Attached files

file filename
EX-32 - EX-32 - M&F BANCORP INC /NC/ex32.htm
EX-31.II - EX-31.II - M&F BANCORP INC /NC/ex31ii.htm
EX-31.I - EX-31.I - M&F BANCORP INC /NC/ex31i.htm

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, 2016

Commission file number 000-027307

 

MFBancorp color logo

(Exact name of registrant as specified in charter)

North Carolina

(State or Other Jurisdiction of

Incorporation or Organization)

 

56-1980549

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

2634 Durham Chapel Hill Blvd.

Durham, North Carolina

(Address of Principal Executive Offices)

 

 

27707-2800

(Zip Code)

 

(919) 687-7800

(Registrant’s Telephone Number, Including Area Code)

 

 

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

 

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

 

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

 

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

 

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

Yes  o  No  x

 

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

As of August 12, 2016, there were 2,031,337 shares outstanding of the issuer's common stock, no par value.

 

 

M&F BANCORP, INC. AND SUBSIDIARY

INDEX  
PART I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements (unaudited)  
   
Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015 3
   
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and 2015 4
   
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2016  and 2015 5
   
Consolidated Statement of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2016 and 2015 6
   
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 7
   
Notes to Consolidated Financial Statements 9
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 40
   
Item 4. Controls and Procedures 53
   
PART II. OTHER INFORMATION  
   
Item 1. Legal Proceedings 54
   
Item 6. Exhibits 55
   
SIGNATURES 57

 

2 

Index

M&F BANCORP, INC. AND SUBSIDIARY

 

PART I

FINANCIAL INFORMATION

Item 1 – Financial

CONSOLIDATED BALANCE SHEETS 
         
   June 30,   December 31, 
(Dollars in thousands)  2016   2015 
   (Unaudited)     
ASSETS        
         
Cash and cash equivalents:          
Cash and due from banks  $2,339   $2,181 
Interest-bearing cash   30,591    26,081 
Federal funds sold       11 
Total cash and cash equivalents   32,930    28,273 
Interest-bearing time deposits   6,665    6,665 
Investment securities available-for-sale, at fair value   74,964    79,941 
Other invested assets   298    298 
Loans, net of unearned income and deferred fees   163,487    164,849 
Allowance for loan losses   (3,112)   (3,435)
Loans, net   160,375    161,414 
Interest receivable   684    785 
Bank premises and equipment, net   4,633    4,412 
Cash surrender value of bank-owned life insurance   8,353    8,228 
Other real estate owned ("OREO")   2,687    2,764 
Deferred tax assets and taxes receivable, net   3,972    4,264 
Other assets   1,141    1,206 
TOTAL ASSETS  $296,702   $298,250 
LIABILITIES AND STOCKHOLDERS' EQUITY          
Deposits:          
Interest-bearing deposits  $203,623   $209,817 
Noninterest-bearing deposits   50,537    44,883 
Total deposits   254,160    254,700 
Other borrowings   864    938 
Other liabilities   5,041    6,388 
Total liabilities   260,065    262,026 
           
COMMITMENTS AND CONTINGENCIES          
           
Stockholders' equity:          
Series B Preferred Stock-  $1,000 liquidation value per share, 11,735 shares authorized, issued and outstanding   11,731    11,731 
Series C Junior Participating Preferred Stock-  $0.01 par  value, 21,000 shares authorized, no shares issued or outstanding        
Common stock, no par value, 10,000,000 shares authorized; 2,031,337 shares issued and outstanding   8,732    8,732 
Retained earnings   17,747    17,895 
Accumulated other comprehensive loss   (1,573)   (2,134)
Total stockholders' equity   36,637    36,224 
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $296,702   $298,250 

 

See notes to consolidated financial statements.        

