q22010-10q.htm

10-Q 1 q22010-10q.htm JUNE 30, 2010 10Q q22010-10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

Commission file number 000-27307

North Carolina

56-1980549

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

2634 Durham Chapel Hill Blvd., Durham, NC 27707-2800

(Address of Principal Executive Offices)

(919) 687-7800

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the previous 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. Yes x No r

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 definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)

Large accelerated filer r Accelerated filer r Non-accelerated filer r 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) Yes r No x

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

As of August 12, 2010, there were 2,031,337 shares outstanding of the issuer’s common stock, no par value.

M&F BANCORP, INC

Table of Contents

PART I	1
FINANCIAL INFORMATION	1
Item 1- Financial Statements	1
Item 2 - Management’s Discussion and Analysis	18
Item 3 - Quantitative and Qualitative Disclosures about Market Risk	32
PART II	32
OTHER INFORMATION	32
Item 1 - Legal Proceedings	32
Item 1A - Risk Factors	32
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3 - Defaults Upon Senior Securities	32
Item 4 - Removed and Reserved	32
Item 5 - Other Information	32
Item 6 - Exhibits	32

M&F BANCORP, INC.

PART I

FINANCIAL INFORMATION

Item 1- Financial Statements

CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
(Dollars in thousands)	2010			2009
(Unaudited)
ASSETS

Cash and cash equivalents	$	49,478		$	30,313
Investment securities available for sale, at fair value		15,810			17,699
Other invested assets		1,061			1,061
Loans, net of unearned income and deferred fees		206,700			210,111
Allowances for loan losses		(3,795	)		(3,564	)
Loans, net		202,905			206,547
Interest receivable		745			935
Bank premises and equipment, net		4,685			4,852
Cash surrender value of bank-owned life insurance		5,601			5,499
Other real estate owned		1,920			2,176
Deferred tax assets and taxes receivable, net		4,290			4,402
Other assets		1,064			897
TOTAL ASSETS	$	287,559		$	274,381
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Interest-bearing deposits	$	189,926		$	186,791
Noninterest-bearing deposits		54,462			38,016
Total deposits		244,388			224,807

Other borrowings		756			7,766
Other liabilities		5,641			5,253
Total liabilities		250,785			237,826

COMMITMENTS AND CONTINGENCIES

Stockholders' equity:
Series A Preferred stock- $1,000 liquidation value per share, 11,735 shares issued and outstanding as of June 30, 2010 and December 31, 2009		11,721			11,719
Common stock, no par value 10,000,000 shares authorized as of June 30, 2010 and December 31, 2009; 2,031,337 shares issued and outstanding as of June 30, 2010 and December 31, 2009		8,732			8,732
Retained earnings		17,291			17,128
Accumulated other comprehensive loss		(970	)		(1,024	)
Total stockholders' equity		36,774			36,555

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	287,559		$	274,381

See notes to consolidated financial statements.

M&F BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME
	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
(Dollars in thousands except per share data)	2010			2009			2010			2009
(Unaudited)
Interest income:
Loans, including fees	$	3,122		$	3,254		$	6,261		$	6,534
Investment securities, including dividends
Taxable		93			149			206			369
Tax-exempt		73			109			155			235
Other		19			3			32			11

Total interest income		3,307			3,515			6,654			7,149
Interest expense:
Deposits		531			745			1,067			1,608
Borrowings		1			12			4			46
Total interest expense		532			757			1,071			1,654
Net interest income		2,775			2,758			5,583			5,495
Less provision for loan losses		77			122			267			181

Net interest income after provision for loan losses		2,698			2,636			5,316			5,314

Noninterest income:
Service charges		460			429			900			852
Rental income		89			31			150			100
Cash surrender value of life insurance		55			54			102			102
Realized gain on sale of securities		10			47			26			109
Impairment of other assets		-			(74	)		-			(74	)
Other income (loss)		-			21			(1	)		18
Total noninterest income		614			508			1,177			1,107

Noninterest expense:
Salaries and employee benefits		1,228			1,607			2,467			3,109
Occupancy and equipment		373			428			768			917
Directors fees		60			90			147			174
Marketing		70			66			109			108
Professional fees		243			257			496			501
Information technology		199			149			424			304
FDIC deposit insurance		192			157			432			210
OREO expense (recovery), net		247			(8	)		264			(2	)
Other		356			251			760			550
Total noninterest expense		2,968			2,997			5,867			5,871

Income before income taxes		344			147			626			550
Income tax expense		75			15			134			114
Net income		269			132			492			436

Less preferred stock dividends		(147	)		(7	)		(293	)		(7	)

Net income available to common stockholders	$	122		$	125		$	199		$	429

Basic and diluted earnings per share of common stock:	$	0.06		$	0.06		$	0.10		$	0.21
Weighted average shares of common stock outstanding:
Basic and diluted		2,031,337			2,031,337			2,031,337			2,031,337
Dividends per share of common stock	$	-		$	0.05		$	0.0175		$	0.05

See notes to consolidated financial statements.

