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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, 2014

Commission file number 000-027307

 

(Exact name of registrant as specified in charter)

North Carolina

(State or Other Jurisdiction of

Incorporation or Organization)

 

56-1980549

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

2634 Durham Chapel Hill Blvd.

Durham, North Carolina

(Address of Principal Executive Offices)

 

 

27707-2800

(Zip Code)

 

(919) 687-7800

(Registrant’s Telephone Number, Including Area Code)

 

 

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. Yes  x  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). Yes  x  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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

 

Large accelerated filer  ¨ Accelerated filer  ¨ Non-accelerated filer  ¨ Smaller reporting Company x
  (Do not check here if a smaller
reporting Company)
 

 

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

Yes  ¨  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, 2014, there were 2,031,337 shares outstanding of the issuer's common stock, no par value.

 
 

M&F BANCORP, INC. AND SUBSIDIARY

 

INDEX  
PART 1. FINANCIAL INFORMATION  
   
Item 1. Financial Statements (unaudited)  
   
Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013 3
   
Consolidated Statements of Income (Loss) for the three and six months ended June 30, 2014 and 2013 4
   
Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2014 and 2013 5
   
Consolidated Statement of Changes in Stockholders’ Equity for the six months ended June 30, 2014  and 2013 6
   
Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013 7
   
Notes to Consolidated Financial Statements 9
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35
   
Item 4. Controls and Procedures 46
   
PART II. OTHER INFORMATION  
   
Item 1. Legal Proceedings 47
   
Item 6. Exhibits 48
   
SIGNATURES 50

 

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M&F BANCORP, INC. AND SUBSIDIARY

 

PART I

FINANCIAL INFORMATION

Item 1 - Financial Statements

CONSOLIDATED BALANCE SHEETS        
         
   June 30,   December 31, 
(Dollars in thousands)  2014   2013 
   (Unaudited)      
ASSETS          
           
Cash and cash equivalents          
Cash and due from banks  $2,731   $3,390 
Interest-bearing deposits   26,231    22,193 
Federal funds sold       3,000 
Total cash and cash equivalents   28,962    28,583 
Investment securities available for sale, at fair value   69,495    65,919 
Other invested assets   308    389 
Loans, net of unearned income and deferred fees   184,900    189,475 
Allowances for loan losses   (3,449)   (3,493)
Loans, net   181,451    185,982 
Interest receivable   821    912 
Bank premises and equipment, net   4,359    4,373 
Cash surrender value of bank-owned life insurance   6,091    6,191 
Other real estate owned   2,691    3,032 
Deferred tax assets and taxes receivable, net   3,575    4,153 
Other assets   908    1,955 
TOTAL ASSETS  $298,661   $301,489 
LIABILITIES AND STOCKHOLDERS' EQUITY          
Deposits          
Interest-bearing deposits  $205,594   $211,870 
Noninterest-bearing deposits   50,672    48,057 
Total deposits   256,266    259,927 
Other borrowings   805    847 
Other liabilities   4,450    4,578 
Total liabilities   261,521    265,352 
           
COMMITMENTS AND CONTINGENCIES          
           
Stockholders' equity:          
Series B Preferred Stock-  $1,000 liquidation value per share, 11,735 shares issued and outstanding   11,728    11,727 
Common stock, no par value 10,000,000 shares authorized; 2,031,337 shares issued and outstanding   8,732    8,732 
Retained earnings   17,770    17,103 
Accumulated other comprehensive loss   (1,090)   (1,425)
Total stockholders' equity   37,140    36,137 
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $298,661   $301,489 

 

See notes to consolidated financial statements.  

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M&F BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (LOSS)                
   For the Three Months Ended   For the Six Months Ended 
   June 30,   June 30, 
(Dollars in thousands except for share and per share data)  2014   2013   2014   2013 
(Unaudited)                
Interest income:                    
Loans, including fees  $2,443   $2,481   $4,937   $4,921 
Investment securities, including dividends                    
Taxable   296    189    614    368 
Tax-exempt   8    9    17    18 
Other   16    11    34    36 
                     
Total interest income   2,763    2,690    5,602    5,343 
Interest expense:                    
Deposits   163    174    337    363 
Borrowings   1    2    2    3 
                     
Total interest expense   164    176    339    366 
Net interest income   2,599    2,514    5,263    4,977 
Less provision for loan losses                
                     
Net interest income after provision for loan losses   2,599    2,514    5,263    4,977 
                     
Noninterest income:                    
Service charges   298    285    595    566 
Rental income   49    65    97    143 
Cash surrender value of life insurance   51    57    101    108 
Gain on sale of repossessed assets   515        515     
Other income   5    1    61    3 
Total noninterest income   918    408    1,369    820 
                     
Noninterest expense:                    
Salaries and employee benefits   1,360    1,404    2,663    2,869 
Occupancy and equipment   374    370    739    742 
Directors fees   50    74    104    157 
Marketing   35    46    71    88 
Professional fees   177    193    380    447 
Information technology   188    207    394    421 
FDIC deposit insurance   143    126    292    228 
Other real estate owned expense, net   27    173    85    190 
Gains at foreclosure   (28)   (5)   (41)   (5)
Delivery expenses   44    45    90    84 
Other   359    299    653    572 
Total noninterest expense   2,729    2,932    5,430    5,793 
                     
Income (loss) before income taxes   788    (10)   1,202    4 
Income tax expense (benefit)   281    (3)   418    1 
Net income (loss)   507    (7)   784    3 
                     
Less preferred stock dividends and accretion   (59)   (59)   (117)   (118)
                     
Net income (loss) available to common stockholders  $448   $(66)  $667   $(115)
                     
                     
Basic and diluted earnings  (loss) per share of common stock:  $0.22   $(0.03)  $0.33   $(0.06)
Weighted average shares of common stock outstanding:                    
Basic and diluted   2,031,337    2,031,337    2,031,337    2,031,337 

 

See notes to consolidated financial statements.

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M&F BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)                    
   For the Three Months Ended   For the Six Months Ended 
(Dollars in thousands)  June 30,   June 30, 
(Unaudited)  2014   2013   2014   2013 
                 
Net income (loss)  $507   $(7)  $784   $3 
                     
Other comprehensive income (loss):                    
Investment Securities:                    
Unrealized holding gains (losses) on securities available for sale   229    (596)   539    (672)
Tax Effect   (87)   230    (204)   238 
Net of tax amount   142    (366)   335    (434)
                     
Defined benefit pension plans:                    
Net actuarial gain   (54)   (90)   (108)   (180)
Prior service cost   54    90    108    180 
Tax effect                
Net of tax amount                
                     
Other comprehensive income (loss), net of tax   142    (366)   335    (434)
                     
Comprehensive income (loss)  $649   $(373)  $1,119   $(431)

 

See notes to consolidated financial statements  

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M&F BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY                
For the Six Months Ended June 30, 2014 and 2013                        
                   Accumulated     
   Number               Other     
(Dollars in thousands except for share data)  of   Common   Preferred   Retained   Comprehensive     
(Unaudited)  Shares   Stock   Stock   Earnings   Loss   Total 
Balances as of December 31, 2012   2,031,337   $8,732   $11,725   $17,230   $(1,408)  $36,279 
Accretion of Series B preferred stock issuance costs             1    (1)         
Net income                  3         3 
Other comprehensive loss, net of tax                       (434)   (434)
Dividends declared on preferred stock                  (117)        (117)
                               
Balances as of June 30, 2013   2,031,337   $8,732   $11,726   $17,115   $(1,842)  $35,731 
                               
Balances as of December 31, 2013   2,031,337   $8,732   $11,727   $17,103   $(1,425)   36,137 
Accretion of Series B preferred stock issuance costs             1    (1)         
Net income                  784         784 
Other comprehensive income, net of tax                       335    335 
Dividends declared on preferred stock                  (116)        (116)
                               
Balances as of June 30, 2014   2,031,337   $8,732   $11,728   $17,770   $(1,090)  $37,140 

 

See notes to consolidated financial statements

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M&F BANCORP, INC. AND SUBSIDIARY

         
CONSOLIDATED STATEMENTS OF CASH FLOWS        
   For the Six Months Ended 
   June 30, 
(Dollars in thousands)  2014   2013 
(Unaudited)        
         
Cash flows from operating activities:          
Net income  $784   $3 
Adjustments to reconcile net income to net cash          
 provided by (used in) operating activities:          
Depreciation and amortization   169    176 
Gain on disposition of repossessed asset   (515)    
Amortization of discounts/premiums on investments, net   352    577 
Deferred income tax provision   86    43 
Deferred loan origination fees and costs, net   89    94 
Increase in cash surrender value of bank owned life insurance   (101)   (108)
Gain at foreclosure   (41)   (5)
Net gain on sale of other real estate owned   (121)   (28)
Writedown of other real estate owned   114    165 
Net changes in:          
Accrued interest receivable and other assets   837    (1,550)
Other liabilities   (128)   (515)
           
Net cash  provided by (used in) operating activities   1,525    (1,148)
           
Cash flows from investing activities:          
Activity in available for sale securities:          
Maturities and calls   5,657     
Principal collections   6,741    9,093 
Purchases   (15,787)   (5,663)
FHLB stock redemptions   81    99 
Net (increase) decrease in loans   4,184    (4,093)
Purchases of bank premises and equipment   (162)   (56)
Disposal of bank premises and equipment   7     
Proceeds from death benefit of bank-owned life insurance policies   201     
Proceeds from disposition of repossessed asset   1,107     
Proceeds from sale of other real estate owned   644    44 
           
Net cash provided by (used in)  investing activities   2,673    (576)
           
Cash flows from financing activities:          
Net decrease in deposits   (3,661)   (10,379)
Proceeds from other borrowings   62    62 
Repayments of other borrowings   (104)   (102)
Cash dividends   (116)   (117)
           
Net cash used in financing activities   (3,819)   (10,536)
           
Net increase (decrease) in cash and cash equivalents   379    (12,260)
           
Cash and cash equivalents as of the beginning of the period   28,583    42,586 
           
Cash and cash equivalents as of the end of the period  $28,962   $30,326 

 

See notes to consolidated financial statements.

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M&F BANCORP, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED        
   For the Six Months Ended June 30, 
(Dollars in thousands)  2014   2013 
(Unaudited)        
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:          
Cash paid during period for:          
Interest  $314   $384 
Income Taxes  $39   $ 
Noncash Transactions:          
Loans transferred to OREO  $255  $54 
Net unrealized gain (loss) on investment securities available for sale, net of deferred income tax  $335   $(434)
Loans transferred to foreclosed assets  $3   $ 
Accretion of Series B preferred stock issuance costs  $1   $1 
Transfer of participation loans sold from other borrowings to loans  $   $(2,010)
Loan transfer to other assets  $   $3,012 
Transfer between fixed assets and noninerest-bearing deposit account  $   $(39)

 

See notes to consolidated financial statements.  

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M&F BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations

 

M&F Bancorp, Inc. (the “Company”) is a bank holding company, and the parent company of Mechanics and Farmers Bank (the “Bank”), a state chartered commercial bank incorporated in North Carolina (“NC”) in 1907, which began operations in 1908. The Bank has seven branches in NC: two in Durham, two in Raleigh, and one each in Charlotte, Greensboro and Winston-Salem. The Company, headquartered in Durham, operates as a single business segment and offers a wide variety of consumer and commercial banking services and products almost exclusively in NC.

 

Basis of Presentation

 

The Consolidated Financial Statements include the accounts and transactions of the Company and the Bank, the wholly owned subsidiary. 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, 2013, which were derived from the Company’s audited consolidated Annual Report on Form 10-K as of and for the year ended December 31, 2013.

 

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, 2013.

 

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.

 

Segment Reporting

 

Based on an analysis performed by the Company, management has determined that the Company has only one operating segment, which is commercial banking. The chief operating decision-maker uses consolidated results to make operating and strategic decisions and therefore, the Company is not required to disclose additional segment information.

 

Use of Estimates

 

The financial statements are prepared in accordance with GAAP, which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

New Accounting Pronouncements –

 

In January 2014, the Financial Accounting Standards Board (“FASB”) amended the “Receivables—Troubled Debt Restructurings by Creditors” subtopic of the Codification to address the reclassification of consumer mortgage loans collateralized by residential real estate upon foreclosure. The amendments clarify the criteria for determining that an in substance repossession or foreclosure has occurred, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The amendments also outline interim and annual disclosure requirements. The amendments will be effective for the Company for interim and annual reporting periods beginning after December 15, 2014. Companies are allowed to use either a modified retrospective transition method or a prospective transition method when adopting this update. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

 

In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2016. The Company will apply the guidance using a modified retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

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Notes to Consolidated Financial Statements continued

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

2.INVESTMENT SECURITIES

 

The main objectives of our investment strategy are to provide a source of liquidity while managing our interest rate risk, and to generate an adequate level of interest income without taking undue risks. Our investment policy permits investments in various types of securities, certificates of deposits and federal funds sold in compliance with various restrictions in the policy. As of June 30, 2014 and December 31, 2013, all investment securities were classified as available-for-sale.

