M&F Bancorp 10QSB 2005 Q1 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 March 31, 2005

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 Durham 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 ¨

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 1,685,646

Outstanding at May 10, 2005

Transitional Small Business Disclosure Format (Check one):

Yes ¨ No x

M&F BANCORP, INC.

INDEX


		Page
PART I.	FINANCIAL STATEMENTS (unaudited)

Item 1.	Consolidated Condensed Financial Statements

	Consolidated Condensed Balance Sheets as of March 31, 2005 and December 31, 2004	3

	Consolidated Condensed Statements of Income for the three-month periods ended March 31, 2005 and March 31, 2004	4

	Consolidated Condensed Statements of Shareholders’ Equity for the three-month periods ended March 31, 2005 and March 31, 2004	5

	Consolidated Condensed Statements of Cash Flows for the three-month periods ended March 31, 2005 and March 31, 2004	6

	Notes to Consolidated Condensed Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3.	Controls and Procedures	18

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	19

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19

Item 3.	Defaults Upon Senior Securities	19

Item 4.	Submission of Matters to a Vote of Security Holders	19

Item 5.	Other Information	19

Item 6.	Exhibits	19

Signature Page		21-38

PART I: FINANCIAL INFORMATION

ITEM 1 Financial Statements

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands)


	March 31, 2005			December 31, 2004
	(Unaudited)			(Audited)
ASSETS
Cash and amounts due from financial institutions	$	4,906		$	4,432
Interest-earning deposits in financial institutions		19,759			15,236

Cash and cash equivalents		24,665			19,668

Securities available for sale		26,037			26,691

Securities held to maturity		190			385

Loans:
Commercial, financial and agricultural loans		103,396			107,600
Real estate-construction loans		19,435			14,937
Real estate-mortgage loans		39,939			40,014
Installment loans to individuals		6,660			6,743

Total Loans		169,430			169,294
Unearned income		(549	)		(618	)
Allowance for loan losses		(2,712	)		(2,512	)

Net loans		166,169			166,164
Land available for sale		590			590
Premises and equipment, net		6,160			6,196
Other assets		11,414			10,847

TOTAL ASSETS	$	235,225		$	230,541

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:
Interest-bearing deposits		156,455			157,410
Non-interest-bearing deposits		37,850			31,649

Total Deposits		194,305			189,059
Other borrowings		16,795			16,802
Other liabilities		4,180			4,340

Total liabilities		215,280			210,201
Commitments and Contingencies (Note 8)

Shareholders’ Equity:
Common stock, no par value, authorized 5,000,000 shares; issued and outstanding 1,685,646		5,901			5,901
Retained earnings		14,043			14,143
Accumulated other comprehensive income		1			296

Total shareholders’ equity		19,945			20,340
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY	$	235,225		$	230,541

See notes to consolidated condensed financial statements.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(unaudited)

(in thousands, except per share data)


Three months ended:	March 31, 2005			March 31, 2004
Interest income:
Interest on loans	$	2,882		$	2,696
Securities:
Taxable		132			141
Tax exempt		89			101
Interest on bank deposits		98			31

Total interest income		3,201			2,969

Interest expense:
Interest on deposits		726			611
Interest on federal funds & borrowings		213			151

Total interest expense		939			762

Net interest income		2,262			2,207
Provision for loan losses		233			106

Net interest income after provision for loan losses		2,029			2,101

Non-interest income		522			531
Salaries & employee benefits		1,374			1,314
Other non-interest expense		1,209			804

Income (loss) before taxes		(32	)		514
Income tax (benefit) expense		(16	)		138

Net (loss) income	$	(16	)	$	376

Earnings (Loss) per common share:
Basic	$	(0.01	)	$	0.23
Diluted	$	(0.01	)	$	0.22
Weighted average common shares outstanding:
Basic		1,686			1,686
Diluted		1,686			1,712
Dividends per common share	$	0.05		$	0.05

See notes to consolidated condensed financial statements.

