FIRST M&F CORP/MS - FORM 10-Q

Attached files

file	filename
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - FIRST M&F CORP/MS	fmfc-3122q12.htm
EX-32.1 - CERTIFICATION OF PERIODIC FINANCIAL REPORT BY CHIEF EXECUTIVE OFFICER - FIRST M&F CORP/MS	fmfc-3212q12.htm
EX-32.2 - CERTIFICATION OF PERIODIC FINANCIAL REPORT BY CHIEF FINANCIAL OFFICER - FIRST M&F CORP/MS	fmfc-3222q12.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - FIRST M&F CORP/MS	fmfc-3112q12.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

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

Commission File Number 000-09424

FIRST M&F CORPORATION

(Exact name of registrant as specified in its charter)



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

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

662-289-5121

(Registrant’s telephone number, including area code)

No Change

(Former name, former address and former fiscal year,

if changed since the last report)

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

x Yes o No

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

x Yes o No

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



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

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

o Yes x No

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



Common stock, $5 par value		9,172,098 Shares
Title of Class		Shares Outstanding at July 31, 2012

FIRST M&F CORPORATION

FORM 10-Q

INDEX



		Page
PART I:	FINANCIAL INFORMATION

Item 1	Financial Statements (unaudited):	3
	Consolidated Statements of Condition	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Stockholders’ Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	9

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operation	50

Item 3	Quantitative and Qualitative Disclosures About Market Risk	76

Item 4	Controls and Procedures	77

PART II:	OTHER INFORMATION

Item 1	Legal Proceedings	78

Item 1A	Risk Factors	78

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	78

Item 3	Defaults upon Senior Securities	78

Item 4	Mine Safety Disclosures	78

Item 5	Other Information	78

Item 6	Exhibits	79

SIGNATURES		80

EXHIBIT INDEX		81

CERTIFICATIONS

FIRST M & F CORPORATION AND SUBSIDIARY

PART I: FINANCIAL INFORMATION

Item 1 – Financial Statements (Unaudited)

Consolidated Statements of Condition



(Dollars in thousands)
	June 30, 2012			December 31, 2011
	June 30, 2012			December 31, 2011
	(Unaudited)			(Note 1)
Assets
Cash and due from banks	$	37,147		$	39,976
Interest bearing bank balances	20,708			39,391
Federal funds sold	6,750			25,000
Securities available for sale, amortized cost of $371,424 and $315,890	377,670			320,774
Loans held for sale	22,291			26,073
Loans, net of unearned income	982,596			996,340
Allowance for loan losses	(15,310		)	(14,953		)
Net loans	967,286			981,387
Bank premises and equipment	37,529			37,989
Accrued interest receivable	6,060			6,122
Other real estate	31,077			36,952
Other intangible assets	4,373			4,586
Bank owned life insurance	22,866			22,477
Other assets	27,739			27,924
	$	1,561,496		$	1,568,651
Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing deposits	$	236,145		$	231,718
Interest-bearing deposits	1,125,193			1,139,745
Total deposits	1,361,338			1,371,463
Federal funds purchased and repurchase agreements	3,224			4,398
Other borrowings	40,333			43,001
Junior subordinated debt	30,928			30,928
Accrued interest payable	844			1,023
Other liabilities	10,912			8,242
Total liabilities	1,447,579			1,459,055
Commitments and contingencies
Stockholders’ equity:
Preferred stock; 2,000,000 shares authorized; 30,000 shares issued and outstanding	18,198			17,564
Common stock of $5.00 par value; 50,000,000 shares authorized: 9,172,098 and 9,154,936 shares issued and outstanding	45,860			45,775
Additional paid-in capital	31,890			31,895
Nonvested restricted stock awards	836			674
Retained earnings	16,699			14,456
Accumulated other comprehensive income (loss)	434			(768		)
Total equity	113,917			109,596
	$	1,561,496		$	1,568,651

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

FIRST M & F CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations

(Unaudited)



(Dollars in thousands, except per share data)	Three Months Ended						Six Months Ended
	June 30						June 30
	2012			2011			2012			2011
Interest income:
Interest and fees on loans	$	13,741		$	15,281		$	27,899		$	30,656
Interest on loans held for sale	244			27			417			68
Taxable investments	1,563			1,931			3,053			3,702
Tax-exempt investments	319			302			637			616
Federal funds sold	11			15			26			31
Interest bearing bank balances	28			46			79			98
Total interest income	15,906			17,602			32,111			35,171
Interest expense:
Deposits	2,233			3,523			4,746			7,370
Federal funds purchased and repurchase agreements	5			7			11			22
Other borrowings	437			509			888			1,033
Junior subordinated debt	315			292			586			750
Total interest expense	2,990			4,331			6,231			9,175
Net interest income	12,916			13,271			25,880			25,996
Provision for loan losses	2,280			2,280			4,560			4,860
Net interest income after provision for loan losses	10,636			10,991			21,320			21,136
Noninterest income:
Deposit account income	2,548			2,473			5,005			4,931
Mortgage banking income	1,806			323			2,373			679
Agency commission income	848			936			1,677			1,828
Trust and brokerage income	163			152			303			285
Bank owned life insurance income	182			176			369			359
Other income	491			396			1,141			1,052
Securities gains, net	1			341			592			1,690
Total investment other-than-temporary impairment losses	(8		)	2			(8		)	(239		)
Portion of loss recognized in (reclassified from) other comprehensive income (before taxes)	4			(87		)	4			(142		)
Net investment impairment losses recognized	(4		)	(85		)	(4		)	(381		)
Total noninterest income	6,035			4,712			11,456			10,443
Noninterest expenses:
Salaries and employee benefits	6,737			7,157			13,600			14,113
Net occupancy expenses	932			951			1,840			1,940
Equipment expenses	423			451			886			916
Software and processing expenses	346			395			708			794
Telecommunication expenses	221			229			466			454
Marketing and business development expenses	267			272			504			477
Foreclosed property expenses	1,282			1,468			2,738			3,821
FDIC insurance assessments	553			577			1,067			1,351
Intangible asset amortization	106			107			213			214
Other expenses	3,452			2,696			6,283			5,034
Total noninterest expenses	14,319			14,303			28,305			29,114
Income before income taxes	2,352			1,400			4,471			2,465
Income tax expense	599			294			1,111			409
Net income	1,753			1,106			$	3,360		$	2,056
Dividends and accretion on preferred stock	471			440			934			872
Net income applicable to common stock	$	1,282		$	666		$	2,426		$	1,184
Net income allocated to common shareholders	$	1,226		$	661		$	2,365		$	1,176
Earnings per share:
Basic	0.14			0.07			$	0.26		$	0.13
Diluted	0.14			0.07			$	0.26		$	0.13

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

FIRST M & F CORPORATION AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

(Unaudited)



(Dollars in thousands)	Three Months Ended						Six Months Ended
	June 30						June 30
	2012			2011			2012			2011
Net income	$	1,753		$	1,106		$	3,360		$	2,056
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Unrealized gains on securities available for sale arising during the period, net of tax of $557 and $1,161 for the three months ended June 30 and $713 and $1,349 for the six months ended June 30	936			1,953			1,205			2,269
Unrealized gains (losses) on other-than-temporarily impaired securities available for sale arising during the period, net of tax of $7 and $30 for the three months ended June 30 and $13 and $5 for the six months ended June 30	(14		)	50			19			7
Reclassification adjustment for gains on securities available for sale included in net income, net of tax of $0 and $127 for the three months ended June 30 and $220 and $630 for the six months ended June 30	(1		)	(214		)	(372		)	(1,060		)
Reclassification adjustment for credit related other-than-temporary impairment losses on securities available for sale included in net income, net of tax of $1 and $32 for the three months ended June 30 and $1 and $142 for the six months ended June 30	3			53			3			239
Unrealized losses net of settlements on cash flow hedge arising during the period, net of tax of $232 and $330 for the three months ended June 30 and $192 and $266 for the six months ended June 30	(389		)	(555		)	(323		)	(448		)
Defined benefit pension plans:
Amortization of prior service cost, net of tax of $0 and $2 for the three months ended June 30 and $0 and $4 for the six months ended June 30	—			(4		)	—			(8		)
Amortization of actuarial loss, net of tax of $199 and $92 for the three months ended June 30 and $398 and $183 for the six months ended June 30	335			154			670			309
Other comprehensive income	870			1,437			1,202			1,308
Total comprehensive income	$	2,623		$	2,543		$	4,562		$	3,364

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

FIRST M & F CORPORATION AND SUBSIDIARY

Consolidated Statements of Stockholders' Equity

Six Months Ended June 30, 2012 and 2011

(Unaudited)



(Dollars in thousands, except per share data)
	Preferred Stock		Common Stock		Additional Paid-In Capital			Nonvested Restricted Stock Awards			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
January 1, 2011	$	16,390	$	45,534	$	31,883		$	784		$	12,225		$	249		$	107,065
Net income	—		—		—			—			2,056			—			2,056
Cash dividends ($.02 per share)	—		—		—			—			(185		)	—			(185		)
18,584 shares granted to directors	—		93		(23		)	—			—						70
Dividends and accretion on preferred stock	572		—		—			—			(872		)	—			(300		)
6,000 restricted share awards vested	—		30		71			(101		)	—			—			—
Share-based compensation expense recognized	—		—		4			35			—			—			39
Net change	—		—		—			—			—			1,308			1,308
June 30, 2011	$	16,962	$	45,657	$	31,935		$	718		$	13,224		$	1,557		$	110,053
January 1, 2012	$	17,564	$	45,775	$	31,895		$	674		$	14,456		$	(768	)	$	109,596
Net income	—		—		—			—			3,360			—			3,360
Cash dividends ($.02 per share)	—		—		—			—			(189		)	—			(189		)
17,162 shares granted to directors	—		85		(8		)	—			—			—			77
Dividends and accretion on preferred stock	634		—		—			—			(934		)	—			(300		)
Share-based compensation expense recognized	—		—		3			162			6			—			171
Net change	—		—		—			—			—			1,202			1,202
June 30, 2012	$	18,198	$	45,860	$	31,890		$	836		$	16,699		$	434		$	113,917

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

FIRST M & F CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)



(Dollars in thousands)	Six Months Ended
	June 30
	2012			2011
Cash flows from operating activities:
Net income	$	3,360		$	2,056
Adjustments to reconcile net income to net cash provided by operating activities:
Share-based compensation	248			109
Amortization of pension costs	901			366
Depreciation and amortization	1,170			1,290
Provision for loan losses	4,560			4,860
Net investment amortization	2,112			1,017
Net change in unearned fees/deferred costs on loans	(992		)	(421		)
Capitalized dividends on FHLB stock	(14		)	(14		)
Gain on securities available for sale	(592		)	(1,690		)
Impairment loss on securities available for sale	4			381
Gain on loans held for sale	(1,497		)	(438		)
Other real estate losses	2,254			3,195
Other asset sales losses	95			140
Deferred income taxes	1,109			407
Originations of loans held for sale, net of repayments	(69,201		)	(24,746		)
Sales proceeds of loans held for sale	70,376			29,132
(Increase) decrease in:
Accrued interest receivable	62			410
Cash surrender value of bank owned life insurance	(369		)	(359		)
Other assets	(1,785		)	(655		)
Increase (decrease) in:
Accrued interest payable	(180		)	(164		)
Other liabilities	2,649			718
Net cash provided by operating activities	14,270			15,594
Cash flows from investing activities:
Purchases of securities available for sale	(136,027		)	(101,320		)
Sales of securities available for sale	42,837			61,074
Maturities of securities available for sale	36,131			26,655
Purchases of loans held for investment	(2,259		)	(821		)
Net decrease in other loans held for investment	13,534			7,483
Net (increase) decrease in:
Interest bearing bank balances	18,682			(31,744		)
Federal funds sold	18,250			—
Bank premises and equipment	(449		)	(944		)
Net purchases of bank owned life insurance	(19		)	(25		)
Proceeds from sales of other real estate and other repossessed assets	6,688			4,863
Net cash used in investing activities	(2,632		)	(34,779		)

FIRST M & F CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)



(Dollars in thousands)	Six Months Ended
	June 30
	2012			2011
Cash flows from financing activities:
Net increase (decrease) in deposits	$	(10,136	)	$	49,075
Net decrease in short-term borrowings	(1,174		)	(28,434		)
Proceeds from other borrowings	—			686
Repayments of other borrowings	(2,668		)	(5,610		)
Common dividends paid	(189		)	(185		)
Preferred dividends paid	(300		)	(300		)
Net cash provided by (used in) financing activities	(14,467		)	15,232
Net decrease in cash and due from banks	(2,829		)	(3,953		)
Cash and due from banks at January 1	39,976			45,099
Cash and due from banks at June 30	$	37,147		$	41,146
Supplemental disclosures:
Total interest paid	$	6,417		$	9,346
Total income taxes paid	192			3

Transfers of loans from held for sale to held for investment	4,199			454
Transfers of loans to foreclosed property	3,182			7,618
U. S. Treasury preferred dividend accrued but unpaid	75			75
Accretion on U. S. Treasury preferred stock	634			572

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

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 1: Summary of Significant Accounting Policies

Basis of Presentation

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

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

Use of Estimates

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

Reclassifications

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

Loans Held for Sale

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

Loans Held for Investment

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

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

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

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 1: (Continued)

Allowance and Provision for Loan Losses

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

The allowance for loan losses is maintained at a level believed to be adequate by management to absorb estimated probable loan losses. Management’s periodic evaluation of the adequacy of the allowance for loan losses is based on estimated credit losses for specifically identified impaired loans as well as estimated probable credit losses inherent in the remainder of the loan portfolio based primarily on historical loss rates. Several asset quality metrics, both quantitative and qualitative, are considered in estimating both specific impairments and in the application of historical loss rates. The fundamental tool used by management to estimate individual impairment allowances and contingency allowances is the individual loan risk rate. For the purpose of determining allowances, management segregates the loan portfolio primarily by risk rating and secondarily by whether the loan is collateral dependent. Management considers a number of factors in assigning risk rates to individual loans and in determining impairment allowances and in the application of historical loss rates, including: past due trends, current trends, current economic conditions, industry exposure, internal and external loan reviews, loan performance, the estimated value of underlying collateral, evaluation of a borrower’s financial condition and other factors considered relevant. Loans not reviewed for specific impairment allowances are grouped into risk pools with similar traits and subjected to historical loss rates to estimate losses in each pool. Troubled debt restructurings are considered to be impaired loans and are included with the loans that are individually reviewed for impairment allowances. Troubled debt restructurings are loans in which the Company has granted a concession to the borrower which would not otherwise be considered due to the borrower’s financial difficulties.

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

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

Management’s evaluation of the allowance for loan losses is inherently subjective as it requires material estimates. The actual amounts of loan losses realized in the near term could differ from the amounts estimated in arriving at the allowance for loan losses reported in the financial statements.

Concentrations of Credit

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

Restricted Cash Balances

The Company has entered into an interest rate swap agreement designed to convert floating rate interest payments on subordinated debentures into fixed rate payments. The Company had pledged interest bearing bank balances as collateral to the interest rate swap counterparty in the amounts of $1.752 million at June 30, 2012 and $1.861 million at December 31, 2011.

