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, 2010

Or

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

For the transition period from __________ to __________

Commission File Number 000-09424

FIRST M&F CORPORATION

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

Indicate by check mark 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).    ¨ 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, 2010, the aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant was $26,716,762.

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	9,106,803 Shares
Title of Class	Shares Outstanding at January 31, 2011

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement dated March 16, 2011, are incorporated by reference into Part III of the Form 10-K report.

FIRST M&F CORPORATION AND SUBSIDIARY

CROSS REFERENCE INDEX

		Page
PART I
Item 1	Business	3
Item 1A	Risk Factors	13
Item 1B	Unresolved Staff Comments	15
Item 2	Properties	15
Item 3	Legal Proceedings	15
Item 4	Reserved
PART II
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	16
Item 6	Selected Financial Data	19
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	49
Item 8	Financial Statements and Supplementary Data	50
Item 9	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	107
Item 9A	Controls and Procedures	107
Item 9B	Other Information	107
PART III
Item 10	Directors, Executive Officers and Corporate Governance	108
Item 11	Executive Compensation	108
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	108
Item 13	Certain Relationships and Related Transactions and Director Independence	108
Item 14	Principal Accounting Fees and Services	108
PART IV
Item 15	Exhibits	109

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

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FIRST M&F CORPORATION AND SUBSIDIARY

PART I

BUSINESS

General

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

The Bank was chartered and organized under the laws of the State of Mississippi in 1890, and accounts for substantially all of the total assets and revenues of the Company.  The Bank is the seventh largest bank in the state, having total assets of approximately $1.599 billion at December 31, 2010. The Bank offers a complete range of commercial and consumer services at its main office and two branches in Kosciusko and its branches within central and north Mississippi, including Ackerman, Brandon, Bruce, Canton, Cleveland, Clinton, Durant, Flowood, Grenada, Jackson, Madison, Olive Branch, Oxford, Pearl, Philadelphia, Ridgeland, Southaven, Starkville, and Tupelo. The Bank also has banking locations in southwest Tennessee in Bells and Cordova. The Bank also has banking locations in central Alabama in Chelsea, Columbiana, Inverness, Pelham and Wilsonville. The Bank also has a banking location in Niceville, Florida.

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

The 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 timberland 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, 2010, the Company and its subsidiary employed 499 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.

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FIRST M&F CORPORATION AND SUBSIDIARY

Overview

In the opinion of First M&F Corporation’s management, the Company’s highlights during 2010 were as follows:

Facilities

· In February 2010 closed a full service branch in Memphis, Tennessee

· In February 2010 closed a full service branch in Germantown, Tennessee

· In February 2010 closed a full service branch in Birmingham, Alabama

Earnings

· Return on assets for 2010 was 0.25% while the return on equity was 3.74%. Return on assets for 2009 was (3.63)% while the return on equity was (42.97)%.

· Debit card revenues grew by 9.44%, composing 26.96% of deposit revenues

· Mortgage banking revenues decreased by 13.27% in 2010 after increasing by 51.66% in 2009

· Mortgage originations were $80.139 million in 2010 as compared to $97.741 million in 2009

· Property, casualty, life and health insurance commissions decreased from $3.810 million in 2009 to $3.796 million in 2010

Credit

· Loans held for investment increased by 0.17% in 2010 due to the continuing effects of the general economic slowdown

· Church loan participations of $36.221 million were purchased in 2010 as a means to grow and diversify the loan portfolio

· Net charge offs, as a percentage of average loans, were 1.65% for 2010 compared to 4.50% for 2009

· Nonaccrual loans as a percentage of loans decreased to 3.11% at the end of 2010 from 4.17% at the end of 2009

· 90 day past due accruing loans as a percentage of loans decreased to .09% at the end of 2010 from .23% at the end of 2009

· Foreclosed real estate balances were $31.125 million at the end of 2010 as compared to $23.578 million at the end of 2009

· Foreclosed real estate of $15.877 million was sold during 2010

· Expenses related to foreclosed properties were $1.373 million in 2010 while losses incurred on foreclosed properties through sales and write-downs were $1.573 million as compared to expenses of $1.505 million and losses of $5.778 million in 2009

Other

· As previously disclosed in the Company’s Current Report on Form 8-K filed October 5, 2010, the Company’s bank subsidiary was certified as a Community Development Financial Institution in September 2010, allowing it access to capital under the TARP Community Development Capital Initiative

· In September 2010 the Company issued preferred stock with a 2% coupon pursuant to the Community Development Capital Initiative and exchanged it with the U.S. Treasury for its 5% coupon preferred stock originally issued in February 2009 pursuant to the TARP Capital Purchase Program

· The Company remained well capitalized with a total risk-based capital ratio of 11.29% at the end of 2010 as compared to 11.09% at the end of 2009

CDCI

On September 29, 2010, and pursuant to the terms of the letter agreement between the Corporation and the United States Department of the Treasury (“Treasury”) attached hereto as Exhibit 10.6 (the “Letter Agreement”), 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, and are attached hereto as Exhibit 3.4.

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.

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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, 2010, are as follows:

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

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

· Build the capital strength and funding flexibility of the organization

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

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

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

· Continue to build the retail investment brokerage business

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

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

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

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

· 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 niche markets such as church and agricultural lending

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.

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.

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FIRST M&F CORPORATION AND SUBSIDIARY

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.

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, 2010, the Company and the Bank were in compliance with the total capital ratio and the Tier 1 capital ratio requirements. Note 20 - Regulatory Matters of the Notes to Consolidated Financial Statements presents the Company's and the Bank's capital ratios.

Deposit Insurance Assessments

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

The FDIC instituted the Transaction Account Guarantee Program in 2009 to allow financial institutions the option to insure primarily noninterest-bearing accounts for balances in excess of the standard $250 thousand limit. The annual cost of the additional insurance 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).

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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 current system, the assessment base is domestic deposits minus a few allowable exclusions, such as pass-through reserve balances.  Under the Dodd-Frank Act, assessments are to be 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 will range from 5 to 35 basis points, and total base assessment rates will range from 2.5 to 45 basis points after adjustments.  These final regulations will be 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: 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 authorizes the Treasury Department to purchase from financial institutions and their holding companies up to $700 billion in mortgage loans, mortgage-related securities and certain other financial instruments, including debt and equity securities issued by financial institutions and their holding companies in a troubled asset relief program (“TARP”).  The purpose of TARP is to restore confidence and stability to the U.S. banking system and to encourage financial institutions to increase their lending to customers and to each other.  The Treasury Department has allocated $250 billion towards the TARP Capital Purchase Program (“CPP”).  Under the CPP, Treasury will purchase debt or equity securities from participating institutions.  The TARP also includes direct purchases or guarantees of troubled assets of financial institutions. Participants in the CPP are subject to executive compensation limits and are encouraged to expand their lending and mortgage loan modifications.

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.

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.

The recent 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 of Transaction 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.

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· 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 contains 16 different titles, is 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.

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.

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FIRST M&F CORPORATION AND SUBSIDIARY

STATISTICAL DISCLOSURE

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

Table 1

AVERAGE BALANCE SHEETS/YIELDS

(Dollars in thousands)	2010							2009							2008
	Average				Yield/			Average				Yield/			Average				Yield/
	Balance		Interest		Cost			Balance		Interest		Cost			Balance		Interest		Cost
Interest-bearing bank balances	$	60,894	$	143		0.23	%	$	25,151	$	42		0.17	%	$	6,954	$	133		1.91	%
Federal funds sold		35,642		82		0.23			43,871		95		0.22			9,810		182		1.86
Taxable investments		236,046		7,616		3.23			234,942		9,531		4.06			176,284		9,023		5.12
Tax-exempt investments		41,347		2,470		5.97			56,021		3,357		5.99			55,990		3,451		6.16
Loans		1,052,883		62,501		5.94			1,130,428		67,290		5.95			1,206,798		81,972		6.79
Total earning assets		1,426,812		72,812		5.10			1,490,413		80,315		5.39			1,455,836		94,761		6.51
Nonearning assets		164,130							154,747							165,867
Total average assets	$	1,590,942						$	1,645,160						$	1,621,703
NOW & MMDA		473,010		5,062		1.07			447,909		5,839		1.30			388,588		7,336		1.89
Savings deposits		114,358		1,467		1.28			113,397		1,679		1.48			115,027		2,645		2.30
Certificates of deposit		544,192		12,280		2.26			569,623		16,183		2.84			587,695		22,274		3.79
Short-term borrowings		19,112		66		0.35			10,448		97		0.93			13,860		327		2.36
Other borrowings		102,112		5,016		4.91			165,548		7,441		4.49			186,978		8,710		4.66
Total interest-bearing liabilities		1,252,784		23,891		1.91			1,306,925		31,239		2.39			1,292,148		41,292		3.20
Noninterest-bearing deposits		222,083							190,541							179,237
Noninterest-bearing liabilities		8,909							8,538							8,312
Capital		107,166							139,156							142,006
Total avg. liabilities & equity	$	1,590,942						$	1,645,160						$	1,621,703
Net interest margin				48,921		3.43					49,076		3.29					53,469		3.67
Less tax equivalent adjustment
Investments				921		0.06					1,252		0.08					1,287		0.09
Loans				199		0.02					230		0.02					186		0.01
Reported book net interest margin			$	47,801		3.35	%			$	47,594		3.19	%			$	51,996		3.57	%

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

	2010 Compared To 2009									2009 Compared To 2008
(Dollars in thousands)	Increase (Decrease) Due To									Increase (Decrease) Due To
				Yield/									Yield/
	Volume			Cost			Net			Volume			Cost			Net
Interest earned on:
Interest-bearing bank balances	$	72		$	29		$	101		$	189		$	(280	)	$	(91	)
Federal funds sold		(18	)		5			(13	)		353			(440	)		(87	)
Taxable investments		40			(1,955	)		(1,915	)		2,691			(2,183	)		508
Tax-exempt investments		(878	)		(9	)		(887	)		2			(96	)		(94	)
Loans		(4,610	)		(179	)		(4,789	)		(4,867	)		(9,815	)		(14,682	)
Total earning assets		(3,336	)		(4,167	)		(7,503	)		2,057			(16,503	)		(14,446	)
Interest paid on:
NOW & MMDA		298			(1,075	)		(777	)		947			(2,444	)		(1,497	)
Savings deposits		13			(225	)		(212	)		(31	)		(935	)		(966	)
Certificates of deposit		(648	)		(3,255	)		(3,903	)		(599	)		(5,492	)		(6,091	)
Short-term borrowings		55			(86	)		(31	)		(56	)		(174	)		(230	)
Other borrowings		(2,984	)		559			(2,425	)		(981	)		(288	)		(1,269	)
Total interest-bearing liabilities		(1,163	)		(6,185	)		(7,348	)		413			(10,466	)		(10,053	)
Change in net interest income on a tax-equivalent basis	$	(2,173	)	$	2,018		$	(155	)	$	1,644		$	(6,037	)	$	(4,393	)

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

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FIRST M&F CORPORATION AND SUBSIDIARY

Table 3

SECURITIES AVAILABLE FOR SALE

	Carrying Value of Securities
	December 31
(Dollars in thousands)	2010		2009		2008
Securities Available For Sale
U.S. Treasury	$	-	$	517	$	543
U.S. Government sponsored entities		58,611		55,161		8,397
Mortgage-backed securities		173,921		167,875		145,362
Obligations of states and political subdivisions		41,828		56,586		64,829
Other securities		2,569		4,411		8,014
Total securities available for sale	$	276,929	$	284,550	$	227,145

	Amortized Cost of Securities
	December 31
	2010		2009		2008
Securities Available For Sale
U.S. Treasury	$	-	$	503	$	509
U.S. Government sponsored entities		58,152		54,746		8,089
Mortgage-backed securities		170,039		162,647		141,688
Obligations of states and political subdivisions		40,924		55,153		64,357
Other securities		5,306		7,421		9,239
Total securities available for sale	$	274,421	$	280,470	$	223,882

Table 4

MATURITY DISTRIBUTION AND YIELDS OF SECURITIES AVAILABLE FOR SALE

						After One
	Within					But Within					After Five
(Dollars in thousands)	One					Five					But Within					Over
	Year		Yield			Years		Yield			Ten Years		Yield			Ten Years		Yield			Total		Yield
Securities Available For Sale
U.S. Government sponsored entities	$	25,393		1.80	%	$	32,647		2.12	%	$	571		2.51	%	$	-		-	%	$	58,611		1.99	%
Mortgage-backed securities		62,589		3.76			67,925		3.86			18,915		3.07			24,492		3.63			173,921		3.71
Obligations of states and political subdivisions		6,913		6.22			18,750		6.17			15,307		6.30			858		9.51			41,828		6.29
Other debt securities		260		5.49			1,375		5.52			-		-			934		1.44			2,569		4.04
Total debt securities available for sale	$	95,155		3.42	%	$	120,697		3.77	%	$	34,793		4.48	%	$	26,284		3.74	%	$	276,929		3.74	%

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.

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FIRST M&F CORPORATION AND SUBSIDIARY

Table 5

COMPOSITION OF THE LOAN PORTFOLIO

	2010					2009					2008					2007					2006
(Dollars in			% Of					% Of					% Of					% Of					% Of
thousands)	Amount		Total			Amount		Total			Amount		Total			Amount		Total			Amount		Total
Held For Investment:
Commercial, financial and agricultural	$	133,226		12.57	%	$	129,571		12.24	%	$	136,795		11.62	%	$	176,747		14.50	%	$	156,613		14.41	%
Non-residential real estate		646,731		61.00			643,804		60.83			745,699		63.39			731,595		59.99			621,841		57.19
Residential real estate		235,489		22.21			239,921		22.67			255,488		21.71			269,601		22.11			262,046		24.10
Consumer loans		44,700		4.22			45,044		4.26			38,613		3.28			41,492		3.40			46,514		4.28
Lease financing		-		-			-		-			-		-			-		-			269		0.02
Total loans	$	1,060,146		100.00	%	$	1,058,340		100.00	%	$	1,176,595		100.00	%	$	1,219,435		100.00	%	$	1,087,283		100.00	%
Loans held for sale	$	6,242				$	10,266				$	7,698				$	5,571				$	7,263

Table 6

LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES

Maturity distribution of loans at December 31, 2010	Within		One to Five		After Five
(Dollars in thousands)	One Year		Years		Years		Total
Commercial, financial and agricultural	$	79,993	$	49,314	$	3,919	$	133,226
Non-residential real estate		150,308		425,403		71,020		646,731
Residential real estate		33,265		101,033		101,191		235,489
Consumer loans		9,838		34,330		532		44,700
Total loans	$	273,404	$	610,080	$	176,662	$	1,060,146
Rate sensitivity of loans at December 31, 2010			One to Five		After Five
			Years		Years		Total
Fixed rate loans			$	591,735	$	146,795	$	738,530
Floating rate loans				18,345		29,867		48,212
Total			$	610,080	$	176,662	$	786,742

Table 7

NONPERFORMING ASSETS AND PAST DUE LOANS

(Dollars in thousands)	2010		2009		2008		2007		2006
Nonaccrual loans	$	33,127	$	44,549	$	20,564	$	6,524	$	3,557
Other real estate owned		31,125		23,578		11,061		6,232		3,135
Investment securities		698		825		-		-		-
Total nonperforming assets	$	64,950	$	68,952	$	31,625	$	12,756	$	6,692
Accruing loans past due 90 days or more		951		2,479		5,686		1,093		376
Restructured loans (accruing)		18,052		4,620		3,664		-		-
Interest income that would have been recorded on nonaccrual loans if they had been current and accruing	$	2,128
Interest that was recorded in the financial statements for loans that were on nonaccrual status	$	250

11

FIRST M&F CORPORATION AND SUBSIDIARY

Table 8

ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

(Dollars in thousands)	2010			2009			2008			2007			2006
Balance at beginning of year	$	24,014		$	24,918		$	14,217		$	14,950		$	12,449
Adjustment for purchase acquisition		-			-			-			-			2,234
Charge offs:
Commercial, financial and agricultural		(3,617	)		(4,605	)		(993	)		(762	)		(767	)
Real estate – nonresidential		(13,325	)		(42,133	)		(5,235	)		(1,223	)		(282	)
Real estate – residential		(1,854	)		(3,409	)		(1,968	)		(1,581	)		(1,512	)
Consumer		(859	)		(1,093	)		(1,510	)		(1,178	)		(1,264	)
Total		(19,655	)		(51,240	)		(9,706	)		(4,744	)		(3,825	)
Recoveries:
Commercial, financial and agricultural		281			169			75			373			256
Real estate – nonresidential		1,798			174			135			666			228
Real estate – residential		121			47			67			25			102
Consumer		246			345			396			427			474
Total		2,446			735			673			1,491			1,060
Net charge-offs		(17,209	)		(50,505	)		(9,033	)		(3,253	)		(2,765	)
Provision for loan losses		9,220			49,601			19,734			2,520			3,032
Balance at end of year	$	16,025		$	24,014		$	24,918		$	14,217		$	14,950
Net Charge-Offs To Average Loans		1.65	%		4.50	%		0.75	%		0.28	%		0.26	%

Table 9

ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

	December 31
(Dollars in thousands)	2010		2009		2008		2007		2006
Commercial, financial and agricultural	$	4,442	$	5,893	$	6,815	$	6,953	$	7,540
Non-residential real estate		6,705		13,375		13,129		3,094		3,095
Residential real estate		3,701		3,407		1,634		1,936		1,865
Consumer loans		1,177		1,339		3,340		2,234		2,450
Total loans	$	16,025	$	24,014	$	24,918	$	14,217	$	14,950

	December 31
Allowance As A Percentage Of Loan Type	2010			2009			2008			2007			2006
Commercial, financial and agricultural		3.33	%		4.55	%		4.98	%		3.93	%		4.81	%
Non-residential real estate		1.04			2.08			1.76			0.42			0.50
Residential real estate		1.57			1.42			0.64			0.72			0.71
Consumer loans		2.63			2.97			8.65			5.38			5.27
Total loans		1.51	%		2.27	%		2.12	%		1.17	%		1.37	%
Net Charge-Offs As A Percent Of Year End	December 31
Loans Outstanding, By Type	2010			2009			2008			2007			2006
Commercial, financial and agricultural		2.50	%		3.42	%		0.67	%		0.22	%		0.33	%
Non-residential real estate		1.78			6.52			0.68			0.08			0.01
Residential real estate		0.74			1.40			0.74			0.58			0.54
Consumer loans		1.37			1.66			2.89			1.81			1.70
Total loans		1.62	%		4.77	%		0.77	%		0.27	%		0.25	%

Table 10

TIME DEPOSITS OF $100,000 OR MORE

The table below shows maturities of outstanding time deposits of $100,000 or more at December 31, 2010 (dollars in thousands):

Three months or less	$	26,354
Over three months through six months		31,634
Over six months through twelve months		85,805
Over one year		102,641
Total	$	246,434

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FIRST M&F CORPORATION AND SUBSIDIARY

Table 11

SELECTED RATIOS

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

	2010			2009			2008
Return on average assets		0.25	%		(3.63	)%		0.03	%
Return on average equity		3.74			(42.97	)		0.37
Dividend payout ratio		2.41			-			866.67
Average equity to assets ratio		6.74			8.46			8.76

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)
	2010			2009			2008
Securities sold under agreements to repurchase
Outstanding at end of period	$	33,481		$	8,642		$	9,728
Maximum outstanding at any month-end during the period		41,897			12,985			20,879
Average outstanding during the period		19,112			10,331			12,876
Interest paid		66			96			301
Weighted average rate during each period		0.35	%		0.93	%		2.34	%
Federal funds purchased
Outstanding at end of period	$	-		$	-		$	-
Maximum outstanding at any month-end during the period		-			-			325
Average outstanding during the period		-			117			984
Interest paid		-			1			26
Weighted average rate during each period		-			0.80	%		2.62	%

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 $31.125 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 61% 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 3.42% 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 2.65% 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.

