slow but steady progress made in updating collateral valuations and working out problem loans after the initial write-downs stemming from the real estate downturn of 2008.

The percentage of allowance for loan loss to total loans held for investment was 1.50% at December 31, 2011, 1.51% at December 31, 2010, and 2.27% at December 31, 2009.

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

Noninterest Income

Deposit account revenues have declined over the last three years as service charge and overdraft charge revenues have declined. Overdraft revenues tend to be sensitive to economic conditions. The overdraft revenue decreases have been influenced by a decrease in spending by customers as the economy softened beginning in 2008 and into 2009 and through 2011. Numbers of items charged decreased by 12.80% in 2011 and decreased by 12.79% in 2010.

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

(Dollars in thousands)	2011		2010		2009
Service charge revenues	$	1,209	$	1,282	$	1,368
Debit/ATM card revenues	3,247		2,755		2,518
Overdraft fee revenues	5,837		6,184		7,090
Service charges on deposit accounts	$	10,293	$	10,221	$	10,976

24

FIRST M&F CORPORATION AND SUBSIDIARY

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 competitive market prices as well as on costs associated with processing the items. The majority of the volumes of overdraft items processed comes from customers in the Company’s overdraft protection program which grants overdraft limits to customers, generally allows account activity up to the overdraft limit balance, and requires that accounts have positive balances at some point within a thirty day period. Overdraft limits, which are equivalent to credit limits, were increased for accounts in the overdraft protection program during 2007. This policy change influenced the increased volume that was experienced during 2008. Overdrafts are considered loans for accounting purposes and therefore are subject to the Company’s loan accounting policies concerning the charging off of accounts to the allowance for loan losses. Interest charged on overdrawn balances, based on the Federal discount rate, is recorded as interest on loans. The overdraft protection program is designed to help customers with their cash flow needs and is not extended to individuals who are poor credit risks.

The Federal Reserve issued a regulatory change, effective July 1, 2010, prohibiting banks from charging fees for paying overdrafts on automated teller machine and one-time debit card transactions unless the customer consents, or opts in, to the overdraft service for those types of transactions. During 2010, approximately 49% of the customers affected by the regulatory change opted in to the fee-paid overdraft protection. At the end of 2010 management estimated the impact of revenues lost due to customers who incurred multiple overdrafts prior to the effect of the regulatory change but did not opt in to having overdraft items paid for a fee to be a decrease of $150 thousand to $200 thousand in annual overdraft revenues. These expected revenue losses as well as competitor pricing prompted an increase in the overdraft per item fee by $6 in August 2011.

Debit card activity has experienced 7.91% compounded annual growth over the last three years. Many of the Company’s deposit products encourage the use of debit cards, online banking and image checking account statements. The recently enacted Dodd-Frank Act includes measures that would 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 final rule went into effect on October 1, 2011. Although the regulation is aimed at banks with $10 billion in total assets and greater, management believes that the reduced interchange fees could possibly result in banks with less than $10 billion in total assets receiving less business activity on their cards, which would charge higher fees to the merchants. Management estimates, but does not necessarily expect, that the Dodd-Frank legislation would reduce debit card revenues by as much as $800 thousand annually going forward if small banks were forced to reduce interchange fees to remain competitive or were to lose business because of the disparity in pricing between banks over and under $10 billion in asset size.

Management believes that overdraft fee revenues will continue to be the largest component of deposit revenues for the foreseeable future, while debit card revenues should continue to grow. Overdraft fee revenues should remain a dependable source of revenues in 2012 if the economy strengthens and personal spending increases.

Mortgage banking income increased by 15.18% from 2010 to 2011 after decreasing by 13.27% from 2009 to 2010. Origination volumes were evenly balanced between refinancing and purchase mortgages. Mortgage rates on conventional 30-year mortgages fell by 91 basis points in 2011 after declining by 28 basis points in 2010. During 2011 the Company began originating mortgages through mortgage brokers in Alabama. Originations of $18.773 million were produced through broker-referred (wholesale) mortgages while traditional retail originations were $73.236 million. Mortgage revenues include $1.741 million in retail revenues and $80 thousand in wholesale revenues. Interest on loans held for sale includes $208 thousand in interest on retail mortgages and $67 thousand in interest on wholesale mortgages. Other noninterest expense includes $232 thousand in broker fees and pricing discounts paid to originate wholesale mortgages.

Origination volumes slowed to $80.139 million in 2010 from $97.741 million in 2009, with 59.33% being for refinancing purposes, as the refinancing cycle played out. Mortgage rates remained around 5.00% during the first quarter of 2010 and then fell for the remainder of the year, hitting a low of 4.17% in November. Turnover in the mortgage management personnel and originator staff during the summer and fall months of the year also hurt 2010 origination volumes. A more liquid secondary mortgage market emerged in 2010 as mortgage investors became more competitive in their pricing for mortgage purchases. This improved pricing helped mortgage revenues during the latter half of 2010.

The Company expects mortgage revenues to move inversely with the trend in mortgage rates and to move directly with improvements in the unemployment rate and the general economy.

Agency commissions have declined for three consecutive years as certain annuity products and title insurance lines have been discontinued and the traditional property, casualty, life and health lines (traditional agency lines) have experienced decreased pricing margins and lower demand. Average revenues per employee in the traditional agency lines have decreased from $102.583 thousand per employee in 2008 to $92.543 thousand per employee in 2011 while average salary and commission costs have decreased from $49.077 thousand per employee in 2008 to $46.760 thousand per employee in 2011. The soft economy has hurt demand for insurance products and more intense competition has reduced profit margins for property and casualty products.

25

FIRST M&F CORPORATION AND SUBSIDIARY

The Company sold $44.924 million of mortgage-backed securities for net gains of $2.037 million in 2011. Additionally, the Company had sales of $26.773 million and calls of $36.316 million of U.S. government-sponsored entity securities for net gains of $614 thousand. The proceeds from the sales were primarily reinvested in mortgage-backed securities with approximately $10 million being reinvested in municipal securities. The Company sold $23.266 million of U.S. government-sponsored entity securities, $31.035 million of mortgage-backed securities and $7.199 million of municipal bonds for gains of approximately $2.302 million during 2010. The proceeds from the sale of the mortgage-backed securities, coupled with payments received from mortgage-backed securities, were redeployed back into the mortgage-backed portfolio. The proceeds from sales and maturities of municipal bonds and calls of U.S. government sponsored entity bonds were reinvested into securities of U.S. government sponsored entities, most of which had three to five year maturities. The sales were made to generate taxable gains on securities and to provide liquidity for loan participation purchases.

The Company owns certain beneficial interests in collateralized debt obligations that own bank trust preferred securities. Three of the beneficial interests, Trapeza I, Trapeza II, and Trapeza V deferred their interest payments and were placed in nonaccrual status during 2009. The MM Community Funding IX interest was placed in nonaccrual status in 2009 and began deferring payments in 2011. All of the beneficial interests failed impairment tests in 2009, with four failing additional impairment tests in 2010. The Trapeza V, Tpref Funding II and MM Community Funding IX interests failed impairment tests during 2011. The total amount of interest that would have been earned by the four securities that were in nonaccrual status was $86 thousand during 2011, $70 thousand during 2010 and $74 thousand during 2009.

These beneficial interests are secured and funded by trust preferred securities issued by commercial and savings banks. The significant problems that occurred in the housing market and the related mortgage market beginning in 2008 resulted in widespread losses for financial institutions that had exposure to those markets. Many of those financial institutions had issued trust preferred securities that had been purchased and securitized by the trusts that issued the beneficial interests that the Company had invested in. Certain of these financial institutions began to default on their trust preferred securities during 2009, resulting in deficiencies in the collateral securing and funding the beneficial interests. The Company’s holdings are at risk if enough of the trust preferred securities default so that the beneficial interests senior to and equal to the Company’s owned beneficial interests cannot be fully paid. Impairment tests of these beneficial interests are performed each quarter to determine if losses are expected due to cash flow deficiencies. This is primarily done by projecting cash flows to be received on the Company’s interests owned after determining the effect of expected collateral defaults on the payments made by the interests senior to and equal to the Company’s interests owned. If the cash flows expected to be received by the Company are less than the original contractual cash flows, then an other-than-temporary credit-related impairment, which is charged against current earnings, is assumed. The remaining difference between the fair value of the beneficial interest and its book value is charged against other comprehensive income.

The following table shows the other-than-temporary charges that the Company incurred during 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		4th Quarter		1st Quarter			2nd Quarter			3rd Quarter			4th Quarter
Trapeza I 2002-1A	$	—	$	—	$	—	$	—	$	—		$	—		$	—		$	—
Trapeza II 2003-2A	—		—		—		—		—			—			—			—
Tpref Funding II	69		—		5		50		(72		)	—			1			(49		)
Trapeza V 2003-5A	224		—		—		—		35			—			—			—
MM Community Funding IX	3		85		195		—		(18		)	(87		)	(73		)	—
Total	$	296	$	85	$	200	$	50	$	(55	)	$	(87	)	$	(72	)	$	(49	)

The following table shows the other-than-temporary charges that the Company incurred during 2010.

(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		4th Quarter		1st Quarter			2nd Quarter			3rd Quarter			4th Quarter
Trapeza I 2002-1A	$	101	$	—	$	—	$	—	$	156		$	—		$	—		$	—
Trapeza II 2003-2A	—		53		8		—		—			(14		)	39			—
Tpref Funding II	—		50		—		—		—			(17		)	—			—
MM Community Funding IX	101		61		29		—		(86		)	(36		)	(10		)	—
Total	$	202	$	164	$	37	$	—	$	70		$	(67	)	$	29		$	—

26

FIRST M&F CORPORATION AND SUBSIDIARY

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

(Dollars in thousands)	Other-Than-Temporary Impairment Charged Against Earnings								Other-Than-Temporary Impairment Charged To Other Comprehensive Income
Name of Issuer	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter		1st Quarter		2nd Quarter		3rd Quarter		4th Quarter
Trapeza I 2002-1A	$	—	$	175	$	—	$	—	$	—	$	218	$	—	$	—
Trapeza II 2003-2A	—		—		—		200		—		—		—		769
Tpref Funding II	—		—		—		113		—		—		—		632
Trapeza V 2003-5A	—		—		167		—		—		—		501		—
MM Community Funding IX	—		—		70		104		—		—		489		89
Total	$	—	$	175	$	237	$	417	$	—	$	218	$	990	$	1,490

The following table summarizes certain financial information about the trust preferred security-backed CDOs at the end of 2011 and 2010.

As of December 31, 2011
(Dollars in thousands)
Name of Issuer	Class	Book  Value		Fair Value		UnrealizedLoss		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	$	91	$	383	C	22	43.33	%	0.00	%
Trapeza II 2003-2A	C1	989		273		716		Ca	36	30.41		0.00
Tpref Funding II	B	713		220		493		Caa3	34	38.81		0.00
Trapeza V 2003-5A	C1	609		115		494		Ca	42	35.45		0.00
MM Community Funding IX	B1	352		120		232		Caa3	31	50.68		0.00
		$	3,137	$	819	$	2,318

As of December 31, 2010
(Dollars in thousands)
Name of Issuer	Class	Book  Value		Fair Value		UnrealizedLoss		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	$	112	$	362	C	25	43.09	%	0.00	%
Trapeza II 2003-2A	C1	989		246		743		Ca	37	37.04		0.00
Tpref Funding II	B	837		235		602		Caa3	34	36.21		0.00
Trapeza V 2003-5A	C1	833		129		704		Ca	43	29.30		0.00
MM Community Funding IX	B1	635		212		423		Caa3	33	42.95		0.00
		$	3,768	$	934	$	2,834

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.

27

FIRST M&F CORPORATION AND SUBSIDIARY

Significant components of other income for 2009 through 2011 are contained in the following table:

(Dollars in thousands)	2011		2010		2009
Agency profit-sharing revenues	$	257	$	234	$	433
Loan fees	384		387		399
Gains on student loan sales	—		176		133
Loss on bankers bank stock	—		—		(78		)
All other income	1,823		1,068		1,525
Other income	$	2,464	$	1,865	$	2,412

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. All other income for 2011 includes $534 thousand in net gains on disposals of four branch properties in the Jackson, Oxford, Ridgeland and Tupelo, Mississippi markets and one branch property in Wilsonville, Alabama.

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 28.92% for 2009 to 29.55% for 2010 and decreased to 29.02% for 2011. Another metric that the Company monitors is revenues per full-time employee, which were approximately $150 thousand for 2011 as compared to $140 thousand for 2010 and $131 thousand for 2009. Management's focus is to improve revenues generated per employee while maintaining stability in revenue growth by increasing the mix of noninterest revenues to total revenues.

Noninterest Expense

The increase in salaries and employee benefits for 2011 included $551 thousand in increased salary expenses, $158 thousand in increased severance pay, $232 thousand in increased health care costs and $126 thousand in increased retirement plan costs. The increase in salary expense was due primarily to general raises that were re-instituted during the fourth quarter of 2010 and implemented piecemeal through April 2011 after the elimination of raises for 2009 and 2010.

The decrease in salaries and employee benefits for 2010 was due to the closure of four branches during the fourth quarter of 2009 and three branches during the first quarter of 2010. The 3 branch closures in 2010 were done without exiting any markets. For 2010 compared to 2009, salaries were down by $897 thousand, health plan costs were up by $70 thousand, 401k savings plan costs were down by $69 thousand and pension expenses were down by $85 thousand. During 2009 the Company closed 5 branches without exiting any markets.

The branch closures and related employee severance activities resulted in a decrease in average full-time equivalent employees from 528 in 2009 to 497 in 2010 and 496 in 2011. The number of full-time equivalent employees was 460 at the end of 2011, 499 at the end of 2010 and 512 at the end of 2009.

The Company initiated a restructuring project during the third quarter of 2011 which called for the closure of five branches, the sale of up to two branches and a reduction in staffing of approximately 55 positions. Five branches were closed in Jackson, Oxford, Ridgeland and Tupelo, Mississippi and in Wilsonville, Alabama with their operations being consolidated into other branches in those markets. A sale of the Niceville, Florida branch operation is pending and expected to occur in 2012. Substantially all of the staffing reductions occurred during the third and fourth quarters of 2011 with severance costs of $238 thousand being incurred.

Health care related costs increased by 12.71% in 2011, increased by 3.99% in 2010 and decreased by 19.53% in 2009. Health care costs rise and fall primarily due to claims experience and secondarily by the number of covered employees.

Prior to 2009 the Company matched 75% of participating employees' first 6% of contributions to the Company's 401(k) plan for all employees with three years or more of credited service and 60% of participating employees' first 6% of contributions for all employees with less than three years of credited service. Beginning in 2009, the Company cut the matching percentages in half to 37.5% and 30% respectively. The cost of the Company's matching contributions decreased from $712 thousand in 2008 to $385 thousand in 2009. The Company restored the original 75% and 60% matching contributions in September 2011. Management expects that the change in matching contribution levels will increase benefit plan expenses for 2012 by a range of $250 thousand to $300 thousand.

Occupancy expenses were unchanged from 2010 to 2011 with increased rental expenses being offset by decreased depreciation, property taxes and other property-related expenses. Occupancy expense decreased by 14.67% during 2010 due primarily to the closing of three branches, two of which were leased. Occupancy expense increased by 9.59% during 2009 due primarily to additional depreciation amounts related to the abandonment of leasehold improvements.

28

FIRST M&F CORPORATION AND SUBSIDIARY

Foreclosed property losses and expenses increased by $4.405 million in 2011 over 2010 and decreased by $4.337 million in 2010 from 2009. Other real estate increased from $23.578 million at the end of 2009 to $31.125 million at the end of 2010 and $36.952 million at the end of 2011. The Company became aggressive in writing down foreclosed properties in 2009. These actions resulted in some gains being taken on property sales in 2010 as conditions improved.Volumes of other real estate sales have decreased over the last three years as properties with buildings have drawn buyer interest. Vacant and undeveloped properties have been more difficult to sell, generating little investor interest. Management expects the working out of the bulk of the foreclosed property portfolio to occur over the next three to five years.

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

(Dollars in thousands)	2011			2010			2009
Losses (gains) on sales of other real estate	$	781		$	(749	)	$	1,677
Write-downs of other real estate	5,093			2,323			4,101
Other real estate expenses	1,816			1,686			1,543
Rental income on other real estate properties	(339		)	(314		)	(38		)
Total foreclosed property expenses	$	7,351		$	2,946		$	7,283

FDIC insurance assessment expenses decreased by 25.61% in 2011 from 2010 due to the change in assessment bases and assessment rates prescribed by the Dodd-Frank Act. 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 (generally defined as average tier 1 capital) 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 for the Company. The previous base assessment rate applicable to the adjusted deposit base was generally 22 basis points annually for the Company. FDIC insurance assessments stabilized in 2010 after increasing significantly in 2009 over 2008 as (1) assessment rates for the first quarter of 2009 were increased by 7 basis points by the FDIC over the 2008 assessment rates, (2) credits used to reduce assessments paid were fully used up in 2008, (3) amounts paid due to the special assessment for insured deposits in excess of $250,000 in the Temporary Liquidity Guarantee Program and (4) a special banking industry assessment of 5 basis points on total bank assets less Tier 1 risk-based capital accrued during the second quarter of 2009. The special assessment accrued during the second quarter of 2009 was $749 thousand. During the third quarter of 2009 the base assessment rate for the Company increased from 14 basis points to 22 basis points based on a change in the classification of the Company into a lower performance category.  The Company remained in the lower classification category throughout 2010. The Company participated in the Temporary Liquidity Guarantee Program during 2009 and 2010 to insure noninterest-bearing deposits in excess of $250,000. Expenses for these assessments were $33.168 thousand in 2009 and $113.489 thousand in 2010. TheDodd-Frank Act effectively eliminated these provisions in the Temporary Liquidity Guarantee Program, which expired as of December 31, 2010, by legislating that all noninterest-bearing deposits in excess of $250,000 be covered by FDIC insurance through December 31, 2012.

29

FIRST M&F CORPORATION AND SUBSIDIARY

Goodwill Impairment

Goodwill is tested for impairment on an annual basis and also when there are indicators that an impairment may have occurred. There was no impairment recognized as a result of the goodwill impairment tests performed by the Company through 2008. An additional impairment test was performed at the end of November 2008 due to the considerable credit problems encountered and because the stock price had decreased by 47.34%. The tested community banking unit, with lower intermediate-term cash flow projections than it had one year ago, did have a calculated fair value that was less than its book value. The fair value calculation was based on a discounted cash flow analysis that assumed continued credit loss expectations through 2009, a projection of noninterest revenues and expenses based on historical growth and future market expectations and a projection of net interest income starting at the current margins with expectations for future decreases in the margins and increases in loan volumes. A minimum tangible capital ratio was required to be maintained as well. A terminal value was determined using a standard multiple of earnings and a market discount rate was applied to the series of cash flows to arrive at a fair value. The book value in excess of fair value required a second step to be performed in the impairment analysis. The second step of the goodwill calculation was performed to assign fair values to the identifiable assets and liabilities of the community banking unit to determine if the goodwill asset, which would be a residual, was worth at least as much as its carrying value. In the marking of community banking assets to market for the impairment test, the loan portfolio absorbed the majority of the valuation decreases from a year earlier. The loan portfolio had suffered from credit deterioration during 2008 and observations of the Company’s current markets indicated that more deterioration could be expected. The loan portfolio was valued using assumptions concerning the recoverability of the nonaccrual loans that were currently identified. The remaining unadjusted loan portfolio cash flows were discounted using credit spreads observable in the corporate bond market. This analysis resulted in a much lower fair value being assigned to the loan portfolio than its carrying value. Management concluded that the community banking unit’s impairment was primarily due to impairment in the loan portfolio and not in the goodwill asset. Therefore, no goodwill impairment was recorded when the fair value of the community banking unit was allocated to all assets and liabilities, leaving the original community banking unit goodwill intact. As a result, no goodwill impairment was recognized from the November test.

In the fourth quarter of 2008 loan loss accruals of $10.684 million were recorded for loan impairments, confirming the decrease in net realizable loans that was implied in the November goodwill impairment testing. The Company performed a subsequent goodwill impairment test as of December 31, 2008 with no goodwill impairment indicated. The fair value of the community banking unit was valued using a discounted cash flow analysis. Earnings were expected to be positive for 2009, with approximately $12.000 million in loan losses, and subsequently returning to normal over time and achieving a 1.00% return on assets in the fourth year of the five-year projection. Low loan growth was expected with no improvement in the net interest margins. The same discount rate and multiple of earnings terminal value were used from the November test. Even though the first step test of the community banking unit resulted in an estimated fair value in excess of its carrying value, a valuation of the loan portfolio was performed to determine if there was still a significant difference between its fair value and book value. This valuation confirmed that the loan portfolio had a fair value of approximately $65 million less than its gross (before being reduced by the allowance for loan losses) balance as disclosed in Note 20 – Fair Value concerning fair value, in the Company’s December 31, 2008 financial statements. Therefore, if the fair value of the community banking unit had been less than its book value, the impairment would have been primarily in the loan portfolio and not in the goodwill asset.