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

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 2: Fair Value

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

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

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

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

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 2: (Continued)

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



			Fair Value Measurements at June 30, 2012, Using
	Assets/Liabilities Measured at Fair Value		Quoted Prices In Active Markets For Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	June 30, 2012		(Level 1)		(Level 2)		(Level 3)
U.S. Government sponsored entities	$	79,269	$	—	$	79,269	$	—
Mortgage-backed investments	221,589		—		223,560		—
Obligations of states and political subdivisions	63,180		—		63,180		—
Collateralized debt obligations	850		—		—		850
Other debt securities	12,782		—		10,811		—
Total securities available for sale	$	377,670	$	—	$	376,820	$	850
Mortgage derivative assets	576		—		—		576
	$	378,246	$	—	$	376,820	$	1,426

Interest rate swap liability	$	2,349	$	—	$	—	$	2,349
Mortgage derivative liabilities	304		—		—		304
	$	2,653	$	—	$	—	$	2,653



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

Interest rate swap liability	$	1,834	$	—	$	—	$	1,834
Mortgage derivative liabilities	291		—		—		291
	$	2,125	$	—	$	—	$	2,125

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 2: (Continued)

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

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

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

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

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

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

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 2: (Continued)

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



(Dollars in thousands)	Three Months Ended									Six Months Ended
	June 30, 2012									June 30, 2012
	Collateralized Debt Obligations			Mortgage Derivatives			Interest Rate Swap			Collateralized Debt Obligations			Mortgage Derivatives			Interest Rate Swap
Beginning Balance	$	872		$	81		$	(1,728	)	$	819		$	(22	)	$	(1,834	)
Total gains or losses (realized/unrealized):
Other-than-temporary impairment included in earnings	(4		)	—			—			(4		)	—			—
Other-than-temporary impairment (included in) transferred from other comprehensive income	(4		)	—			—			(4		)	—			—
Other gains/losses included in other comprehensive income	(14		)	—			(772		)	39			—			(812		)
Net swap settlement recorded	—			—			151			—			—			297
IRLC and FSA issuances	—			448			—			—			95			—
IRLC and FSA expirations and fair value changes included in earnings	—			(180		)	—			—			50			—
IRLC transfers into closed loans/FSA transferred on sales	—			(77		)	—			—			149			—
Ending Balance	$	850		$	272		$	(2,349	)	$	850		$	272		$	(2,349	)
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	$	(4	)	$	—		$	(151	)	$	—		$	—		$	(297	)



	Three Months Ended									Six Months Ended
(Dollars in thousands)	June 30, 2011									June 30, 2011
	Collateralized Debt Obligations			Mortgage Derivatives			Interest Rate Swap			Collateralized Debt Obligations			Mortgage Derivatives		Interest Rate Swap
Beginning Balance	$	866		$	31		$	988		$	934		218		$	817
Total gains or losses (realized/unrealized):
Other-than-temporary impairment included in earnings	(85		)	—			—			(381		)	—		—
Other-than-temporary impairment (included in) transferred from other comprehensive income	87			—			—			143			—		—
Other gains/losses included in other comprehensive income	78			—			(1,049		)	250			—		(907		)
Net swap settlement recorded	—			—			164			—			—		193
IRLC and FSA issuances	—			39			—			—			206		—
IRLC and FSA expirations and fair value changes included in earnings	—			(22		)	—			—			(65	)	—
IRLC transfers into closed loans/FSA transferred on sales	—			(14		)	—			—			(325	)	—
Ending Balance	$	946		$	34		$	103		$	946		34		$	103
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	$	(85	)	$	—		$	(164	)	$	—		—		$	(193	)

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 2: (Continued)

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



	Fair Value at			Valuation	Unobservable			Weighted
(Dollars in thousands)	June 30, 2012			Techniques	Inputs	Range		Average
Collateralized debt obligations	$	850		Discounted cash flow	Discount margin Default rates	15.00% - 25.00% 0.25% - 1.76%		18.63% .74%
Mortgage interest rate lock agreements	309			Discounted cash flow	Pull-through rates	85.00	%	85.00	%
Mortgage forward sale agreements	(37		)	Consensus pricing	Pull-through rates	85.00	%	85.00	%
Interest rate swap	(2,349		)	Discounted cash flow	Discount rate	.52% - 1.10%		0.68	%

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

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

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

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

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



			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	06/30/12 (a)		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	8,245	$	—	$	—	$	8,245
Loan foreclosures	1,855		—		—		1,855
Other real estate	8,732		—		—		8,732

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 2: (Continued)

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



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

(a)

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

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

Fair Value at

Valuation

Unobservable

Weighted

(Dollars in thousands)

June 30, 2012

Techniques

Inputs

Range

Average

Impaired loans

8,245

Appraisals from comparable properties

Adjustments for market conditions since appraisal

$1 thousand -
$559 thousand

$51 thousand

Loan foreclosures

1,855

Appraisals from comparable properties

Adjustments for market conditions since appraisal

$1 thousand - $68 thousand

$25 thousand

Other real estate

8,732

Appraisals from comparable properties

Adjustments for market conditions since appraisal

$9 thousand - $116 thousand

$55 thousand

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

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 2: (Continued)

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



	Three Months Ended				Six Months Ended
	June 30				June 30
(Dollars in thousands)	2012		2011		2012		2011
Impaired loans (a)	$	2,595	$	2,356	$	5,442	$	4,416
Loan foreclosures (b)	1,124		345		1,503		817
Other real estate (c)	536		1,053		1,636		3,107


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


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


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

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

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

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

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 2: (Continued)

Fair Value of Financial Instruments

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



							Fair Value Measurements at June 30, 2012, Using
	June 30, 2012						Quoted Prices In Active Markets For Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	Carrying			Estimated			Quoted Prices In Active Markets For Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Amount			Fair Value			(Level 1)		(Level 2)		(Level 3)
Financial assets:
Cash and short-term investments	$	64,605		$	64,605		$	64,605	$	—	$	—
Securities available for sale	377,670			377,670			—		376,820		850
Loans held for sale	22,291			22,893			—		—		22,893
Loans held for investment	967,286			909,021			—		—		909,021
Agency accounts receivable	201			201			201		—		—
Accrued interest receivable	6,060			6,060			6		1,745		4,309
Nonmarketable equity investments	7,394			7,394			—		—		7,394
Investments in unconsolidated VIEs	3,281			3,281			—		—		3,281
Mortgage derivative assets	576			576			—		—		576
Financial liabilities:
Noninterest-bearing deposits	236,145			236,145			236,145		—		—
NOW, MMDA and savings deposits	719,771			719,771			719,771		—		—
Certificates of deposit	405,422			412,408			—		—		412,408
Short-term borrowings	3,224			3,224			3,224		—		—
Other borrowings	40,333			42,130			—		—		42,130
Junior subordinated debt	30,928			25,250			—		—		25,250
Agency accounts payable	1,518			1,518			1,518		—		—
Accrued interest payable	844			844			844		—		844
Mortgage derivative liabilities	304			304			—		—		304
Other financial instruments:
Commitments to extend credit and letters of credit	(2		)	(319		)	—		—		(319		)
Interest rate swap	(2,349		)	(2,349		)	—		—		(2,349		)

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 2: (Continued)



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

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

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

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

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

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

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 2: (Continued)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 3: Investment Securities

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



			Gross Unrealized
(Dollars in thousands)	Amortized Cost		Gains		Losses		Fair Value
June 30, 2012:
U.S. Government sponsored entities	$	78,698	$	625	$	54	$	79,269
Mortgage-backed investments	216,506		5,236		153		221,589
Obligations of states and political subdivisions	60,287		2,980		87		63,180
Collateralized debt obligations	3,132		—		2,282		850
Other debt securities	12,801		38		57		12,782
	$	371,424	$	8,879	$	2,633	$	377,670
December 31, 2011:
U.S. Government sponsored entities	$	58,714	$	174	$	96	$	58,792
Mortgage-backed investments	198,832		5,016		162		203,686
Obligations of states and political subdivisions	51,763		2,459		80		54,142
Collateralized debt obligations	3,137		—		2,318		819
Other debt securities	3,444		25		134		3,335
	$	315,890	$	7,674	$	2,790	$	320,774

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



(Dollars in thousands)	Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2012:
U.S. Government sponsored entities	$	20,506	$	54	$	—	$	—	$	20,506	$	54
Mortgage-backed investments	20,184		153		—		—		20,184		153
Obligations of states and political subdivisions	7,122		87		—		—		7,122		87
Collateralized debt obligations	—		—		850		2,282		850		2,282
Other debt securities	9,304		32		2,437		25		11,741		57
	$	57,116	$	326	$	3,287	$	2,307	$	60,403	$	2,633
December 31, 2011:
U.S. Government sponsored entities	$	23,734	$	96	$	—	$	—	$	23,734	$	96
Mortgage-backed investments	32,280		162		—		—		32,280		162
Obligations of states and political subdivisions	7,613		80		—		—		7,613		80
Collateralized debt obligations	—		—		819		2,318		819		2,318
Other debt securities	2,317		134		—		—		2,317		134
	$	65,944	$	472	$	819	$	2,318	$	66,763	$	2,790

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 3: (Continued)

At June 30, 2012, there were 13 U.S. government sponsored entity securities with unrealized losses less than 12 months. There were 9 mortgage-backed securities with unrealized losses less than 12 months. There were 20 municipal securities with unrealized losses less than 12 months. There were 7 corporate securities with unrealized losses less than 12 months and 2 corporate securities with unrealized losses more than 12 months. The unrealized losses associated with the U.S. government sponsored entity, mortgage-backed and corporate securities were primarily driven by changes in market rates and not due to the credit quality of the securities. Of the two corporate securities that had unrealized losses extending more than twelve months, one with an unrealized loss of $21 thousand had actually improved its position from a December 31, 2011 unrealized loss of $104 thousand. The municipal securities that were in unrealized loss positions for less than a year were in unrealized loss positions due primarily to fluctuations in interest rates and market liquidity. A review of the municipal securities portfolio did not indicate any credit deterioration.

There are five collateralized debt obligations that represent the majority of unrealized losses in the investment portfolio. These obligations are secured by commercial bank trust preferred securities. Management has evaluated these instruments for impairment as of each quarter end within the accounting guidelines for determining impairments for beneficial interests using the discounted cash flow approach prescribed, which required management to make assumptions concerning the estimates of the ultimate collectability of the contractual cash flows of the beneficial interests owned. Credit downgrades of the beneficial interests are also factored in when determining whether the impairments in these securities are other-than-temporary. The discounted cash flow estimates depend on the expected cash flows that the beneficial interest issuer will receive on its investments in the trust preferred securities (the CDO collateral) of the commercial bank investees. The ability of the banks that issued trust preferred securities to the beneficial interest issuer to pay their obligations is determined based on an analysis of the financial condition of the banks. Generally, the same factors that result in credit rating downgrades of the beneficial interests also result in negative adjustments to the expected cash flows of the underlying collateral. This analysis results in an estimate of the timing and amount of cash flows derived from a determination of how many would default on their obligations and how many would eventually pay off their obligations and the timing of those events. Those estimated cash flows would first pay off more senior beneficial interests if certain collateral coverage ratios are not maintained, with the remaining amounts eventually flowing through to the interests owned by the Company. Based on this type of analysis for each beneficial interest issuer, the cash flows of each of the five beneficial interests owned by the Company are projected and discounted to their present values and compared to the amortized cost book values of the interests. This analysis has resulted in other-than-temporary impairment (OTTI) conditions for all five of the securities since 2008. During the second quarter of 2011, one of the securities incurred other-than-temporary impairments that resulted in $85 thousand in credit-related losses being charged against earnings with the remaining non-credit-related losses being charged to other comprehensive income. During the second quarter of 2012, one of the securities incurred an other-than-temporary impairment of $4 thousand. Management believes that as the economy improves, the deferrals related to the CDO collateral will cure and provide enough cash flows to the CDOs for the Company to recover its adjusted book values.

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

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



	Three Months Ended				Six Months Ended
(Dollars in thousands)	June 30				June 30
	2012		2011		2012		2011
Beginning balance	$	1,863	$	1,528	$	1,863	$	1,232
OTTI credit losses on previously impaired securities	4		85		4		381
Ending balance	$	1,867	$	1,613	$	1,867	$	1,613

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

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 3: (Continued)

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



	Three Months Ended				Six Months Ended
(Dollars in thousands)	June 30				June 30
	2012		2011		2012		2011
Proceeds from sales	$	8,855	$	19,653	$	42,837	$	61,074
Gross realized gains	6		388		688		1,746
Gross realized losses	5		47		96		56
Net gains from sales	$	1	$	341	$	592	$	1,690
Gross recognized losses related to the credit component of other-than-temporary impairments	$	4	$	85	$	4	$	381

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

Securities with a carrying value totaling $218.739 million at June 30, 2012 and $211.988 million at December 31, 2011 were pledged to secure an interest rate swap, public deposits, short-term borrowings and for other purposes required or permitted by law.

The amortized cost and fair values of debt securities available for sale at June 30, 2012, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with, or without, call or prepayment penalties. Mortgage-backed securities receive monthly payments based on the cash flows of the underlying collateral. Therefore, their stated maturities do not represent the timing of principal amounts received and no maturity distributions are shown for these securities.



(Dollars in thousands)	Amortized Cost		Fair Value
One year or less	$	20,830	$	20,928
After one through five years	80,289		81,765
After five through ten years	38,256		39,740
After ten years	15,543		13,648
	154,918		156,081
Mortgage-backed investments	216,506		221,589
	$	371,424	$	377,670

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4: Loans and Allowance for Loan Losses

The Bank's loan portfolio includes commercial, consumer, agricultural and residential loans originated primarily in its markets in central and north Mississippi, southwest Tennessee, central Alabama and the Florida panhandle. The following is a summary of the Bank's loans held for investment, net of unearned income of $1.437 million at June 30, 2012 and $2.045 million at December 31, 2011:



(Dollars in thousands)	June 30, 2012		December 31, 2011
Construction and land development loans	$	67,814	$	69,325
Other commercial real estate loans	499,370		505,180
Asset-based loans	36,689		37,540
Other commercial loans	111,084		117,790
Home equity loans	36,183		37,024
Other 1-4 family residential loans	189,927		186,815
Consumer loans	41,529		42,666
Total loans	$	982,596	$	996,340

The Bank uses loans as collateral for borrowings at the Federal Reserve Bank and a Federal Home Loan Bank. Approximately $11.344 million and $18.005 million of commercial and consumer loans were pledged to a line of credit with the Federal Reserve Bank at June 30, 2012 and December 31, 2011 respectively. Approximately $172.152 million and $216.201 million of individual real estate-secured loans were pledged to the Federal Home Loan Bank at June 30, 2012 and December 31, 2011, respectively.

During the first half of 2011 the Company purchased $821 thousand in commercial real estate loan participations. During the first half of 2012 the Company purchased $2.138 million in agricultural loan participations.

During the first half of 2012 the Company transferred $4.199 million of mortgage loans from held-for-sale status into the portfolio of loans held for investment. During the first half of 2011 the Company transferred $454 thousand of mortgage loans from held-for-sale status into the portfolio of loans held for investment.

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



(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days and Accruing
Construction and land development loans	$	556	$	64	$	1,078	$	1,698	$	66,116	$	67,814	$	—
Other commercial real estate loans	1,155		499		2,832		4,486		494,884		499,370		1,368
Asset based loans	—		—		—		—		36,689		36,689		—
Other commercial loans	433		53		289		775		110,309		111,084		80
Home equity loans	209		80		17		306		35,877		36,183		—
Other 1-4 family residential loans	1,641		567		708		2,916		187,011		189,927		81
Consumer loans	188		37		14		239		41,290		41,529		8
Total	$	4,182	$	1,300	$	4,938	$	10,420	$	972,176	$	982,596	$	1,537

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4: (Continued)

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



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

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



(Dollars in thousands)	June 30, 2012		December 31, 2011
Construction and land development loans	$	1,373	$	4,398
Other commercial real estate loans	2,557		9,937
Asset based loans	—		—
Other commercial loans	629		913
Home equity loans	116		474
Other 1-4 family residential loans	1,748		1,422
Consumer loans	20		33
Total nonaccrual loans	$	6,443	$	17,177
Other real estate owned	31,077		36,952
Total nonperforming credit-related assets	$	37,520	$	54,129

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

Risk rating 10 – Excellent:

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

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

Risk rating 20 – Strong:

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

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4: (Continued)

Risk rating 30 – Good:

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

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

Risk rating 31 – Moderate:

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

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

Risk rating 32 – Fair:

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

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

Risk rating 40 – Special Mention:

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

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

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4: (Continued)

Risk rating 50 – Substandard:

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

Risk rating 60 – Doubtful:

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

Risk rating 70 – Loss:

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

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



(Dollars in thousands)
	Construction		Other Commercial Real Estate		Asset-Based		Other Commercial
10 and 20	$	—	$	—	$	—	$	20,919
30-32	43,604		403,986		24,065		86,496
40	12,838		65,839		11,572		2,298
50	10,772		29,545		1,052		1,296
60	600		—		—		75
Total	$	67,814	$	499,370	$	36,689	$	111,084



(Dollars in thousands)
	Home Equity		Other 1-4 Family		Consumer		Total
10 and 20	$	—	$	114	$	13,291	$	34,324
30-32	34,033		174,642		27,427		794,253
40	977		8,745		605		102,874
50	1,173		6,335		203		50,376
60	—		91		3		769
Total	$	36,183	$	189,927	$	41,529	$	982,596

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4: (Continued)

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



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



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

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

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

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

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4: (Continued)

During the first quarter of 2012 the Company removed the environmental factor in the loss rate applied to pools of commercial loans not individually reviewed for impairment. Due to the switch from a thirteen year average loss calculation to a five year calculation, average loss rates applied to pools of commercial loans increased by 27 basis points from the calculation used at the end of 2011. This increase captured the risks that were manually adjusted into the 2011 loss rate calculations, therefore removing the need for the environmental factor.

