M&F Bancorp (MFBP) 10QSB 2002 Q2 Quarterly report (small business)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF  1934
For the quarterly period ended June 30, 2002
Commission File Number 0-27307
M&F BANCORP, INC.
(Exact name of small business issuer as specified in its charter)
North Carolina		56-1980549
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
2634 Chapel Hill Blvd., P.O. Box 1932, Durham, North Carolina 27707
(Address of principal executive offices)
(919) 683-1521
(Issuer’s telephone number, including area code)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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

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

Common Stock no par value             842,823

Outstanding at July 20, 2002

Transitional Small Business Disclosure Format (Check one):

Yes     o          No    x

M&F BANCORP, INC.

INDEX

			Page
PART I.		FINANCIAL INFORMATION (unaudited)
Item 1.	Consolidated Condensed Financial Statements
	Consolidated Condensed Balance Sheets as of June 30, 2002 and December 31, 2001		3
	Consolidated Condensed Statements of Income for the six months ended June 30, 2002 and June 30, 2001		4
	Consolidated Condensed Statements of Income for the three months ended June 30, 2002 and June 30, 2001		5
	Consolidated Condensed Statements of Shareholders’ Equity for the six months ended June 30, 2002 and June 30, 2001		6
	Consolidated Condensed Statements of Cash flows for the six months ended June 30, 2002 and June 30, 2001		7
	Notes to Consolidated Condensed Financial Statements		8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings	12
Item 2.		Changes in Securities	13
Item 3.		Defaults Upon Senior Securities	13
Item 4.		Submission of Matters to a Vote of Security Holders	13
Item 5.		Other Information	13
Item 6.		Exhibits	13
Signature Page			13

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PART I: FINANCIAL INFORMATION
ITEM 1 Financial Statements
CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands)

			June 30, 2002			December 31, 2001
ASSETS				(unaudited)
Cash and amounts due from fin. institutions			$	4,597		$	5,488
Interest-earning deposits in financial institutions				11,429			4,327
	Cash and cash equivalents			16,026			9,815
Securities available for sale				28,061			28,913
Securities held to maturity				883			1,413
Loans:
	Commercial, financial and agricultural loans			71,669			71,573
	Real estate-construction loans			2,860			1,377
	Real estate-mortgage loans			48,735			44,438
	Installment loans to individuals			4,557			4,921
		Total Loans		127,821			122,309
	Unearned income			(492	)		(424	)
	Allowance for loan losses			(1,728	)		(1,505	)
		Net Loans		125,601			120,380
Premises and equipment, net				5,085			5,141
Other assets				3,679			2,434
TOTAL ASSETS			$	179,335		$	168,096
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
	Interest-bearing deposits			119,104			109,741
	Non-interest-bearing deposits			27,403			25,642
		Total Deposits		146,507			135,383
	Other borrowings			11,865			12,375
	Other liabilities			2,376			2,485
		Total Liabilities		160,748			150,243
Shareholders’ Equity:
	Common stock			5,892			5,998
	Retained earnings			12,071			11,615
	Accumulated other comprehensive income			624			240
	Shareholders’ Equity			18,587			17,853
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY			$	179,335		$	168,096

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CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
(in thousands, except per share data)

Six months ended:				June 30, 2002		June 30, 2001
Interest income:
	Interest on loans		$	5,070	$	4,890
	Securities:
		Taxable		545		676
		Tax exempt		129		144
	Federal funds sold			0		6
	Other interest			73		260
Total interest income				5,817		5,976
Interest expense:
	Interest-bearing demand			56		58
	Savings			597		625
	Time deposits			829		1,300
	Interest on other borrowings			309		315
Total interest expense				1,791		2,298
Net interest income				4,026		3,678
	Provision for loan losses			369		272
Net interest income after provision for loan losses				3,657		3,406
Non-interest income				996		996
Salaries & employee benefits				2,421		2,228
Other non-interest expense				1,421		1,656
Income before taxes				811		518
Income tax expense				224		127
Net income			$	587	$	391
Earnings per share common equivalent shares:
	Basic and diluted		$	0.69	$	0.46
Weighted average common shares outstanding:
	Basic and diluted			851		854
Dividends per common share:
	Basic and diluted		$	0.16	$	0.16

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CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)