13

FIRST M&F CORPORATION AND SUBSIDIARY

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.

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

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

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

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

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.

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FIRST M&F CORPORATION AND SUBSIDIARY

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 loan-related losses. The Company will have to repay these funds by raising capital within the next eight 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.

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 $15.367 million of Mississippi NOLs were carried back to 2007 and 2008.

· The Company has 20 years to generate net taxable earnings sufficient to absorb the $14.700 million in Federal and $19.004 million in Mississippi 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.

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

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PART II

MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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

At December 31, 2010, there were 1,139 shareholders of record of the Company's common stock.  On December 31, 2010, the Company's stock closed at $3.74 per share.

The following table summarizes the trading ranges and dividend payouts for the two years ended December 31, 2010:

	Quarterly Closing Common Stock Price Ranges and Dividends Paid - Common
	First		Second		Third		Fourth
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	*
2009:
High	$	9.00	$	7.39	$	4.70	$	3.25
Low		4.48		4.04		2.66		1.80
Close		6.12		4.07		2.75		2.21
Dividend		.13		.01		.01		.01	*

The following table summarizes common stock and dividend performance ratios for the five years ended December 31, 2010:

	Common Stock and Dividend Performance
	2010			2009			2008			2007			2006
Price/earnings ratio		2.25	x		-			141.00	x		9.88	x		12.72	x
Price/book value ratio		0.38	x		0.26	x		0.56	x		1.02	x		1.38	x
Book value/share	$	9.98		$	8.36		$	15.00		$	15.45		$	14.15
Dividend payout ratio		2.41	%		-	%		866.67	%		32.50	%		33.77	%
Historical dividend yield		1.81	%		1.89	%		3.29	%		2.65	%		3.08	%

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

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

*The Company entered into a transaction with the Department of the Treasury under the TARP 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.

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The following table provides information regarding securities issued under our equity compensation plans that were in effect during 2010:

		Number of
		Securities to be
		Issued Upon		Weighted-Average
		Exercise of		Exercise Price of
		Outstanding		Outstanding		Number of Securities
		Options, Warrants		Options, Warrants		Remaining Available
	Plan Name	and Rights		and Rights		for Future Issuance
Equity compensation plans approved by security holders	1999 Stock Option Plan		15,800	$	16.11		-
	2005 Equity Incentive Plan		16,600		12.04		603,634
Equity compensation plans not approved by security holders	None		-		-		-
Total			32,400	$	14.03		603,634

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

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

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

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

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

In 2010, under the 2005 Equity Incentive Plan, there were forfeitures of 14,000 shares and no vestings of restricted stock. Also in 2010, under the 2005 Equity Incentive Plan, the Company issued 2,000 shares of stock options to directors with a grant date strike price of $4.89, which was the grant date fair value of the underlying stock.

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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 2005.

*$100 invested on 12/31/05 in stock or index, including reinvestment of dividends.

Fiscal year ending December 31.

	12/05	12/06	12/07	12/08	12/09	12/10
First M&F Corporation	100.00	119.57	99.33	55.77	15.07	25.78
NASDAQ Composite	100.00	111.74	124.67	73.77	107.12	125.93
NASDAQ Bank	100.00	114.45	88.71	71.34	62.32	75.34

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

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SELECTED FINANCIAL DATA

(Thousands, except per share data)
	2010			2009			2008			2007			2006
EARNINGS
Interest income	$	71,692		$	78,833		$	93,288		$	101,916		$	91,505
Interest expense		23,891			31,239			41,292			47,876			39,156
Net interest income		47,801			47,594			51,996			54,040			52,349
Provision for loan losses		9,220			49,601			19,734			2,520			3,032
Noninterest income		20,521			19,970			21,131			21,320			20,148
Noninterest expense		54,490			95,872			54,284			51,373			48,926
Income taxes		602			(18,104	)		(1,436	)		6,976			6,598
Noncontrolling interests		(1	)		(6	)		19			33			16
Net income (loss)	$	4,011		$	(59,799	)	$	526		$	14,458		$	13,925
Net interest income, taxable equivalent	$	48,921		$	49,076		$	53,469		$	55,277		$	53,616
Cash dividends paid on common stock	$	366		$	1,466		$	4,772		$	4,772		$	4,751
Dividends paid and accrued on preferred stock	$	1,692		$	1,464		$	-		$	-		$	-
PER COMMON SHARE
Net income (loss) – basic	$	1.66		$	(6.69	)	$	0.06		$	1.58		$	1.53
Cash dividends paid – common		.04			.16			.52			.52			.52
Book value – common		9.96			8.36			15.00			15.45			14.15
Closing stock price – common		3.74			2.21			8.46			15.80			19.59
SELECTED AVERAGE BALANCES
Assets	$	1,590,942		$	1,645,160		$	1,621,703		$	1,573,630		$	1,482,013
Earning assets, amortized cost		1,426,812			1,490,413			1,455,836			1,407,559			1,321,730
Loans held for investment		1,045,467			1,122,307			1,200,628			1,148,275			1,056,899
Investments, amortized cost		277,393			290,963			232,274			243,042			237,578
Total deposits		1,353,643			1,321,470			1,270,547			1,208,007			1,153,381
Equity		107,166			139,156			142,006			134,083			122,288
SELECTED YEAR-END BALANCES
Assets	$	1,603,964		$	1,662,968		$	1,596,865		$	1,653,751		$	1,540,275
Earning assets, carrying value		1,440,420			1,507,966			1,427,344			1,467,624			1,360,064
Loans held for investment		1,060,146			1,058,340			1,176,595			1,219,435			1,087,283
Investments, carrying value		276,929			284,550			227,145			237,138			261,828
Total deposits		1,375,412			1,388,263			1,261,387			1,262,455			1,185,982
Equity		107,065			104,630			135,968			140,098			128,066
SELECTED RATIOS
Return on average assets		0.25	%		(3.63	)%		0.03	%		0.92	%		0.94	%
Return on average equity		3.74			(42.97	)		0.37			10.78			11.39
Average equity to average assets		6.74			8.46			8.76			8.52			8.25
Dividend payout ratio		2.41			-			866.67			32.50			33.77
Price to earnings		2.25	x		-			141.00	x		9.88	x		12.72	x
Price to book		0.38	x		0.26	x		0.56	x		1.02	x		1.38	x

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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 2010 was $4.011 million, or $1.66 basic and diluted earnings per share as compared to a net loss of $59.799 million, or $6.69 basic and diluted loss per share in 2009 and net income of $.526 million, or $.06 basic and diluted earnings per share in 2008. 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 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. The major factors contributing to the earnings decrease in 2009 were (1) the $29.867 million increase in loan loss accruals in 2009 and (2) goodwill and other intangible asset impairments of $33.820 million in 2009. Another factor influencing the 2009 earnings was the decrease in loans as $50.505 million in net charge-offs were taken and demands for loans decreased as the economy slowed throughout the year.

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 February 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.

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

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

Total assets decreased by 3.55% in 2010, ending the year at $1.604 billion. Total assets increased by 4.14% in 2009, ending the year at $1.663 billion. The compounded annual growth rate for total assets for the last five (5) years was 4.83%, while the compounded growth rate for deposits was 7.15%.

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RESULTS OF OPERATIONS

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

	2010			2009			2008
Net interest margin		3.43	%		3.29	%		3.67	%
Efficiency ratio		78.47			89.87			72.77
Return on assets		0.25			(3.63	)		0.03
Return on equity		3.74			(42.97	)		0.37
Noninterest income to avg. assets		1.29			1.21			1.30
Noninterest income to revenues (1)		29.55			28.92			28.33
Noninterest expense to avg. assets		3.43			5.83			3.35
Salaries and benefits to total noninterest expense		50.11			29.53			53.34
Nonaccrual loans to loans		3.11			4.17			1.74
90 day past due loans to loans		0.09			0.23			0.48
Net charge-offs as a percent of average loans		1.65			4.50			0.75

(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)	2010		2009		2008
Mortgage originations	$	80,139	$	97,741	$	62,444
Treasury and electronic banking services revenues		100		119		189
Trust and retail investment revenues		526		489		585
Revenues per FTE employee		140		131		134
Agency commissions per agency FTE employee (2)		99		99		103

(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 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 19 basis points and the net interest margin increased by 14 basis points.

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

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.

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

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.

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

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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.

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

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

Similar to 2010 expectations, management expects that the Federal Reserve will continue to maintain its 0 to .25% Fed funds target rate until economic indicators show improvements in the economy. Unemployment and housing would have to rebound somewhat to push short-end rates upward. Management also expects loan demand to remain modest. Therefore, four challenges for 2011 will be to (1) maintain loan yields in a low-rate environment in which loan demand may be extremely soft, (2) manage the earning asset mix to improve yields if market opportunities arise, (3) take advantage of opportunities to decrease deposit costs or to leverage new deposit relationships with sales of related fee-based services and (4) manage the funding mix to emphasize checking accounts and interest-bearing deposits over borrowed funds. Wider credit market spreads, combined with a normally-shaped yield curve, should help to stabilize loan yields during 2011 if the pace of economic recovery quickens. The Company’s focus in 2011 will continue to be on improving asset quality, liquidating foreclosed assets and problem loans, diversifying the loan portfolio, building capital and funding the balance sheet with deposits. Within this overall focus, the Company will use loan and deposit pricing strategies and sales and business development strategies that are consistent with achieving these goals.

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Provision for Loan Losses

During 2010 the Company’s provision for loan losses decreased to $9.220 million from $49.601 million in 2009 and $19.734 million in 2008. The decreased loan loss accruals were the result of a continuing effort to manage credit quality by foreclosing on nonperforming loans, many of which had been written down to their collateral values in 2009. Net charge offs in 2010 were $17.209 million as compared to $50.505 million in 2009. Deterioration in the values of real estate collateral was the primary factor affecting the provisions for the past three years.

Nonaccrual loans decreased to $33.127 million at the end of 2010 from $44.549 million at the end of 2009 and increased from $20.564 million at the end of 2008. Nonperforming assets as a percentage of total assets increased from 1.98% at the end of 2008 to 4.15% at the end of 2009 and decreased to 4.05% at the end of 2010. 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. The Company was able to take advantage of the less volatile real estate market and disposed of $15.877 million of foreclosed real estate during 2010 as some buying interest began to emerge. The percentage of allowance for loan loss to total loans held for investment was 1.51% at December 31, 2010, 2.27% at December 31, 2009, and 2.12% at December 31, 2008.

Noninterest Income

Deposit account revenues declined during 2009 and 2010 as service charge and overdraft charge revenues have declined. Overdraft revenues tend to be sensitive to economic conditions. The overdraft revenue decrease in 2010 and 2009 was influenced by a decrease in spending by customers as the economy softened beginning in 2008 and into 2009 and 2010. Numbers of items charged decreased by 12.79% in 2010 and decreased by 12.01% in 2009.

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

(Dollars in thousands)	2010		2009		2008
Service charge revenues	$	1,282	$	1,368	$	1,415
Debit/ATM card revenues		2,755		2,518		2,219
Overdraft fee revenues		6,184		7,090		8,058
Service charges on deposit accounts	$	10,221	$	10,976	$	11,692

Overdraft fees are per item charges applied to each check paid on an overdrawn account or returned. The per item fee is determined by the Company’s pricing committee and is based primarily on the competitive market prices as well as on costs associated with processing the items. The majority of the volumes of overdraft items processed comes from customers in the Company’s overdraft protection program which grants overdraft limits to customers, generally allows account activity up to the overdraft limit balance, and requires that accounts have positive balances at some point within a thirty day period. Overdraft limits, which are equivalent to credit limits, were increased for accounts in the overdraft protection program during 2007. This policy change influenced the increased volume that was experienced during 2008. Overdrafts are considered loans for accounting purposes and therefore are subject to the Company’s loan accounting policies concerning the charging off of accounts to the allowance for loan losses. Interest charged on overdrawn balances, based on the Federal discount rate, is recorded as interest on loans. The overdraft 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. At the end of 2010 the Company had over 16,000 checking accounts covered by the overdraft protection program. Approximately 9,000 of these account holders also had debit cards, with approximately 49% of this group opting in to the fee-paid overdraft protection. Management expects 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.

Debit card activity has experienced 14.09% 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 for interchange fees that may be charged on debit cards. Although it is unclear how these changes will affect banks with less than $10 billion in total assets, sensitivity tests indicate that if the per item revenue were to be capped at $.12 per transaction, the Company would experience an $800 thousand decrease in debit/atm card revenues on an annualized basis.

Management expects debit card revenues to continue to be the largest component of deposit revenues for the foreseeable future. Overdraft fee revenues should remain a dependable source of revenues in 2011 if the economy strengthens and personal spending increases. However, uncertainty in the economy coupled with uncertainty about the effects of Federal Reserve actions related to debit card interchange fees make future deposit revenues difficult to project.

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FIRST M&F CORPORATION AND SUBSIDIARY

Mortgage banking income improved from 2008 to 2009 as interest rates declined steadily from a high of 6.63% in July 2008 to a low of 4.71% in December 2009. The economic stagnation that occurred in the real estate markets in 2008 significantly affected mortgage revenues. The resulting reaction of government stimulation programs helped revenues in 2009 as the Federal Reserve acted to reduce market interest rates and to provide liquidity to the economy. The first-time home buyer tax credit legislation also brought renewed interest for new home mortgages. Mortgage originations increased from $62.444 million in 2008 to $97.741 million in 2009 with the interest rate environment having a significant influence as 69.27% of the 2009 originations were for refinancing purposes. Origination volumes slowed to $80.139 million in 2010, 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 to have improved mortgage volumes in 2011 unless interest rates move steadily upward for the year. Revenues should improve if volumes improve, the housing market becomes more liquid and revenues per mortgage sold are maintained.

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 $99.379 thousand per employee in 2010 while average compensation costs have remained relatively constant at $60.286 thousand per employee in 2008 and $60.123 thousand per employee in 2010. The soft economy has hurt demand for insurance products and resulted in customers tending to decrease coverage in an attempt to save on expenses. Management expects that 2011 will continue to be difficult for most traditional agency products without a strengthened economy.

Significant components of other income for 2008 through 2010 are contained in the following table:

(Dollars in thousands)	2010		2009			2008
Agency profit-sharing revenues	$	234	$	433		$	392
Loan fees		387		399			494
Gains on student loan sales		176		133			218
Loss on bankers bank stock		-		(78	)		-
All other income		1,068		1,525			1,802
Other income	$	1,865	$	2,412		$	2,906

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.

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FIRST M&F CORPORATION AND SUBSIDIARY

The Company owns certain beneficial interests in collateralized debt obligations that own bank trust preferred securities. These beneficial interests are tested for impairment on a quarterly basis. Three of the beneficial interests, Trapeza I, Trapeza II and Trapeza V, deferred their interest payments and were placed in nonaccrual status during 2009. The Trapeza I beneficial interest failed an impairment test at June 30, 2009. The Trapeza V and MM Community Funding IX beneficial interests failed impairment tests at September 30, 2009. The Trapeza II, Tpref Funding II and MM Community Funding IX beneficial interests failed impairment tests at December 31, 2009. The MM Community Funding IX beneficial interest was placed in nonaccrual status during the fourth quarter of 2009 after failing the impairment test. The Trapeza I and MM Community Funding IX beneficial interests failed impairment tests at March 31, 2010. The Trapeza II, Tpref Funding II and MM Community Funding IX beneficial interests failed impairment tests at June 30, 2010. The Trapeza II and MM Community Funding IX beneficial interests failed impairment tests at September 30, 2010. No beneficial interests failed the impairment tests at December 31, 2010. The total amount of interest that would have been outstanding as a receivable if the securities had been in accrual status at the end of 2009 was $149 thousand and at the end of 2010 was $220 thousand.

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

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

(Dollars in thousands)							Other-Than-Temporary Impairment
	Other-Than-Temporary Impairment						Charged To (Reclassified From)
	Charged Against Earnings						Other Comprehensive Income
Name of Issuer	1st Quarter		2nd Quarter		3rd Quarter		1st Quarter			2nd Quarter			3rd 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

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

(Dollars in thousands)	Other-Than-Temporary Impairment						Other-Than-Temporary Impairment
	Charged Against Earnings						Charged To Other Comprehensive Income
Name of Issuer	2nd Quarter		3rd Quarter		4th 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

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FIRST M&F CORPORATION AND SUBSIDIARY

The following table summarizes certain financial information about the trust preferred security-backed CDOs at the end of 2010 and 2009.

As of December 31, 2010
(Dollars in thousands)											Deferrals and
								Moody’s	Number of		Defaults as
		Book		Fair		Unrealized		Credit	Banks in		a Percent			Excess
Name of Issuer	Class	Value		Value		Loss		Rating	Issuance		of Collateral			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

As of December 31, 2009
(Dollars in thousands)											Deferrals and
								Moody’s	Number of		Defaults as
		Book		Fair		Unrealized		Credit	Banks in		a Percent			Excess
Name of Issuer	Class	Value		Value		Loss		Rating	Issuance		of Collateral			Subordination
Trapeza I 2002-1A	C1	$	575	$	125	$	450	Ca		25		43.09	%		0.00	%
Trapeza II 2003-2A	C1		1,050		281		769	Ca		40		33.36			3.01
Tpref Funding II	B		887		255		632	Caa3		34		26.60			0.00
Trapeza V 2003-5A	C1		833		170		663	Ca		43		26.09			0.10
MM Community Funding IX	B1		826		249		577	Caa3		34		38.04			0.00
		$	4,171	$	1,080	$	3,091

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. This calculation assumes that underlying securities that are deferring interest payments will all default and not be able to provide funds to pay off the beneficial interests.