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



(Dollars in thousands)
	Recorded Balance		Unpaid Principal Balance		Specific Allowance
Loans without a specific valuation allowance:
Construction and land development loans	$	7,028	$	9,382	$	—
Other commercial real estate loans	37,763		39,601		—
Asset based loans	—		—		—
Other commercial loans	687		713		—
Home equity loans	1,099		1,099		—
Other 1-4 family residential loans	4,187		4,245		—
Consumer loans	112		124		—
Loans with a specific valuation allowance:
Construction and land development loans	$	4,344	$	4,344	$	1,120
Other commercial real estate loans	6,933		6,962		1,372
Asset based loans	—		—		—
Other commercial loans	684		813		496
Home equity loans	74		74		36
Other 1-4 family residential loans	2,239		2,239		520
Consumer loans	94		95		94
Total:
Construction and land development loans	$	11,372	$	13,726	$	1,120
Other commercial real estate loans	44,696		46,563		1,372
Asset based loans	—		—		—
Other commercial loans	1,371		1,526		496
Home equity loans	1,173		1,173		36
Other 1-4 family residential loans	6,426		6,484		520
Consumer loans	206		219		94

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4: (Continued)

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



(Dollars in thousands)	Average Investment In Impaired Loans		Interest Income Recognized		Average Investment In Impaired Loans		Interest Income Recognized
	Quarter-to-Date		Quarter-to-Date		Year-to-Date		Year-to-Date
Loans without a specific valuation allowance:
Construction and land development loans	$	11,818	$	77	$	12,856	$	228
Other commercial real estate loans	35,435		435		34,911		844
Asset based loans	—		—		—		—
Other commercial loans	664		13		669		22
Home equity loans	1,135		13		732		14
Other 1-4 family residential loans	4,159		65		4,716		118
Consumer loans	108		3		119		5
Loans with a specific valuation allowance:
Construction and land development loans	$	4,351	$	70	$	4,491	$	101
Other commercial real estate loans	11,178		168		10,400		229
Asset based loans	—		—		—		—
Other commercial loans	576		1		698		7
Home equity loans	76		4		201		6
Other 1-4 family residential loans	2,561		18		2,460		49
Consumer loans	126		2		87		3
Total:
Construction and land development loans	$	16,169	$	147	$	17,347	$	329
Other commercial real estate loans	46,613		603		45,311		1,073
Asset based loans	—		—		—		—
Other commercial loans	1,240		14		1,367		29
Home equity loans	1,211		17		933		20
Other 1-4 family residential loans	6,720		83		7,176		167
Consumer loans	234		5		206		8

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4: (Continued)

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



(Dollars in thousands)
	Recorded Balance		Unpaid Principal Balance		Specific Allowance
Loans without a specific valuation allowance:
Construction and land development loans	$	13,493	$	18,319	$	—
Other commercial real estate loans	34,100		36,754		—
Asset based loans	—		—		—
Other commercial loans	728		754		—
Home equity loans	721		721		—
Other 1-4 family residential loans	2,835		2,836		—
Consumer loans	452		462		—
Loans with a specific valuation allowance:
Construction and land development loans	$	14,209	$	18,046	$	3,333
Other commercial real estate loans	16,459		18,129		2,658
Asset based loans	—		—		—
Other commercial loans	3,393		3,545		1,341
Home equity loans	—		—		—
Other 1-4 family residential loans	3,286		3,307		1,261
Consumer loans	54		54		40
Total:
Construction and land development loans	$	27,702	$	36,365	$	3,333
Other commercial real estate loans	50,559		54,883		2,658
Asset based loans	—		—		—
Other commercial loans	4,121		4,299		1,341
Home equity loans	721		721		—
Other 1-4 family residential loans	6,121		6,143		1,261
Consumer loans	506		516		40

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4: (Continued)

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



(Dollars in thousands)	Average Investment In Impaired Loans		Interest Income Recognized		Average Investment In Impaired Loans		Interest Income Recognized
	Quarter-to-Date		Quarter-to-Date		Year-to-Date		Year-to-Date
Loans without a specific valuation allowance:
Construction and land development loans	$	9,294	$	115	$	14,894	$	247
Other commercial real estate loans	19,933		290		34,179		774
Asset based loans	—		—		—		—
Other commercial loans	—		—		3,156		79
Home equity loans	730		4		719		4
Other 1-4 family residential loans	2,905		31		3,000		65
Consumer loans	416		7		471		14
Loans with a specific valuation allowance:
Construction and land development loans	$	16,583	$	97	$	14,700	$	193
Other commercial real estate loans	23,563		1		16,656		47
Asset based loans	—		—		—		—
Other commercial loans	5,490		53		3,413		62
Home equity loans	—		—		—		—
Other 1-4 family residential loans	3,725		40		3,291		44
Consumer loans	7		1		56		1
Total:
Construction and land development loans	$	25,877	$	212	$	29,594	$	440
Other commercial real estate loans	43,496		291		50,835		821
Asset based loans	—		—		—		—
Other commercial loans	5,490		53		6,569		141
Home equity loans	730		4		719		4
Other 1-4 family residential loans	6,630		71		6,291		109
Consumer loans	423		8		527		15

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4: (Continued)

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



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

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4: (Continued)

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



(Dollars in thousands)
	Construction			Other CRE			Commercial			Residential			Consumer			Unallocated		Total
Allowance for loan losses:
Balance, beginning of period	$	4,131		$	4,073		$	3,347		$	2,607		$	795		$	—	$	14,953
Provision charged to expense	935			3,146			51			426			2			—		4,560
Losses charged off	(1,506		)	(2,584		)	(479		)	(596		)	(356		)	—		(5,521		)
Recoveries	588			141			104			355			130			—		1,318
Balance, end of period	$	4,148		$	4,776		$	3,023		$	2,792		$	571		$	—	$	15,310
Ending balance:
Individually evaluated for impairment	$	1,120		$	1,372		$	496		$	556		$	94		$	—	$	3,638
Ending balance:
Collectively evaluated for impairment	$	3,028		$	3,404		$	2,527		$	2,236		$	477		$	—	$	11,672
Ending balance:
Loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—	$	—
Loans:
Ending balance	$	67,814		$	499,370		$	147,773		$	226,110		$	41,529		$	—	$	982,596
Ending balance:
Individually evaluated for impairment	$	11,372		$	44,696		$	1,371		$	7,599		$	206		$	—	$	65,244
Ending balance:
Collectively evaluated for impairment	$	56,442		$	454,674		$	146,402		$	218,511		$	41,323		$	—	$	917,352
Ending balance:
Loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—	$	—

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



(Dollars in thousands)
	Construction			Other CRE			Commercial			Residential			Consumer			Unallocated		Total
Allowance for loan losses:
Balance, beginning of period	$	4,426		$	5,280		$	2,856		$	2,946		$	576		$	—	$	16,084
Provision charged to expense	903			700			406			168			103			—		2,280
Losses charged off	(1,414		)	(1,231		)	(271		)	(357		)	(187		)	—		(3,460		)
Recoveries	233			27			32			35			79			—		406
Balance, end of period	$	4,148		$	4,776		$	3,023		$	2,792		$	571		$	—	$	15,310

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4: (Continued)

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



(Dollars in thousands)
	Construction			Other CRE			Commercial			Residential			Consumer			Unallocated		Total
Allowance for loan losses:
Balance, beginning of period	$	3,942		$	2,763		$	4,442		$	3,701		$	1,177		$	—	$	16,025
Provision charged to expense	127			2,092			1,798			566			277			—		4,860
Losses charged off	(331		)	(1,017		)	(1,095		)	(706		)	(440		)	—		(3,589		)
Recoveries	882			264			137			121			105			—		1,509
Balance, end of period	$	4,620		$	4,102		$	5,282		$	3,682		$	1,119		$	—	$	18,805
Ending balance:
Individually evaluated for impairment	$	3,333		$	2,658		$	1,341		$	1,261		$	40		$	—	$	8,633
Ending balance:
Collectively evaluated for impairment	$	1,287		$	1,444		$	3,941		$	2,421		$	1,079		$	—	$	10,172
Ending balance:
Loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—	$	—
Loans:
Ending balance	$	87,826		$	533,720		$	152,063		$	226,823		$	44,163		$	—	$	1,044,595
Ending balance:
Individually evaluated for impairment	$	27,702		$	50,559		$	4,121		$	6,842		$	506		$	—	$	89,730
Ending balance:
Collectively evaluated for impairment	$	60,124		$	483,161		$	147,942		$	219,981		$	43,657		$	—	$	954,865
Ending balance:
Loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—	$	—

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



(Dollars in thousands)
	Construction			Other CRE			Commercial			Residential			Consumer			Unallocated		Total
Allowance for loan losses:
Balance, beginning of period	$	4,124		$	3,165		$	5,023		$	3,606		$	1,125		$	—	$	17,043
Provision charged to expense	13			1,295			421			366			185			—		2,280
Losses charged off	(111		)	(515		)	(255		)	(326		)	(235		)	—		(1,442		)
Recoveries	594			157			93			36			44			—		924
Balance, end of period	$	4,620		$	4,102		$	5,282		$	3,682		$	1,119		$	—	$	18,805

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4: (Continued)

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



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

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



(Dollars in thousands)	June 30, 2012				December 31, 2011
	Recorded Balance		Allowance		Recorded Balance		Allowance
Restructured loans with an allowance:
Construction and land development loans	$	295	$	16	$	136	$	61
Other commercial real estate loans	4,447		603		4,018		320
Other commercial loans	238		238		387		117
Other 1-4 family residential loans	198		80		199		76
Restructured loans without an allowance:
Construction and land development loans	2,282		—		2,725		—
Other commercial real estate loans	11,707		—		17,002		—
Other commercial loans	92		—		119		—
Other 1-4 family residential loans	469		—		1,194		—
Total restructured loans	$	19,728	$	937	$	25,780	$	574

At June 30, 2012, there were $175 thousand in available credit commitments for construction and land development restructured loans. At December 31, 2011, there were $356 thousand in available credit commitments for construction and land development restructured loans.

There were no loans restructured during the second quarter of 2012 or during the first half of 2012. There were no loans restructured during the first quarter of 2011 while there were 11 loans restructured during the second quarter of 2011. The following table summarizes the activity for trouble debt restructurings that occurred in the second quarter of 2011.

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4: (Continued)



(Dollars in thousands)	Number of Loans Modified	Pre Modification Balance		Post Modification Balance
Interest Rate Modifications:
Construction and land development loans	2	$	662	$	662
Total rate modifications	2	$	662	$	662

Term Extensions and Renewals:
Construction and land development loans	2	$	1,004	$	949
Other commercial real estate loans	5	4,188		4,175
Other commercial loans	1	1,828		1,797
Other 1-4 family residential loans	1	153		152
Total extensions and renewals	9	$	7,173	$	7,073
Total loans restructured	11	$	7,835	$	7,735

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



(Dollars in thousands)	Three Months Ended June 30, 2012			Six Months Ended June 30, 2012
	Number of Loans	Amortized Cost		Number of Loans	Amortized Cost
Other commercial loans	—	$	—	1	$	335
Other 1-4 family residential loans	1	152		2	304
Total subsequent defaults	1	$	152	3	$	639

The second quarter and first half of 2012 defaults were 90 day delinquencies and all were term extensions and renewals.

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 5: Other Intangible Assets

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



Core Deposit Intangible
	Three Months Ended						Six Months Ended
(Dollars in thousands)	June 30						June 30
	2012			2011			2012			2011
Beginning Balance	$	4,479		$	4,906		$	4,586		$	5,013
Amortization expense	(106		)	(107		)	(213		)	(214		)
Ending Balance	$	4,373		$	4,799		$	4,373		$	4,799

Estimated future amortization expense
Remainder of 2012	$	214
2013	427
2014	427
2015	427
2016	427
2017	427

Note 6: Borrowing Arrangements

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



(Dollars in thousands)	June 30 2012		December 31 2011
Company’s line of credit in the amount of $5,000,000, maturing in March 2013; secured by approximately 51% of the Bank’s common stock; interest payable quarterly at the prime rate with a floor of 3.50%	$	3,042	$	3,292
Bank’s advances from Federal Home Loan Banks	37,291		39,709
	$	40,333	$	43,001
Company’s junior subordinated debentures, interest payable quarterly at 90-day LIBOR plus 1.33% through March 2036; currently redeemable	$	30,928	$	30,928

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

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 6: (Continued)

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 June 30, 2012 the Bank had approximately $64.869 million in available credit.

The Bank has a line of credit with the Federal Reserve Discount Window collateralized by commercial and consumer loans. The bank had a line of credit of approximately $7.373 million at June 30, 2012, 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 became effective on March 15, 2011, and it terminates on March 15, 2018. The terms of the interest rate swap include fixed interest paid by the Company at a rate of 3.795% and floating interest paid based on 90-day LIBOR plus 1.33%. Based on its analysis, the Company expects the hedge to be highly effective.

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

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

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

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 7: Preferred Stock and Common Stock Warrant

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

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

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

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

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

Accretion of the discount associated with the preferred stock is recognized as an increase to preferred stock dividends in determining net income available to common shareholders. The discount on the Class B, Series A Preferred Stock was being accreted over a five year period using the effective yield method. The discount on the Class B, Series CD Preferred Stock is being accreted over an eight year period. The discount accretion recognized on the Class B, Series CD Preferred Stock was $572 thousand during the first half of 2011. The discount accretion recognized on the Class B, Series CD Preferred Stock was $634 thousand during the first half of 2012.

The following table summarizes preferred stock of the Company:



(Dollars in thousands)			Shares at		Shares at		Carrying Value
(Dollars in thousands)			June 30, 2012		December 31, 2011		June 30, 2012		December 31, 2011
	Rate		Authorized	Outstanding	Authorized	Outstanding	June 30, 2012		December 31, 2011
Class A	—		1,000,000	—	1,000,000	—	$	—	$	—
Class B:			1,000,000		1,000,000
Series A	5	%		—		—	—		—
Series CD	2	%		30,000		30,000	18,198		17,564
							$	18,198	$	17,564

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 8: Pension and Other Employee Benefit Plans

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



(Dollars in thousands)	Balance			2012			Balance
	12/31/11			Amortization			06/30/12
Unamortized actuarial loss	$	4,272		$	(1,068	)	$	3,204
Deferred taxes	(1,593		)	398			(1,195		)
Net unamortized pension costs	$	2,679		$	(670	)	$	2,009

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



	Three Months Ended						Six Months Ended
(Dollars in thousands)	June 30						June 30
	2012			2011			2012			2011
Interest cost	$	102		$	112		$	204		$	224
Expected return on plan assets	(132		)	(141		)	(263		)	(282		)
Amortization of prior service costs	—			(6		)	—			(12		)
Recognized actuarial loss	534			246			1,068			492
Net pension cost	$	504		$	211		$	1,009		$	422

The Company made $108 thousand in contributions to the pension plan during the first six months of 2012. The Company made no contribution to the pension plan during the first six months of 2011. The Company expects to make approximately $406 thousand in contributions to the pension plan during the remainder of 2012.