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY

(unaudited)

(in thousands)


	March 31, 2005			March 31, 2004
Beginning balance, January 1	$	20,340		$	19,417
Net income (loss)		(16	)		376
Changes in fair value of securities, net of tax		(295	)		79
Dividends		(84	)		(84	)

Ending Balance, March 31	$	19,945		$	19,788

See notes to consolidated condensed financial statements.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


Three months ended:	March 31, 2005			March 31, 2004
Operating activities:
Net income (loss)	$	(16	)	$	376

Adjustments to reconcile net income to net cash from operating activities:
Provision for possible loan losses		233			106
Depreciation and amortization		92			74
Deferred income taxes		(33	)		(82	)
Deferred loan fees		69			44
Income taxes receivable		(119	)		303
Interest receivable		(76	)		(18	)
Other assets		(271	)		(290	)
Other		(85	)		538
Other liabilities		(160	)		(167	)

Net cash (used in) provided by operating activities		(366	)		884

Investing activities:

Proceeds from sales, calls and maturities of securities (AFS)		402			2,364
Purchase of securities (AFS)		—			(1,500	)
Net increase in loans		(136	)		(5,875	)
Purchase of premises and equipment		(58	)		(166	)

Net cash provided by (used in) investing activities		208			(5,177	)

Financing activities:

Net increase (decrease) in demand and savings deposits		9,499			(7,364	)
Net decrease in certificates of deposit		(4,253	)		(2,220	)
Repayment of FHLB Borrowings		(7	)		(7	)
Cash dividends		(84	)		(84	)

Net cash provided by (used in) financing activities		5,155			(9,675	)

Net increase (decrease) in cash and cash equivalents		4,997			(13,968	)
Cash and cash equivalents at the beginning of the period		19,668			25,859
Cash and cash equivalents at the end of the period	$	24,665		$	11,891

Interest Paid	$	993		$	651
Taxes Paid	$	0		$	0

See notes to consolidated condensed financial statements.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

1.	Basis of Presentation

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

The consolidated condensed 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, 2004.

In the opinion of management, the interim financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position, results of operations and cash flows in the accompanying unaudited consolidated condensed financial statement.

2.	Loans and Allowance for Possible Loan Losses

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in process of collection. In all cases, loans are placed on non-accrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued, but not collected, for loans that are placed on non-accrual status or that are charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The allowance for possible loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case 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. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

3.	Investment Securities

Non-equity securities not classified as either “held to maturity” securities or trading securities and equity securities not classified as trading securities, are classified as “available for sale securities” and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of consolidated shareholders’ equity. The fair values of these securities are based on quoted market prices, dealer quotes and prices obtained from independent pricing services. Available for sale and held to maturity securities are reviewed quarterly for possible other-than-temporary impairments. The review is inherently subjective as it requires material estimates and judgments, including an analysis of the facts and circumstances of each individual investment such as the length of time the fair value has been below cost, the expectation for that security’s performance, the credit worthiness of the issuer and the Company’s ability and intent to hold the security to maturity. Declines in the fair value of the individual held to maturity and available for sale securities below their costs that are other-than –temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in consolidated earnings as realized losses.

4.	Earnings Per Share

Earnings per share are calculated on the basis of the weighted-average number of common shares outstanding. For the three periods ended March 31, 2005 and March 31, 2004, 110,400 and 82,200 stock options, were excluded from the computations of diluted earnings per share because the impact of their inclusion would be anti-dilutive.

5.	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 March 31, 2005 and December 31, 2004, the capital levels are as indicated below:


	Capital
	Risk Based		(a) Tier 1		(b) Tier 1		Minimum Required Capital
March 31, 2005	11.44	%	9.98	%	7.96	%	6.00	%
December 31, 2004	12.00	%	10.48	%	8.54	%	6.00	%

a)	to risk weighted assets

b)	to average assets

6.	Common Stock Cash Dividends

On March 15, 2005, the Board of Directors of the Company declared a quarterly cash dividend of $0.05 per share to all shareholders of record on April 4, 2005 payable April 11, 2005. The dividend reduced shareholders’ equity by $84,282.

7.	Pro Forma Net Income with Stock Option Compensation Costs Determined Using Fair Value Method

The Company accounts for compensation costs related to the Company’s employee stock option plan using the intrinsic value method. Therefore, no compensation cost has been recognized for stock option awards because the options are granted at exercise prices based on the market value of the Company stock on the date of grant. The following table illustrates the effect on net income (loss) and earnings (loss) per share if the fair value method had been applied to all outstanding and unvested awards in each period. For purposes of the pro forma disclosures required by SFAS No. 148, Accounting for Stock-Based Compensation – transaction and disclosure – an amendment of FASB Statement No. 123(SFAS No. 148), to expense over the options vesting period. The estimated fair value of the Company’s stock options is amortized over the vesting period. All stock options were fully vested as of March 31, 2005.