Noninterest Expense

Most categories of noninterest expense were down in 2009 and 2010 as efforts were made to cut expenses and increase efficiencies across the entire organization.

Salary and benefits expenses decreased in 2010 with average full-time equivalent employees decreasing from 528 in 2009 to 497 in 2010. The Company closed 3 branches in 2010 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. During 2008 the Company reduced personnel by 13 full-time equivalent employees in branches that were acquired or denovo expansions in the previous three years.

The number of full-time equivalent employees was 499 at the end of 2010, 512 at the end of 2009 and 543 at the end of 2008.

Health care related costs increased by 3.99% in 2010, decreased by 19.53% in 2009 and increased by 84.37% in 2008. Health care costs rise and fall primarily due to claims experience and secondarily by the number of covered employees.

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. Occupancy expense increased during 2008 due to the expansion into rented office space in 2007 in Cordova, Tennessee and Niceville, Florida and the expansion into new constructed facilities in Ridgeland and Brandon, Mississippi.

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FIRST M&F CORPORATION AND SUBSIDIARY

Foreclosed property losses and expenses decreased by $4.337 million in 2010 from 2009 and increased by $5.370 million in 2009 over 2008. The significant increase in these expenses subsequent to 2007 was a direct result of the problems that were encountered in the land development and construction loan portfolio. Other real estate increased from $11.061 million at the end of 2008 to $23.578 million at the end of 2009 and $31.125 million at the end of 2010. 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. 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)	2010			2009			2008
Losses (gains) on sales of other real estate	$	(749	)	$	1,677		$	258
Write-downs of other real estate		2,323			4,101			1,117
Other real estate expenses		1,686			1,543			557
Rental income on other real estate properties		(314	)		(38	)		(19	)
Total foreclosed property expenses	$	2,946		$	7,283		$	1,913

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. The Dodd-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.

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.

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FIRST M&F CORPORATION AND SUBSIDIARY

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

Management continued to monitor the Company’s stock price throughout 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.

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Intangible asset impairments

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

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

Income Taxes

The average tax rate for 2010 was 13.05% as compared to net tax benefits that were accrued for 2008 and 2009. The low average rate resulted from low pre-tax earnings that included $1.748 million in net tax-exempt interest, $667 thousand in non-taxable insurance income and low income housing tax credits of $330 thousand. The $602 thousand in income tax expenses for 2010 included $735 thousand in deferred tax expenses and a $133 thousand current tax benefit. At December 31, 2010 the Company had a current tax receivable of $129 thousand and a deferred tax asset of $14.563 million. Due to a significant addition to the provision for loan losses, a non-tax deductible goodwill impairment charge and other intangible asset impairments the Company incurred pre-tax losses and accrued an income tax benefit for 2009. The $18.104 million tax benefit for 2009 includes a deferred tax benefit of $10.855 million and a current tax benefit of $7.249 million. At December 31, 2009, the Company had a current tax benefit receivable of $8.498 million and a deferred tax asset of $15.219 million. During 2010 the Company received refunds generated by carrying back the 2009 NOL to the 2007 and 2008 tax years. Approximately $7.738 million in Federal and $768 thousand in state refunds were received. The Company had a remaining carryover NOL of $14.700 million for Federal tax purposes and $19.004 million for Mississippi tax purposes. Between 2005 and 2007 the Company paid annual Federal and state taxes of between $4.4 million and $6.7 million. Management expects that the net operating losses will be realized through carry-forwards in the foreseeable future. The net operating loss carryforwards represent deferred taxes of approximately $7.7 million. Management has also reviewed its other remaining 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 future years 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, 2009 or 2010 and therefore did not have any tax accruals during 2009 or 2010 related to uncertain positions.

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Quarterly Financial Trends (Unaudited)

The following table summarizes components of the Company’s statements of operations by quarter for 2010 and 2009:

	2010
	First			Second			Third			Fourth
(Dollars in thousands)	Quarter			Quarter			Quarter			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
Preferred dividends		(437	)		(439	)		(441	)		(375	)
Gain on exchange of preferred stock		-			-			12,867			-
Net income applicable to common stock		416			833			13,671			266
Loss (earnings) attributable to participating securities		(3	)		(7	)		(106	)		1
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

	2009
	First			Second			Third			Fourth
(Dollars in thousands)	Quarter			Quarter			Quarter			Quarter
Interest income	$	20,261		$	19,160		$	19,926		$	19,486
Interest expense		8,417			7,895			7,628			7,299
Net interest income		11,844			11,265			12,298			12,187
Provision for loan losses		19,840			9,195			4,805			15,761
Noninterest income		5,188			4,976			5,381			4,425
Noninterest expense		31,041			15,815			14,140			34,876
Income taxes		(6,592	)		(3,660	)		(1,137	)		(6,715	)
Noncontrolling interest		(16	)		2			7			1
Net loss	$	(27,241	)	$	(5,111	)	$	(136	)	$	(27,311	)
Preferred dividends		(154	)		(439	)		(435	)		(436	)
Net loss applicable to common stock		(27,395	)		(5,550	)		(571	)		(27,747	)
Loss (earnings) attributable to participating securities		306			52			(9	)		259
Net loss allocated to common shareholders	$	(27,089	)	$	(5,498	)	$	(580	)	$	(27,488	)
Per common share:
Net loss - basic	$	(2.99	)	$	(.61	)	$	(.06	)	$	(3.03	)
Net loss - diluted	$	(2.99	)	$	(.61	)	$	(.06	)	$	(3.03	)
Cash dividends		.13			.01			.01			.01

Fourth Quarter Earnings

Net income before taxes for the fourth quarter of 2010 was down by $1.233 million from the third quarter, most of which was due to an increase in foreclosed property expenses of $1.739 million. Most of the increased foreclosed property expense was attributable to write-downs on foreclosed properties, the bulk of the write-downs on two properties, resulting from management estimates of lower values in two declining markets. The Company incurred a tax benefit in the fourth quarter as compared to the third quarter due primarily to the accrual of $165 thousand in low income housing tax credits due for 2010 during the fourth quarter.

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FINANCIAL CONDITION

Earning Assets

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. The average earning asset mix for 2008 was 82.89% in loans, 15.96% in investments and 1.15% in short-term funds. 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 increased by 10.06%. Loans held for investment decreased by 3.51% in 2008 while deposits decreased by .08%. The following table shows the volume changes in loans and deposits over the last three years:

(Dollars in thousands)	2010			2009			2008
Net increase (decrease) in loans	$	1,806		$	(118,255	)	$	(42,840	)
Net increase (decrease) in deposits		12,851			126,876			(1,068	)
Ratio of loan growth to deposit growth		14.05	%		-	%		-	%

Assets decreased by 3.55% from December 31, 2009 to December 31, 2010, and increased by 4.14% from December 31, 2008 to December 31, 2009. Investments decreased by 2.68% in 2010 after increasing by 25.27% in 2009. The Company changed its investment portfolio mix 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. The Company purchased $51.832 million in government-sponsored entity securities and $86.283 million in mortgage-backed securities during 2009. Liquidity from mortgage-backed securities’ sales, deposit growth, a reduction in the loan portfolio and funds received through the U. S. Treasury CPP program was used to fund the purchases and build the Company’s short-term liquidity position. Approximately $10.629 million of mortgage-backed securities were sold during 2009 for a gain of $449 thousand to take advantage of the improved pricing in the mortgage-backed markets.

The following table shows loans held for investment by type as of December 31, 2010, 2009 and 2008:

(Dollars in thousands)	December 31, 2010		December 31, 2009		December 31, 2008
Commercial real estate	$	646,731	$	643,804	$	745,699
Residential real estate		195,184		195,361		209,697
Home equity lines		40,305		44,560		45,791
Commercial, financial and agricultural		133,226		129,571		136,795
Consumer		44,700		45,044		38,613
Total	$	1,060,146	$	1,058,340	$	1,176,595
Mortgages held for sale	$	6,242	$	3,118	$	3,803
Student loans held for sale		-		7,148		3,895

Although real estate loans were down in 2010, much of the decrease was attributable to a $38.094 million decline in construction and land development loans. Other commercial real estate loans increased by $41.021 million due primarily to the purchases of two groups of loan participations secured by church properties. The first 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 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 for $26.159 million to yield 9.04%. Real estate-related loans decreased during 2009 as the Company sought to remove problem real estate loans and diversify into other areas. The amount of construction and land development loans was reduced by more than 50% during 2009 as loans were worked out, charged-off, sold and foreclosed on.

Commercial loans increased by 2.28% in 2010, decreased by 5.28% in 2009 and decreased by 22.60% in 2008. The largest contributor to commercial loan growth in 2010 was in one relationship. The asset-based lending operation portfolio in Memphis, M&F Business Credit, Inc., grew by 2.38% in 2010, grew by 3.85% in 2009 and grew by 9.14% in 2008.

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.

The Company began the process of diversifying the product mix of the loan portfolio during the first quarter of 2009 by de-emphasizing commercial and residential construction loans. A renewed emphasis was made in 2009 and 2010 on small business, agricultural and consumer loans. Loans held to maturity increased by $1.806 million or .17% from December 31, 2009 to December 31, 2010, and decreased by $118.255 million or 10.05% from December 31, 2008 to December 31, 2009. With projections of no net growth in 2011, management expects that the loan portfolio’s decline or increase in size over the next several years will depend on the resolution of the remaining real estate-related and other problem loans as well as the strength of the economy. Loans held for investment as a percent of total assets were 66.10% at December 31, 2010, 63.64% at December 31, 2009, and 73.68% at December 31, 2008.

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Liability Management

Deposits decreased by .93% during 2010 and increased by 10.06% during 2009. The following table shows the breakdown by deposit category of core deposit and public funds deposit growth from December 31, 2009 to December 31, 2010:

	Core Customers						Public Funds						Total Deposits
(Dollars in thousands)	Increase (Decrease)						Increase (Decrease)						Increase (Decrease)
	Amt.			Pct.			Amt.			Pct.			Amt.			Pct.
Noninterest-bearing	$	(5,677	)		(2.68	)%	$	(10,703	)		(63.42	)%	$	(16,380	)		(7.17	)%
NOW		15,130			7.37			39,534			37.92			54,664			17.66
MMDA		21,864			16.72			(16,979	)		(55.14	)		4,885			3.02
Savings		1,947			1.73			58			20.94			2,005			1.78
Customer CDs		(34,965	)		(6.77	)		(18,996	)		(47.40	)		(53,961	)		(9.69	)
Brokered CDs		(5,413	)		(36.55	)		1,349			31.66			(4,064	)		(21.31	)
Total	$	(7,114	)		(.60	)%	$	(5,737	)		(2.92	)%	$	(12,851	)		(0.93	)%

Noninterest bearing core customer balances decreased by $5.677 million in 2010 after increasing by $39.978 million in 2009. Approximately half of the 2009 increase was concentrated in a small number of commercial accounts while the balance of the increase occurred over the noninterest bearing core customer base. General decreases across the core customer noninterest bearing account base was also the cause of the 2010 decrease. Public funds noninterest bearing balances increased by $9.912 million in 2009 and subsequently decreased by $10.703 million in 2010. The interest-bearing Summit Checking account continued to be the sales leader for deposit products in 2010. 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 and by $27.479 million during 2009 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. Balances in public funds NOW accounts, which tend to be difficult to predict, increased from the end of 2009 to the end of 2010. 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 deposit in the middle to low range of market rates continued into 2010 as management focused on limiting overall balance sheet growth and continuing to improve its capital ratios. 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. 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.

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

(Dollars in thousands)	December 31, 2010		December 31, 2009		December 31, 2008
Noninterest-bearing demand	$	212,199	$	228,579	$	178,689
NOW deposits		364,209		309,545		217,334
Money market deposits		166,455		161,570		182,364
Savings deposits		114,769		112,764		114,281
Certificates of deposit		502,772		556,733		549,224
Brokered certificates of deposit		15,008		19,072		19,495
Total	$	1,375,412	$	1,388,263	$	1,261,387

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

(Dollars in thousands)	December 31, 2010		December 31, 2009		December 31, 2008
Noninterest-bearing demand	$	6,174	$	16,877	$	6,965
NOW deposits		143,781		104,247		48,019
Money market deposits		13,814		30,793		23,411
Savings deposits		335		277		469
Certificates of deposit		21,076		40,072		93,265
Brokered certificates of deposit		5,610		4,261		2,465
Total	$	190,790	$	196,527	$	174,594

Other borrowings decreased by 58.85% in 2010, decreased by 19.16% in 2009 and decreased by 24.72% in 2008. The decreases in borrowings were primarily funded through liquidity provided by deposit growth and loan portfolio paydowns. Amounts of borrowings maturing within one year decreased from 62.20% of other borrowings at December 31, 2009 to 21.24% at December 31, 2010. 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.

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

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 move from a fixed rate to a floating rate basis in March 2011. The swap has a notional amount of $30 million, becomes effective on March 15, 2011, pays a floating rate of 3-month LIBOR plus 1.33% to the Company and receives a 3.795% fixed rate from the Company. Interest payments will become due quarterly, starting with the June 15, 2011 payment, and continuing 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.

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FIRST M&F CORPORATION AND SUBSIDIARY

Fair Value

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

The 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 2010, the Company carried these investments at 24.77% 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. As of the end of 2009, the Company carried these investments at 25.90% of amortized cost, with the unrealized losses of approximately $3.091 million recorded in stockholders’ equity, net of tax, as a component of other comprehensive income.

The Company recorded $829 thousand in 2009 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 2009 tests resulted in an $829 thousand credit-related impairment charge against earnings and a $2.698 million other impairment charge to other comprehensive income on all five 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.

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FIRST M&F CORPORATION AND SUBSIDIARY

An economic by-product of the sub-prime mortgage crisis has been the slow-down in the housing markets. Lack of demand in housing, an over-supply of homes on the market, a tightening of available credit by banks and a general deterioration in the economy have affected the Company’s ability to dispose of foreclosed properties and to arrive at values of real estate collateral for loan impairment testing. As real estate values fell from 2008 to 2010, the Company experienced losses on sales and write downs of foreclosed real estate of $1.574 million in 2010 as compared to $5.778 million in 2009. Real estate-related loan impairment calculations became more severe after 2008, resulting in $8.247 million in loan loss accruals related to real estate secured loans individually reviewed for impairments in 2010 and $42.368 million in 2009. The Company estimates that fair values of properties related to land development and construction and commercial real estate could remain under pressure into 2011, 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 convert 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 will be reclassified into interest expense. Any ineffective portion of the change in the fair value of the swap, which is valued on a monthly basis, will be recorded in earnings rather than into other comprehensive income. The fair value of the swap at the end of 2010 was $817 thousand. 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 contributed $12 thousand in revenues to mortgage banking income during 2010 and $17 thousand in revenues to mortgage banking income during 2009. Fair value adjustments for forward sale derivatives contributed $168 thousand in revenues to mortgage banking income during 2010 and increased mortgage banking revenues by $80 thousand during 2009.

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FIRST M&F CORPORATION AND SUBSIDIARY

Credit Risk Management

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

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

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

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FIRST M&F CORPORATION AND SUBSIDIARY

The Company experienced a large increase in the amount of past due and nonaccrual real estate-secured construction and commercial loans during 2008, a trend which continued through 2009. The trend in nonaccrual and past due loans stabilized in the fourth quarter of 2009 and into 2010. 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 into 2010 many real estate-secured loans were worked out or foreclosed on and properties disposed of. With the trend in nonaccrual loans having moved downward over the past twelve months, the primary challenge 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.

Approximately 81.56% of the $33.127 million in nonaccrual loans at December 31, 2010 were in construction and development and commercial real estate loans. These nonaccrual balances consisted of several large loans rather than a great many small loans.

The following table summarizes the number and amount of nonaccrual construction and land development loans of $500 thousand or more at the end of each quarter from December 31, 2009 through December 31, 2010.

(Dollars in thousands)
	Number of Loans		Amount
Balance at 12/31/09		13	$	19,297
Balance at 03/31/10		10		14,980
Balance at 06/30/10		9		13,213
Balance at 09/30/10		7		8,581
Balance at 12/31/10		5		6,620

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, 2009 through December 31, 2010.

(Dollars in thousands)
	Number of Loans		Amount
Balance at 12/31/09		6	$	8,021
Balance at 03/31/10		8		11,291
Balance at 06/30/10		8		8,899
Balance at 09/30/10		7		13,451
Balance at 12/31/10		8		14,085

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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, 2009 and at December 31, 2010.

	December 31, 2009				December 31, 2010
	Thirteen Largest Loans				Five Largest Loans
(Dollars in thousands)	Nonaccrual		Impairment		Nonaccrual		Impairment
Note	Balance		Allowance		Balance		Allowance
1.	$	2,600	$	-	$	-	$	-
2.		1,999		-		1,325		-
3.		1,960		-		-		-
4.		1,849		-		-		-
5.		1,770		-		-		-
6.		1,760		-		1,634		-
7.		1,465		-		1,465		-
8.		1,400		-		1,393		125
9.		1,210		-		-		-
10.		1,036		-		-		-
11.		845		-		-		-
12.		803		-		803		-
13.		600		-		-		-
Totals	$	19,297	$	-	$	6,620	$	125
Total nonaccrual construction and land development loans	$	25,655	$	36	$	10,060	$	175

	December 31, 2009				December 31, 2010
	Six Largest Loans				Eight Largest Loans
(Dollars in thousands)	Nonaccrual		Impairment		Nonaccrual		Impairment
Note	Balance		Allowance		Balance		Allowance
14.	$	2,980	$	-	$	-	$	-
15.		2,703		-		2,925		-
16.		653		-		-		-
17.		650		-		-		-
18.		519		-		-		-
19.		516		-		-		-
20.		-		-		2,469		-
21.		-		-		2,455		300
22.		-		-		2,093		-
23.		-		-		1,582		-
24.		-		-		1,008		-
25.		-		-		880		-
26.		-		-		673		255
Totals	$	8,021	$	-	$	14,085	$	555
Total nonaccrual commercial real estate loans	$	9,789	$	-	$	16,960	$	765

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FIRST M&F CORPORATION AND SUBSIDIARY

The following table summarizes information relevant to the impairment determinations for the five largest construction and development loans and the eight largest commercial real estate loans that were in nonaccrual status at December 31, 2010.