The Company made $75 thousand in contributions to the ESOP and $322 thousand in matching contributions to the 401k plan during the first six months of 2012. The Company made $75 thousand in contributions to the ESOP and $156 thousand in matching contributions to the 401k plan during the first six months of 2011. During 2012 the Company matched 60% of an employee's first 6% of salary deferral in the 401k plan for all employees with less than three years of credited service and 75% for employees with three years or more of credited service. During the first half of 2011, the matching percentages were 30% and 37.5% respectively.

The Company has a nonqualified deferred compensation plan for certain senior officers. Participants deferred $42 thousand of compensation and received $5 thousand in distributions during the first six months of 2012. Participants deferred $29 thousand of compensation and received $4 thousand in distributions during the first six months of 2011. Employee benefit expenses include charges for earnings increases of $65 thousand for the first six months of 2012 and $47 thousand for the first six months of 2011. The plan incurred $1 thousand of expenses during the first six months of 2012 and $2 thousand during the first six months of 2011. Liabilities of the plan were $600 thousand at June 30, 2012 and $537 thousand at June 30, 2011, substantially all of which were vested.

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 9: Share-based Compensation

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

The following table is a summary of stock awards activity:



	2005 Plan										1999 Plan
			Restricted Stock				Stock Options				Stock Options
	Shares Available For Grant		Number of Shares		Weighted Average Grant Date Fair Value		Number Of Shares		Weighted Average Exercise Price		Number Of Shares		Weighted Average Exercise Price
January 1, 2011	603,634		63,000		$	16.995	16,600		$	12.043	15,800		$	16.018
Awards Granted	(3,000	)	—		—		3,000		4.120		—		—
Vested	—		(6,000	)	16.855		—		—		—		—
Forfeitures	4,800		(3,000	)	17.075		(1,800	)	13.840		—		—
Expired	—		—		—		—		—		—		—
June 30, 2011	605,434		54,000		$	17.006	17,800		$	10.526	15,800		$	16.018
January 1, 2012	613,434		46,000		$	17.032	17,800		$	10.526	15,800		$	16.018
Awards Granted	(428,746	)	428,746		4.510		—		—		—		—
Vested	—		—		—		—		—		—		—
Forfeitures	—		—		—		—		—		(600	)	5.140
Expired	—		—		—		—		—		(5,000	)	12.625
June 30, 2012	184,688		474,746		$	5.723	17,800		$	10.526	10,200		$	18.322
Shares exercisable at June 30, 2012			—		—		12,400		$	12.672	10,200		$	18.322

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

The Company issues restricted stock awards to certain executives and other key employees. The awards vest over periods of one to seven years and are forfeited in their entirety if the officer leaves the Company before the end of the vesting term. 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. In April 2012 the Company granted 298,746 shares of restricted stock to certain officers and other employees. Also during April 2012 the Company granted 130,000 shares of restricted stock to the directors of the Company who are not members of management. The April grants vest over a five year period and may be forfeited if the employee or director leaves before the completion of the vesting period. The 2012 stock grants do not contain any performance conditions. At June 30, 2012, there were $1.863 million in unrecognized compensation costs for all restricted stock grants. The unrecognized costs at June 30, 2012, are expected to be recognized over a weighted-average period of 4.69 years. The Company estimates that 4.00% (0.80% annual rate) of the employee shares and 2.00% (0.40% annual rate) of the director shares will be forfeited in determining net compensation expenses recognized.

As a sublimit under the plan, there are 100,000 shares available for awards to directors who are not employees of the Company at the time of the grant. At the time of the April 2012 grants, 82,200 shares remained available for grants to such directors. The grants of 130,000 shares to non-employee directors would exceed the amount of shares currently available under the applicable sublimit. The Board proposes to amend the sublimit without affecting the total authorized shares under the plan and to seek shareholder approval of the proposed amendment. The amount of these grants in excess of the existing limitation are contingent on shareholder approval of the amendment.

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 second quarter of 2012, 9,377 shares were issued to directors in lieu of fees. For the first six months of 2012, 17,162 shares were issued to directors in lieu of fees.

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 10: Accumulated Other Comprehensive Income (Loss)

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



(Dollars in thousands)	Gross			Tax			Net
June 30, 2012:
Net unrealized gain on securities available for sale	$	8,528		$	3,181		$	5,347
Net unrealized loss on other-than-temporarily impaired securities available for sale	(2,282		)	(851		)	(1,431		)
Net unamortized pension costs	(3,204		)	(1,195		)	(2,009		)
Net unrealized loss on cash flow hedge	(2,349		)	(876		)	(1,473		)
	$	693		$	259		$	434
December 31, 2011:
Net unrealized gain on securities available for sale	$	7,202		$	2,688		$	4,514
Net unrealized loss on other-than-temporarily impaired securities available for sale	(2,318		)	(865		)	(1,453		)
Net unamortized pension costs	(4,272		)	(1,593		)	(2,679		)
Net unrealized loss on cash flow hedge	(1,834		)	(684		)	(1,150		)
	$	(1,222	)	$	(454	)	$	(768	)
June 30, 2011:
Net unrealized gain on securities available for sale	$	7,270		$	2,712		$	4,558
Net unrealized loss on other-than-temporarily impaired securities available for sale	(2,441		)	(910		)	(1,531		)
Net unamortized pension costs	(2,447		)	(913		)	(1,534		)
Net unrealized gain on cash flow hedge	103			39			64
	$	2,485		$	928		$	1,557

Note 11: Regulatory Matters

Federal banking regulations require that the Bank maintain certain cash reserves based on a percent of deposits. This requirement was $2.755 million at June 30, 2012 and $2.258 million at December 31, 2011. The reserve requirements were covered by vault cash of $11.873 million at June 30, 2012 and $12.311 million at December 31, 2011. The Company is also required to hold a clearing balance of $2.000 million with the Federal Reserve. This clearing balance was included in interest bearing bank balances at June 30, 2012 and December 31, 2011.

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

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

As of June 30, 2012, the most recent notification by the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category.

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 11: (Continued)

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



(Dollars in thousands)	Actual				Minimum Capital				Well Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
June 30, 2012:
Total capital (to risk weighted assets):
Company	$	146,734	12.49	%	$	93,985	8.00	%	$	—	—	%
Bank	146,579		12.50	%	93,830		8.00	%	117,287		10.00	%
Tier I capital (to risk weighted assets):
Company	132,041		11.24	%	46,992		4.00	%	—		—	%
Bank	131,910		11.25	%	46,915		4.00	%	70,372		6.00	%
Tier I capital (to average assets):
Company	132,041		8.43	%	62,633		4.00	%	—		—	%
Bank	131,910		8.44	%	62,483		4.00	%	78,104		5.00	%
December 31, 2011:
Total capital (to risk weighted assets):
Company	$	141,434	12.09	%	$	93,564	8.00	%	$	—	—	%
Bank	141,088		12.08	%	93,410		8.00	%	116,762		10.00	%
Tier I capital (to risk weighted assets):
Company	126,810		10.84	%	46,782		4.00	%	—		—	%
Bank	126,488		10.83	%	46,705		4.00	%	70,057		6.00	%
Tier I capital (to average assets):
Company	126,810		8.17	%	62,072		4.00	%	—		—	%
Bank	126,488		8.17	%	61,933		4.00	%	77,416		5.00	%

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

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

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

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

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 12: Income Taxes

Income tax expense was as follows:



	Three Months Ended				Six Months Ended
(Dollars in thousands)	June 30				June 30
	2012		2011		2012		2011
Current income tax expense	$	—	$	1	$	2	$	2
Deferred income tax expense	599		293		1,109		407
Total income tax expense	$	599	$	294	$	1,111	$	409

Net deferred tax assets totaled $12.483 million at June 30, 2012 and $14.115 million at December 31, 2011. Management has reviewed its deferred tax assets and determined that it is more likely than not that the deferred tax assets will be realized in the foreseeable future and therefore no valuation allowance has been accrued.

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



(Dollars in thousands)
	Amount		Expiration Dates
Net operating loss from 2009	$	8,700	2029
Net operating loss from 2010	4,321		2030
Tax credits from 2009	208		2029
Tax credits from 2010	299		2030
Tax credits from 2011	475		2031

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

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

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

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 13: Earnings Per Share

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

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



	Three Months Ended				Six Months Ended
(Dollars in thousands, except per share data)	June 30				June 30
	2012		2011		2012		2011
Net income	$	1,753	$	1,106	$	3,360	$	2,056
Preferred dividends	471		440		934		872
Net income attributable to common stock	1,282		666		2,426		1,184
Net income allocated to common stockholders:
Distributed	92		93		184		185
Undistributed	1,134		568		2,181		991
	$	1,226	$	661	$	2,365	$	1,176
Weighted-average basic common and participating shares outstanding	9,596,919		9,178,201		9,399,697		9,173,888
Less: weighted average participating restricted shares outstanding	432,343		59,934		239,171		60,182
Weighted-average basic shares outstanding	9,164,576		9,118,267		9,160,526		9,113,706
Basic net income per share	0.14		0.07		0.26		0.13
Weighted-average basic common and participating shares outstanding	9,596,919		9,178,201		9,399,697		9,173,888
Add: share-based options and stock warrant	—		—		—		—
	9,596,919		9,178,201		9,399,697		9,173,888
Less: weighted average participating restricted shares outstanding	432,343		59,934		239,171		60,182
Weighted-average dilutive shares outstanding	9,164,576		9,118,267		9,160,526		9,113,706
Dilutive net income per share	0.14		0.07		0.26		0.13
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	29,714		32,848		31,657		32,625
Common stock warrant	513,113		513,113		513,113		513,113

Note 14: Derivative Financial Instruments

In November 2010 the Company entered into an interest rate swap designed to hedge the interest cash flows of its junior subordinated debentures. The swap became effective on March 15, 2011, which is the date on which the junior subordinated debentures switched from a fixed interest rate to a floating interest rate. The maturity date of the swap is March 15, 2018. The Company expects the hedge to be highly effective and it is being accounted for as a cash flow hedge. The unrealized gains and losses of the interest rate swap are being recorded in accumulated other comprehensive income until the interest payment due dates when the balance remaining in other comprehensive income will be removed and charged or credited to interest expense. The swap is designed to make fixed rate payments at 3.795% to the counterparty and receive floating rate payments at three month LIBOR plus 1.33% from the counterparty. Government sponsored entity securities with a fair value of $1.506 million and cash of $1.752 million were pledged as collateral on the swap at June 30, 2012. Government sponsored entity securities with a fair value of $1.505 million and cash of $1.861 million were pledged as collateral on the swap at December 31, 2011.

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

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 14: (Continued)

The following tables summarize the Company’s derivative positions:



	As of June 30, 2012
	Asset Derivatives					Liability Derivatives
(Dollars in thousands)	Balance Sheet Classification	Notional Amount		Fair Value		Balance Sheet Classification	Notional Amount		Fair Value
Derivatives designated in cash flow hedging relationships:
Interest rate swap	Other assets	$	—	$	—	Other liabilities	$	30,000	$	2,349
Derivatives not designated as hedging instruments:
Forward sale agreements	Other assets	22,167		137		Other liabilities	25,484		174
Written interest rate options (locks)	Other assets	17,972		439		Other liabilities	6,955		130
Total derivatives		$	40,139	$	576		$	62,439	$	2,653



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

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



	Three Months Ended June 30, 2012
(Dollars in thousands)	Amount of pre-tax gain (loss) recognized in OCI (Effective Portion)			Classification of gain (loss) reclassified from AOCI into earnings (Effective Portion)	Amount of pre-tax gain (loss) reclassified from AOCI into earnings (Effective Portion)
Derivatives in cash flow hedging relationships:
Interest rate swap	$	(772	)	Interest on junior subordinated debt	$	(151	)
	Classification of gain (loss) recognized in earnings				Amount of pre-tax gain (loss) recognized in earnings
Derivatives not designated as hedging instruments:
Forward sale agreements	Mortgage banking income				$	(299	)
Written interest rate options (locks)	Mortgage banking income				567
Total					$	268

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 14: (Continued)



	Six Months Ended June 30, 2012
(Dollars in thousands)	Amount of pre-tax gain (loss) recognized in OCI (Effective Portion)			Classification of gain (loss) reclassified from AOCI into earnings (Effective Portion)	Amount of pre-tax gain (loss) reclassified from AOCI into earnings (Effective Portion)
Derivatives in cash flow hedging relationships:
Interest rate swap	$	(812	)	Interest on junior subordinated debt	$	(297	)
	Classification of gain (loss) recognized in earnings				Amount of pre-tax gain (loss) recognized in earnings
Derivatives not designated as hedging instruments:
Forward sale agreements	Mortgage banking income				$	(51	)
Written interest rate options (locks)	Mortgage banking income				196
Total					$	145



	Three Months Ended June 30, 2011
(Dollars in thousands)	Amount of pre-tax gain (loss) recognized in OCI (Effective Portion)			Classification of gain (loss) reclassified from AOCI into earnings (Effective Portion)	Amount of pre-tax gain (loss) reclassified from AOCI into earnings (Effective Portion)
Derivatives in cash flow hedging relationships:
Interest rate swap	$	(1,049	)	Interest on junior subordinated debt	$	(164	)
	Classification of gain (loss) recognized in earnings				Amount of pre-tax gain (loss) recognized in earnings
Derivatives not designated as hedging instruments:
Forward sale agreements	Mortgage banking income				$	32
Written interest rate options (locks)	Mortgage banking income				(15		)
Total					$	17



	Six Months Ended June 30, 2011
(Dollars in thousands)	Amount of pre-tax gain (loss) recognized in OCI (Effective Portion)			Classification of gain (loss) reclassified from AOCI into earnings (Effective Portion)	Amount of pre-tax gain (loss) reclassified from AOCI into earnings (Effective Portion)
Derivatives in cash flow hedging relationships:
Interest rate swap	$	(851	)	Interest on junior subordinated debt	$	(165	)
	Classification of gain (loss) recognized in earnings				Amount of pre-tax gain (loss) recognized in earnings
Derivatives not designated as hedging instruments:
Forward sale agreements	Mortgage banking income				$	165
Written interest rate options (locks)	Mortgage banking income				(24		)
Total					$	141

A net settlement payment of $153 thousand was made to the swap counterparty on June 15, 2012. A total of $299 thousand in settlement payments were made to the swap counterparty during the first six months of 2012. The Company estimates that approximately $306 thousand will be recognized as a charge to interest expense during the remainder of 2012 related to the swap. The Company expects approximately $607 thousand related to future swap settlements to be recognized as a charge to interest expense over the next twelve months.

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 15: Variable Interest Entities

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

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

The Company is involved as a limited partner in two low income housing tax credit entities. The Company has determined that it is not the primary beneficiary of these partnerships because it does not have the power to direct the activities of the entity – primarily construction, renovation and property management – that most significantly impact the entity’s economic performance. The Company had a total investment and a total exposure of $2.353 million in these entities at June 30, 2012 and $2.497 million at December 31, 2011. The low income housing tax credit partnership investments are evaluated for impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable.

FIRST M & F CORPORATION

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

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

Forward Looking Statements

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


•	A significant weakening of the economy.


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


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


•	An unanticipated inflationary spike or deflationary decline.


•	A market crash or a highly volatile market.


•	A loss of market liquidity for financial products.


•	Unfavorable judgments in ongoing litigation.


•	Technological disruptions or breaches.


•	Unanticipated catastrophic events or natural disasters.


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


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

Financial Summary

Net income for the second quarter of 2012 was $1.753 million, or $0.14 basic and diluted earnings per share as compared to net income of $1.106 million, or $0.07 basic and diluted earnings per share for the same period in 2011 and net income of $1.607 million or $0.12 basic and diluted earnings per share for the first quarter of 2012. Net income for the first six months of 2012 was $3.360 million or $0.26 basic and diluted earnings per share as compared to net income of $2.056 million or $0.13 basic and diluted earnings per share for the same period in 2011. The major factors contributing to the improvement in earnings for the second quarter of 2012 as compared to the second quarter of 2011 were (1) an increase of $1.483 million in mortgage revenues and (2) a negligible increase in noninterest expenses highlighted by a decrease of $420 thousand in salaries and employee benefits and a $186 thousand decrease in foreclosure expenses. The major factors contributing to the improvement in earnings for the second quarter of 2012 as compared to the first quarter of 2012 were (1) an improvement in the net interest margin from 3.67% to 3.72%, (2) an increase of $1.239 million in mortgage revenues and (2) decreases of $126 thousand in salaries and employee benefits and $174 thousand in foreclosure expenses.