3 

Index

M&F BANCORP, INC. AND SUBSIDIARY

                 
CONSOLIDATED STATEMENTS OF OPERATIONS 
                 
   For the Three Months Ended   For the Six Months Ended 
(Dollars in thousands except for share and per share data)  June 30,   June 30, 
(Unaudited)  2016   2015   2016   2015 
                 
Interest income:                    
Loans, including fees  $1,949   $2,287   $3,928   $4,493 
Investment securities available-for-sale, including dividends                    
Taxable   365    314    730    644 
Tax-exempt   29    15    83    19 
Interest-bearing time deposits   29    19    57    34 
Other   43    16    87    37 
                     
Total interest income   2,415    2,651    4,885    5,227 
Interest expense:                    
Deposits   185    162    363    334 
Borrowings   2    2    4    3 
                     
Total interest expense   187    164    367    337 
Net interest income   2,228    2,487    4,518    4,890 
Less provision for loan losses   171        171     
                     
Net interest income after provision for loan losses   2,057    2,487    4,347    4,890 
                     
Noninterest income:                    
Service charges   265    293    527    558 
Rental income   54    43    108    87 
Cash surrender value of life insurance   64    64    125    114 
Net realized gains on sales of investment securities available-for-sale   315        321    29 
Other income   28    3    73    7 
Total noninterest income   726    403    1,154    795 
                     
Noninterest expense:                    
Salaries and employee benefits   1,345    1,302    2,738    2,647 
Occupancy and equipment   318    330    650    682 
Directors' fees   54    58    99    115 
Marketing   67    57    135    95 
Professional fees   160    175    297    340 
Information technology   285    214    561    436 
FDIC deposit insurance   139    142    276    285 
OREO (income) expenses, net   43    (102)   156    216 
Delivery expenses   35    44    68    75 
Other   311    281    585    597 
Total noninterest expense   2,757    2,501    5,565    5,488 
                     
Income (loss) before income tax (benefit)   26    389    (64)   197 
Income tax (benefit)   (24)   71    (33)   48 
Net income (loss)   50    318    (31)   149 
                     
Less preferred stock dividends and accretion   (59)   (59)   (117)   (117)
                     
Net income (loss) available to common stockholders  $(9)  $259   $(148)  $32 
                     
                     
Basic and diluted income (loss) per share of common stock:  $   $0.13   $(0.07)  $0.02 
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.

4 

Index

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)  2016   2015   2016   2015 
                 
Net income (loss)  $50   $318   $(31)  $149 
                     
Other comprehensive income (loss):                    
Investment securities:                    
Unrealized holding gains (losses) on investment securities available-for-sale   421    (759)   1,207    (560)
Tax effect   (155)   283    (443)   207 
Reclassification adjustments for net realized gains   (315)       (321)   (29)
Tax effect   116        118    12 
Net of tax amount   67    (476)   561    (370)
                     
Defined benefit pension plans:                    
Net actuarial losses   (78)   (62)   (157)   (125)
Tax effect                
Prior service cost   78    62    157    125 
Tax effect                 
Net of tax amount                
                     
Other comprehensive income (loss), net of tax   67    (476)   561    (370)
                     
Comprehensive income (loss)  $117   $(158)  $530   $(221)

 

See notes to consolidated financial statements  

5 

Index

M&F BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the Six Months Ended June 30, 2016 and 2015    

 

                   Accumulated     
(Dollars in thousands except for share data)  Number               Other     
(Unaudited)  of   Common   Preferred   Retained   Comprehensive     
   Shares   Stock   Stock   Earnings   Loss   Total 
Balances as of December 31, 2014   2,031,337   $8,732   $11,729   $17,785   $(1,668)  $36,578 
Accretion of Series B preferred stock issuance costs           1    (1)        
Net income               149        149 
Other comprehensive loss, net of tax                   (370)   (370)
Dividends declared on preferred stock               (116)       (116)
                               
Balances as of June 30, 2015   2,031,337   $8,732   $11,730   $17,817   $(2,038)  $36,241 
                               
Balances as of December 31, 2015   2,031,337   $8,732   $11,731   $17,895   $(2,134)  $36,224 
Net loss               (31)       (31)
Other comprehensive income, net of tax                   561    561 
Dividends declared on preferred stock               (117)       (117)
                               
Balances as of June 30, 2016   2,031,337   $8,732   $11,731   $17,747   $(1,573)  $36,637 

 

See notes to consolidated financial statements  

6 

Index

M&F BANCORP, INC. AND SUBSIDIARY

         
CONSOLIDATED STATEMENTS OF CASH FLOWS 
   For the Six Months Ended 
   June 30, 
(Dollars in thousands)  2016   2015 
(Unaudited)        
         
