PINX:MFBP Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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 March 31, 2012
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  o

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 (Sec.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 o

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  o
Accelerated filer  o
Non-accelerated filer  o
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  o  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 May 14, 2012, there were 2,031,337 shares outstanding of the issuer's common stock, no par value.
 
 
 
 
 




INDEX




i

M&F BANCORP, INC.

PART I
FINANCIAL INFORMATION
Item 1 -
Financial Statements (unaudited)

CONSOLIDATED BALANCE SHEETS
 
 
 
 
(Dollars in thousands)
 
March 31,
2012
 
December 31,
2011
 
 
(Unaudited)
 
 ***
ASSETS
 
 
 
 
Cash and cash equivalents
 
$
57,606

 
$
61,296

Investment securities available for sale, at fair value
 
42,483

 
37,595

Other invested assets
 
638

 
638

Loans, net of unearned income and deferred fees
 
178,770

 
188,084

Allowances for loan losses
 
(3,697
)
 
(3,850
)
Loans, net
 
175,073

 
184,234

Interest receivable
 
798

 
764

Bank premises and equipment, net
 
4,618

 
4,654

Cash surrender value of bank-owned life insurance
 
5,818

 
5,768

Other real estate owned
 
3,116

 
3,215

Deferred tax assets and taxes receivable, net
 
4,626

 
4,703

Other assets
 
2,884

 
1,589

TOTAL ASSETS
 
$
297,660

 
$
304,456

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 

 
 

Deposits
 
 

 
 

Interest-bearing deposits
 
$
199,390

 
$
209,291

Noninterest-bearing deposits
 
53,251

 
49,853

Total deposits
 
252,641

 
259,144

Other borrowings
 
2,905

 
2,939

Other liabilities
 
5,641

 
5,976

Total liabilities
 
261,187

 
268,059

COMMITMENTS AND CONTINGENCIES- NOTE 9
 


 


Stockholders' equity:
 
 

 
 

Series B Preferred Stock-  $1,000 liquidation value per share, 11,735 shares issued and outstanding as of March 31, 2012 and December 31, 2011
 
11,724

 
11,724

Common stock, no par value 10,000,000 shares authorized as of March 31, 2012 and December 31, 2011; 2,031,337 shares issued and outstanding as of March 31, 2012 and December 31, 2011
 
8,732

 
8,732

Retained earnings
 
17,462

 
17,380

Accumulated other comprehensive loss
 
(1,445
)
 
(1,439
)
Total stockholders' equity
 
36,473

 
36,397

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
297,660

 
$
304,456

 
See notes to consolidated financial statements.
***Derived from audited financial statements.

1

M&F BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME
 
For the Three Months Ended March 31,
(Dollars in thousands except share and per share data)
 
2012
 
2011
Unaudited
 
 
 
 
Interest income:
 
 
 
 
Loans, including fees
 
$
2,592

 
$
2,878

Investment securities, including dividends
 
 
 
 
Taxable
 
209

 
122

Tax-exempt
 
40

 
64

Other
 
39

 
40

Total interest income
 
2,880

 
3,104

Interest expense:
 
 
 
 
Deposits
 
252

 
395

Borrowings
 
22

 
22

Total interest expense
 
274

 
417

Net interest income
 
2,606

 
2,687

Less provision (recovery) for loan losses
 

 
(250
)
Net interest income after recovery for loan losses
 
2,606

 
2,937

Noninterest income:
 
 
 
 
Service charges
 
330

 
350

Rental income
 
89

 
85

Cash surrender value of life insurance
 
50

 
48

Realized gain on sale of securities
 
54

 
13

Realized gain on sale of other real estate owned
 
1

 
2

Realized gain on disposal of assets
 

 
79

Other income (expense)
 
2

 
(2
)
Total noninterest income
 
526

 
575

Noninterest expense:
 
 
 