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


•	Debit card revenues increased by 15.75% for the second quarter of 2012 from the second quarter of 2011


•	The net interest margin decreased to 3.72% in the second quarter of 2012 from 3.75% in the second quarter of 2011


•	Loans held for investment were down by $61.999 million from the June 30, 2011 balance


•	Nonaccrual loans were 0.64% of total loans at June 30, 2012 as compared to 3.13% at June 30, 2011


•	Annualized net charge-offs were 1.26% for the second quarter of 2012 as compared to 0.20% for the second quarter of 2011


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


•	As a result of branch closings and other cost-saving initiatives, full-time equivalent employees dropped from 510 employees at June 30, 2011 to 468 employees at June 30, 2012

FIRST M & F CORPORATION

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

(Net change, in thousands)



	Loans			Non-Interest Bearing Deposits			Interest Bearing Deposits
2nd Qtr 2011	$	(6,666	)	$	35,169		$	(10,746	)
3rd Qtr 2011	(29,629		)	(21,584		)	(19,056		)
4th Qtr 2011	(18,626		)	9,676			(22,072		)
1st Qtr 2012	(16,845		)	6,885			32,160
2nd Qtr 2012	3,101			(2,458		)	(46,712		)

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

(Net amount, in thousands)



	Net Interest Income		Loan Loss Accruals		Non-Interest Income		Non-Interest Expense
2nd Qtr 2011	$	13,271	$	2,280	$	4,712	$	14,303
3rd Qtr 2011	13,225		2,580		5,219		14,143
4th Qtr 2011	12,643		2,280		5,912		15,077
1st Qtr 2012	12,964		2,280		5,421		13,986
2nd Qtr 2012	12,916		2,280		6,035		14,319

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



	2nd Qtr 2012		1st Qtr 2012		4th Qtr 2011		3rd Qtr 2011		2nd Qtr 2011
Net interest income	$	1.41	$	1.42	$	1.38	$	1.45	$	1.45
Loan loss expense	0.25		0.25		0.25		0.28		0.25
Noninterest income	0.66		0.59		0.65		0.57		0.52
Noninterest expense	1.56		1.53		1.65		1.55		1.57
Net income before taxes	$	0.26	$	0.23	$	0.13	$	0.19	$	0.15

FIRST M & F CORPORATION

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



	2nd Qtr 2012		1st Qtr 2012		4th Qtr 2011		3rd Qtr 2011		2nd Qtr 2011
Net interest margin	3.72	%	3.67	%	3.64	%	3.72	%	3.75	%
Efficiency ratio	74.70	%	75.18	%	80.29	%	75.76	%	78.56	%
Return on assets	0.45	%	0.40	%	0.25	%	0.33	%	0.28	%
Return on total equity	6.27	%	5.84	%	3.54	%	4.78	%	4.07	%
Return on common equity	5.46	%	4.95	%	2.27	%	3.76	%	2.90	%
Noninterest income to avg. assets	1.54	%	1.36	%	1.50	%	1.30	%	1.18	%
Noninterest income to revenues (1)	31.48	%	29.14	%	31.48	%	27.96	%	25.88	%
Noninterest expense to avg assets	3.65	%	3.50	%	3.82	%	3.52	%	3.59	%
Salaries and benefits to total noninterest expense	47.05	%	49.07	%	45.76	%	52.72	%	50.04	%
Nonaccrual loans to loans	0.64	%	1.45	%	1.68	%	2.59	%	3.13	%
90 day past due loans to loans	0.15	%	0.02	%	0.06	%	0.02	%	0.07	%
Annualized net charge offs as a percent of average loans	1.26	%	0.47	%	1.37	%	2.03	%	0.20	%


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

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



(Dollars in thousands)	2nd Qtr 2012		1st Qtr 2012		4th Qtr 2011		3rd Qtr 2011		2nd Qtr 2011
Mortgage originations	$	38,693	$	30,508	$	41,297	$	25,863	$	12,194
Trust revenues	46		41		43		56		43
Retail investment revenues	117		99		110		90		109
Revenues per FTE employee	41		40		39		37		37
Agency commissions per agency FTE employee (1)	22		22		20		26		24

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

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



	2nd Qtr 2012	1st Qtr 2012	4th Qtr 2011	3rd Qtr 2011	2nd Qtr 2011
Full-time equivalent employees	468	460	460	496	510
Number of noninterest-bearing deposit accounts	31,980	32,081	32,332	32,587	32,609

FIRST M & F CORPORATION

Net Interest Income

Net interest income before loan loss expenses for the first six months of 2012 was $25.880 million as compared to $25.996 million for the first six months of 2011. For the first six months of 2012 compared to 2011: earning asset yields decreased by 37 basis points, liability costs decreased by 43 basis points, the net interest spread increased by 6 basis points and the net interest margin increased by 2 basis points.

Net interest income before loan loss expenses for the second quarter of 2012 was $12.916 million as compared to $13.271 million for the second quarter of 2011 and $12.964 million for the first quarter of 2012. For the second quarter of 2012 compared to the same quarter of 2011: earning asset yields decreased by 43 basis points, liability costs decreased by 39 basis points, the net interest spread decreased by 4 basis points and the net interest margin decreased by 3 basis points. For the second quarter of 2012 compared to the first quarter of 2012: earning asset yields remained unchanged, liability costs decreased by 5 basis points, the net interest spread increased by 5 basis points and the net interest margin increased by 5 basis points.

Balance sheet dynamics affecting the comparative net interest margins for the first six months of 2012 compared to 2011 include (1) a decrease of 7.10% in average loans held for investment, (2) a decrease in average loans as a percentage of earning assets from 72.47% in the first six months of 2011 to 68.30% in the first six months of 2012, (3) a decrease in average interest-bearing deposits of 1.84%, (4) a decrease in average other borrowings of 8.12% and (5) an increase in average noninterest-bearing deposits as a percentage of total assets from 13.21% in 2011 to 14.39% in 2012.

Balance sheet dynamics affecting the comparative net interest margins for the second quarter of 2012 compared to 2011 include (1) a decrease of 7.29% in average loans held for investment, (2) a decrease in average loans held for investment as a percentage of earning assets from 72.69% in the second quarter of 2011 to 68.54% in the second quarter of 2012, (3) a decrease in average interest-bearing deposits of 2.81%, (4) a decrease in average other borrowings of 7.32% and (5) an increase in average noninterest-bearing deposits as a percentage of total assets from 13.52% in 2011 to 14.75% in 2012.

Balance sheet dynamics affecting the comparative net interest margins for the second quarter of 2012 compared to the first quarter of 2012 include (1) a decrease of 1.04% in average loans held for investment, (2) an increase in average loans held for investment as a percentage of earning assets from 68.07% in the first quarter of 2012 to 68.54% in the second quarter of 2012, (3) a decrease in average interest-bearing deposits of 3.11%, (4) a decrease in average other borrowings of 1.83% and (5) an increase in average noninterest-bearing deposits as a percentage of total assets from 14.04% in the first quarter of 2012 to 14.75% in the second quarter of 2012.

Yield and cost dynamics affecting the comparative net interest margins for the first six months of 2012 compared to 2011 include (1) a decrease of 20 basis points in yields on loans held for investment and for sale, (2) a decrease of 49 basis points in investment and short-term funds yields, (3) a decrease of 43 basis points in costs of deposits and (4) an increase of 7 basis points in costs of borrowings.

Yield and cost dynamics affecting the comparative net interest margins for the second quarter of 2012 compared to 2011 include (1) a decrease of 24 basis points in yields on loans held for investment and for sale, (2) a decrease of 50 basis points in investment and short-term funds yields, (3) a decrease of 42 basis points in costs of deposits and (4) an increase of 31 basis points in costs of borrowings.

Yield and cost dynamics affecting the comparative net interest margins for the second quarter of 2012 compared to the first quarter of 2012 include (1) a decrease of 13 basis points in yields on loans held for investment and for sale, (2) an increase of 15 basis point in investment and short-term funds yields, (3) a decrease of 7 basis points in costs of deposits and (4) an increase of 32 basis points in costs of borrowings.

Net interest income for the second quarter of 2012 was down minimally as compared to the first quarter of 2012 as earning asset yields remained unchanged at 4.57%, earning assets declined driven by interest-bearing deposit declines, and liability costs decreased by fewer basis points than any quarter since the fourth quarter of 2008. The stabilization in earning asset yields occurred as short-term interest-bearing cash was moved into the investment portfolio and the average balances of loans held for investment and held for sale stabilized with little downward movement from the first quarter. The slowdown in liability costs from the first to second quarter was due to a smaller quarterly decrease in certificate of deposit costs, 8 basis points as compared to 21 basis points, and an increase in borrowing costs. The small decline in the cost of certificates of deposit was a result of a stabilization of offered rates with first quarter pricing.

FIRST M & F CORPORATION

Net interest income for the second quarter for 2012 as compared to the second quarter of 2011 decreased due primarily to trends that were prevalent throughout 2011. Earning assets decreased from the second quarter of 2011 to the second quarter of 2012 while the net interest margin decreased from 3.75% to 3.72%. A mitigating factor to the decline in net interest income from the second quarter of 2011 to 2012 has been the change in asset and liability mix. Short-term interest-bearing funds decreased from 6.67% of average earning assets to 3.24% as cash was invested for better returns with minimal reduction in liquidity. Certificates of deposit declined from 38.99% of interest-bearing liabilities to 32.96% while other interest-bearing deposits, which are the most price-sensitive liabilities, increased from 54.21% to 60.92%.

Net interest income for the first half of 2012 as compared to the first half of 2011 decreased due to several factors related to those mentioned above. Average earning assets declined by $20.953 million while interest-bearing liabilities declined by $40.450 million - producing more financial leverage from noninterest-bearing demand deposits. Earning asset yields declined by 37 basis points from the first half of 2011 to the first half of 2012 while the net interest margin declined by only 2 basis points. The change in the net interest margin tracked the change in the average 3-month Treasury rate, which declined by 1 basis point. Alternatively, the change in earning asset yields tracked the change in the average 2-year Treasury rate, which declined by 34 basis points. The spread between the yield on earning assets and the average AAA corporate debt rate was negative 14 basis points for the first half of 2011, indicating the dominance of non-loan assets in the balance sheet mix. However, for the first half of 2012, the spread between earning asset yields and the average AAA corporate debt rate was a positive 72 basis points. Although yields on loans held for investment decreased from 5.88% during the first half of 2011 to 5.74% during the first half of 2012, the pricing was actually stronger as the spread between these loan yields and the average AAA corporate debt rate increased from 80 basis points during the first half of 2011 to 189 basis points during the first half of 2012. However, as the long end of the yield curve continues to flatten, loans will tend to reprice downward. A mitigating factor to this trend is that the market appears to be pricing corporate credit risk as the spread between the average AAA corporate debt rate and the 10-year Treasury yield increased from 174 basis points during the first half of 2011 to 192 basis points during the first half of 2012, indicating that below-prime pricing for generally unsecured debt is a rare event. The strength of the economy, especially with respect to how it affects consumer spending and the ability of small businesses to grow, will be the primary driver of loan growth over the next year. Loan growth will be necessary to stabilize earning asset yields over time, which will influence the trend of the net interest margin.

FIRST M & F CORPORATION

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



	Yields/Costs				Yields/Costs
	2nd Quarter, 2012		1st Quarter, 2012		2nd Quarter, 2011		1st Quarter, 2011
Interest bearing bank balances	0.37	%	0.26	%	0.26	%	0.22	%
Federal funds sold	0.27		0.25		0.25		0.25
Taxable investments	1.88		2.00		2.95		2.88
Tax-exempt investments	5.59		5.83		5.98		5.98
Loans held for sale	3.22		3.06		3.75		3.85
Loans held for investment	5.69		5.80		5.85		5.92
Earning asset yield	4.57		4.57		5.00		4.93
Interest checking	0.43		0.46		0.71		0.81
Money market deposits	0.37		0.52		0.77		0.85
Savings deposits	0.95		0.99		1.12		1.21
Certificates of deposit	1.31		1.39		1.76		1.86
Short-term borrowings	0.62		0.48		0.34		0.25
Other borrowings	4.21		3.97		4.15		4.97
Cost of interest-bearing liabilities	0.98		1.03		1.37		1.51
Net interest spread	3.59		3.54		3.63		3.42
Effect of non-interest bearing deposits	0.16		0.16		0.20		0.21
Effect of leverage	(0.03	)	(0.03	)	(0.08	)	(0.04	)
Net interest margin, tax-equivalent	3.72		3.67		3.75		3.59
Less: Tax equivalent adjustments:
Investments	0.05		0.05		0.05		0.05
Loans	0.01		0.01		0.02		0.01
Reported book net interest margin	3.66	%	3.61	%	3.68	%	3.53	%

The following table shows the components of the net interest margin for the first six months of 2012 and 2011:
	Yields/Costs
	YTD June 2012		YTD June 2011
Interest bearing bank balances	0.29	%	0.24	%
Federal funds sold	0.26		0.25
Taxable investments	1.94		2.92
Tax-exempt investments	5.71		5.98
Loans held for sale	3.15		3.81
Loans held for investment	5.74		5.88
Earning asset yield	4.57		4.94
Interest checking	0.45		0.76
Money market deposits	0.45		0.81
Savings	0.97		1.17
Certificates of deposit	1.35		1.81
Short-term borrowings	0.53		0.27
Other borrowings	4.09		4.56
Cost of interest-bearing liabilities	1.01		1.44
Net interest spread	3.56		3.50
Effect of non-interest bearing deposits	0.16		0.21
Effect of leverage	(0.03	)	(0.04	)
Net interest margin, tax-equivalent	3.69		3.67
Less: Tax equivalent adjustments:
Investments	0.05		0.05
Loans	0.01		0.01
Reported book net interest margin	3.63	%	3.61	%

FIRST M & F CORPORATION

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



(Dollars in thousands)
	2nd Quarter,			1st Quarter,			2nd Quarter,			1st Quarter,
	2012			2012			2011			2011
Interest bearing bank balances	$	30,923		$	79,212		$	71,291		$	93,864
Federal funds sold	15,082			25,000			25,000			25,000
Taxable investments	333,794			299,622			262,915			249,061
Tax-exempt investments	36,610			34,969			32,407			33,939
Loans held for sale	30,416			22,729			2,928			4,265
Loans held for investment	973,545			983,800			1,050,136			1,056,903
Earning assets	1,420,370			1,445,332			1,444,677			1,463,032
Other assets	157,050			161,681			154,194			159,331
Total assets	$	1,577,420		$	1,607,013		$	1,598,871		$	1,622,363
Interest checking	$	404,958		$	419,260		$	400,942		$	402,801
Money market deposits	217,533			226,602			167,657			161,581
Savings deposits	121,778			120,835			117,783			115,815
Certificates of deposit	402,703			417,086			493,722			514,184
Short-term borrowings	2,974			5,054			8,637			23,917
Other borrowings	71,771			73,107			77,440			80,261
Interest-bearing liabilities	1,221,717			1,261,944			1,266,181			1,298,559
Noninterest-bearing deposits	232,744			225,610			216,227			209,352
Other liabilities	10,493			8,714			7,552			6,819
Stockholders’ equity	112,466			110,745			108,911			107,633
Liabilities and stockholders’ equity	$	1,577,420		$	1,607,013		$	1,598,871		$	1,622,363
Loans to earning assets	68.54		%	68.07		%	72.69		%	72.24		%
Loans to assets	61.72		%	61.22		%	65.68		%	65.15		%
Earning assets to assets	90.04		%	89.94		%	90.36		%	90.18		%
Noninterest-bearing deposits to assets	14.75		%	14.04		%	13.52		%	12.90		%
Equity to assets	7.13		%	6.89		%	6.81		%	6.63		%

FIRST M & F CORPORATION

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



(Dollars in thousands)
	YTD June 2012			YTD June 2011
Interest bearing bank balances	$	55,067		$	82,515
Federal funds sold	20,041			25,000
Taxable investments	316,708			256,026
Tax-exempt investments	35,790			33,169
Loans held for sale	26,573			3,593
Loans held for investment	978,672			1,053,501
Earning assets	1,432,851			1,453,804
Other assets	159,365			156,748
Total assets	$	1,592,216		$	1,610,552
Interest checking	$	412,108		$	401,866
Money market deposits	222,067			164,635
Savings deposits	121,307			116,805
Certificates of deposit	409,895			503,896
Short-term borrowings	4,014			16,235
Other borrowings	72,439			78,843
Interest-bearing liabilities	1,241,830			1,282,280
Noninterest-bearing deposits	229,177			212,809
Other liabilities	9,603			7,188
Stockholders’ equity	111,606			108,275
Liabilities and stockholders’ equity	$	1,592,216		$	1,610,552
Loans to earning assets	68.30		%	72.47		%
Loans to assets	61.47		%	65.41		%
Earning assets to assets	89.99		%	90.27		%
Noninterest-bearing deposits to assets	14.39		%	13.21		%
Equity to assets	7.01		%	6.72		%

Provision for Loan Losses

The accrual for the provision for loan losses for the second quarter of 2012 was $2.280 million as compared to $2.280 million for the first quarter of 2012 and $2.280 million for the second quarter of 2011. Net charge-offs were $3.054 million for the second quarter of 2012 as compared to $1.149 million for the first quarter of 2012 and $.518 million for the second quarter of 2011. The accrual for the provision for loan losses for the first half of 2012 was $4.560 million as compared to $4.860 for the same period in 2011. Net charge-offs were $4.203 million for the first half of 2012 as compared to $2.080 for the same period in 2011. The allowance for loan losses as a percentage of loans was 1.56% at June 30, 2012, 1.50% at December 31, 2011, and 1.80% at June 30, 2011.