Three months ended:				June 30, 2002		June 30, 2001
Interest income:
	Interest on loans		$	2,549	$	2,404
	Securities:
		Taxable		292		344
		Tax exempt		22		36
	Federal funds sold			0		0
	Other interest			55		119
Total interest income				2,915		2,903
Interest expense:
	Interest-bearing demand			28		28
	Savings			329		312
	Time deposits			372		665
	Interest on federal funds & borrowings			155		157
Total interest expense				884		1,162
Net interest income				2,031		1,741
	Provision for loan losses			183		138
Net interest income after provision for loan losses				1,846		1,603
Non-interest income				493		573
Salaries & employee benefits				1,165		1,124
Other non-interest expense				627		822
Income before taxes				547		230
Income tax expense				154		68
Net income			$	393	$	162
Earnings per share common equivalent shares:
	Basic and diluted		$	0.46	$	0.19
Weighted average common shares outstanding:				846		854
	Basic and diluted
Dividends per common share:
	Basic and diluted		$	0.08	$	0.08

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CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY
(unaudited)
(in thousands)

		June 30, 2002			June 30, 2001
Beginning balance, January 1	$	17,853		$	17,707
Net income		587			391
Other Comprehensive Income		389			32
Common Stock Repurchase (10,902 shares @ $9.75 each)		(106	)		—
Dividends		(136	)		(136	)
Ending Balance, June 30	$	18,587		$	17,994

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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands, except per share data)

Six months ended:			June 30, 2002			June 30, 2001
Cash flows provided by operating activities:
Net income		$	587		$	391
Adjustments to reconcile net income to net cash from operating activities:
	Provision for possible loan losses		369			271
	Provision for depreciation		198			212
	Deferred income taxes		114			(229	)
	Loss on disposal of assets		(45	)		(178	)
	Deferred loan fees		68			10
	Income taxes receivable		(609	)		(70	)
	Interest Receivable		(38	)		153
	Prepaid expenses and other assets		1,145			(111	)
	Accrued expenses and other liabilities		(521	)		284
Net cash provided by operating activities			1,268			165
Cash flows used in Investing Activities:
	Proceeds from sales and maturities of securities (AFS)		1,680			5,500
	Purchase of securities (AFS)		(2,200	)		(5,612	)
	Net (increase) decrease in loans		(5,445	)		874
	Purchase of premises and equipment		(125	)		(62	)
Net cash (used in) provided by investing Activities			(6,090	)		700
Net Cash Provided by (used in) Financing Activities:
	Net increase in demand and savings deposits		13,260			4,069
	Net (decrease) increase in certificates of deposit		(2,159	)		4,046
	Cash dividends		(68	)		(136	)
Net cash provided by financing activities			11,033			7,979
Net Increase in Cash and Cash Equivalents			6,211			8,844
Cash and Cash Equivalents at the Beginning of the Period			9,815			15,599
Cash and Cash Equivalents at the End of the Period		$	16,026		$	24,443

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)

1.        Basis of Presentation
The consolidated financial statements include the accounts and transactions of M&F Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, Mechanics & Farmers Company (“M&F Company”).   All significant intercompany accounts and transactions have been eliminated in consolidation.   The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and instructions from Regulation S-B.

The condensed consolidated financial statements included herein 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-KSB for the year ended December 31, 2001.

In the opinion of management, all adjustments consisting of normal recurring adjustments necessary for a fair presentation have been included.

2.        Earnings Per Share
Earnings per share are calculated on the basis of the weighted-average number of common shares outstanding.  The anti-dilutive potential common shares outstanding for the periods ended June 30, 2002 and June 30, 2001 represented 82,200 shares.

3.        Regulatory Capital Requirements
The Company is subject to various regulatory capital requirements administered by the federal and state banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.  As of June 30, 2002 and December 31, 2001 the Company had the following capital levels:

			Capital
	Risk Based		(a) Tier 1		(b) Tier 1		Minimum Required Capital
June 30, 2002	14.92	%	13.26	%	9.60	%	6.00	%
December 31, 2001	15.60	%	13.91	%	11.44	%	6.00	%

a)  to risk weighted assets
b)  to average assets

4.        Common Stock Cash Dividends
On March 19, 2002, the Board of Directors of the Company declared a quarterly cash dividend of $0.08 per share to all shareholders of record on March 19, 2002 payable April 12, 2002. The dividend reduced shareholders’ equity by $68,298.  On June 19, 2002, the Board of Directors of the Company declared a quarterly cash dividend of $0.08 per share to all shareholders of record on July 3, 2002 payable July 12, 2002.  The dividend reduced shareholders’ equity by $67,425.