The Company evaluated its goodwill asset as of March 31, 2009 after the stock price continued to fall from $8.46 per share at December 31, 2008 to $6.12 per share at March 31, 2009 and as the Company continued to accrue for sizeable losses in the real estate construction loan portfolio, resulting in unexpected first quarter net losses. The Company determined that another impairment test of the community banking unit’s goodwill was needed. A notable change to the balance sheet of the community banking unit was also made by redefining the community banking unit as the consolidated company, therefore including funding sources and investments that had previously been allocated to a treasury unit. This was done since (1) the treasury area is almost exclusively used by the community banking operations and (2) funding sources such as debentures that were issued by the Company in a trust preferred transaction were obtained to benefit the bank’s capital position. The implied fair value of goodwill was determined after valuing the community banking unit using a weighted average of (1) a market-based price, (2) a control-premium-based valuation and (3) a discounted cash flow analysis. The market-based price was the most heavily weighted valuation component because it involved the most directly observable data. The market-based value of the Company was determined using historical deal prices for community banks, adjusted for bank size and credit quality factors. The valuation analysis resulted in a fair value of the community banking unit that was less than the book value by approximately $17 million. In contrast, the December 2008 test, based on discounted cash flow analysis, had resulted in a fair value in excess of book value by approximately $6 million. Therefore, the March 2009 test, with net assets of the community banking unit exceeding their estimated fair value, required a second step assigning individual fair values to identified assets and liabilities to determine if the goodwill asset was impaired. After fair values were assigned to the identifiable assets and liabilities, the residual amount that was assigned to goodwill, its implied fair value, was approximately $15.800 million less than its book value. In comparing the fair value allocations in the March 2009 test to the November and December 2008 tests, the primary differences were (1) a lower fair value estimate for the community banking unit based on the valuation using observable merger transaction prices, (2) the deterioration in the fair value of the trust preferred-related debentures which were liabilities of the banking unit in the March 2009 test but were liabilities of the treasury unit in previous tests, and (3) a decreased correlation between the deterioration in the estimated fair value of the banking unit and the deterioration in the estimated fair value of the loan portfolio from the 2008 periods when the difference between book value and estimated fair value of the banking unit approximated the difference between book value and estimated fair value of the loan portfolio to the March 2009 test when the two amounts were further apart. The implied fair value of goodwill was estimated to be $16.772 million, requiring an impairment charge of $15.800 million.

30

FIRST M&F CORPORATION AND SUBSIDIARY

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

Intangible asset impairments

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

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

31

FIRST M&F CORPORATION AND SUBSIDIARY

Income Taxes

The average tax rate was 18.78% for 2011 as compared to 13.05% for 2010. The low average rate resulted from low pre-tax earnings that included $1.437 million in net tax-exempt interest, $638 thousand in non-taxable insurance income and low income housing tax credits of $248 thousand. The $1.011 million in income tax expenses for 2011 included $1.007 million in deferred tax expenses and $4 thousand in current tax expenses. 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 incurred net operating losses in 2009 which it carried back to its 2006 through 2008 tax years, generating refunds of $7.738 million in Federal taxes and $768 thousand in Mississippi taxes in 2010. The Company incurred additional net operating losses (NOLs) in 2010, resulting in accumulated Federal NOLs of $19.021 million and Mississippi NOLs of $23.712 million. The Company estimates that it generated approximately $6 million in Federal net taxable earnings and $5.5 million in Mississippi net taxable earnings during 2011. Management expects that the remaining net operating losses will be realized through carry-forwards in the foreseeable future. The net operating loss carryforwards represent deferred taxes of approximately $5.6 million. 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. 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 Company had no material recognized uncertain tax positions as of December 31, 2010 or 2011 and therefore did not have any tax accruals during 2010 or 2011 related to uncertain positions.

32

FIRST M&F CORPORATION AND SUBSIDIARY

Quarterly Financial Trends (Unaudited)

The following table summarizes components of the Company’s statements of operations by quarter for 2011 and 2010:

	2011
(Dollars in thousands)	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Interest income	$	17,569	$	17,602	$	17,239	$	16,305
Interest expense	4,844		4,331		4,014		3,662
Net interest income	12,725		13,271		13,225		12,643
Provision for loan losses	2,580		2,280		2,580		2,280
Noninterest income	5,731		4,712		5,219		5,912
Noninterest expense	14,811		14,303		14,143		15,077
Net income before taxes	1,065		1,400		1,721		1,198
Income taxes	115		294		391		211
Noncontrolling interest	—		—		—		—
Net income	$	950	$	1,106	$	1,330	$	987
Net income allocated to common shareholders	$	515	$	661	$	878	$	530
Per common share:
Net income - basic	$	.06	$	.07	$	.10	$	.05
Net income - diluted	$	.06	$	.07	$	.10	$	.05
Cash dividends	$	.01	$	.01	$	.01	$	.01

	2010
(Dollars in thousands)	First Quarter		Second Quarter		Third Quarter			Fourth Quarter
Interest income	$	18,012	$	18,222	$	17,855		$	17,603
Interest expense	6,771		6,324		5,561			5,235
Net interest income	11,241		11,898		12,294			12,368
Provision for loan losses	2,280		2,380		2,280			2,280
Noninterest income	5,603		5,216		4,746			4,956
Noninterest expense	13,409		13,342		13,111			14,628
Net income before taxes	1,155		1,392		1,649			416
Income taxes	301		120		407			(226		)
Noncontrolling interest	1		—		(3		)	1
Net income	$	853	$	1,272	$	1,245		$	641
Net income allocated to common shareholders	$	413	$	826	$	13,565		$	267
Per common share:
Net income - basic	$	.05	$	.09	$	1.49		$	.03
Net income - diluted	$	.05	$	.09	$	1.49		$	.03
Cash dividends	$	.01	$	.01	$	.01		$	.01

Fourth Quarter Earnings

Net income before taxes for the fourth quarter of 2011 was down by $523 thousand from the third quarter. Net interest income before loan loss provision decreased by $582 thousand from the third quarter primarily due to a faster decrease in earning asset yields than the decrease in interest bearing liabilities. The acceleration in asset yield declines was prompted by the continued decrease in the loan portfolio and the reinvestment of proceeds from securities sales into lower yielding instruments. Noninterest income increased quarter-over-quarter due primarily to the $534 thousand in net gains taken on sales of branch properties. Noninterest expenses were up due to an increase in foreclosed property write-downs by $646 thousand, an increase of $140 thousand in legal expenses and an increase in mortgage processing expenses of $257 thousand. Approximately 70% of the $558 thousand decrease in salaries and employee benefits was due to the effect of the third and fourth quarter staffing reductions.

33

FIRST M&F CORPORATION AND SUBSIDIARY

FINANCIAL CONDITION

Earning Assets

The average earning asset mix for 2011 was 72.49% in loans, 20.82% in investments, and 6.69% in short-term funds. The average earning asset mix for 2010 was 73.79% in loans, 19.44% in investments, and 6.77% in short-term funds. The average earning asset mix for 2009 was 75.85% in loans, 19.52% in investments and 4.63% in short-term funds. Loans held for investment decreased by 6.02% in 2011 while deposits decreased by .29%. Loans held for investment increased by .17% in 2010 while deposits decreased by .93%. Loans held for investment decreased by 10.05% in 2009 while deposits decreased by 10.06%. The following table shows net changes in the major balance sheet categories for the year-to-date periods as of December 31, 2011 and 2010:

	Year to Date Net Change
(Dollars in thousands)	2011			2010
Cash and due from banks	$	(5,123	)	$	2,653
Interest-bearing bank balances and Federal funds sold	(32,712		)	(57,707		)
Securities available for sale	43,845			(7,621		)
Loans held for sale	19,831			(4,024		)
Loans held for investment	(63,806		)	1,806
Allowance for loan losses	1,072			7,989
Other real estate	5,827			7,547
Other assets	(4,247		)	(9,647		)
Total assets	$	(35,313	)	$	(59,004	)
Total deposits	(3,949		)	(12,851		)
Total borrowings	(36,498		)	(47,255		)
Other liabilities	2,603			(1,333		)
Stockholders’ equity	2,531			2,435
Total liabilities and equity	$	(35,313	)	$	(59,004	)

Assets decreased by 2.20% from December 31, 2010 to December 31, 2011, and decreased by 3.55% from December 31, 2009 to December 31, 2010. Investments increased by 15.83% in 2011 after decreasing by 2.68% in 2010. The driving factor behind the decrease in total assets for 2011 was a decrease in short-term borrowings from customers in the form of repurchase agreements and a much smaller decrease in total deposits. These liability reductions were funded from cash and due from banks. As the loan portfolio continued its decrease through 2011, loan cash flows were primarily used to purchase investment securities and also to fund the growth in originations for mortgages held for sale. The mortgage activity was prompted by the low rate environment. The investment portfolio was grown from loan portfolio cash flows and was also restructured to take advantage of market gains. Approximately $62.543 million in U.S. government entity securities were purchased using proceeds from $36.316 million from called securities and the remainder from maturities, all in the same investment category. The mortgage-backed securities portfolio grew by $28.765 million as $135.180 million of securities were purchased using reinvested proceeds from $44.924 million of sold securities, $58.144 million from monthly payment activity and funds from loan pay-downs for the remainder. Included in the purchases were $63.999 million of collateralized mortgage obligations which have attractive payment structures and protections against interest rate risks. The Company began to move back into the municipal sector with $10.477 million in taxable municipal security purchases. The investment portfolio activity resulted in longer durations in U.S. government entity securities, shorter durations in mortgage-backed securities and longer durations in municipal securities. The Company changed its investment portfolio mix in 2010 in light of its net operating loss carry-forwards and the potential weakening of the municipal sector by disposing of $16.061 million of tax-exempt municipal bonds through sales, calls and maturities. Consequently, the portfolio of government-sponsored agency securities was increased by $3.406 million and the portfolio of mortgage-backed securities was increased by $7.392 million in 2010.

34

FIRST M&F CORPORATION AND SUBSIDIARY

The following table shows loans held for investment by type as of December 31, 2011, 2010 and 2009:

(Dollars in thousands)	December 31, 2011		December 31, 2010		December 31, 2009
Commercial real estate	$	574,505	$	646,731	$	643,804
Residential real estate	186,815		195,184		195,361
Home equity lines	37,024		40,305		44,560
Commercial, financial and agricultural	117,790		105,094		102,092
Asset-based loans	37,540		28,132		27,479
Consumer	42,666		44,700		45,044
Total	$	996,340	$	1,060,146	$	1,058,340
Mortgages held for sale	$	26,073	$	6,242	$	3,118
Student loans held for sale	—		—		7,148

The diversification of the entire loan portfolio was a continuing effort in 2011 as management re-emphasized small business lending and agricultural lending, adding lenders with SBA and timberland expertise. A commercial products division was started during the third quarter of 2011 to acquire loan participations, build the asset-based lending portfolio and grow the commercial and industrial and commercial real estate loan portfolios.

Within the commercial real estate portfolio, construction loans declined by $19.768 million in 2011 after declining by $34.161 million in 2010. Other commercial real estate loans decreased by $52.458 million in 2011 primarily due to foreclosure activity and payment activity as demand remained weak and problem loans were worked out. Foreclosure activity represented $25.724 million of the decrease in construction and other real estate-secured loans in 2011 as compared to $28.273 million for 2010. A portfolio of acquired participations in loans secured by church properties declined by $15.446 million during 2011. One group of 8 loan participations with a total face value of $10.062 million and an average rate of 6.94%, secured by church properties in Florida, Georgia, Tennessee and Texas, were purchased in November of 2010 at face value. The second group of 20 loan participations with a total face value of $26.968 million and an average rate of 7.29%, secured by church properties in Florida, Georgia, Louisiana, North Carolina, Tennessee and Texas, were purchased in December of 2010 for $26.159 million to yield 9.04%.

Commercial, financial and agricultural loans grew by 12.08% during 2011, increased by 2.94% in 2010 and decreased by 7.47% in 2009. The growth for 2011 was driven by participations purchased during the fourth quarter. Agricultural loans increased due to the purchase of 19 participations in crop production loans from an agribusiness customer of the Company. The loans had a purchased face value of $10.154 million and were purchased at par value. They had outstanding balances of $8.919 million at the end of 2011. The commercial products division purchased participations in one commercial loan during the fourth quarter with a balance of $13.171 million and one commercial line of credit with a commitment of $1.829 million and an outstanding balance of $183 thousand. The loan and line were to a large technology company. SBA loans grew from $642 thousand at the end of 2010 to $3.044 million at the end of 2011 as the Company staffed for and focused resources on SBA opportunities. The asset-based lending operation portfolio in Memphis, M&F Business Credit, Inc. (MFBC), grew by 33.44% in 2011, grew by 2.38% in 2010 and grew by 3.85% in 2009. MFBC provides working capital lines of credit to companies that generally do not have the necessary capital base to support a traditional working capital line unless the line of credit is monitored on a daily or weekly basis. These companies would not qualify for a traditional bank line of credit and MFBC mitigates this risk through very tight monitoring of all accounts receivable and inventory (at least weekly), accounts payable and monthly reporting of financial statements. These loans are generally collateralized by inventory and accounts receivable and paid from the cash flows received from sales of inventory and collections of accounts receivable. The cash flows are managed through a lock box arrangement under the control of MFBC and collateral is monitored through daily, weekly or monthly procedures. The target market area for the asset-based lending operation is the southeastern U.S., but for the right opportunity, the group can service a loan anywhere in the U.S. The average balance per customer relationship was $1.976 million at the end of 2011.

Consumer loans grew steadily over the course of 2009 and leveled off in 2010. An automobile loan campaign in 2010 resulted in 3.03% growth in new and used car loan balances. Automobile loan balances decreased by $1.740 million in 2011 as no new campaigns were initiated.

The Company began the process of diversifying the product mix of the loan portfolio in 2009 by de-emphasizing commercial and residential construction loans. A renewed emphasis was made on small business, agricultural and consumer loans. A commercial products division was started in 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. Management expects that the loan portfolio's change in size over the next year will depend on the volume of real estate-related and other problem loans that are moved out of the portfolio as well as the pace of economic recovery as it relates to consumer, small business and agricultural loans.

35

FIRST M&F CORPORATION AND SUBSIDIARY

Liability Management

Deposits decreased by .29% during 2011 and decreased by .93% during 2010. The following table shows the breakdown by deposit category of core deposit and public funds deposit growth from December 31, 2010 to December 31, 2011:

	Core Customers Increase (Decrease)					Public Funds Increase (Decrease)					Total Deposits Increase (Decrease)
(Dollars in thousands)	Amount			Percent		Amount			Percent		Amount			Percent
Noninterest-bearing	$	18,572		9.01	%	$	947		15.34	%	$	19,519		9.20	%
NOW	4,117			1.87		21,930			15.25		26,047			7.15
MMDA	25,730			16.86		5,664			41.00		31,394			18.86
Savings	4,923			4.30		1			0.30		4,924			4.29
Customer CDs	(80,631		)	(16.74	)	(6,761		)	(32.08	)	(87,392		)	(17.38	)
Brokered CDs	1,386			14.75		173			3.08		1,559			10.39
Total	$	(25,903	)	(2.19	)%	$	21,954		11.51	%	$	(3,949	)	(0.29	)%

Noninterest-bearing core customer balances increased by $18.572 million in 2011 after decreasing by $5.677 million in 2010. Accounts with balances in excess of $250 thousand increased by $7.580 million in 2011 with the rest of the growth occurring across the deposit base. General decreases across the core customer noninterest-bearing account base were the cause of the 2010 decrease. Public funds noninterest-bearing balances decreased by $10.703 million in 2010 and subsequently increased by $947 thousand in 2011.

NOW account growth in 2011 was dominated by the public funds sector. Although public balances grew by 15.25% in 2011, the number of accounts grew by only 2.76%, indicating that the growth occurred primarily in established accounts. Balances in public funds NOW accounts, which tend to be difficult to predict, also increased from the end of 2009 to the end of 2010. The interest-bearing Summit Checking account, although showing no growth in balances in 2011, was the sales leader for deposit products in 2010. The number of Summit accounts grew in 2011 by 7.24%. The Summit Checking account was introduced during the fourth quarter of 2007. This account is designed to pay a premium deposit rate if the customer meets certain criteria related to electronic banking and debit card transaction activity. Summit accounts, which are classified as NOW accounts, increased by $16.992 million during 2010 while other core customer NOW account balances decreased across the customer base in 2010. The number of Summit Checking accounts grew by 12.64% in 2010 to approximately 11 thousand.

Similar to the activity in noninterest-bearing account balances, core money market balances showed 16.86% growth over 2010 with most of that growth occurring across the customer base. Money market deposits with balances in excess of $250 thousand increased by $4.109 million. The number of core money market accounts grew by 3.30% in 2011. The money market public funds growth occurred almost exclusively in accounts with balances in excess of $250 thousand. During 2010, core money market deposit accounts increased while public funds money market balances decreased. While the public funds money market balance decreases occurred primarily in a small number of accounts, the increase in core customer money market deposits occurred across the customer base. The number of money market deposit accounts with balances in excess of $250 thousand increased by 27.96% in 2010.

The Company became less aggressive in its rate-bidding process for certificates of deposits of municipalities during 2009 as deposit growth occurred in noninterest-bearing and interest-bearing checking accounts. The philosophy of pricing certificates of deposits in the middle to low range of market rates continued through 2010 and 2011 as management focused on limiting overall balance sheet growth and continuing to improve its capital ratios. Certificate of deposit balances dropped steadily through 2010 and 2011 as the rate environment became less conducive to time deposits. Market rates for one year certificates fell by over 100 basis points from the end of 2008 to the end of 2011. By 2010 the Summit NOW account and certain tiers of money market deposit accounts offered better customer yields than long-term certificates of deposits. The dynamics of the Company's deposit base have shown evidence of movement of funds from certificates into NOW and money market accounts since 2009. The Company has worked since 2008 to build the core customer deposit base as a primary source of liquidity and reduce balances of borrowed funds. The Company's capital requirements have limited the amount of balance sheet growth available to it since 2009, thus resulting in a flat to small trend down in total deposits. Strategies for deposit growth have been replaced by strategies toward a more quality core deposit mix. The numbers of core demand, NOW and money market deposit accounts have increased by approximately 2% since the end of 2009. 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.

36

FIRST M&F CORPORATION AND SUBSIDIARY

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

(Dollars in thousands)	December 31, 2011		December 31, 2010		December 31, 2009
Noninterest-bearing demand	$	231,718	$	212,199	$	228,579
NOW deposits	390,256		364,209		309,545
Money market deposits	197,849		166,455		161,570
Savings deposits	119,693		114,769		112,764
Certificates of deposit	415,380		502,772		556,733
Brokered certificates of deposit	16,567		15,008		19,072
Total	$	1,371,463	$	1,375,412	$	1,388,263

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

(Dollars in thousands)	December 31, 2011		December 31, 2010		December 31, 2009
Noninterest-bearing demand	$	7,121	$	6,174	$	16,877
NOW deposits	165,711		143,781		104,247
Money market deposits	19,478		13,814		30,793
Savings deposits	336		335		277
Certificates of deposit	14,315		21,076		40,072
Brokered certificates of deposit	5,783		5,610		4,261
Total	$	212,744	$	190,790	$	196,527

Fed funds purchased and repurchase agreements decreased in 2011 due primarily to one repurchase agreement obligation.

Other borrowings decreased by 14.71% in 2011, decreased by 58.85% in 2010 and decreased by 19.16% in 2009. The decreases in borrowings were primarily funded through liquidity provided by correspondent bank balances and loan portfolio paydowns. Amounts of borrowings maturing within one year increased from 21.24% of other borrowings at December 31, 2010 to 22.76% at December 31, 2011. Management aggressively moved to reduce the amount of borrowings from the Federal Home Loan Bank (FHLB) in 2010. This effort resulted in a $73.595 million decrease in FHLB borrowings during 2010. Management intends to allow its Federal Home Loan Bank borrowings to decrease as they mature while deposits are used as a primary source of funding.

In February 2006 the Company formed First M&F Statutory Trust I for the purpose of issuing corporation-obligated mandatory redeemable capital securities to third-party investors and investing the proceeds from the sale of the capital securities in floating rate junior debentures of the Company. The $30 million in proceeds were used to fund the acquisition on February 17, 2006 of Columbiana Bancshares, Inc. The 30-year junior subordinated debentures paid interest quarterly at a rate of 6.44% fixed for the first five years, and subsequently converted to floating at a rate equal to three month LIBOR plus 133 basis points in March 2011. These junior subordinated debentures, net of the Company’s investment in the variable interest entity, qualify with certain limitations as Tier 1 capital for regulatory purposes. The Company expects to have sufficient cash flows to retire the debt according to its contractual terms.