			Nonaccrual		Impairment		Information
(Dollars in thousands)	Type of	Type of	Balance		Allowance		Supporting
Note	Borrower	Collateral	12/31/10		12/31/10		Allowance
1.	Commercial Developer	Commercial Subdivision	$	1,634		-	Appraisal dated 11/17/08
2.	Residential Developer	Residential Subdivision		1,465		-	Appraisal dated 11/23/09
3.	Commercial Developer	Commercial		1,393		125	Appraisal dated 10/03/08
4.	Commercial Developer	Commercial Subdivision		1,325		-	Appraisal dated 09/29/10
5.	Residential Developer	Residential Subdivision		803		-	Appraisal dated 09/30/09
6.	Commercial	Land		2,925		-	Appraisal dated 07/07/08
7.	Commercial	Office		2,469		-	Appraisal dated 02/01/10
8.	Commercial	Retailer		2,455		300	Appraisal dated 10/05/10
9.	Commercial	Office/Warehouse		2,093		-	Appraisal dated 05/06/09
10.	Commercial	Self Storage		1,582		-	Appraisal dated 12/06/10
11.	Commercial	Land		1,008		-	Appraisal dated 10/14/10
12.	Commercial	Commercial		880		-	Appraisal dated 07/08/10
13.	Commercial	Self Storage		673		255	In-house evaluation dated 07/22/09

Through 2007 and into 2008 the majority of loans that were individually reviewed for impairment were in accrual status but had risk ratings that indicated potential or actual impairment. Toward the end of 2008 and into the first quarter of 2009 many of these loans required an impairment allowance and also were placed into 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 28 loans for $16.960 million at the end of 2010.

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FIRST M&F CORPORATION AND SUBSIDIARY

The following table shows a distribution of the totals for construction loans evaluated for impairment and the impairment allowances allocated to those loans at December 31, 2009 and December 31, 2010.

	December 31, 2009				December 31, 2010
(Dollars in thousands)	Loan		Impairment		Loan		Impairment
	Balance		Allowance		Balance		Allowance
Nonaccrual loans	$	25,655	$	36	$	10,060	$	175
Accruing loans with an allowance		16,646		6,028		11,327		2,696
Accruing loans without an allowance		11,758		-		8,111		-
Total	$	54,059	$	6,064	$	29,498	$	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, 2009 and December 31, 2010.

	December 31, 2009				December 31, 2010
(Dollars in thousands)	Loan		Impairment		Loan		Impairment
	Balance		Allowance		Balance		Allowance
Nonaccrual loans	$	9,789	$	-	$	16,960	$	765
Accruing loans with an allowance		23,073		4,614		5,025		817
Accruing loans without an allowance		26,332		-		36,275		-
Total	$	59,194	$	4,614	$	58,260	$	1,582

The dollar volume of commercial real estate loans reviewed for impairment significantly increased from the end of 2008 to the end of 2009. As of the end of 2009, the nonaccrual commercial real estate loans with impairments had been written down to their estimated fair values, less costs to sell. Included in the accruing loans that had impairments at the end of 2009 was one that had an outstanding balance of $9.761 million with an impairment allowance of $1.405 million. A second significant loan with an impairment allowance was a loan with an outstanding balance of $4.060 million and an impairment allowance of $870 thousand. The first loan, which is secured by retail stores, was paid down by $700 thousand and written down by an additional $1.411 million in a bankruptcy cramdown in 2010. It had a balance of $7.650 million, no individual impairment allowance, was out of bankruptcy and was in full accrual status at December 31, 2010. The second loan, which is secured by office space, was placed into nonaccrual status in February 2010 and incurred $1.663 million in charge offs during 2010. It had a balance of $2.468 million, no individual impairment allowance and was still in nonaccrual status while 395 days past due at December 31, 2010. Included in the accruing loans with no impairment allowances at the end of 2010 was one loan that had an outstanding balance of $8.517 million. This loan is secured by a hotel property and was restructured in January 2010, resulting in its being included in loans reviewed for impairment allowances thereafter. This loan was current according to its restructured terms as of the end of 2010. These large loans made up the majority of the increase from December 31, 2009 to December 31, 2010 in the balance of impaired commercial real estate loans not requiring an allowance.

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FIRST M&F CORPORATION AND SUBSIDIARY

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

			Past Due		Past Due
			30 – 89		90 Days
			Days		Or More				Year-To-
(Dollars in thousands)	Outstanding		And Still		And Still				Date Net
	Balances		Accruing		Accruing		Nonaccrual		Charge-Offs
Construction and development loans:
12/31/10	$	85,160	$	1,257	$	274	$	10,060	$	4,167
09/30/10		96,848		979		430		11,887		2,628
06/30/10		106,015		2,495		79		17,092		2,816
03/31/10		108,574		2,434		352		20,363		852
12/31/09		123,254		3,119		901		25,655		38,713
Loans secured by 1-4 family properties:
12/31/10	$	235,489	$	3,020	$	564	$	3,863	$	1,733
09/30/10		236,822		2,422		319		5,001		936
06/30/10		237,801		2,538		123		4,106		812
03/31/10		238,904		2,984		440		4,545		288
12/31/09		239,921		4,512		312		4,490		3,362
Commercial real estate-secured loans:
12/31/10	$	561,571	$	2,091	$	-	$	16,960	$	7,360
09/30/10		529,899		3,824		44		16,306		4,917
06/30/10		509,556		6,359		1,080		11,890		4,667
03/31/10		517,450		8,120		1,268		12,444		3,848
12/31/09		520,550		13,928		1,208		9,789		3,245

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

(Dollars in thousands)	December 31			December 31			December 31
	2010			2009			2008
Nonaccrual loans	$	33,127		$	44,549		$	20,564
Other real estate		31,125			23,578			11,061
Investment securities		698			825			-
Total non-performing assets	$	64,950		$	68,952		$	31,625
Past due 90 days or more and still accruing interest	$	951		$	2,479		$	5,686
Restructured loans (accruing)		18,052			4,620			3,664
Ratios:
Nonaccrual loans to loans		3.11	%		4.17	%		1.74	%
Past due 90 day loans to loans		.09	%		.23	%		.48	%
Non-performing credit assets to loans and other real estate		5.85	%		6.24	%		2.65	%
Non-performing assets to assets		4.05	%		4.15	%		1.98	%

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 2011.

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

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

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FIRST M&F CORPORATION AND SUBSIDIARY

Defined Benefit Pension Plan

The Company has a defined benefit pension plan that it froze in September 2001. For accounting purposes, the plan’s funded status was a net liability of $542 thousand at the end of 2010 and $528 thousand at the end of 2009. The plan had an unamortized actuarial loss of $2.952 million at the end of 2010 and $3.538 million at the end of 2009 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 2010, the plan experienced gains in its investment portfolio of $874 thousand. These gains were partially offset by actuarial losses of $614 thousand incurred as a result of a reduction in the discount rate used to determine the present value of benefit obligations. The amortization expense component of pension expense was $885 thousand in 2010 and $906 thousand in 2009. It is expected to be $984 thousand for 2011.

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 2009 and 2010 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 $204 thousand were made in 2009 and of $224 thousand were made in 2010. Management believes that the market will perform sufficiently in 2011 and beyond to reduce the unamortized actuarial loss by earning returns in excess of expectations. 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. However, during 2011 and likely into 2012 the Company will experience pension expenses of approximately $800 thousand annually.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Liquidity is the ability of a bank to convert assets into cash and cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the Company’s ability to meet day-to-day cash flow requirements of customers, whether they wish to withdraw funds or to borrow funds to meet their capital needs. Historically, deposit growth has been sufficient to provide for the Company’s liquidity needs. The Company 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 did not have any stock option exercises during 2010 or 2009.

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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 positive 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 assets to reprice than the amount of liabilities repricing. At the end of 2010, the one-year repricing gap stood at -1.40% as compared to -6.17% at the end of 2009. Factors influencing the change in the one-year repricing gap from negative to slightly negative were (1) a 28.21% decrease in time deposits repricing within one year as rate sensitive certificates of deposit were allowed to liquidate and core NOW, MMDA and savings deposits experienced growth, and (2) a 43.07% decrease in the amount of borrowings due within one year as the Company continued to pay out its maturing Federal Home Loan Bank borrowings, offset to a moderate extent by a decrease in short-term liquid funds. 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. The Company was approved for up to $40.000 million in the Capital Purchase Program during the fourth quarter of 2008. Management decided to request $30.000 million of the approved amount for several reasons: (1) the economy had experienced significant deterioration since the beginning of 2008, (2) there was much uncertainty regarding the timing and extent of the next economic recovery and (3) the economic uncertainty called for prudence when projecting the path of real estate values for illiquid and depressed markets.

The Capital Purchase Program proceeds were used primarily to inject additional capital into the Company’s bank subsidiary. The acquisition of these funds served (1) to increase the Company’s capital position, (2) to provide liquidity for the Company’s and bank subsidiary’s operations and debt service obligations and (3) to act as a buffer against the effects on capital of future unpredictable events.

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

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FIRST M&F CORPORATION AND SUBSIDIARY

On September 29, 2010 the Company issued 30,000 shares of Class B, Series CD Preferred Stock to the U. S. Treasury to retire its Class B, Series A Preferred Stock that was issued in the Capital Purchase Program in 2009. 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 will 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 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.

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 6,800 shares per day during 2010. There is one analyst who follows the Company and issues earnings forecasts.

The ratio of capital to assets stood at 6.68% at December 31, 2010, 6.29% at December 31, 2009, and 8.51% at December 31, 2008, with risk-based capital ratios in excess of the regulatory requirements. The Company’s regulatory capital ratios for 2010 and 2009 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.

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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, 2010, the Company had $122.448 million in unused loan commitments outstanding. Of these commitments, $93.235 million mature in one year or less. Lines of credit are established using the credit policy of the Company concerning the lending of money.

Letters of credit are used to facilitate the borrowers’ business and are usually related to the acquisition of inventory or of assets to be used in the customers’ business. Letters of credit are generally secured and are underwritten using the same standards as traditional commercial loans. Most standby letters of credit expire without being presented for payment. However, the presentment of a standby letter of credit would create a loan receivable from the Bank’s loan customer. The Bank’s asset-based lending subsidiary uses commercial letters of credit to facilitate the purchase of inventory items by its customers. There were no commercial letters of credit outstanding at the end of 2010. At December 31, 2010, the Company had $6.169 million in financial standby letters of credit issued and outstanding.

At December 31, 2010, there were no standby letters of credit issued on the Company’s behalf by any Federal Home Loan Banks. At December 31, 2009, there were $100 thousand in standby letters of credit issued on the Company’s behalf by a Federal Home Loan Bank. The Company uses these letters of credit primarily to pledge to certain state and municipality deposits and occasionally as additional collateral on loan participations sold and is obligated to the Federal Home Loan Bank if the letters of credit must be drawn upon.

Liabilities of $15 thousand at December 31, 2010, and $31 thousand at December 31, 2009, 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 $4.398 million at December 31, 2010. 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, 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, 2010, the Company had $7.745 million in locked forward sales agreements in place. 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 has not sustained any recourse-related losses in its mortgage program and the repurchase of mortgages has been an extremely rare event. Mortgages sold that were still in the recourse period were $27.984 million at December 31, 2010. No recourse liability was recorded for these mortgages.

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

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

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

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 switch 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 is March 15, 2011 with an expiration date of March 15, 2018.

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TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The following table summarizes the obligations of the Company:

(Dollars in thousands)	Payments Due by Period
			Less						More
			Than 1		1 - 3		3 – 5		Than 5
Contractual Obligations	Total		Year		Years		Years		Years
Long-Term Debt	$	50,416	$	10,707	$	25,982	$	4,606	$	9,121
Junior Subordinated Debentures		30,928		-		-		-		30,928
Capital Lease Obligations		-		-		-		-		-
Operating Leases		2,548		637		906		576		429
Purchase Obligations		-		-		-		-		-
Other Long-Term Liabilities		-		-		-		-		-
Total	$	83,892	$	11,344	$	26,888	$	5,182	$	40,478

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

(1) Allowance for loan losses

(2)  Fair value

(3)  Goodwill, intangible assets and related impairment

(4)  Contingent liabilities

(5)  Income taxes

Allowance for loan losses

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

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

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

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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, 2010, less than 1% of assets measured at fair value were based on significant unobservable inputs.

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

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

The Company enters into interest rate lock agreements with customers during the mortgage origination process. These interest rate lock agreements are considered written options and are accounted for as 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 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 lesser of fair value of the property, net of estimated costs to sell, or the recorded loan balance 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.

Goodwill, intangible assets and related impairment

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

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

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

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

Contingent liabilities

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

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

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FIRST M&F CORPORATION AND SUBSIDIARY

Income Taxes

The Company, the Bank and the Bank's wholly owned subsidiaries, except for the credit insurance subsidiary, file consolidated Federal and state income tax returns. The estimates that pertain to the income tax expense or benefit and the related current and deferred tax assets and liabilities involves a high degree of judgment related to the ultimate measurement and resolution of tax-related matters. 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.

48

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, 2010, 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, 2010
(Dollars in thousands)	0-12 months			1-5 years			Over 5 years			Total
Short-term funds	$	97,103		$	-		$	-		$	97,103
Investments		83,054			135,569			58,306			276,929
Loans		496,474			505,971			63,943			1,066,388
Total earning assets		676,631			641,540			122,249			1,440,420
NOW, MMDA & savings deposits		343,339			40,272			261,825			645,436
Time deposits		304,444			213,332			-			517,776
Short-term borrowings		33,481			-			-			33,481
Other borrowings		47,829			33,515			-			81,344
Interest rate swap		(30,000	)		-			30,000			-
Total int. bearing liabilities	$	699,093		$	287,119		$	291,825		$	1,278,037
Rate sensitive gap	$	(22,462	)	$	354,421		$	(169,576	)
Cumulative gap	$	(22,462	)	$	331,959		$	162,383
Cumulative % of assets		(1.40	)%		20.70	%		10.12	%

Interest rate shock analysis shows that the Company will experience a .04% increase over 12 months in its net interest income with a gradual (12 month ramp) and sustained 100 basis point decrease in interest rates. A gradual and sustained increase in interest rates of 200 basis points will result in a .06% 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 4.57% with an immediate and sustained increase in interest rates of 200 basis points. The market value of equity will decrease by 8.60% with an immediate and sustained decrease in interest rates of 100 basis points.

49

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, 2010.

/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

50

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, 2010 and 2009, 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, 2010.  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, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

/s/ BKD, LLP

Jackson, Mississippi

March 16, 2011

51

FIRST M&F CORPORATION AND SUBSIDIARY

Consolidated Statements of Condition

December 31, 2010 and 2009

(In Thousands, Except Share Data)

	2010			2009
Assets
Cash and due from banks	$	45,099		$	42,446
Interest-bearing bank balances		72,103			84,810
Federal funds sold		25,000			70,000
Securities available for sale, amortized cost of $274,421 and $280,470		276,929			284,550
Loans held for sale		6,242			10,266
Loans, net of unearned income		1,060,146			1,058,340
Allowance for loan losses		(16,025	)		(24,014	)
Net loans		1,044,121			1,034,326
Bank premises and equipment		40,696			42,919
Accrued interest receivable		6,380			7,598
Other real estate		31,125			23,578
Other intangible assets		5,013			5,439
Other assets		51,256			57,036
	$	1,603,964		$	1,662,968
Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing deposits	$	212,199		$	228,579
Interest-bearing deposits		1,163,213			1,159,684
Total deposits		1,375,412			1,388,263
Fed funds purchased and repurchase agreements		33,481			8,642
Other borrowings		50,416			122,510
Junior subordinated debt		30,928			30,928
Accrued interest payable		1,470			2,933
Other liabilities		5,192			5,062
Total liabilities		1,496,899			1,558,338
Stockholders’ equity:
Preferred stock:
Class A; 1,000,000 shares authorized		-			-
Class B; 1,000,000 shares authorized;
Series A; 30,000 shares issued		-			28,838
Series CD; 30,000 shares issued		16,390			-
Common stock of $5.00 par value; 50,000,000 shares authorized: 9,106,803 and 9,069,346 shares issued		45,534			45,347
Additional paid-in capital		31,883			31,926
Nonvested restricted stock awards		784			734
Retained earnings (deficit)		12,225			(2,595	)
Accumulated other comprehensive income		249			379
First M&F Corporation equity		107,065			104,629
Noncontrolling interest in subsidiaries		-			1
Total equity		107,065			104,630
	$	1,603,964		$	1,662,968

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

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FIRST M&F CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations

Years Ended December 31, 2010, 2009 and 2008

(In Thousands, Except Share Data)

	2010			2009			2008
Interest income:
Interest and fees on loans	$	62,070		$	66,782		$	81,487
Interest on loans held for sale		232			278			299
Taxable investments		7,616			9,531			9,023
Tax-exempt investments		1,549			2,105			2,164
Federal funds sold		82			95			182
Interest-bearing bank balances		143			42			133
Total interest income		71,692			78,833			93,288
Interest expense:
Deposits		18,809			23,701			32,255
Fed funds purchased and repurchase agreements		66			97			327
Other borrowings		3,024			5,449			6,717
Junior subordinated debt		1,992			1,992			1,993
Total interest expense		23,891			31,239			41,292
Net interest income		47,801			47,594			51,996
Provision for loan losses		9,220			49,601			19,734
Net interest income (expense) after provision for loan losses		38,581			(2,007	)		32,262
Noninterest income:
Deposit account income		10,221			10,976			11,692
Mortgage banking income		1,581			1,823			1,202
Agency commission income		3,809			3,881			4,125
Trust and brokerage income		526			489			585
Bank owned life insurance income		667			762			615
Other income		1,865			2,412			2,906
Securities gains, net		2,255			456			6
Total investment other-than-temporary impairment losses		(435	)		(3,527	)		-
Portion of loss recognized in other comprehensive income (before taxes)		32			2,698			-
Net investment impairment losses recognized		(403	)		(829	)		-
Total noninterest income		20,521			19,970			21,131
Noninterest expenses:
Salaries and employee benefits		27,303			28,314			28,954
Net occupancy expenses		3,937			4,614			4,210
Equipment expenses		2,382			2,877			3,594
Software and processing expenses		1,627			1,898			2,072
Telecommunications expenses		980			1,043			1,162
Marketing and business development expenses		1,014			1,351			1,439
Foreclosed property expenses		2,946			7,283			1,913
FDIC insurance assessments		3,261			3,276			575
Goodwill impairment		-			32,572			-
Intangible asset amortization and impairment		426			1,688			485
Other expenses		10,614			10,956			9,880
Total noninterest expenses		54,490			95,872			54,284
Income (loss) before income taxes		4,612			(77,909	)		(891	)
Income tax expense (benefit)		602			(18,104	)		(1,436	)
Net income (loss)		4,010			(59,805	)		545
Net income (loss) attributable to noncontrolling interests		(1	)		(6	)		19
Net income (loss) attributable to First M&F Corporation	$	4,011		$	(59,799	)	$	526
Dividends and accretion on preferred stock		1,692			1,464			-
Gain on exchange of preferred stock		12,867			-			-
Net income (loss) applicable to common stock	$	15,186		$	(61,263	)	$	526
Net income (loss) allocated to common shareholders	$	15,071		$	(60,655	)	$	522
Earnings (loss) per share:
Basic	$	1.66		$	(6.69	)	$	0.06
Diluted		1.66			(6.69	)		0.06