5.        Common Stock Retirement
On May 8, 2002 the Company purchased 10,902 shares of common stock at $9.75 per share for a total of $106,295.  The shares were retired from the outstanding shares of common stock.

ITEM 2

Management’s Discussion and Analysis of Financial

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Condition and Results of Operations

General

The following discussion and analysis of earnings and related financial data should be read in conjunction with the Company’s financial statements and notes thereto included in the Annual Report on Form 10-KSB for the year ended December 31, 2001.  It is intended to assist you in understanding the financial condition and the results of operations for the six months and three months ended June 30, 2002 and 2001.

Forward-Looking Statements

When used in this report, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or other similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Such statements are subject to certain risks and uncertainties including changes in economic conditions in the market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the market area, and competition that could cause actual results to differ materially from historical earnings and those presently anticipated or projected.  The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.  The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions, which may be made to any forward-looking statements to reflect events or occurrences after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Financial Condition

Total assets increased 6.69 percent to $179,335,000 at June 30, 2002 from $168,096,000 at December 31, 2001. The investment portfolio balance (including FHLB stock) as of June 30, 2002 was $28,944,000 compared to $30,326,000 at December 31, 2001.  Investment Securities maturities and deposits were used to fund loan demand and satisfy liquidity needs.  Approximately 97 percent and 95 percent of the portfolio was classified as available-for-sale at June 30, 2002 and December 31, 2001, respectively.  All securities purchased during 2002 and 2001 were classified in the available-for-sale category.

Net loans increased 4.34 percent to $125,601,000 at June 30, 2002 from $120,380,000 at December 31, 2001.  Management continues its effort to add more adjustable rate loans to the portfolio in an effort to reduce the interest rate sensitivity of our loan portfolio.  This effort is normally achieved in the area of commercial loans which are primarily secured by real estate.

Deposits increased 8.22 percent to $146,507,000 at June 30, 2002 from $135,383,000 at December 31, 2001.  The majority of the growth came from increased balances on public fund accounts from local universities and municipalities.  Management believes that large deposit growth will be more difficult as customers continue to look for alternative investment

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opportunities with higher yields.  As a result, the Company will continue to seek other sources of liquidity to meet loan demand.

Total shareholders’ equity increased 4.11 percent to $18,587,000 on June 30, 2002 from $17,853,000 at December 31, 2001.  The favorable change in this account was due to year-to-date net income partially offset by dividends declared and common stock retirements.

Results of Operations - Comparison for the six months and three months ended June 30, 2002 and 2001

Net income for the six months ended June 30, 2002 increased 50.13 percent to $587,000 compared to $391,000 for the same period in 2001.  Total interest income decreased 2.66 percent to $5,817,000 for the six months ended June 30, 2002 from $5,976,000 for the six months ended June 30, 2001.  The decrease resulted primarily from a reduction in the securities income created by a lower balance outstanding in the securities portfolio.  Total interest expense decreased 22.06 percent to $1,791,000 for the six months ended June 30, 2002 from $2,298,000 for the six months ended June 30, 2001.  The reduction resulted from lower interest rates, as the rates paid on interest bearing liabilities declined to 2.44 percent for the six months ended June 30, 2002 compared to 3.39 percent for the prior year.  This decrease in rates offset a higher volume of deposits.  The Company increased the loan loss provision 35.66 percent from $272,000 to $369,000.  The increase was a result of increased loan volume and management’s assessment of non-performing assets and total classified assets.  Non-interest income remained unchanged at  $996, 000 from the prior year.  Non-interest expense decreased 1.08 percent from $3,884,000 during the six months ended June 30, 2001 to $3,842,000 during the six months ended June 30, 2002.  The decrease in this category was attributed to cost management strategies.