In November 2010 the Company entered into a forward-starting interest rate swap designed to hedge the Company’s exposure to rising interest rates when the junior subordinated debenture interest payments moved from a fixed rate to a floating rate basis in March 2011. The swap has a notional amount of $30 million, became effective on March 15, 2011, and is structured so that the Company receives a floating rate of 3-month LIBOR plus 1.33% from the counterparty and pays a 3.795% fixed rate to the counterparty. Interest payments became due quarterly, starting with the June 15, 2011 payment, and continue through the termination date of March 15, 2018.

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

Fair Value

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

37

FIRST M&F CORPORATION AND SUBSIDIARY

The Company has investments in five asset-backed securities also known as collateralized debt obligations (CDOs) that are beneficial interests. These beneficial interests were issued by vehicles that used the proceeds to invest in trust preferred securities of commercial banks. Trust preferred securities are a long-term form of capital that were used by commercial banks during the past decade to fund acquisitions of other banks, repurchases of common stock and denovo expansion efforts. Some of the trust preferred securities in these trusts were issued by banks that incurred significant losses on sub-prime mortgages and other real estate-related loans, resulting in defaults on the trust preferred securities. As defaults and deferrals of dividend payments on these securities have increased, covenants have been triggered within these trusts to divert incoming cash flows toward the payment of the most senior securities issued by the trusts. As this occurred, the trusts began to defer interest payments on the less senior instruments. The financial troubles beginning in 2008 which led to deferrals of payments by the issuing banks led to a re-evaluation of the credit quality of the beneficial interests, secured by the issuing bank trust preferred securities, issued by the trusts. These reviews resulted in downgrades by Moody’s in late 2008 and early 2009 of the five CDOs that the Company owns to below investment grade. Since observable transactions in these securities are extremely rare, the Company uses assumptions that a market participant would use in valuing these instruments. These assumptions primarily include cash flow estimates and market discount rates. The cash flow estimates are sensitive to the assumptions related to the ability of the issuers to pay the underlying trust preferred securities according to their terms. The market discount rates depend on transactions, which are rare given the lack of interest of investors in these types of beneficial interests. As of the end of 2011, the Company carried these investments at 26.11% of amortized cost, with the unrealized losses of approximately $2.318 million recorded in stockholders’ equity, net of tax, as a component of other comprehensive income. As of the end of 2010, the Company carried these investments at 24.79% of amortized cost, with the unrealized losses of approximately $2.834 million recorded in stockholders’ equity, net of tax, as a component of other comprehensive income.

The Company recorded $631 thousand in 2011 and $403 thousand in 2010 of other-than-temporary impairment losses through earnings on these securities. The credit downgrades at the end of 2008 and in the first quarter of 2009 were the first indicator that an other-than-temporary impairment may be present in some of these beneficial interests. Impairment tests are performed quarterly and consist of estimating the cash flows that are available to pay the beneficial interests and discounting those cash flows using the Company’s initial yield at purchase as the discount rate. Any deficit of the discounted value below the book value of the beneficial interest is considered a credit-related other-than-temporary impairment and is charged against current earnings. The remainder of the difference between the fair value and the book value of the beneficial interest is considered an other-than-temporary impairment charged separately to other comprehensive income. The 2011 tests resulted in a $631 thousand credit-related impairment charge against earnings and $263 thousand of impairment charges reclassified from other comprehensive income on three of the beneficial interests. The 2010 tests resulted in a $403 thousand credit-related impairment charge against earnings and a $32 thousand other impairment charge to other comprehensive income on four of the beneficial interests.

An economic by-product of the sub-prime mortgage crisis has been the slow-down in the housing markets. Lack of demand in housing, an over-supply of homes on the market, a tightening of available credit by banks and a general deterioration in the economy have affected the Company’s ability to dispose of foreclosed properties and to arrive at values of real estate collateral for loan impairment testing. As real estate values have steadily fallen since 2008, losses and write-downs of other real estate have increased. The Company experienced losses on sales and write downs of foreclosed real estate of $5.874 million in 2011 as compared to $1.574 million in 2010. Real estate-related loan impairment calculations became more severe after 2008, resulting in $6.971 million in loan loss accruals related to real estate secured loans individually reviewed for impairments in 2011 and $8.247 million in 2010. The Company estimates that fair values of properties related to land development and construction and commercial real estate could remain under pressure through 2012, and may result in additional loan loss accruals for loan impairments.

In November 2010 the Company entered into an interest rate swap designed to hedge its exposure to rising interest rates on its $30 million of junior subordinated debentures, which converted from a fixed rate of interest to a floating rate effective March 15, 2011. The interest rate swap is designed for the Company to receive floating rate interest amounts and to make fixed rate payments in a net settlement arrangement with the swap counterparty. The swap is expected to be highly effective. Therefore, the net change in fair value of the swap is being recorded in other comprehensive income. On each interest settlement date the balance in accumulated other comprehensive income is reclassified into interest expense. Any ineffective portion of the change in the fair value of the swap, which is valued on a monthly basis, is recorded in earnings rather than into other comprehensive income. The fair value of the swap at the end of 2011 was $1.834 million, classified as a liability. The fair value, net of deferred taxes of $684 thousand, was recorded in other comprehensive income. The fair value of the swap at the end of 2010 was $817 thousand, classified as an asset. The fair value, net of deferred taxes of $305 thousand, was recorded in other comprehensive income.

The Company accounts for mortgages held for sale at the lower of cost or fair value. Fair values of mortgages are primarily influenced by market rates. The Company also uses credit spreads in valuing mortgages held for sale. Since these loans are originated to conform to FNMA underwriting standards, their values are not influenced by the sub-prime mortgage market. These mortgages are generally sold within 90 days of origination and retention of these mortgages in the Company’s loan portfolio is rare. The Company also issues rate locks related to loan originations and receives purchase commitments from correspondent bank investors to purchase the loans when they are originated. These commitments to originate and purchase are accounted for as derivatives and are therefore marked to fair value every month with changes being recorded in mortgage banking income. Fair value adjustments for origination derivatives resulted in $188 thousand in losses charged to mortgage banking income during 2011 and $12 thousand in revenues credited to mortgage banking income during 2010. Fair value adjustments for forward sale derivatives contributed $188 thousand in revenues to mortgage banking income during 2011 and increased mortgage banking revenues by $502 thousand during 2010.

38

FIRST M&F CORPORATION AND SUBSIDIARY

Credit Risk Management

The Company measures and monitors credit quality on an ongoing basis through credit committees and the loan review process. Credit standards are approved by the Board with their adherence monitored during the lending process as well as through subsequent loan reviews. The Company strives to minimize risk through the diversification of the portfolio geographically as well as by loan purpose and collateral. 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. 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 2011 the Company changed the number of periods included in the historical loss rate from 13 years to five years. The 13-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 13-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 13-year calculation. The change in calculation, given the previous statistical adjustments to the 13-year average, resulted in an immaterial difference. 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.

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, remained stable through 2010 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. Over the course of 2009 and through 2010 many real estate-secured loans were worked out or foreclosed on and properties disposed of. Nonaccrual loans have moved downward from their high of $74.420 million in the second quarter of 2009 and fallen below $20 million at the end of 2011. The primary challenge during 2012 and beyond will be to liquidate foreclosed properties to avoid a burdensome build-up of these non-earning assets as problem loans are either managed back to performing status or foreclosed on.

39

FIRST M&F CORPORATION AND SUBSIDIARY

Nonaccrual loans decreased to $17.177 million at the end of 2011 from $33.127 million at the end of 2010 and $44.549 million at the end of 2009. Nonperforming assets as a percentage of total assets decreased from 4.15% at the end of 2009 to 4.05% at the end of 2010 and decreased to 3.49% at the end of 2011. The slow-down in housing that began in 2007 continued to worsen throughout 2008 and 2009. The real estate market, although still stagnant, stabilized somewhat in 2010 from its steep losses in 2008 and 2009. The lack of a liquid housing market has had a direct effect on developers and builders as lots and speculative houses became more difficult to move and prices continued to drop through 2009 in search of an equilibrium, with prices still moving downward at a slow pace in 2011. The Company disposed of $15.877 million of foreclosed real estate during 2010 and sold $10.510 million of foreclosed properties in 2011.

Approximately 83.45% of the $17.177 million in nonaccrual loans at December 31, 2011 were in construction and development and commercial real estate loans. These nonaccrual balances included several large loans.

The following table summarizes the number and amount of nonaccrual construction and land development loans of $500 thousand or more at the end of each quarter from December 31, 2010 through December 31, 2011.

(Dollars in thousands)	Number of Loans	Amount
Balance at 12/31/11	3	$	2,989
Balance at 09/30/11	6	6,927
Balance at 06/30/11	7	8,035
Balance at 03/31/11	7	10,139
Balance at 12/31/10	7	10,553

The following table summarizes the number and amount of nonaccrual commercial real estate loans of $500 thousand or more at the end of each quarter from December 31, 2010 through December 31, 2011.

(Dollars in thousands)	Number of Loans	Amount
Balance at 12/31/11	4	$	8,185
Balance at 09/30/11	5	12,465
Balance at 06/30/11	8	16,221
Balance at 03/31/11	7	15,467
Balance at 12/31/10	6	10,152

40

FIRST M&F CORPORATION AND SUBSIDIARY

The following tables list construction and commercial real estate loans, along with their impairment allowances, that were in nonaccrual status and had balances of $500 thousand or more at December 31, 2010 and at December 31, 2011.

	December 31, 2011				December 31, 2010
	Three Largest Loans				Seven Largest Loans
(Dollars in thousands)	Nonaccrual Balance		Impairment Allowance		Nonaccrual Balance		Impairment Allowance
Note
1	$	1,465	$	400	$	1,465	$	—
2	963		—		1,393		125
3	561		—		803		—
4	—		—		2,925		—
5	—		—		1,634		—
6	—		—		1,325		—
7	—		—		1,008		—
Totals	$	2,989	$	400	$	10,553	$	125
Total nonaccrual construction and land development  loans	$	4,398	$	400	$	13,993	$	175

	December 31, 2011				December 31, 2010
	Four Largest Loans				Six Largest Loans
(Dollars in thousands)	Nonaccrual Balance		Impairment Allowance		Nonaccrual Balance		Impairment Allowance
Note
8	$	4,650	$	—	$	—	$	—
9	1,847		200		2,455		300
10	881		—		880		—
11	807		207		—		—
12	—		—		2,469		—
13	—		—		2,093		—
14	—		—		1,582		—
15	—		—		673		255
Totals	$	8,185	$	407	$	10,152	$	555
Total nonaccrual commercial real estate loans	$	9,937	$	477	$	13,027	$	765

The following table summarizes information relevant to the impairment determinations for the three largest construction and development loans and the four largest commercial real estate loans that were in nonaccrual status at December 31, 2011.

(Dollars in thousands)	Type of Borrower	Type of Collateral	Nonaccrual Balance		Impairment Allowance		Information Supporting Allowance
Note			12/31/2011		12/31/2011
1	Residential Developer	Residential Subdivision	$	1,465	$	400	Appraisal dated 11/23/09
2	Commercial Developer	Commercial - Retail	963		—		Appraisal dated 10/03/08
3	Residential Developer	Residential Subdivision	561		—		Appraisal dated 09/30/09
8	Commercial	Assisted Living Facility	4,650		—		Appraisal dated 06/23/11
9	Commercial	Retailer	1,847		200		Appraisal dated 10/05/10
10	Commercial	Commercial Office	881		—		Appraisal dated 07/08/10
11	Commercial	Industrial	807		207		Appraisal dated 10/14/10

41

FIRST M&F CORPORATION AND SUBSIDIARY

Through 2007 and into 2008 the majority of loans that were individually reviewed for impairment were in accrual status but had risk ratings that indicated potential or actual impairment. Toward the end of 2008 and into the first quarter of 2009 many of these loans required an impairment allowance and also were placed into nonaccrual status. The additions to the impairment allowance and the nonaccrual loan balances in 2009 occurred primarily in construction and land development loans. Many of these loans were foreclosed on during 2009. Many remaining nonaccrual loans were written down to their collateral values, resulting in a small allowance for loan losses remaining for nonaccrual loans at the end of 2009. During 2010 initial impairments became fewer for construction loans while commercial real estate loans incurred new impairments. Commercial real estate loans in nonaccrual status increased from 18 loans for $9.789 million at the end of 2009 to 26 loans for $13.027 million at the end of 2010 and then decreased to 14 loans for $9.937 million at the end of 2011.

The following table shows a distribution of the totals for construction loans evaluated for impairment and the impairment allowances allocated to those loans at December 31, 2011 and December 31, 2010.

	December 31, 2011				December 31, 2010
(Dollars in thousands)	Loan Balance		Impairment Allowance		Loan Balance		Impairment Allowance
Nonaccrual loans	$	4,398	$	400	$	13,993	$	175
Accruing loans with an allowance	7,155		1,350		11,327		2,696
Accruing loans without an allowance	6,606		—		8,111		—
Total	$	18,159	$	1,750	$	33,431	$	2,871

The following table shows a distribution of the totals for commercial real estate loans evaluated for impairment and the impairment allowances allocated to those loans at December 31, 2011 and December 31, 2010.

	December 31, 2011				December 31, 2010
(Dollars in thousands)	Loan Balance		Impairment Allowance		Loan Balance		Impairment Allowance
Nonaccrual loans	$	9,937	$	477	$	13,027	$	765
Accruing loans with an allowance	4,495		417		5,025		817
Accruing loans without an allowance	26,338		—		36,275		—
Total	$	40,770	$	894	$	54,327	$	1,582

42

FIRST M&F CORPORATION AND SUBSIDIARY

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

(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
Construction and development loans:
12/31/2011	$	69,325	$	603	$	72	$	4,398	$	1,970
9/30/2011	83,100		1,147		—		8,801		743
6/30/2011	87,826		1,514		307		9,735		(551		)
3/31/2011	92,744		1,218		101		13,608		(68		)
12/31/2010	89,093		1,257		274		13,993		4,167
Loans secured by 1-4 family properties:
12/31/2011	$	223,839	$	3,288	$	174	$	1,896	$	1,998
9/30/2011	223,884		2,334		3		2,166		1,790
6/30/2011	226,823		2,067		285		3,272		585
3/31/2011	227,912		2,378		102		3,144		295
12/31/2010	235,489		3,020		564		3,863		1,733
Commercial real estate-secured loans:
12/31/2011	$	505,180	$	2,592	$	279	$	9,937	$	3,998
9/30/2011	520,804		2,958		189		14,804		2,229
6/30/2011	533,720		3,746		67		18,506		753
3/31/2011	549,628		4,940		65		19,111		395
12/31/2010	557,638		2,091		—		13,027		7,360

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

(Dollars in thousands)	December 31, 2011			December 31, 2010			December 31, 2009
Nonaccrual loans	$	17,177		$	33,127		$	44,549
Other real estate	36,952			31,125			23,578
Investment securities	599			698			825
Total non-performing assets	$	54,728		$	64,950		$	68,952
Past due 90 days or more and still accruing interest	$	602		$	951		$	2,479
Restructured loans (accruing)	19,662			18,052			4,620
Ratios:
Nonaccrual loans to loans	1.68		%	3.11		%	4.17		%
Past due 90 day loans to loans	.06		%	.09		%	.23		%
Non-performing credit assets to loans and other real estate	5.11		%	5.85		%	6.24		%
Non-performing assets to assets	3.49		%	4.05		%	4.15		%

43

FIRST M&F CORPORATION AND SUBSIDIARY

The following table shows foreclosed real estate balances by type as of December 31, 2011 and December 31, 2010:

(Dollars in thousands)	December 31, 2011		December 31, 2010
Construction and land development	$	22,773	$	21,682
Farmland	2,618		1,841
1-4 family residential	2,136		2,706
Five plus residential	950		1,036
Nonfarm nonresidential	8,475		3,860
	$	36,952	$	31,125

The Company is still in the process, begun in 2008, of working through the negative effects of the real estate downturn. The length and depth of any further deterioration will depend on the strength of the economy and of the housing and commercial real estate sectors. A continued deterioration in real estate values, especially if in the commercial real estate sector, could result in additional write-downs of loans. Management does not know of any additional material contingencies that could negatively affect the remainder of the loan portfolio during 2012.

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

In an effort to address and change the risk profile of the Company’s balance sheet, management decided in 2010 to de-emphasize residential and commercial construction loans and re-emphasize consumer, small business loans and certain agricultural loans. The Company also added a group of acquired participations of church loans to further diversify the portfolio.

Defined Benefit Pension Plan

The Company has a defined benefit pension plan that it froze in September 2001. For accounting purposes, the plan’s funded status was a net liability of $2.564 million at the end of 2011 and $542 thousand at the end of 2010. The plan had an unamortized actuarial loss of $4.272 million at the end of 2011 and $2.952 million at the end of 2010 that was recorded in stockholders’ equity within other comprehensive income. The actuarial loss balance is being amortized against earnings on a straight-line basis through 2013. The Company expects to terminate the plan in five to seven years.

During 2011, the plan experienced losses in its investment portfolio of $235 thousand. The plan also experienced actuarial losses of $1.478 million related to the change in present value of the pension obligation. The actuarial loss was triggered by a decline in the discount rate from 5.05% at the end of 2010 to 4.00% at the end of 2011. The amortization expense component of pension expense was $984 thousand in 2011 and $885 thousand in 2010. It is expected to be $2.136 million for 2012.

Two significant issues for the Company going forward are (1) how to adjust planned contributions to the pension plan since it experienced a net funded deficit at the ends of 2010 and 2011 and (2) working with the higher expense level brought about by the unamortized actuarial loss and the shortening of the time frame for amortizing that loss against earnings. Management expects to manage pension contributions with the desire to terminate the plan within the next five to seven years. Contributions of $224 thousand were made in 2010 and of $168 thousand were made in 2011. If interest rates increase over the next three to five years, then the discounted value of the benefit obligations will decrease, thus reducing the actuarial loss further or producing a net actuarial gain. However, during 2012 and likely into 2013 the Company will experience pension expenses of approximately $2 million annually.

44

FIRST M&F CORPORATION AND SUBSIDIARY

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

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

The asset/liability committee establishes guidelines, approved by appropriate board action, by which the current liquidity position of the Company is monitored to ensure adequate funding capacity. Accessibility to local, regional and other funding sources is also maintained in order to actively manage the funding structure that supports the earning assets of the Company. The Company and its bank subsidiary maintain secured lines of credit with correspondent banks, the Federal Home Loan Bank and the Federal Reserve.

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

The Company received funding in 2010 from the U.S. Treasury under the Community Development Capital Initiative (CDCI), which was used to pay off its $30 million U.S. Treasury Capital Purchase Program obligations that were incurred in 2009. The CDCI obligation is in the form of preferred stock with a 2% annual dividend rate. The dividend rate accelerates to 9% in the fourth quarter of 2018. The Company expects to generate sufficient cash flows through earnings retention to pay off the preferred stock before the dividend rate accelerates.

The Company also has $30 million in subordinated debenture obligations related to a trust preferred securities issuance in 2006. The debentures pay interest on a quarterly basis of LIBOR plus 133 basis points. The obligations are due in 2036 and may be prepaid. The Company expects to generate sufficient cash flows through future earnings to pay the debentures in full.

Interest Rate Sensitivity

Interest rate sensitivity is a function of the repricing characteristics of the Company’s portfolio of assets and liabilities. Interest rate sensitivity management focuses on repricing relationships of these assets and liabilities during periods of changing market interest rates. Management seeks to minimize the effect of interest rate movements on net interest income. Responsibility for managing the Company’s program for controlling and monitoring interest rate risk and liquidity risk and for maintaining income stability, given the Company’s exposure to changes in interest rates, is vested in the asset/liability committee. Appropriate policy and guidelines, approved by the board of directors, govern these actions. Monitoring is primarily accomplished through monthly reviews and analysis of asset and liability repricing opportunities, market conditions and expectations for the economy. In addition to these monthly reviews, a quarterly sensitivity analysis is performed to determine the potential effects of changes in interest rates on the Company’s net interest income and market value of equity. Cash flow analyses are also used to project short-term interest rate risks and liquidity risks.

The Company is currently in a negative gap position for assets and liabilities repricing within the next year. This generally means that for assets and liabilities maturing and repricing within the next 12 months, the Company is positioned for more liabilities to reprice than the amount of assets repricing. At the end of 2011, the one-year repricing gap stood at -2.44% as compared to -1.40% at the end of 2010. The primary factor influencing the change in the one-year repricing gap to a more negative percentage was a decrease in short-term earning assets. According to interest-rate sensitivity analysis, the Company has low-to-moderate interest rate risk.

Capital Resources

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

The Company issued 30,000 shares of Class B, Series A Preferred Stock and a warrant for 513,113 shares of common stock with an exercise price of $8.77 on February 27, 2009 to the U. S. Treasury under the provisions of the TARP Capital Purchase Program for total proceeds of $30.000 million. Approximately $28.637 million of the proceeds were allocated to the preferred stock with the remaining $1.363 million being allocated to additional paid-in capital for the common stock warrant. The preferred stock was treated as Tier 1 capital for risk-based capital measurement purposes.