Net income (loss):


	Three Months Ended March 31
	2005			2004
As reported	$	(16	)		376
Deduct – total stock based employee compensation expense determined under fair value based method for all awards, net of income taxes		0			(3	)

Pro forma	$	(16	)	$	373

Basic earnings (loss) per share:
As reported	$	(0.01	)	$	0.13
Pro forma	$	(0.01	)	$	0.22

Diluted earnings (loss) per share:
As reported	$	(0.01	)	$	0.22
Pro forma	$	(0.01	)	$	0.22

8.	Loan Commitments

In the normal course of business, the Bank has various commitments to extend credit, which are not reflected in the financial statements. At March 31, 2005 and December 31, 2004, the Bank had outstanding loan commitments of approximately $47.8 million and $41.1 million, respectively. Commitments under standby letters of credit amounted to approximately $3.6 million for both periods ending March 31, 2005 and December 31, 2004, respectively. These letters of credit represent agreements, whereby the Bank guarantees to lend funds to customers up to a predetermined maximum amount.

The bank approves lines of credit to customers through home equity and overdraft protection loans. At March 31, 2005 and December 31, 2004, in addition to actual advances made on such loans, the Bank’s customers have available additional lines of credit on home equity and consumer overdraft protection loans. Available amount on home equity lines at March 31, 2005 and December 31, 2004 were approximately $1.4 million, respectively. In addition, consumer overdraft protections loans had available lines of credit of $848,000 and $882,000 as of March 31, 2005 and December 31, 2004, respectively.

9.	New Accounting Pronouncements

In May 2004, FASB issued FASB Staff Position (“FSP”) No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP FAS 106-2), which supersedes FSP FAS 106-1, in response to the December 2003 enactment of the Medicare Prescription Drug, Improvement and Modernization Act of 2003(“the Act”). FSP FAS 106-2 provides guidance on the accounting for the effects of the Act for employees that sponsor postretirement health care plans that provide prescription drug benefits. The Company believes that its plans are eligible for the subsidy provided by the Act but has not determined the effect on its financial statements.

In September 2004, the FASB issued FSP EITF 03-1-1, which delays the recognition and measurement provisions of EITF 03-1-1 pending the issuance of further implementation guidance. The delay applies to both debt and equity securities and specifically applies to impairments caused by interest rate and sector spreads. In addition, the provisions of EITF 03-1 that have been delayed relate to the requirements that a Company declare its intent to hold the security to recovery and designate a recovery period in order to avoid recognizing an other- than-temporary impairment charge through earnings. The FASB will be issuing implementation guidance related to this topic. Once issued, the Company will evaluate the impact of adopting EITF 03-1.

In December 2004, the FASB Statement No. 123 (revised 2004) (SFAS 123(R)), “Share-based Payment”, which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation”. FASB 123(R) eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 and requires that such transactions be accounted for using a fair value-based method. Statement 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. In April 2005, the Securities and Exchange Commission (“SEC”) delayed the effective date for public companies, which results in the required effective date of January 1, 2006 for the Company.

Statement 123 (R) may be adopted using one of two methods: (1) A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123 (R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted employees prior to the effective date of Statement 123 (R) that remain unvested on the effective date. (2) A “modified retrospective” which incorporates a restatement of previously reported earnings per share based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. The Company has not adopted Statement 123 (R) at this time and is still evaluating its impact.

10.	Benefit Plans

The Company and its subsidiary have a non-contributory defined benefit retirement (pension) plan for substantially all full-time employees. The Company also has supplementary defined benefit pension plans that provide benefits to higher-level employees. During the first three months of 2005, we made contributions of $21,000 and expect to contribute approximately $81,000 during the remainder of 2005.

The components of the net periodic benefit cost for the three months ended March 31 are:


	Pension Benefits						Other Executive Retirement Benefits
	(in thousands)						(in thousands)
	2005			2004			2005		2004
Service Cost	$	25		$	24		$	14	$	16
Interest Cost		55			55			33		31
Expected Returns on Plan Assets		(70	)		(67	)		—		—
Amortization of prior service cost		(7	)		(8	)		22		19
Amortization of net loss		4			6			8		8

Net Periodic Cost	$	7		$	10		$	77	$	74

The Company provides certain post retirement benefits to specified Executive Officers. At March 31, 2005, the amount of the liability for these benefits was approximately $132,200.

ITEM 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

The accounting and reporting policies of the Company and its subsidiary are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry.

Certain accounting policies require us to make significant estimates and assumptions, which have a material impact on the carrying value of certain assets and liabilities, and we consider these to be critical accounting policies. Three of the more critical accounting and reporting policies include the Company’s accounting for the allowance for possible loan losses, investment securities and pension costs. The estimates and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods.