Our available-for-sale securities totaled $69.5 million and $65.9 million as of June 30, 2014 and December 31, 2013, respectively. Securities with a fair value of $1.0 million were pledged to the Federal Reserve Bank of Richmond (“Federal Reserve Bank”) and an additional $4.4 million and $19.1 million in investments were pledged to public housing authorities in North Carolina and the North Carolina Department of State Treasurer as collateral for public deposits at June 30, 2014. Securities with a fair value of $1.0 million were pledged to the Federal Reserve Bank and an additional $3.5 million and $15.4 million in investments were pledged to public housing authorities in North Carolina and the North Carolina Department of State Treasurer as collateral for public deposits at December 31, 2013. Our investment portfolio consists of the following securities:

·U.S. government agency securities ,
·U.S. government sponsored residential mortgage backed securities (“MBS”), and
·Municipal securities (“Municipals”)

 

The amortized cost, gross unrealized gains and losses and fair values of investment securities at June 30, 2014 and December 31, 2013 were:

 

(Dollars in thousands)  Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair Value 
(Unaudited)                
June 30, 2014                    
US government agencies  $12,370   $17   $(96)  $12,291 
Government sponsored MBS                    
Residential   56,223    256    (278)   56,201 
Municipal securities                    
North Carolina   1,015    12    (24)   1,003 
Total  $69,608   $285   $(398)  $69,495 
                     
December 31, 2013                    
US government agencies  $7,000       $(234)  $6,766 
Government sponsored MBS                    
Residential   58,086    118    (506)   57,698 
Municipals                    
North Carolina   1,485    21    (51)   1,455 
Total  $66,571   $139   $(791)  $65,919 

There were no gross realized gains or losses on sales or calls of securities during the three- or six-month periods ended June 30, 2014 or 2013.

The amortized cost and estimated market values of securities as of June 30, 2014 and December 31, 2013 by contractual maturities are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. MBS, which are not due at a single maturity date, are grouped based upon the final payment date. MBS may mature prior to the applicable final payment date because of principal prepayments.

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Notes to Consolidated Financial Statements continued

   As of June 30, 2014 
   Fair Value   Amortized Cost 
         
Due within one year  $1,989   $2,000 
Due after one year through five years   7,369    7,370 
Due after five years through ten years   2,933    3,000 
Total US government agencies  $12,291   $12,370 
           
           
Residential          
Due within one year  $12,215   $12,258 
Due after one year through five years   24,504    24,537 
Due after five years through ten years   12,490    12,462 
Due after ten years   6,992    6,966 
Total government sponsored MBS  $56,201   $56,223 
           
           
North Carolina          
Due within one year  $166   $162 
Due after one year through five years   269    260 
Due after five years through ten years   568    593 
Total North Carolina municipal bonds  $1,003   $1,015 
           

 

   As of December 31, 2013 
   Fair Value   Amortized Cost 
         
Due within one year  $4,934   $5,000 
Due after one year through five years   1,832    2,000 
Total US government agencies  $6,766   $7,000 
           
           
Residential          
Due within one year  $12,090   $12,156 
Due after one year through five years   25,152    25,314 
Due after five years through ten years   12,450    12,560 
Due after ten years   8,006    8,056 
Total government sponsored MBS  $57,698   $58,086 
           
           
North Carolina          
Due within one year  $472   $465 
Due after one year through five years   437    423 
Due after five years through ten years   546    597 
Total North Carolina municipal bonds  $1,455   $1,485 

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M&F BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements continued

All securities owned as of June 30, 2014 and December 31, 2013 are investment grade. The unrealized losses were attributable to changes in market interest rates. The Company evaluates securities for other than temporary impairment on a quarterly basis. Consideration is given to the financial condition and near-term prospects of the issuer, the length of time and extent to which the fair value has been less than cost, and our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Based on these evaluations, the Company did not deem any securities to be impaired during 2013 or the first six months of 2014.

 

As of June 30, 2014 and December 31, 2013, the Company held 56 and 68 investment positions, respectively, with unrealized losses of $398 thousand and $791 thousand, respectively. These investments were in U.S. government agencies, Government sponsored MBS and Municipals. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. Management had determined that all declines in market values of available-for-sale securities are not other-than-temporary, and the Company will not likely be required to sell these securities.

 

As of June 30, 2014 and December 31, 2013, the fair value of securities with gross unrealized losses by length of time that the individual securities have been in an unrealized loss position is as follows:

 

(Dollars in thousands)  Less Than 12 Months   12 Months or Greater   Total 
(Unaudited)  Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
June 30, 2014                        
US government agencies  $5,843   $(27)  $1,931   $(69)  $7,774   $(97)
Government sponsored MBS                              
Residential   12,880    (66)   15,198    (212)   28,078    (278)
Municipals                              
North Carolina   568    (24)           568    (24)
Total  $19,291   $(117)  $17,129   $(281)  $36,420   $(398)

 

(Dollars in thousands)  Less Than 12 Months   12 Months or Greater   Total 
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
December 31, 2013                              
US government agencies  $6,766   $(234)  $   $   $6,766   $(234)
Government sponsored MBS                              
Residential   46,373    (506)   20        46,393    (506)
Municipals                              
North Carolina   546    (51)           546    (51)
Total  $53,685   $(791)  $20   $   $53,705   $(791)

 

 

3.FEDERAL HOME LOAN BANK OF ATLANTA (“FHLB”)

 

To be a member of the FHLB System, the Bank is required to maintain an investment in capital stock of the FHLB in an amount equal to 0.09% and 0.12% at June 30, 2014 and December 31, 2013, respectively, of its total assets as of December 31 of the prior year (up to a maximum of $15.0 million and $20.0 million at June 30, 2014 and December 31, 2013, respectively), plus 4.5% of its outstanding FHLB advances. The carrying value of FHLB stock, which is included in Other Invested Assets on the Consolidated Balance Sheets, as of June 30, 2014 and December 31, 2013 was $0.3 million and $0.4 million, respectively. No ready market exists for the FHLB stock, and it has no quoted market value; however, management believes that the cost approximates the market value as of June 30, 2014 and December 31, 2013. The FHLB, of which the Bank is a member, has been impacted by the Recession that began in 2008. Management has reviewed its investment in FHLB stock for impairment and does not believe it is impaired as of June 30, 2014 or December 31, 2013.

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M&F BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements continued

4.RECONCILIATIONS OF BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE ("EPS")

 

Basic EPS is computed by dividing net income (loss) available to common stockholders by the weighted average number shares of common stock outstanding for the period. Basic EPS excludes the dilutive effect that could occur if any options or warrants to purchase shares of common stock were exercised. Diluted EPS is computed by dividing net income (loss) available to common stockholders by the sum of the weighted average number of shares of common stock outstanding for the period plus the number of additional shares of common stock that would have been outstanding if the potentially dilutive common shares had been issued. There are no stock options or warrants outstanding.

 

5.ACCUMULATED OTHER 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 defined benefit plan adjustments.

 

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT        
For The Three and Six Months Ended June 30, 2014 and 2013            
             
(Dollars in thousands)            
(Unaudited)            
   Unrealized
Gains and
Losses on
Available-for-
Sale Securities
   Defined
Benefit
Pension Items
   Total 
Balance as of December 31, 2012  $426   $(1,834)  $(1,408)
Other comprehensive loss before reclassifications   (434)       (434)
Amounts reclassified from accumulated other comprehensive loss            
Net current-period other comprehensive loss   (434)       (434)
Balance as of June 30, 2013  $(8)  $(1,834)  $(1,842)
                
                
                
Balance as of March 31, 2013  $358   $(1,834)  $(1,476)
Other comprehensive loss before reclassifications   (366)       (366)
Amounts reclassified from acumulated other comprehensive loss            
Net current-period other comprehensive loss   (366)       (366)
Balance as of June 30, 2013  $(8)  $(1,834)  $(1,842)
                
                
                
Balance as of December 31, 2013  $(405)  $(1,020)  $(1,425)
Other comprehensive income before reclassifications   335        335 
Amounts reclassified from accumulated other comprehensive income            
Net current-period other comprehensive income   335        335 
Balance as of June 30, 2014  $(70)  $(1,020)  $(1,090)
                
                
Balance as of March 31, 2014  $(212)  $(1,020)  $(1,232)
Other comprehensive income before reclassifications   142        142 
Amounts reclassified from acumulated other comprehensive income            
Net current-period other comprehensive income   142        142 
Balance as of June 30, 2014  $(70)  $(1,020)  $(1,090)

 

All amounts are net of tax.    

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M&F BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements continued

6.LOANS AND ALLOWANCE FOR LOAN LOSSES

 

The activity in the Company’s allowance for loan losses (“ALLL”) for the three and six month periods ending June 30, 2014 and 2013 and related asset balances at June 30, 2014 and December 31, 2013 is summarized as follows:

 

   For the Three Months Ended June 30, 2014 
           Faith-                     
           Based   Residential                 
       Commercial   Non-   Real       Other         
(Dollars in thousands)  Commercial   Real Estate   Profit   Estate   Consumer   Loans   Unallocated   Total 
                                 
ALLL:                                        
Total ending ALLL balances as of March 31, 2014  $178   $699   $1,796   $612   $19   $37   $145   $3,486 
For the three months ended June 30, 2014                                        
Charge-offs               (24)   (15)   (5)       (44)
Recoveries               5    1    1        7 
Provision for loan losses   (69)   81    (110)   52    22    76    (52)    
Total ending ALLL balances as of June 30, 2014  $109   $780   $1,686   $645   $27   $109   $93   $3,449 

 

 

   For the Three Months Ended June 30, 2013 
           Faith-                     
           Based   Residential                 
       Commercial   Non-   Real       Other         
(Dollars in thousands)  Commercial   Real Estate   Profit   Estate   Consumer   Loans   Unallocated   Total 
                                 
ALLL:                                        
Total ending ALLL balances as of March 31, 2013  $76   $1,192   $1,278   $851   $27   $48   $29   $3,501 
For the three months ended June 30, 2013                                        
Charge-offs       (237)       (33)       (5)       (275)
Recoveries       2        4    (4)   6        8 
Provision for loan losses   165    (151)       9    (1)   (6)   (16)    
Total ending ALLL balances as of June 30, 2013  $241   $806   $1,278   $831   $22   $43   $13   $3,234 

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M&F BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements continued

   For the Six Months Ended June 30, 2014 
           Faith-                     
           Based   Residential                 
       Commercial   Non-   Real       Other         
(Dollars in thousands)  Commercial   Real Estate   Profit   Estate   Consumer   Loans   Unallocated   Total 
                                 
ALLL:                                        
Total ending ALLL balances as of December 31, 2013  $184   $808   $1,883   $493   $19   $106   $   $3,493 
For the six months ended June 30, 2014                                        
Charge-offs               (31)   (16)   (11)       (58)
Recoveries               9    1    4        14 
Provision for loan losses   (75)   (28)   (197)   174    23    10    93     
Total ending ALLL balances as of June 30, 2014  $109   $780   $1,686   $645   $27   $109   $93   $3,449 

 

   For the Six Months Ended June 30, 2013 
           Faith-                     
           Based   Residential                 
       Commercial   Non-   Real       Other         
(Dollars in thousands)  Commercial   Real Estate   Profit   Estate   Consumer   Loans   Unallocated   Total 
                                 
ALLL:                                        
Total ending ALLL balances as of December 31, 2012  $90   $881   $1,246   $937   $30   $54   $261   $3,499 
For the Six Months Ended June 30, 2013                                        
Charge-offs       (237)       (33)   (2)   (10)       (282)
Recoveries       2        8    1    6        17 
Provision for loan losses   151    160    32    (81)   (7)   (7)   (248)    
Total ending ALLL balances as of June 30, 2013  $241   $806   $1,278   $831   $22   $43   $13   $3,234 

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M&F BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements continued

   June 30, 2014 
           Faith                     
           Based                     
       Commercial   Non-   Residential       Other         
(Dollars in thousands)  Commercial   Real Estate   Profit   Real Estate   Consumer   Loans   Unallocated   Total 
ALLL:                                        
  Ending ALLL balance attributable to loans:                                              
Individually evaluated for impairment  $   $63   $576   $213   $   $   $   $852 
Collectively evaluated for impairment   109    717    1,110    432    27    109    93    2,597 
Total ending ALLL balance  $109   $780   $1,686   $645   $27   $109   $93   $3,449 
                                         
Loans:                                        
Loans individually evaluated for impairment  $   $9,029   $16,481   $3,310   $8   $   $   $28,828 
Loans collectively evaluated for impairment   7,154    42,797    74,810    23,380    1,251    6,680        156,072 
Total ending loans balance  $7,154   $51,826   $91,291   $26,690   $1,259   $6,680   $   $184,900 

 

   December 31, 2013 
           Faith                     
           Based                     
       Commercial   Non-   Residential       Other         
(Dollars in thousands)  Commercial   Real Estate   Profit   Real Estate   Consumer   Loans   Unallocated   Total 
ALLL:                                        
  Ending ALLL balance attributable to loans:                              
Individually evaluated for impairment  $   $   $931   $75   $   $   $   $1,006 
Collectively evaluated for impairment   184    808    952    418    19    106        2,487 
Total ending ALLL balance  $184   $808   $1,883   $493   $19   $106   $   $3,493 
                                         
Loans:                                        
Loans individually evaluated for impairment  $   $9,029   $17,661   $3,947   $11   $   $   $30,648 
Loans collectively evaluated for impairment   12,344    50,060    67,802    24,966    1,329    2,326        158,827 
Total ending loans balance  $12,344   $59,089   $85,463   $28,913   $1,340   $2,326   $   $189,475 

 

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M&F BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements continued

The Bank experienced $37 thousand and $267 thousand in net loan charge-offs for the three months ended June 30, 2014 and 2013, respectively. Annualized net charge-offs as a percent of average loan balances outstanding totaled 0.08% and 0.60% during the three month periods ended June 30, 2014 and 2013, respectively. The Bank experienced $44 thousand and $265 thousand in net loan charge-offs for the six months ended June 30, 2014 and 2013, respectively. Annualized net charge-offs as a percent of average loan balances outstanding totaled 0.05% and 0.30% during the six month periods ended June 30, 2014 and 2013, respectively, and 0.19% for the year ended December 31, 2013.