45

FIRST M&F CORPORATION AND SUBSIDIARY

The Capital Purchase Program proceeds were used primarily to inject additional capital into the Company’s bank subsidiary. The acquisition of these funds has served, and will continue to serve, (1) to increase the Company’s capital position, (2) to provide liquidity for the Company’s and bank subsidiary’s operations and debt service obligations and (3) to act as a buffer against the effects on capital of future unpredictable events. The additional capital also served to support growth in the non-real estate secured commercial loan portfolio during 2010 and in the consumer loan portfolio during 2009 and 2010.

Cumulative dividends on the Class B, Series A Preferred Stock paid a dividend rate of 5% per annum until they were exchanged in September 2010. The Class B, Series A Preferred Stock did not have a stated maturity date and was generally non-voting.

On September 29, 2010 the Company issued 30,000 shares of Class B, Series CD Preferred Stock to the U. S. Treasury to redeem its Class B, Series A Preferred Stock. The Class B, Series CD shares were issued through the U. S. Treasury’s Community Development Capital Initiative, which is available to Community Development Financial Institutions. 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 will be paid only if, as, and when declared by the Company’s Board of Directors. The rate may increase to 5% in the event that M&F Bank fails to re-qualify as a CDFI three years after the initial certification, and that re-qualifying failure remains uncured for 180 days. If the bank continues to fail to re-qualify for an additional 90 days, the rate increases to 9% until the bank is once again re-qualified as a CDFI. 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 terms of the Exchange agreement with the U. S. Treasury specify that the Company may not pay common dividends in excess of the aggregate per share dividends for the immediately prior fiscal year. This will limit future common dividends while the preferred stock is outstanding to the current rate of $.01 per share per quarter or $.04 per share per year.

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

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

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

The Company’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 7,500 shares per day during 2011. The stock's closing price was $2.84 per share on December 31, 2011.

The ratio of capital to assets stood at 6.99% at December 31, 2011, 6.68% at December 31, 2010, and 6.29% at December 31, 2009, with risk-based capital ratios in excess of the regulatory requirements. The Company’s regulatory capital ratios for 2011 and 2010 are summarized in Note 20 – Regulatory Matters of the audited financial statements included in Item 8, Financial Statements and Supplementary Data, in this Form 10-K.

46

FIRST M&F CORPORATION AND SUBSIDIARY

OFF-BALANCE SHEET ARRANGEMENTS

The Company’s primary off-balance sheet arrangements are in the form of loan commitments, operating lease commitments and an interest rate swap. At December 31, 2011, the Company had $126.455 million in unused loan commitments outstanding. Of these commitments, $89.963 million mature in one year or less. Lines of credit are established using the credit policy of the Company concerning the lending of money.

Letters of credit are used to facilitate the borrowers’ business and are usually related to the acquisition of inventory or of assets to be used in the customers’ business. Letters of credit are generally secured and are underwritten using the same standards as traditional commercial loans. Most standby letters of credit expire without being presented for payment. However, the presentment of a standby letter of credit would create a loan receivable from the Bank’s loan customer. At December 31, 2011, the Company had $1.580 million in financial standby letters of credit issued and outstanding. At December 31, 2010, the Company had $6.169 million in financial standby letters of credit issued and outstanding.

Liabilities of $4 thousand at December 31, 2011, and $15 thousand at December 31, 2010, are recognized in other liabilities related to the obligation to stand ready to perform related to standby letters of credit.

The Company makes commitments to originate mortgage loans that will be held for sale. The total commitments to originate mortgages to be held for sale were $11.246 million at December 31, 2011. These commitments are accounted for as derivatives and are marked to fair value with changes in fair value recorded in mortgage banking income. At December 31, 2011, mortgage origination-related derivatives with positive fair values of $134 thousand were included in other assets and derivatives with negative fair values of $167 thousand were included in other liabilities.

The Company also engages in forward sales contracts with mortgage investors to purchase mortgages held for sale. Those forward sale agreements that have a determined price and expiration date are accounted for as derivatives and marked to fair value through mortgage banking income. At December 31, 2011, the Company had $37.507 million in locked forward sales agreements in place. Forward sale-related derivatives with positive fair values of $135 thousand were included in other assets and derivatives with negative fair values of $124 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. The Company incurred one recourse loss of $4 thousand in 2011, with no recourse loss in any of the previous five years. Mortgages sold that were still in the recourse period were $42.146 million at December 31, 2011. No recourse liability was recorded for these mortgages.

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

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 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.

47

FIRST M&F CORPORATION AND SUBSIDIARY

TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The following table summarizes the obligations of the Company:

(Dollars in thousands)	Payments Due by Period
Contractual Obligations	Total		Less Than 1 Year		1 - 3 Years		3 - 5 Years		More Than 5 Years
Time deposits	$	431,947	$	248,185	$	135,174	$	46,419	$	2,169
Short-term borrowings	4,398		4,398		—		—		—
Other borrowings	43,001		9,786		21,748		10,685		782
Junior subordinated debentures	30,928		—		—		—		30,928
Capital lease obligations	—		—		—		—		—
Operating leases	1,965		577		683		504		201
Purchase obligations	—		—		—		—		—
Other long-term liabilities	—		—		—		—		—
Total	$	512,239	$	262,946	$	157,605	$	57,608	$	34,080

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

(1) Allowance for loan losses

(2) Fair value

(3) 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.

48

FIRST M&F CORPORATION AND SUBSIDIARY

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. 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 December 31, 2011, 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.

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.

49

FIRST M&F CORPORATION AND SUBSIDIARY

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 involves 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 estimate of current and deferred tax expenses or benefits and the related current and deferred tax assets and liabilities. Changes in these estimates occur as tax rates, tax laws or regulations change, as court decisions change the merits of certain tax treatments and as examinations by taxing authorities change our treatments of tax items. These changes impact tax accruals and can materially affect our operating results. 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.

50

FIRST M&F CORPORATION AND SUBSIDIARY

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk comes in the form of risk to the net interest income of the Company as well as to the market values of the financial assets and liabilities on the balance sheet and the values of off-balance sheet activities such as commitments. The Company monitors interest rate risk on a monthly basis with quarterly sensitivity analyses being performed on the balance sheet and economic value of equity. The following table shows the gap position of the Company at December 31, 2011, placing variable-rate instruments in the earliest repricing category and including estimated prepayment activity for certain loans and mortgage-backed securities. The gap positioning for deposits without maturities are estimated using a combination of factors that include deposit product price sensitivity estimates for increasing and decreasing rate periods. As the assumptions made regarding non-maturity deposits heavily influence the interest rate sensitivity analysis of the Company’s balance sheet, management frequently reviews these inputs to best reflect current deposit market forces and industry standards for monitoring these risk factors.

Rate Sensitivity Gap Report
As of December 31, 2011
(Dollars in thousands)	0-12 months			1-5 years			Over 5 years			Total
Short-term funds	$	61,941		$	2,450		$	—		$	64,391
Investments	103,178			155,818			61,778			320,774
Loans	483,431			472,894			66,088			1,022,413
Total earning assets	$	648,550		$	631,162		$	127,866		$	1,407,578
NOW, MMDA & savings deposits	$	412,780		$	40,520		$	254,498		$	707,798
Time deposits	248,185			181,593			2,169			431,947
Short-term borrowings	4,398			—			—			4,398
Other borrowings	51,398			21,751			780			73,929
Interest rate swap	(30,000		)	—			30,000			—
Total int. bearing liabilities	$	686,761		$	243,864		$	287,447		$	1,218,072
Rate sensitive gap	$	(38,211	)	$	387,298		$	(159,581	)
Cumulative gap	$	(38,211	)	$	349,087		$	189,506
Cumulative % of assets	(2.44		)%	22.25		%	12.08		%

Interest rate shock analysis shows that the Company will experience a 1.04% 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 .49% 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 10.08% with an immediate and sustained increase in interest rates of 200 basis points. The market value of equity will decrease by 15.11% with an immediate and sustained decrease in interest rates of 100 basis points.

51

FIRST M&F CORPORATION AND SUBSIDIARY

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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

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

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

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

Based on First M&F Corporation’s evaluation under the framework in Internal Control – Integrated Framework, management concluded that internal control over financial reporting was effective as of December 31, 2011.

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

52

FIRST M&F CORPORATION AND SUBSIDIARY

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Audit Committee, Board of Directors and Stockholders

First M&F Corporation

Kosciusko, Mississippi

We have audited the accompanying consolidated statements of condition of First M&F Corporation as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2011. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First M&F Corporation as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

/s/ BKD, LLP

Jackson, Mississippi

March 14, 2012

53

FIRST M&F CORPORATION AND SUBSIDIARY

Consolidated Statements of Condition

December 31, 2011 and 2010

(In Thousands, Except Share Data)

	2011			2010
Assets
Cash and due from banks	$	39,976		$	45,099
Interest-bearing bank balances	39,391			72,103
Federal funds sold	25,000			25,000
Securities available for sale, amortized cost of $315,890 and $274,421	320,774			276,929
Loans held for sale	26,073			6,242
Loans, net of unearned income	996,340			1,060,146
Allowance for loan losses	(14,953		)	(16,025		)
Net loans	981,387			1,044,121
Bank premises and equipment	37,989			40,696
Accrued interest receivable	6,122			6,380
Other real estate	36,952			31,125
Other intangible assets	4,586			5,013
Bank owned life insurance	22,477			21,790
Other assets	27,924			29,466
	$	1,568,651		$	1,603,964
Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing deposits	$	231,718		$	212,199
Interest-bearing deposits	1,139,745			1,163,213
Total deposits	1,371,463			1,375,412
Fed funds purchased and repurchase agreements	4,398			33,481
Other borrowings	43,001			50,416
Junior subordinated debt	30,928			30,928
Accrued interest payable	1,023			1,470
Other liabilities	8,242			5,192
Total liabilities	1,459,055			1,496,899
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock; 1,000,000 shares authorized; 30,000 shares issued and outstanding	17,564			16,390
Common stock of $5.00 par value; 50,000,000 shares authorized: 9,154,936 and 9,106,803 shares  issued	45,775			45,534
Additional paid-in capital	31,895			31,883
Nonvested restricted stock awards	674			784
Retained earnings	14,456			12,225
Accumulated other comprehensive income (loss)	(768		)	249
Total equity	109,596			107,065
	$	1,568,651		$	1,603,964

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

54

FIRST M&F CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations

Years Ended December 31, 2011, 2010 and 2009

(In Thousands, Except Share Data)

	2011				2010				2009
Interest income:
Interest and fees on loans	$	60,201			$	62,070			$	66,782
Interest on loans held for sale	275				232				278
Taxable investments	6,745				7,616				9,531
Tax-exempt investments	1,252				1,549				2,105
Federal funds sold	63				82				95
Interest-bearing bank balances	179				143				42
Total interest income	68,715				71,692				78,833
Interest expense:
Deposits	13,501				18,809				23,701
Fed funds purchased and repurchase agreements	36				66				97
Other borrowings	1,979				3,024				5,449
Junior subordinated debt	1,335				1,992				1,992
Total interest expense	16,851				23,891				31,239
Net interest income	51,864				47,801				47,594
Provision for loan losses	9,720				9,220				49,601
Net interest income (expense) after provision for loan losses	42,144				38,581				(2,007		)
Noninterest income:
Deposit account income	10,293				10,221				10,976
Mortgage banking income	1,821				1,581				1,823
Agency commission income	3,636				3,809				3,881
Trust and brokerage income	584				526				489
Bank owned life insurance income	638				667				762
Other income	2,464				1,865				2,412
Securities gains, net	2,769				2,255				456
Total investment other-than-temporary impairment losses	(368		)		(435		)		(3,527		)
Portion of loss recognized in (reclassified from) other comprehensive income (before taxes)	(263		)		32				2,698
Net investment impairment losses recognized	(631		)		(403		)		(829		)
Total noninterest income	21,574				20,521				19,970
Noninterest expenses:
Salaries and employee benefits	28,469				27,303				28,314
Net occupancy expenses	3,935				3,937				4,614
Equipment expenses	1,871				2,382				2,877
Software and processing expenses	1,540				1,627				1,898
Foreclosed property expenses	7,351				2,946				7,283
FDIC insurance assessments	2,426				3,261				3,276
Goodwill impairment	—				—				32,572
Intangible asset amortization and impairment	427				426				1,688
Other expenses	12,315			12,608,000	12,608			12,315,000	13,350
Total noninterest expenses	58,334				54,490				95,872
Income (loss) before income taxes	5,384				4,612				(77,909		)
Income tax expense (benefit)	1,011				602				(18,104		)
Net income (loss)	4,373				4,010				(59,805		)
Net loss attributable to noncontrolling interests	—				(1		)		(6		)
Net income (loss) attributable to First M&F Corporation	$	4,373			$	4,011			$	(59,799	)
Dividends and accretion on preferred stock	1,774				1,692				1,464
Gain on exchange of preferred stock	—				12,867				—
Net income (loss) applicable to common stock	$	2,599			$	15,186			$	(61,263	)
Net income (loss) allocated to common shareholders	$	2,584			$	15,071			$	(60,655	)
Earnings (loss) per share:
Basic	$	0.28			$	1.66			$	(6.69	)
Diluted	0.28				1.66				(6.69		)

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

55

FIRST M&F CORPORATION AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2011, 2010 and 2009

(In Thousands)

	2011			2010			2009
Net income (loss)	$	4,373		$	4,010		$	(59,805	)
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Unrealized gains on securities available for sale arising during the period, net of tax of $1,728, $159, and $1,628	2,901			267			2,736
Unrealized losses on other-than-temporarily impaired securities available for sale arising during the period, net of tax of $43, $54 and $1,462	(72		)	(92		)	(2,458		)
Reclassification adjustment for gains on securities available for sale included in net income, net of tax of $1,033, $841, and $170	(1,736		)	(1,414		)	(286		)
Reclassification adjustment for credit related other-than-temporary impairment losses on securities available for sale included in net income, net of tax of $235, $150 and $309	396			253			520
Unrealized gains (losses) net of settlements on cash flow hedge arising during the period,  net of tax of $989 and $305	(1,662		)	512			—
Defined benefit pension plans:
Net actuarial gains (losses) arising during the period, net of tax of $859, $111 and $32	(1,445		)	(187		)	53
Amortization of transition asset, net of tax of $0, $0 and $3	—			—			(4		)
Amortization of prior service cost, net of tax of $9, $14 and $14	(16		)	(23		)	(23		)
Amortization of actuarial loss, net of tax of $367, $330 and $338	617			554			568
Other comprehensive income (loss)	(1,017		)	(130		)	1,106
Total comprehensive income (loss)	3,356			3,880			(58,699		)
Comprehensive loss attributable to noncontrolling interests	—			(1		)	(6		)
Comprehensive income (loss) of First M&F Corp	$	3,356		$	3,881		$	(58,693	)

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

56

FIRST M&F CORPORATION AND SUBSIDIARY

Consolidated Statements of Stockholders' Equity

Years Ended December 31, 2011, 2010 and 2009

(In Thousands, Except Share Data)

	Preferred Stock			Common Stock		Additional Paid-in Capital			Nonvested Restricted Stock Awards			Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interest			Total
January 1, 2009	$	—		$	45,317	$	30,447		$	780		$	60,133		$	(727	)	$	18		$	135,968
Net loss	—			—		—			—			(59,799		)	—			(6		)	(59,805		)
Cash dividends - common ($.16 per  share)	—			—		—			—			(1,466		)	—			—			(1,466		)
Issuance of 30,000 shares of   preferred stock	28,637			—		—			—			—			—			—			28,637
Issuance of stock warrant for  513,113 shares	—			—		1,363			—			—			—			—			1,363
Dividends and accretion on  preferred stock	201			—		—			—			(1,464		)	—			—			(1,263		)
6,000 restricted share awards vested	—			30		71			(101		)	—			—			—			—
Share-based compensation expense  recognized	—			—		17			55			1			—			—			73
Tax benefits on restricted stock  dividends paid	—			—		28			—			—			—			—			28
Net change	—			—		—			—			—			1,106			—			1,106
Distributions	—			—		—			—			—			—			(11		)	(11		)
December 31, 2009	$	28,838		$	45,347	$	31,926		$	734		$	(2,595	)	$	379		$	1		$	104,630
Net income	—			—		—			—			4,011			—			(1		)	4,010
Cash dividends - common ($.04 per  share)	—			—		—			—			(366		)	—			—			(366		)
37,457 shares issued to directors	—			187		(54		)	—			—			—			—			133
Dividends and accretion on  preferred stock	419			—		—			—			(1,692		)	—			—			(1,273		)
Gain on exchange of preferred stock	(12,867		)	—		—			—			12,867			—			—			—
Share-based compensation expense  recognized	—			—		11			50			—			—			—			61
Net change	—			—		—			—			—			(130		)	—			(130		)
December 31, 2010	$	16,390		$	45,534	$	31,883		$	784		$	12,225		$	249		$	—		$	107,065
Net income	—			—		—			—			4,373			—			—			4,373
Cash dividends - common ($.04 per  share)	—			—		—			—			(368		)	—			—			(368		)
42,133 shares issued to directors	—			211		(68		)	—			—			—			—			143
Dividends and accretion on  preferred stock	1,174			—		—			—			(1,774		)	—			—			(600		)
6,000 restricted share awards vested	—			30		71			(101		)	—			—			—			—
Share-based compensation expense  recognized	—			—		7			(9		)	—			—			—			(2		)
Tax benefits on restricted stock  dividends paid	—			—		2			—			—			—			—			2
Net change	—			—		—			—			—			(1,017		)	—			(1,017		)
December 31, 2011	$	17,564		$	45,775	$	31,895		$	674		$	14,456		$	(768	)	$	—		$	109,596

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

57

FIRST M&F CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

Years Ended December 31, 2011, 2010 and 2009

(In Thousands)

	2011			2010			2009
Cash flows from operating activities:
Net income (loss)	$	4,373		$	4,010		$	(59,805	)
Adjustments to reconcile net income (loss) to net cash provided by operating    activities:
Share-based compensation	141			194			73
Amortization of pension costs	676			787			878
Depreciation and amortization	2,517			2,736			3,281
Goodwill impairment	—			—			32,572
Intangible asset impairments	—			—			1,248
Provision for loan losses	9,720			9,220			49,601
Net investment amortization	2,791			2,090			1,178
Net change in unearned fees/deferred costs on loans	(109		)	44			(243		)
Capitalized dividends on FHLB stock	(27		)	(27		)	(19		)
Gain on securities available for sale	(2,769		)	(2,255		)	(456		)
Impairment loss on securities available for sale	631			403			829
Gains on loans held for sale	(1,377		)	(1,285		)	(1,006		)
Other real estate losses	5,874			1,574			5,778
Other asset sale (gains) losses	(317		)	225			(732		)
Deferred income taxes	1,007			735			(10,855		)
Originations of loans held for sale, net of repayments	(92,009		)	(83,200		)	(107,959		)
Sales proceeds of loans held for sale	73,071			88,277			106,348
(Increase) decrease in:
Accrued interest receivable	258			1,218			2,234
Cash surrender value of bank owned life insurance	(638		)	(667		)	(762		)
Other assets	(1,683		)	(1,800		)	1,086
Increase (decrease) in:
Accrued interest payable	(447		)	(1,463		)	(604		)
Other liabilities	799			8,392			(4,874		)
Net cash provided by operating activities	2,482			29,208			17,791
Cash flows from investing activities:
Purchases of securities available for sale	(220,235		)	(170,862		)	(142,697		)
Sales of securities available for sale	114,435			89,164			17,240
Maturities of securities available for sale	63,678			87,509			67,318
Purchases of loans held for investment	(42,118		)	(44,167		)	—
Sales of nonperforming loans	—			500			6,350
Net decrease in other loans held for investment	75,124			397			21,506
Net (increase) decrease in:
Interest-bearing bank balances	32,712			12,707			(78,254		)
Federal funds sold	—			45,000			(60,650		)
Bank premises and equipment	1,119			(226		)	(1,061		)
Net benefits received (purchases) of bank owned life insurance	(49		)	(41		)	202
Proceeds from sales of other real estate and other repossessed assets	9,729			16,626			23,127
Payments for ORE improvements and lienholder payoffs	(563		)	(1,276		)	(599		)
Net redemptions of FHLB stock	—			—			225
Net cash provided by (used in) investing activities	33,832			35,331			(147,293		)

58

FIRST M&F CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

Years Ended December 31, 2011, 2010 and 2009

(In Thousands)

	2011			2010			2009
Cash flows from financing activities:
Net increase (decrease) in deposits	(3,973		)	(12,880		)	126,857
Net increase (decrease) in short-term borrowings	(29,083		)	24,839			(1,086		)
Proceeds from other borrowings	686			2,872			20,000
Repayments of other borrowings	(8,101		)	(74,966		)	(49,037		)
Earnings distributions to noncontrolling interests	—			—			(11		)
Common dividends paid	(368		)	(366		)	(1,466		)
Preferred dividends paid	(600		)	(1,385		)	(1,075		)
Preferred shares and common stock warrant issued to U.S. Treasury	—			—			30,000
Tax benefits related to share-based compensation	2			—			28
Net cash provided by (used in) financing activities	(41,437		)	(61,886		)	124,210
Net increase (decrease) in cash and due from banks	(5,123		)	2,653			(5,292		)
Cash and due from banks at January 1	45,099			42,446			47,738
Cash and due from banks at December 31	$	39,976		$	45,099		$	42,446
Supplemental disclosures:
Total interest paid	$	17,311		$	25,373		$	31,852
Total income taxes paid	3			232			69
Income tax refunds received	—			8,735			1,249
Transfers of loans to foreclosed property	20,870			24,192			40,048
Transfers of buildings to foreclosed property	139			180			—
Gain on exchange of Class B preferred stock	—			12,867			—
U.S. Treasury preferred dividend accrued but unpaid	75			75			187
Accretion on U.S. Treasury preferred stock	1,174			419			201

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

59

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 1:  Summary of Significant Accounting Policies

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

Organization and Operations

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

Principles of Consolidation

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

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

Reclassifications

Certain immaterial items within the accompanying financial statements for previous years have been reclassified to conform to the 2011 presentation. These reclassifications had no effect on net earnings or stockholders’ equity.