M&F BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND OTHER COMPREHENSIVE LOSS
SIX MONTHS ENDED JUNE 30, 2010 and 2009
									Accumulated
	Number								Other
(Dollars in thousands)	of	Common		Preferred		Retained			Comprehensive
(Unaudited)	Shares	Stock		Stock		Earnings			Loss			Total
Balances as of December 31, 2008	2,031,337	$	8,732	$	-	$	16,972		$	(1,385	)	$	24,319
Issuance of preferred stock, net of issuance costs of $0.018					11,717								11,717
Comprehensive income:
Net income							436						436
Other comprehensive income, net of tax										59			59
Total comprehensive income, net of tax													495
Dividends declared on preferred stock							(7	)					(7	)
Dividends declared on common stock ($0.05 per share)					-		(101	)					(101	)

Balances as of June 30, 2009	2,031,337	$	8,732	$	11,717	$	17,300		$	(1,326	)	$	36,423

Balances as of December 31, 2009	2,031,337	$	8,732	$	11,719	$	17,128		$	(1,024	)	$	36,555
Accretion of preferred stock issuance costs					2								2
Comprehensive income:
Net income							492						492
Other comprehensive income, net of tax										54			54
Total comprehensive income, net of tax													546
Dividends declared on preferred stock							(293	)					(293	)
Dividends declared on common stock ($0.0175 per share)							(36	)					(36	)

Balances as of June 30, 2010	2,031,337	$	8,732	$	11,721	$	17,291		$	(970	)	$	36,774

See notes to consolidated financial statements

M&F BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2010 and 2009
(Dollars in thousands)	2010			2009
(Unaudited)

Cash flows from operating activities:
Net income	$	492		$	436
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses		267			181
Depreciation and amortization		203			306
Loss from disposals of bank premises and equipment		3			-
Amortization of premiums/discounts on investments, net		7			6
Loan purchase accounting amortization (accretion), net		87			87
Deferred loan origination fees and costs, net		(75	)		(72	)
Impairment on other assets		-			74
Gains on disposition of available for sale securities		(26	)		(109	)
Increase in cash surrender value of bank owned life insurance		(102	)		(102	)
Gain on sale of loan		-			-
Gain on sale of other real estate owned		(18	)		-
Other than temporary decline in value-other asset		-
Impairment of other real estate owned		-
Changes in:
Accrued interest receivable and other assets		358			664
Other liabilities		442			(5	)
Net cash provided by operating activities		1,638			1,466
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales		-			6,559
Maturities, prepayments and calls		891			4,319
Principal collections		2,103			3,660
Purchases		(1,000	)		(3,082	)
Net decrease (increase) in loans		3,281			(4,315	)
Purchases of bank premises and equipment		(39	)		(83	)
Proceeds from sale of other assets		-			28
Proceeds from sale of real estate owned		100			-
Net cash provided by investing activities		5,336			7,086
Cash flows from financing activities:
Net increase in deposits		19,581			1,398
Net decrease from other borrowings		(7,010	)		(19,153	)
Issuance of preferred stock, net of issuance costs		-			11,717
Cash dividends		(380	)		(108	)
Net cash provided by (used in) financing activities		12,191			(6,146	)

Net increase in cash and cash equivalents		19,165			2,406

Cash and cash equivalents as of the beginning of the period		30,313			13,776

Cash and cash equivalents as of the end of the period	$	49,478		$	16,182

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest	$	954		$	1,562
Income taxes		5			96

See notes to consolidated financial statements.

M&F BANCORP, INC.

Notes To Consolidated Financial Statements

Notes to Consolidated Financial Statements, June 30, 2010, Unaudited

1.	Summary of Significant Accounting Policies

Basis of Presentation

The Consolidated Financial Statements include the accounts and transactions of M&F Bancorp, Inc. (the “Company”) and its wholly-owned bank subsidiary, Mechanics and Farmers Bank (the “Bank”). All significant inter-company accounts and transactions have been eliminated in consolidation. The Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial statements and in accordance with the instructions for Form 10-Q and Rule 8-03 of Regulation S-X. The accompanying Consolidated Financial Statements and Notes are unaudited except for the balance sheet and footnote information as of December 31, 2009, which were derived from the Company’s audited consolidated Annual Report on Form 10-K as of and for the year ended December 31, 2009.

