UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2002
Commission File Number 0-27307
M&F BANCORP, INC.
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(Exact name of small business issuer as specified in its charter)
North Carolina 56-1980549
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2634 Chapel Hill Blvd., P.O. Box 1932, Durham, North Carolina 27707
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(Address of principal executive offices)
(919) 683-1521
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(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_______
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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 853,725
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Outstanding at April 12, 2002
Transitional Small Business Disclosure Format (Check one):
Yes___________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 March 31, 2002 and December 31, 2001 3
Consolidated Condensed Statements of Income for the three months ended March 31, 4
2002 and March 31, 2001
Consolidated Condensed Statements of Shareholders' Equity for the three months 5
ended March 31, 2002 and March 31, 2001
Consolidated Condensed Statements of Cash flows for the three months ended 6
March 31, 2002 and March 31, 2001
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results 8
of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signature Page 12
2
PART I: FINANCIAL INFORMATION
ITEM 1 Financial Statements
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
March 31, 2002 December 31, 2001
ASSETS (unaudited)
Cash and amounts due from fin. institutions $ 6,068 $ 5,488
Interest-earning deposits in financial institutions 10,894 4,327
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Cash and cash equivalents 16,962 9,815
Securities available for sale 25,872 28,913
Securities held to maturity 1,413 1,413
Loans:
Commercial, financial and agricultural loans 73,070 71,573
Real estate-construction loans 2,038 1,377
Real estate-mortgage loans 46,357 44,438
Installment loans to individuals 4,622 4,921
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Total Loans 126,087 122,309
Unearned income (466) (424)
Allowance for loan losses (1,696) (1,505)
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Net Loans 123,925 120,380
Company premises and equipment, net 5,084 5,141
Other assets 2,714 2,434
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TOTAL ASSETS $ 175,970 $ 168,096
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LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Interest-bearing deposits 115,735 109,741
Non-interest-bearing deposits 28,106 25,642
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Total Deposits 143,841 135,383
Other borrowings 11,870 12,375
Other liabilities 2,236 2,485
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Total Liabilities 157,947 150,243
Shareholders' Equity:
Common stock 5,999 5,998
Retained earnings 11,707 11,615
Accumulated other comprehensive income 317 240
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Shareholders' Equity 18,023 17,853
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TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 175,970 $ 168,096
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3
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
Three months ended: March 31, 2002 March 31, 2001
Interest Income:
Interest on loans $ 2,521 $ 2,486
Securities:
Taxable 253 342
Tax exempt 107 108
Federal funds sold 6
Other interest 21 141
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Total interest income $ 2,902 $ 3,083
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Interest Expense:
Interest-bearing demand 28 30
Savings 268 313
Time deposits 457 635
Interest on federal funds & borrowings 154 158
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Total Interest Expense 907 $ 1,136
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Net Interest Income 1,995 1,947
Provision for loan losses 184 134
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Net Interest Income After Provision for 1,811 1,813
Loan Losses
Non-interest income 503 423
Salaries & employee benefits 1,256 1,104
Other non-interest expense 794 843
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Income before taxes 264 289
Income tax expense 70 59
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Net income $ 194 $ 230
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Earnings per share common equivalent shares:
Basic and diluted $ 0.23 $ 0.27
Weighted average common shares outstanding:
Basic and diluted 854 854
Dividends per share common:
Basic and diluted $ .08 $ .08
4
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited)
(in thousands)
March 31, 2002 March 31, 2001
Beginning balance, January 1 $ 17,853 $ 17,706
Net income 194 230
Other Comprehensive Income 44 14
Dividends (68) (68)
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Ending Balance, March 31 $ 18,023 $ 17,882
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5
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands, except per share data)
Three months ended: March 31, 2002 March 31, 2001
Cash flows from operating activities:
Net income $ 194 $ 230
Adjustments to reconcile net income to net cash from
operating activities:
Provision for possible loan losses 184 134
Provision for depreciation 92 105
Deferred income taxes 180 (9)
Loss on disposal of assets 39 (8)
Deferred loan fees 43 13
Income taxes receivable 283 (14)
Interest Receivable 37 94
Prepaid expenses and other assets 37 (224)
Accrued expenses and other liabilities
(19) 375
Other (176) 161
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Net cash from operating activities 894 857
Cash flows used in Investing Activities:
Proceeds from sales and maturities of 2,180 3,500
securities (AFS)
Purchase of securities (AFS) (500) (2,112)
Net (increase) decrease in loans (3,774) 837
Purchase of premises and equipment (42) (45)
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Net cash used in (provided by) investing (2,136) 2,180
activities
Net Cash Provided by (Used In) Financing Activities:
Net decrease in demand and savings deposits 9,741 85
Net (decrease) increase in certificates of (1,284)
deposit 4,850
Cash dividends (68) (68)
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Net cash provided by financing activities 8,389 4,867
Net Increase in Cash and Cash Equivalents 7,147 7,904
Cash and Cash Equivalents at the Beginning of the 9,815 15,599
Period ------------- --------------
Cash and Cash Equivalents at the End of the Period $ 16,962 $ 23,503
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6
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. Investment Securities
The Company accounts for investment securities dependent upon their
classification as held to maturity, available for sale, or trading assets.