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 2012 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.

Comprehensive Income

Comprehensive income includes net income reported in the statements of operations and net changes in stockholders’ equity arising from activity with non-owners. Components of accumulated other comprehensive income (loss) for the Company are: (1) changes in unrealized gains (losses) on securities available for sale, (2) changes in unrealized gains (losses) on cash flow hedges and (3) actuarial and other changes in net unamortized pension costs.

Fair Value Measurements

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

Securities Available for Sale

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

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

60

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 1: (Continued)

Realized gains and losses on securities available for sale are included in earnings and are determined using the specific amortized cost of the securities sold. When the fair values of available-for-sale securities fall below their amortized cost basis they are considered to be impaired. For debt securities, if the Company has the intent to sell the security or it is more likely than not that it will be required to sell the debt security before the recovery of its amortized cost basis then the full impairment is recognized in earnings as a realized loss. However, if the Company does not have the intent to sell the debt security and it is more likely than not that it will not be required to sell the debt security before recovery of its amortized cost basis, then only the amount of the unrealized loss that is determined to be a credit loss is reflected in earnings. The remaining unrealized loss that is due to non-credit factors is reflected in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) historical cash flows and economic factors that could detrimentally affect those cash flows, (4) changes in credit ratings of the issuers and (5) the Company’s intent to sell and assessment of the likelihood that the Company would be required to sell the security before it could recover its cost. For beneficial interests such as collateralized debt obligations the Company uses the expected cash flow analysis prescribed by applicable accounting standards as well as its intent related to the disposition of its investment to determine whether an other-than-temporary impairment exists.

Loans Held for Sale

Loans held for sale, consisting primarily of mortgages, 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.

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 estimate individual impairment allowances and 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. 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.

61

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 1: (Continued)

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 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.

Bank Premises and Equipment

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

Other Real Estate

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

Intangible Assets

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

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

Income Taxes

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

62

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 1: (Continued)

Contingent Liabilities

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

Concentrations of Credit

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

Derivative Financial Instruments

All contracts that satisfy the definition of a derivative are carried at fair value. Interest rate swaps are used to hedge the Company’s exposure to changes in interest rates. The Company maintains written documentation for these derivatives which hedge forecasted transactions and are therefore considered cash flow hedges. This documentation identifies the hedging objective and strategy, the hedging instrument, the instrument being hedged, the reasoning behind the assertion that the hedge is highly effective and the methodology for measuring ongoing hedge effectiveness and ineffectiveness. Changes in the fair value of a derivative that is highly effective and that has been designated and qualifies as a cash flow hedge are initially recorded in other comprehensive income, and subsequently reclassified to earnings in the same period that the hedged item impacts earnings. Any ineffective portion is recorded in current period earnings. Assessments of hedge effectiveness are performed monthly, and hedge accounting ceases on transactions that are no longer deemed effective. For discontinued cash flow hedges where the hedged transaction remains probable to occur as originally designated, the unrealized gains and losses recorded in accumulated other comprehensive income would be reclassified to earnings in the period when the previously designated hedged cash flows occur. If the previously designated transaction were no longer probable of occurring, any unrealized gains and losses would be immediately reclassified to earnings.

The Company enters into interest rate lock and forward sale agreements on mortgage loans that are held for sale. These agreements are accounted for as freestanding derivatives with all changes in fair value recorded in mortgage banking income.

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 an interest rate swap counterparty in the amounts of $1.861 million at December 31, 2011 and $1.500 million at December 31, 2010.

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

Recent Pronouncements

Accounting Standards Update No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures About Fair Value Measurements.” ASU 2010-06 requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements. ASU 2010-06 further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) companies should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The provisions of ASU 2010-06 became effective on January 1, 2010 with the exception of the requirement to provide Level 3 activity of purchases, sales, issuances and settlements on a gross basis, which became effective on January 1, 2011. The adoption of the portion of ASU 2010-06 that became effective on January 1, 2011 did not have a material impact on the Company’s financial position or results of operations.

63

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 1: (Continued)

Recent Pronouncements: (Continued)

Accounting Standards Update No. 2010-20, “Receivables (Topic 310) – Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU 2010-20 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things, a roll forward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. ASU 2010-20 became effective for the Company’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period are required for the Company’s financial statements that include periods beginning on or after January 1, 2011. The adoption of ASU 2010-20 as it relates to activity during a reporting period did not have a material impact on the Company’s financial position or results of operations.

Accounting Standards Update No. 2011-02, “Receivables (Topic 310) – A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring." ASU 2011-02 provides guidance and clarification to help in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (1) the restructuring constitutes a concession, and (2) the debtor is experiencing financial difficulties. ASU 2011-02 became effective for the Company as of July 1, 2011, and was applied retrospectively to restructurings occurring on or after January 1, 2011. For purposes of measuring impairment of those receivables that were newly considered impaired, the provisions of ASU 2011-02 were applied prospectively as of July 1, 2011. The adoption of ASU 2011-02 did not have a material impact on the Company’s financial position or results of operations.

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 will be effective for the Company as of January 1, 2012. Adoption of ASU 2011-03 is not expected to 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 will be effective for the Company prospectively for interim and annual periods beginning on January 1, 2012. Adoption of ASU 2011-04 is not expected to 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 will be 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 is not expected to have a material impact on the Company's financial position or results of operations.

64

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 1: (Continued)

Recent Pronouncements: (Continued)

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 is effective concurrent with the effective date of ASU 2011-05.

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.

65

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 2:  (Continued)

The following table summarizes assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 and December 31, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

			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 securities available for sale	$	320,774	$	—	$	319,955	$	819
Interest rate swap asset	—		—		—		—
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

			Fair Value Measurements at December 31, 2010, 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, 2010		(Level 1)		(Level 2)		(Level 3)
U.S. Government sponsored entities	$	58,611	$	—	$	58,611	$	—
Mortgage-backed investments	173,921		—		173,921		—
Obligations of states and political subdivisions	41,828		—		41,828		—
Collateralized debt obligations	934		—		—		934
Other debt securities	1,635		—		1,635		—
Total securities available for sale	$	276,929	$	—	$	275,995	$	934
Interest rate swap asset	817		—		—		817
Mortgage derivative assets	246		—		—		246
	$	277,992	$	—	$	275,995	$	1,997
Interest rate swap liability	$	—	$	—	$	—	$	—
Mortgage derivative liabilities	28		—		—		28
	$	28	$	—	$	—	$	28

66

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 2:  (Continued)

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

Obligations of states and political subdivisions. Municipal securities include investments that are traded in a dealer market and investments that trade infrequently and are reported using Level 2 inputs. The fair value measurements are obtained from both an independent pricing service and from a 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.

The following table reports the activity for 2011 in assets measured at fair value on a recurring basis using significant unobservable (Level 3) inputs.

	Year Ended December 31, 2011
(Dollars in thousands)	Collateralized Debt Obligations			Mortgage Derivatives			Interest Rate Swap
Beginning Balance	$	934		$	218		$	817
Total gains or losses (realized/unrealized):
Other-than-temporary impairment included in earnings	(631		)	—			—
Other-than-temporary impairment transferred from other comprehensive income	263			—			—
Other gains/losses included in other comprehensive income	253			—			(3,171		)
Net swap settlement recorded	—			—			520
IRLC and FSA issuances	—			398			—
IRLC and FSA expirations and fair value changes included in earnings	—			(398		)	—
IRLC transfers into closed loans/FSA transferred on sales	—			(240		)	—
Ending Balance	$	819		$	(22	)	$	(1,834	)
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	$	(631	)	$	—		$	(520	)

67

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 2:  (Continued)

The following table reports the activity for 2010 in assets measured at fair value on a recurring basis using significant unobservable (Level 3) inputs.

	Year Ended December 31, 2010
(Dollars in thousands)	Collateralized Debt Obligations			Mortgage Derivatives			Interest Rate Swap
Beginning Balance	$	1,080		$	84		$	—
Total gains or losses (realized/unrealized):
Other-than-temporary impairment included in earnings	(403		)	—			—
Other-than-temporary impairment included in other comprehensive income	(32		)	—			—
Other gains/losses included in other comprehensive income	289			—			817
Net swap settlement recorded	—			—			—
IRLC and FSA issuances	—			702			—
IRLC and FSA expirations and fair value changes included in earnings	—			(188		)	—
IRLC transfers into closed loans/FSA transferred on sales	—			(380		)	—
Ending Balance	$	934		$	218		$	817
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	$	(403	)	$	—		$	—

The following table reports the activity for 2009 in assets measured at fair value on a recurring basis using significant unobservable (Level 3) inputs.

	Year Ended December 31, 2009
(Dollars in thousands)	Collateralized Debt Obligations			Mortgage Derivatives
Beginning Balance	$	—		$	—
Total gains or losses (realized/unrealized):
Other-than-temporary impairment included in earnings	(829		)	—
Other-than-temporary impairment included in other comprehensive income	(2,698		)	—
Other gains/losses included in other comprehensive income	641			—
Transfers in and/or out of Level 3	3,966			84
Ending Balance	$	1,080		$	84
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	$	(829	)	$	—

68

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 2:  (Continued)

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

			Fair Value Measurements Using
	For the Year-to-Date Ended		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

The following tables summarize assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

			Fair Value Measurements Using
	For the Year-to-Date Ended		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	12/31/10 (a)		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	27,335	$	—	$	—	$	27,335
Loan foreclosures	5,013		—		—		5,013
Loans transferred to HFS	—		—		—		—
Other real estate	12,498		—		—		12,498

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

			Fair Value Measurements Using
	For the Year-to-Date Ended		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	12/31/09 (a)		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	67,492	$	—	$	—	$	67,492
Loan foreclosures	17,899		—		—		17,899
Loans transferred to HFS	—		—		—		—
Other real estate	11,464		—		—		11,464
Bankers bank stock	—		—		—		—
Goodwill	—		—		—		—
Intangible assets	—		—		—		—

(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.

69

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 2:  (Continued)

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

(Dollars in thousands)	2011		2010		2009
Impaired loans	$	8,303	$	6,550	$	26,135
Loan foreclosures	4,892		4,080		12,025
Loans transferred to HFS	—		325		3,189
Other real estate	5,093		2,323		4,101
Bankers bank stock	—		—		78
Goodwill	—		—		32,572
Intangible assets	—		—		1,248

Gains and losses recognized due to fair value re-measurements are recorded in the consolidated statements of operations in (1) provision for loan losses for impaired loans, loan foreclosures and loans held for sale and (2) foreclosed property expenses for other real estate. The loss on bankers bank stock was recorded in other income. The goodwill and intangible asset impairments were recorded as separate noninterest expense line items.

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.

Loans Transferred To Held For Sale.  Certain nonperforming loans held for investment were transferred to held for sale status during 2010. Loans with an amortized cost of $825 thousand were written down by $325 thousand to a fair value of $500 thousand upon transfer to held for sale status. The $325 thousand write-down was charged to the allowance for loan losses. The loans were subsequently sold for $500 thousand.

Bankers bank stock.  Bankers bank stock consists of 100 shares of Silverton Bank, N.A. which was formerly known as the Georgia Bankers Bank. The stock was purchased in 2001 for $78 thousand. The Bank was closed by federal bank regulators on May 1, 2009 and taken into receivership. Since the stock did not have a readily determinable fair value it was carried at cost in other assets in the consolidated statement of condition. The Company wrote off the entire $78 thousand balance as an other asset impairment loss which was included in other income in the consolidated statements of operations.

Other real estate.  Other real estate consists of real estate from loans that have been foreclosed on. It is carried at the lower of cost or fair value less costs to sell. Subsequent to foreclosure, these properties may experience further market declines. When this occurs, the Company writes the property down to management’s best estimate of what the market may be willing to pay. Management considers 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.

Goodwill.  Goodwill is tested for impairment on an annual basis and also when there are indicators that an impairment may have occurred. The Company evaluated its goodwill asset as of March 31, 2009 and again at December 31, 2009 after the stock price continued to fall from $8.46 per share at December 31, 2008 to $6.12 per share at March 31, 2009 and to $2.21 per share at December 31, 2009 and as the Company continued to accrue for growing losses in the real estate construction loan portfolio during the first quarter and again during the fourth quarter. The implied fair value of goodwill was determined after valuing the community banking unit of the Company using Level 3 inputs based primarily on (1) historical deal prices for community banks, adjusted for bank size and credit quality factors and (2) discounted cash flow analyses. The implied fair value of goodwill was determined as a residual amount after allocating the estimated value of the net assets of the community banking unit to its identifiable recognized and unrecognized, both tangible and intangible, assets and liabilities in a manner similar to the purchase accounting allocations required by applicable accounting principles. These allocations required the estimation of the fair values of identifiable assets and liabilities, both recognized and unrecognized, primarily using Level 3 inputs such as discounted cash flow analyses utilizing cash flow projections, credit assumptions, and discount rate assumptions and other adjustments that management assumes that a market participant would use. The implied fair value of goodwill at March 31, 2009, which had a carrying value of $32.572 million, was estimated to be $16.772 million, requiring an impairment charge of $15.800 million. The implied fair value of goodwill at December 31, 2009, which had a carrying value of $16.772 million, was estimated to be zero, requiring an impairment charge of $16.772 million.

70

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 2:  (Continued)

Intangible assets.  Intangible assets include a Florida banking charter and insurance agency customer renewal lists and noncompete agreements. The Company evaluated these assets for impairment during the first quarter of 2009. An analysis of expected cash flows related to insurance agency customer renewal lists and noncompete agreements indicated that the assets were impaired. An analysis of the Florida banking charter, based on indications of market value and management’s assessment of economic factors related to the Florida markets, indicated that it was impaired. The intangible assets were valued using unobservable (Level 3) inputs. The banking charter is an indefinite lived intangible asset for which the Company had recorded no amortization expense. The insurance agency assets were being amortized over their useful lives up until the time of the impairment test. The Company recorded $14 thousand in amortization expense related to the insurance agency assets during the first quarter of 2009. The banking charter was determined to be fully impaired, with an impairment charge of $1.025 million being recorded in intangible asset amortization and impairment expense during the first quarter of 2009. The insurance agency intangible assets were also deemed to be fully impaired with their remaining balances of $223 thousand being written off to intangible asset amortization and impairment expense.

Fair Value of Financial Instruments

The following table presents the carrying amounts and fair values of the Company’s financial instruments at December 31, 2011 and December 31, 2010:

	December 31, 2011						December 31, 2010
(Dollars in thousands)	Carrying Amount			Estimated Fair Value			Carrying Amount			Estimated Fair Value
Financial assets:
Cash and short-term investments	$	104,367		$	104,367		$	142,202		$	142,202
Securities available for sale	320,774			320,774			276,929			276,929
Loans held for sale	26,073			27,053			6,242			6,242
Loans held for investment	981,387			921,351			1,044,121			965,894
Agency accounts receivable	217			217			346			346
Accrued interest receivable	6,122			6,122			6,380			6,380
Nonmarketable equity investments	7,380			7,380			7,353			7,353
Investment in unconsolidated VIE	3,425			3,425			3,615			3,615
Mortgage derivative assets	269			269			246			246
Financial liabilities:
Noninterest-bearing deposits	231,718			231,718			212,199			212,199
NOW, MMDA and savings deposits	707,798			707,798			645,433			645,433
Certificates of deposit	431,947			439,518			517,780			527,971
Short-term borrowings	4,398			4,398			33,481			33,481
Other borrowings	43,001			45,193			50,416			53,213
Junior subordinated debt	30,928			25,204			30,928			25,123
Agency accounts payable	641			641			586			586
Accrued interest payable	1,023			1,023			1,470			1,470
Mortgage derivative liabilities	291			291			28			28
Other financial instruments:
Commitments to extend credit and letters of credit	(4		)	(320		)	(15		)	(306		)
Interest rate swap	(1,834		)	(1,834		)	817			817

71

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 2:  (Continued)

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

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

Securities available for sale are predominantly valued based on prices obtained from an independent nationally recognized pricing service and market yield matrices. We use an external pricing service to electronically provide prices by CUSIP number. These prices include exchange quoted prices, dealer quoted prices and prices derived from market yields published by specialized financial database providers. We use the one price per instrument provided for the securities that the service can produce prices for. We do not adjust the prices that are obtained from external pricing services. Typically, all securities except for some small municipal issues and the collateralized debt obligations are priced by the primary external provider. For issues that are not priced by the primary provider, we use the pricing disclosed in the investment accounting product provided by a broker-dealer affiliate of a correspondent bank. The broker-dealer’s accounting system uses prices provided by (1) the same external pricing service that we use, (2) Standard & Poor’s, (3) matrix pricing with market yield inputs provided by Bloomberg and a municipal securities market data provider and (4) the broker-dealer’s trading staff. Any quotes provided by a broker-dealer are usually non-binding. However, the Company rarely uses solicited broker-dealer quotes to price any of its securities. The broker-dealer prices all municipal securities through its pricing matrix. At December 31, 2011, the only securities that were not priced by the primary provider were 13 municipal bonds representing 6 issuers and the collateralized debt obligations. We used the broker-dealer’s matrix prices for the municipal securities and a third-party provider’s modeled prices for the collateralized debt obligations (CDOs).

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

The primary method of validation of investment security values that we use is the comparison of the prices that we receive from our primary pricing service provider with the prices that are used in the broker-dealer’s investment accounting reports. The fair values used for selected agency, mortgage-backed and corporate securities are also periodically checked by comparing them to prices obtained from Bloomberg. The CDOs may be validated by comparing the fair values with those obtained by other valuation experts. We review the documentation provided with the CDO pricing and impairment models to assure that sound valuation methodologies are used and to determine whether or not the significant inputs are observable in the market.

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

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

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

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

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

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 equivalent to fair value for these deposits.

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

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

72

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 2:  (Continued)

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 assumed to be their carrying value. These payables are carried in other liabilities in the statement of condition.

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

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

Mortgage origination and sale commitments are considered derivatives and are therefore carried at fair market value with the changes in 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.

Note 3:  Securities Available for Sale

The following is a summary of the amortized cost and fair value of securities available for sale at December 31, 2011, and 2010:

	Amortized Cost		Gross Unrealized				Fair Value
(Dollars in thousands)			Gains		Losses
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
December 31, 2010:
U.S. Government sponsored entities	$	58,152	$	650	$	191	$	58,611
Mortgage-backed investments	170,039		4,268		386		173,921
Obligations of states and political subdivisions	40,924		1,104		200		41,828
Collateralized debt obligations	3,768		—		2,834		934
Other debt securities	1,538		97		—		1,635
	$	274,421	$	6,119	$	3,611	$	276,929

73

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 3:  (Continued)

Provided below is a summary of securities available for sale which were in an unrealized loss position and the length of time that individual securities have been in a continuous loss position at December 31, 2011 and December 31, 2010. 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
December 31, 2011:	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
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
December 31, 2010:
U.S. Government sponsored entities	$	10,898	$	191	$	—	$	—	$	10,898	$	191
Mortgage-backed investments	35,821		386		—		—		35,821		386
Obligations of states and political subdivisions	5,898		162		317		38		6,215		200
Collateralized debt obligations	—		—		934		2,834		934		2,834
	$	52,617	$	739	$	1,251	$	2,872	$	53,868	$	3,611

At December 31, 2011 there were 19 U.S. government sponsored entity securities with unrealized losses less than 12 months. There were 16 mortgage-backed securities with unrealized losses less than 12 months. There were 20 municipal securities with unrealized losses less than 12 months. The unrealized losses associated with the U.S. government sponsored entity, mortgage-backed and municipal securities were primarily driven by changes in market rates and liquidity and not due to the credit quality of the securities.