The Consolidated Financial Statements included herein do not include all the information and notes required by GAAP and should be read in conjunction with the Consolidated Financial Statements and the related notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2009.

In the opinion of management, the interim financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position, results of operations and cash flows in the Consolidated Financial Statements. The unaudited operating results for the periods presented may not be indicative of annual results.

Reclassification—Certain amounts in the Consolidated Financial Statements for the three and six months ended June 30, 2009 have been reclassified to conform to the 2010 presentation. These reclassifications have had no impact on reported amounts of net income, stockholders’ equity or total assets.

New Accounting Pronouncements

In July 2010, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) that affects disclosures about the credit quality of financing receivables and the allowance for credit losses. The ASU amendment seeks to improve the disclosures about the credit quality of an entity’s financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate, by portfolio segment or class of financing receivable, certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses.

Existing disclosures are amended to require an entity to provide the following disclosures about its financing receivables on a disaggregated basis:

(1) A roll-forward schedule of the allowance for credit losses from the beginning of the reporting period to the end of the reporting period on a portfolio segment basis, with the ending balance further disaggregated on the basis of the impairment method;

(2) For each disaggregated ending balance in item (1) above, the related recorded investment in financing receivables;

(3) The nonaccrual status of financing receivables by class of financing receivables;

(4) Impaired financing receivables by class of financing receivables.

M&F BANCORP, INC.

Notes To Consolidated Financial Statements, Continued

The amendments in the ASU also require an entity to provide the following additional disclosures about its financing receivables:

(1) Credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables;

(2) The aging of past due financing receivables at the end of the reporting period by class of financing receivables;

(3) The nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses;

(4) The nature and extent of financing receivables modified as troubled debt restructurings within the previous twelve months that defaulted during the reporting period by class of financing receivables and their effect on the allowance for credit losses; and

(5) Significant purchases and sales of financing receivables during the reporting period disaggregated by portfolio segments.

The disclosures as of the end of a reporting period will be effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period will be effective for interim and annual reporting periods beginning on or after December 15, 2010. As this ASU is disclosure-related only, we do not expect it to have an impact on our financial condition or results of operations.

In April 2010, the FASB issued an ASU in reference to the effect of a loan modification when the loan is part of a pool that is accounted for as a single asset. This ASU codifies the consensus reached in an earlier Emerging Issues Task Force (“EITF”) Issue about the same topic. The amendments to the Codification provides that modifications of loans that are accounted for within a pool do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The ASU does not affect the accounting for loans that are not accounted for within pools. Loans accounted for individually continue to be subject to the troubled debt restructuring accounting provisions.

This ASU is effective prospectively for modifications of loans accounted for within pools occurring in the first interim or annual period ending on or after July 15, 2010. Early application is permitted. Upon initial adoption of the ASU, an entity may make a one-time election to terminate accounting for loans as a pool. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration. We do not expect this ASU to have a significant impact on our financial condition or results of operations.

On February 24, 2010, the FASB issued ASU to address amendments to certain recognition and disclosure requirements. The amendments in this ASU remove the requirement for a Securities and Exchange (“SEC”) filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. generally accepted accounting principles. The FASB believes these amendments remove potential conflicts with the SEC’s literature. All of the amendments in the ASU were effective upon issuance.

In January 2010, the FASB issued an ASU entitled “Fair Value Measurements and Disclosures. The ASU is aimed at improving disclosures about fair value measurements. This ASU requires new disclosures: (i) of significant transfers in and out of Levels 1 and 2 with reasons for the transfers; and (ii) activity in Level 3 fair value measurements, including purchases, sales, issuances, and settlements on a gross basis. In addition, the reporting entity should provide fair value measurement disclosures for each class of assets and liabilities, and disclosures about inputs and valuation techniques used to measure fair value of both recurring and nonrecurring fair value measurements. The ASU includes conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets. These amendments change the terminology from major categories of assets to classes of assets and provide a cross reference on how to determine appropriate class to present fair value disclosures. This ASU is effective for interim and annual periods beginning after December 15, 2009, except disclosures about purchases, sales, issuances, and settlements in the roll forward of Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and interim periods within those years. This ASU requires additional disclosures which will not have an impact on the Company’s results of operations or assets.

M&F BANCORP, INC.

Notes To Consolidated Financial Statements, Continued

2.	Earnings Per Share

Basic earnings per share (“EPS”) computations are based upon the weighted average number of shares outstanding during the reporting periods. Diluted EPS computations are based upon the weighted average number of shares outstanding during each reporting period plus the dilutive effect of outstanding stock options. The Company had no options outstanding as of June 30, 2010 and 25,200 options outstanding as of June 30, 2009 all of which were anti-dilutive for the three and six months ended June 30, 2009. The options and the option plan expired on December 31, 2009.