 
Salaries and employee benefits
 
1,488

 
1,376

Occupancy and equipment
 
357

 
402

Directors fees
 
70

 
81

Marketing
 
36

 
59

Professional fees
 
220

 
246

Information technology
 
223

 
216

FDIC deposit insurance
 
135

 
190

OREO expense, net
 
101

 
78

Delivery expenses
 
53

 
67

Other
 
296

 
292

Total noninterest expense
 
2,979

 
3,007

Income before income taxes
 
153

 
505

Income tax expense
 
12

 
140

Net income
 
141

 
365

Less preferred stock dividends and accretion
 
59

 
59

Net income available to common stockholders
 
$
82

 
$
306

Basic and diluted earnings per share of common stock:
 
$
0.04

 
$
0.15

Weighted average shares of common stock outstanding:
 
 
 
 
Basic and diluted
 
2,031,337

 
2,031,337


2

M&F BANCORP, INC.

Dividends per share of common stock
 
$

 
$

See notes to consolidated financial statements.

3

M&F BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
For the Three Months Ended March 31,
 
(Unaudited)
2012
 
2011
 
Net income
$
141

 
$
365

 
 
 
 
 
 
Items of other comprehensive income, before tax:
 

 
 

 
Unrealized gains on securities available for sale, net of taxes
50

 
105

 
Reclassification adjustments for gains included in income before income tax expense
(54
)
 
(13
)
 
Other comprehensive (loss) income before tax expense
(4
)
 
92

 
Less: Changes in deferred income taxes related to change in unrealized gains on securities available for sale
2

 
22

 
Other comprehensive (loss) income, net of taxes
(6
)
 
70

 
 
 
 
 
 
Total comprehensive income
$
135

 
$
435

 
 
See notes to consolidated financial statements
 

4

M&F BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND OTHER COMPREHENSIVE LOSS
THREE MONTHS ENDED MARCH 31, 2012 and 2011
(Dollars in thousands except for share data)
 
Number of
 
Common
 
Preferred
 
Retained
 
Accumulated Other Comprehensive
 
 
(Unaudited)
 
Shares
 
Stock
 
Stock
 
Earnings
 
Loss
 
Total
Balances as of December 31, 2010
 
2,031,337

 
$
8,732

 
$
11,722

 
$
17,264

 
$
(1,308
)
 
$
36,410

Comprehensive income:
 
 

 
 

 


 


 


 


Net income
 
 

 
 

 


 
365

 


 
365

Other comprehensive income, net of tax expense of $22
 
 

 
 

 


 


 
70

 
70

Total comprehensive income, net of tax expense $162
 
 

 
 

 
 

 
 

 

 
435

Dividends declared on preferred stock
 
 

 
 

 
 

 
(59
)
 
 

 
(59
)
Balances as of March 31, 2011
 
2,031,337

 
$
8,732

 
$
11,722

 
$
17,570

 
$
(1,238
)
 
$
36,786


 


 


 


 


 


 


Balances as of December 31, 2011
 
2,031,337

 
$
8,732

 
$
11,724

 
$
17,380

 
$
(1,439
)
 
$
36,397

Comprehensive income:
 
 

 
 

 


 

 
 

 


Net income
 
 

 
 

 


 
141

 
 

 
141

Other comprehensive loss, net of tax expense of $2
 
 

 
 

 
 

 
 

 
(6
)
 
(6
)
Total comprehensive income, net of tax expense of $14
 
 

 
 

 
 

 
 

 
 

 
135

Dividends declared on preferred stock
 
 

 
 

 
 

 
(59
)
 
 

 
(59
)
Balances as of March 31, 2012
 
2,031,337

 
$
8,732

 
$
11,724

 
$
17,462

 
$
(1,445
)
 
$
36,473


See notes to consolidated financial statements

5

M&F BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
 
 
 
 
(Unaudited)
 
2012
 
2011
Cash flows from operating activities:
 
 
 
 
Net income
 
$
141

 
$
365

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 

 
 