Loans— Loans are stated at the amount of unpaid principal, net of deferred loan origination fees and costs. Nonrefundable loan fees, net of direct costs, associated with the origination or acquisition of loans are deferred and recognized as an adjustment of the loan yield over the life of the respective loan using the effective interest method. Loans (net) are reduced by the ALLL. Interest on loans is accrued on the daily balances of unpaid principal outstanding. Interest income is accrued and credited to income only if deemed collectible. Other loan fees and charges, representing service charges for the prepayment of loans, for delinquent payments, or for miscellaneous loan services, are recorded in income when collected.

A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its ALLL. The composition of the loan portfolio, net of deferred fees and costs, by loan classification as of June 30, 2014 and December 31, 2013 was as follows:

 

(Dollars in thousands)  June 30, 2014   December 31, 2013 
         
Commercial  $7,154   $12,344 
Commercial real estate:          
Construction   537    4,758 
Owner occupied   24,010    22,186 
Other   27,279    32,145 
Faith-based non-profit:          
Construction   6,598     
Owner Occupied   82,809    78,761 
Other   1,884    6,702 
Residential real estate:          
First mortgage   20,557    22,350 
Multifamily   3,105    3,271 
Home equity   2,671    3,051 
Construction   357    241 
Consumer   1,259    1,340 
Other loans   6,680    2,326 
Loans, net of deferred fees   184,900    189,475 
ALLL   (3,449)   (3,493)
Loans, net of ALLL  $181,451   $185,982 

 

The Bank has a concentration of loans to faith-based non-profit organizations, in which the Bank has specialized lending experience. As of June 30, 2014, the percentage of loans in this niche, which included construction, real estate secured, and lines of credit, comprised approximately 49.37% of the total loan portfolio and the reserve for these loans was 48.88% of the total allowance. Historically, the Bank has experienced low levels of loan losses in this niche; however, repayment of these loans is generally dependent on voluntary contributions which some have been adversely affected by the recent economic downturn.

 

Non-Performing Loans and Leases - Generally, all classes of loans and leases are placed on non-accrual status upon becoming contractually past due 90 days or more as to principal or interest (unless loans are adequately secured by collateral, are in the process of collection, and are reasonably expected to result in repayment), or where substantial doubt about full repayment of principal or interest is evident.

 

When a loan is placed on non-accrual status, regardless of class, the accrued and unpaid interest receivable is reversed and the loan is accounted for on the cash or cost recovery method until qualifying for return to accrual status. All payments received on non-accrual loans and leases are applied against the principal balance of the loan or lease. Loans may be returned to accrual status when all principal and interest amounts contractually due (including any arrearages) are reasonably assured of repayment within a reasonable period, the borrower has demonstrated payment performance for a minimum of six months in accordance with the original or revised contractual terms of the loan, and when doubt about repayment is resolved.

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M&F BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements continued

Generally, for all classes of loans and leases, a charge-off is recorded when it is probable that a loss has been incurred and when it is possible to determine a reasonable estimate of the loss. For all classes of commercial loans and leases, a charge-off is determined on a subjective basis after due consideration of the debtor's prospects for repayment and the fair value of collateral. For closed-end consumer loans, the entire outstanding balance of the loan is charged-off during the month that the loan becomes 120 days past due as to principal or interest. Consumer loans with non-real estate collateral are written down to the value of the collateral, less estimated costs to sell, if repossession of collateral is assured and in process. For residential mortgage and home equity loan classes, a partial charge-off is recorded at 120 days past due as to principal or interest for the amount that the loan balance exceeds the fair value of the collateral less estimated costs to sell.

 

Impaired Loans - A loan is considered impaired when, based on current information and events, it is probable that the Company will not be able to collect all amounts due from the borrower in accordance with the original contractual terms of the loan, including scheduled interest payments. Impaired loans include all classes of commercial non-accruing loans and Troubled Debt Restructurings ("TDRs"). Impaired loans exclude smaller balance homogeneous loans (consumer and small business non-accruing loans) not in the process of foreclosure that are collectively evaluated for impairment.

 

For all classes of commercial loans, a quarterly evaluation of specific individual commercial borrowers with identified weaknesses is performed to identify impaired loans. The identification of specific borrowers for review is based on a review of non-accrual loans as well as those loans specifically identified by management as exhibiting above average levels of risk.

 

When a loan has been identified as being impaired, the amount of impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral-dependent. If the measurement of the impaired loan is less than the recorded investment in the loan (net of deferred loan fees or costs and unamortized premiums or discounts), impairment is recognized by creating or adjusting an existing allocation of the ALLL, or by recording a partial charge-off of the loan to its estimated fair value. Interest payments made on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest income may be accrued or recognized on a cash basis.

 

Income Recognition on Impaired and Non-accrual Loans - Loans, including impaired loans, are generally classified as non-accrual if they are past due as to maturity, or payment of principal or interest for a period of more than 90 days, unless such loans are well secured and in the process of collection. If a loan or a portion of a loan is classified as doubtful or is partially charged off, the loan is generally classified as non-accrual. Loans that are on a current payment status or past due less than 90 days may also be classified as non-accrual if full repayment of principal and/or interest is in doubt.

 

Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within a reasonable period of time, and the borrower has demonstrated payment performance for a minimum of six months in accordance with the contractual terms involving payments of cash or cash equivalents. During the non-accrual period, all payments received will be applied to principal. After a loan is returned to accruing status, foregone interest will be accreted to interest income on a pro-rata basis over the remaining term of the loan if full repayment of principal and interest is reasonably assured.

 

In the case where a non-accrual loan had been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the remaining loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to the ALLL until prior charged off balances have been fully recovered.

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M&F BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements continued

The following tables present loans not past due and the aging of past due loans as of June 30, 2014 and December 31, 2013:

 

           90 Days             
June 30, 2014  30-59 Days   60-89 Days   Or More   Total Past         
(Dollars in thousands)  Past Due   Past Due   Past Due   Due   Current   Total 
                         
Commercial  $83   $   $   $83   $7,071   $7,154 
Commercial real estate:                              
Construction                   537    537 
Owner occupied       936    3,596    4,532    19,478    24,010 
Other   327        1,827    2,154    25,125    27,279 
Faith-based non-profit:                              
Construction                   6,598    6,598 
Owner Occupied   2,932    3,365    250    6,547    76,262    82,809 
Other                   1,884    1,884 
Residential real estate:                              
First mortgage   80    255    4,500    4,835    15,722    20,557 
Multifamily                   3,105    3,105 
Home equity       15    184    199    2,472    2,671 
Construction                   357    357 
Consumer   6        8    14    1,245    1,259 
Other loans                   6,680    6,680 
Total  $3,428   $4,571   $10,365   $18,364   $166,536   $184,900 

 

 

           90 Days             
December 31, 2013  30-59 Days   60-89 Days   Or More   Total Past         
(Dollars in thousands)  Past Due   Past Due   Past Due   Due   Current   Total 
                         
Commercial  $   $4   $   $4#  $12,340   $12,344 
Commercial real estate:                              
Construction                   4,758    4,758 
Owner occupied   77        2,675    2,752#   19,434    22,186 
Other           642    642#   31,503    32,145 
Faith-based non-profit:                              
Construction                        
Owner Occupied   2,859    29    333    3,221#   75,540    78,761 
Other   1            1#   6,701    6,702 
Residential real estate:                              
First mortgage   747    275    2,602    3,624#   18,726    22,350 
Multifamily                   3,271    3,271 
Home equity   241        118    359#   2,692    3,051 
Construction                   241    241 
Consumer   6    3    9    18#   1,322    1,340 
Other loans                   2,326    2,326 
Total  $3,931   $311   $6,379   $10,621   $178,854   $189,475 

 

At June 30, 2014 and December 31, 2013, the total recorded investment in impaired loans amounted to $28.9 million and $30.7 million, respectively. Of these impaired loans, $6.4 million and $6.7 million were on non-accrual at June 30, 2014 and December 31, 2013, respectively.

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M&F BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements continued

The recorded investment and related information for impaired loans is summarized as follows for June 30, 2014, June 30, 2013 and December 31, 2013:

   June 30, 2014 
               For the Six Months Ended   For the Three Months Ended 
   Unpaid           Interest   Average   Interest   Average 
   Principal   Recorded   ALLL   Income   Recorded   Income   Recorded 
(Dollars in thousands)  Balance   Investment   Allocated   Recognized   Investment   Recognized   Investment 
                             
With no related allowance recorded:                                   
Commercial  $   $   $   $   $   $   $ 
Commercial real estate:                                   
Construction   78    78        3    291        219 
Owner occupied   3,133    3,135        41    3,159    8    3,147 
Other   3,367    3,379        61    2,655    55    2,124 
Faith based non-profit:                                   
Construction                            
Owner occupied   9,202    9,226        285    10,116    157    8,872 
Other                            
Residential real estate:                                   
First mortgage   2,583    2,574        47    2,795    28    2,659 
Multifamily                            
Home equity   23    23            66        53 
Construction                            
Consumer   8    8            9        8 
Impaired loans with no allowance recorded  $18,394   $18,423   $   $437   $19,091   $248   $17,082 
                                    
With an allowance recorded:                                   
Commercial  $   $   $   $   $   $   $ 
Commercial real estate:                                   
Construction   279    279    29    12    70    12    140 
Owner occupied                            
Other   2,172    2,179    34    48    2,883        3,427 
Faith based non-profit:                                   
Construction                            
Owner occupied   7,278    7,296    576    177    6,744    75    7,693 
Other                            
Residential real estate:                                   
First mortgage   567    548    182    5    554    3    536 
Multifamily                            
Home equity   166    166    31    4    113    2    122 
Construction                            
Consumer                            
Impaired loans with allowance recorded  $10,462   $10,468   $852   $246   $10,364   $92   $11,918 
Impaired loans  $28,856   $28,891   $852   $683   $29,455   $340   $29,000 

20
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M&F BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements continued

   June 30, 2013 
               For the Six Months Ended   For the Three Months Ended 
   Unpaid           Interest   Average   Interest   Average 
   Principal   Recorded   ALLL   Income   Recorded   Income   Recorded 
(Dollars in thousands)  Balance   Investment   Allocated   Recognized   Investment   Recognized   Investment 
                             
With no related allowance recorded:                                   
Commercial  $   $   $   $   $221   $   $147 
Commercial real estate:                                   
Construction   361    365        12    278    5    276 
Owner occupied   795    559        17    525    9    468 
Other   4,856    4,873        113    4,385    54    4,028 
Faith based non-profit:                                   
Construction                            
Owner occupied   15,036    15,061        299    10,391    157    10,589 
Other                            
Residential real estate:                                   
First mortgage   2,770    2,739        10    1,441    3    1,625 
Multifamily                            
Home equity   9    9            60        28 
Construction                            
Consumer   13    13            5        8 
Impaired loans with no allowance recorded  $23,840   $23,619   $   $451   $17,306   $228   $17,169 
                                    
With an allowance recorded:                                   
Commercial  $   $   $   $   $   $   $ 
Commercial real estate:                                   
Construction                            
Owner occupied                   59        59 
Other                   501        501 
Faith based non-profit:                                   
Construction                            
Owner occupied   882    885    115    34    324    27    435 
Other                            
Residential real estate:                                   
First mortgage   1,408    1,412    294        836        1,013 
Multifamily                            
Home equity   91    92    27        12        23 
Construction                            
Consumer                            
Impaired loans with allowance recorded  $2,381   $2,389   $436   $34   $1,732   $27   $2,031 
Impaired loans  $26,221   $26,008   $436   $485   $19,038   $255   $19,200 

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M&F BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements continued

   December 31, 2013 
               Interest     
   Unpaid           Earned   Average 
   Principal   Recorded   ALLL   For the   Recorded 
(Dollars in thousands)  Balance   Investment   Allocated   Year   Investment 
                     
With no related allowance recorded:                         
Commercial  $   $   $   $   $74 
Commercial real estate:                         
Construction   363    364        28    321 
Owner occupied   3,181    3,183        142    1,194 
Other   5,486    5,503        256    4,858 
Faith based non-profit:                         
Construction                    
Owner occupied   14,151    14,203        681    12,880 
Other                    
Residential real estate:                         
First mortgage   3,116    3,119        213    2,143 
Multifamily                    
Home equity   77    77        3    50 
Construction                    
Consumer   11    11            9 
Impaired loans with no allowance recorded  $26,385   $26,460   $   $1,323   $21,529 
                          
With an allowance recorded:                         
Commercial  $   $   $   $   $ 
Commercial real estate:                         
Construction                    
Owner occupied                   59 
Other                   251 
Faith based non-profit:                         
Construction                    
Owner occupied   3,510    3,500    931    242    631 
Other                    
Residential real estate:                         
First mortgage   621    623    38    29    1,017 
Multifamily                    
Home equity   131    131    37    6    42 
Construction                    
Consumer                    
Impaired loans with allowance recorded  $4,262   $4,254   $1,006   $277   $2,000 
Impaired loans  $30,647   $30,714   $1,006   $1,600   $23,529 

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M&F BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements continued

The recorded investment in TDRs, which are included in total impaired loans, was $25.2 million, $20.9 million and $26.4 million at June 30, 2014, June 30, 2013 and December 31, 2013, respectively.

 

Reserve for Credit Losses - The Company's reserve for credit losses is comprised of two components, the ALLL and the reserve for unfunded commitments (the “Unfunded Reserve”).