Loans

Loans are made primarily to customers in the Company’s market areas within North Carolina which include Raleigh, Durham, Charlotte, Winston-Salem, and Greensboro. The Company’s loans, classified by type are as follows:

(Unaudited)	June 30, 2010					December 31, 2009
(Dollars in thousands)	Amount		% of Total			Amount		% of Total
Commercial	$	10,458		5.06	%	$	8,605		4.10	%
Real estate construction		15,618		7.56			16,987		8.08
Consumer		5,429		2.63			5,891		2.80
Commercial real estate		134,114		64.88			135,249		64.37
Consumer real estate		40,611		19.65			42,706		20.33
Other		470		0.22			673		0.32
	$	206,700		100.00	%	$	210,111		100.00	%

Nonperforming assets were as follows:

(Unaudited)
(Dollars in thousands)	June 30, 2010			December 31, 2009
Loans contractually past due 90 days or more and/or on nonaccrual status
Commercial	$	1,238		$	1,263
Real estate construction		654			681
Commercial real estate		5,824			4,703
Consumer real estate		1,855			2,352
Total nonaccrual loans		9,571			8,999

Foreclosed properties		1,920			2,176

Total nonperforming assets	$	11,491		$	11,175

Nonperforming assets to:
Loans outstanding at end of quarter		5.56	%		5.32	%
Total assets at end of quarter		4.00			4.07
Allowance for loan losses as a percent of nonperforming assets		33.03			31.89

M&F BANCORP, INC.

Notes To Consolidated Financial Statements, Continued

4.	Allowances for Loan Losses

Allowances for loan losses consisted of the following:

(Dollars in thousands)	June 30, 2010							December 31, 2009
(Unaudited)	Loan Balance		Allowance		% of Total Loans			Loan Balance		Allowance		% of Total Loans
Commercial	$	10,458	$	644		0.31	%	$	8,605	$	515		0.25	%
Real estate construction		15,618		192		0.09			16,987		176		0.08
Consumer		5,429		494		0.24			5,891		122		0.06
Commercial real estate		134,114		1,727		0.84			135,249		2,238		1.07
Consumer real estate		40,611		738		0.36			42,706		485		0.23
Other		470		-		-			673		28		-

	$	206,700	$	3,795		1.84	%	$	210,111	$	3,564		1.69	%

The activity in the allowance for the six months ended June 30, 2010 and 2009 is as follows:

	As of and for the
(Unaudited)	Six Months Ended June 30
(Dollars in thousands)	2010		2009

Average amount of loans outstanding, net of unearned income/expense	$	208,644	$	212,778
Amount of loans outstanding at quarter end, net of unearned income		206,700		212,724
Allowance for loan losses:
Balance at beginning of year		3,564		2,962
Loans charged-off:
Commercial		7		-
Consumer		12		-
Consumer real estate		3		1
Commercial real estate		8		1

Total charge-offs		30		2

Recoveries of loans previously charged off:
Commercial		1		18
Consumer		5		12
Consumer real estate		2		4

Total recoveries		8		34

Net loans charged off (recovered)		22		(32	)
Bounce protection charge-offs (net)		14		19
Provision for loan losses		267		181

Balance at end of period	$	3,795	$	3,156

M&F BANCORP, INC.

Notes To Consolidated Financial Statements, Continued

The loans classified as impaired and Troubled Debt Restructuring (“TDRs”) with the respective allowance are shown in the table below:

(Dollars in thousands)	Impaired and TDR Loans							Impaired and TDR Loans
(Unaudited)	As of June 30, 2010							As of December 31, 2009
	Amount		Allowance		Coverage			Amount		Allowance		Coverage
Impaired loans:
Commercial	$	106	$	70		66.04	%	$	1,607	$	35		2.18	%
Commercial real estate		3,707		84		2.27			-		-		-
Consumer real estate		129		65		50.39			1,605		-		-

Total	$	3,942	$	219		5.56	%	$	3,212	$	35		1.09	%

TDRs
Commercial	$	1,239		-		-	%	$	1,263	$	-		-	%
Construction		654		-		-			-		-
Commercial real estate		4,984		9		0.18			5,488		203		3.70
Consumer real estate		134		-		-			227		-		-

Total	$	7,011	$	9		0.13	%	$	6,978	$	203		2.91	%

Certain loans in the above table are not included in Note 3, the non-performing loans table, because they are paying as agreed and are not in non-accrual status as of June 30, 2010 and December 31, 2009.