3. Loans
Loans are carried at their principal amount outstanding, net of the allowance
for possible loan losses and deferred fees. Interest on commercial, mortgage and
installment loans is accrued and credited to operating income based upon the
principal amount outstanding. The Company's policy is to discontinue the accrual
of interest when, in management's judgment, circumstances indicate that
collection is doubtful.
4. Earnings Per Share
Earnings per share are calculated on the basis of the weighted-average number of
common shares outstanding. The potential dilutive common shares outstanding for
the periods ended March 31, 2002 and March 31, 2001 represented 82,200 shares.
5. Regulatory Capital Requirements
The Company is subject to various regulatory capital requirements administered
by the federal 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, 2002 and December 31, 2001 the
Company had the following capital levels:
7
Capital
(a) (b) Minimum
Risk Based Tier 1 Tier 1 Required Capital
March 31, 2002 15.26% 13.55% 11.26% 6.00%
December 31, 2001 15.60% 13.91% 11.44% 6.00%
a) to risk weighted assets
b) to average assets
6. Comprehensive Income
Reporting comprehensive income requires the Company to (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position.
7. 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.
8. Presentation
Certain amounts in 2001 have been reclassified to conform to the 2002
presentation.
9. Subsequent Event
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
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 three months ended March 31, 2002 and
2001.
Critical Accounting Policies
The accounting and reporting policies of the Company and its bank subsidiary are
in accordance with accounting principles generally accepted in the United States
and conform to general practices within the banking industry. The more critical
accounting and reporting policies include the Company's accounting for
securities, loans, the allowance for loan losses and income taxes. In
particular, the Company's accounting policies relating to the allowance for loan
losses and income taxes involve the use of estimates and require significant
judgments to be made by management. Different assumptions in the application of
these policies could result in material changes in the Company's consolidated
financial position or consolidated results of operations. Please also refer to
Note A in the "Notes to Consolidated Financial Statements" in the Company's
Annual Report for the year ended December 31, 2001 on Form 10-KSB on file with
8
the Securities and Exchange Commission for details regarding all of the
Company's critical and significant accounting policies.
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 4.68 percent to $175,970,000 at March 31, 2002 from
$168,096,000 at December 31, 2001. The investment portfolio balance (including
FHLB stock) as of March 31, 2002 was $27,285,000 compared to $30,326,000 at
December 31, 2001. Maturities and deposits were used to fund loan demand and
satisfy liquidity needs. The investment portfolio can be liquidated to meet loan
demand if necessary. Approximately 95 percent of the portfolio was classified as
available-for-sale at March 31, 2002 and December 31, 2001. All securities
purchased during 2002 and 2001 were classified in the available-for-sale
category.
Net loans increased 2.94 percent to $123,925,000 at March 31, 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 loans. This effort is normally achieved in the area of
commercial loans which are primarily secured by real estate.
Deposits increased 6.25 percent to $143,841,000 at March 31, 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 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 marginally to $18,023,000 on March 31, 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.
Results of Operations - Comparison for the three months ended March 31, 2002
and 2001
Net income for the three months ended March 31, 2002 decreased 15.65 percent to
$194,000 compared with $230,000 for the same period in 2001. Total interest
income decreased 5.87 percent to $2,902,000 at March 31, 2002 from $3,083,000 at
9
March 31, 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 20.16 percent to $907,000 at March
31, 2002 from $1,136,000 at March 31, 2001. The reduction resulted from lower
interest rates, a yield of 2.60 percent compared to 3.55 for the prior year. A
higher volume of deposits partially offset the change in yield. The Company
increased the loan loss provision by 37.31 percent from $134,000 to $184,000.
The increase was a factor of increased loan volume and management's assessment
of non-performing assets and total classified assets. Non-interest income
increased 18.91 percent from $423,000 to $503,000 primarily due to a $45,000
gain on the sale of other real estate owned. Employee compensation and benefits
and other non-interest expense increased 5.29 percent from $1,947,000 to
$2,050,000. The increase in the other non-interest category was attributed to
small increases in various accounts.
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, 2002 allowance for
loan losses was $1,696,000 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 loan
loss allowance. 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.
03/31/02 12/31/01
(Dollars in Thousands)
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Non-Accruing Loans $ 370 434
Accruing Loans Delinquent 90 days or more 351 263
Foreclosed Assets 40 133
Restructured Loans 792 914
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Total Non-Performing Assets $ 1,553 $ 1,744
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Percentage of total assets 88% 1.04%
As non-performing assets decline, it has a favorable impact on earning assets
and net interest income.
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 three-month period ended March 31, 2002.
10
The Company places great significance on monitoring and managing the Company's
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
Company'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.
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 Company'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 from that 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: Not applicable
ITEM 5. Other Information: Not applicable
ITEM 6. Exhibits
11
(a) Exhibits
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.
Exhibit (4) Specimen Stock Certificate incorporated by
reference to Exhibit (4) to the Form 10-KSB40 for the fiscal
year ended December 31, 20000 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
references 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.
13(b) On February 9, 2001 the Company filed on Form 8-K the
announcement that Julia W. Taylor would retire from the Board
of Directors of M&F Bancorp, Inc. and that Ms. Taylor had
asked that her name be withdrawn from nomination for the May
1, 2001 Annual Meeting of Shareholders. Additionally, the
Company announced that Ms. Taylor asked not to be reappointed
to the Mechanics & Farmers Bank Board of Directors when
directors are appointed on March 27, 2001.
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.
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(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
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Fohliette W. Becote
Secretary/Treasurer
12
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
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.
13