 

Allowance for Loan Losses (“ALLL”) - The ALLL is a valuation allowance that is established through a provision for loan losses charged to expense. When management believes that the collectability of the principal is unlikely, loans are charged against the ALLL. Subsequent recoveries, if any, are credited to the ALLL.

 

The ALLL is management's estimate of probable losses that are inherent in the loan portfolio. The ALLL is based on regular quarterly assessments. The methodologies for measuring the appropriate level of the ALLL include the combination of a quantitative historical loss history by loan type and a qualitative analysis for loans not classified as impaired or TDRs ("ASC 450 reserve"), and a specific allowance method for impaired and TDR loans ("ASC 310 reserve"). The qualitative analysis for the ASC 450 reserve is patterned after the guidelines provided under Securities Exchange Commission (“SEC”) Staff Accounting Bulletin 102 and the Federal Financial Institutions Examination Council (“FFIEC”) Interagency Policy Statement on the Allowance for Loan and Lease Losses and include the following:

· Changes in lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices;
· Changes in national economic and business conditions and developments and the effect of unemployment on African Americans, who are the majority of our customers;
· Changes in the nature and volume of the loan portfolio;
· Changes in the experience, ability, and depth of lending management and staff;
· Changes in trends of the volume and severity of past due and classified loans; and changes in trends in the volume of non-accrual loans, troubled debt restructurings and classified loans;
· Changes in the quality of the loan review system and the degree of oversight by the Bank’s Board of Directors;
· The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
· The effect of external factors such as competition and legal and regulatory requirements.

 

Management has developed, from historical loan and economic information, quantitative drivers for certain qualitative factors. Management has identified which factors, by nature, are subjective, such as lending policies, competition and regulatory requirements. The quantitative drivers of qualitative factors, to which different weights are assigned based on management’s judgment, are reviewed and updated quarterly based on updated quarterly and eight-quarter rolling data. The quantitative loss history is based on an eight-quarter rolling history of losses incurred by different loan types within the loan portfolio.

 

A specific ALLL is established for loans identified as impaired or TDRs, based on significant conditions or circumstances related to the specific credits. The specific allowance amounts are determined by a method prescribed by ASC 310, Receivables. Loans identified as impaired and non-accruing TDRs are accounted for in accordance with one of three valuations: (i) the present value of future cash flows discounted at the loan's effective interest rate; (ii) the loan's observable market price, or (iii) the fair value of the collateral, if the loan is collateral dependent, less estimated liquidation costs.

 

For commercial business, faith-based non-profit, real estate and certain consumer loans, the measurement of loan impairment is based on the present value of the expected future cash flows, discounted at the loan's effective interest rate, or on the fair value of the loan's collateral if the loan is collateral dependent. Most consumer loans are smaller balance and homogeneous, and are evaluated for impairment on a collective basis, applying the quantitative loss history and the qualitative factors. Impairment losses are included in the ALLL through a charge to the provision for loan losses.

 

The Company uses several credit quality indicators to manage credit risk on an ongoing basis. The Company's credit risk rating system was developed to aid in the risk management process by grouping credits with similar risk profiles into pass (which includes internal watch), special mention, or criticized categories, which includes substandard, doubtful, and loss. Credit risk ratings are applied individually to all classes of loans. Internal credit reviews and external contracted credit review examinations are used to determine and validate loan risk grades. The credit review system takes into consideration factors such as: borrower's background and experience; historical and current financial condition; credit history and payment performance; economic conditions and their impact on various industries; type, market value and volatility of the market value of collateral; lien position; and the financial strength of guarantors.

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M&F BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements continued

The process of assessing the adequacy of the ALLL is necessarily subjective. Further, and particularly in periods of economic downturns, it is reasonably possible that future credit losses may exceed historical loss levels and may also exceed management's current estimates of incurred losses inherent within the loan portfolio. As such, there can be no assurance that future loan charge-offs will not exceed management's current estimate of what constitutes a reasonable ALLL.

 

The Company and the Bank are subject to periodic examination by their federal and state regulators, and may be required by such regulators to recognize additions to the allowance for loan losses based on the regulators' assessment of credit information available to them at the time of their examinations.

 

Reserve for Unfunded Commitments - The Unfunded Reserve is a component of other liabilities and represents the estimate for probable credit losses inherent in unfunded commitments to extend credit. Unfunded commitments to extend credit include loans with usable balances available, new commitments to lend that are not yet funded, and standby and commercial letters of credit. The process used to determine the Unfunded Reserve is consistent with the process for determining the quantitative portion of the ASC 450 reserve, as adjusted for estimated funding probabilities and historical eight quarter rolling quantitative loan loss factors. The level of the Unfunded Reserve is adjusted by recording an expense or recovery in other noninterest expense. The balances of $20.4 thousand and $12.5 thousand for June 30, 2014 and December 31, 2013, respectively, are reflected in other liabilities on the Consolidated Balance Sheets.

 

The following table presents the recorded investment in non-accrual loans and loans past due over 90 days still on accrual by class of loans as of June 30, 2014 and December 31, 2013, respectively:

 

           90 Days     
           or More     
           Past Due     
June 30, 2014          Still     
(Dollars in thousands)  Non-accrual   Number   Accruing   Number 
                 
Commercial  $       $     
Commercial real estate:                    
Construction                
Owner occupied   2,652    3    978    2 
Other   524    3    1,303    4 
Faith-based non-profit:                    
Construction                
Owner Occupied   22    1    228    1 
Other                
Residential real estate:                    
First mortgage   2,979    37    2,233    10 
Multifamily                
Home equity   189    7         
Construction                
Consumer   8    1         
Other loans                
Total  $6,374    52   $4,742    17 

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M&F BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements continued

           90 Days     
           or More     
           Past Due     
December 31, 2013          Still     
(Dollars in thousands)  Non-accrual   Number   Accruing   Number 
                 
Commercial  $       $     
Commercial real estate:                    
Construction                
Owner occupied   2,676    3         
Other   532    3    110    1 
Faith-based non-profit:                    
Construction                
Owner Occupied   29    1    332    1 
Other                
Residential real estate:                    
First mortgage   3,348    43    253    5 
Multifamily                
Home equity   124    7         
Construction                
Consumer   11    2         
Other loans                
Total  $6,720    59   $695    7 

 

Non-accrual loans and loans past due over 90 days still accruing interest include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified impaired loans. Loans for which principal or interest is in default for 90 days or more are classified as a non-accrual unless they are well secured and in process of collection.

 

Those loans over 90 days still accruing interest were in the process of modification. In these cases, the borrowers are still making payments. Borrowers have continued to make payments on these loans while administrative and legal due processes are proceeding which will enable the Bank to extend or modify maturity dates.

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans for reserves according to the loan's classification as to credit risk. This analysis includes non-homogenous loans, such as commercial, commercial real estate and faith-based non–profit entities, and mortgage loans in process of foreclosure for which the loan to value does not support repayment in full. This analysis is performed on at least a quarterly basis. The Company uses the following definitions for risk ratings:

 

·Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Management believes that there is a moderate likelihood of some loss related to those loans and leases that are considered special mention.

 

·Substandard. Loans classified as substandard are inadequately protected by the current sound financial repayment capacity and debt service coverage of the obligor or of the collateral pledge, if any. Loans so classified have a well-defined weakness or weaknesses that may jeopardize the liquidation of our repayment according to the original terms of the debt. In addition to commercial and faith-based non-profit loans with identified weaknesses, substandard loans include loans within the mortgage and consumer portfolio segments that are past due 90 days or more as to principal or interest if the loan to value does not support full repayment. Substandard loans are evaluated for impairment on an individual loan basis unless the substandard loan is a smaller homogeneous loan that is not a TDR and is not in the process of foreclosure. These loans exhibit a distinct possibility that the Company will sustain some loss if the deficiencies related to the loss are not corrected in a timely manner.

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M&F BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements continued

·Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with 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.

 

·Loss. Based on current facts and circumstances, loans classified as loss are not expected to be repaid, or that collateral will be difficult to liquidate. Loans classified as loss are charged off to the ALLL with board approval.

 

·Pass. Loans not identified as special mention, substandard, doubtful or loss are classified as pass.

 

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M&F BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements continued

The following is a breakdown of loans by risk categories at June 30, 2014 and December 31, 2013:

 

June 30, 2014                    
(Dollars in thousands)  Pass   Special Mention   Substandard   Doubtful   Total 
                     
Commercial  $1,122   $3,188   $2,844   $   $7,154 
Commercial real estate:                         
Construction   180        357        537 
Owner occupied   18,681    481    4,848        24,010 
Other   23,367    2,989    923        27,279 
Faith-based non-profit:                         
Construction   6,598                6,598 
Owner Occupied   71,700    4,117    6,992        82,809 
Other   1,884                1,884 
Residential real estate:                         
First mortgage   16,720    415    3,417    5    20,557 
Multifamily   3,013    32    60        3,105 
Home equity   2,376        295        2,671 
Construction   357                357 
Consumer   1,230    16    13        1,259 
Other loans   6,680                6,680 
Total  $153,908   $11,238   $19,749   $5   $184,900 

 

December 31, 2013                    
(Dollars in thousands)  Pass   Special Mention   Substandard   Doubtful   Total 
                     
Commercial  $12,342   $   $2   $   $12,344 
Commercial real estate:                         
Construction   4,396        362        4,758 
Owner occupied   17,586    625    3,975        22,186 
Other   27,584    2,703    1,858        32,145 
Faith-based non-profit:                         
Construction                    
Owner Occupied   66,626    7,474    4,661        78,761 
Other   6,701    1            6,702 
Residential real estate:                         
First mortgage   17,890    427    4,033        22,350 
Multifamily   3,171    38    62        3,271 
Home equity   2,668        383        3,051 
Construction   241                241 
Consumer   1,323        17        1,340 
Other loans   2,326                2,326 
Total  $162,854   $11,268   $15,353   $   $189,475 

 

Loans Modified as a TDR - Loans are considered to have been modified as a TDR when the Company makes certain concessions to a borrower experiencing financial difficulty. Concessions to the borrower at modification may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a non-accrual loan that has been modified as a TDR remains on non-accrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. Since the economic crisis began in 2008, management has elected to offer concessions to borrowers with identified financial weaknesses, even if the borrowers have continued making scheduled payments, working with the borrowers to enable them to continue to satisfy their loan repayment obligations to the Company.

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M&F BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements continued

The following tables present TDRs as of June 30, 2014 and December 31, 2013.

 

   Troubled Debt Restructurings 
   June 30, 2014 
           Non-accrual   Total 
   Accrual Status   Status   Modifications 
(Dollars in thousands)  Number   Amount   Number   Amount   Number   Amount 
                         
Commercial real estate:                              
Construction   2   $357       $    2   $357 
Owner occupied   3    481    1    2,576    4    3,057 
Other   5    5,015            5    5,015 
Faith-based non-profit:                              
Owner occpied   20    16,459    1    22    21    16,481 
Residential real estate:                              
First mortgage   1    29    2    178    3    207 
    31   $22,341    4   $2,776    35   $25,117 

 

   Troubled Debt Restructurings 
   December 31, 2013 
           Non-accrual   Total 
   Accrual Status   Status   Modifications 
(Dollars in thousands)  Number   Amount   Number   Amount   Number   Amount 
                         
Commercial real estate:                              
Construction   2   $362       $    2   $362 
Owner occupied   4    506    1    2,598    5    3,104 
Other   5    4,953            5    4,953 
Faith-based non-profit:                              
Owner occpied   21    17,632    1    29    22    17,661 
Residential real estate:                              
First mortgage   1    29    3    244    4    273 
    33   $23,482    5   $2,871    38   $26,353 

 

No loans were restructured during the three or six months ended June 30, 2014. Loans totaling $3.1 million were restructured during the 12 months ended June 30, 2014. One loan totaling $2.6 million was classified as non-accrual due to delinquency. With the exception of the aforementioned loan, loans restructured during that period were paying as restructured as of June 30, 2014. No loans were restructured during the three or six months ended June 30, 2013. Loans totaling $3.2 million were restructured during the 12 months ended June 30, 2013. All loans restructured during that period were paying as restructured as of June 30, 2013. The Company considers a restructured loan to be “paying” unless it is more than 90 days past due, foreclosed upon or charged-off.

 

There were no loans modified as TDRs and with a payment default, with the payment default occurring within 12 months of the restructure date, and the payment default occurring during the three or six months ended June 30, 2014 and 2013.

 

TDR defaults can result in a higher ALLL and a corresponding higher provision for loan losses because they generally negatively impact the timing of and expected collections from these impaired loans. Impaired loans, which include TDRs, are evaluated for specific additions to the ALLL by subtracting the recorded investment in these impaired loans from their fair values. Fair values are generally determined by the present value of future cash flows, collateral value, or liquidation value. Defaults generally reduce the present value of the future cash flows and can negatively influence the collateral values if the declining real estate values are affecting the sale of collateral.

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M&F BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements continued

7.OTHER REAL ESTATE OWNED (“OREO”)

 

At the time of foreclosure, real estate is recorded at fair market value based on appraised value less estimated costs to sell, such as realtor, legal and recording fees and expenses. Subsequent to foreclosure, properties are appraised annually and adjusted to the lower of carrying amount or fair market value less estimated costs to sell. At June 30, 2014 and December 31, 2013, OREO totaled $2.7 million and $3.0 million, respectively.

 

8.BORROWINGS

 

Borrowings as of June 30, 2014 consisted of an FHLB borrowing of $0.7 million with an interest rate of 0.50% that matures in 2020 and a capital lease of $0.1 million with an interest rate of 1.60%. Borrowings as of December 31, 2013 consisted of an FHLB borrowing of $0.7 million with an interest rate of 0.50% that matures in 2020 and a capital lease of $0.2 million with an interest rate of 1.60%.