Dividends

During the three months ended March 31, 2010, the Board declared common stock dividends of $0.0175 per share. No common stock dividend was declared during the three months ended June 30, 2010. The Company has declared and paid to the Department of the Treasury (“Treasury”) all dividends on the preferred stock issued through the Troubled Asset Relief Program (“TARP”) at the annualized rate of 5%.

6.	Benefit Plans

The Company sponsors a non-contributory qualified defined benefit retirement (pension) plan (the “Cash Balance Plan”) for substantially all full-time employees. The Company also sponsors a non-qualified, unfunded supplemental executive retirement plan (the “SERP Plan”) that provides benefits to certain current and former executives. The Company made a $0.1 million contribution to the Cash Balance Plan during the three and six months ended June 30, 2010.

The Company provides post-retirement benefits to certain former executive officers. As of June 30, 2010 and December 31, 2009, the amount of this liability was $0.2 million and $0.3 million, respectively, and is reflected in Other Liabilities.

The components of the net periodic benefit cost reflected in salaries and employee benefits expense for the three months ended June 30, 2010 and 2009 are as follows:

(Unaudited)	Cash Balance Plan						SERP				Total
(Dollars in thousands)	2010			2009			2010		2009		2010			2009

Service cost	$	33		$	29		$	-	$	-	$	33		$	29
Interest cost		63			63			28		28		91			91
Expected return on plan assets		(53	)		(50	)		-		-		(53	)		(50	)
Amortization of prior service costs		-			-			1		1		1			1
Amortization of net loss		38			45			-		-		38			45
Net periodic cost	$	81		$	87		$	29	$	29	$	110		$	116

M&F BANCORP, INC.

Notes To Consolidated Financial Statements, Continued

The components of the net periodic benefit cost reflected in salaries and employee benefits expense for the six months ended June 30, 2010 and 2009 are as follows:

	Cash Balance Plan						SERP				Total
(Dollars in thousands)	2010			2009			2010		2009		2010			2009
(Unaudited)
Service cost	$	67		$	57		$	-	$	-	$	67		$	57
Interest cost		127			127			55		57		182			184
Expected return on plan assets		(106	)		(101	)		-		-		(106	)		(101	)
Amortization of prior service costs		1			-			2		2		3			2
Amortization of net loss		76			91			-		-		76			91
Net periodic cost	$	165		$	174		$	57	$	59	$	222		$	233

7.	Comprehensive Income

Comprehensive income includes net income and all other changes to the Company’s equity, with the exception of transactions with stockholders. The Company’s other comprehensive income and accumulated other comprehensive income are comprised of unrealized gains and losses on certain investments in debt securities and pension adjustments.

	For the Six Months Ended
(Dollars in thousands)	June 30,
(Unaudited)	2010			2009

Net income	$	492		$	436

Items of other comprehensive income, before tax:
Unrealized gains on securities available for sale, net of taxes		112			204
Reclassification adjustments for gains
included in income before income tax expense		(26	)		(109	)
Other comprehensive income before tax expense		86			95

Less: Changes in deferred income taxes related to change in unrealized
gains on securities available for sale		32			36
Other comprehensive income, net of taxes		54			59

Total comprehensive income	$	546		$	495

8.	Fair Value Measurement

The Company follows the required disclosures for the Company’s assets and liabilities that are measured at fair value, and establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. This category generally includes securities that are traded on an active exchange, such as the New York Stock Exchange, and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets.

M&F BANCORP, INC.

Notes To Consolidated Financial Statements, Continued

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 2 securities include U. S. Government agency obligations, state and municipal bonds and mortgage-backed securities.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. Level 3 generally includes OREO and impaired loans when there is no observable market price or if it is impaired.

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. While management believes the Company’s valuation methodologies are appropriate and consistent with other financial institutions, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges, which is a Level 1 input, or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities, which is a Level 2 input.

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired, and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company classifies the impaired loan as nonrecurring Level 3.

Other real estate owned is reported at fair value less anticipated costs to sell. Fair value is based on third party or internally developed appraisals which, considering the assumptions in the valuation, are considered Level 3 inputs.

Assets measured at fair value on a recurring and non-recurring basis, segregated by fair value hierarchy level, are summarized below:

(Dollars in thousands)				Quoted Prices in		Significant Other		Significant
(Unaudited)				Active Markets for		Observable		Unobservable
				Identical Assets		Inputs		Inputs
Description		June 30, 2010		(Level 1)		(Level 2)		(Level 3)
Recurring:
	Available for sale securities	$	15,810	$	-	$	15,810	$	-

Non-recurring:
	Other real estate owned		1,920		-		-		1,920
	Impaired and TDR loans		10,725		-		-		10,725
	Total	$	28,455	$	-	$	15,810	$	12,645

The “Financial Instruments” topic of the ASC requires the disclosure of the estimated fair value of certain financial instruments. These estimated fair values as of June 30, 2010, have been determined using available market information and appropriate valuation methodologies. Considerable judgment is required to interpret market data to develop estimates of fair value. The estimates presented are not necessarily indicative of amounts the Company could realize in a current market exchange. The use of alternative market assumptions and estimation methodologies could have a material effect on these estimates of fair value.