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

FIRST M & F CORPORATION

Non Interest Income

Noninterest income, excluding securities transactions, was $6.038 million for the second quarter of 2012 as compared to $4.456 million for the same period in 2011 and $4.830 million in the first quarter of 2012. For the second quarter of 2012 as compared to the second quarter of 2011: (1) deposit revenues increased by $75 thousand, (2) mortgage banking revenues increased by $1,483 thousand and (3) agency commissions decreased by $88 thousand. For the second quarter of 2012 as compared to the first quarter of 2012: (1) deposit revenues increased by $91 thousand, (2) mortgage banking revenues increased by $1,239 thousand and (3) agency commissions increased by $19 thousand.

The second quarter of 2012 showed an increase of 3.03% from the second quarter of 2011 and a 3.70% increase from the first quarter of 2012 in deposit revenues. Overdraft fee revenues, which comprise approximately 52% of deposit revenues, decreased by 2.88% from the second quarter of 2011 to the second quarter of 2012 and decreased by .60% from the first quarter of 2012 to the second quarter of 2012. On August 1, 2011 the Company increased the per item charge for overdrafts by $6 per item. The year-over-year positive impact of the fee increase was fully offset by a 19.12% decline in overdraft items processed. Overdraft fee revenues declined by $8 thousand from the first quarter of 2012 to the second quarter of 2012, primarily due to decreased volumes. Overdraft fees are per item charges applied to each check paid on an overdrawn account or returned. The per item fee is determined by the Company’s pricing committee and is based primarily on the competitive market prices as well as on costs associated with processing the items.

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

Debit card revenues increased by 15.75% from the second quarter of 2011 to the second quarter of 2012 and increased by 11.92% from the first quarter of 2012 to the second quarter of 2012 as monthly transaction volumes have increased steadily since February 2012. The Dodd-Frank Act includes measures that allow the Federal Reserve to define limits on large banks for interchange fees that may be charged on debit cards. The Federal Reserve issued a final rule on June 29, 2011, setting the fee cap at $.21 per transaction plus 5 basis points multiplied by the value of the transaction, with an additional potential fee of $.01 per transaction as a fraud-prevention reimbursement. The fee caps only apply to banks with $10 billion or more in total assets. The final rule went into effect on October 1, 2011. The Company has not experienced any direct or indirect negative consequences from the implementation of the fee caps. The following table shows the components of deposit account income:



	Three Months Ended				Six Months Ended
(Dollars in thousands)	June 30				June 30
	2012		2011		2012		2011
Service charge revenues	$	284	$	299	$	570	$	602
Debit/ATM card revenues	948		819		1,795		1,640
Overdraft fee revenues	1,316		1,355		2,640		2,689
Service charges on deposit accounts	$	2,548	$	2,473	$	5,005	$	4,931

FIRST M & F CORPORATION

Mortgage banking income increased by 459.13% from the second quarter of 2011 to the second quarter of 2012 and increased by 218.52% from the first quarter of 2012 to the second quarter of 2012. Mortgage originations increased by 217.31% from the second quarter of 2011 to the second quarter of 2012 and increased by 26.83% from the first quarter of 2011 to the second quarter of 2012.

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



(Dollars in thousands)										YTD			YTD
	2Q12			1Q12			2Q11			June 2012			June 2011
Non-interest income:
Retail revenues	$	1,110		$	280		$	323		$	1,390		$	679
Selected non-interest expenses: (a)
Recourse expenses	74			6			—			80			—
Closing and shipping expenses	182			143			94			325			196
Origination-related expenses	256			149			94			405			196
Adjusted revenues	$	854		$	131		$	229		$	985		$	483

Retail originations	$	23,898		$	17,434		$	12,194		$	41,332		$	24,746
Retail sales	$	25,123		$	16,095		$	12,478		$	41,218		$	28,695

Adjusted revenues / dollar sales	3.40		%	0.81		%	1.84		%	2.39		%	1.68		%

Non-interest income:
Wholesale revenues	$	696		$	287		$	—		$	983		$	—
Selected non-interest expenses: (a)
Broker fees	368			203						571			—
Recourse expenses	86			—			—			86			—
Closing and shipping expenses	132			70			—			202			—
Origination-related expenses	586			273			—			859			—
Adjusted revenues	$	110		$	14		$	—		$	124		$	—

Wholesale originations	$	14,795		$	13,074		$	—		$	27,869		$	—
Wholesale sales	$	18,055		$	9,605		$	—		$	27,660		$	—

Adjusted revenues / dollar sales	0.61		%	0.15		%	—			0.45		%	—

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

Conventional 30-year mortgage rates fell steadily by 91 basis points throughout 2011, ending the year at 3.95%. Rates were volatile during the first quarter of 2012 but ended relatively flat as compared to the beginning of the year. Mortgage rates steadily declined during the second quarter of 2012, ending the quarter 42 basis points lower than their high point in late March. The 30-year mortgage rate ended the second quarter at 3.66% after beginning the year at 3.95%. The rate decline triggered the increases in origination volumes for the first half of 2012. Management expects mortgage origination volumes to remain steady until the economy strengthens to the point that long-term rates are allowed to move up.

Agency commission income decreased by 9.40% from the second quarter of 2011 to the second quarter of 2012 and increased by 2.29% from the first quarter of 2012 to the second quarter of 2012. Property and casualty commissions decreased by $61 thousand while life and health commissions decreased by $25 thousand and annuity commissions decreased by $2 thousand for the second quarter of 2012 as compared to the second quarter of 2011. Property and casualty commissions increased by $46 thousand while life and health commissions decreased by $27 thousand for the second quarter of 2012 as compared to the first quarter of 2012. Insurance commission volumes are expected to be influenced by the strength of the economy, competitive pricing pressures and sales efforts.

FIRST M & F CORPORATION

The Company had sales and calls of $7.993 million of U.S. government-sponsored entity (GSE) securities for a net gain of $6 thousand during the second quarter of 2012. The Company also had sales and calls of $859 thousand of municipal securities for a net loss of $5 thousand during the second quarter of 2012. The Company had sales and calls of $15.851 million of GSE securities for a net loss of $20 thousand during the first quarter of 2012. The Company also had sales and calls of $17.115 million of mortgage-backed securities for net gains of $596 thousand during the first quarter of 2012. The Company also had sales and calls of $425 thousand of municipal securities for net gains of $15 thousand during the first quarter of 2012. The first quarter sales of mortgage-backed securities were primarily done for capital preservation. The first quarter GSE losses were due primarily to called securities. The gains and losses arising during the second quarter of 2012 were all due to called securities. The Company had sales and calls of $28.408 million of GSE securities for a net gain of $282 thousand during the first half of 2011. The Company also had sales and calls of $29.746 million of mortgage-backed securities for a net gain of $1.408 million during the first half of 2011. The Company also had calls of $391 thousand of corporate debt securities for a net gain of $7 thousand and calls of $1.117 million of municipal securities for net losses of $7 thousand during the first half of 2011. Approximately 80% of the 2011 sales occurred during the first quarter while approximately 60% of the calls occurred during the second quarter. Sales of GSE and mortgage-backed securities during the first quarter dominated investment gains, which were generated to support earnings and preserve capital.

The Company owns five separate beneficial interests in collateralized debt obligations that own bank trust preferred securities. These beneficial interests are tested for impairment on a quarterly basis. All of the beneficial interests have incurred other-than-temporary impairments since 2008. Four of the beneficial interests - Trapeza I, Trapeza II, Trapeza V and MM Community Funding IX - are deferring their interest payments and are in nonaccrual status. The Trapeza V, Tpref Funding II and MM Community Funding IX beneficial interests failed impairment tests during the first half of 2011. The Tpref Funding II beneficial interest failed an impairment test during the second quarter of 2012. The total amount of interest that would have been earned by the four securities that were in nonaccrual status during the first half of 2012 was $49 thousand and for the first half of 2011 was $36 thousand.

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

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



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

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



(Dollars in thousands)	Other-Than-Temporary Impairment Charged Against Earnings				Other-Than-Temporary Impairment Charged To (Reclassified From) Other Comprehensive Income
Name of Issuer	1st Quarter		2nd Quarter		1st Quarter			2nd Quarter
Tpref Funding II	$	69	$	—	$	(72	)	$	—
Trapeza V 2003-5A	224		—		35			—
MM Community Funding IX	3		85		(18		)	(87		)
Total	$	296	$	85	$	(55	)	$	(87	)

FIRST M & F CORPORATION

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



As of June 30, 2012
(Dollars in thousands)
Name of Issuer	Class	Book Value		Fair Value		Unrealized Loss		Moody's Credit Rating	Number of Banks in Issuance	Deferrals and Defaults as a Percent of Collateral		Excess Subordination
Trapeza I 2002-1A	C1	$	474	$	103	$	371	C	22	43.33	%	—	%
Trapeza II 2003-2A	C1	988		267		721		Ca	36	38.43	%	—	%
Tpref Funding II	B	710		211		499		Caa3	34	38.81		—	%
Trapeza V 2003-5A	C1	608		128		480		Ca	42	33.97	%	—	%
MM Community Funding IX	B1	352		141		211		Caa3	31	50.68		—	%
		$	3,132	$	850	$	2,282

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

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



(Dollars in thousands)	2Q2012		1Q2012		2Q2011		1Q2011
Agency profit-sharing revenues	$	10	$	132	$	3	$	254
Loan fees	76		178		100		101
Gains on disposals of branch properties	44		—		—		—
All other income	361		340		293		301
Total other income	$	491	$	650	$	396	$	656

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

The Company has a strategy to increase noninterest revenues as a proportion of total revenues over time. Noninterest revenues as a percentage of total revenues decreased from 25.88% in the second quarter of 2011 to 31.48% in the second quarter of 2012, and decreased from 29.14% in the first quarter of 2012 to 31.48% in the second quarter of 2012. Another metric that the Company monitors is revenues per full-time employee, which were approximately $41 thousand per employee for the second quarter of 2012, $40 thousand for the first quarter of 2012, $37 thousand for the second quarter of 2011 and $38 thousand for the first quarter of 2011. Insurance product revenues per producer decreased to $22 thousand per producer for the second quarter of 2012 from $24 thousand per producer for the second quarter of 2011. Management’s strategic focus is to improve revenues generated per employee while maintaining stability in revenue growth by increasing the mix of noninterest revenues to total revenues.

FIRST M & F CORPORATION

Non Interest Expense

Noninterest expenses increased by .11% from the second quarter of 2011 to the second quarter of 2012 and increased by 2.38% from the first quarter of 2012 to the second quarter of 2012.

Salary and benefit expenses, which comprise approximately 47% of noninterest expenses, decreased by 5.87% from the second quarter of 2011 to the second quarter of 2012 and decreased by 1.84% from the first quarter of 2012 to the second quarter of 2012. The number of full-time equivalent employees was 468 at June 30, 2012, 460 at December 31, 2011, 510 at June 30, 2011, and 489 at December 31, 2010. The decrease in salary and benefit expenses from the first half of 2011 to the first half of 2012 was due primarily to restructuring efforts initiated during the third quarter of 2011. The restructuring project called for the closure of five branches, the sale of up to two branches and a reduction in staffing of approximately 55 positions. Four branches were closed in Mississippi and one was closed in Alabama although no markets were exited. A sale of the Niceville, Florida branch location closed during the second quarter of 2012. Substantially all of the staffing reductions occurred during the third and fourth quarters of 2011 with severance costs of $238 thousand being incurred. For the second quarter of 2012 compared to the first quarter of 2012: (1) salaries were up by $193 thousand due to employee raises being granted in April, (2) commission expenses were up by $157 thousand due to increased mortgage production, (3) stock-based compensation expenses were up by $85 thousand due to new stock grants issued in April, (4) deferred loan costs were up by $172 thousand due to higher commercial and commercial real estate loan origination volumes (these deferred costs reduce salary expenses and are capitalized, net of origination fees, to the originated loan and subsequently amortized to loan interest income as a yield adjustment) and (5) health plan costs decreased by $253 thousand as the estimate for the effect of claims was reduced by $200 thousand in the second quarter.

During April 2012, restricted stock grants totaling 298,746 shares were issued to employees and grants totaling 130,000 shares were issued to directors. The grants have five-year cliff vesting lives. The employee grants are being recognized over their vesting periods in salary and benefits expenses. The director grants are being recognized over their vesting periods in other expenses.

Foreclosed property expenses decreased from the second quarter of 2011 to the second quarter of 2012 due primarily to lower write-downs. The second quarter losses were the result of sales of $4.787 million of foreclose properties as compared to first quarter sales of $2.810 million of properties. Management expects expenses and losses related to foreclosed properties to continue to be a significant expense through 2012 as the Company continues to foreclose on non-performing loans and dispose of the properties in a weak real estate market.

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



(Dollars in thousands)	2Q2012			1Q2012			2Q2011			1Q2011
Losses (gains) on sales of other real estate	$	495		$	123		$	124		$	(36	)
Write-downs of other real estate	536			1,100			1,053			2,054
Other real estate expenses	288			304			327			359
Rental income on other real estate properties	(37		)	(71		)	(36		)	(24		)
Total foreclosed property expenses	$	1,282		$	1,456		$	1,468		$	2,353

FIRST M & F CORPORATION

FDIC insurance assessments decreased by 4.16% from the second quarter of 2011 to the second quarter of 2012 and increased by 7.59% from the first quarter of 2012 to the second quarter of 2012. The primary cause of the expense decrease for the first half of 2012 as compared to 2011 was the effect of the change in assessment base and assessment rate as prescribed by the Dodd-Frank Act. The FDIC, as required by the Dodd-Frank Act, redefined the deposit assessment insurance base effective April 1, 2011. The new assessment base is generally defined as average consolidated assets minus average tangible equity, subject to adjustments for unsecured debt and brokered deposits. The new base assessment rate applicable to the adjusted asset base is generally 14 basis points annually. The previous base assessment rate applicable to the adjusted deposit base was generally 22 basis points annually. The first to second quarter increase in 2012 was due to higher estimated average adjusted assets.