Recovery for loan losses
 

 
(250
)
Depreciation and amortization
 
94

 
97

Gain on disposition of asset
 

 
(79
)
Amortization of discounts/premiums on investments, net
 
19

 
4

Loan purchase accounting amortization, net
 
43

 
43

Deferred loan origination fees and costs, net
 
42

 
6

Gains on sale of available for sale securities
 
(54
)
 
(13
)
Increase in cash surrender value of bank owned life insurance
 
(50
)
 
(48
)
Write-down of other real estate owned
 

 
43

Changes in:
 
 
 
 
Accrued interest receivable and other assets
 
(1,253
)
 
138

Other liabilities
 
(335
)
 
11

Net cash (used in) provided by operating activities
 
(1,353
)
 
317

Cash flows from investing activities:
 
 

 
 

Activity in available-for-sale securities:
 
 

 
 

Sales
 
2,069

 

Maturities, prepayments and calls
 
375

 
497

Principal collections
 
1,596

 
799

Purchases
 
(8,897
)
 
(3,954
)
Net decrease in loans
 
9,075

 
3,213

Purchases of bank premises and equipment
 
(58
)
 
(4
)
Proceeds from disposition of asset
 

 
85

Proceeds from sale of real estate owned
 
99

 

Net cash provided by investing activities
 
4,259

 
636

Cash flows from financing activities:
 
 

 
 

Net decrease in deposits
 
(6,503
)
 
(15,507
)
Net decrease from other borrowings
 
(34
)
 
(5
)
Cash dividends
 
(59
)
 
(59
)
Net cash used in financing activities
 
(6,596
)
 
(15,571
)
Net decrease in cash and cash equivalents
 
(3,690
)
 
(14,618
)
Cash and cash equivalents as of the beginning of the period
 
61,296

 
74,575

Cash and cash equivalents as of the end of the period
 
$
57,606

 
$
59,957

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 

 
 

Cash paid during period for:
 
 

 
 

Interest
 
$
324

 
$
417

Income taxes
 
181

 
30

 
See notes to consolidated financial statements.

6

M&F BANCORP, INC.

Notes to Consolidated Financial Statements, March 31, 2012 (unaudited)

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation

The Consolidated Financial Statements include the accounts and transactions of M&F Bancorp, Inc. (the “Company”) and its wholly-owned bank subsidiary, Mechanics and Farmers Bank (the “Bank”). All significant inter-company accounts and transactions have been eliminated in consolidation. The Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial statements and in accordance with the instructions for Form 10-Q and Rule 8-03 of Regulation S-X. The accompanying Consolidated Financial Statements and Notes are unaudited except for the balance sheet and footnote information as of December 31, 2011, which were derived from the Company’s audited consolidated Annual Report on Form 10-K for the year ended December 31, 2011.
 
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 for the year ended December 31, 2011.
 
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.
 
New Accounting Pronouncements –
In May 2011, the Financial Accounting Standards Board (“FASB”) issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This update became effective for the Company for interim and annual reporting periods beginning after December 15, 2011 and did not have a material impact on the Company's consolidated financial position or results of operations.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expeted 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 deposit and federal funds sold in compliance with various restrictions in the policy. As of March 31, 2012 and December 31, 2011, all investment securities were classified as available for sale.
 
Our available for sale securities totaled $42.5 million and $37.6 million as of March 31, 2012 and December 31, 2011, respectively. Securities with a fair value of $0.5 million were pledged to the Federal Reserve Bank of Richmond (“FRB”) and an additional $5.4 million and $2.5 million in investments were pledged to public housing authorities in North Carolina and the North Carolina Department of State Treasurer, respectively, as collateral for public deposits at March 31, 2012.  Securities with a fair value of $0.6 million were pledged to the FRB and an additional $5.3 million and $2.0 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, 2011.  Our investment portfolio consists of the following securities:

U.S. Government agency securities (“U.S. Agencies”)
U.S. Government sponsored residential mortgage backed securities (“MBS”),
Non-Government sponsored residential MBS, and
Municipal securities (“Municipals”):
North Carolina