M&F BANCORP, INC.

Notes To Consolidated Financial Statements, Continued

Cash and Cash Equivalents: The carrying amount of cash and cash equivalents approximates fair value.

Loans (other than impaired loans): Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, residential mortgage, and other consumer. Each loan category is further segmented into groups by fixed and adjustable rate interest terms and by performing and non-performing categories.

The fair value of performing loans is typically calculated by discounting scheduled cash flows through their estimated maturity, using estimated market discount rates that reflect the credit and interest rate risk inherent in each group of loans. The estimate of maturity is based on contractual maturities for loans within each group, or on the Company’s historical experience with repayments for each loan classification, modified as required by an estimate of the effect of current economic conditions.

For all loans, assumptions regarding the characteristics and segregation of loans, maturities, credit risk, cash flows, and discount rates are judgmentally determined using specific borrower and other available information.

Accrued Interest Receivable and Payable: The fair value of interest receivable and payable is estimated to approximate the carrying amounts due to the relatively short term of these instruments.

Deposits: The fair value of deposits with no stated maturity, such as demand deposits, checking accounts, savings and money market accounts, is equal to the carrying amount. The fair value of time deposits is based on the discounted value of contractual cash flows, where the discount rate is estimated using the market rates currently offered for deposits of similar remaining maturities.

Borrowings: The fair value of borrowings is based on the discounted value of estimated cash flows. The discounted rate is estimated using market rates currently offered for similar advances or borrowings.

Off-Balance Sheet Instruments: Since the majority of the Company’s off-balance sheet instruments consist of non-fee-producing, variable rate commitments, the Company has determined they do not have a distinguishable fair value.

As of June 30, 2010 and December 31, 2009, the carrying amounts and associated estimated fair value of financial assets and liabilities of the Company are as follows:

(Dollars in thousands)	June 30, 2010				December 31, 2009
(Unaudited)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value

Assets:
Cash and cash equivalents	$	49,478	$	49,478	$	30,313	$	30,313
Marketable securities		15,810		15,810		17,699		17,699
Other invested assets		1,061		1,061		1,061		1,061
Loans, net of allowances for loan losses		202,905		209,092		206,547		212,158
Accrued interest receivable		745		745		935		935

Liabilities:
Deposits	$	244,388	$	244,672	$	224,807	$	228,506
Other borrowings		756		642		7,766		6,951
Accrued interest payable		306		306		188		188

M&F BANCORP, INC.

Notes To Consolidated Financial Statements, Continued

9.	Restricted Investment in FHLB Stock

Restricted stock, which represents a required investment in the common stock of a correspondent bank, is carried at cost and, as of June 30, 2010 and December 31, 2009, consisted of the common stock of the Federal Home Loan Bank (“FHLB”) of Atlanta.

Management evaluates the restricted stock for impairment in accordance with authoritative accounting guidance under ASC Topic 320, “Investment - Debt and Equity Securities.” Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of the cost of an investment is influenced by criteria such as (1) the significance of the decline in net assets of the issuing bank as compared to the capital stock amount for that bank and the length of time this situation has persisted, (2) commitments by the issuing bank to make payments required by law or regulation and the level of such payments in relation to the operating performance of that bank, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the issuing bank.

The FHLB of Atlanta announced that it would no longer provide dividend guidance prior to the end of each quarter. The FHLB of Atlanta also announced that it will no longer conduct repurchases of excess activity-based stock on a daily basis, but will make such determinations quarterly. The FHLB of Atlanta has announced $300 million repurchases of excess activity-based stock for each of the first two quarters of 2010, distributed pro rata to the banks with excess stock, as well as small dividends for each of the first two quarters of 2010.

10.	Investments

Investment securities represent the second largest component of earning assets. The Company’s securities portfolio consists primarily of the following debt securities:

U.S. government agencies

Government sponsored mortgage-backed securities (“MBS”)

Highly-rated collateralized debt securities

Municipal bonds

All of the securities are classified as available for sale. The available for sale classification allows flexibility in the management of interest rate risk, liquidity, and loan portfolio growth. Securities available for sale are reported at fair value with unrealized gains and losses (net of tax) excluded from operations and reported in other comprehensive income. Interest income includes amortization of purchase premium and accretion of purchase discount. The amortization of premiums and accretion of discounts is determined by using the level yield method. Securities are not acquired for purposes of engaging in trading activities. Realized gains and losses from sales of securities are determined using the specific identification method.