Allowance for Possible Loan Losses

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the 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. Management determines the significance of payment delays and payment shortfalls on a case-by-case 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. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance loans are collectively evaluated for impairment based on estimates of charge-off trends, expected default rates, general economic conditions and overall portfolio quality. The evaluation of collectability of the loan portfolio is inherently subjective as it requires material estimates and projections of future changes that could negatively affect a borrower’s ability to repay, such conditions could result in material adjustments to the allowance for loan losses that could adversely impact earnings in future periods.

See “Non-Performing Assets and Allowance for Loan Losses” herein for additional discussion.

Investment Securities

Pension Plans

The Company maintains a qualified defined benefit cash balance pension plan (the “Qualified Plan”), which covers substantially all full time employees and an unfunded excess plan to provide benefits to a select group of highly compensated employees. The excess plan provides benefits that would otherwise be provided under the Qualified Plan but for maximum benefit and compensation limits applicable under the tax law.

The benefit cost and obligation are dependent on numerous factors resulting from actual plan experience and assumptions of future experiences. The assumptions include discount rates, inflation, salary growth and long-term return on plan assets.

Please also refer to Note 1 in the “Notes to Consolidated Financial Statements” in the Company’s Annual Report for the year ended December 31, 2004 on Form 10-KSB on file with the Securities and Exchange Commission for details regarding all of the Company’s critical and significant accounting policies.

General

The following discussion and analysis of earnings and related financial data should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Annual Report on Form 10-KSB for the year ended December 31, 2004. It is intended to assist you in understanding the financial condition and the results of operations for the three months ended March 31, 2005 and 2004.

Forward-Looking Statements

When used in this report, the words or phrases “will likely result,” “should,” “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 and other factors 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, except as required by regulation.

Executive Overview

The Company generated the majority of its income in the first quarter of 2005, from traditional banking services—lending and deposit services.

Despite the net loss for the quarter, the Company continued to execute on the strategy and meet many expectations such as targeting commercial business and diversifying the customer base and increasing available rate products. During the first three months of 2005, the Company continued to target commercial business in an effort to diversify the customer base and increase variable-rate products. The Company also concentrated efforts to attract long-term deposits.

As management looks forward there are several key challenges that the Company will face, namely:

•

Improving operating efficiency

•

Intense competition

•

Increased costs to comply with the requirements of Sarbanes-Oxley

•

Economic environment of local markets

•

Improving Liquidity

The Company will continue to rely on its emphasis on quality personal services and enhanced technology to meet these challenges. The Company has developed both long-term and short-term strategic objectives to obtain profitable growth. Management will continually monitor and modify these objectives as the industry changes. The Company will also explore expansions of services as it seeks to increase fee revenue.

Financial Condition

Total assets increased 2.03 percent to $235.2 million at March 31, 2005 from $230.5 million at December 31, 2004 primarily due to a $5.2 million increase in deposits, resulting in an increase in cash and cash equivalents of $5.0 million.

Total loans increased less than 1.00 percent to $169.4 million at March 31, 2005 from $169.3 million at December 31, 2004. This small increase was primarily the result of lower than expected loan closings during the first quarter.

The investment portfolio balance as of March 31, 2005 was $26.2 million compared to $27.1 million at December 31, 2004. Maturing investment securities and cash and cash equivalents were used to fund loan demand and satisfy liquidity needs. Approximately 99.3 and 98.6 percent of the portfolio was classified as available-for-sale at March 31, 2005 and December 31, 2004, respectively. All securities purchased during 2005 and 2004 were classified as available-for-sale.

Deposits increased 2.75 percent to $194.3 million at March 31, 2005 from $189.1 million at December 31, 2004, primarily as a result of a $6.2 million increase in non-interest bearing deposits.

Total shareholders’ equity decreased 1.94 percent to $19.9 million, as of March 31, 2005 from $20.3 million at December 31, 2004. The decrease was primarily due to year-to-date net loss of $16 thousand, the quarterly dividends declared and a decrease in net investment gains.

Results of Operations - Comparison for the three months ended March 31, 2005 and 2004.

Net income for the three months ended March 31, 2005 decreased 104.3 percent to a loss of $16 thousand compared to income of $376 thousand for

the same period in 2004. Total interest income was $3.2 million for the three months ended March 31, 2005 compared to $3.0 million for the comparable period in 2004.