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

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FIRST M&F CORPORATION AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2010, 2009 and 2008

(In Thousands)

	2010			2009			2008
Net income (loss)	$	4,010		$	(59,805	)	$	545
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Unrealized gains on securities available for sale arising during the period, net of tax of $159, $1,628, and $1,009		267			2,736			1,697
Unrealized losses on other-than-temporarily impaired securities available for sale arising during the period, net of tax of $54 and $1,462		(92	)		(2,458	)		-
Reclassification adjustment for gains on securities available for sale included in net income, net of tax of $841, $170, and $2		(1,414	)		(286	)		(4	)
Reclassification adjustment for credit related other-than- temporary impairment losses on securities available for sale included in net income, net of tax of $150 and $309		253			520			-
Unrealized gains on cash flow hedge arising during the period, net of tax of $305		512			-			-
Defined benefit pension plans:
Net actuarial gains (losses) arising during the period, net of tax of $112, $32 and $1,113		(187	)		53			(1,868	)
Amortization of transition asset, net of tax of $0, $3 and $3		-			(4	)		(6	)
Amortization of prior service cost, net of tax of $14, $14 and $14		(23	)		(23	)		(23	)
Amortization of actuarial loss, net of tax of $331, $338 and $122		554			568			204
Effects of changing the pension plan measurement date pursuant to change in accounting principle (charged to retained earnings):
Amortization of transition asset, net of tax of $1		-			-			(1	)
Amortization of prior service cost, net of tax of $3		-			-			(6	)
Amortization of actuarial loss, net of tax of $30		-			-			51
Other comprehensive income (loss)		(130	)		1,106			44
Total comprehensive income (loss)		3,880			(58,699	)		589
Comprehensive income (loss) attributable to noncontrolling interests		(1	)		(6	)		19
Comprehensive income (loss) of First M&F Corp	$	3,881		$	(58,693	)	$	570

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

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FIRST M&F CORPORATION AND SUBSIDIARY

Consolidated Statements of Stockholders' Equity

Years Ended December 31, 2010, 2009 and 2008

(In Thousands, Except Share Data)

										Nonvested						Accumulated
							Additional			Restricted			Retained			Other
	Preferred			Common			Paid-in			Stock			Earnings			Comprehensive			Noncontrolling
	Stock			Stock			Capital			Awards			(Deficit)			Income (Loss)			Interest			Total
January 1, 2008	$	-		$	45,338		$	30,475		$	643		$	64,395		$	(771	)	$	18		$	140,098
Net income		-			-			-			-			526			-			19			545
Cash dividends - common ($.52 per share)		-			-			-			-			(4,772	)		-			-			(4,772	)
7,500 common shares repurchased		-			(38	)		(80	)		-			-			-			-			(118	)
Share-based compensation expense recognized		-			-			9			197			3			-			-			209
3,266 restricted share awards vested		-			17			43			(60	)		-			-			-			-
Net change		-			-			-			-			-			-			-			-
Distributions		-			-			-			-			-			-			(19	)		(19	)
Effects of change in accounting principle regarding pension plan measurement date:
Interest cost, and expected return on plan assets for October 1- December 31, 2008 net of tax of $15		-			-			-			-			25			-			-			25
Amortization of prior service cost and transition asset for October 1- December 31, 2008, net of tax of $26		-			-			-			-			(44	)		44			-			-
December 31, 2008	$	-		$	45,317		$	30,447		$	780		$	60,133		$	(727	)	$	18		$	135,968
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

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

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FIRST M&F CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

Years Ended December 31, 2010, 2009 and 2008

(In Thousands)

	2010			2009			2008
Cash flows from operating activities:
Net income (loss)	$	4,010		$	(59,805	)	$	545
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Share-based compensation		61			73			209
Director fees issued in stock		133			-			-
Amortization of pension costs		787			878			121
Depreciation and amortization		2,736			3,281			3,373
Goodwill impairment		-			32,572			-
Intangible asset impairments		-			1,248			-
Provision for loan losses		9,220			49,601			19,734
Net investment amortization (accretion)		2,090			1,178			(122	)
Net change in unearned fees/deferred costs on loans		44			(243	)		(496	)
Capitalized dividends on FHLB stock		(27	)		(19	)		(237	)
Net accretion of discount on time deposits		29			19			38
Net accretion of discount on debt		-			-			5
Gain on securities available for sale		(2,255	)		(456	)		(6	)
Impairment loss on securities available for sale		403			829			-
Gains on loans held for sale		(1,285	)		(1,006	)		(831	)
Other real estate losses		1,574			5,778			1,375
Other asset sale (gains) losses		225			(732	)		(94	)
Deferred income taxes		735			(10,855	)		(3,670	)
Originations of loans held for sale, net of repayments		(83,200	)		(107,959	)		(67,955	)
Sales proceeds of loans held for sale		88,277			106,348			66,582
(Increase) decrease in:
Accrued interest receivable		1,218			2,234			2,602
Cash surrender value of bank owned life insurance		(667	)		(762	)		(615	)
Other assets		(1,800	)		1,086			1,638
Increase (decrease) in:
Accrued interest payable		(1,463	)		(604	)		(1,614	)
Other liabilities		8,363			(4,893	)		(2,207	)
Net cash provided by operating activities		29,208			17,791			18,375
Cash flows from investing activities:
Purchases of securities available for sale		(170,862	)		(142,697	)		(89,503	)
Sales of securities available for sale		89,164			17,240			6,878
Maturities of securities available for sale		87,509			67,318			95,446
Purchases of loans held for investment		(36,380	)		-			-
Sales of nonperforming loans		500			6,350			-
Net (increase) decrease in other loans held for investment		(7,390	)		21,506			20,986
Net (increase) decrease in:
Interest-bearing bank balances		12,707			(78,254	)		(3,076	)
Federal funds sold		45,000			(60,650	)		(7,350	)
Bank premises and equipment		(226	)		(1,061	)		(1,867	)
Net benefits received (purchases) of bank owned life insurance		(41	)		202			(78	)
Proceeds from sales of other real estate and other repossessed assets		16,626			23,127			7,338
Payments for ORE improvements and lienholder payoffs		(1,276	)		(599	)		(300	)
Net redemptions of FHLB stock		-			225			2,382
Net cash provided by (used in) investing activities		35,331			(147,293	)		30,856

56

FIRST M&F CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

Years Ended December 31, 2010, 2009 and 2008

(In Thousands)

	2010			2009			2008
Cash flows from financing activities:
Net increase (decrease) in deposits		(12,880	)		126,857			(1,106	)
Net increase (decrease) in short-term borrowings		24,839			(1,086	)		52
Proceeds from other borrowings		2,872			20,000			200,500
Repayments of other borrowings		(74,966	)		(49,037	)		(250,270	)
Earnings distributions to noncontrolling interests		-			(11	)		(19	)
Common dividends paid		(366	)		(1,466	)		(4,772	)
Preferred dividends paid		(1,385	)		(1,075	)		-
Preferred shares and common stock warrant issued to U.S. Treasury		-			30,000			-
Common shares repurchased		-			-			(118	)
Tax benefits related to share-based compensation		-			28			-
Net cash provided by (used in) financing activities		(61,886	)		124,210			(55,733	)
Net increase (decrease) in cash and due from banks		2,653			(5,292	)		(6,502	)
Cash and due from banks at January 1		42,446			47,738			54,240
Cash and due from banks at December 31	$	45,099		$	42,446		$	47,738
Supplemental disclosures:
Total interest paid	$	25,373		$	31,852		$	42,870
Total income taxes paid		232			69			3,435
Income tax refunds received		8,735			1,249			23
Transfers of loans to foreclosed property		24,192			40,048			13,031
Transfers of buildings to foreclosed property		180			-			-
Gain on exchange of Class B preferred stock		12,867			-			-
U.S. Treasury preferred dividend accrued but unpaid		75			187			-
Accretion on U.S. Treasury preferred stock		419			201			-

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

57

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 2010 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 2011 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.

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Notes to Consolidated Financial Statements

Note 1:  (Continued)

Securities Available for Sale

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

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

Realized gains and losses on securities available for sale are included in earnings and are determined using the specific amortized cost of the securities sold. 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 or other 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. 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 not 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 on historical loss rates. The fundamental tool used by management to estimate impairments and contingency reserves is the individual loan risk rate. Management considers a number of factors in assigning risk rates to individual loans, including: historical loan loss experience for various types of loans, past due trends, current trends, current economic conditions, industry exposure, internal and external loan reviews, loan risk, loan performance, the estimated value of underlying collateral, evaluation of a borrower’s financial condition and other factors considered relevant in grading loans. 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.

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.

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Notes to Consolidated Financial Statements

Note 1:  (Continued)

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

Contingent Liabilities

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

Concentrations of Credit

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

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Notes to Consolidated Financial Statements

Note 1:  (Continued)

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 has pledged $1.5 million in interest bearing bank balances to the swap dealer as collateral.

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.

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Notes to Consolidated Financial Statements

Note 1:  (Continued)

Recent Pronouncements

Accounting Standards Codification. The Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) became effective on July 1, 2009. At that date, the ASC became FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles (GAAP) applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure. Adoption of the change to the codification did not have a material impact on the Company’s financial statements.

FASB ASC Topic 810, “Consolidation.” New authoritative accounting guidance under ASC Topic 810, “Consolidation,” amended prior guidance to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Under ASC Topic 810, a non-controlling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, ASC Topic 810 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated statement of operations, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. The new authoritative accounting guidance under ASC Topic 810 became effective for the Company on January 1, 2009 and did not have a significant impact on the Company’s financial statements.

Further new authoritative accounting guidance under ASC Topic 810 amends prior guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its effect on the entity’s financial statements. The new authoritative accounting guidance under ASC Topic 810 became effective January 1, 2010 and did not have a significant impact on the Company’s financial statements.

FASB ASC Topic 860, “Transfers and Servicing.” New authoritative accounting guidance under ASC Topic 860, “Transfers and Servicing,” amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. The new authoritative accounting guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. The new authoritative accounting guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The new authoritative accounting guidance under ASC Topic 860 became effective January 1, 2010 and did not have a significant impact on the Company’s financial statements.

Accounting Standards Update (ASU) No. 2009-16, “Transfers and Servicing (Topic 860) – Accounting for Transfers of Financial Assets.” ASU 2009-16 amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. ASU 2009-16 eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. ASU 2009-16 also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The provisions of ASU 2009-16 became effective on January 1, 2010 and did not have a material impact on the Company’s financial position or results of operations.

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FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 1:  (Continued)

Recent Pronouncements

Accounting Standards Update No. 2009-17, “Consolidations (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” ASU 2009-17 amends prior guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. ASU 2009-17 requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its effect on the entity’s financial statements. The provisions of ASU 2009-17 became effective on January 1, 2010 and did not have a material impact on the Company’s financial position or results of operations.

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 will become effective on January 1, 2011. Early adoption is permitted. The adoption of ASU 2010-06 as of January 1, 2010 did not have a material impact on the Company’s financial position or results of operations. The adoption of the portion of ASU 2010-06 that becomes effective on January 1, 2011 is not expected to have a material impact on the Company’s financial position or results of operations.

Accounting Standards Update No. 2010-09, “Subsequent Events (Topic 855) – Amendments to Certain Recognition and Disclosure Requirements.” ASU 2010-09 addresses certain implementation issues related to an entity’s requirement to perform and disclose subsequent events procedures. ASU 2010-09 added a definition of the term “SEC filer” and requires SEC filers and certain other entities to evaluate subsequent events through the date the financial statements are issued. It also exempts SEC filers from disclosing the date through which subsequent events have been evaluated. The provisions of ASU 2010-09 became effective upon it’s issuance on February 24, 2010 and did not have a material impact on the Company’s financial position or results of operations.

Accounting Standards Update No. 2010-11, “Derivatives and Hedging (Topic 815) – Scope Exception Related to Embedded Credit Derivatives.” ASU 2010-11 clarifies that the only form of an embedded credit derivative that is exempt from embedded derivative bifurcation requirements are those that relate to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. ASU 2010-11 also allows a one-time election of, on an instrument-by-instrument basis, the fair value option for any investments in a beneficial interest in a securitized financial asset, such as certain investments in collateralized debt obligations, at the beginning of the reporting period of adoption. The provisions of ASU 2010-11 became effective on July 1, 2010 and did not have a material impact on the Company’s financial position or results of operations.

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Notes to Consolidated Financial Statements

Note 1:  (Continued)

Accounting Standards Update No. 2010-18, “Receivables (Topic 310) – Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset – a consensus of the FASB Emerging Issues Task Force.” ASU 2010-18 states that a modified loan within a pool of purchased, credit-impaired loans which are accounted for as a single asset, should remain in the pool even if the modification would otherwise be considered a Troubled Debt Restructuring (TDR). A one-time election to terminate accounting for a group of loans in a pool, which may be made on a pool-by-pool basis, is allowed upon adoption of ASU 2010-18. ASU 2010-18 does not require any additional recurring disclosures and became effective on July 1, 2010  and did not have a material impact on the Company’s financial position or results of operations.

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 rollforward 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. These disclosures are included in Note 4 – Loans and Allowance for Loan Losses. Disclosures that relate to activity during a reporting period will be 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 is not expected to have a material impact on the Company’s financial position or results of operations. The disclosure requirements relating to troubled debt restructurings have been indefinitely deferred.

Note 2:  Fair Value

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

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

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

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

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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, 2010 and December 31, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

			Fair Value Measurements at
			December 31, 2010, Using
			Quoted
			Prices In
			Active
			Markets		Significant
	Assets/Liabilities		For		Other		Significant
	Measured at Fair		Identical		Observable		Unobservable
	Value		Assets		Inputs		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		817		-		-		817
Mortgage derivative assets		246		-		-		246
Mortgage derivative liabilities		28		-		-		28

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

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FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 2:  (Continued)

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

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

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

Collateralized debt obligations. The Company owns certain beneficial interests in collateralized debt obligations secured by community bank trust preferred securities. These interests have an amortized cost of $3.768 million with estimated fair values of $934 thousand. 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.

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

Mortgage derivatives.  Throughout 2009 mortgage derivative assets and liabilities were reported at fair value utilizing Level 2 inputs. These assets and liabilities represent the fair values of the 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 credit-related adjustments. The most significant inputs used in 2009 were dealer quotes. During the fourth quarter of 2009 the model for FSA derivatives was changed to supplement the dealer quotes with estimates of servicing values. The model for IRLC derivatives was adjusted to use estimated pull-through rates. Therefore, these instruments were transferred to Level 3 status upon their valuations at December 31, 2009.  Mortgage derivative assets are included in other assets and mortgage derivative liabilities are included in other liabilities in the Company’s 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 the forward swap curve, with the resulting fair value being classified as a Level 3 valuation.

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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.

(Dollars in thousands)	Year Ended December 31, 2010
	Collateralized						Interest
	Debt			Mortgage			Rate
	Obligations			Derivatives			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) transferred from other comprehensive income		(32	)		-			-
Other gains/losses included in other comprehensive income		289			-			817
IRLC and FSA issuances included in earnings		-			702			-
IRLC and FSA expirations and fair value changes included in earnings		-			(67	)		-
IRLC transfers into closed loans/FSA sold loans		-			(501	)		-
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.

(Dollars in thousands)	Year Ended December 31, 2009
	Collateralized
	Debt			Mortgage
	Obligations			Derivatives
Beginning Balance	$	-		$	-
Total gains or losses (realized/unrealized)
Other-than-temporary impairment included in earnings		(829	)		-
Other-than-temporary impairment (included in) transferred from 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	)	$	-

67

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, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

			Fair Value Measurements Using
			Quoted
			Prices in								Fair Value
			Active		Significant				Charged to		Adjustment
	For the		Markets for		Other		Significant		Allowance		Recognized
	Year-to-Date		Identical		Observable		Unobservable		for Loan Losses		In Earnings
	Ended		Assets		Inputs		Inputs		During		During
(Dollars in thousands)	12/31/10 (a)		(Level 1)		(Level 2)		(Level 3)		Current Period		Current Period
Impaired loans	$	27,335	$	-	$	-	$	27,335	$	-	$	(6,550	)
Loan foreclosures		5,013		-		-		5,013		4,080		-
Loans transferred to HFS		500		-		-		-		325		-
Other real estate		12,498		-		-		12,498		-		(2,323	)

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
			Quoted
			Prices in								Fair Value
			Active		Significant				Charged to		Adjustment
	For the		Markets for		Other		Significant		Allowance		Recognized
	Year-to-Date		Identical		Observable		Unobservable		for Loan Losses		In Earnings
	Ended		Assets		Inputs		Inputs		During		During
(Dollars in thousands)	12/31/09 (a)		(Level 1)		(Level 2)		(Level 3)		Current Period		Current Period
Impaired loans	$	67,492	$	-	$	-	$	67,492	$	-	$	(26,135	)
Loan foreclosures		17,899		-		-		17,899		12,025		-
Loans transferred to HFS		-		-		-		-		3,189		-
Bankers bank stock		-		-		-		-		-		(78	)
Other real estate		11,464		-		-		11,464		-		(3,509	)
Goodwill		-		-		-		-		-		(32,572	)
Intangible assets		-		-		-		-		-		(1,248	)

(a) These amounts represent the 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.

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 and (2) foreclosed property expenses for other real estate.

Impaired Loans.  Certain financial assets such as impaired loans are measured by means that are similar to fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to adjustments similar to fair value adjustments in certain circumstances, such as when there is evidence of impairment. Impaired values are determined by discounting expected cash flows by a rate equal to the original yield on the loan rather than by a market discount rate. However, when market prices or dealer quotes for loans are available and can be used, then the impaired value does meet the definition of fair value. Collateral dependent loans, which are loans for which the repayment is expected to be provided solely by the underlying collateral, are valued for impairment purposes by using the fair value of the underlying collateral. For collateral dependent loans, collateral values are estimated using Level 3 inputs based on observable market data.

68

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 2:  (Continued)

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 observable market data.