 

The Company has federal funds lines of credit with three correspondent banks totaling $10.0 million at June 30, 2014 and December 31, 2013. The Company periodically tests its federal funds lines of credit with its correspondent banks. These lines were tested during the three months ended June 30, 2014. The Company had unused borrowing capacity with the FHLB of $5.3 million as of June 30, 2014 and $5.3 million as of December 31, 2013, respectively. In addition, the Company has the ability to borrow from the Federal Reserve Bank to the extent of investment securities pledged to the Federal Reserve Bank.

 

9.COMMITMENTS AND CONTINGENCIES

 

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized on the Consolidated Balance Sheets. The contractual amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.

 

The Bank’s exposure to credit losses in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank utilizes the same credit policies in making commitments and conditional obligations as it does for balance sheet instruments.

 

Commitments to extend credit are agreements to lend to a customer as long as there is not a violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, upon extension of credit is based on management’s credit evaluation of the counter parties. Collateral varies and may include real estate, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

 

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. To the extent deemed necessary, collateral of varying types and amounts is held to secure customer performance under certain of those letters of credit outstanding.

 

Financial instruments whose contract amounts represent credit risk as of June 30, 2014 and December 31, 2013, respectively, are commitments to extend credit (including availability of lines of credit), and standby letters of credit. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral deemed necessary by the Bank is based on management’s credit evaluation and underwriting guidelines for the particular loan.

 

Commitments outstanding at June 30, 2014 are summarized in the following table:

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M&F BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements continued

(Dollars in thousands)  Commercial
letters of credit
   Other loan
commitments
   Total
commitments
 
             
Less than one year  $133   $4,582   $4,715 
One to three years   297    9,951    10,248 
Three to five years       5,141    5,141 
More than five years   93    1,968    2,061 
Total  $523   $21,642   $22,165 

 

10.FAIR VALUE MEASUREMENT

 

Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. Fair value measurements are required to be separately disclosed by level within the fair value hierarchy. The Company bases fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

For assets and liabilities recorded at fair value, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy.

 

Fair value measurements for assets and liabilities where there exists limited or no observable market data and, therefore, are based primarily upon estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.

 

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment, OREO, and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

 

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

Level 1 —Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange.

 

Level 2 —Valuations are obtained from readily available pricing sources via independent providers for market transactions involving similar assets or liabilities. The Company’s principal market for these securities is the secondary institutional markets and valuations are based on observable market data in those markets. Level 2 securities include U. S. Agencies, state and municipal bonds and MBS.

 

Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets.

 

Assets and Liabilities Measured on a Recurring Basis:

 

Available-for-Sale Investment Securities: Investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely 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. Level 1 securities include those traded on nationally recognized securities exchanges, U.S. Treasury securities, and money market funds. Level 2 securities include U.S. government agency securities, mortgage-backed securities issued by government-sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

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M&F BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements continued

Assets measured at fair value on a recurring basis as of June 30, 2014 were:

 

(Dollars in thousands)      Quoted Prices in   Significant Other   Significant 
       Active Markets for   Observable   Unobservable 
       Identical Assets   Inputs   Inputs 
Description  June 30, 2014   (Level 1)   (Level 2)   (Level 3) 
Recurring:                    
                     
US government agencies  $12,291   $   $12,291   $ 
Government sponsored MBS                    
Residential   56,201        56,201     
Municipal securities                    
North Carolina   1,003        1,003     
Mortgage servicing rights   24            24 
Total  $69,519   $   $69,495   $24 

 

Assets measured at fair value on a recurring basis as of December 31, 2013 were:

 

                 
(Dollars in thousands)      Quoted Prices in   Significant Other   Significant 
       Active Markets for   Observable   Unobservable 
       Identical Assets   Inputs   Inputs 
Description  December 31, 2013   (Level 1)   (Level 2)   (Level 3) 
Recurring:                    
                     
US government agencies  $6,766   $   $6,766   $ 
Government sponsored MBS                    
Residential   57,698        57,698     
Municipal securities                    
North Carolina   1,455        1,455     
Mortgage Servicing Rights  $25            25 
Total  $65,944   $   $65,919   $25 

 

The table below displays changes in all recurring Level 3 Assets from December 31, 2013 to June 30, 2014 and December 31, 2012 to December 31, 2013.

 

(Dollars in thousands)  Mortgage Servicing Rights 
     
Beginning balance (December 31, 2013)  $25 
Amortization   1 
Ending Balance (June 30, 2014)  $24 

 

     
(Dollars in thousands)  Mortgage Servicing Rights 
     
Beginning balance (December 31, 2012)  $36 
Amortization   11 
Ending Balance (December 31, 2013)  $25 

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M&F BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements continued

Assets and Liabilities Measured on a Nonrecurring Basis:

 

Impaired loans: Impaired loans are evaluated and valued at the time the loan is identified as impaired, and are carried at the lower of cost or market value. Market value is measured based on the value of the collateral securing these loans or net present value of expected future cash flows discounted at the loan’s effective interest rate. Collateral may be real estate and/or business assets including equipment, inventory, and/or accounts receivable. The value of business equipment, inventory, and accounts receivable collateral is based on net book value on the business’ financial statements and, if necessary, discounted based on management’s review and analysis. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and the client’s selling costs and other expenses. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. The Company records impaired loans as nonrecurring Level 3, when Management believes the underlying collateral is worth less than the appraised value.

 

OREO: Foreclosed assets are adjusted to fair value, less estimated carrying costs and costs to sell, upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of the carrying value or the fair value, less estimated costs to sell. Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. The Company records foreclosed assets as nonrecurring Level 3.

 

Repossessed Collateral: Repossessed collateral is adjusted to fair value, less estimated costs to sell, upon transfer of the loans to repossessions. Subsequently, repossessed assets are carried at the lower of the carrying value or the fair value, less estimated costs to sell. Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. The Company records repossessed collateral as nonrecurring Level 3.

 

Mortgage Servicing Rights: Mortgage servicing rights do not trade in an active market with readily observable market data. As a result, the Company estimates the fair value of mortgage servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income. The Company stratifies its mortgage servicing portfolio on the basis of loan type. The assumptions used in the discounted cash flow model are those that we believe market participants would use in estimating future net servicing income, including estimates of loan prepayment rates, servicing costs, ancillary income, impound account balances, and discount rates. Significant assumptions in the valuation of mortgage servicing rights include changes in interest rates, estimated loan repayment rates, and the timing of cash flows, among other factors. Mortgage servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.

 

Assets measured at fair value on a nonrecurring basis as of June 30, 2014 and December 31, 2013 were:

 

(Dollars in thousands)      Quoted Prices in   Significant Other   Significant 
       Active Markets for   Observable   Unobservable 
       Identical Assets   Inputs   Inputs 
Description  June 30, 2014   (Level 1)   (Level 2)   (Level 3) 
Nonrecurring:                    
                     
OREO  $2,691   $   $   $2,691 
Impaired loans:                    
Commercial real estate   8,987            8,987 
Faith-based non-profit   15,946            15,946 
Residential real estate   3,098            3,098 
Consumer   8            8 
Total  $30,730   $   $   $30,730 

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M&F BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements continued

(Dollars in thousands)      Quoted Prices in   Significant Other   Significant 
       Active Markets for   Observable   Unobservable 
       Identical Assets   Inputs   Inputs 
Description  December 31, 2013   (Level 1)   (Level 2)   (Level 3) 
Nonrecurring:                    
                     
OREO  $3,032   $   $   $3,032 
Repossessed collateral   590            590 
Impaired loans:                    
Commercial real estate   9,050            9,050 
Faith-based non-profit   16,772            16,772 
Residential real estate   3,875            3,875 
Consumer   11            11 
Total  $33,330   $   $   $33,330 

 

Quantitative Information about Level 3 Fair Value Measurements

 

(Dollars in thousands)         Significant  Significant 
       Valuation  Unobservable  Unobservable 
Description  June 30, 2014   Technique  Inputs  Input Value 
Nonrecurring:                
                 
OREO  $2,691   discounted appraisals  collateral discounts    6-20%  
Impaired loans   28,039   discounted appraisals  collateral discounts    6-20%  
Total  $30,730            

 

(Dollars in thousands)          Significant   Significant 
       Valuation   Unobservable   Unobservable 
Description  December 31, 2013   Technique   Inputs   Input Value 
Nonrecurring:                    
                     
OREO  $3,032    discounted appraisals    collateral discounts     6-20%  
Repossessed collateral   590    discounted appraisals    collateral discounts     20-50%  
Impaired loans   29,708    discounted appraisals    collateral discounts     6-20%  
Total  $33,330                

 

The Company discloses estimated fair values for its significant financial instruments. The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The methodologies for other financial assets and liabilities are discussed below.

 

The Company had no transfers between any of the three levels in 2013 or 2014.

 

Cash and Cash Equivalents: The carrying amount of cash, due from banks, and federal funds sold approximates fair value, and is therefore considered Level 1 input.

 

Loans (other than impaired), net of allowances for loan losses: Fair values are estimated for portfolios of loans with similar financial characteristics. The majority of the Company’s loans and lending-related commitments are not carried at fair value on a recurring basis on the Consolidated Balance Sheets, nor are they actively traded.

 

The fair value of performing loans is calculated by discounting scheduled cash flows through their individual contractual maturity, using discount rates that reflect the credit risk, overhead expenses, interest rate earned and again, contractual maturity of each loan. The maturity is based on contractual maturities for each loan, modified as required by an estimate of the effect of historical prepayments and current economic conditions.

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M&F BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements continued

For all loans, assumptions regarding the characteristics and segregation of loans, maturities, credit risk, cash flows, and discount rates are determined using specific borrower and other available information and are therefore considered a Level 3 input.

 

Accrued Interest Receivable and Payable: The fair value of interest receivable and payable is estimated to approximate the carrying amounts and is therefore considered a Level 1 input.

 

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 and is therefore considered a Level 1 input. The fair value of certificates of deposit 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 and is therefore considered a Level 2 input.

 

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 and is therefore considered a Level 3 input.

 

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, 2014 and December 31, 2013, the carrying amounts and associated estimated fair value of financial assets and liabilities of the Company are as follows:

 

   June 30, 2014 
(Dollars in thousands)  Carrying   Estimated             
   Amount   Fair Value   Level 1   Level 2   Level 3 
                     
Assets:                         
Cash and cash equivalents  $28,962   $28,962   $28,962   $   $ 
Investment securities available for sale   69,495    69,495        69,495     
Loans, net of allowances for loan losses   181,451    184,606              184,606 
Accrued interest receivable   821    821    821          
                          
Liabilities:                         
Non-maturity deposits  $120,186   $120,186    120,186         
Maturity deposits   136,080    135,796        135,796     
Other borrowings   805    764            764 
Accrued interest payable   100    100    100         

   December 31, 2013 
(Dollars in thousands)  Carrying   Estimated             
   Amount   Value   Level 1   Level 2   Level 3 
                     
Assets:                         
Cash and cash equivalents  $28,583   $28,583   $28,583   $   $ 
Investment securities available for sale   65,919    65,919        65,919     
Loans, net of allowances for loan losses   185,982    189,387              189,387 
Accrued interest receivable   912    912    912          
                          
Liabilities:                         
Non-maturity deposits  $116,115   $116,115    116,115         
Maturity deposits   143,812    143,314        143,314     
Other borrowings   847    791            791 
Accrued interest payable   75    75    75         

 

 

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M&F BANCORP, INC. AND SUBSIDIARY

ITEM 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

INTRODUCTION

 

The following discussion and analysis is intended to aid the reader in understanding and evaluating the Company’s consolidated results of operations and financial condition. This discussion is designed to provide more comprehensive information about the major components of the Company’s results of operations, financial condition, liquidity, and capital resources than may be obtained from reading the financial statements alone. This discussion should be read in conjunction with, and is qualified in its entirety by reference to, the Company’s Consolidated Financial Statements, including the related notes thereto presented under Item 1 in this Quarterly Report on Form 10-Q. All information presented is consolidated data unless otherwise specified.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements represent expectations and beliefs of the Company and Mechanics and Farmers Bank (the “Bank”), including but not limited to the Company’s operations, performance, financial condition, growth or strategies. These forward-looking statements are identified by words such as “expects”, “anticipates”, “should”, “estimates”, “believes” and variations of these words and other similar statements. For this purpose, any statements contained in this quarterly Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. These forward-looking statements involve estimates, assumptions, risks and uncertainties that could cause actual results to differ materially from current projections depending on a variety of important factors, including but not limited to those risk factors identified in the section headed "Risk Factors", beginning on page 10 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the Securities and Exchange Commission (the "SEC") on March 18, 2014 (the "Annual Report"). The Company undertakes no obligation to update any forward-looking statement, whether written or not, which may be made from time to time by or on behalf of the Company.

 

IMPACT OF RECENT DEVELOPMENTS ON THE BANKING INDUSTRY

 

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act was intended primarily to overhaul the financial regulatory framework following the global financial crisis and has impacted, and will continue to impact, all financial institutions including the Company and the Bank. The Dodd-Frank Act contains provisions that have, among other things, established a Bureau of Consumer Financial Protection (the "CFPB"), established a systemic risk regulator, consolidated certain federal bank regulators and imposed increased corporate governance and executive compensation requirements on financial institutions. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations and to prepare numerous studies and reports for the U.S. Congress. The federal agencies are given significant discretion in drafting and implementing regulations. Many regulations have been promulgated, and more additional regulations are expected to be issued in 2014 and thereafter. Consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

 

Many of the provisions of the Dodd-Frank Act are focused on financial institutions that are significantly larger than the Company and the Bank. As rules and regulations are promulgated by the federal agencies, the Bank will have to address each to ensure compliance with applicable provisions of the Act and compliance costs are expected to increase.