Interest income on loans increased $186 thousand primarily due to an increase in the average loans outstanding to $170.0 million from $155.9 million for the three months ended March 31, 2005 and 2004, respectively, partially offset by a decline in yield from 6.92 percent to 6.78 percent. Interest income on securities decreased 8.67 percent when comparing the three months ended March 31, 2005 with the same period in 2004. This decrease was the result of a decrease in securities portfolio as a result of calls and maturities. The yield on the securities portfolio for the period ended March 31, 2005 increased 7 basis points from a yield of 3.36 percent for the same period in 2004.

Total interest expense increased 23.22 percent to $939 thousand for the three months ended March 31, 2005 from $762 thousand for the three months ended March 31, 2004. The increase in interest expense is primarily the result of time deposits repricing during the three months ended March 31, 2005 at significantly higher rates. The rates paid on interest bearing deposits were approximately 1.84 percent for the three months ended March 31, 2005 as compared to 1.67 percent, for the comparable period in 2004. During 2004, the Bank began to utilize a deposit acquisition program with Qwickrate, a CD listing service. CD’s outstanding through this program as of March 31, 2005 was $17.3 million with an average interest rate of 3.01 percent. It is anticipated that interest expense may increase when these deposits are subject to renewal.

During the three months ended March 31, 2005, the Company increased the loan loss provision to $233 thousand as compared to $106 thousand for the three months ended March 31, 2004. This is a result of an increase of $1.4 million in non-accrual, past due and restructured loans at March 31, 2005 as compared to December 31, 2004. The provision for loan losses is the result of management’s assessment of the Company’s delinquency ratios, non-performing assets, charge-off history, composition of loans in the portfolio.

Non-interest income during the three months ended March 31, 2005 decreased 1.69 percent to $522 thousand from $531 thousand for the same period in the prior year. Non-interest expense increased 22.00 percent from $2.1 million during the three months ended March 31, 2004 to $2.6 million during the three months ended March 31, 2005. This is primarily the result of $211,000 in consultant fees expensed through the first three months of 2005, an increase of $197 thousand over the same period in 2004. The increase was the result of the reorganization of the entire human resources function. In addition, the Company opened a new branch office in May of 2005.

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 the Company’s past statistical history concerning charge-offs. The March 31, 2005 allowance for loan losses was $2.7 million or 1.53 percent of total loans outstanding compared with $2.5 million or 1.60 percent of total loans outstanding at December 31, 2004. The loan loss allowance, as a percentage of total loans, increased based on the result of management’s assessment of the Company’s delinquency ratios, charge-off history and composition of loans in the portfolio. Management 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.


	March 31, 2005			December 31, 2004
	(Dollars in Thousands)
Non-Accruing Loans	$	4,271			1,546
Accruing Loans Delinquent 90 days or more		353			2,089
Foreclosed Assets		594			509
Restructured Loans		—			52

Total Non-Performing Assets	$	5,218		$	4,196

Percentage of total assets		2.22	%		1.82	%

Non-accruing loans increased significantly from year-end due primarily to one large commercial real estate loan of approximately $2.8 million going past due more than 90 days. Despite this increase, management considers the allowance for loan losses of $2.7 million at March 31, 2005 to be sufficient to cover the potential loan losses.

There were no restructured loans at March 31, 2005 as compared to $52,000 at December 31, 2004. Federal regulation states that a restructured obligation that is in compliance with its modified terms and yields a market rate need not continue to be reported as a troubled debt restructured in calendar years after the year in which restructuring took place.

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 increased from 18.73 percent at December 31, 2004 to 20.23 percent for the period ended March 31, 2005. The increase resulted from an increase in deposits of $5.2 million.

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 interest 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. 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 that was reported in its December 31, 2004, Annul Report on Form 10-KSB.

Item 3

Controls and Procedures

The Company maintains a system of internal controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. The Company’s Board of Directors, operating through its audit committee, which is composed entirely of independent outside directors, provides oversight to the Company’s financial reporting process.

The Company’s management, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of the end of the period covered by this Report, that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer of the Company, as appropriate to allow timely decisions regarding required disclosure.

There were no significant 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.

PART II

OTHER INFORMATION


ITEM 1.		Legal Proceedings: Not applicable
ITEM 2.		Unregistered Sales of Equity Securities and use of Proceeds: Not Applicable
ITEM 3.		Defaults upon Senior Securities: Not applicable
ITEM 4.		Submission of Matters to a Vote of Security Holders: Not Applicable
ITEM 5.		Other Information: Not applicable
ITEM 6.		Exhibits

(a) 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 SEC 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 SEC 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 20, 2002, incorporated by reference to Exhibit 3(iii) to the Form 10-QSB for the quarter ended March 31, 2002 filed with the SEC on May 14, 2002.