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



(Dollars in thousands)	2Q2012		1Q2012		2Q2011		1Q2011
Postage and shipping	$	224	$	234	$	232	$	239
Supplies	214		185		182		180
Legal expenses	274		292		250		174
Other professional expenses	324		334		267		205
Insurance expenses	141		275		104		248
Debit card processing expenses	220		205		194		192
Mortgage processing expenses	842		422		94		102
All other expenses	1,213		884		1,373		998
Total other expense	$	3,452	$	2,831	$	2,696	$	2,338

Income Taxes

The average tax rate for the first half of 2012 was 24.85% as compared to 16.60% for the first half of 2011. The low average tax rates are due primarily to the low level of net income before taxes as compared to the tax-exempt revenues and tax credit items available for those periods.

At June 30, 2012, the Company had a current tax benefit receivable of $175 thousand and a deferred tax asset of $12.483 million. At December 31, 2011, the Company had a current tax receivable of $175 thousand and a deferred tax asset of $14.115 million. The Company carried forward $19.021 million in Federal net operating losses (NOLs) and $23.712 million of Mississippi NOLs from its 2010 tax returns. The Company estimates that it generated approximately $6 million in Federal net taxable earnings and $5.5 million in Mississippi net taxable earnings during 2011. Management expects that the remaining net operating losses will be realized through carry-forwards within the next five years. The Company expects to utilize the tax benefits implicit in the deferred tax asset in the foreseeable future when (1) current tax benefits increase as losses are realized through loan charge-offs and collateral foreclosures and dispositions and (2) future earnings become sufficient to absorb the deductions. The following table shows the differences between actual income tax expense and expected income tax expense, listing significant items that affected the average tax rate for each period:



(Dollars in thousands)	Three Months Ended						Six Months Ended
	June 30						June 30
	2012			2011			2012			2011
Amount computed using the Federal statutory rates on income before taxes	$	800		$	476		$	1,520		$	838
Increase (decrease) resulting from:
State income tax expense, net of Federal effect	56			24			102			36
Tax exempt income, net of disallowed interest deduction	(119		)	(121		)	(239		)	(245		)
Life insurance income	(62		)	(60		)	(126		)	(122		)
Low income housing tax credits	(82		)	(27		)	(165		)	(110		)
Other, net	6			2			19			12
Total income tax expense	$	599		$	294		$	1,111		$	409

FIRST M & F CORPORATION

Assets and Liabilities

Assets decreased by 3.79% from June 30, 2011 to June 30, 2012, and decreased by .46% from December 31, 2011. Investments increased by 28.84% from June 30, 2011 to June 30, 2012, and increased by 17.74% from December 31, 2011.

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



	June 30, 2012						June 30, 2011						June 30, 2012
(Dollars in thousands)	Net Change						Net Change						Net Change
	QTD			YTD			QTD			YTD			Year-Over-Year
Cash and due from banks	$	(1,541	)	$	(2,829	)	$	4,962		$	(3,953	)	$	(3,999	)
Interest-bearing bank balances and Federal funds sold	(49,442		)	(36,933		)	23,439			31,744			(101,389		)
Securities available for sale	11,700			56,896			(3,109		)	16,204			84,537
Loans held for sale	(6,393		)	(3,782		)	(469		)	(4,125		)	20,174
Loans held for investment	3,101			(13,744		)	(6,666		)	(15,551		)	(61,999		)
Allowance for loan losses	774			(357		)	(1,762		)	(2,780		)	3,495
Other real estate	(3,559		)	(5,875		)	990			(475		)	427
Other assets	(286		)	(531		)	(1,795		)	(1,938		)	(2,840		)
Total assets	$	(45,646	)	$	(7,155	)	$	15,590		$	19,126		$	(61,594	)
Total deposits	(49,170		)	(10,125		)	24,423			49,087			(63,161		)
Total borrowings	(1,854		)	(3,842		)	(12,549		)	(33,358		)	(6,982		)
Other liabilities	2,816			2,491			1,342			409			4,685
Stockholders’ equity	2,562			4,321			2,374			2,988			3,864
Total liabilities and equity	$	(45,646	)	$	(7,155	)	$	15,590		$	19,126		$	(61,594	)

Deposits declined during the second quarter of 2012 as public funds, primarily in NOW accounts, flowed out after having accumulated during the first quarter. Public NOW deposits decreased by $25.382 million during the second quarter of 2012 after increasing by $25.170 million during the first quarter. Certificates of deposit stabilized during the second quarter of 2012, decreasing by $1.346 million after having decreased by $25.179 million during the first quarter. The deposit declines were funded primarily from interest-bearing cash on hand and Fed funds sold. Loans held for investment reversed their downward trend during the second quarter of 2012 as agricultural loans increased by $2.290 million as a result of purchased participations, closed-end first lien residential loans increased by $2.139 million primarily through transfers from mortgages held for sale and asset-based commercial loans increased by $780 thousand. SBA loans increase by $1.071 million during the second quarter of 2012 and have increased by $2.998 million for the year. Other real estate declined during the second quarter of 2012 as $4.787 million of properties were disposed of as compared to $2.838 million in the first quarter. The first half of 2012 was dominated by asset movement as increased investments were funded by cash flows from loan portfolio net decreases and a decrease in interest-bearing bank balances and Fed funds sold. Approximately $136.027 million of securities were purchased during the first half of 2012, 32.53% of which were U.S. government sponsored entity securities and 53.16% of which were mortgage-backed securities. Approximately 58% of the purchases were funded by security sales, calls, maturities and principal payments. The security purchases were prompted by the need to redeploy excess liquidity, so the investment portfolio was used to provide better yields than the short-term cash. Most loan categories declined during the first half of 2012 with agricultural loans and other commercial real estate loans making up most of the decline from December 31, 2011. At June 30, 2012 real estate-secured loans made up 80.73% of loans held for investment as compared to 81.22% at June 30, 2011.

During the first half of 2011 deposit growth was used to pay down borrowing and build liquidity. Most of the cash flow from the pay-down of the loan portfolio was reinvested into securities as loans continued to decline. Asset-based loans were one sector of the portfolio that grew during the first half of 2011, increasing by $11.885 million. Other commercial loans also increased by $6.952 million, dominated by one large loan to an existing commercial deposit customer. A commercial products division was started in August of 2011 to acquire loan participations, build the asset-based lending portfolio, grow the commercial and industrial loan portfolio and begin the process of rebuilding the commercial real estate loan portfolio.

Loans as a percent of total assets were 62.93% at June 30, 2012, 63.52% at December 31, 2011, and 64.36% at June 30, 2011. Management projects that the commercial real estate loan portfolio will decline at a slower pace over the next twelve months as foreclosures decrease and lending opportunities begin to emerge. Small business and consumer loan growth will depend on the momentum of economic growth.

FIRST M & F CORPORATION

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



(Dollars in thousands)	June 30, 2012		December 31, 2011		June 30, 2011
Commercial real estate	$	567,184	$	574,505	$	621,546
Residential real estate	189,927		186,815		187,932
Home equity lines	36,183		37,024		38,891
Commercial, financial and agricultural	147,773		155,330		152,063
Consumer	41,529		42,666		44,163
Total	$	982,596	$	996,340	$	1,044,595
Mortgages held for sale	$	22,291	$	26,073	$	2,117

Deposits decreased by 4.43% from June 30, 2011 to June 30, 2012, and decreased by .74% from December 31, 2011. The following table shows the breakdown by deposit category of core deposit and public funds deposit changes from December 31, 2011 to June 30, 2012:



	Core Customers					Public Funds					Total Deposits
(Dollars in thousands)	Increase (Decrease)					Increase (Decrease)					Increase (Decrease)
	Amt.			Pct.		Amt.			Pct.		Amt.			Pct.
Noninterest-bearing	$	4,463		1.99	%	$	(36	)	(0.51	)%	$	4,427		1.91	%
NOW	1,682			0.75	%	(212		)	(0.13	)%	1,470			0.38	%
MMDA	17,406			9.76	%	(3,808		)	(19.55	)%	13,598			6.87	%
Savings	(3,010		)	(2.52	)%	(85		)	(25.30	)%	(3,095		)	(2.59	)%
Customer CDs	(25,952		)	(6.47	)%	(1,818		)	(12.70	)%	(27,770		)	(6.69	)%
Brokered CDs	1,479			13.71	%	(234		)	(4.05	)%	1,245			7.51	%
Total	$	(3,932	)	(0.34	)%	$	(6,193	)	(2.91	)%	$	(10,125	)	(0.74	)%

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

During the first half of 2011 deposit growth was dominated by core noninterest-bearing deposits and public funds deposits, especially in NOW accounts. Approximately 62% of the noninterest-bearing growth was due to one commercial customer. Noninterest-bearing deposits represented 17.35% of total deposits at June 30, 2012 as compared to 16.90% at December 31, 2011 and 17.10% at June 30, 2011.

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

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



(Dollars in thousands)	June 30, 2012		December 31, 2011		June 30, 2011
Noninterest-bearing demand	$	236,145	$	231,718	$	243,626
NOW deposits	391,726		390,256		397,281
Money market deposits	211,447		197,849		174,127
Savings deposits	116,598		119,693		117,830
Certificates of deposit	387,610		415,380		473,387
Brokered certificates of deposit	17,812		16,567		18,248
Total	$	1,361,338	$	1,371,463	$	1,424,499

FIRST M & F CORPORATION

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



(Dollars in thousands)	June 30, 2012		December 31, 2011		June 30, 2011
Noninterest-bearing demand	$	7,085	$	7,121	$	6,887
NOW deposits	165,499		165,711		171,933
Money market deposits	15,670		19,478		19,595
Savings deposits	251		336		320
Certificates of deposit	12,497		14,315		17,184
Brokered certificates of deposit	5,549		5,783		5,261
Total	$	206,551	$	212,744	$	221,180

Other borrowings decreased by $5.159 million from June 30, 2011 to June 30, 2012 and decreased by $2.668 million from December 31, 2011. The decreases in borrowings were primarily funded through liquidity provided by loan portfolio paydowns and deposit growth. Amounts of borrowings maturing within one year increased from 22.76% of other borrowings at December 31, 2011 to 25.80% at June 30, 2012. Management intends to continue to allow its Federal Home Loan Bank borrowings to decrease as they mature while deposits are used as a primary source of funding.

Equity

Capital adequacy is continuously monitored by the Company to promote depositor and investor confidence and provide a solid foundation for future growth of the organization. The Company increased its capital position during the first quarters of 2012 and 2011 primarily through the retention of earnings. The Company reduced the quarterly dividend rate to $.01 per share beginning in the second quarter of 2009 after maintaining a $.13 per share quarterly dividend rate from the second quarter of 2005 through the first quarter of 2009. The Company is restricted from increasing the dividend rate until its Community Development Capital Initiative (CDCI) preferred stock is redeemed.

Average year-to-date equity to assets was 7.01% at June 30, 2012, 6.86% at December 31, 2011 and 6.72% at June 30, 2011. Total asset growth has been constrained since the 2009 losses as capital has been rebuilt over time. Corporate strategies have been dominated primarily by capital growth and preservation and secondarily by asset and deposit growth strategies.

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

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

The Company’s stock is publicly traded on the NASDAQ Global Select Market, also providing an avenue for additional capital if it is needed. The Company’s shares traded at a rate of approximately 10,000 shares per day during the first half of 2012. The stock’s closing price was $5.18 per share on June 30, 2012.

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

FIRST M & F CORPORATION

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



(Dollars in thousands)	June 30, 2012			December 31, 2011			June 30, 2011
Tier 1 capital	$	132,041		$	126,810		$	124,625
Total risk-based capital	146,734			141,434			139,435
Risk-weighted assets	1,174,807			1,169,553			1,180,785
Tier 1 common equity:
Tier 1 capital	132,041			126,810			124,625
Qualifying trust preferred securities	(30,000		)	(30,000		)	(30,000		)
Preferred stock	(18,198		)	(17,564		)	(16,962		)
Tier 1 common equity	$	83,843		$	79,246		$	77,663
Risk-based ratios:
Tier 1 capital	11.24		%	10.84		%	10.55		%
Total risk-based capital	12.49		%	12.09		%	11.81		%
Tier 1 leverage	8.43		%	8.17		%	7.87		%
Tier 1 common equity	7.14		%	6.78		%	6.58		%

Total capital to assets ratio	7.30		%	6.99		%	6.78		%

Interest Rate Risk and Liquidity Management

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

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

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

FIRST M & F CORPORATION

Credit Risk Management

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

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

The adequacy of the allowance for loan losses is evaluated quarterly with provision accruals approved by the Board. Allowance adequacy is dependent on loan classifications by internal and external loan review personnel, past due status, collateral reviews, loan growth and loss history. As part of the allowance evaluation, certain impaired loans are tested to determine if individual impairment allowances are required. A loan is considered to be impaired if management estimates that it is probable that the Company will be unable to collect all contractual payments due. Impairment review meetings are held monthly to review existing and new impairments. Loans with high risk grades, generally implying a substandard classification, are considered impaired and therefore are selected for individual impairment allowance tests. Loan grades are a significant indicator in determining which loans to individually test for impairment amounts because the loan grading process incorporates past due status, payment history, customer financial condition and collateral value in assigning individual grades to loans. Nonaccrual loans are also generally selected for individual impairment allowance tests. Loans that have been modified in a troubled debt restructuring are also selected for individual impairment allowance tests. For collateral-dependent loans, those for which the repayment is expected to be provided solely by the underlying collateral, the impairment allowance is primarily based on the value of the related collateral. Otherwise, impairment allowance calculations are based on the estimated present value of expected cash flows discounted at the effective interest rate of the loan. The material estimates necessary in this process make it inherently subjective and make the estimates subject to significant changes and may add volatility to earnings as provisions are adjusted. Loans not individually tested for impairment allowances are grouped into risk-rated pools and evaluated based on historical loss experience. Additionally, in determining the allowances for pools of loans, management considers specific qualitative external credit risk factors (“environmental factors”) that may not be reflected in historical loss rates such as: (1) potential disruptions in the real estate market and their effect on real estate concentrations; (2) trends in loan to value exception rates; (3) general economic conditions, including extending or worsening recessionary pressures; (4) past due rates; and (5) reviews of underwriting standards in our various markets. These and other environmental factors are reviewed on a quarterly basis. During the third quarter of 2011 the Company changed the number of periods included in the historical loss rate from thirteen years to five years. The thirteen year average previously used was also adjusted by two standard deviations to capture a higher percentage of probable losses. Given the higher variation and wider distribution of losses that can occur during any thirteen year historical period, two standard deviations were added to the mean to capture the potential losses that may have been distributed further from the mean but resulted from conditions that could reasonably re-occur. The five year average calculation includes more recent loss history, which management believes reflects current conditions better than the thirteen year calculation. The change in calculation, given the previous statistical adjustments to the thirteen year average, resulted in an immaterial difference.

FIRST M & F CORPORATION

At the end of 2011, the average loss rates applied to pools of commercial loans and for real estate secured commercial and construction loans were adjusted for economic condition environmental factors related to (1) the lack of economic growth impacting small businesses in the Company's markets and (2) the lack of liquidity in the market for commercial real estate, especially concerning undeveloped properties. During the first quarter of 2012 the Company removed the environmental factor in the loss rate applied to pools of commercial loans not individually reviewed for impairment. Due to the switch from a thirteen year average loss calculation to a five year calculation, average loss rates applied to pools of commercial loans increased by 27 basis points from the calculation used at the end of 2011, indicating that the shorter term average will be more volatile than the average loss rates used prior to the third quarter of 2011. The 27 basis point increase captured risks that were manually adjusted into the 2011 year end loss rate calculations, therefore removing the need for the environmental factor.