 

It is expected that the Dodd-Frank Act and the regulations it requires could increase the non-interest expense and compliance costs of the Bank and comparable financial institutions. Although neither the possible increase in the Bank’s interest expense and compliance costs, nor any one or more of the other aspects of Dodd-Frank Act discussed above, may have a material effect upon the Company’s future financial performance by themselves, the specific impact of the Dodd-Frank Act cannot be determined with specificity until after all required or otherwise proposed regulations are issued in final form. We believe that our operating income will be adversely affected, as will the operating expenses of other community financial institutions, in the future as a consequence of the implementation of the Dodd-Frank Act. Because of the current uncertainty about the schedule of implementation, the breadth of the regulations expected to be issued, and other similar factors, we cannot quantify the amount of any adverse impact.

 

The banking industry, including the Company, is operating in a challenging and volatile economic environment. The effects of the downturn in the housing market have adversely impacted credit markets, consumer confidence and the broader economy. Although the Bank remains profitable, it has not been immune to the impact of the recent recession or the increased focus of banking regulators upon capital and liquidity levels.

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M&F BANCORP, INC. AND SUBSIDIARY

EXECUTIVE SUMMARY

 

As discussed in more detail below, the following is an executive summary of the Company’s significant results for the three months ended June 30, 2014.

 

·Net income before preferred stock dividends and accretion was $507 thousand for the three months ended June 30, 2014 compared to a net loss before preferred stock dividends and accretion of $7 thousand for the three months ended June 30, 2013. Net income available to common stockholders was $448 thousand or $0.22 per share for the quarter ended June 30, 2014 compared to a net loss of $66 thousand or $0.03 per share for the quarter ended June 30, 2013.
·Net interest income totaled $2.6 million and $2.5 million for the three months ended June 30, 2014 and 2013, respectively. The net interest margin on a tax equivalent (“TE”) basis for the three months ended June 30, 2014 was 3.73% compared to 3.93% for the three months ended June 30, 2013, a decrease of 20 basis points (“bps”).
·The balance of the ALLL as a percentage of loans outstanding increased slightly to 1.87% as of June 30, 2014 compared to 1.84% as of December 31, 2013. Loans outstanding decreased $4.6 million from $189.5 million at December 31, 2013 to $184.9 million at June 30, 2014. Net charge-offs were $37 thousand and $267 thousand during the three months ended June 30, 2014 and 2013, respectively. There was no provision for loan losses for quarters ended June 30, 2014 or 2013.
·Noninterest income increased by $510 thousand during the second quarter of 2014 compared to the same period in 2013, due to the realization of a $515 thousand gain on the sales of repossessed assets.
·Noninterest expense decreased $203 thousand in the second quarter of 2014 compared to the same period in 2013 primarily driven by decreases in net OREO expenses, salaries and benefits, directors fees, information technology and professional fees.
·Preferred stock dividends and accretion in the quarters ended June 30, 2014 and 2013 were $59 thousand. The dividend yield for the three months ended June 30, 2014 and 2013 was 2.00%.

 

As discussed in more detail below, the following is an executive summary of the Company’s significant results for the six months ended June 30, 2014.

 

·Net income before preferred stock dividends and accretion was $784 thousand and $3 thousand for the six months ended June 30, 2014 and 2013, respectively. Net income available to common stockholders was $667 thousand or $0.33 per share for the six months ended June 30, 2014 compared to a net loss of $115 thousand or $0.06 per share for the six months ended June 30, 2013.
·Net interest income totaled $5.3 million and $5.0 million for the six months ended June 30, 2014 and 2013, respectively. The net interest margin on a TE basis for the six months ended June 30, 2014 was 3.74% compared to 3.77% for the six months ended June 30, 2013, a decrease of three basis points (“bps”).
·The balance of the ALLL as a percentage of loans outstanding increased slightly to 1.87% as of June 30, 2014 compared to 1.84% as of December 31, 2013. Loans outstanding decreased $4.6 million from $189.5 million at December 31, 2013 to $184.9 million at June 30, 2014. Net charge-offs were $44 thousand and $265 thousand during the six months ended June 30, 2014 and 2013, respectively. There was no provision for loan losses for the six-month periods ended June 30, 2014 or 2013.
·Noninterest income increased by $549 thousand during the six months ended June 30, 2014 compared to the same period in 2013, mainly due to the realization of $515 thousand gains on the sales of repossessed assets.
·Noninterest expense decreased $363 thousand in the during the six months ended June 30, 2014 compared to the same period in 2013 primarily driven by reductions in salaries and benefits, net OREO expenses, directors fees, information technology and professional fees.
·Preferred stock dividends and accretion during the six months ended June 30, 2014 and 2013 were $117 thousand and $118 thousand, respectively. The dividend yield for the six months ended June 30, 2014 and 2013 was 2.00%.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The following discussion and analysis of the Company’s financial condition and results of operations are based on the Company’s Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires the Company to make estimates and judgments regarding uncertainties that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to the allowance for loan losses, investment values, income taxes, contingencies, and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. However, because future events and their effects cannot be determined with certainty, actual results may differ from these estimates under different assumptions or conditions, and the Company may be exposed to gains or losses that could be material.

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M&F BANCORP, INC. AND SUBSIDIARY

The Company’s significant accounting policies are discussed below and in the Annual Report. Management believes that the following accounting policies are the most critical to aid in fully understanding and evaluating the Company’s reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting policies and related disclosures with the Audit Committee of the Board of Directors.

 

·ALLL – The Company records an estimated ALLL for loan losses based on known problem loans and estimated risks inherent within the existing loan portfolio. The allowance calculation takes into account historical loss trends, current market, and economic conditions. If economic conditions were to decline significantly or the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional increases to the allowance may be required.

 

·Investments – The Company records an investment impairment charge when it believes an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions and associated market values of investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.

 

·Deferred Taxes – The Company assesses the need to record a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. The Company considers anticipated future taxable income and ongoing prudent and feasible tax planning strategies in determining the need for the valuation allowance which, at this time, it deems not to be necessary. In the event the Company were to determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

 

·Foreclosed Assets - Foreclosed assets represent properties acquired through foreclosure or physical possession. Write-downs to fair value of foreclosed assets at the time of transfer are charged to allowance for loan losses. Subsequent to foreclosure, the Company periodically evaluates the value of foreclosed assets held for sale and records an impairment charge for any subsequent declines in fair value less selling costs. Subsequent declines in value are charged to operations. Fair value is based on an assessment of information available at the end of a reporting period and depends upon a number of factors, including historical experience, economic conditions, and issues specific to individual properties. The evaluation of these factors involves subjective estimates and judgments that may change.

 

·Fair Value Estimates - Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market inputs. For financial instruments that are traded actively and have quoted market prices or observable market inputs, there is minimal subjectivity involved in measuring fair value. However, when quoted market prices or observable market inputs are not fully available, significant management judgment may be necessary to estimate fair value. In developing our fair value measurements, we maximize the use of observable inputs and minimize the use of unobservable inputs.

 

·The fair value hierarchy defines Level 1 and 2 valuations as those that are based on quoted prices for identical instruments traded in active markets and quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 3 valuations are based on model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that we believe market participants would use in pricing the asset or liability. Financial assets that are recorded at fair value on a recurring basis include available-for-sale investment securities.

 

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M&F BANCORP, INC. AND SUBSIDIARY

FINANCIAL CONDITION

 

The Company’s financial condition is measured in terms of its asset and liability composition, asset quality, capital resources and liquidity.

 

Assets. Total assets decreased from $301.5 million at December 31, 2013 to $298.7 million at June 30, 2014. Cash and cash equivalents increased slightly from $28.6 million at December 31, 2013 to $29.0 million at June 30, 2014. Investment securities increased by $3.6 million primarily due to net purchases of investments. Gross loans decreased $4.6 million primarily due to a $2.9 million reduction of a loan participation. OREO decreased slightly from $3.0 million at December 31, 2013 to $2.7 million at June 30, 2014. Other assets decreased $1.0 million during the six-month period primarily due to the liquidation of repossessed collateral totaling $590 thousand along with reduction in other miscellaneous asset accounts.

 

Liabilities. Total liabilities decreased from $265.4 million at December 31, 2013 to $261.5 million at June 30, 2014. The change was primarily driven by a $7.8 million decrease in the Bank’s time deposits greater than $100,000 (primarily Certificate of Deposit Account Registry Service (“CDARS”) deposits), which are subject to significant volatility due to seasonality, partially offset by growth in core deposits, such as interest-checking, savings and noninterest-bearing deposits. Noninterest-bearing deposits increased $2.6 million from December 31, 2013 to June 30, 2014; approximately $1.8 million of the increase was attributable to a commercial checking product. We believe a significant portion of that increase to be temporary. Other borrowings decreased by $42 thousand due to principal payments on long-term leases and other long-term debt.

 

Stockholders’ Equity. Total consolidated stockholders’ equity increased from $36.1 million at December 31, 2013 to $37.1 million at June 30, 2014. For the six months ended June 30, 2014, the net increase in retained earnings was comprised of $784 thousand of net income, offset by dividends and accretion on preferred stock of $117 thousand. The Company did not pay a common stock dividend during the first six months of 2014. Accumulated other comprehensive loss represents the unrealized loss on available-for-sale securities and the unrealized loss related to the deferred pension liability, net of deferred taxes. Accumulated other comprehensive loss was in a net unrealized loss position of $1.1 million at June 30, 2014 compared to a net unrealized loss position of $1.4 million at December 31, 2013.

 

RESULTS OF OPERATIONS

 

Three months ended June 30, 2014 compared with three months ended June 30, 2013

 

General. Net income before preferred stock dividends was $507 thousand for the three months ended June 30, 2014 compared to a net loss before preferred stock dividends of $7 thousand for the three months ended June 30, 2013. Preferred stock dividends and accretion in the quarters ended June 30, 2014 and 2013 were $59 thousand. Dividend yield on the Company’s preferred stock for the three months ended June 30, 2014 and 2013 was 2.00%. Net income available to common stockholders for the three months ended June 30, 2014 was $448 thousand or $0.22 per share compared to a net loss available to common stockholders for the three months ended June 30, 2013 of $66 thousand or $0.03 per share.

 

Net Interest Income. Net interest income, the difference between total interest income from loans and investments, and total interest expenses from deposits and borrowings, is the Company’s principal source of earnings. The amount of net interest income is determined by the volume of interest-earning assets, the level of rates earned on those assets, and the volume and cost of underlying funding from deposits and borrowings. Net interest income increased $85 thousand, or 3.38%, from $2.5 million for the three months ended June 30, 2013 to $2.6 million for the three months ended June 30, 2014. Average earning assets for the three months ended June 30, 2014 were $279.1 million, up 8.88% compared to $256.4 million for the three months ended June 30, 2013. Net interest margin is the total of net interest income divided by average earning assets. On a fully TE basis, net interest margin was 3.73% and 3.93% for the three months ended June 30, 2014 and 2013, respectively. Net interest spread is the difference between rates earned on interest-earning assets and the interest paid on deposits and borrowed funds. The net interest spread decreased 19 bps to 3.65% for the three months ended June 30, 2014 from 3.84% for the three months ended June 30, 2013. The yield on average interest-earning assets was 3.97% and 4.21% for the three months ended June 30, 2014 and 2013, a decrease of 24 bps, while the interest rate on average interest-bearing liabilities for those periods was 0.32% and 0.37%, respectively, a decrease of five bps due to the ongoing low interest rate environment.

 

Interest income increased 2.71% for the three months ended June 30, 2014 to $2.8 million from $2.7 million for the three months ended June 30, 2013. The average balances of loans, which had overall yields of 5.26% and 5.55% for the three months ended June 30, 2014 and 2013, respectively, increased from $178.9 million for the three months ended June 30, 2013 to $185.8 million for the three months ended June 30, 2014. The average balance of investment securities increased $9.1 million from $58.2 million for the three months ended June 30, 2013 to $67.3 million for the three months ended June 30, 2014. The TE yield on investment securities increased from 1.40% for the three months ended June 30, 2013 to 1.84% for the three months ended June 30, 2014. The average balances of federal funds and other short-term investments increased from $19.3 million for the three months ended June 30, 2013 to $26.0 million for the three months ended June 30, 2014. The average yield in this category was 0.25% and 0.23% during the second quarter of 2014 and 2013, respectively.

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M&F BANCORP, INC. AND SUBSIDIARY

Interest expense decreased 6.82% for the three months ended June 30, 2014 to $164 thousand from $176 thousand for the three months ended June 30, 2013. Average total interest-bearing deposits, including savings, interest-bearing demand deposits and time deposits increased from $187.9 million for the three months ended June 30, 2013 to $207.0 million for the three months ended June 30, 2014. The average rate paid on interest-bearing deposits decreased 5 bps from 0.37% for the three months ended June 30, 2013 to 0.32% for the three months ended June 30, 2014.

 

The average rate on borrowings decreased from 0.89% for the three months ended June 30, 2013 to 0.49% for the three months ended June 30, 2014. The average borrowings outstanding decreased from $899 thousand during the three months ended June 30, 2013 to $818 thousand during the three months ended June 30, 2014. The interest expense on borrowed funds decreased from $2 thousand to $1 thousand from the second quarter of 2013 to the same period in 2014.

