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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q


 

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2014

Commission file number 000-027307

 

(Exact name of registrant as specified in charter)

North Carolina

(State or Other Jurisdiction of

Incorporation or Organization)

 

56-1980549

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

2634 Durham Chapel Hill Blvd.

Durham, North Carolina

(Address of Principal Executive Offices)

 

 

27707-2800

(Zip Code)

 

(919) 687-7800

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x  No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting Company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

 

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

 

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

Yes  ¨  No  x

 

State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

As of August 12, 2014, there were 2,031,337 shares outstanding of the issuer's common stock, no par value.

 
 

M&F BANCORP, INC. AND SUBSIDIARY

 

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

 

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M&F BANCORP, INC. AND SUBSIDIARY

 

PART I

FINANCIAL INFORMATION

Item 1 - Financial Statements

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

 

See notes to consolidated financial statements.  

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M&F BANCORP, INC. AND SUBSIDIARY

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

 

See notes to consolidated financial statements.

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M&F BANCORP, INC. AND SUBSIDIARY

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

 

See notes to consolidated financial statements  

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M&F BANCORP, INC. AND SUBSIDIARY

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

 

See notes to consolidated financial statements

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M&F BANCORP, INC. AND SUBSIDIARY

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

 

See notes to consolidated financial statements.

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M&F BANCORP, INC. AND SUBSIDIARY

 

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

 

See notes to consolidated financial statements.  

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

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations

 

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

 

Basis of Presentation

 

The Consolidated Financial Statements include the accounts and transactions of the Company and the Bank, the wholly owned subsidiary. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

The Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial statements and in accordance with the instructions for Form 10-Q and Rule 8-03 of Regulation S-X. The accompanying Consolidated Financial Statements and Notes are unaudited except for the balance sheet and footnote information as of December 31, 2013, which were derived from the Company’s audited consolidated Annual Report on Form 10-K as of and for the year ended December 31, 2013.

 

The Consolidated Financial Statements included herein do not include all the information and notes required by GAAP and should be read in conjunction with the Consolidated Financial Statements and the related notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2013.

 

In the opinion of management, the interim financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position, results of operations and cash flows in the Consolidated Financial Statements. The unaudited operating results for the periods presented may not be indicative of annual results.

 

Segment Reporting

 

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

 

Use of Estimates

 

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

 

New Accounting Pronouncements –

 

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

 

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

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Notes to Consolidated Financial Statements continued

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

 

2.INVESTMENT SECURITIES

 

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

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

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

 

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

 

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

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

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

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Notes to Consolidated Financial Statements continued

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

 

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

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

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

 

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

 

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

 

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

 

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

 

 

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

 

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

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

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

 

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

 

5.ACCUMULATED OTHER COMPREHENSIVE INCOME

 

Comprehensive income includes net income and all other changes to the Company's equity, with the exception of transactions with stockholders. The Company's other comprehensive income and accumulated other comprehensive income are comprised of unrealized gains and losses on certain investments in debt securities and defined benefit plan adjustments.

 

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

 

All amounts are net of tax.    

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

6.LOANS AND ALLOWANCE FOR LOAN LOSSES

 

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

 

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

 

 

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

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

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

 

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

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

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

 

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

 

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

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

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

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

 

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

 

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

 

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

 

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

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

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

 

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

 

 

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

 

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

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

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

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

20
Index

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

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

21
Index

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

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