Net income for the three months ended June 30, 2002 increased 41.22 percent to $393,000 compared with $162,000 for the same period in 2001.  Total interest income increased .41 percent to $2,915,000 for the three months ended June 30, 2002 from $2,903,000 for the three months ended June 30, 2001.  Total interest expense decreased 23.92 percent to $884,000 for the three months ended June 30, 2002 from $1,162,000 for the three months ended June 30, 2001.  Lower rates paid on interest bearing deposits offset a higher volume of deposits.  The Company increased the loan loss provision by 32.61 percent from $138,000 during the three months ended June 30, 2001 to $183,000 during the three months ended June 30, 2002.  Non-interest income decreased 13.96 percent from $573,000 during the three months ended June 30, 2001 to $493,000 during the three months ended June 30, 2002 primarily due to a higher percentage of rental income received in the second quarter for the prior year.  Non-interest expense decreased 7.91 percent from $1,946,000 during the three months ended June 30, 2001 to $1,792,000 during the three months ended June 30, 2002.  The decrease in this category was attributed to cost management strategies.

Non-performing assets and allowance for loan losses

The allowance for loan losses is calculated based upon an evaluation of pertinent factors underlying the types and qualities of the Company’s loans.  Management considers such factors as the repayment status of a loan, the estimated net realizable value of the underlying collateral, the borrower’s ability to repay the loan, current and anticipated economic conditions which might affect the borrower’s ability to repay the loan and

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the Company’s past statistical history concerning charge-offs.  The June 30, 2002 allowance for loan losses was $1,728,000 or 1.35 percent of total loans outstanding compared with $1,505,000 or 1.23 percent of total loans outstanding at December 31, 2001.  An increase in loan volume was the primary cause for an increase in the allowance for loan losses.  Management has also considered non-performing assets and total classified assets in establishing the allowance for loan losses.

The ratio of non-performing assets to total assets is one indicator of the exposure to credit risk.  Non-performing assets of the Company consist of non-accruing loans, accruing loans delinquent 90 days or more, restructured loans, and foreclosed assets, which have been acquired as a result of foreclosure or deed-in-lieu-of foreclosure.  The following table provides certain information regarding non-performing assets.

			06/30/02			12/31/01
		(Dollars in Thousands)
Non-Accruing Loans		$	205			434
Accruing Loans Delinquent 90 days or more			206			263
Foreclosed Assets			40			133
Restructured Loans			913			914
	Total Non-Performing Assets	$	1,364		$	1,744
	Percentage of total assets		.76	%		1.04	%

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, as well as providing funds to meet the basic needs for on-going operations of the Company and regulatory requirements.  The Company’s liquidity position remained substantially constant during the six-month period ended June 30, 2002.

The Company places great significance on monitoring and managing its asset/liability position.  The Company’s policy for managing its interest margin (or net yield on interest-earning assets) is to maximize net interest income while maintaining a stable deposit base.  The Company’s deposit base has not historically been subject to the levels of volatility experienced in national financial markets in recent years; however, the Company does realize the importance of minimizing such volatility while at the same time maintaining and improving earnings.  Gap analysis, a common method historically used to estimate interest rate sensitivity, measures the difference or gap between the volume of interest-earning assets and interest-bearing liabilities repricing over various time periods.  However, this method addresses only the magnitude of funding mismatches and does not address the magnitude or relative timing of rate changes.  Therefore, management prepares on a quarterly basis earnings projections based on a range of interest rate scenarios of rising, flat and declining rates in order to more accurately measure interest rate risk.

Interest-bearing liabilities and the variable rate loans are generally repriced to current market rates.  The Company’s balance sheet is liability-sensitive, meaning that in a given period there will be more liabilities than assets subject to immediate repricing as the market rates change.  Because most of the Bank’s loans are fixed rate mortgages, they reprice less rapidly than rate sensitive interest-bearing deposits.  During periods of rising rates, this results in decreased net interest income.  The opposite occurs during periods of declining rates.

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In addition to the gap analysis described above, the Company uses a modeling technique which projects net interest income under varying interest rate scenarios and the theoretical impact of immediate and sustained rate changes referred to as “rate shocks.”  “Rate shocks” measure the estimated theoretical impact on the Bank’s tax equivalent net interest income and market value of equity from hypothetical immediate changes in interest rates as compared to the estimated theoretical impact of rates remaining unchanged.  The prospective effects of these hypothetical interest rate changes are based upon numerous assumptions including relative and estimated levels of key interest rates.

The Company has not experienced a change in the mix of its rate-sensitive assets and liabilities or in market interest rates that it believes would result in a material change in its interest rate sensitivity since reported at December 31, 2001.