7

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


The amortized cost, gross unrealized gains and losses and fair values of investment securities at March 31, 2012 and December 31, 2011 were:
 
(Dollars in thousands)
 
Amortized
Cost
 
Gross
 Unrealized
 Gains
 
Gross
Unrealized
 Losses
 
Fair Value

 
 
 
 
 
 
 
 
March 31, 2012
 
 
 
 
 
 
 
 
U.S. Agencies
 
$
441

 
$

 
$

 
$
441

Government sponsored MBS
 
 
 
 
 
 
 
 

Residential
 
37,791

 
450

 
(59
)
 
38,182

Non-Government sponsored MBS
 
 
 
 
 
 
 
 

Residential
 
123

 
2

 

 
125

Municipal securities
 
 
 
 
 
 
 
 

North Carolina
 
3,501

 
234

 

 
3,735

Total at March 31, 2012
 
$
41,856

 
$
686

 
$
(59
)
 
$
42,483

December 31, 2011
 
 

 
 

 
 

 
 

US government agencies
 
$
483

 
$

 
$

 
$
483

Government sponsored MBS
 
 

 
 

 
 

 
 

Residential
 
30,399

 
416

 
(26
)
 
30,789

Non-Government sponsored MBS
 
 

 
 

 
 

 
 

Residential
 
133

 
2

 

 
135

Municipal securities
 
 

 
 

 
 

 
 

North Carolina
 
3,505

 
197

 

 
3,702

Out of state
 
2,444

 
42

 

 
2,486

Total at December 31, 2011
 
$
36,964

 
$
657

 
$
(26
)
 
$
37,595


Sales and calls of securities available for sale for the three months ended March 31, 2012 and March 31, 2011 resulted in aggregate gross realized gains of $54 thousand and $13 thousand respectively, and no realized losses.  
 
The amortized cost and estimated market values of securities as of March 31, 2012 by contractual maturities are shown below. Expected maturities may 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 earlier because of principal prepayments.


8

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


(Dollars in thousands)
 
March 31, 2012

 
Fair Value
 
Amortized Cost
U.S. Agencies
 
 
 
 
Due after five years through ten years
 
$
441

 
$
441

Total US Agencies
 
$
441

 
$
441

 
 
 
 
 
Government sponsored MBS
 
 

 
 
Residential
 
 

 
 
Due after one year through five years
 
$
82

 
$
77

Due after five years through ten years
 
333

 
311

Due after ten years
 
37,767

 
37,403

Total government sponsored MBS
 
$
38,182

 
$
37,791

 
 
 
 
 
Non-Government sponsored MBS
 
 

 
 
Residential
 
 

 
 
Due after ten years
 
$
125

 
$
123

 
 
125

 
123

Municipal bonds
 
 

 
 
North Carolina
 
 

 
 
Due within one year
 
$
299

 
$
295

Due after one year through five years
 
2,540

 
2,363

Due after five years through ten years
 
896

 
843

Total North Carolina municipal bonds
 
$
3,735

 
$
3,501


As of March 31, 2012 and December 31, 2011, 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
March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
Government sponsored MBS
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
12,533

 
$
(59
)
 
$

 
$

 
$
12,533

 
$
(59
)
Total at March 31, 2012
 
$
12,533

 
$
(59
)
 
$

 
$

 
$
12,533

 
$
(59
)

(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, 2011
 
 
 
 
 
 
 
 
 
 
 
 
Government sponsored MBS
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
9,669

 
$
(26
)
 
$

 
$

 
$
9,669

 
$
(26
)
Total at December 31, 2011
 
$
9,669

 
$
(26
)
 
$

 
$

 
$
9,669

 
$
(26
)
 
 
 
 
 
 
 
 
 
 
 
 
 

All securities owned as of March 31, 2012 and December 31, 2011 are investment grade. During the quarters ended March 31, 2012 and December 31, 2011, the Company elected to phase out its out of state municipal securities, with the last transaction completed by March 31, 2012. These securities were sold or called at a net gain to the Company.