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

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

69

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 2:  (Continued)

Fair Value of Financial Instruments

The following table presents the carrying amounts and fair values of the Company’s financial instruments at December 31, 2010 and December 31, 2009:

	December 31, 2010						December 31, 2009
(Dollars in thousands)	Carrying			Estimated			Carrying			Estimated
	Amount			Fair Value			Amount			Fair Value
Financial assets:
Cash and short-term investments	$	142,202		$	142,202		$	197,256		$	197,256
Securities available for sale		276,929			276,929			284,550			284,550
Loans held for sale		6,242			6,242			10,266			10,270
Loans held for investment		1,044,121			965,894			1,034,326			996,382
Agency accounts receivable		346			346			357			357
Accrued interest receivable		6,380			6,380			7,598			7,598
Nonmarketable equity investments		7,353			7,353			7,326			7,326
Investment in unconsolidated VIE		3,615			3,615			928			928
Mortgage derivative assets		246			246			85			85
Financial liabilities:
Noninterest-bearing deposits		212,199			212,199			228,579			228,579
NOW, MMDA and savings deposits		645,433			645,433			583,879			583,879
Certificates of deposit		517,780			527,971			575,805			580,895
Short-term borrowings		33,481			33,481			8,642			8,642
Other borrowings		50,416			53,213			122,510			124,021
Junior subordinated debt		30,928			25,123			30,928			15,835
Agency accounts payable		586			586			639			639
Accrued interest payable		1,470			1,470			2,933			2,933
Mortgage derivative liabilities		28			28			1			1
Other financial instruments:
Commitments to extend credit and letters of credit		(15	)		(306	)		(31	)		(400	)
Interest rate swap		817			817			-			-

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, 2010, the only securities that were not priced by the primary provider were 12 municipal bonds representing 5 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.

70

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 2:  (Continued)

The primary method of validation of investment security values that we use is the comparison of the prices that we receive from our primary pricing service provider with the prices that are used in the broker-dealer’s investment accounting reports. The fair values used for selected agency, mortgage-backed and corporate securities are also periodically checked by comparing them to prices obtained from Bloomberg. The CDOs may be validated by comparing the fair values with those obtained by other valuation experts. We 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 recent transaction 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.

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.

71

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 2:  (Continued)

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

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

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

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

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.

72

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 3:  Securities Available for Sale and Derivatives

The following is a summary of the amortized cost and fair value of securities available for sale at December 31, 2010, and 2009:

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

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, 2010 and December 31, 2009. Securities on which we have taken only credit-related other-than-temporary-impairment (OTTI) write-downs are categorized as being “less than 12 months” or “12 months or more” in a continuous loss position based on the point in time that the fair value declined to below the amortized cost basis and not the period of time since the OTTI write-down.

(Dollars in thousands)	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2010:	Value		Losses		Value		Losses		Value		Losses
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
December 31, 2009:
U.S. Government sponsored entities	$	5,093	$	74	$	-	$	-	$	5,093	$	74
Mortgage-backed investments		4,122		71		76		1		4,198		72
Obligations of states and political subdivisions		2,423		40		3,087		60		5,510		100
Collateralized debt obligations		-		-		1,080		3,091		1,080		3,091
Equity securities		350		8		84		32		434		40
	$	11,988	$	193	$	4,327	$	3,184	$	16,315	$	3,377

73

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 3:  (Continued)

Management believes that the impairments reflected as unrealized losses above are temporary and will be recovered over the investments’ holding periods. At December 31, 2010 there were 8 U.S. government sponsored entity securities with unrealized losses less than 12 months. There were 11 mortgage-backed securities with unrealized losses less than 12 months. There were 2 municipal securities with unrealized losses of 12 months or longer and 24 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. Management does not intend to sell any investment securities that have unrealized losses before the time that those losses could be recovered. Management has evaluated the investment securities that have unrealized losses within the framework of the Company’s liquidity and capital needs as well as its ability to hold those securities over an extended recovery period. Management’s evaluation involved (1) assessing whether significant future cash outflows would occur that would require the liquidation of securities and (2) determining if the balance sheet would need to be managed or reduced in a way that would require the liquidation of securities to meet regulatory capital ratio requirements. This analysis was performed to determine if it was more likely than not that the investments would have to be sold before their anticipated recoveries. Management determined that it was not more likely than not that the investments would have to be disposed of prior to their anticipated recoveries. In estimating whether there are other-than-temporary impairment losses on debt securities management considers (1) the length of time and extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) historical cash flows and economic factors that could detrimentally affect those cash flows and (4) changes in credit ratings of the issuers.

There are five collateralized debt obligations that represent the majority of unrealized losses in the investment portfolio. These obligations are secured by commercial bank trust preferred securities. The impairments have arisen due to a virtual trading halt related to the liquidity crisis in corporate debt, and the effects of the sub-prime mortgage crisis and the resulting economic deterioration and ongoing recession on the financial stability of financial institution issuers of the trust preferred collateral. In December 2008, these CDOs were downgraded to below investment grade by Moody’s. During 2008 and 2009 several banks that had issued trust preferred securities that were held as collateral in some of the CDOs were closed by federal regulators. These defaults and the credit downgrades, accompanied by interest deferrals by several other bank issuers, resulted in reductions in fair value estimates as credit assumptions had to be revised. Management evaluated these instruments for impairment as of each quarter end during 2009 and 2010 within the accounting guidelines for determining impairments for beneficial interests using the discounted cash flow approach prescribed, which required nanagement to make assumptions concerning the estimates of the ultimate collectability of the contractual cash flows of the beneficial interests owned. These estimates depend on the expected cash flows that the beneficial interest issuer will receive on its investments in the trust preferred securities of the commercial bank investees. The ability of the banks that issued trust preferred securities to the beneficial interest issuer to pay their obligations was determined based on an analysis of the financial condition of the banks. This analysis resulted in an estimate of the timing and amount of cash flows derived from a determination of how many would default on their obligations and how many would eventually pay off their obligations and the timing of those events. Those estimated cash flows would first pay off more senior beneficial interests 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 were projected and discounted to their present values and compared to the amortized cost book values of the interests. This analysis resulted in a determination that other-than-temporary impairment (OTTI) conditions existed for one of the securities at June 30, 2009. By December 31, 2009 all five of the securities had incurred other-than-temporary impairment charges. During 2010, four of the securities incurred additional OTTIs. The unrealized losses by individual security in the CDO portfolio as of December 31, 2010 ranged from 67% of amortized cost to 85% of amortized cost.

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.

(Dollars in thousands)	Year Ended December 31
	2010		2009
Beginning balance	$	829	$	-
OTTI credit losses on securities not previously impaired		-		724
OTTI credit losses on previously impaired securities		403		105
Ending balance	$	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 given the current economic environment.

74

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 3:  (Continued)

The amortized cost and fair values of debt securities available for sale at December 31, 2010, 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.

	Amortized		Fair
(Dollars in thousands)	Cost		Value
One year or less	$	32,447	$	32,564
After one through five years		51,748		52,776
After five through ten years		15,550		15,877
After ten years		4,637		1,791
		104,382		103,008
Mortgage-backed investments		170,039		173,921
	$	274,421	$	276,929

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:

	2010				2009
	Amortized		Fair		Amortized		Fair
(Dollars in thousands)	Cost		Value		Cost		Value
Pledged to secure public and tax deposits	$	158,839	$	161,469	$	212,088	$	215,830
Pledged for Trust account deposits		4,877		4,990		4,208		4,324
Pledged for FHLB borrowings		-		-		1,094		1,141
Pledged for non-public repurchase agreements		37,420		37,109		23,415		24,177
Pledged for Fed funds purchased lines of credit		8,683		8,866		14,288		14,378
Pledged for letter of credit obtained		5,691		5,717		3,701		3,744
Pledged to an insurance commissioner		546		585		544		591
Total securities pledged	$	216,056	$	218,736	$	259,338	$	264,185

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

(Dollars in thousands)	2010			2009			2008
Proceeds from sales	$	89,164		$	17,240		$	6,878
Gross realized gains		2,346			467			32
Gross realized losses		(91	)		(11	)		(26	)
Net gains from sales	$	2,255		$	456		$	6
Gross recognized losses related to the credit component of other-than-temporary impairments	$	403		$	829		$	-

75

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 3:  (Continued)

Derivatives

The Company enters into interest rate lock agreements related to mortgage loan originations with customers. The Company also enters into forward sale agreements with mortgage investors. The interest rate lock agreements, which are written options, and the forward sale agreements are 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 table summarizes these instruments, which are considered derivatives not designated as hedges:

(Dollars in thousands)	December 31, 2010						December 31, 2009
	Notional		Positive		Negative		Notional		Positive		Negative
Instrument	Amount		Fair Value		Fair Value		Amount		Fair Value		Fair Value
Forward sale contracts	$	7,745	$	245	$	-	$	3,895	$	77	$	-
Written interest rate options (locks)		4,398		1		28		7,108		8		1

Derivatives with positive fair values are recorded as other assets and derivatives with negative fair values are recorded as other liabilities in the consolidated statements of condition.

Amounts included in the consolidated statements of operations related to non-hedging mortgage banking-related derivative instruments were as follows:

(Dollars in thousands)	Year Ended December 31
	2010		2009
Forward sale contracts:
Recorded in mortgage banking income	$	168	$	80
Written interest rate options (locks):
Recorded in mortgage banking income		12		17

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 becomes effective on March 15, 2011, which is the date on which the junior subordinated debentures switch from a fixed interest rate to a floating interest rate. 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 will be recorded in accumulated other comprehensive income until the interest payment due dates when the balance remaining in other comprehensive income will be removed and charged or credited to interest expense. The following table shows a summary of the hedging instrument at December 31, 2010.

(Dollars in thousands)
			Positive					Fixed			Floating
	Notional		Fair		Trade	Effective	Termination	Rate			Rate
Instrument	Amount		Value		Date	Date	Date	Paid			Received
Interest rate swap	$	30,000	$	817	11/09/2010	03/15/2011	03/15/2018		3.795	%	3-Month
											LIBOR
											Plus 1.33%

76

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 4:  Loans and Allowance for Loan Losses

The Bank's loan portfolio includes commercial, consumer, agricultural and residential loans originated primarily in its markets in central and north Mississippi, southwest Tennessee, central Alabama and the Florida panhandle. The following is a summary of the Bank's loans held for investment, net of unearned income of $2.439 million and $1.698 million at December 31, 2010, and 2009:

(Dollars in thousands)	2010		2009
Real estate loans:
Residential	$	235,489	$	239,921
Multifamily		45,329		41,482
Construction and land development		85,160		123,254
Farmland		37,061		38,508
Nonfarm nonresidential real estate		479,181		440,560
Commercial, financial and agricultural		133,226		129,571
Consumer		44,700		45,044
	$	1,060,146	$	1,058,340

The Bank uses loans as collateral for borrowings at the Federal Reserve Bank and a Federal Home Loan Bank. Approximately $15.658 million and $22.689 million of commercial and consumer loans were pledged to a line of credit with the Federal Reserve Bank at December 31, 2010 and December 31, 2009 respectively. Approximately $247.422 million and $280.398 million of individual real estate-secured loans were pledged to the Federal Home Loan Bank at December 31, 2010 and December 31, 2009, respectively.

Nonfarm nonresidential real estate loans increased by $38.621 million due primarily to the purchases of two groups of loan participations secured by church properties. The first 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 at face value in November. 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 for $26.159 million to yield 9.04% in December.

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

(Dollars in thousands)	2010			2009
Loans outstanding at January 1	$	5,018		$	9,367
New loans and advances		592			23,235
Repayments		(2,402	)		(27,583	)
Retirements		(2,335	)		(1	)
Loans outstanding at December 31	$	873		$	5,018

Loans are placed on 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 shows overall statistics for non-performing loans and other assets of the Company:

(Dollars in thousands)	2010		2009
Nonaccrual loans	$	33,127	$	44,549
Other real estate owned		31,125		23,578
Total nonperforming credit-related assets	$	64,252	$	68,127
Accruing loans past due 90 days or more	$	951	$	2,479
Loans restructured and in compliance with modified terms	$	18,052	$	4,620

77

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 4:  (Continued)

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

(Dollars in thousands)													Total
	30-59		60-89		Greater		Total				Total		Loans > 90
	Days		Days		Than		Past				Loans		Days and
	Past Due		Past Due		90 Days		Due		Current		Receivable		Accruing
Construction and land development loans	$	1,295	$	388	$	8,265	$	9,948	$	75,212	$	85,160	$	274
Other commercial real estate loans		997		1,453		14,557		17,007		544,564		561,571		-
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

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

(Dollars in thousands)	2010
Construction and land development loans	$	10,060
Other commercial real estate loans		16,960
Asset based loans		-
Other commercial loans		2,151
Home equity loans		303
Other 1-4 family residential loans		3,560
Consumer loans		93
Total	$	33,127

The Company applies internal risk ratings to all loans. The risk ratings range from 10, which is the highest quality rating, to 60, which indicates an impending charge-off. The following definitions apply to the internal risk ratings:

Risk rating 10 - This loan is secured by the Bank’s own certificate of deposit, U.S. Government securities, or governmental agency securities. The loan is properly structured with maturities not to exceed two years. No credit or collateral exceptions exist and the loan adheres to the Bank’s loan policy in every respect.

Risk rating 20 - Borrowers are typically limited to companies that are regional and/or have access to market debt, i.e. commercial paper. Financial statement analysis displays a strong financial condition and earnings ability along with sound asset quality and cash flow capacity to meet debt obligations in a timely manner. Loans in this category are generally limited to short or medium term maturities and are considered collectable in full with little supervision. The borrower exhibits a high capacity to service the debt based on prior history and an ability to service debt through the conversion of liquid assets, cash flow, or letters of credit from quality financial institutions.

Risk rating 30 - Loans in this category are to established borrowers representing an above average credit risk with proven earnings history, liquidity, or other adequate margins of credit protection. Financial statement analysis does not indicate any negative trends or abnormal comparisons. These loans are evidenced by a level of steady reduction along with anticipated extensions or renewals. The borrower is capable of absorbing normal setbacks without the advent of failure. The ability to repay is considered good through the conversion of liquid assets, cash flow, or co-signors/guarantors ability to reduce the debt.

Risk rating 31 - Borrowers have adequate capital and cash flow coverage along with reliable secondary sources of repayment, i.e. conversion of collateral, which may be called upon in the event of business failure or other deterioration. These loans are considered collectable in full but have experienced some unplanned extensions or renewals and may require more than normal supervision. There may have been some slow pay in the past but recent payment patterns have been as agreed. The borrower is presently stable enough to withstand normal setbacks without undue concern, but should be monitored fairly close during these events. The ability to repay is considered moderate through the conversion of liquid assets, cash flow, or co-signers/guarantors ability to reduce the debt.

Risk rating 32 - The borrower’s ability to service the debt and/or the value of the collateral may have deteriorated due to market fluctuations or negligence, however, repayment of the debt is still anticipated. Financial statement analysis does not indicate alarming trends or comparisons but does display a decline in earnings and strength. These loans are experiencing slow reduction along with some unplanned extensions or renewals and are requiring more than normal supervision. There may have been delinquent payments made in the past, but not within the last six months. Other means do exist to service the debt such as conversion of liquid assets, cash flow, or co-signer/guarantors abilities.

78

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 4:  (Continued)

Risk rating 40 - Loans in this category are presently protected from apparent loss, however, weaknesses do exist which could cause future impairment of repayment.  These loans require more than an ordinary amount of supervision and may exhibit potential weakness due to questionable trends in financial position, high debt to worth ratios, or unproven management capabilities.  These customers may be new or expanding businesses where ability to repay is marginal and the collateral may not be considered immediately marketable. Documentation exceptions may exist that could potentially have a negative effect on our lien position or hinder monitoring of problems. Early signs of problems such as past due payments, extension requests, or overdraft patterns have emerged. This risk rating category may also be used for new or untested borrowers.

Risk rating 50 - 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: high debt-to-worth ratios, declining or negative earnings trend, declining or inadequate liquidity, improper loan structure, questionable repayment sources, lack of well-defined secondary repayment source, and unfavorable competitive comparisons. Such loans are no longer considered to be adequately protected due to the borrower’s declining net worth, lack of earning capacity, declining collateral margins, 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, extensions, or renewals.

Risk rating 60 - Loans in this category exhibit the same weaknesses found in the loans with a risk rating of 50; however, the weaknesses are more pronounced.  Such loans are static and collection in full is improbable.  The ability of the borrower to service the debt is extremely weak, past due status is constant, and no definite repayment plan exists.  These loans are not yet rated Loss because certain events may occur which could salvage all or most of the debt.  Among these events are: acquisition by or merger with a stronger entity, injection of capital, alternative financing, liquidation of assets, or the pledging of additional capital. Loans in this category are typically on nonaccrual unless collateralized and not over 90 days past due.

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

(Dollars in thousands)			Other Commercial
	Construction		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		23,045		58,111		1,023		7,565
60		6,927		150		-		761
Total	$	85,160	$	561,571	$	28,132	$	105,094

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

79

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)			Unpaid				Average
	Recorded		Principal		Specific		Investment
	Balance		Balance		Allowance		in Impaired Loans *
Loans without a specific valuation allowance:
Construction and land development loans	$	16,598	$	24,993	$	-	$	16,708
Other commercial real estate loans		49,544		53,879		-		50,421
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	$	29,498	$	38,914	$	2,871	$	29,644
Other commercial real estate loans		58,260		62,595		1,582		59,361
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.

80

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 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	$	85,160		$	561,571		$	133,226		$	235,489		$	44,700		$	-	$	1,060,146
Ending balance:
individually evaluated for impairment	$	29,498		$	58,260		$	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	$	-		$	-		$	-		$	-		$	-		$	-	$	-

81

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 4:  (Continued)

Loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of the collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible. Restructured loans are considered to be impaired loans. A troubled debt restructuring occurs when a creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider. That concession either stems from an agreement between the creditor and the debtor or is imposed by law or a court. The following table presents information about the Company’s impaired loans as of and for the years ended December 31, 2010, and 2009:

(Dollars in thousands)	2010		2009
Restructured loans with an allowance	$	5,610	$	3,783
Other impaired loans with an allowance		19,752		40,897
Restructured loans without an allowance		12,500		837
Other impaired loans without an allowance		66,347		94,710
Total impaired loans	$	104,209	$	140,227
Allowance for restructured loans	$	1,297	$	1,974
Allowance for other impaired loans	$	4,835	$	11,419

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

At December 31, 2010 and 2009, there were no available credit commitments for any restructured loans.

The following table presents information related to income recognized on impaired loans for the years ended December 31, 2010, 2009 and 2008:

(Dollars in thousands)	2010		2009		2008
Average balance of impaired loans	$	126,102	$	148,762	$	91,337
Interest income recognized on impaired loans		5,667		6,285		4,941

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

(Dollars in thousands)	2010			2009			2008
Balance at January 1	$	24,014		$	24,918		$	14,217
Loans charged off		(19,330	)		(48,051	)		(9,706	)
Charge offs resulting from write-downs of loans transferred to held for sale status		(325	)		(3,189	)		-
Recoveries		2,446			735			673
Net charge-offs		(17,209	)		(50,505	)		(9,033	)
Provision for loan losses		9,220			49,601			19,734
Balance at December 31	$	16,025		$	24,014		$	24,918

82

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 5:  Bank Premises and Equipment

The following is a summary of bank premises and equipment at December 31, 2010, and 2009:

(Dollars in thousands)	2010		2009
Land	$	14,178	$	14,278
Buildings		36,292		37,304
Furniture, fixtures and equipment		19,890		20,804
Leasehold improvements		890		890
Construction in progress		428		380
		71,678		73,656
Less accumulated depreciation and amortization		30,982		30,737
	$	40,696	$	42,919

Amounts charged to operating expenses for depreciation and amortization of bank premises and equipment were $2.310 million in 2010, $2.841 million in 2009, and $2.888 million in 2008.