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 2011, three of the securities incurred other-than-temporary impairments that resulted in $631 thousand in credit-related losses being charged against earnings. During 2010, four of the securities incurred other-than-temporary impairments that resulted in $403 thousand in credit-related losses. The unrealized losses by individual security in the CDO portfolio as of December 31, 2011 ranged from 66% of amortized cost to 81% of amortized cost. 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.

74

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 3:  (Continued)

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 rollforward 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.

	Year Ended December 31
(Dollars in thousands)	2011		2010		2009
Beginning balance	$	1,232	$	829	$	—
OTTI credit losses on securities not previously impaired	—		—		724
OTTI credit losses on previously impaired securities	631		403		105
Ending balance	$	1,863	$	1,232	$	829

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

The amortized cost and fair values of debt securities available for sale at December 31, 2011, 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	$	27,286	$	27,281
After one through five years	59,747		60,971
After five through ten years	24,929		26,010
After ten years	5,096		2,826
	117,058		117,088
Mortgage-backed investments	198,832		203,686
	$	315,890	$	320,774

75

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 3:  (Continued)

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

	2011				2010
	Amortized		Fair		Amortized		Fair
(Dollars in thousands)	Cost		Value		Cost		Value
Pledged to secure public and tax deposits	$	184,739	$	188,445	$	158,839	$	161,469
Pledged for Trust account deposits	3,902		4,084		4,877		4,990
Pledged for non-public repurchase agreements	8,049		8,458		37,420		37,109
Pledged for Fed funds purchased lines of credit	1,008		1,006		8,683		8,866
Pledged for interest rate swap	1,500		1,505		—		—
Pledged for letter of credit obtained	7,837		7,924		5,691		5,717
Pledged to an insurance commissioner	548		566		546		585
Total securities pledged	$	207,583	$	211,988	$	216,056	$	218,736

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

(Dollars in thousands)	2011			2010			2009
Proceeds from sales	$	114,435		$	89,164		$	17,240
Gross realized gains	2,838			2,346			467
Gross realized losses	(69		)	(91		)	(11		)
Net gains from sales	$	2,769		$	2,255		$	456
Gross recognized losses related to the credit component of other-than-temporary impairments	$	631		$	403		$	829

Note 4:  Loans and Allowance for Loan Losses

The Bank's loan portfolio includes commercial, consumer, agricultural and residential loans originated primarily in its markets in central and north Mississippi, southwest Tennessee, central Alabama and the Florida panhandle. The following is a summary of the Bank's loans held for investment, net of unearned income of $2.045 million and $2.439 million at December 31, 2011, and 2010:

(Dollars in thousands)	December 31, 2011		December 31, 2010
Construction and land development loans	$	69,325	$	89,093
Other commercial real estate loans	505,180		557,638
Asset-based loans	37,540		28,132
Other commercial loans	117,790		105,094
Home equity loans	37,024		40,305
Other 1-4 family residential loans	186,815		195,184
Consumer loans	42,666		44,700
Total loans	$	996,340	$	1,060,146

The Bank uses loans as collateral for borrowings at the Federal Reserve Bank and a Federal Home Loan Bank. Approximately $18.005 million and $15.658 million of commercial and consumer loans were pledged to a line of credit with the Federal Reserve Bank at December 31, 2011 and December 31, 2010 respectively. Approximately $216.201 million and $247.422 million of individual real estate-secured loans were pledged to the Federal Home Loan Bank at December 31, 2011 and December 31, 2010, respectively.

76

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 4:  (Continued)

During 2011 the Company purchased $31.144 million in participations of commercial loans extended to three companies. Additionally, the Company purchased $10.154 million of participations in 19 agricultural loans originated by an agribusiness customer. The commercial participations mature in five years while the agricultural participations mature during the first quarter of 2012. During 2010 the Company purchased two groups of participations in loans secured by church properties. The first group of 8 loan participations with a total face value of $10.062 million, secured by church properties in Florida, Georgia, Tennessee and Texas, were purchased at face value. The second group of 20 loan participations with a total face value of $26.968 million, secured by church properties in Florida, Georgia, Louisiana, North Carolina, Tennessee and Texas, were purchased for $26.159 million.

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

(Dollars in thousands)	2011			2010
Loans outstanding at January 1	$	4,485		$	5,018
New loans and advances	13,341			13,182
Repayments	(15,879		)	(11,380		)
Retirements	(156		)	(2,335		)
Loans outstanding at December 31	$	1,791		$	4,485

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

The following table presents a summary of the past due status of all loans, including nonaccrual loans, by type at December 31, 2010:

(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	$	1,295	$	388	$	11,190	$	12,873	$	76,220	$	89,093	$	274
Other commercial real estate loans	997		1,453		11,632		14,082		543,556		557,638		—
Asset based loans	—		—		—		—		28,132		28,132		—
Other commercial loans	873		48		2,028		2,949		102,145		105,094		99
Home equity loans	453		—		220		673		39,632		40,305		—
Other 1-4 family residential loans	2,396		452		2,549		5,397		189,787		195,184		564
Consumer loans	315		147		46		508		44,192		44,700		14
Total	$	6,329	$	2,488	$	27,665	$	36,482	$	1,023,664	$	1,060,146	$	951

77

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 4:  (Continued)

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 December 31, 2011 and December 31, 2010 and other nonperforming assets:

(Dollars in thousands)	December 31, 2011		December 31,  2010
Construction and land development loans	$	4,398	$	13,993
Other commercial real estate loans	9,937		13,027
Asset based loans	—		—
Other commercial loans	913		2,151
Home equity loans	474		303
Other 1-4 family residential loans	1,422		3,560
Consumer loans	33		93
Total nonaccrual loans	$	17,177	$	33,127
Other real estate owned	36,952		31,125
Total nonperforming credit-related assets	$	54,129	$	64,252
Accruing loans past due 90 days or more	$	602	$	951
Loans restructured and in compliance with modified terms	$	19,662	$	18,052

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).

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.

78

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 4:  (Continued)

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 don’t jeopardize liquidation of the debt but do substantially increase the level of risk may also warrant this rating.

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.

79

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 4:  (Continued)

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 nonaccrual 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 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

80

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 4:  (Continued)

The following table presents a summary of loans by credit risk rating at December 31, 2010.

(Dollars in thousands)	Construction		Other Commercial Real Estate		Asset-Based		Other Commercial
10 and 20	$	—	$	—	$	—	$	13,141
30-32	51,077		472,614		19,162		79,856
40	4,111		30,696		7,947		3,771
50	26,978		54,178		1,023		7,565
60	6,927		150		—		761
Total	$	89,093	$	557,638	$	28,132	$	105,094

(Dollars in thousands)	Home Equity		Other 1-4 Family		Consumer		Total
10 and 20	$	—	$	170	$	14,516	$	27,827
30-32	39,478		179,501		29,288		870,976
40	274		8,514		292		55,605
50	508		6,810		600		97,662
60	45		189		4		8,076
Total	$	40,305	$	195,184	$	44,700	$	1,060,146

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 13-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 13-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.

81

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

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		Average Investment in Impaired Loans		Interest Income Recognized
Loans without a specific valuation allowance:
Construction and land development loans	$	9,539	$	13,915	$	—	$	10,665	$	419
Other commercial real estate loans	33,048		36,117		—		33,597		1,361
Asset based loans	—		—		—		—		—
Other commercial loans	433		460		—		1,920		83
Home equity loans	159		159		—		291		4
Other 1-4 family residential loans	4,466		4,732		—		4,476		229
Consumer loans	128		154		—		147		14
Loans with a specific valuation allowance:
Construction and land development loans	$	8,620	$	11,294	$	1,750	$	10,991	$	356
Other commercial real estate loans	7,722		8,471		894		10,005		314
Asset based loans	—		—		—		—		—
Other commercial loans	1,111		1,111		485		2,099		91
Home equity loans	456		456		166		457		7
Other 1-4 family residential loans	1,843		1,843		397		1,848		93
Consumer loans	37		37		37		50		3
Total:
Construction and land development loans	$	18,159	$	25,209	$	1,750	$	21,656	$	775
Other commercial real estate loans	40,770		44,588		894		43,602		1,675
Asset based loans	—		—		—		—		—
Other commercial loans	1,544		1,571		485		4,019		174
Home equity loans	615		615		166		748		11
Other 1-4 family residential loans	6,309		6,575		397		6,324		322
Consumer loans	165		191		37		197		17

82

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 4:  (Continued)

The following table summarizes loans that were individually reviewed for impairment allowances at December 31, 2010:

(Dollars in thousands)	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans *
Loans without a specific valuation allowance:
Construction and land development loans	$	20,531	$	29,004	$	—	$	20,641
Other commercial real estate loans	45,611		49,868		—		46,488
Asset based loans	—		—		—		—
Other commercial loans	7,028		8,049		—		7,288
Home equity loans	508		508		—		513
Other 1-4 family residential loans	4,695		4,961		—		4,721
Consumer loans	474		485		—		505
Loans with a specific valuation allowance:
Construction and land development loans	$	12,900	$	13,921	$	2,871	$	12,936
Other commercial real estate loans	8,716		8,716		1,582		8,940
Asset based loans	—		—		—		—
Other commercial loans	1,268		1,419		809		1,387
Home equity loans	45		45		45		45
Other 1-4 family residential loans	2,304		2,304		765		2,317
Consumer loans	129		129		60		138
Total:
Construction and land development loans	$	33,431	$	42,925	$	2,871	$	33,577
Other commercial real estate loans	54,327		58,584		1,582		55,428
Asset based loans	—		—		—		—
Other commercial loans	8,296		9,468		809		8,675
Home equity loans	553		553		45		558
Other 1-4 family residential loans	6,999		7,265		765		7,038
Consumer loans	603		614		60		643

* These are the average year-to-date balances of loans that were reviewed for impairment in the December 31, 2010 testing.

83

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 4:  (Continued)

The following table summarizes activity in the allowance for loan losses for 2011 by loan category:

(Dollars in thousands)	Construction			Other CRE			Commercial			Residential			Consumer			Unallocated		Total
Allowance for loan losses:
Balance, beginning of year	$	3,942		$	2,763		$	4,442		$	3,701		$	1,177		$	—	$	16,025
Provision charged to expense	2,159			5,308			971			904			378			—		9,720
Losses charged off	(2,935		)	(4,446		)	(2,534		)	(2,142		)	(952		)	—		(13,009		)
Recoveries	965			448			468			144			192			—		2,217
Balance, end of year	$	4,131		$	4,073		$	3,347		$	2,607		$	795		$	—	$	14,953
Ending balance:
individually evaluated for impairment	$	1,750		$	894		$	485		$	563		$	37		$	—	$	3,729
Ending balance:
collectively evaluated for impairment	$	2,381		$	3,179		$	2,862		$	2,044		$	758		$	—	$	11,224
Ending balance:
loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—	$	—
Loans:
Ending balance	$	69,325		$	505,180		$	155,330		$	223,839		$	42,666		$	—	$	996,340
Ending balance:
individually evaluated for impairment	$	18,159		$	40,770		$	1,544		$	6,924		$	165		$	—	$	67,562
Ending balance:
collectively evaluated for impairment	$	51,166		$	464,410		$	153,786		$	216,915		$	42,501		$	—	$	928,778
Ending balance:
loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—	$	—

The following table summarizes activity in the allowance for loan losses for 2010 by loan category:

(Dollars in thousands)	Construction			Other CRE			Commercial			Residential			Consumer			Unallocated		Total
Allowance for loan losses:
Balance, beginning of year	$	7,416		$	5,959		$	5,893		$	3,407		$	1,339		$	—	$	24,014
Provision charged to expense	693			4,164			1,885			2,027			451			—		9,220
Losses charged off	(5,471		)	(7,854		)	(3,617		)	(1,854		)	(859		)	—		(19,655		)
Recoveries	1,304			494			281			121			246			—		2,446
Balance, end of year	$	3,942		$	2,763		$	4,442		$	3,701		$	1,177		$	—	$	16,025
Ending balance:
individually evaluated for impairment	$	2,871		$	1,582		$	809		$	810		$	60		$	—	$	6,132
Ending balance:
collectively evaluated for impairment	$	1,071		$	1,181		$	3,633		$	2,891		$	1,117		$	—	$	9,893
Ending balance:
loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—	$	—
Loans:
Ending balance	$	89,093		$	557,638		$	133,226		$	235,489		$	44,700		$	—	$	1,060,146
Ending balance:
individually evaluated for impairment	$	33,431		$	54,327		$	8,296		$	7,552		$	603		$	—	$	104,209
Ending balance:
collectively evaluated for impairment	$	55,662		$	503,311		$	124,930		$	227,937		$	44,097		$	—	$	955,937
Ending balance:
loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—	$	—

84

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 4:  (Continued)

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

(Dollars in thousands)	2011			2010			2009
Balance at January 1	$	16,025		$	24,014		$	24,918
Loans charged off	(13,009		)	(19,330		)	(48,051		)
Charge offs resulting from write-downs of loans transferred to held for sale status	—			(325		)	(3,189		)
Recoveries	2,217			2,446			735
Net charge-offs	(10,792		)	(17,209		)	(50,505		)
Provision for loan losses	9,720			9,220			49,601
Balance at December 31	$	14,953		$	16,025		$	24,014

Restructured loans are considered to be impaired loans. A troubled debt restructuring occurs when a creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider. That concession either stems from an agreement between the creditor and the debtor or is imposed by law or a court. The following table presents information about the Company’s impaired loans as of and for the years ended December 31, 2011, and 2010:

	December 31, 2011				December 31, 2010
(Dollars in thousands)	Recorded Balance		Allowance		Recorded Balance		Allowance
Restructured loans with an allowance:
Construction and land development loans	$	136	$	61	$	2,135	$	450
Other commercial real estate loans	4,018		320		2,086		160
Other commercial loans	387		117		210		175
Other 1-4 family residential loans	199		76		1,179		512
Restructured loans without an allowance:
Construction and land development loans	2,725		—		—		—
Other commercial real estate loans	17,002		—		12,333		—
Other commercial loans	119		—		—		—
Other 1-4 family residential loans	1,194		—		167		—
Total restructured loans	$	25,780	$	574	$	18,110	$	1,297

At December 31, 2011, there were $356 thousand in available credit commitments for construction and land development restructured loans. At December 31, 2010, there were no available credit commitments for any restructured loans.

85

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 4:  (Continued)

The following table summarizes the activity for troubled debt restructurings that occurred during 2011.

(Dollars in thousands)	Number of Loans Modified	Pre Modification Balance		Post Modification Balance
Interest Rate Modifications:
Construction and land development loans	3	$	1,125	$	1,125
Other commercial real estate loans	3	674		672
Other commercial loans	1	10		10
Other 1-4 family residential loans	3	157		157
Total rate modifications	10	$	1,966	$	1,964
Term Extensions and Renewals:
Construction and land development loans	6	$	3,685	$	3,483
Other commercial real estate loans	7	9,694		9,663
Other commercial loans	1	1,797		1,747
Other 1-4 family residential loans	3	537		536
Total extensions and renewals	17	$	15,713	$	15,429
Total loans restructured	27	$	17,679	$	17,393

The following table presents loans modified under the terms of a TDR that became 90 days or more delinquent or were foreclosed on during 2011 that were initially restructured during 2011.

(Dollars in thousands)	Number of Loans	Amortized Cost
Construction and land development loans	2	$	1,951
Other commercial real estate loans	5	6,655
Other 1-4 family residential loans	4	306
Total subsequent defaults	11	$	8,912

The defaults for construction and land development loans for were foreclosures. Three loans for $1.118 million of the defaults for other commercial real estate loans were foreclosures, with the remaining balances being subsequent ninety day past due defaults. The other 1-4 family loans were all subsequent ninety day past due defaults.

Note 5:  Bank Premises and Equipment

The following is a summary of bank premises and equipment at December 31, 2011 and 2010:

(Dollars in thousands)	2011		2010
Land	$	12,365	$	14,178
Buildings	36,293		36,292
Furniture, fixtures and equipment	19,901		19,890
Leasehold improvements	842		890
Construction in progress	131		428
	69,532		71,678
Less accumulated depreciation and amortization	31,543		30,982
	$	37,989	$	40,696

Amounts charged to operating expenses for depreciation and amortization of bank premises and equipment were $2.090 million in 2011, $2.310 million in 2010, and $2.841 million in 2009.

86

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 5:  (Continued)

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

(Dollarsin thousands)	2011			2010			2009
Buildings and office space	$	665		$	581		$	844
Computer equipment	13			284			399
Other equipment and autos	163			184			276
	841			1,049			1,519
Rental income	(41		)	(42		)	(47		)
Net rent expense	$	800		$	1,007		$	1,472

The Company is obligated under a number of noncancelable operating leases for premises and equipment. Minimum future lease payments for noncancelable operating leases at December 31, 2011, are as follows:

(Dollarsin thousands)
2012	$	573
2013	384
2014	300
2015	271
2016	233
After 2016	201
Total minimum lease payments	$	1,962

Note 6:  Goodwill and Intangible Assets

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

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

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

87

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 6:  (Continued)

The following is a summary of intangible assets at December 31, 2010 and 2011:

	Core Deposit Intangible
	December 31
(Dollars in thousands)	2011			2010
Beginning Balance	$	5,013		$	5,439
Amortization expense	(427		)	(426		)
Ending Balance	$	4,586		$	5,013
Estimated amortization expense
2012	$	427
2013	427
2014	427
2015	427
2016	427

The following tables summarize the gross carrying amounts and accumulated amortization balances of amortizing intangible assets as of December 31, 2011, and 2010:

	Core Deposit Intangible
	December 31
(Dollars in thousands)	2011			2010
Gross carrying amount	$	7,060		$	7,060
Accumulated amortization	(2,474		)	(2,047		)
Net carrying amount	$	4,586		$	5,013

Intangible assets with a determinable useful life are amortized over their respective useful lives. Core deposit intangibles have lives of 16 to 20 years with a remaining average life of 11.0 years at December 31, 2011.

Amortization expense for intangible assets having determinable useful lives amounted to $427 thousand in 2011, $426 thousand in 2010, and $440 thousand in 2009. Impairment charges for intangible assets having determinable useful lives amounted to $223 thousand in 2009.

Note 7:  Other Assets

The following is a summary of other assets at December 31, 2011, and 2010:

(Dollars in thousands)	2011		2010
Federal Home Loan Bank stock	$	7,380	$	7,353
Income taxes receivable	175		129
Deferred income tax	14,115		14,563
Investment in First M&F Statutory Trust I	928		928
Investment in low income housing tax credit entities	2,497		2,687
Other	2,829		3,806
	$	27,924	$	29,466

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

88

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 8:  Deposits

The following is a summary of deposits at December 31, 2011, and 2010:

(Dollars in thousands)	2011		2010
Noninterest-bearing	$	231,718	$	212,199
Interest-bearing:
NOW and money market deposits	588,105		530,664
Savings deposits	119,693		114,769
Core certificates of deposit of $100 thousand or more	187,513		234,500
Other core certificates of deposit	227,867		268,272
Brokered certificates of deposit of $100 thousand or more	13,028		11,934
Other brokered certificates of deposit	3,539		3,074
Total interest-bearing	1,139,745		1,163,213
Total deposits	$	1,371,463	$	1,375,412

Interest expense on certificates of deposit of $100 thousand or more amounted to $4.265 million in 2011, $5.942 million in 2010 and $7.900 million in 2009.

The amount of overdrawn demand and savings deposits that were reclassified as loans held for investment were $492 thousand at December 31, 2011, and $627 thousand at December 31, 2010.

At December 31, 2011, the scheduled maturities of certificates of deposit are as follows:

(Dollarsin thousands)
2012	$	250,353
2013	93,564
2014	41,629
2015	44,254
2016	2,147
After 2016	—
	$	431,947

The amount of deposits of directors and executive officers and their related interests were $15.820 million at December 31, 2011, and $18.351 million at December 31, 2010.

89

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 9:  Short-Term Borrowings

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

	Balance Outstanding						Weighted Average Rate
(Dollars in thousands)	Maximum Month End		Average Daily		At Year End		During Year		At Year End
2011:
Federal funds purchased	$	—	$	—	$	—	—	%	—	%
Securities sold under agreements to repurchase	27,082		10,855		4,398		0.33	%	0.70	%
	$	27,082	$	10,855	$	4,398
2010:
Federal funds purchased	$	—	$	—	$	—	—	%	—	%
Securities sold under agreements to repurchase	41,897		19,112		33,481		0.35	%	0.17	%
	$	41,897	$	19,112	$	33,481
2009:
Federal funds purchased	$	—	$	117	$	—	0.80	%	—	%
Securities sold under agreements to repurchase	12,985		10,331		8,642		0.93	%	0.61	%
	$	12,985	$	10,448	$	8,642

Federal funds purchased represent primarily overnight borrowings through relationships with correspondent banks. Federal funds purchased may be obtained through secured or unsecured lines. The Company had $37.000 million in available Federal funds purchased lines with its correspondent banks. The Company has pledged $1.006 million in investment securities to secure certain Federal funds lines. Securities sold under agreements to repurchase generally have maturities of less than 30 days and are collateralized by U. S. Treasury securities and securities of U. S. Government agencies and sponsored entities. The Company has pledged $8.458 million in investment securities to secure repurchase agreements. The amounts of repurchase agreement obligations due to directors and their related interests were $2.919 million at December 31, 2011 and $4.810 million at December 31, 2010.