9

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


The Company evaluates securities for other-than-temporary impairment, at least 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.  As of March 31, 2012 and December 31, 2011, the Company held 11 investment positions with unrealized losses of $59.0 thousand and $26.0 thousand, respectively. As of March 31, 2012, these investments were in U.S. Government sponsored MBS. 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 has determined that all declines in the market value of available for sale securities are not other-than-temporary, and will not be likely required to sell.

The Company owns stock in the Federal Home Loan Bank of Atlanta ("FHLB"), classified on the Consolidated Balance Sheets as Other Invested Assets, which is evaluated on a quarterly basis for other-than-temporary impairment.  The FHLB has been issuing dividends and repurchasing excess stock on a pro-rata basis for several quarters.  The Company believes that the investment in FHLB is not other-than-temporarily-impaired.
3.
RECONCILIATIONS OF BASIC AND DILUTED EARNINGS PER SHARE ("EPS")

Basic EPS is computed by dividing net income after preferred stock dividends 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 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 for any of the periods being reported.
4.
ACCUMULATED OTHER COMPREHENSIVE LOSS

Total 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 (loss) and accumulated other comprehensive loss are comprised of unrealized gains and losses on certain investments in debt securities and pension adjustments.
5.
LOANS AND ALLOWANCE FOR LOAN LOSSES

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 loan using the effective interest method. Loans (net) are reduced by the allowance for loan losses ("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 costs for the prepayment of loans, for delinquent payments, or for miscellaneous loan services, are recorded in income when collected.
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.
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 judgmental 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

10

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


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 (including accrued interest, net of deferred loan fees or costs and unamortized premiums or discounts), impairment is recognized by creating or adjusting an existing allocation of the Allowance, 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.
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 in 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 meeting their obligations to repay the debt to the Company.

Income Recognition on Impaired and Nonaccrual Loans - Loans, including impaired loans, are generally classified as nonaccrual 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 nonaccrual. Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual 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.
In the case where a nonaccrual 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 allowance for loan losses until prior charged off balances have been fully recovered.
Reserve for Credit Losses - The Company's reserve for credit losses is comprised of two components, the allowance for loan losses (the "ALLL") and the reserve for unfunded commitments (the "Unfunded Reserve").
Allowances for Loan Losses - The ALLL is a valuation allowance which 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 the Securities Exchange Commission (“SEC”) Staff Accounting Bulletin

11

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


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 identified factors which, by nature, are subjective and for which no quantitative drivers have been established, such as lending policies, competition, and regulatory requirements. In the quarter ended March 31, 2012, the qualitative factor for competition was increased by 8 basis points ("bps") due to increased competition for our qualified borrowers to move to other banks that can offer more attractive terms, such as longer term low fixed rate loans. Management has developed, from historical loan and economic information, quantitative drivers for most of the qualitative factors. The quantitative drivers , 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. For example, more weight is assigned to changes in Doubtful account balances than that assigned to changes in Substandard balances.
The quantitative loss history is based on an eight quarter rolling history of losses incurred by different loan types within the loan portfolio. The qualitative factors by loan type are added to the quantitative loss factors and multiplied by the balances of each loan type to determine the ASC 450 reserve. The actual eight quarter loss history is 64 bp of average loans outstanding as of March 31, 2012. The qualitative factors applied to the ASC 450 calculations totaled 1.41% and the quantitative factors varied from a net recovery to 53.55% for overdrafts.
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 Accounting Standards Codification (“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. A loan is considered impaired when it is probable that not all amounts due (principal and interest) will be collectible according to the original contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The significance of payment delays and payment shortfalls are considered on a loan by loan basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
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 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 in an ongoing manner. The Company's risk rating system was developed to aid in the risk management process by grouping credits with similar risk profiles into pass, internal watch, special mention, or criticized categories, which includes substandard, doubtful, and loss. Credit risk ratings are applied individually to all classes of loans and leases. 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

12

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


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.
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 credit 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 their 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 unfunded loans with available balances, 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 ALLL, 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 $21.1 thousand and $23.7 thousand for March 31, 2012 and December 31, 2011, respectively, were reflected in other liabilities on the Consolidated Balance Sheets.