The Company experienced a large increase in the amount of past due and nonaccrual real estate-secured construction and commercial loans during 2008. The trend in nonaccrual and past due loans stabilized in the fourth quarter of 2009 and began its decline in 2011. Management addressed the problem of liquidating nonperforming loans by creating a special problem asset group within the organization in 2009, separate from the ongoing credit operations and lending activities of the Company. Problem loans, including large nonaccrual loans, have been assigned to this group of specialists with the intent of liquidating the loans or their collateral in an orderly fashion. Nonaccrual loans have moved downward from their high of $74.420 million in the second quarter of 2009 and fallen to $6.443 million at June 30, 2012. Management has made much progress recently in improving the credit quality of the portfolio as substandard and loss loans have fallen from 8.69% of loans held for investment at June 30, 2011 to 5.21% at June 30, 2012. Construction and development substandard and loss loans decreased from 31.65% to 16.77% and other commercial real estate substandard and loss loans decreased from 9.47% to 5.92% during the same period. During the same period the allowance for loan losses as a percentage of loans held for investment has decreased from 1.80% to 1.56%. The allowances for loans individually tested for impairment fell from $8.633 million at June 30, 2011 to $3.638 million at June 30, 2012. Moving forward, as old years are removed and recent years are added, the allowances related to risk pools of loans should also decline as the historical five year average loss rates decline, assuming that recent trends continue. The portfolio clean-up since 2008 came at the expense of higher net charge-offs. Although the $4.203 million in net charge-offs for the first half of 2012 exceeded those of the first half of 2011, they were much lower than the $8.712 million in net charge-offs produced during the second half of 2011, producing a downward trend in net loan losses during the last four quarters. Approximately 35.76% of the net charge-off activity in 2012 was related to foreclosure transactions. Approximately 45.33% of the net charge-offs for all of 2011 were related to foreclosure transactions. Foreclosure volume increased every quarter during 2011, accelerating to $8.186 million for the fourth quarter. During the first half of 2012, $3.064 million of properties were foreclosed on.

The primary challenge during 2012 and beyond will be the liquidation of foreclosed properties. The Company sold $4.787 million of foreclosed properties for $4.291 million during the second quarter of 2012. During the second quarter of 2011 $2.643 million of properties were sold for $2.519 million. During the first quarter of 2012 $2.838 million of properties were sold for $2.716 million. Over the past twelve months $12.893 million of properties have been sold for approximately 89.83% of their book value. As sales have outpaced foreclosure activity in 2012, the Company faces the challenge of selling the remaining properties, with the most difficult task being the disposition of raw land which makes up over 75% of the balance of other real estate owned.

FIRST M & F CORPORATION

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



(Dollars in thousands)	06/30/12		12/31/11		06/30/11		12/31/10		12/31/09
Construction and land development:
Total number	4		10		21		22		54
Total balance	$	1,373	$	4,398	$	9,735	$	13,993	$	25,655
Number, $500 thousand or more	1		3		7		7		13
Balance, $500 thousand or more	$	600	$	2,989	$	8,035	$	10,553	$	19,297

Other commercial real estate:
Total number	12		14		20		26		18
Total balance	$	2,557	$	9,937	$	18,506	$	13,027	$	9,789
Number, $500 thousand or more	—		4		8		6		2
Balance, $500 thousand or more	$	—	$	8,185	$	16,221	$	10,152	$	3,496

1-4 family residential:
Total number	30		28		34		40		57
Total balance	$	1,864	$	1,896	$	3,272	$	3,863	$	4,490
Number, $500 thousand or more	—		—		1		1		1
Balance, $500 thousand or more	$	—	$	—	$	564	$	941	$	1,024

Total real estate:
Total number	46		52		75		88		129
Total balance	$	5,794	$	16,231	$	31,513	$	30,883	$	39,934
Number, $500 thousand or more	1		7		16		14		16
Balance, $500 thousand or more	$	600	$	11,174	$	24,820	$	21,646	$	23,817

Commercial, financial & agricultural:
Total number	11		17		15		23		33
Total balance	$	629	$	913	$	1,141	$	2,151	$	4,459
Number, $500 thousand or more	—		—		—		1		2
Balance, $500 thousand or more	$	—	$	—	$	—	$	784	$	2,411

Consumer:
Total number	4		5		7		10		10
Total balance	$	20	$	33	$	146	$	93	$	156
Number, $500 thousand or more	—		—		—		—		—
Balance, $500 thousand or more	$	—	$	—	$	—	$	—	$	—

Total portfolio:
Total number	61		74		97		121		172
Total balance	$	6,443	$	17,177	$	32,800	$	33,127	$	44,549
Number, $500 thousand or more	1		7		16		15		18
Balance, $500 thousand or more	$	600	$	11,174	$	24,820	$	22,430	$	26,228

FIRST M & F CORPORATION

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



	June 30, 2012				December 31, 2011
(Dollars in thousands)	Loan Balance		Impairment Allowance		Loan Balance		Impairment Allowance
Non-accrual loans	$	1,373	$	31	$	4,398	$	400
Accruing loans with an allowance	4,024		1,089		7,155		1,350
Accruing loans without an allowance	5,975		—		6,606		—
Total	$	11,372	$	1,120	$	18,159	$	1,750

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



	June 30, 2012				December 31, 2011
(Dollars in thousands)	Loan Balance		Impairment Allowance		Loan Balance		Impairment Allowance
Non-accrual loans	$	2,557	$	222	$	9,937	$	477
Accruing loans with an allowance	6,130		1,150		4,495		417
Accruing loans without an allowance	36,009		—		26,338		—
Total	$	44,696	$	1,372	$	40,770	$	894

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



(Dollars in thousands)	Outstanding Balances		Past Due 30-89 Days And Still Accruing		Past Due 90 Days Or More And Still Accruing		Nonaccrual		Year-To-Date Net Charge-Offs (Recoveries)
Construction and development loans:
06/30/12	$	67,814	$	325	$	—	$	1,373	$	918
03/31/12	70,087		254		23		4,519		(263		)
12/31/11	69,325		603		72		4,398		1,970
09/30/11	83,100		1,147		—		8,801		743
06/30/11	87,826		1,514		307		9,735		(551		)
Loans secured by 1-4 family properties:
06/30/12	$	226,110	$	2,232	$	81	$	1,864	$	241
03/31/12	224,989		2,810		87		2,352		(81		)
12/31/11	223,839		3,288		174		1,896		1,998
09/30/11	223,884		2,334		3		2,166		1,790
06/30/11	226,823		2,067		285		3,272		585
Commercial real estate-secured loans:
06/30/12	$	499,370	$	1,177	$	1,368	$	2,557	$	2,443
03/31/12	498,724		3,061		75		7,125		1,239
12/31/11	505,180		2,952		279		9,937		3,998
09/30/11	520,804		2,958		189		14,804		2,229
06/30/11	533,720		3,746		67		18,506		753

FIRST M & F CORPORATION

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



(Dollars in thousands)	June 30			December 31			June 30
	2012			2011			2011
Nonaccrual loans	$	6,443		$	17,177		$	32,800
Other real estate	31,077			36,952			30,650
Nonaccrual investment securities	639			599			693
Total non-performing assets	$	38,159		$	54,728		$	64,143
Past due 90 days or more and still accruing interest	$	1,537		$	602		$	784
Restructured loans (accruing)	18,372			19,662			22,988
Ratios:
Nonaccrual loans to loans	0.64		%	1.68		%	3.13		%
Past due 90 day loans to loans	0.15		%	0.06		%	0.07		%
Non-performing credit assets to loans and other real estate	3.62		%	5.11		%	5.89		%
Non-performing assets to assets	2.44		%	3.49		%	3.95		%

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

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



	QTD			QTD			YTD
(Dollars in thousands)	June 30, 2012			June 30, 2011			June 30, 2012
Balance at beginning of period	$	34,636		$	29,660		$	36,952
Foreclosures	1,499			4,436			3,064
Third-party lien pay-offs	—			250			—
Improvements	265			—			323
Write downs	(536		)	(1,053		)	(1,636		)
Properties sold	(4,787		)	(2,643		)	(7,626		)
Balance at end of period	$	31,077		$	30,650		$	31,077

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



(Dollars in thousands)	June 30, 2012		December 31, 2011		June 30, 2011
Construction and land development	$	24,691	$	22,773	$	20,169
Farmland	137		2,618		1,823
1-4 family residential	1,122		2,136		2,798
Multifamily residential	—		950		2,036
Nonfarm nonresidential	5,127		8,475		3,824
	$	31,077	$	36,952	$	30,650

FIRST M & F CORPORATION

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 June 30, 2012, the Company had $126.833 million in unused loan commitments outstanding. Of these commitments, $87.951 million mature in one year or less. Lines of credit are established using the credit policy of the Company concerning the lending of money.

Letters of credit are used to facilitate a borrower’s business and are usually related to the acquisition of inventory or of assets to be used in the customer’s business. Letters of credit are generally secured and are underwritten using the same standards as traditional commercial loans. Most standby letters of credit expire without being presented for payment. However, the presentment of a standby letter of credit would create a loan receivable from the Bank’s loan customer. At June 30, 2012, the Company had $3.685 million in financial standby letters of credit issued and outstanding.

Liabilities of $2 thousand at June 30, 2012, and $7 thousand at June 30, 2011, were recognized in other liabilities related to the obligation to stand ready to perform related to standby letters of credit.

The Company makes commitments to originate mortgage loans that will be held for sale. The total commitments to originate mortgages to be held for sale were $24.928 million at June 30, 2012. These commitments are accounted for as derivatives and are marked to fair value with changes in fair value recorded in mortgage banking income. At June 30, 2012, mortgage origination-related derivatives with positive fair values of $439 thousand were included in other assets, and derivatives with negative fair values of $130 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 June 30, 2012, the Company had $47.651 million in locked forward sales agreements in place. Forward sale-related derivatives with positive fair values of $137 thousand were included in other assets, and derivatives with negative fair values of $174 thousand were included in other liabilities.

Mortgages that are sold generally have recourse obligations if any of the first four payments become past due over 30 days under certain investor contracts and over 90 days under other investor contracts. The Company may also be required to repurchase mortgages that do not conform to FNMA or FHA underwriting standards or that contain critical documentation errors or fraud. The Company only originates for sale mortgages that conform to FNMA and FHA underwriting guidelines. Mortgages sold that were still in the recourse period were $61.896 million at June 30, 2012. A recourse liability of $161 thousand was recorded for these mortgages as of June 30, 2012.

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

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

FIRST M & F CORPORATION

Critical Accounting Policies

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


(1)	Allowance for loan losses


(2)	Fair value


(3)	Contingent liabilities


(4)	Income taxes

Allowance for loan losses

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

Management of the Company evaluates many factors in determining the estimate for the allowance for loan losses. Management reviews loan quality on an ongoing basis to determine the collectability of individual loans and reflects that collectability by assigning loan grades to individual credits. The grades generally determine how closely a loan will be monitored on an ongoing basis. A customer’s payment history, financial statements, cash flow patterns and collateral, among other factors, are reviewed to determine if the loan has potential losses. Such information is used to determine if individual loans are impaired and to group remaining loans into risk pools. A loan is impaired if management estimates that it is probable that the Company will be unable to collect all contractual payments due. Generally, all loans (1) risk-rated as substandard, doubtful or loss, (2) in nonaccrual status or (3) classified as troubled debt restructurings are considered to be impaired and are therefore individually tested for impairment allowances. Impairment estimates may be based on discounted cash flows or collateral values. Historical loan losses by loan type and loan grade are also a significant factor in estimating future losses when applied to the risk pools of loans not individually tested for impairment allowances. Various external environmental factors are also considered in estimating the allowance for pools of loans. Concentrations of credit by loan type and collateral type are also reviewed to estimate exposures and risks of loss for loans aggregately evaluated in risk pools. General economic factors as well as economic factors for individual industries or factors that would affect certain types of loan collateral are reviewed to determine the exposure of pools of loans to economic fluctuations. The Company has a loan review department that audits types of loans as well as geographic segments to determine credit problems and loan policy violations that require the attention of management. All of these factors are used to determine the adequacy of the allowance for loan losses and adjust its balance accordingly.

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

Fair value

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

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

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

FIRST M & F CORPORATION

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

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

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

Contingent liabilities

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

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

Income taxes

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

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

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

FIRST M & F CORPORATION

Recent Accounting Pronouncements

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

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

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

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

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

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

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

Interest rate shock analysis shows that the Company will experience a 0.79% decrease over 12 months in its net interest income with a gradual (12 month ramp) and sustained 100 basis point decrease in interest rates. A gradual and sustained increase in interest rates of 200 basis points will result in a 1.20% 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 decrease by 4.99% with an immediate and sustained increase in interest rates of 200 basis points. The market value of equity will increase by 2.53% with an immediate and sustained decrease in interest rates of 100 basis points.

FIRST M & F CORPORATION

Item 4 - 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 June 30, 2012, (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. During the last quarter ended June 30, 2012, there has been no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s 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.

FIRST M & F CORPORATION

PART II: OTHER INFORMATION

Item 1 - Legal Proceedings

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

Item 1A – Risk Factors

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

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

None.

Item 3 – Defaults Upon Senior Securities

None.

Item 4 – Mine Safety Disclosures

Not applicable.

Item 5 – Other Information

None.

FIRST M & F CORPORATION

Item 6 – Exhibits



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

3.2	Amended and Restated Articles of Incorporation of the Registrant. Incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K filed on March 14, 2012.

3.3	By-laws of the Registrant, as amended. Filed as Exhibit 3-b to the Company’s Form S-1 (File No. 33-08751) September 15, 1986, incorporated herein by reference.

3.4	Amended and Restated Bylaws of the Registrant. Incorporated herein by reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K filed on March 14, 2012.

4.1	Warrant to Purchase up to 513,113 Shares of Common Stock of the Registrant. Incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.

10.1	First M&F Corporation 2005 Equity Incentive Plan. Filed as Appendix A to the Company’s Proxy Statement, March 15, 2005, incorporated herein by reference.

10.2	Merchants and Farmers Bank Profit and Savings Plan, as amended. Filed as Exhibit 10(B) to the Company’s Form 10-Q on August 9, 2005, incorporated herein by reference.

10.3	Letter Agreement, including as Exhibit A thereto, Securities Purchase Agreement. Incorporated herein by reference to Exhibit A to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.

10.4	Form of Preferred Stock Certificate. Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.

10.5	Side Letter Agreement. Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.

10.6	CDCI Letter Agreement dated September 29, 2010. Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on October 5, 2010.

10.7	Form of Change in Control Agreement between the Company and John G. Copeland, effective May 3, 2004. Incorporated herein by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K filed on March 14, 2012.

11	Computation of Earnings Per Share – Filed herewith as Note 13 to the consolidated financial statements.

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

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

FIRST M & F CORPORATION

SIGNATURES

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

Date: August 14, 2012



BY:	/s/ Hugh S. Potts, Jr.	BY:	/s/ John G. Copeland
	Hugh S. Potts, Jr.		John G. Copeland
	Chairman of the Board and Chief Executive Officer (principal executive officer)		Executive Vice President and Chief Financial Officer (principal financial officer)

		BY:	/s/ Robert C. Thompson, III
			Robert C. Thompson, III
			Vice President – Accounting Policy (principal accounting officer)

FIRST M & F CORPORATION

EXHIBIT INDEX



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

3.2	Amended and Restated Articles of Incorporation of the Registrant. Incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K filed on March 14, 2012.

3.3	By-laws of the Registrant, as amended. Filed as Exhibit 3-b to the Company’s Form S-1 (File No. 33-08751) September 15, 1986, incorporated herein by reference.

3.4	Amended and Restated Bylaws of the Registrant. Incorporated herein by reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K filed on March 14, 2012.

4.1	Warrant to Purchase up to 513,113 Shares of Common Stock of the Registrant. Incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.

10.1	First M&F Corporation 2005 Equity Incentive Plan. Filed as Appendix A to the Company’s Proxy Statement, March 15, 2005, incorporated herein by reference.

10.2	Merchants and Farmers Bank Profit and Savings Plan, as amended. Filed as Exhibit 10(B) to the Company’s Form 10-Q on August 9, 2005, incorporated herein by reference.

10.3	Letter Agreement, including as Exhibit A thereto, Securities Purchase Agreement. Incorporated herein by reference to Exhibit A to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.

10.4	Form of Preferred Stock Certificate. Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.

10.5	Side Letter Agreement. Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.

10.6	CDCI Letter Agreement dated September 29, 2010. Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on October 5, 2010.

10.7	Form of Change in Control Agreement between the Company and John G. Copeland, effective May 3, 2004. Incorporated herein by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K filed on March 14, 2012.

11	Computation of Earnings Per Share – Filed herewith as Note 13 to the consolidated financial statements.

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

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

FIRST M&F CORP/MS - FORM 10-Q - August 14, 2012

Attached files

FIRST M&F CORP/MS Reports