Construction in progress includes a balance of $159 thousand for renovation of the Oxford, Mississippi main branch. This project, which was originally scheduled for 2009, is expected to be completed during 2011 with an estimated total cost of $1.3 million.

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

(Dollars in thousands)	2010			2009			2008
Buildings and office space	$	581		$	844		$	815
Computer equipment		284			399			713
Other equipment and autos		184			276			317
		1,049			1,519			1,845
Rental income		(42	)		(47	)		(56	)
Net rent expense	$	1,007		$	1,472		$	1,789

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, 2010, are as follows:

(Dollars in thousands)
2011	$	635
2012		533
2013		373
2014		288
2015		287
After 2015		429
Total minimum lease payments	$	2,545

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.

83

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 6:  (Continued)

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

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

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

							Customer
				Core			Renewal			Noncompete			Banking
(Dollars in thousands)	Goodwill			Deposits			Lists			Agreements			Charter
Balance at January 1, 2009	$	32,572		$	5,865		$	198		$	39		$	1,025
Amortization expense		-			(426	)		(7	)		(7	)		-
Impairment charge		(32,572	)		-			(191	)		(32	)		(1,025	)
Balance at December 31, 2009	$	-		$	5,439		$	-		$	-		$	-
Amortization expense		-			(426	)		-			-			-
Balance at December 31, 2010	$	-		$	5,013		$	-		$	-		$	-
Estimated amortization expense
2011				$	426
2012					426
2013					426
2014					426
2015					426

The following tables summarize the gross carrying amounts and accumulated amortization balances of amortizing intangible assets as of December 31, 2010, and 2009:

	Gross				Net
	Carrying		Accumulated		Carrying
(Dollars in thousands)	Amount		Amortization		Amount
December 31, 2010:
Customer renewal lists	$	-	$	-	$	-
Noncompete agreements		-		-		-
Core deposits		7,060		2,047		5,013
	$	7,060	$	2,047	$	5,013
December 31, 2009:
Customer renewal lists	$	513	$	513	$	-
Noncompete agreements		413		413		-
Core deposits		7,060		1,621		5,439
	$	7,986	$	2,547	$	5,439

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 11.9 years at December 31, 2010.

Amortization expense for intangible assets having determinable useful lives amounted to $426 thousand in 2010, $440 thousand in 2009, and $485 thousand in 2008. Impairment charges for intangible assets having determinable useful lives amounted to $223 thousand in 2009.

84

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 7:  Other Assets

The following is a summary of other assets at December 31, 2010, and 2009:

(Dollars in thousands)	2010		2009
Cash surrender value of bank-owned life insurance	$	21,790	$	21,082
Federal Home Loan Bank stock		7,353		7,326
Income taxes receivable		129		8,498
Deferred income tax		14,563		15,219
Investment in First M&F Statutory Trust I		928		928
Investment in low income housing tax credit entities		2,687		-
Other		3,806		3,983
	$	51,256	$	57,036

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.

Note 8:  Deposits

The following is a summary of deposits at December 31, 2010, and 2009:

(Dollars in thousands)	2010		2009
Noninterest-bearing	$	212,199	$	228,579
Interest-bearing:
NOW and money market deposits		530,664		471,115
Savings deposits		114,769		112,764
Core certificates of deposit of $100 thousand or more		234,500		266,131
Other core certificates of deposit		268,272		290,602
Brokered certificates of deposit of $100 thousand or more		11,934		11,788
Other brokered certificates of deposit		3,074		7,284
Total interest-bearing		1,163,213		1,159,684
Total deposits	$	1,375,412	$	1,388,263

Interest expense on certificates of deposit of $100 thousand or more amounted to $5.942 million in 2010, $7.900 million in 2009 and $11.168 million in 2008.

The amount of overdrawn demand and savings deposits that were reclassified as loans held for investment were $627 thousand at December 31, 2010, and $608 thousand at December 31, 2009.

At December 31, 2010, the scheduled maturities of certificates of deposit are as follows:

(Dollars in thousands)
2011	$	304,418
2012		125,471
2013		34,615
2014		9,384
2015		43,888
After 2015		4
	$	517,780

The amount of deposits of directors and executive officers and their related interests were $18.351 million at December 31, 2010, and $16.172 million at December 31, 2009.

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FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 9:  Short-Term Borrowings

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

(Dollars in thousands)							Weighted
	Balance Outstanding						Average Rate
	Maximum		Average		At		During			At
	Month End		Daily		Year End		Year			Year End
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
2008:
Federal funds purchased	$	325	$	984	$	-		2.62	%		-	%
Securities sold under agreements to repurchase		20,879		12,876		9,728		2.34	%		1.76	%
	$	21,204	$	13,860	$	9,728

Federal funds purchased represent primarily overnight borrowings through relationships with correspondent banks. Federal funds purchased may be obtained through secured or unsecured lines. The Company has pledged $8.866 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 $37.109 million in investment securities to secure repurchase agreements.

Note 10:  Other Borrowings

The following is a summary of other borrowings at December 31, 2010, and 2009:

(Dollars in thousands)	2010		2009
Company’s line of credit in the amount of $5,000,000, maturing in February 2011; secured by approximately 29% of the Bank’s common stock; interest payable quarterly at the prime rate with a floor of 3.50%	$	3,417	$	1,916
Bank’s advances from Federal Home Loan Banks		46,999		120,594
	$	50,416	$	122,510
Company’s junior subordinated debentures, interest payable quarterly at 6.44% through March 2011, and payable quarterly at 90-day LIBOR plus 1.33% through March 2036; redeemable at par after March 2011	$	30,928	$	30,928

The Company’s correspondent line of credit contains certain restrictive covenants related to capital ratios, asset quality, dividends and supervisory actions by the Company’s regulators. The Company executed an informal agreement with the Federal Reserve Bank of St. Louis in November 2009, the occurrence of which was an event of default under the Loan Agreement. The lender has modified the terms of the line of credit thereby extending the term, modifying the financial (capital ratio) covenant, waiving the supervisory action and dividend covenants and modifying the asset quality covenant. The Company was in compliance with the modified financial and asset quality covenants at December 31, 2010. Under the modification, the Lender has agreed to a waiver of the covenant violations and events of default until February 28, 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, 2010 the Bank had approximately $550 thousand in available credit although any new advances could only be received after approval by the FHLB.

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FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 10:  (Continued)

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 $10.178 million at December 31, 2010, all of which was available.

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 become effective on March 15, 2011, and it terminates on March 15, 2018. The terms of the interest rate swap include fixed interest paid by the Company at a rate of 3.795% and floating interest paid based on 90-day LIBOR plus 1.33%. Based on its analysis, the Company expects the hedge to be highly effective.

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

The following is a summary of FHLB advances at December 31, 2010, and 2009:

(Dollars in thousands)	2010			2009
Single payment advances maturing within 12 months of year end:
Balance	$	686		$	67,500
Range of rates		0.16	%		2.72%-6.50	%
Single payment advances maturing after 12 months of year end:
Balance	$	-		$	-
Range of rates		-			-
Range of maturities		-			-
Amortizing advances:
Balance	$	46,313		$	53,094
Monthly payment amount		550			565
Range of rates		3.17%-7.83	%		3.17%-8.48	%
Range of maturities		2011-2020			2010-2020

Scheduled principal payments on FHLB advances at December 31, 2010, are as follows:

(Dollars in thousands)
2011	$	7,290
2012		6,494
2013		19,488
2014		2,260
2015		2,346
After 2015		9,121
	$	46,999

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 has a total investment and a total exposure of $2.687 million in these entities.

87

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 12:  Commitments and Contingencies

Legal Proceedings

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

Credit Related Financial Instruments

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

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

Standby and commercial letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. When issuing letters of credit, the Company applies the same credit policies and standards as it does in the normal lending process. Collateral is obtained based upon the Company's assessment of a customer's credit worthiness. A liability of $15 thousand is recognized at December 31, 2010, and a liability of $31 thousand is recognized at December 31, 2009, 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, 2010, and 2009 follows:

(Dollars in thousands)	2010		2009
Commitments to extend credit	$	122,448	$	145,335
Standby letters of credit		6,169		3,336

At December 31, 2010, there were no standby letters of credit issued on the Company’s behalf by any Federal Home Loan Banks. At December 31, 2009, there were $100 thousand of standby letters of credit issued on the Company’s behalf by a Federal Home Loan Bank. The Company generally uses these letters as security for public funds deposits and is obligated to the Federal Home Loan Bank if the letters of credit must be drawn upon.

The 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 $4.398 million at December 31, 2010, and $7.108 million at December 31, 2009. These commitments are accounted for as derivatives and marked to fair value through mortgage banking income. 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. At December 31, 2009, mortgage origination-related derivatives with positive fair values of $8 thousand were included in other assets and derivatives with negative fair values of $1 thousand were included in other liabilities.  The Company also engages in forward sales contracts with mortgage investors to purchase mortgages held for sale. Those forward sale agreements that have a determined price and expiration date are accounted for as derivatives and marked to fair value through mortgage banking income. At December 31, 2010 and 2009, the Company had $7.745 million and $3.895 million in locked forward sales agreements in place. 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. At December 31, 2009, forward sale-related derivatives with positive fair values of $77 thousand were included in other assets and no derivatives with negative fair values were included in other liabilities.

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 has not sustained any recourse-related losses in its mortgage program, and the repurchase of mortgages has been an extremely rare event. Mortgages sold that were still in the recourse period were $27.984 million at December 31, 2010, and $8.093 million at December 31, 2009. The Company did not have a recourse liability recorded at December 31, 2010 or 2009.

88

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 12:  (Continued)

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:

(Dollars in thousands)	Gross			Tax			Net
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
December 31, 2008:
Net unrealized gain on securities available for sale	$	3,263		$	1,217		$	2,046
Net unamortized pension costs		(4,423	)		(1,650	)		(2,773	)
	$	(1,160	)	$	(433	)	$	(727	)

89

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 amortized over a five-year period using the effective yield method. The discount on the Class B, Series CD Preferred Stock is being amortized over an eight-year period. The discount recognized on the Class B, Series A Preferred Stock was $188 thousand during 2010 and $201 thousand during 2009. The discount recognized on the Class B, Series CD Preferred Stock was $231 thousand during 2010.

Dividend Reinvestment and Stock Purchase Plan

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

Common Stock Repurchase Program

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

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

Dividend Restrictions

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

90

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 2010, 2009 and 2008: expected dividend yields of 1.00%, 1.50% and 3.00%; expected volatility of 31.45%, 23.37% and 19.47%; risk-free interest rates of 3.28%, 2.47% and 3.19%; 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 $1.74 in 2010, $1.28 in 2009 and $2.34 in 2008. 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)	2010			2009			2008
Stock option expense recognized, gross	$	11		$	17		$	19
Adjustment for actual vs expected forfeitures		-			-			(10	)
Stock option expense recognized, net		11			17			9
Restricted stock award expenses recognized, gross		170			256			321
Adjustment for actual vs expected forfeitures		(120	)		(200	)		(121	)
Restricted stock award expenses recognized, net		50			56			200
Total stock-based compensation		61			73			209
Income tax benefits		(23	)		(27	)		(78	)
Net stock-based compensation recognized	$	38		$	46		$	131

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.

91

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
							Weighted
							Average
	Shares						Grant					Weighted					Weighted
	Available			Number			Date		Number			Average		Number			Average
	for			of			Fair		of			Exercise		of			Exercise
	Grant			Shares			Value		Shares			Price		Shares			Price
Balance, January 1, 2008		563,984			123,516		$	16.888		5,000		$	19.033		119,900		$	15.995
Awards Granted		(7,000	)		-			-		7,000			13.840		-			-
Vested		-			(3,266	)		18.230		-			-		-			-
Forfeitures		14,000			(14,000	)		17.075		-			-		-			-
December 31, 2008		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		$	16.966		16,600		$	12.043		15,800		$	16.112

The following is a summary of stock options outstanding at December 31, 2010:

				Weighted		Weighted				Weighted
				Average		Average				Average
				Remaining		Exercise				Exercise
				Contractual		Price-				Price-
Exercise		Options		Life		Options		Options		Options
Price Range		Outstanding		(Years)		Outstanding		Exercisable		Exercisable
$	4.89 - 5.14		6,000		8.67	$	5.06		800	$	5.14
	12.63 - 13.84		11,200		4.57		13.30		7,600		13.04
	17.00 - 19.06		15,200		3.97		18.01		14,200		17.94
			32,400		5.05	$	14.03		22,600	$	15.84

There was no aggregate intrinsic value of options exercisable at December 31, 2010 or December 31, 2009. At December 31, 2010, there was a total of $15 thousand in unrecognized compensation costs, expected to be recognized over a weighted-average period of 2.4 years, related to stock options.

92

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 15:  (Continued)

The Company has issued restricted stock awards to certain executives and senior officers. The awards vest over periods of one to seven years and are forfeited in their entirety if the officer leaves the Company before the end of the vesting term. Additionally the restricted shares include a performance condition that may accelerate vesting at the achievement of a diluted earnings per share and net income target. Non-achievement of the performance condition during the vesting period would not prevent vesting of the shares. Dividends are paid quarterly to restricted stock grantees. At December 31, 2010, there were $307 thousand in unrecognized compensation costs. The unrecognized costs at December 31, 2010, are expected to be recognized over a weighted-average period of 2.0 years. 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 July 2010 the Board of Directors approved the reservation of 1,000,000 shares of authorized, unissued shares for issuance in lieu of cash for directors’ fees earned for 2010 and beyond. All shares are issued at market value and provide a convenient way for directors to receive shares of the Company based on the amount of directors fees that would otherwise be paid. Directors individually elect a percentage of their compensation, not less than 50%, to be received in common stock with the balance of the fees being paid in cash each quarter. For the first half of 2010, the Board authorized the issuance of 18,681 shares to directors in lieu of cash director fees. For the third quarter, 9,525 shares were issued to directors in lieu of fees. For the fourth quarter, 9,251 shares were issued to directors in lieu of fees.

Note 16:  Other Expenses

Significant components of other expenses are summarized as follows:

(Dollars in thousands)	2010		2009		2008
Postage and shipping	$	875	$	926	$	931
Stationery and supplies		696		814		868
Accounting, legal and professional fees		2,324		2,160		1,704
Insurance expense		836		782		802
Other		5,883		6,274		5,575
	$	10,614	$	10,956	$	9,880

93

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 17:  Income Taxes

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

(Dollars in thousands)	Federal			State			Total
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	)
2008:
Current	$	2,225		$	253		$	2,478
Current benefits from net operating loss carryforwards		(244	)		-			(244	)
Deferred		(3,178	)		(492	)		(3,670	)
Total	$	(1,197	)	$	(239	)	$	(1,436	)

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

(Dollars in thousands)	2010			2009			2008
Amount computed using the Federal statutory rates on income before taxes	$	1,568		$	(26,489	)	$	(303	)
Increase (decrease) resulting from:
Tax exempt income, net of disallowed interest deduction		(594	)		(770	)		(739	)
State income tax expense (benefit), net of Federal effect		207			(1,677	)		(157	)
Life insurance income		(227	)		(259	)		(209	)
Goodwill impairment expense		-			11,074			-
Low income housing tax credits		(330	)		-			-
Other, net		(22	)		17			(28	)
	$	602		$	(18,104	)	$	(1,436	)

94

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 17:  (Continued)

The change in the net deferred taxes is a result of current period deferred tax expense (benefit), and changes in accumulated other comprehensive income. The components of the net deferred tax asset (liability) at December 31, 2010, and 2009 consist of the following:

(Dollars in thousands)	2010			2009
Allowance for loan losses	$	5,977		$	8,957
Loan fees		420			404
Purchase accounting adjustments		200			293
Nonperforming assets		3,334			3,260
Accrued expenses		71			236
Share-based compensation		319			299
Employee benefit plans		173			150
Net pension liability and unamortized pension costs		202			197
Net operating loss carry forward		7,685			6,304
Tax credit carry forward		687			208
Other		1,310			1,298
Total deferred tax assets		20,378			21,606
Fixed assets and depreciation		(2,244	)		(2,419	)
Federal Home Loan Bank stock dividends		(468	)		(458	)
Intangible assets		(1,427	)		(1,557	)
Prepaid expenses		(398	)		(393	)
Unrealized gain on securities available for sale		(936	)		(1,522	)
Unrealized gain on cash flow hedge		(305	)		-
Other		(37	)		(38	)
Total deferred tax liabilities		(5,815	)		(6,387	)
	$	14,563		$	15,219

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

(Dollars in thousands)					Remaining						Total
					Carry						Carried
			Carried		Forward						Forward
			Back		For			Estimated			For
	2009		to Prior		Future		Expiration	2010		Expiration	Future
	NOL		Years		Years		Dates	NOL		Dates	Years
Federal net operating loss	$	38,353	$	23,653	$	14,700	2029	$	3,300	2030	$	18,000
Mississippi net operating loss		34,371		15,367		19,004	2029		3,996	2030		23,000
Alabama net operating loss		3,206		708		2,498	2029		502	2030		3,000
Tennessee net operating loss		1,627		-		1,627	2029		373	2030		2,000
Florida net operating loss		654		-		654	2029		146	2030		800
								Tax
								Credit		Expiration
								Amounts		Dates
Federal tax credits from 2009								$	207	2029
Federal tax credits from 2010									480	2030

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, 2010 and 2009 and therefore did not have any tax accruals in 2010 or 2009 related to uncertain positions.

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 2007.