The composition of the loan portfolio, net of deferred fees and costs, by loan classification as of March 31, 2012 and December 31, 2011 was as follows:

 
March 31, 2012
 
December 31, 2011

 
 
 
Commercial
$
4,772

 
$
7,688

Commercial real estate:
 
 
 
Construction
1,894

 
1,871

Owner occupied
17,994

 
20,352

Other
24,536

 
24,831

Faith-based non-profit
 
 
 
Construction
2,751

 
2,287

Owner occupied
76,432

 
78,161

Other
8,637

 
8,703

Residential real estate:
 
 
 
First mortgage
26,870

 
27,896

Multifamily
6,222

 
7,207

Home equity
4,229

 
4,457

Construction

 

Consumer
1,480

 
1,667

Other loans
2,953

 
2,964

Loans, net of deferred fees
178,770

 
188,084

ALLL
(3,697
)
 
(3,850
)
 
 
 
 
Loans, net of ALLL
$
175,073

 
$
184,234


The Bank has a concentration of loans to faith-based non-profit organizations, in which the Bank has specialized lending experience.  As of March 31, 2012, the percentage of loans in this niche, which included construction, owner occupied real estate secured, and other loans, comprised approximately 49.12% of the total loan portfolio  The reserve allocated for these loans is

13

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


29.96% 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, some of which have been adversely affected by the current economic downturn.

A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for loan losses.  The following table presents the reported investment in loans, net of deferred fees and costs, by portfolio segment and based on impairment method as of March 31, 2012:

Allowance for loan losses:
 
Individually evaluated for impairment
 
Collectively evaluated for impairment
 
Ending balance March 31, 2012
(Dollars in thousands)
 
 
 
 
 
 
Commercial
 
$

 
$
64

 
$
64

Commercial real estate
 
225

 
827

 
1,052

Faith-based non-profit
 
50

 
1,057

 
1,107

Residential real estate
 
542

 
767

 
1,309

Consumer
 

 
46

 
46

Other loans
 

 
52

 
52

Unallocated
 

 
67

 
67

Total
 
$
817

 
$
2,880

 
$
3,697

Loans:
 
 
 
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
Commercial
 
$
590

 
$
4,182

 
$
4,772

Commercial real estate
 
8,086

 
36,338

 
44,424

Faith-based non-profit
 
13,713

 
74,107

 
87,820

Residential real estate
 
2,012

 
35,309

 
37,321

Consumer
 

 
1,480

 
1,480

Other loans
 

 
2,953

 
2,953

Total
 
$
24,401

 
$
154,369

 
$
178,770

 
 
 
 
 
 
 

The following table presents the reported investment in loans, net of deferred fees and costs, by portfolio segment and based on impairment method as of December 31, 2011:

Allowance for loan losses:
 
Individually evaluated for impairment
 
Collectively evaluated for impairment
 
Ending balance December 31, 2011
(Dollars in thousands)
 
 
 
 
 
 
Commercial
 
$

 
$
348

 
$
348

Commercial real estate
 
119

 
852

 
971

Faith-based non-profit
 
56

 
1,072

 
1,128

Residential real estate
 
543

 
756

 
1,299

Consumer
 
2

 
60

 
62

Other loans
 

 
42

 
42

Unallocated
 

 

 
0
Total
 
$
720

 
$
3,130

 
$
3,850


14

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


Loans:
 
Individually evaluated for impairment
 
Collectively evaluated for impairment
 
Ending balance December 31, 2011
(Dollars in thousands)
 
 
 
 
 
 
Commercial
 
$
590

 
$
7,098

 
$
7,688

Commercial real estate
 
6,828

 
40,226

 
47,054

Faith-based non-profit
 
13,816

 
75,335

 
89,151

Residential real estate
 
2,180

 
37,380

 
39,560

Consumer
 
2

 
1,665

 
1,667

Other loans
 

 
2,964

 
2,964

Total
 
$
23,416

 
$
164,668

 
$
188,084

 
 
 
 
 
 
 

Total impaired loans including TDR loans was $24.4 million as of March 31, 2012 and $23.4 million as of December 31, 2011. Two real estate secured commercial loans loans totaling $1.4 million were restructured in the quarter ended March 31, 2012. Of the 40 TDRs at March 31, 2012, 28 loans totaling $13.8 million were in compliance with the restructured terms.