 

The following table, Average Balances, Interest Earned or Paid, and Interest Yields/Rates reflects the Company’s effective yield on earning assets and cost of funds. Yields and costs are computed by dividing income or expense for the year by the respective daily average asset or liability balance. Changes in net interest income from year to year can be explained in terms of fluctuations in volume and rate. In the table, the amount earned on nontaxable securities is reflected as actual, whereas the rate on nontaxable securities is stated at the TE rate.

 

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M&F BANCORP, INC. AND SUBSIDIARY

Average Balances, Interest Earned or Paid, and Interest Yields/Rates
For the Three Months Ended June 30, 2014 and 2013
(Dollars in thousands)  2014   2013 
(Unaudited)  Average
Balance
   Amount
Earned/Paid
   Average
Rate
   Average
Balance
   Amount
Earned/Paid
   Average
Rate
 
Assets                        
Loans receivable (1):  $185,829   $2,443    5.26%  $178,918   $2,481    5.55%
Taxable securities   66,524    296    1.78    57,281    189    1.32 
Nontaxable securities(2)   739    8    6.98    890    9    6.58 
Federal funds sold and other interest on short-term investments   26,049    16    0.25    19,281    11    0.23 
Total interest earning assets   279,141    2,763    3.97%   256,370    2,690    4.21%
Cash and due from banks   2,788              2,964           
Other assets   20,352              20,699           
Allowance for loan losses   (3,476)             (3,415)          
Total assets  $298,805             $276,618           
                               
Liabilities and Equity                              
Savings deposits  $51,689   $16    0.12%  $49,647   $20    0.16%
Interest-bearing demand deposits   20,655    4    0.08    21,817    4    0.07 
Time deposits   134,638    143    0.42    116,484    150    0.52 
Total interest-bearing deposits   206,982    163    0.32    187,948    174    0.37 
Borrowed funds   818    1    0.49    899    2    0.89 
Total interest-bearing liabilities   207,800    164    0.32%   188,847    176    0.37%
Non-interest-bearing deposits   49,825              45,935           
Other liabilities   4,495              5,810           
Total liabilities   262,120              240,592           
Stockholders' equity   36,685              36,026           
Total liabilities and stockholders' equity  $298,805             $276,618           
                               
Net interest income       $2,599             $2,514      
                               
Non-taxable securities        8              9      
Tax equivalent adjustment (3)        5              6      
                               
Tax equivalent net interest income       $2,604             $2,520      
Net interest spread (4)             3.65%             3.84%
Net interest margin (5)        3.73%             3.93%     

 

(1) Loans receivable include nonaccrual loans for which accrual of interest income has not been recorded.

(2) The tax equivalent rate is computed using a blended federal and state tax rate of 38.55%

(3) The tax equivalent adjustment is computed using a  blended tax rate of 37.96% for 2014 and 38.55% for 2013.

(4) Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(5) Net interest margin represents net interest income divided by average interest-earning assets.

Provision for loan losses. There was no provision for loan losses for the three months ended June 30, 2014 or 2013, due to a decrease in loans outstanding and a decrease in historical loss ratios used to calculate the ALLL on performing loans in 2014.

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M&F BANCORP, INC. AND SUBSIDIARY

Noninterest Income. Noninterest income increased 125.00%, or $510 thousand, for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The increase was due to the gains on sales of repossessed collateral totaling $515 thousand during the three months ended June 30, 2014 compared to none during the comparable period of 2013. While the Bank has historically experienced gains and or losses on the disposal of repossessed collateral, the amounts have generally been immaterial. However, during the three months ended June 30, 2014, the sale of one piece of collateral resulted in a gain of $514 thousand. We do not anticipate similar large gains in the future. Service charge income increased by $13 thousand primarily due to increased fees earned from overdraft, non-sufficient-fee (“NSF”) income and interchange income from the usage of debit cards, which are customer activity based. Rental income decreased by $16 thousand for the three months ended June 30, 2014 when compared to the same period in 2013. The decrease in rental income was driven by lower occupancy and occupancy rates during the second quarter of 2014 as compared to the same period in 2013.

 

Noninterest Expense. Noninterest expense represents the costs of operating the Company and the Bank. Management regularly monitors all categories of noninterest expense with the goal of improving productivity and operating performance. Noninterest expense decreased 6.92% to $2.7 million for the three months ended June 30, 2014 from $2.9 million for the three months ended June 30, 2013.

 

Salaries and employee benefits expenses for the three months ended June 30, 2014 and 2013 were $1.4 million.

 

Occupancy expense increased by $4 thousand during the three months ended June 30, 2014 from the same period in 2013. The increase was primarily due to repairs and maintenance during the more recent period.

 

Information technology costs decreased by 9.18% or $19 thousand to $188 thousand in 2014. The decrease was mainly due to decreased core processing charges.

 

Directors and advisory board fees decreased by $24 thousand or 32.43% from $74 thousand in the second quarter of 2013 to $50 thousand in the corresponding 2014 period as a result of fewer committee and board meetings during the more recent period as well as a restructuring of compensation arrangements.

 

Professional fees decreased by $16 thousand or 8.29% from 2013 to 2014 primarily as a result of lower audit and consulting expenses.

 

Net OREO expenses decreased $146 thousand from $173 thousand in the second quarter of 2013 to $27 thousand in the corresponding 2014 period. Principally, write-downs during the 2014 period decreased by $72 thousand to $94 thousand compared to $166 thousand during the corresponding 2013 period, and gains on the sales of OREO totaled $155 thousand during the second quarter of 2014 compared to a net loss of $10 thousand during the comparable quarter in 2013, partially offset with increases in other OREO expenses such as legal fees, insurance and property taxes.

 

FDIC deposit insurance expense increased from $126 thousand for the three months ended June 30, 2013 to $143 thousand for the three months ended June 30, 2014. The increase represents larger average deposit balances during 2014 compared to 2013.

 

During the second quarter of 2014, the Company realized a $28 thousand gain at foreclosure compared to $5 thousand during the comparable quarter of 2013.

 

Other expenses increased $60 thousand for the three months ended June 30, 2014 from the three months ended June 30, 2013. The increase in other expenses was primarily driven by a $16 thousand increase in off-balance sheet provisions for unfunded letters of credit and lines of credit and a $21 thousand increase in check fraud losses.

Provision for Income Taxes. The Company recorded an income tax expense of $281 thousand and an income tax benefit of $3 thousand for the three months ended June 30, 2014 and 2013, respectively. The overall effective rate increased from a tax benefit of 26.67% in 2013 to a tax expense of 35.60% in 2014. The increase in the effective tax rate during 2014 was largely driven by permanent differences in non-taxable income in proportion to taxable income during the period.

 

Six months ended June 30, 2014 compared with six months ended June 30, 2013

 

General. Net income before preferred stock dividends was $784 thousand and $3 thousand for the six months ended June 30, 2014 and 2014, respectively. Preferred stock dividends and accretion during the six months ended June 30, 2014 and 2013 were $117 thousand and $118 thousand, respectively. Dividend yield on the Company’s preferred stock for the six months ended June 30, 2014 and 2013 was 2.00%. Net income available to common stockholders for the six months ended June 30, 2014 was $667 thousand or $0.33 per share compared to a net loss available to common stockholders for the six months ended June 30, 2013 of $115 thousand or $0.06 per share.

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M&F BANCORP, INC. AND SUBSIDIARY

Net Interest Income. Net interest income, the difference between total interest income from loans and investments, and total interest expenses from deposits and borrowings, is the Company’s principal source of earnings. The amount of net interest income is determined by the volume of interest-earning assets, the level of rates earned on those assets, and the volume and cost of underlying funding from deposits and borrowings. Net interest income increased $286 thousand, or 5.75%, from $5.0 million for the six months ended June 30, 2013 to $5.3 million for the six months ended June 30, 2014. Average earning assets for the six months ended June 30, 2014 were $281.7 million, up 6.43% compared to $264.7 million for the six months ended June 30, 2013. Net interest margin is the total of net interest income divided by average earning assets. On a fully TE basis, net interest margin was 3.74% and 3.77% for the six months ended June 30, 2014 and 2013, respectively. Net interest spread is the difference between rates earned on interest-earning assets and the interest paid on deposits and borrowed funds. The net interest spread held flat at 3.66% for the six months ended June 30, 2014 and 2013. The yield on average interest-earning assets was 3.98% and 4.04% for the six months ended June 30, 2014 and 2013, a decrease of six bps, while the interest rate on average interest-bearing liabilities for those periods was 0.32% and 0.38%, respectively, a decrease of 6 bps due to the ongoing low interest rate environment.

 

Interest income increased 4.85% for the six months ended June 30, 2014 to $5.6 million from $5.3 million for the six months ended June 30, 2013. The average balances of loans, which had overall yields of 5.27% and 5.57% for the six months ended June 30, 2014 and 2013, respectively, increased from $176.6 million for the six months ended June 30, 2013 to $187.2 million for the six months ended June 30, 2014. The average balance of investment securities increased $6.5 million from $59.7 million for the six months ended June 30, 2013 to $66.2 million for the six months ended June 30, 2014. The TE yield on investment securities increased from 1.33% for the six months ended June 30, 2013 to 1.94% for the six months ended June 30, 2014. Reduced principal payments on MBS contributed to the improvement in yield on investment securities. The average balances of federal funds and other short-term investments remained at $28.3 million for the six months ended June 30, 2014 and 2013. The average yield in this category was 0.24% and 0.25% during the six months ended June 30, 2014 and 2013, respectively.

 

Interest expense decreased 7.38% for the six months ended June 30, 2014 to $339 thousand from $366 thousand for the six months ended June 30, 2013. Average total interest-bearing deposits, including savings, interest-bearing demand deposits and time deposits increased from $192.9 million for the six months ended June 30, 2013 to $209.3 million for the six months ended June 30, 2014. The average rate paid on interest-bearing deposits decreased six bps from 0.38% for the six months ended June 30, 2013 to 0.32% for the six months ended June 30, 2014.

 

The average rate on borrowings increased from 0.31% for the six months ended June 30, 2013 to 0.48% for the six months ended June 30, 2014. The average borrowings outstanding decreased $1.1 million from $1.9 million during six months ended June 30, 2013 to $828 thousand during the six months ended June 30, 2014. The interest expense on borrowed funds decreased $1 thousand to $2 thousand during the six months ended June 30, 2014 compared to $3 thousand during the same period in 2013.

 

The following table, Average Balances, Interest Earned or Paid, and Interest Yields/Rates reflects the Company’s effective yield on earning assets and cost of funds. Yields and costs are computed by dividing income or expense for the year by the respective daily average asset or liability balance. Changes in net interest income from year to year can be explained in terms of fluctuations in volume and rate. In the table, the amount earned on nontaxable securities is reflected as actual, whereas the rate on nontaxable securities is stated at the TE rate.

 

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Index

M&F BANCORP, INC. AND SUBSIDIARY

Average Balances, Interest Earned or Paid, and Interest Yields/Rates
For the Six Months Ended June 30, 2014 and 2013
(Dollars in thousands)  2014   2013 
   Average
Balance
   Amount
Earned/Paid
   Average
Rate
   Average
Balance
   Amount
Earned/Paid
   Average
Rate
 
Assets                              
Loans receivable (1):  $187,215   $4,937    5.27%  $176,631   $4,921    5.57%
Taxable securities   65,379    614    1.88    58,820    368    1.25 
Nontaxable securities(2)   813    17    6.74    891    18    6.58 
Federal funds sold and other interest on short-term investments   28,274    34    0.24    28,321    36    0.25 
Total interest earning assets   281,681    5,602    3.98%   264,663    5,343    4.04%
Cash and due from banks   2,833              2,832           
Other assets   20,675              20,777           
Allowance for loan losses   (3,483)             (3,469)          
Total assets  $301,706             $284,803           
                               
Liabilities and Equity                              
Savings deposits  $51,799   $32    0.12%  $50,918   $42    0.16%
Interest-bearing demand deposits   21,228    8    0.08    23,140    9    0.08 
Time deposits   136,245    297    0.44    118,882    312    0.52 
Total interest-bearing deposits   209,272    337    0.32    192,940    363    0.38 
Borrowed funds   828    2    0.48    1,910    3    0.31 
Total interest-bearing liabilities   210,100    339    0.32%   194,850    366    0.38%
Non-interest-bearing deposits   50,561              47,988           
Other liabilities   4,532              5,890           
Total liabilities   265,193              248,728           
Stockholders' equity   36,513              36,075           
Total liabilities and stockholders' equity  $301,706             $284,803           
                               
Net interest income       $5,263             $4,977      
                               
Non-taxable securities        17              18      
Tax equivalent adjustment (3)        10              11      
                               
Tax equivalent net interest income       $5,273             $4,988    ` 
Net interest spread (4)             3.66%             3.66%
Net interest margin (5)        3.74%             3.77%     

 

(1) Loans receivable include nonaccrual loans for which accrual of interest income has not been recorded.

(2) The tax equivalent rate is computed using a blended federal and state tax rate of 38.55%

(3) The tax equivalent adjustment is computed using a  blended tax rate of 37.96% for 2014 and 38.55% for 2013.

(4) Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(5) Net interest margin represents net interest income divided by average interest-earning assets.

Provision for loan losses. There was no provision for loan losses for the six months ended June 30, 2014 or 2013, due to a decrease in loans outstanding and a decrease in historical loss ratios used to calculate the ALLL on performing loans in 2014.