PART II Other Information
ITEM 1.	Legal Proceedings:           Not applicable
ITEM 2.	Changes in Securities:            Not applicable
ITEM 3.	Defaults upon Senior Securities:            Not applicable
ITEM 4.	Submission of Matters to a Vote of Security Holders:

At the Annual Meeting of Stockholders held on April 30, 2002 shareholders were asked to vote on the following:

1.		Election of seven (7) persons to serve on the Board of Directors of M&F Bancorp, Inc. until the annual meeting of stockholders in 2003.  The seven nominated directors were elected:
	Director		Votes in Favor	Votes Withheld
	Willie T. Closs, Jr.		531,483	3,000
	Genevia Gee Fulbright		531,684	0
	Lee Johnson, Jr.		531,684	0
	Benjamin S. Ruffin		531,684	0
	Joseph M. Sansom		531,684	0
	Maceo K. Sloan		531,483	3,000
	Aaron L. Spaulding		531,684	0
2.		Approval of an amendment to the bylaws of M&F Bancorp, Inc. which provided that if and when the number of directors on the M&F Bancorp, Inc. Board of Directors is nine or more, the terms of directors will, without any requirement for stockholder approval, be staggered so that the terms of approximately one-third of the directors will expire each year.
		The amendment was approved; there were 439,707 votes in favor of the amendment, 12,625 votes against, and 78,873 abstentions.
3.		Ratification of the selection of Deloitte and Touche, L.L.P. as the independent auditor for M&F Bancorp, Inc. for the fiscal year ending December 31, 2002
		The selection was ratified; there were 528,858 votes in favor; 1,525 votes against; and 822 abstentions.

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ITEM 5.	Other Information:            Not applicable
ITEM.6	Exhibits

                Exhibit (3)(i) Articles of Incorporation of M&F Bancorp, Inc., incorporated by reference to Exhibit (3) to the Form 10-QSB for the quarter ended September 30, 1999 filed with the Securities and Exchange Commission on November 12, 1999.

                Exhibit (3)(ii) Bylaws of M&F Bancorp, Inc., incorporated by reference to Exhibit (3) to the Form 10-QSB for the quarter ended September 30, 1999 filed with the Securities and Exchange Commission on November 12, 1999.

                Exhibit (3)(iii) Amended and Restated Article III, Section 5 of the Bylaws of M&F Bancorp, Inc., adopted by the shareholders of M&F Bancorp, Inc. on April 30, 2002, incorporated by reference to Exhibit 3(iii) to the Form 10-QSB for the quarter ended March 31, 2002 filed with the Securities and Exchange Commission on May 14, 2002.

                Exhibit (4) Specimen Stock Certificate incorporated by reference to Exhibit (4) to the Form 10-KSB40 for the fiscal year ended December 31, 2000 filed with the Securities and Exchange Commission on April 2, 2001.

                Exhibit (10)(a) Employment Agreement between Mechanics and Farmers Bank and Lee Johnson, Jr. incorporated by reference to Exhibit 10(a) to the Form 10-QSB for the quarter ended September 30, 2000 filed with the Securities and Exchange Commission on November 9, 2000.

                Exhibit (10)(b) Retention Bonus Agreement between Mechanics and Farmers Bank and Fohliette Becote incorporated by reference to Exhibit 10(b) to the Form 10-QSB for the quarter ended September 30, 1999 filed with the Securities and Exchange Commission on November 12, 1999.

                Exhibit (10)(c) Retention Bonus Agreement between Mechanics and Farmers Bank and Walter D. Harrington incorporated by reference to Exhibit 10(c) to the Form 10-QSB for the quarter ended September 30, 1999 filed with the Securities and Exchange Commission on November 12, 1999.

                Exhibit (10)(d) Retention Bonus Agreement between Mechanics and Farmers Bank and Harold G. Sellars incorporated by reference to Exhibit 10(d) to the Form 10-QSB for the quarter ended September 30, 1999 filed with the Securities and Exchange Commission on November 12, 1999.

                Exhibit (10)(e) Retention Bonus Agreement between Mechanics and Farmers Bank and Elaine Small incorporated by reference to Exhibit 10(e) to the Form 10-QSB for the quarter ended September 30, 1999 filed with the Securities and Exchange Commission on November 12, 1999.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

M&F Bancorp, Inc.
(Registrant)
Date: May 13, 2002
By:	/s/ Lee Johnson Jr.

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		Lee Johnson, Jr.
		President/Chief Executive Officer
By:	/s/ Fohliette W. Becote
		Fohliette W. Becote
		Secretary/Treasurer

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