95

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)	2010			2009
Change in benefit obligation:
Projected benefit obligation at beginning of year	$	8,643		$	8,032
Interest cost		468			486
Actuarial loss		614			604
Benefit payments		(543	)		(479	)
Projected benefit obligation at end of year		9,182			8,643
Change in plan assets:
Fair value of plan assets at beginning of year		8,115			7,231
Actual return on plan assets		874			1,175
Employer contributions		224			204
Benefit payments		(543	)		(479	)
Expenses		(30	)		(16	)
Fair value of plan assets at end of year		8,640			8,115
Funded status at measurement date	$	(542	)	$	(528	)

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

(Dollars in thousands)	2010			2009
Net pension asset	$	-		$	-
Net pension liability	$	(542	)	$	(528	)
Accumulated other comprehensive income, before income taxes	$	2,927		$	3,476

96

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 18:  (Continued)

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

(Dollars in thousands)	2010		2009
Projected benefit obligation	$	9,182	$	8,643
Accumulated benefit obligation		9,182		8,643
Fair value of plan assets		8,640		8,115

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

(Dollars in thousands)	2010			2009
Unamortized prior service credit	$	(25	)	$	(62	)
Unamortized actuarial loss		2,952			3,538
Accumulated other comprehensive income	$	2,927		$	3,476

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

(Dollars in thousands)	2010			2009			2008
Net Periodic Benefit Cost:
Interest cost	$	468		$	486		$	460
Expected return on plan assets		(529	)		(470	)		(619	)
Amortization of transition asset		-			(7	)		(9	)
Amortization of prior service credit		(37	)		(37	)		(37	)
Recognized actuarial loss		885			906			326
Net periodic benefit cost	$	787		$	878		$	121
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income:
Net (gain) loss	$	299		$	(85	)	$	2,981
Amortization of actuarial net loss		(885	)		(906	)		(326	)
Amortization of transition asset		-			7			9
Amortization of prior service credit		37			37			37
Measurement date transition adjustment		-			-			(70	)
Total recognized in other comprehensive income	$	(549	)	$	(947	)	$	2,631
Total recognized in net periodic benefit cost and other comprehensive income	$	238		$	(69	)	$	2,752
Measurement Date Transition Amounts Recognized in Retained Earnings:
Interest cost							$	115
Expected return on plan assets								(155	)
Amortization of transition asset								(2	)
Amortization of prior service credit								(9	)
Recognized actuarial loss								81
Net measurement transition retained earnings adjustment							$	30

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

The estimated net loss for the defined benefit pension plan that will be amortized from accumulated other comprehensive income into net periodic pension cost during 2011 is $984 thousand. The estimated prior service cost that will be amortized from accumulated comprehensive income to reduce net periodic pension cost during 2011 is $25 thousand.

97

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 18:  (Continued)

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

(Dollars in thousands)	2010		2009		2008
Net pension cost	$	787	$	878	$	121
Payments for expenses made on behalf of the plan		43		39		33
Payments to PBGC for premiums		16		15		9
	$	846	$	932	$	163

The following is a summary of weighted average assumptions:

	2010			2009			2008
Discount rate for determining current year’s costs		5.60	%		6.25	%		5.75	%
Discount rate for determining year end benefit obligation		5.05	%		5.60	%		6.25	%
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 and for 2010 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.

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. 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 10.77% profit in 2010, a 16.25% profit in 2009 and a 28.4% loss in 2008. 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 is being 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, 2010, and 2009 by asset category were as follows:

	2010			2009
Interest-bearing bank balances		5	%		17	%
Debt securities		32	%		23	%
Equity securities		63	%		60	%
		100	%		100	%

Equity securities included 18,868 shares of the Company’s common stock at December 31, 2010, and 2009.

98

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
			Quoted
			Prices In
			Active
			Markets		Significant
	Assets/Liabilities		For		Other		Significant
	Measured at Fair		Identical		Observable		Unobservable
	Value		Assets		Inputs		Inputs
(Dollars in thousands)	December 31, 2010		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents	$	398	$	398	$	-	$	-
Equity securities – domestic:
Industrials		550		550		-		-
Telecommunication		176		176		-		-
Energy and Utilities		731		731		-		-
Information technology		679		679		-		-
Consumer		833		833		-		-
Health care		423		423		-		-
Financials		957		957		-		-
Other		343		343		-		-
Equity securities – international		581		581		-		-
Mutual funds(bond funds)		212		212		-		-
Government debt securities		1,056		-		1,056		-
Corporate debt securities		1,701		-		1,701		-
Total assets	$	8,640	$	5,883	$	2,757	$	-

99

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 18:  (Continued)

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

			Fair Value Measurements at
			December 31, 2009, Using
			Quoted
			Prices In
			Active
			Markets		Significant
	Assets/Liabilities		For		Other		Significant
	Measured at Fair		Identical		Observable		Unobservable
	Value		Assets		Inputs		Inputs
(Dollars in thousands)	December 31, 2009		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents	$	1,368	$	1,368	$	-	$	-
Equity securities – domestic:
Industrials		535		535		-		-
Telecommunication		61		61		-		-
Energy and Utilities		505		505		-		-
Information technology		778		778		-		-
Consumer		665		665		-		-
Health care		341		341		-		-
Financials		276		276		-		-
Other		337		337		-		-
Equity securities – international		1,145		1,145		-		-
Mutual funds(bond funds)		260		260		-		-
Government debt securities		1,081		-		1,081		-
Corporate debt securities		571		-		571		-
Mortgage-backed securities		192		-		192		-
Total assets	$	8,115	$	6,271	$	1,844	$	-

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

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

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

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

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

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

100

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 18:  (Continued)

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

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

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

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

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

(Dollars in thousands)
Year	Expected payments
2011	$	606
2012		606
2013		634
2014		679
2015		671
2016 – 2020		3,336

The Company expects to make a contribution within a range of $100 thousand to $400 thousand to the pension plan in 2011.

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. Total matching contributions for this plan were $317 thousand in 2010, $385 thousand in 2009 and $712 thousand in 2008. 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 2010, 2009 and 2008. ESOP shares are considered outstanding for basic earnings per share calculations. Dividends on ESOP shares are deducted from retained earnings when declared.

At December 31, 2010, and 2009, the profit and savings plan owned 285,672 and 257,879 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 $51 thousand of compensation during 2010, $67 thousand during 2009 and $95 thousand during 2008. The Company did not make any profit sharing contributions to the plan in 2010, 2009 or 2008. The plan also had distributions of $23 thousand in 2010, $80 thousand in 2009 and $34 thousand in 2008. Included in salaries and employee benefit expenses are charges for earnings increases of $40 thousand for 2010, charges for earnings increases of $2 thousand for 2009, and $79 thousand in credits for earnings declines for 2008. Also included in salaries and employee benefit expenses are administrative expenses of $2 thousand in 2010, $3 thousand in 2009 and $2 thousand in 2008.

101

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 19:  Earnings Per Share

A change in accounting principles for earnings per share that became effective in 2009 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The Corporation has determined that its outstanding non-vested restricted stock awards are participating securities. Accordingly, effective January 1, 2009, earnings per common share are computed using the two-class method. All previously reported earnings per common share data has been retrospectively adjusted to conform to the new computation method.

(Dollars in thousands, except per share data)	2010		2009			2008
Net income (loss)	$	4,011	$	(59,799	)	$	526
Less: Preferred dividends		1,692		1,464			-
Add: Gain on exchange of preferred stock		12,867		-			-
Net income (loss) attributable to common stock	$	15,186	$	(61,263	)	$	526
Net income (loss) allocated to common stockholders:
Distributed		363		1,451			4,712
Undistributed		14,708		(62,106	)		(4,190	)
	$	15,071	$	(60,655	)	$	522
Weighted-average basic common and participating shares outstanding		9,150,980		9,157,752			9,179,118
Less: weighted average participating restricted shares outstanding		69,293		90,872			117,388
Weighted-average basic shares outstanding		9,081,687		9,066,880			9,061,730
Basic net income (loss) per share	$	1.66	$	(6.69	)	$	0.06
Weighted-average basic common and participating shares outstanding		9,150,980		9,157,752			9,179,118
Add: share-based options and stock warrant		-		-			654
		9,150,980		9,157,752			9,179,772
Less: weighted average participating restricted shares outstanding		69,293		90,872			117,388
Weighted-average dilutive shares outstanding		9,081,687		9,066,880			9,062,384
Dilutive net income (loss) per share	$	1.66	$	(6.69	)	$	0.06
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		38,942		62,184			128,186
Common stock warrant		513,113		432,983			-

102

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 20:  Regulatory Matters

Federal banking regulations require that the Bank maintain certain cash reserves based on a percent of deposits. This requirement was $897 thousand, which was covered by $12.162 million in vault cash, at December 31, 2010. The Company is also required to hold a clearing balance of $2.000 million with the Federal Reserve. This clearing balance is included in cash and due from banks.

The Company 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, 2010, that all capital adequacy requirements have been met.

As of December 31, 2010, the most recent notification by the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category.

The Company's and Bank's actual capital amounts and ratios as of December 31, 2010, and 2009, are also presented in the table:

(Dollars in thousands)	Actual					Minimum Capital					Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2010:
Total capital (to risk weighted assets):
Company	$	135,291		11.3	%	$	95,790		8.0	%	$	-		-
Bank		134,020		11.2	%		95,568		8.0	%		119,460		10.0	%
Tier I capital (to risk weighted assets):
Company		120,310		10.1	%		47,895		4.0	%		-		-
Bank		119,074		10.0	%		47,784		4.0	%		71,676		6.0	%
Tier I capital (to average assets):
Company		120,310		7.7	%		62,211		4.0	%		-		-
Bank		119,074		7.7	%		62,155		4.0	%		77,693		5.0	%
December 31, 2009:
Total capital (to risk weighted assets):
Company	$	133,574		11.1	%	$	96,374		8.0	%	$	-		-
Bank		130,960		10.9	%		96,293		8.0	%		120,366		10.0	%
Tier I capital (to risk weighted assets):
Company		118,405		9.8	%		48,187		4.0	%		-		-
Bank		115,803		9.6	%		48,147		4.0	%		72,220		6.0	%
Tier I capital (to average assets):
Company		118,405		7.1	%		66,346		4.0	%		-		-
Bank		115,803		7.0	%		66,339		4.0	%		82,924		5.0	%

103

FIRST M&F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 20:  (Continued)

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

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

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 has approved, pursuant to the informal agreement, the common dividends payable to shareholders, the interest payment on the trust preferred securities and the dividends payable on the TARP preferred stock for the third and fourth quarters of 2010.

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.

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Notes to Consolidated Financial Statements

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

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

STATEMENTS OF CONDITION

(Dollars in thousands)
	2010		2009
Assets
Cash	$	4,401	$	4,735
Investment in banking subsidiary		133,947		131,179
Investment in statutory trust		928		928
Other assets		2,250		912
	$	141,526	$	137,754
Liabilities and Stockholders’ Equity
Note payable	$	3,416	$	1,916
Junior subordinated debt		30,928		30,928
Other liabilities		117		281
Stockholders’ equity		107,065		104,629
	$	141,526	$	137,754

STATEMENTS OF OPERATIONS

(Dollars in thousands)	2010		2009			2008
Income:
Dividends received from banking subsidiary	$	2,200	$	3,800		$	4,500
Dividends received from statutory trust		60		60			60
Equity in undistributed earnings (loss) of banking subsidiary		3,215		(59,869	)		(2,578	)
Other income		10		24			2
Total income (loss)		5,485		(55,985	)		1,984
Expenses:
Interest on other borrowings		84		64			99
Interest on junior subordinated debentures		1,992		1,992			1,993
Goodwill impairment		-		2,310			-
Other expenses		224		291			194
Total expenses		2,300		4,657			2,286
Income (loss) before income taxes		3,185		(60,642	)		(302	)
Income tax benefit		826		843			828
Net income (loss)	$	4,011	$	(59,799	)	$	526

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Notes to Consolidated Financial Statements

Note 21:  (Continued)

STATEMENTS OF CASH FLOWS

(Dollars in thousands)	2010			2009			2008
Cash flows from operating activities:
Net income (loss)	$	4,011		$	(59,799	)	$	526
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed (earnings) loss of banking subsidiary		(3,215	)		59,869			2,578
Goodwill impairment		-			2,310			-
Other, net		(879	)		(45	)		1,390
Net cash provided by (used in) operating activities		(83	)		2,335			4,494
Cash flows from investing activities:
Additional investment in Bank		-			(25,000	)		-
Net cash used in investing activities		-			(25,000	)		-
Cash flows from financing activities:
Increase (decrease) in note payable		1,500			(500	)		500
Cash dividends		(1,751	)		(2,541	)		(4,772	)
Common shares repurchased		-			-			(118	)
Preferred stock issued		-			30,000			-
Tax benefits on share-based transactions		-			28			-
Net cash provided by (used in) financing activities		(251	)		26,987			(4,390	)
Net increase (decrease) in cash		(334	)		4,322			104
Cash at January 1		4,735			413			309
Cash at December 31	$	4,401		$	4,735		$	413

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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, 2010 (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 50 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, 2010. 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.

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PART III

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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

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

As a 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 14, 2009 and is posted on the Bank’s website at www.mfbank.com/inv_governance.htm.

EXECUTIVE COMPENSATION

Information concerning executive compensation is incorporated by reference and contained in the proxy material on Page 11 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 8 and following.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Information concerning certain relationships and related transactions is incorporated by reference and contained in the proxy material on Page 26.

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 26.

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PART IV

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

Financial Statements and Exhibits

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

(a)	Management’s Annual Report on Internal Control Over Financial Reporting
(b)	Report of Independent Registered Public Accounting Firm
(c)	Consolidated Statements of Condition – December 31, 2010 and 2009
(d)	Consolidated Statements of Operations – Years Ended December 31, 2010, 2009 and 2008
(e)	Consolidated Statements of Comprehensive Income – Years Ended December 31, 2010, 2009 and 2008
(f)	Consolidated Statements of Stockholders’ Equity – Years Ended December 31, 2010, 2009 and 2008
(g)	Consolidated Statements of Cash Flows – Years Ended December 31, 2010, 2009 and 2008
(h)	Notes to Consolidated Financial Statements

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

3.1	Articles of Incorporation of the Registrant. Incorporated herein by reference to (1) Exhibit 3 to the Company’s Form S-1 (File No. 33-08751) September 15, 1986, incorporated herein by reference, and (2) Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
3.2	Articles of Amendment of the Registrant. Incorporated herein by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
3.3	By-laws of the Registrant, as amended. Filed as Exhibit 3-b to the Company's Form S-1 (File No. 33-08751) September 15, 1986, incorporated herein by reference.
3.4	Articles of Amendment of the Registrant.  Incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed on October 5, 2010.
3.5	Amended and Restated Bylaws of the Registrant.
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.
11	Computation of Earnings per Share. Filed herewith as Note 19 to the consolidated financial statements.
21	Subsidiaries of the Registrant
23	Consent of Independent Registered Public Accounting Firm
The following Rule 13a-14(a)/15d-14(a) Certifications are included as exhibits to this report:
31.1	Rule 13a-14(a) Certification of Hugh S. Potts, Jr., Chief Executive Officer
31.2	Rule 13a-14(a) Certification of John G. Copeland, Chief Financial Officer
The following Section 1350 Certifications are included as exhibits to this report:
32.1	Section 1350 Certification of Hugh S. Potts, Jr., Chief Executive Officer
32.2	Section 1350 Certification of John G. Copeland, Chief Financial Officer
The following Emergency Economic Stability Act of 2008 Certifications are included as exhibits to this report:
99.1	Certification pursuant to the Emergency Economic Stability Act of 2008 of Hugh S. Potts, Jr., Chief Executive Officer
99.2	Certification pursuant to the Emergency Economic Stability Act of 2008 of John G. Copeland, Chief Financial Officer

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SIGNATURES

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

FIRST M & F CORPORATION

BY:	/s/ Hugh S. Potts, Jr.
	Hugh S. Potts, Jr.
	Chairman of the Board and
	Chief Executive Officer
DATE:	March 15, 2011

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 15, 2011	Hugh S. Potts, Jr., Director
	Chairman of the Board
	Chief Executive Officer
	(principal executive officer)
	/s/ Hollis C. Cheek
DATE:  March 15, 2011	Hollis C. Cheek, Director
	/s/ Jon A. Crocker
DATE:  March 15, 2011	Jon A. Crocker, Director
	/s/ J. Marlin Ivey
DATE:  March 15, 2011	J. Marlin Ivey, Director
	/s/ Jeffrey B. Lacey
DATE:  March 15, 2011	Jeffrey B. Lacey, Director
	President &
	Chief Banking Officer
	/s/ John Clark Love, III
DATE:  March 15, 2011	John Clark Love, III, Director
	/s/ Susan P. McCaffery
DATE:  March 15, 2011	Susan P. McCaffery, Director
	/s/ Michael L. Nelson
DATE:  March 15, 2011	Michael L. Nelson, Director
	/s/ Otho E. Pettit, Jr.
DATE:  March 15, 2011	Otho E. Pettit, Jr., Director
	/s/ Samuel B. Potts
DATE:  March 15, 2011	Samuel B. Potts, Director
	Vice President
	/s/ Charles W. Ritter, Jr.
DATE:  March 15, 2011	Charles W. Ritter, Jr., Director
	/s/ L. F. Sams, Jr.
DATE:  March 15, 2011	L. F. Sams, Jr., Director

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Signatures: (Continued)

	/s/ Larry Terrell
DATE:  March 15, 2011	Larry Terrell, Director
	/s/ James I. Tims
DATE:  March 15, 2011	James I. Tims, Director
	/s/ Scott M. Wiggers
DATE:  March 15, 2011	Scott M. Wiggers, Director
	/s/ John G. Copeland
DATE:  March 15, 2011	John G. Copeland
	EVP & Chief Financial Officer
	(principal financial officer)
	/s/ Robert C. Thompson, III
DATE:  March 15, 2011	Robert C. Thompson, III
	VP – Accounting Policy
	(principal accounting officer)

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EXHIBIT INDEX

3.1	Articles of Incorporation of the Registrant.  Incorporated herein by reference to (1) Exhibit 3 to the Company's Form S-1 (File No. 33-08751) September 15, 1986, incorporated herein by reference, and (2) Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
3.2	Articles of Amendment of the Registrant. Incorporated herein by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
3.3	By-laws of the Registrant, as amended. Filed as Exhibit 3-b to the Company’s Form S-1 (File No. 33-08751) September 15, 1986, incorporated herein by reference.
3.4	Articles of Amendment of the Registrant.  Incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed on October 5, 2010.
3.5	Amended and Restated Bylaws of the Registrant.
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.
11	Computation of Earnings per Share – Filed herewith as Note 19 to the consolidated financial statements.
21	Subsidiaries of the Registrant.
23	Consent of Independent Registered Public Accounting Firm.
31.1	Rule 13a-14(a) Certification of Hugh S. Potts, Jr., Chief Executive Officer.
31.2	Rule 13a-14(a) Certification of John G. Copeland, Chief Financial Officer.
32.1	Section 1350 Certification of Hugh S. Potts, Jr., Chief Executive Officer.
32.2	Section 1350 Certification of John G. Copeland, Chief Financial Officer.
99.1	Certification pursuant to the Emergency Economic Stability Act of 2008 of Hugh S. Potts, Jr., Chief Executive Officer
99.2	Certification pursuant to the Emergency Economic Stability Act of 2008 of John G. Copeland, Chief Financial Officer

112