 

Noninterest Income. Noninterest income increased 66.95%, or $549 thousand, for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. The increase was due to the gains on sales of repossessed collateral totaling $515 thousand during the six months ended June 30, 2014 compared to none during the comparable period of 2013. While the Bank has historically experienced gains and or losses on the disposal of repossessed collateral, the amounts have generally been immaterial. However, during the six months ended June 30, 2014, the sale of one piece of collateral resulted in a gain of $514 thousand. We do not anticipate such large gains in the future. Service charge income increased by $29 thousand primarily due to increased fees earned from overdraft, non-sufficient-fee (“NSF”) income and interchange income from the usage of debit cards, which are customer activity based. Rental income decreased by $46 thousand for the six months ended June 30, 2014 when compared to the same period in 2013. The decrease in rental income was driven by lower occupancy and occupancy rates during the six months ended June 30, 2014 as compared to the same period in 2013.

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M&F BANCORP, INC. AND SUBSIDIARY

Noninterest Expense. Noninterest expense represents the costs of operating the Company and the Bank. Management regularly monitors all categories of noninterest expense with the goal of improving productivity and operating performance. Noninterest expense decreased 6.27% to $5.4 million for the six months ended June 30, 2014 from $5.8 million for the six months ended June 30, 2013.

 

Salaries and employee benefits expenses decreased $206 thousand to $2.7 million during the six months ended June 30, 2014 compared to the comparable period in 2013. The decrease was a result of cost containment measures.

 

Occupancy expense decreased by $3 thousand during the six months ended June 30, 2014 from the same period in 2013. The decrease was primarily due to lower depreciation, insurance expense, and repairs and maintenance during the more recent period.

 

Information technology costs decreased by 6.41% or $27 thousand to $394 thousand in 2014. The decrease was mainly due to decreased core processing charges.

 

Directors and advisory board fees decreased by $53 thousand or 33.76% from $157 thousand during the first six months of 2013 to $104 thousand in the corresponding 2014 period as a result of fewer committee and board meetings during the more recent period as well as a restructuring of compensation arrangements.

 

Professional fees decreased by $67 thousand or 14.99% from 2013 to 2014 primarily as a result of lower audit and legal expenses.

 

Net OREO expenses decreased $105 thousand from $190 thousand during the first six months of 2013 to $85 thousand in the corresponding 2014 period. Principally, write-downs during the 2014 period decreased by $52 thousand to $114 thousand compared to $166 thousand during the 2013 period, and gains on the sales of OREO totaled $155 thousand during the second quarter of 2014 compared to a net loss of $31 thousand during the comparable quarter in 2013, partially offset with increases in other OREO expenses such as legal fees, insurance and property taxes.

 

FDIC deposit insurance expense increased from $228 thousand for the six months ended June 30, 2013 to $292 thousand for the six months ended June 30, 2014. The increase represents larger average deposit balances during 2014 compared to 2013.

 

During the six months ended June 30, 2014, the Company realized $41 thousand in gains at foreclosure compared to $5 thousand during the comparable period of 2013.

 

Other expenses increased $81 thousand for the six months ended June 30, 2014 from the six months ended June 30, 2013. The increase in other expenses was primarily driven by a $48 thousand increase in off-balance sheet provisions for unfunded letters of credit and lines of credit and a $18 thousand increase in check fraud losses.

Provision for Income Taxes. The Company recorded an income tax expense of $418 thousand and $1 thousand for the six months ended June 30, 2014 and 2013, respectively. The overall effective rate increased from 26.89% in 2013 to 34.75% in 2014. The increase in the effective tax rate during 2014 was largely driven by permanent differences in non-taxable income in proportion to taxable income during the period.

 

ASSET QUALITY

 

ALLL. The provision for loan losses is the amount charged against earnings, to establish an adequate allowance for loan losses. Loan losses and recoveries are charged to or credited to this allowance, rather than reported as a direct expense or recovery. As of June 30, 2014 and December 31, 2013, the allowance for loan losses was $3.5 million, which represented approximately 1.87% and 1.84% of total loans outstanding on those respective dates.

 

Nonperforming assets, defined as non-accruing loans plus OREO and other repossessed assets, at June 30, 2014 were 3.04% of total assets compared to 3.43% at December 31, 2013.

 

Of the non-accruing loans totaling $6.4 million at June 30, 2014, 99.88% of the outstanding balance is secured by real estate, which management believes mitigates the risk of loss. TDRs in compliance with their modified terms totaled $17.4 million or 68.95% of total TDRs at June 30, 2014. GAAP does not provide specific guidance on when a loan may be returned to accrual status. Federal banking regulators have provided guidance that interest on impaired loans, including TDRs, should only be recorded when there has been a sustained period of repayment performance, the loan is well secured, and collection under any revised terms is assessed as probable. The Company follows this Federal banking regulators guidance.

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Index

M&F BANCORP, INC. AND SUBSIDIARY

Loans are generally placed on non-accrual status when the scheduled payments reach 90 days past due. Loans are charged-off, with Board approval, when the Chief Credit Officer and his staff determine that all reasonable means of collection of the outstanding balances, except through foreclosure, have been exhausted. The Company continues its collection efforts subsequent to charge-off, which results in some recoveries each year. See Note 6 to the consolidated financial statements for additional discussion of loans and ALLL.

 

Past due loans increased from $10.6 million at December 31, 2013 to $18.4 million at June 30, 2014. Approximately $9.5 million of past due loans represent loans that had matured and were in the process of being renewed.

 

Liquidity and Capital Resources

 

Liquidity, Interest Rate Sensitivity and Market Risks

 

The objectives of the Company’s liquidity management policy include providing adequate funds to meet the needs of depositors and borrowers at all times, providing funds to meet the basic needs for on-going operations of the Company, and to meet regulatory requirements. The 31.07% liquidity ratio is the sum of cash, overnight funds, and un-pledged, marketable securities divided by the sum of deposits and short-term borrowings (less the full amount of pledged deposits). Management believes that core deposit activity, $5.3 million in available borrowing capacity from the FHLB of Atlanta at June 30, 2014, and Fed Funds accommodations of $10.0 million will be adequate to meet the short-term and long-term liquidity needs of the Company. The Company had $669 thousand outstanding from the FHLB as of June 30, 2014. The maximum outstanding balance from FHLB at any time during the first six months of 2014 was $681 thousand. The Company periodically draws on its Fed Funds accommodations to test the lines availability.

 

The Company participates in the Certificate of Deposit Account Registry Service (“CDARS”) program, which enables depositors to receive FDIC insurance coverage for deposits otherwise exceeding the maximum insurable amount. Through the CDARS program, deposits in excess of the maximum insurable amount are placed with multiple participating financial institutions. All of the Bank’s CDARS brokered deposits are reciprocal, relationship-based deposits. There are several large depositors in the CDARS program and the largest continuing depositor has renewed annual $20 million in deposits for several years, and increased the balance by an additional $5 million during the fourth quarter of 2013. There is no guarantee, however, this trend will continue. In management’s opinion, the large depositors have stable and long-term relationships with the Bank.

 

Capital Resources

 

The Company and the Bank are subject to various regulatory capital requirements administered by their federal and state banking regulators. Failure to satisfy minimum capital requirements may result in certain mandatory and additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s Consolidated Financial Statements. The Bank is required to obtain the non-objection of its regulators before engaging in any transactions that would materially change the composition of the Bank’s balance sheet. Also, the Bank’s Memorandum of Understanding with its regulators requires the Bank to maintain a tier 1 leverage capital ratio of not less than 8.00%, and a total risk based capital ratio of not less than 10.00%.

 

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M&F BANCORP, INC. AND SUBSIDIARY

The June 30, 2014 and December 31, 2013 regulatory capital levels of the Company and Bank compared to the regulatory standards were:

 

   June 30, 2014 
                         
           For Capital         
           Adequacy   To Be Well 
(Dollars in thousands)  Actual   Purposes   Capitalized 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
Total capital (to risk weighted assets)                              
Company  $38,108    18.42%  $16,547    8.00%  $20,684    10.00%
Bank   36,886    17.82    16,556    8.00    20,695    10.00 
Tier 1 (to risk weighted assets)                              
Company  $35,512    17.17%  $8,273    4.00%  $12,410    6.00%
Bank   34,288    16.57    8,278    4.00    12,417    6.00 
Tier 1 (to average total assets)                              
Company  $35,512    11.99%  $11,852    4.00%  $14,815    5.00%
Bank   34,288    11.59    11,831    4.00    14,789    5.00 

 

   December 31, 2013 
                         
           For Capital     
           Adequacy   To Be Well 
(Dollars in thousands)  Actual   Purposes   Capitalized 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
Total capital (to risk weighted assets)                              
Company  $37,006    17.42%  $16,990    8.00%  $21,238    10.00%
Bank   35,573    16.77    16,975    8.00    21,219    10.00 
Tier 1 (to risk weighted assets)                              
Company  $34,341    16.17%  $8,495    4.00%  $12,743    6.00%
Bank   32,910    15.51    8,487    4.00    12,731    6.00 
Tier 1 (to average total assets)                              
Company  $34,341    11.87%  $11,576    4.00%  $14,471    5.00%
Bank   32,910    10.69    12,316    4.00    15,395    5.00 

 

Item 4 — Controls and Procedures

 

The Company’s management, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer (its principal executive officer and principal financial officer, respectively), has concluded, based on its evaluation as of the end of the period covered by this report, that the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, (“the Exchange Act”)) are effective to ensure that information required to be disclosed

by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and formats.

 

There were no changes in internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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M&F BANCORP, INC.

PART II

 

OTHER INFORMATION

 

Item 1 - Legal Proceedings

 

From time to time, the Company becomes involved in legal proceedings occurring in the ordinary course of business. Management believes there currently are no pending or threatened proceedings that are reasonably likely to result in a material effect on the Company’s consolidated financial condition or results of operations.

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M&F BANCORP, INC.

 

 

ITEM 6. EXHIBITS    

 

The following exhibits are filed with or incorporated by reference into this report.

     
Exhibit No.   Description of Exhibit
     
Exhibit 3(i)(a)   Amended and Restated Articles of Incorporation of the Company, incorporated by reference to Exhibit 3(i) to the Form 10-QSB for the quarter ended September 30, 1999, filed with the SEC on November 12, 1999.
     
Exhibit 3(i)(b)   Articles of Amendment, adopted by the Shareholders of the Company on May 3, 2000, filed with the North Carolina Department of the Secretary of State on July 12, 2000, and incorporated by reference to Exhibit 3(v) to the Form 10KSB for the year ended December 31, 2005, filed with the SEC on March 31, 2006.
     
Exhibit 3(i)(c)   Articles of Amendment, adopted by the Shareholders of the Company on June 9, 2009, filed with the North Carolina Department of the Secretary of State on June 11, 2009, and incorporated by reference to Exhibit 4.1 to the Form 8-K filed with the SEC on June 26, 2009.
     
Exhibit 3(i)(d)   Articles of Amendment, adopted by the Board of Directors of the Company on June 10, 2009, filed with the North Carolina Department of the Secretary of State on June 25, 2009, and incorporated by reference to Exhibit 4.2 to the Form 8-K filed with the SEC on June 26, 2009.
     
Exhibit 3(i)(e)   Articles of Amendment, adopted by the Board of Directors of the Company on July 27, 2010, filed with the North Carolina Department of the Secretary of State on August 20, 2010, and incorporated by reference to Exhibit 4.1 to the Form 8-K Filed with the SEC on August 23, 2010.
     
Exhibit 3(ii)   Restated Bylaws of the Company, incorporated by reference to Exhibit 99.1 to the Form 8-K filed with the SEC on April 6, 2009.
     
Exhibit 4(i)   Specimen Stock Certificate, incorporated by reference to Exhibit 4 to the Form 10-KSB for the year ended December 31, 2000, filed with the SEC on April 2, 2001.
     
Exhibit 4(ii)   Form of Certificate for the Fixed Rate Cumulative Perpetual Preferred Stock, Series B, incorporated by reference to Exhibit 4.2 to the Form 8-K filed with the SEC on August 23, 2010.
     
Exhibit 10(i)*   Employment Agreement dated January 12, 2007 by and among Kim D. Saunders, the Company and the Bank, incorporated by reference to Exhibit 99.1 to the Form 8-K filed with the SEC on January 18, 2007.
     
Exhibit 10(ii)   Letter Agreement and certain side letters, all dated August 20, 2010, between the Company and the United States Department of the Treasury, with respect to the issuance and sale of the Fixed Rate Cumulative Perpetual Preferred Stock, Series B, incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on August 23, 2010.
     
Exhibit 10(iii) *   Employment Agreement Amendment, dated June 26, 2009, among the Company, the Bank and Kim D. Saunders, incorporated by reference to Exhibit 10.2 to the Form 8-K filed with the SEC on June 26, 2009.
     
Exhibit 31(i)   Certification of Kim D. Saunders.
     
Exhibit 31(ii)   Certification of Randall C. Hall.
     
Exhibit 32  

Certification pursuant to 18 U.S.C. Section 1350.

 

 

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M&F BANCORP, INC.

     
Exhibit 101   Financial information submitted in XBRL format.

 

* Management contracts and compensatory arrangements.

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M&F BANCORP, INC.

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Securities Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    M&F Bancorp, Inc.
         
Date: August 12, 2014   By:   /s/ Kim D. Saunders
        Kim D. Saunders
        President, Chief Executive Officer
         
    By:   /s/ Randall C. Hall
        Randall C. Hall
        Chief Financial Officer

 

 

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M&F BANCORP, INC.

 

Index to Exhibits

Exhibit No.   Description of Exhibit
     
Exhibit 31(i)  

Certification of Kim D. Saunders.

 

     
Exhibit 31(ii)  

Certification of Randall C. Hall.

 

     
Exhibit 32  

Certification pursuant to 18 U.S.C. Section 1350.

 

     
Exhibit 101   Financial information submitted in XBRL format.

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