The Company regularly reviews declines in the fair value of securities below their costs for purposes of determining whether such declines are other-than-temporary in nature. In estimating other-than-temporary losses, management considers adverse changes in expected cash flows, the length of time and extent that fair value has been less than cost, the financial condition and near term prospects of the issuer, and whether it is more likely than not that the Company would be required to sell the investments prior to maturity or recovery of cost. If the Company determines that a decline in the fair value of a security below cost is other-than-temporary, the carrying amount of the security is reduced by any portion of the decline deemed to be credit related, with the corresponding decline charged to earnings. The carrying amount of the security is also reduced by any additional impairment deemed to be non-credit related, with the corresponding decline charged to other comprehensive income. Securities available for sale are carried at their fair value, and the mark-to-market adjustments were $0.6 million and $0.5 million unrealized gains as of June 30, 2010 and December 31, 2009, respectively. After considering applicable tax expense, the cumulative mark-to-market adjustment increased stockholders’ equity by $0.4 million and $0.3 million for June 30, 2010 and December 31, 2009, respectively. Future fluctuations in stockholders’ equity will occur due to changes in the fair values of available for sale securities.

On June 30, 2010 and December 31, 2009, the recorded value of investments totaled $15.8 million and $17.7 million, respectively. The interest rates available for reinvesting maturing securities, and changes in the interest rate yield curve were some of the factors affecting the decrease of the investment securities portfolio. Other invested assets include FHLB stock with a carrying value of $1.1 million as of June 30, 2010 and December 31, 2009.

M&F BANCORP, INC.

Notes To Consolidated Financial Statements, Continued

The following table reflects the fair value of the Company’s investment securities at the dates indicated.

	June 30, 2010		December 31, 2009
(Unaudited)	Fair Value		Fair Value
(Dollars in thousands)
US government agencies	$	1,003	$	-
Government sponsored MBS
Residential		7,648		9,244
Non-Government sponsored MBS
Residential		256		307
Municipal securities
North Carolina		3,265		4,517
Out of state		3,638		3,631
	$	15,810	$	17,699

The following table reflects the debt securities by contractual maturities as of June 30, 2010. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay mortgage-backed securities and collateralized mortgage obligations with or without call or prepayment penalties.

(Dollars in thousands)	As of June 30, 2010
(Unaudited)	Fair Value		Amortized Cost
US government agencies
Due within one year	$	1,003	$	1,000

Government sponsored MBS
Residential
Due after one year through five years	$	10	$	10
Due after five years through ten years		556		521
Due after ten years		7,082		6,675
Total government sponsored MBS	$	7,648	$	7,206

Non-government sponsored MBS
Residential
Due after ten years	$	256	$	251

Municipal bonds
North Carolina
Due within one year	$	511	$	497
Due after one year through five years		1,001		940
Due after five years through ten years		1,753		1,730
Total North Carolina municipal bonds	$	3,265	$	3,167

Out of state
Due within one year	$	256	$	255
Due after one year through five years		1,703		1,657
Due after five years through ten years		1,679		1,653
Total out of state municipal bonds	$	3,638	$	3,565

M&F BANCORP, INC.

Notes To Consolidated Financial Statements, Continued

The amortized cost, gross unrealized gains and losses and fair values of investment securities at June 30, 2010 and December 31, 2009 are as follows:

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
(Unaudited)
June 30, 2010
US government agencies	$	1,000	$	3	$	-		$	1,003
Government sponsored MBS
Residential		7,206		442		-			7,648
Non-Government sponsored MBS
Residential		251		5		-			256
Municipal securities
North Carolina		3,167		98		-			3,265
Out of state		3,565		73		-			3,638
Total at June 30, 2010	$	15,189	$	621	$	-		$	15,810

December 31, 2009
US government agencies
Government sponsored MBS
Residential	$	8,887	$	357	$	-		$	9,244
Non-Government sponsored MBS
Residential		310		-		(3	)		307
Municipal securities
North Carolina		4,402		115		-			4,517
Out of state		3,566		71		(6	)		3,631
Total at December 31, 2009	$	17,165	$	543	$	(9	)	$	17,699

The Bank had no securities in an unrealized loss position as of June 30, 2010. As of December 31, 2009, the fair value of securities with gross unrealized losses by length of time that the individual securities have been in an unrealized loss position were as follows:

	Fair Value					Fair Value					Fair Value
(Dollars in thousands)	Gain		(Loss)			Gain		(Loss)			Gain		(Loss)
(Unaudited)	Less Than 12 Months					12 Months or Greater					Total
December 31, 2009
Government sponsored MBS
Residential	$	-	$	-		$	11	$	-		$	11	$	-
Non-Government sponsored MBS
Residential		-		-			307		(3	)		307		(3	)
Municipal securities
Out of state		244		(6	)							244		(6	)
Total at December 31, 2009	$	244	$	(6	)	$	318	$	(3	)	$	562	$	(9	)

M&F BANCORP, INC.