The following tables show impaired loans, excluding TDR loans, with and without valuation allowances as of March 31, 2012 and December 31, 2011:

(Dollars in thousands)
 
 
 
 
March 31,
2012
 
December 31,
2011
Loans with no allocated ALLL
$
3,348

 
$
3,214

Loans with allocated ALLL
1,144

 
1,545

Total
4,492

 
4,759

Amount of the ALLL allocated
$
571

 
$
600


 
For the Three Months Ended
 
For the Year Ended
(Dollars in thousands)
March 31, 2012
 
March 31, 2011
 
December 31, 2011
Average of impaired loans during the periods ended
$
4,625

 
$
8,119

 
$
6,338


The following table shows TDR loans with and without valuation allowances as of the periods ending March 31, 2012 and December 31, 2011:

(Dollars in thousands)
March 31,
2012
 
December 31,
2011
 
 
 
 
Loans with no ALLL
$
17,937

 
$
16,919

Loans with allocated ALLL
1,972

 
1,738

Total
$
19,909

 
$
18,657

Amount of the ALLL allocated
$
246

 
$
120


(Dollars in thousands)
For the Three Months Ended
 
For the Year Ended
 
March 31, 2012
 
March 31, 2012
 
December 31, 2011
Average of TDR loans during the periods ended
$
19,283

 
$
10,668

 
$
14,016


15

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


The following table presents loans individually evaluated for impairment, excluding TDR loans, by class of loans as of March 31, 2012:
 
March 31, 2012
(Dollars in thousands)
Unpaid
Principal
Balance
 
Total Exposure
 
Recorded
Investment
 
ALLL
Allocated
 
 
Interest Earned
Three
Months
 
 
 
 
 
 
 
 
 
 
 
With no related ALLL recorded
 
 
 
 
 
 
 
 
 
 
Commercial
$

 
$

 
$

 
$

 
 
$

Commercial real estate:
 

 
 
 
 
 
 
 
 
 
Construction
 

 

 

 
 
 
 

Owner occupied
446

 
446

 
446

 

 
 

Other
56

 
56

 
56

 

 
 

Faith-based non-profit:
 

 
 
 
 
 
 
 
 


Construction

 

 

 

 
 

Owner occupied
2,522

 
2,522

 
2,522

 

 
 

Other

 

 

 

 
 

Residential real estate:
 

 
 
 
 
 
 
 
 


First mortgage
324

 
324

 
324

 

 
 

Multifamily

 

 

 

 
 

Home Equity

 

 

 

 
 

Construction

 

 

 

 
 

Consumer

 

 

 

 
 

Total impaired loans without ALLL recorded
$
3,348

 
$
3,348

 
$
3,348

 
$

 
 
$

With an ALLL recorded
 

 
 
 
 

 
 

 
 
 

Commercial
$

 
$

 
$

 
$

 
 
$

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
Construction

 

 

 

 
 

Owner occupied
49

 
49

 
49

 
23

 
 

Other
40

 
40

 
40

 
10

 
 

Faith-based non-profit
 
 

 
 
 
 
 
 
 
Construction

 

 

 

 
 

Owner Occupied

 

 

 

 
 

Other

 

 

 

 
 

Residential real estate:
 
 
 
 
 
 
 
 
 
 
First mortgage
962

 
962

 
962

 
477

 
 
8

Multifamily

 

 

 

 
 

Home equity
93

 
93

 
93

 
61

 
 

Construction

 

 

 

 
 

Consumer

 

 

 

 
 

Total impaired loans with ALLL recorded
$
1,144

 
$
1,144

 
$
1,144

 
$
571

 
 
$
8

Total impaired loans
$
4,492

 
$
4,492

 
$
4,492

 
$
571

 
 
$
8





16

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


The following table presents loans individually evaluated for impairment, excluding TDR     loans, by loan class, as of December 31, 2011.