Exhibit (4)		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 (10)(a)		Employment Agreement between Mechanics and Farmers Bank and Lee Johnson, Jr. incorporated by reference to Exhibit 10 to the Form 10-QSB for the quarter ended September 30, 2000 filed with the SEC on November 9, 2000.

Exhibit (10)(b)		Retention Bonus Agreement between Mechanics and Farmers Bank and Fohliette Becote incorporated by reference to Exhibit 10.03 to the Form 10-QSB for the quarter ended September 30, 1999 filed with the SEC on November 12, 1999.

Exhibit (10)(c)		Retention Bonus Agreement between Mechanics and Farmers Bank and Walter D. Harrington incorporated by reference to Exhibit 10.03 to the Form 10-QSB for the quarter ended September 30, 1999 filed with the SEC on November 12, 1999.

Exhibit (10)(d)		Retention Bonus Agreement between Mechanics and Farmers Bank and Harold G. Sellers incorporated by reference to Exhibit 10.03 to the Form 10-QSB for the quarter ended September 30, 1999 filed with the SEC on November 12, 1999.

Exhibit (10)(e)		Retention Bonus Agreement between Mechanics and Farmers Bank and Elaine Small incorporated by reference to Exhibit 10.03 to the Form 10-QSB for the quarter ended September 30, 1999 filed with the SEC on November 12, 1999.

Exhibit (10)(f)		Supplemental Executive Retirement Plan incorporated by reference to Exhibit 10(f) to the Form 10-KSB for the year ended December 31, 2003 filed with the SEC on March 30, 2004.



Exhibit (10)(g)		Summary of Retirement Package Benefits for Lee Johnson, Jr. incorporated by reference to Exhibit 10(g) to the Form 10-KSB for the year ended December 31, 2004 filed with the SEC on March 31, 2005.

Exhibit (10)(h)		2004 President and CEO Incentive Compensation Program incorporated by reference to Exhibit 10(h) to the Form 10-KSB for the year ended December 31, 2004 filed with the SEC on March 31, 2005.

Exhibit (10)(i)		2004 Executive Incentive Compensation Program incorporated by reference to Exhibit 10(i) to the Form 10-KSB for the year ended December 31, 2004 filed with the SEC on March 31, 2005.

Exhibit (10)(j)		2004 City Executives Incentive Compensation Program incorporated by reference to Exhibit 10(j) to the Form 10-KSB for the year ended December 31, 2004 filed with the SEC on March 31, 2005.

Exhibit (10)(k)		2004 Loan Production Incentive Compensation Program incorporated by reference to Exhibit 10(k) to the Form 10-KSB for the year ended December 31, 2004 filed with the SEC on March 31, 2005.

Exhibit (10)(l)		2004 Incentive Compensation Program – Branch Customer Service Plan incorporated by reference to Exhibit 10(l) to the Form 10-KSB for the year ended December 31, 2004 filed with the SEC on March 31, 2005.

Exhibit (10)(m)		2004 Corporate Support and Tellers Incentive Compensation Program incorporated by reference to Exhibit 10(m) to the Form 10-KSB for the year ended December 31, 2004 filed with the SEC on March 31, 2005.

Exhibit (10)(n)		Employment Agreement dated May 9, 2005 between Ronald Wiley and Mechanics and Farmers Bank, incorporated by reference to Exhibit 99.1 to the Form 8-K filed with the SEC on May 13, 2005.

Exhibit (10)(o)		Split Dollar Life Insurance Agreement (Endorsement Method) between Mechanics and Farmers Bank and Lee Johnson, Jr. dated September 2, 2003

Exhibit (10)(p)		Split Dollar Life Insurance Agreement (Endorsement Method) between Mechanics and Farmers Bank and Ethel M. Small dated September 17, 2003

Exhibit (31.1)		Certification of Lee Johnson, Jr.

Exhibit (31.2)		Certification of Allan E. Sturges

Exhibit (32)		Certification Pursuant to 18 U.S.C. 1350

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, 2005


By:		/s/ Lee Johnson, Jr.
		Lee Johnson, Jr.
		President/Chief Executive Officer

By:		/s/ Allan E. Sturges
		Allan E. Sturges
		Acting Chief Financial Officer

M&F Bancorp (MFBP) 10QSB2005 Q1 Quarterly report (small business)

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