Notes To Consolidated Financial Statements, Continued

11.	Commitments and Contingent Liabilities

Commitments to Extend Credit

In the normal course of business, the Company has various commitments to extend credit, which are not reflected in the Consolidated Financial Statements. As of June 30, 2010 and December 31, 2009, the Company had outstanding loan commitments (including available lines of credit) of approximately $20.6 million and $24.7 million, respectively. Commitments under standby letters of credit and financial guarantees amounted to approximately $0.2 million as of June 30, 2010 and December 31, 2009. These lines of credit, standby letters of credit, and financial guarantees represent agreements whereby the Company commits to lend funds to customers up to a predetermined maximum amount during a certain period.

The Company approves lines of credit to consumer customers through home equity and consumer overdraft protection loans, all of which are included in the above commitments to extend credit. As of June 30, 2010 and December 31, 2009, in addition to actual advances made on such loans, the Company’s consumer customers have available additional lines of credit on home equity and consumer overdraft protection loans. Available amounts on home equity lines as of June 30, 2010 and December 31, 2009 were approximately $1.7 million and $2.5 million, respectively. In addition, the available amounts on consumer overdraft protection loans were $1.0 million as of June 30, 2010 and December 31, 2009.

No significant losses are anticipated as a result of these commitments.

Fed Funds Line

As of June 30, 2010, the Company has available for use Federal Funds Lines (“Fed Funds Lines”) aggregating $12.0 million from three correspondent banks. The Fed Funds Lines are renewed annually. Interest rates are stated as variable on a daily basis. The Company did not have any outstanding balances as of June 30, 2010. The Company utilizes its Fed Funds Lines periodically. The Company, however, did not utilize the Fed Funds Lines during the quarter ended June 30, 2010.

As of June 30, 2010, the Company has additional borrowing capacity at the FHLB of $11.2 million.

Letters of Credit

In October 2008, the Company secured a $2.0 million letter of credit with FHLB to use as collateral for public deposits. The letter of credit is secured by the Company’s collateral with FHLB and is renewable annually.

12.	Borrowings

The June 30, 2010 and December 31, 2009 borrowings, and accompanying maturities and interest rates were:

(Dollars in thousands)	June 30, 2010
(Unaudited)	Amount		Maturity Date		Rate
Fixed Rate Note	$	756		2020		0.50	%



	December 31, 2009
	Amount		Maturity Date		Rate
Daily Rate Credit (1)	$	2,000		2010		0.36	%
Fixed Rate Note (2)		5,000		2013		0.32
Fixed Rate Note		766		2020		0.50
	$	7,766
(1) Variable rate
(2) In January 2010, the Company took advantage of an opportunity to repay the $5 million fixed rate note referenced in the above table, with no prepayment penalty, and the Company repaid the Daily Rate Credit balance in full.

M&F BANCORP, INC.

Notes To Consolidated Financial Statements, Continued

13.	Subsequent Events

The Company has been approved by the Treasury to redeem and exchange the preferred stock issued through TARP with the newly created Community Development Capital Initiative (“CDCI”) program.

CDCI was designed for Community Development Financial Institutions (“CDFI”) and will lower the TARP dividend rate for CDFIs from 5% for 5 years to 2% for 8 years. The CDCI program is expected to reduce the TARP dividends’ impact on capital by approximately $0.3 million annually.

M&F BANCORP, INC.

Item 2 - Management’s Discussion and Analysis

Overview

Management’s Discussion and Analysis is provided to assist readers in understanding and evaluating the results of operations and financial condition of M&F Bancorp, Inc. (the “Company”) and its wholly-owned bank subsidiary, Mechanics and Farmers Bank (the “Bank”). The following discussion is intended to provide a general overview of the Company’s performance for the three and six months ended June 30, 2010, compared with the same period in 2009. Readers seeking a more in-depth discussion are invited to read the more detailed discussions below, as well as the Consolidated Financial Statements and related notes included under Item 1 of this Quarterly Report on Form 10-Q. All information presented is consolidated data unless otherwise specified.

Financial Highlights for the Three Month Period Ended June 30, 2010