 
Unpaid
Principal
Balance
 
Total Exposure
 
Recorded
Investment
 
ALLL
Allocated
 
 
Interest Earned
Three
Months
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
With no related ALLL recorded:
 
 
 
 
 
 
 
Commercial
$

 
$

 
$

 
$

 
 
$

Commercial real estate:
 

 
 

 
 

 
 

 
 
 

Construction

 

 

 

 
 

Owner occupied
322

 
322

 
322

 

 
 
17

Other
56

 
56

 
56

 

 
 

Faith-based non-profit:
 

 
 

 
 

 
 

 
 
 

Construction

 

 

 

 
 

Owner occupied
2,522

 
2,522

 
2,522

 

 
 
61

Other

 

 

 

 
 

Residential real estate:
 

 
 

 
 

 
 

 
 
 

First mortgage
402

 
402

 
314

 

 
 
5

Multifamily

 

 

 

 
 

Home Equity

 

 

 

 
 

Construction

 

 

 

 
 

Consumer

 

 

 

 
 

Total impaired loans without ALLL recorded
$
3,302

 
$
3,302

 
$
3,214

 
$

 
 
$
83

With an ALLL recorded:
 
 

 
 

 
 
 

Commercial
$

 
$

 
$

 
$

 
 
$

Commercial real estate:
 

 
 

 
 

 
 

 
 
 

Construction

 

 

 

 
 

Owner occupied
279

 
279

 
279

 
47

 
 

Other
40

 
40

 
40

 
10

 
 

Faith-based non-profit:
 

 
 
 
 
 
 

 
 
 

Construction

 

 

 

 
 

Owner occupied

 

 

 

 
 

Other

 

 

 

 
 

Residential real estate:
 

 
 
 
 
 
 

 
 
 

First mortgage
763

 
763

 
762

 
290

 
 
36

Multifamily

 

 

 

 
 

Home equity
462

 
462

 
462

 
251

 
 

Construction

 

 

 

 
 

Consumer
2

 
2

 
2

 
2

 
 

Total impaired loans with ALLL recorded
$
1,546

 
$
1,546

 
$
1,545

 
$
600

 
 
$
36

Total impaired loans
$
4,848

 
$
4,848

 
$
4,759

 
$
600

 
 
$
119

The recorded investment in loan balance is net of deferred fees and costs, and partial charge-offs where applicable.






17

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


The following table presents TDR loans by class of loans as of March 31, 2012:

 
March 31, 2012
(Dollars in thousands)
Impaired
Balance
 
Liquid
Collateral
 
Total
Exposure
 
Recorded
Investment
 
ALLL
Allocated
 
Interest
Earned Three
Months
 
 
 
 
 
 
 
 
 
 
 
 
With no ALLL recorded:
 
 
 
 
 
 
 
 
Commercial
$
1,567

 
$

 
$
1,567

 
$
590

 
$

 
$

Commercial real estate:
 
 

 
 
 
 

 
 

 
 

Construction
618

 


 
618

 
618

 

 

Owner occupied
728

 

 
728

 
728

 

 
11

Other
5,114

 

 
5,114

 
5,114

 

 
31

Faith-based non-profit:
 
 

 
 
 
 

 
 

 
 

Construction

 

 

 

 

 

Owner occupied
10,293

 
103

 
10,190

 
10,287

 

 
103

Other

 

 

 

 

 

Residential real estate:
 
 

 
 
 
 

 
 

 
 

First mortgage
610

 

 
610

 
600

 

 
1

Multifamily

 

 

 

 

 

Home equity

 

 

 

 

 

Construction

 

 

 

 

 

Consumer