Note 10:  Other Borrowings

The following is a summary of other borrowings at December 31, 2011, and 2010:

(Dollars in thousands)	2011		2010
Company’s line of credit in the amount of $5,000,000, maturing in March 2012; secured by approximately  51% of the Bank’s common stock; interest payable quarterly at the prime rate with a floor of 3.50%	$	3,292	$	3,417
Bank’s advances from Federal Home Loan Banks	39,709		46,999
	$	43,001	$	50,416
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 February and October 2011, requires two principal payments of at least $125 thousand each - one during the fourth quarter of 2011 and one during the first quarter of 2012. The October modification changed the line of credit from non-revolving to revolving. 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 current and in compliance with the covenants at December 31, 2011.

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 December 31, 2011 the Bank had approximately $431 thousand in available credit although any new advances could only be received after approval by the FHLB.

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 $10.081 million at December 31, 2011, all of which was available.

90

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 10:  (Continued)

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

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 to the counterparty at a rate of 3.795% and floating interest paid from the counterparty to the Company 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 following is a summary of FHLB advances at December 31, 2011, and 2010:

(Dollars in thousands)	2011			2010
Single payment advances maturing within 12 months of year end:
Balance	$	—		$	686
Range of rates	—		%	0.16		%
Single payment advances maturing after 12 months of year end:
Balance	$	—		$	—
Range of rates	—			—
Range of maturities	—			—
Amortizing advances:
Balance	$	39,709		$	46,313
Monthly payment amount	541			550
Range of rates	3.17%-7.83%			3.17%-7.83%
Range of maturities	2012-2020			2011-2020

Scheduled principal payments on FHLB advances at December 31, 2011, are as follows:

(Dollars in thousands)
2012	$	6,494
2013	19,488
2014	2,260
2015	2,346
2016	8,339
After 2016	782
	$	39,709

91

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 11:  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 at any time commencing in March 2011. The subordinated debentures are the only asset of the Trust. The Trust issued $30.000 million in capital securities through a placement and issued $928 thousand of common securities to the Company.

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

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 that most significantly impact the entity’s economic performance. The Company had a total investment and a total exposure in these entities of $2.497 million at December 31, 2011 and $2.687 million at December 31, 2010.

Note 12:  Commitments and Contingencies

Legal Proceedings

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

Credit Related Financial Instruments

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

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

Standby and commercial letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. When issuing letters of credit, the Company applies the same credit policies and standards as it does in the normal lending process. Collateral is obtained based upon the Company's assessment of a customer's credit worthiness. A liability of $4 thousand is recognized at December 31, 2011, and a liability of $15 thousand is recognized at December 31, 2010, for the Company’s obligation to stand ready to perform related to standby letters of credit.

The maximum credit exposure in the event of nonperformance for loan commitments and letters of credit is represented by the contract amount of the instruments. A summary of these instruments at December 31, 2011, and 2010 follows:

(Dollars in thousands)	2011		2010
Commitments to extend credit	$	126,455	$	122,448
Standby letters of credit	1,580		6,169

At December 31, 2011 and December 31, 2010, there were no standby letters of credit issued on the Company’s behalf by any Federal Home Loan Banks. The Company generally uses these letters as security for public funds deposits and is obligated to the Federal Home Loan Bank if the letters of credit must be drawn upon.

92

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 12:  (Continued)

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 $11.246 million at December 31, 2011, and $4.398 million at December 31, 2010. These commitments are accounted for as derivatives and marked to fair value through mortgage banking income. At December 31, 2011, mortgage origination-related derivatives with positive fair values of $134 thousand were included in other assets and derivatives with negative fair values of $167 thousand were included in other liabilities. At December 31, 2010, mortgage origination-related derivatives with positive fair values of $1 thousand were included in other assets and derivatives with negative fair values of $28 thousand were included in other liabilities.  The Company also engages in forward sales contracts with mortgage investors to purchase mortgages held for sale. Those forward sale agreements that have a determined price and expiration date are accounted for as derivatives and marked to fair value through mortgage banking income. At December 31, 2011 and 2010, the Company had $37.507 million and $7.745 million in locked forward sales agreements in place. At December 31, 2011, forward sale-related derivatives with positive fair values of $135 thousand thousand were included in other assets and derivatives with negative fair values of $124 thousand were included in other liabilities. At December 31, 2010, forward sale-related derivatives with positive fair values of $245 thousand were included in other assets and no derivatives with negative fair values were included in other liabilities.

Mortgages that are sold generally have recourse 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. The Company incurred a recourse loss of $4 thousand on one mortgage in 2011. No recourse losses were incurred in 2010 or 2009. Mortgages sold that were still in the recourse period were $42.146 million at December 31, 2011, and $27.984 million at December 31, 2010. The Company did not have a recourse liability recorded at December 31, 2011 or 2010.

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.

Note 13:  Accumulated Other Comprehensive Income

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

(Dollarsin thousands)	Gross			Tax			Net
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	)
December 31, 2010:
Net unrealized gain on securities available for sale	$	5,342		$	1,993		$	3,349
Net unrealized loss on other-than-temporarily impaired securities available for sale	(2,834		)	(1,057		)	(1,777		)
Net unamortized pension costs	(2,927		)	(1,092		)	(1,835		)
Net unrealized gain on cash flow hedge	817			305			512
	$	398		$	149		$	249
December 31, 2009:
Net unrealized gain on securities available for sale	$	7,171		$	2,675		$	4,496
Net unrealized loss on other-than-temporarily impaired securities available for sale	(3,091		)	(1,153		)	(1,938		)
Net unamortized pension costs	(3,476		)	(1,297		)	(2,179		)
	$	604		$	225		$	379

93

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 14:  Stockholders’ Equity

Preferred Stock

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

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 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 A Preferred Stock was $188 thousand during 2010 and $201 thousand during 2009. The discount accretion recognized on the Class B, Series CD Preferred Stock was $231 thousand during 2010. The discount accretion recognized on the Class B, Series CD Preferred Stock was $1.174 million during 2011.

The following table summarizes preferred stock of the Company:

			Shares at		Shares at		Carrying Value
(Dollars in thousands)			December 31, 2011		December 31, 2010		December 31, 2011		December 31, 2010
	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	17,564		16,390
							$	17,564	$	16,390

Dividend Reinvestment and Stock Purchase Plan

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

Dividend Restrictions

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

94

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 15:  Stock Compensation Plan

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

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

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions in 2011, 2010 and 2009: expected dividend yields of 1.00%, 1.00% and 1.50%; expected volatility of 31.66%, 31.45% and 23.37%; risk-free interest rates of 2.84%, 3.28% and 2.47%; and expected lives of 7 years. Expected dividends are based on current dividend rates at the grant date. Expected volatility is estimated using the Company’s historical price variances over the prior ten years. The expected lives are calculated as the average of the contractual life and the vesting period, which approximates the Company’s historical experience. The estimated fair values of stock options at their grant date were $1.44 in 2011, $1.74 in 2010 and $1.28 in 2009. In determining the amounts of compensation expense to record for unvested stock options, the Company is using an estimated forfeiture rate of 9.45% (1.89% annual rate) for employee grants and 5.45% (1.09% annual rate) for Director grants based upon the history of the plan.

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

(Dollars in thousands, except share data)	2011			2010			2009
Stock option expense recognized, gross	$	7		$	11		$	17
Adjustment for actual vs expected forfeitures	—			—			—
Stock option expense recognized, net	7			11			17
Restricted stock award expenses recognized, gross	136			170			256
Adjustment for actual vs expected forfeitures	(145		)	(120		)	(200		)
Restricted stock award expenses recognized, net	(9		)	50			56
Total stock-based compensation	(2		)	61			73
Income tax benefits	1			(23		)	(27		)
Net stock-based compensation recognized	$	(1	)	$	38		$	46

The Company recognized $143 thousand in other expense in 2011 for the fair value of 42,133 shares of stock issued to Directors in lieu of quarterly fees. The Company recognized $133 thousand in other expense in 2010 for the fair value of 37,457 shares of stock issued to Directors in lieu of quarterly fees.

95

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 15:  (Continued)

The following is a summary of stock awards activity:

	2005 Plan										1999 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
Balance, January 1, 2009	570,984		106,250		$	16.823	12,000		$	16.004	119,900		$	15.995
Awards Granted	(4,000	)	—		—		4,000		5.140		—		—
Vested	—		(6,000	)	16.855		—		—		—		—
Forfeitures	23,250		(23,250	)	16.754		—		—		—		—
Expired	—		—		—		—		—		(98,300	)	16.195
December 31, 2009	590,234		77,000		16.841		16,000		13.288		21,600		15.087
Awards Granted	(2,000	)	—		—		2,000		4.890		—		—
Vested	—		—		—		—		—		—		—
Forfeitures	15,400		(14,000	)	16.278		(1,400	)	16.051		(200	)	17.000
Expired	—		—		—		—		—		(5,600	)	12.127
December 31, 2010	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	—		—		—		—		—		—		—
December 31, 2011	613,434		46,000		$	17.032	17,800		$	10.526	15,800		$	16.018

The following is a summary of stock options outstanding at December 31, 2011:

Exercise Price Range	Options Outstanding	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price- Options Outstanding		Options Exercisable	Weighted Average Exercise Price- Options Exercisable
$4.12 - 5.14	9,000	8.22	$	4.74	2,000	$	5.09
12.63 - 13.84	9,400	3.03	13.19		8,200	13.10
17.00 - 19.06	15,200	2.97	18.01		15,000	18.00
	33,600	4.40	$	13.11	25,200	$	15.38

There was no aggregate intrinsic value of options exercisable at December 31, 2011 or December 31, 2010. At December 31, 2011, there was a total of $11 thousand in unrecognized compensation costs, expected to be recognized over a weighted-average period of 3.3 years, related to stock options.

The Company has issued restricted stock awards to certain executives and senior officers. The awards vest over periods of one to seven years and are forfeited in their entirety if the officer leaves the Company before the end of the vesting term. Additionally the restricted shares include a performance condition that may accelerate vesting at the achievement of a diluted earnings per share and net income target. Non-achievement of the performance condition during the vesting period would not prevent vesting of the shares. Dividends are paid quarterly to restricted stock grantees. At December 31, 2011, there were $82 thousand in unrecognized compensation costs. The unrecognized costs at December 31, 2011, are expected to be recognized over a weighted-average period of nine months. The Company estimates that 4.00% (.57% annual rate) of the nonvested shares will be forfeited in determining net compensation expenses recognized. In May 2009, 6,000 shares of restricted stock with a fair value of $26 thousand became fully vested and outstanding. In June 2011, 6,000 shares of restricted stock with a fair value of $23 thousand became fully vested and outstanding.

96

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 15:  (Continued)

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 2010, the Board authorized the issuance of 37,457 shares to directors in lieu of fees, and in 2011, 42,133 shares were issued to directors in lieu of fees.

Note 16:  Other Expenses

Significant components of other expenses are summarized as follows:

(Dollarsin thousands)	2011		2010		2009
Telecommunications expenses	$	909	$	980	$	1,043
Postage and shipping	896		875		926
Stationery and supplies	775		696		814
Marketing and business development expenses	1,139		1,014		1,351
Accounting, legal and professional fees	2,053		2,324		2,160
Insurance expense	911		836		782
Other	5,632		5,883		6,274
	$	12,315	$	12,608	$	13,350

Note 17:  Income Taxes

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

(Dollars in thousands)	Federal			State			Total
2011:
Current	$	4		$	—		$	4
Deferred	864			143			1,007
Total	$	868		$	143		$	1,011
2010:
Current	$	4		$	(137	)	$	(133	)
Deferred	417			318			735
Total	$	421		$	181		$	602
2009:
Current	$	(6,221	)	$	(1,028	)	$	(7,249	)
Deferred	(9,341		)	(1,514		)	(10,855		)
Total	$	(15,562	)	$	(2,542	)	$	(18,104	)

97

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 17:  (Continued)

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

(Dollars in thousands)	2011			2010			2009
Amount computed using the Federal statutory rates on income before taxes	$	1,831		$	1,568		$	(26,489	)
Increase (decrease) resulting from:
Tax exempt income, net of disallowed interest deduction	(488		)	(594		)	(770		)
State income tax expense (benefit), net of Federal effect	95			207			(1,677		)
Life insurance income	(217		)	(227		)	(259		)
Goodwill impairment expense	—			—			11,074
Low income housing tax credits	(248		)	(330		)	—
Other, net	38			(22		)	17
	$	1,011		$	602		$	(18,104	)

The change in the net deferred taxes is a result of current period deferred tax expense (benefit), and changes in accumulated other comprehensive income. The components of the net deferred tax asset (liability) at December 31, 2011, and 2010 consist of the following:

(Dollars in thousands)	2011			2010
Allowance for loan losses	$	5,566		$	5,977
Loan fees	518			406
Purchase accounting adjustments	187			238
Nonperforming assets	4,432			3,131
Accrued expenses	148			71
Share-based compensation	277			324
Employee benefit plans	185			173
Net pension liability and unamortized pension costs	956			202
Unrealized loss on cash flow hedge	684			—
Net operating loss carry forward	5,606			7,989
Tax credit carry forward	982			507
Other	52			568
Total deferred tax assets	19,593			19,586
Fixed assets and depreciation	(1,460		)	(1,448		)
Federal Home Loan Bank stock dividends	(478		)	(468		)
Intangible assets	(1,290		)	(1,438		)
Prepaid expenses	(393		)	(401		)
Unrealized gain on securities available for sale	(1,823		)	(936		)
Unrealized gain on cash flow hedge	—			(305		)
Other	(34		)	(27		)
Total deferred tax liabilities	(5,478		)	(5,023		)
	$	14,115		$	14,563

98

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 17:  (Continued)

In connection with the 2009 and 2010 net operating losses and estimated earnings for 2011, the Company had the following net operating losses and tax credits available for carryover for Federal and state income tax purposes at December 31, 2011:

(Dollars in thousands)	2009 NOL		Carried Back to Prior Years			2010 NOL (Earnings)			Estimated 2011 NOL (Earnings)			Total Carried Forward For Future Years		Expiring in 2029		Expiring in 2030		Expiring in 2031
Federal net operating loss	$	38,353	$	(23,653	)	$	4,321		$	(6,000	)	$	13,021	$	8,700	$	4,321	$	—
Mississippi net operating loss	34,371		(15,366		)	4,707			(5,500		)	18,212		13,505		4,707		—
Alabama net operating loss	3,206		(708		)	(477		)	(170		)	1,851		1,851		—		—
Tennessee net operating loss	1,790		—			86			(50		)	1,826		1,740		86		—
Florida net operating loss	654		—			20			25			699		654		20		25
												Tax Credit Amounts		Expiration Dates
Federal tax credits from 2009												$	208	2029
Federal tax credits from 2010												299		2030
Federal tax credits from 2011												475		2031

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

The Company had no material recognized uncertain tax positions as of December 31, 2011 and 2010 and therefore did not have any tax accruals in 2011 or 2010 related to uncertain positions.

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, owes approximately $184 thousand in alternative minimum tax for 2007. This tax, 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.

As a result of an audit of its state tax returns for the years 2005 through 2007 by the Mississippi State Tax Commission, the Company paid $217 thousand in assessments in February 2010. The amount paid, included in current income tax expense, included $163 thousand in assessments and $54 thousand in interest. The primary issues related to (1) the apportionment of taxable income between state jurisdictions and (2) the excludable nature of interest income on certain investment securities issued by Federal government sponsored enterprises. The change in the calculation of apportioned revenues resulted in amendments of returns filed with the state of Tennessee. The amended returns related to Tennessee resulted in refunds receivable for 2005 through 2007 of $129 thousand, leaving the Company with a net tax expense of $88 thousand related to the assessment.

The Company is no longer subject to Federal income tax examinations of tax returns filed for years before 2008.

99

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 18:  Employee Benefit Plans

Pension Plan

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

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

(Dollars in thousands)	2011			2010
Change in benefit obligation:
Projected benefit obligation at beginning of year	$	9,182		$	8,643
Interest cost	448			468
Actuarial loss	1,478			614
Benefit payments	(563		)	(543		)
Projected benefit obligation at end of year	10,545			9,182
Change in plan assets:
Fair value of plan assets at beginning of year	8,640			8,115
Actual return on plan assets	(235		)	874
Employer contributions	168			224
Benefit payments	(563		)	(543		)
Expenses	(29		)	(30		)
Fair value of plan assets at end of year	7,981			8,640
Funded status at measurement date	$	(2,564	)	$	(542	)

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

(Dollars in thousands)	2011			2010
Net pension asset	$	—		$	—
Net pension liability	$	(2,564	)	$	(542	)
Accumulated other comprehensive income, before income taxes	$	4,272		$	2,927

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

(Dollars in thousands)	2011		2010
Projected benefit obligation	$	10,545	$	9,182
Accumulated benefit obligation	10,545		9,182
Fair value of plan assets	7,981		8,640

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

(Dollars in thousands)	2011		2010
Unamortized prior service credit	$	—	$	(25	)
Unamortized actuarial loss	4,272		2,952
Accumulated other comprehensive income	$	4,272	$	2,927

100

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 18:  (Continued)

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

(Dollars in thousands)	2011			2010			2009
Net Periodic Benefit Cost:
Interest cost	$	448		$	468		$	486
Expected return on plan assets	(563		)	(529		)	(470		)
Amortization of transition asset	—			—			(7		)
Amortization of prior service credit	(25		)	(37		)	(37		)
Recognized actuarial loss	984			885			906
Net periodic benefit cost	$	844		$	787		$	878
Other Changes in Plan Assets and Benefit Obligations Recognized in Other  Comprehensive Income:
Net (gain) loss	$	2,304		$	299		$	(85	)
Amortization of actuarial net loss	(984		)	(885		)	(906		)
Amortization of transition asset	—			—			7
Amortization of prior service credit	25			37			37
Total recognized in other comprehensive income	$	1,345		$	(549	)	$	(947	)
Total recognized in net periodic benefit cost and other comprehensive income	$	2,189		$	238		$	(69	)

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

The estimated net loss for the defined benefit pension plan that will be amortized from accumulated other comprehensive income into net periodic pension cost during 2012 is $2.136 million.

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

(Dollars in thousands)	2011		2010		2009
Net pension cost	$	844	$	787	$	878
Payments for expenses made on behalf of the plan	32		43		39
Payments to PBGC for premiums	11		16		15
	$	887	$	846	$	932

The following is a summary of weighted average assumptions:

	2011		2010		2009
Discount rate for determining current year’s costs	5.05	%	5.60	%	6.25	%
Discount rate for determining year end benefit obligation	4.00	%	5.05	%	5.60	%
Expected return on plan assets for determining current year’s costs	6.75	%	6.75	%	6.75	%
Rate of compensation increase (plan is frozen)	—	%	—	%	—	%

The discount rate used to determine the present value of the pension benefit obligation has decreased since 2008 as the Federal Reserve has acted to reduce market rates in its economic stimulation efforts. The decreases in the discount rate for 2009, 2010 and 2011 resulted in actuarial losses as the present values of the liabilities increased. The Company bases the discount rate on general corporate rates prevalent in the market on the actuarial measurement date.

101

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 18:  (Continued)

The credit market disruptions and a severely slowing economy resulted in stock market losses in excess of 35% in 2008. The markets recovered some of the 2008 losses during 2009 and 2010, which resulted in positive plan returns. At the end of 2010, there was still uncertainty about the strength of the economic recovery going forward and the plan incurred investment losses in 2011. The lack of a market recovery would increase pension expense, which is dominated by the amortization of deferred actuarial gains and losses. Plan returns or losses that negatively deviate from expected returns result in increases in these actuarial deferred losses. Returns in excess of expectations would reduce the deferred actuarial loss and therefore would reduce pension expenses going forward.

The Company estimates the long-term rate of return on plan assets using historical returns, changes in asset mix, general economic conditions and industry practice. Historical annual returns on plan assets have normally ranged from losses of approximately 10% to gains in excess of 15%. The short-term volatility of these returns makes them an unreliable indicator of future long-term returns. Therefore, the historical plan rate of return is not used as a starting point, but rather as a guideline in determining the plan assumption for returns. The plan return was a 2.72% loss in 2011, a 10.77% profit in 2010 and a 16.25% profit in 2009. The mix of invested assets has remained relatively stable over the last five years with equity holdings representing between 45% and 60% of plan assets. The equity securities have brought more return volatility and higher expected returns to the portfolio. Management has operated under the general assumption that the long-term equity market returns will approximate the past 50 years, which provided an average 10% return, based upon stock market historical data. Current and expected economic conditions have also been considered in determining the estimate of long-term returns. Management also uses a survey of pension plan managers provided by a third party which indicates the rate of return assumptions that are predominant in the industry. At the end of 2006, management changed its investment horizon to coincide with the amortization period of the unamortized actuarial gain or loss. The assumption concerning expected returns for 2008 through 2010 was maintained at 2007 levels, which reflected management’s view of expected market returns over the investment horizon. The expected return assumption for 2011 was maintained at the same level as 2010. Management believes that the economy and the markets will recover enough over the next 5 to 7 years to allow the Company to achieve an expectation of 6.75% in annual returns over those periods. Management intends to terminate the Plan within the next 5 to 7 years.

The plan’s asset allocations at December 31, 2011, and 2010 by asset category were as follows:

	2011		2010
Interest-bearing bank balances	7	%	5	%
Debt securities	26	%	32	%
Equity securities	67	%	63	%
	100	%	100	%

Equity securities included 18,868 shares of the Company’s common stock at December 31, 2011, and 2010.

The following table summarizes the fair values of pension plan assets at December 31, 2011 by asset category.

			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)
Cash and cash equivalents	$	548	$	548	$	—	$	—
Equity securities – domestic	3,965		3,965		—		—
Equity securities – international	1,142		1,142		—		—
Mutual funds (bond funds)	214		214		—		—
Government debt securities	239		—		239		—
Corporate debt securities - domestic	1,528		—		1,528		—
Corporate debt securities - international	345		—		345		—
Total assets	$	7,981	$	5,869	$	2,112	$	—

102

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 18:  (Continued)

The following table summarizes the fair values of pension plan assets at December 31, 2010 by asset category.

			Fair Value Measurements at December 31, 2010, 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, 2010		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents	$	398	$	398	$	—	$	—
Equity securities – domestic	4,692		4,692		—		—
Equity securities – international	581		581		—		—
Mutual funds (bond funds)	212		212		—		—
Government debt securities	1,056		—		1,056		—
Corporate debt securities - domestic	1,389		—		1,389		—
Corporate debt securities - international	312		—		312		—
Total assets	$	8,640	$	5,883	$	2,757	$	—

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

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

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

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

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

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

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

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

103

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 18:  (Continued)

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

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

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

(Dollars in thousands)
Year	Expected payments
2012	$	622
2013	651
2014	688
2015	680
2016	682
2017 – 2021	3,370

The Company expects to make a contribution within a range of $150 thousand to $250 thousand to the pension plan in 2012.

Profit and Savings Plan

The Bank has a profit and savings plan which includes features such as an Employee Stock Ownership Plan (ESOP) and a 401(k) plan which provides for certain salary deferrals, covering substantially all full-time employees of the Bank and subsidiaries. The Bank matched employee 401(k) contributions equal to 50% of an employee's first 5% of salary deferral through 2004. Beginning in 2005, the Company matched contributions equal to 50% of an employee’s first 6% of salary deferral. Effective in May 2006, the Company began matching 60% of an employee’s first 6% of salary deferral for all employees with less than three years of credited service. Concurrently, the Company began matching 75% of an employee’s first 6% of salary deferral for all employees with three years or more of credited service. In March 2009 the Company cut the matching percentages in half. In September 2011 the Company returned the matching percentages to 60% of an employee's first 6% of salary deferral for employees with less than three years of credited service and 75% for all employees with three years or more of credited service. Total matching contributions for this plan were $402 thousand in 2011, $317 thousand in 2010 and $385 thousand in 2009. Additional contributions to the plan are at the discretion of the Board of Directors. Discretionary contributions, which are invested in the Company’s common stock, for this plan were $75 thousand in 2011, 2010 and 2009. ESOP shares are considered outstanding for basic earnings per share calculations. Dividends on ESOP shares are deducted from retained earnings when declared. The plan was amended in 2011 to allow employees to borrow from the plan. As of December 31, 2011, the plan had $142 thousand in loans receivable from employees.

At December 31, 2011, and 2010, the profit and savings plan owned 288,586 and 285,672 shares of the Company's common stock.

Nonqualified Deferred Compensation Plan

The Bank has a nonqualified deferred compensation plan for senior officers and executives of the Bank and its subsidiaries. The plan allows for the deferral of salary by the participants with the Company having the option of also making matching contributions and profit sharing contributions. The participants’ earnings credits are indexed to selected mutual fund returns. Matching contributions and profit sharing contributions vest evenly over a five (5) year period. The Company will use the earnings of Bank-owned life insurance policies to provide sufficient revenues to offset the cost of the liabilities incurred by participant earnings credits. Participants deferred $52 thousand of compensation during 2011, $51 thousand during 2010 and $67 thousand during 2009. The Company did not make any profit sharing contributions to the plan in 2011, 2010 or 2009. The plan also had distributions of $14 thousand in 2011, $23 thousand in 2010 and $80 thousand in 2009. Included in salaries and employee benefit expenses are credits for earnings declines of $2 thousand for 2011, charges for earnings increases of $40 thousand for 2010, and charges for earnings increases of $2 thousand in 2009. Also included in salaries and employee benefit expenses are administrative expenses of $4 thousand in 2011, $2 thousand in 2010 and $3 thousand in 2009.

104

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 19:  Earnings Per Share

The Company calculates 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.

(Dollars in thousands, except per share data)	2011		2010		2009
Net income (loss)	$	4,373	$	4,011	$	(59,799	)
Less: Preferred dividends	1,774		1,692		1,464
Add: Gain on exchange of preferred stock	—		12,867		—
Net income (loss) attributable to common stock	$	2,599	$	15,186	$	(61,263	)
Net income (loss) allocated to common stockholders:
Distributed	366		363		1,451
Undistributed	2,218		14,708		(62,106		)
	$	2,584	$	15,071	$	(60,655	)
Weighted-average basic common and participating shares outstanding	9,180,997		9,150,980		9,157,752
Less: weighted average participating restricted shares outstanding	54,392		69,293		90,872
Weighted-average basic shares outstanding	9,126,605		9,081,687		9,066,880
Basic net income (loss) per share	$	0.28	$	1.66	$	(6.69	)
Weighted-average basic common and participating shares outstanding	9,180,997		9,150,980		9,157,752
Add: share-based options and stock warrant	—		—		—
	9,180,997		9,150,980		9,157,752
Less: weighted average participating restricted shares outstanding	54,392		69,293		90,872
Weighted-average dilutive shares outstanding	9,126,605		9,081,687		9,066,880
Dilutive net income (loss) per share	$	0.28	$	1.66	$	(6.69	)
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	33,117		38,942		62,184
Common stock warrant	513,113		513,113		432,983

Note 20:  Regulatory Matters

Federal banking regulations require that the Bank maintain certain cash reserves based on a percent of deposits. This requirement was $2.258 million, which was covered by $12.311 million in vault cash, 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 is included in interest bearing bank balances.

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

Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of Total Capital and Tier I Capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I Capital (as defined) to average assets (as defined). Management believes, as of December 31, 2011, that all capital adequacy requirements have been met.

As of December 31, 2011, 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.

105

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 20:  (Continued)

The Company's and Bank's actual capital amounts and ratios as of December 31, 2011, and 2010, are also presented in the table:

	Actual				Minimum Capital				Well Capitalized
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
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	%
December 31, 2010:
Total capital (to risk weighted assets):
Company	$	135,291	11.30	%	$	95,790	8.00	%	$	—	—	%
Bank	134,020		11.22	%	95,568		8.00	%	119,460		10.00	%
Tier I capital (to risk weighted assets):
Company	120,310		10.05	%	47,895		4.00	%	—		—	%
Bank	119,074		9.97	%	47,784		4.00	%	71,676		6.00	%
Tier I capital (to average assets):
Company	120,310		7.74	%	62,211		4.00	%	—		—	%
Bank	119,074		7.66	%	62,155		4.00	%	77,693		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 get prior approval from its primary regulators - the Federal Deposit Insurance Corporation and the State of Mississippi Department of Banking and Consumer Finance - to pay dividends to the Company.

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 2010 and 2011.

In September 2010 the Company entered into an exchange transaction with the Department of the Treasury TARP Community Development Capital Initiative. Pursuant to the Agreement, the Company issued 30,000 shares of Class B, Series CD preferred stock bearing an annual dividend rate of 2% and redeemed 30,000 shares of Class B, Series A preferred stock bearing an annual dividend rate of 5%. Under the terms of the Exchange Agreement, the Company may not pay common dividends in excess of the aggregate per share dividends for the immediately prior fiscal year. This will limit future dividends through the earlier of September 2018 or the date the preferred stock is redeemed to the current rate of $.01 per share per quarter or $.04 per share per year.

106

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 21:  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 balances remaining in other comprehensive income are 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 $1.505 million and cash of $1.861 million were pledged as collateral on the swap at December 31, 2011. Cash of $1.500 million was pledged as collateral on the swap at December 31, 2010.

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.

The following tables summarize the Company’s derivative positions:

	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

	As of December 31, 2010
	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	$	30,000	$	817	Other liabilities	$	—	$	—
Derivatives not designated as hedging  instruments:
Forward sale agreements	Other assets	7,745		245		Other liabilities	—		—
Written interest rate options (locks)	Other assets	3,234		1		Other liabilities	1,164		28
Total derivatives		$	40,979	$	1,063		$	1,164	$	28

107

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 21:  (Continued)

Amounts included in the consolidated statements of operations and in other comprehensive income (OCI) in 2011, 2010 and 2009 are summarized in the following tables:

	Year Ended December 31, 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	$	(3,171	)	Interest on junior subordinated debt	$	(520	)
	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				$	188
Written interest rate options (locks)	Mortgage banking income				(188		)
Total					$	—

	Year Ended December 31, 2010
(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	$	817	Interest on junior subordinated debt	$	—
	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			$	502
Written interest rate options (locks)	Mortgage banking income			12
Total				$	514

	Year Ended December 31, 2009
(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	$	—	Interest on junior subordinated debt	$	—
	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			$	(62	)
Written interest rate options (locks)	Mortgage banking income			128
Total				$	66

Net settlement payments of $496 thousand were made to the swap counterparty during 2011. The Company estimates that approximately $146 thousand will be recognized as a charge to interest expense during the first quarter of 2012 related to the swap. The Company expects approximately $585 thousand related to future swap settlements to be recognized as a charge to interest expense over the next twelve months.

108

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 22:  Summarized Financial Information of First M & F Corporation

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

STATEMENTS OF CONDITION

(Dollars in thousands)	2011		2010
Assets
Cash	$	976	$	2,901
Restricted interest bearing balances	1,861		1,500
Securities available for sale	1,505		—
Investment in banking subsidiary	137,470		133,947
Investment in statutory trust	928		928
Other assets	3,035		2,250
	$	145,775	$	141,526
Liabilities and Stockholders’ Equity
Note payable	$	3,292	$	3,416
Junior subordinated debt	30,928		30,928
Other liabilities	1,959		117
Stockholders’ equity	109,596		107,065
	$	145,775	$	141,526

STATEMENTS OF OPERATIONS

(Dollars in thousands)	2011		2010		2009
Income:
Dividends received from banking subsidiary	$	2,650	$	2,200	$	3,800
Dividends received from statutory trust	27		60		60
Equity in undistributed earnings (loss) of banking subsidiary	2,738		3,215		(59,869		)
Interest on investment securities	45		—		—
Other income	5		10		24
Total income (loss)	5,465		5,485		(55,985		)
Expenses:
Interest on other borrowings	146		84		64
Interest on junior subordinated debentures	1,335		1,992		1,992
Goodwill impairment	—		—		2,310
Other expenses	206		224		291
Total expenses	1,687		2,300		4,657
Income (loss) before income taxes	3,778		3,185		(60,642		)
Income tax benefit	595		826		843
Net income (loss)	$	4,373	$	4,011	$	(59,799	)

109

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 22:  (Continued)

STATEMENTS OF CASH FLOWS

(Dollars in thousands)	2011			2010			2009
Cash flows from operating activities:
Net income (loss)	$	4,373		$	4,011		$	(59,799	)
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed (earnings) loss of banking subsidiary	(2,738		)	(3,215		)	59,869
Goodwill impairment	—			—			2,310
Other, net	(608		)	(879		)	(45		)
Net cash provided by (used in) operating activities	1,027			(83		)	2,335
Cash flows from investing activities:
Purchases of securities available for sale	(1,500		)	—			—
Additional investment in Bank	—			—			(25,000		)
Net cash used in investing activities	(1,500		)	—			(25,000		)
Cash flows from financing activities:
Increase (decrease) in note payable	(125		)	1,500			(500		)
Cash dividends	(968		)	(1,751		)	(2,541		)
Preferred stock issued	—			—			30,000
Tax benefits on share-based transactions	2			—			28
Net cash provided by (used in) financing activities	(1,091		)	(251		)	26,987
Net increase (decrease) in cash	(1,564		)	(334		)	4,322
Cash at January 1	4,401			4,735			413
Cash at December 31	$	2,837		$	4,401		$	4,735

110

FIRST M&F CORPORATION AND SUBSIDIARY

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

As of December 31, 2011 (the "Evaluation Date"), the Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures as defined in the Exchange Act Rules. Based on their evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are sufficiently effective to ensure that material information relating to the Company and required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms.

Management’s Annual Report on Internal Control over Financial Reporting is contained on page 52 of this Annual Report on Form 10-K and is hereby incorporated by reference.

Design and Evaluation of Internal Control Over Financial Reporting

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, the Company included a report of management’s assessment of the design and effectiveness of its internal controls as part of this Annual Report on Form 10-K for the year ended December 31, 2011. Management’s report is included in the section, Financial Statements and Supplementary Data of this Annual Report on Form 10-K, under the heading “Management’s Annual Report on Internal Control Over Financial Reporting.”

Changes in Internal Control Over Financial Reporting

Subsequent to the Evaluation Date, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls.

OTHER INFORMATION

None.

111

FIRST M&F CORPORATION AND SUBSIDIARY

PART III

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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

The following information concerns the employment history of executive officers for the last five (5) years.

Name	Five Year Employment History
Hugh S. Potts, Jr. (age 67)	Chairman of the Board and CEO, First M&F Corporation and M&F Bank since 1994
John G. Copeland (age 59)	EVP & Chief Financial Officer, First M&F Corporation and M&F Bank since May 2004
Jeffrey B. Lacey (age 49)	President & Chief Banking Officer, M&F Bank since December 2008; Branch President, M&F Bank from March 2002 through December 2008
Eric K. Hanbury (age 39)	EVP & Chief Credit Officer, M&F Bank since August 30, 2011; Senior Vice President - Regional Credit Officer of Northern Mississippi, Alabama and Florida from December 2008 to August 2011; Branch President, M&F Bank from July 2005 to December 2008
Barry S. Winford (age 45)	EVP - Corporate Banking, M&F Bank since August 30, 2011; EVP & Chief Credit Officer, M&F Bank from February 17, 2009 to August 30, 2011; President, Community Church Capital from May 2008 through December 2008; President, Therizo Capital from October 2006 through December 2008
Grover C. Kinney, III (age 51)	EVP - Retail Banking, M&F Bank since September 2011; EVP - Region I, M&F Bank from December 2008 to August 2011; EVP - Chief Deposit Officer, M&F Bank prior to December 2008
Samuel B. Potts (age 33)	Vice-President - Corporate Planning, Performance & Risk Management, M&F Bank since July 2008; Vice President - Commercial Lending, M&F Bank from March 2004 to July 2008

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

As a CDCI/TARP recipient the Company is required to have an Excessive Expenditure Policy. Such a policy was adopted by the Company’s Board of Directors on October 5, 2009 and is posted on the Bank’s website at https://www.mfbank.com/resource-center-investor-relations-governance.htm#fmfcexcessiveexpenditurespolicy.

EXECUTIVE COMPENSATION

Information concerning executive compensation is incorporated by reference and contained in the proxy material on Page 16 and following.

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

Information concerning security ownership of owners and management is incorporated by reference and contained in the proxy material on Page 14 and following.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Information concerning certain relationships and related transactions is incorporated by reference and contained in the proxy material on Pages 8 and 11.

PRINCIPAL ACCOUNTING FEES AND SERVICES

(Last Two Fiscal Years)

Information concerning principal accounting fees and services, as well as information concerning the Company’s audit committee pre-approval policies and procedures, is incorporated by reference and contained in the proxy material on Page 15.

112

FIRST M&F CORPORATION AND SUBSIDIARY

PART IV

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

Financial Statementsand Exhibits

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

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

(b) Report of Independent Registered Public Accounting Firm

(c) Consolidated Statements of Condition – December 31, 2011 and 2010

(d) Consolidated Statements of Operations – Years Ended December 31, 2011, 2010 and 2009

(e) Consolidated Statements of Comprehensive Income – Years Ended December 31, 2011, 2010 and 2009

(f) Consolidated Statements of Stockholders’ Equity – Years Ended December 31, 2011, 2010 and 2009

(g) Consolidated Statements of Cash Flows – Years Ended December 31, 2011, 2010 and 2009

(h) Notes to Consolidated Financial Statements

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

3.1	Articles of Incorporation of the Registrant. Incorporated herein by reference to 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, filed herewith.
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, filed herewith.
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, filed herewith.
11	Computation of Earnings per Share. Filed herewith as Note 19 to the consolidated financial statements.
21	Subsidiaries of the Registrant
23	Consent of Independent Registered Public Accounting Firm
31	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.
99	Certification pursuant to the Emergency Economic Stability Act of 2008 of Hugh S. Potts, Jr., Chief Executive Officer and Certification pursuant to the Emergency Stability Act of 2008 of John G. Copeland, Chief Financial Officer.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase.
101.LAB	XBRL Taxonomy Extension Label Linkbase.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase.
101.DEF	XBRL Taxonomy Definition Linkbase.

113

FIRST M&F CORPORATION AND SUBSIDIARY

SIGNATURES

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

FIRST M & F CORPORATION

BY:	/s/ Hugh S. Potts, Jr.
	Hugh S. Potts, Jr.
	Chairman of the Board and
	Chief Executive Officer
DATE:	March 14, 2012

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

		/s/ Hugh S. Potts, Jr.
DATE:	March 14, 2012	Hugh S. Potts, Jr., Director
		Chairman of the Board
		Chief Executive Officer
		(principal executive officer)
		/s/ Hollis C. Cheek
DATE:	March 14, 2012	Hollis C. Cheek, Director
		/s/ Jon A. Crocker
DATE:	March 14, 2012	Jon A. Crocker, Director
DATE:	March 14, 2012	James D. Frerer, Director
		/s/ Jeffrey B. Lacey
DATE:	March 14, 2012	Jeffrey B. Lacey, Director
		President &
		Chief Banking Officer
		/s/ John Clark Love, III
DATE:	March 14, 2012	John Clark Love, III, Director
		/s/ Susan P. McCaffery
DATE:	March 14, 2012	Susan P. McCaffery, Director
		/s/ Michael L. Nelson
DATE:	March 14, 2012	Michael L. Nelson, Director
		/s/ Otho E. Pettit, Jr.
DATE:	March 14, 2012	Otho E. Pettit, Jr., Director
		/s/ Samuel B. Potts
DATE:	March 14, 2012	Samuel B. Potts, Director
		Vice President
		/s/ Julie B. Taylor
DATE:	March 14, 2012	Julie B. Taylor, Director

114

FIRST M&F CORPORATION AND SUBSIDIARY

		/s/ Lawrence D. Terrell
DATE:	March 14, 2012	Lawrence D. Terrell, Director
		/s/ Lawrence D. Terrell, Jr.
DATE:	March 14, 2012	Lawrence D. Terrell, Jr., Director
		/s/ James I. Tims
DATE:	March 14, 2012	James I. Tims, Director
		/s/ Scott M. Wiggers
DATE:	March 14, 2012	Scott M. Wiggers, Director
		/s/ John G. Copeland
DATE:	March 14, 2012	John G. Copeland
		EVP & Chief Financial Officer
		(principal financial officer)
		/s/ Robert C. Thompson, III
DATE:	March 14, 2012	Robert C. Thompson, III
		VP – Accounting Policy
		(principal accounting officer)

115

FIRST M&F CORPORATION AND SUBSIDIARY

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, filed herewith.
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, filed herewith.
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, filed herewith.
11	Computation of Earnings per Share – Filed herewith as Note 19 to the consolidated financial statements.
21	Subsidiaries of the Registrant.
23	Consent of Independent Registered Public Accounting Firm.
31	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.
99	Certification pursuant to the Emergency Economic Stability Act of 2008 of Hugh S. Potts, Jr., Chief Executive Officer and Certification pursuant to the Emergency Stability Act of 2008 of John G. Copeland, Chief Financial Officer.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase.
101.LAB	XBRL Taxonomy Extension Label Linkbase.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase.
101.DEF	XBRL Taxonomy Definition Linkbase.

116