Cash flows from operating activities:          
Net income (loss)  $(31)  $149 
Adjustments to reconcile net income to net cash          
 provided by (used in) operating activities:          
Provision for loan losses   171     
Depreciation and amortization   222    206 
Amortization of discounts/premiums on investment securities available-for-sale, net   185    238 
Net gains on sales of investment securities available-for-sale   (321)   (29)
Increase in cash surrender value of bank-owned life insurance   (125)   (114)
Gains at foreclosure       (13)
Net (gains) losses on sales of OREO   46    (79)
Writedowns of OREO   106    262 
Net changes in:          
Accrued interest receivable and other assets   133    120 
Other liabilities   (1,347)   (573)
           
Net cash  provided by (used in) by operating activities   (961)   167 
           
Cash flows from investing activities:          
Activity in available for sale securities:          
Sales   14,233    19,860 
Maturities and calls   30,160    11,160 
Principal collections   3,335    4,903 
Purchases   (41,729)   (39,830)
Purchases of interest bearing time deposits       (1,972)
FHLB stock redemptions       3 
Net (increase) decrease in loans   681    (1,214)
Purchases of bank premises and equipment   (443)   (187)
Proceeds from sales of OREO   112    763 
           
Net cash provided by (used in)  investing activities   6,349    (6,514)
           
Cash flows from financing activities:          
Net decrease in deposits   (540)   (2,024)
Proceeds from other borrowings   55    188 
Repayments of other borrowings   (129)   (100)
Cash dividends   (117)   (116)
           
Net cash used in financing activities   (731)   (2,052)
           
Net increase (decrease) in cash and cash equivalents   4,657    (8,399)
           
Cash and cash equivalents as of the beginning of the period   28,273    33,104 
           
Cash and cash equivalents as of the end of the period  $32,930   $24,705 

 

See notes to consolidated financial statements.

7 

Index

M&F BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED        

   For the Six Months Ended 
   June 30, 
   2016   2015 
(Dollars in thousands)        
           
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:          
Cash paid during period for:          
Interest  $341   $315 
Noncash Transactions:          
Loans transferred to OREO   187    122 
Net unrealized gains on investment securities available-for-sale, net of deferred income tax   561    (370)

 

 

See notes to consolidated financial statements.

8 

Index

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

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 consolidated balance sheet and footnote information as of December 31, 2015, which were derived from the Company’s audited consolidated Annual Report on Form 10-K as of and for the year ended December 31, 2015.

 

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, 2015.

 

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 May 2014, the Financial Accounting Standards Board (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, 2017. The Company does not expect this guidance to have a material effect on its consolidated financial statements.

 

In August 2014, the FASB issued guidance that is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. In connection with preparing financial statements, management will need to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the organization’s ability to continue as a going concern within one year after the date that the financial statements are issued. The amendments will be effective for the Company for annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

 

In February 2015, the FASB issued guidance, which amends the consolidation requirements and significantly changes the consolidation analysis required under GAAP. Although the amendments are expected to result in the deconsolidation of many entities,

9 

Index

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

the Company will need to reevaluate all its previous consolidation conclusions. The amendments were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted (including during an interim period), provided that the guidance is applied as of the beginning of the annual period containing the adoption date. The adoption of these amendments did not have a material effect on the Company’s consolidated financial statements.

 

In April 2015, the FASB issued guidance which provides a practical expedient that permits the Company to measure defined benefit plan assets and obligations using the month-end that is closest to the Company’s fiscal year-end. The amendments were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The adoption of these amendments did not have a material effect on the Company’s consolidated financial statements.

 

In June 2015, the FASB issued amendments to clarify the Accounting Standards Codification (“ASC”), correct unintended application of guidance, and make minor improvements to the ASC that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments were effective upon issuance (June 12, 2015) for amendments that do not have transition guidance. Amendments that are subject to transition guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption was permitted, including adoption in an interim period. The adoption of these amendments did not have a material effect on the Company’s consolidated financial statements.

 

In August 2015, the FASB deferred the effective date of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. As a result of the deferral, the guidance in ASU 2014-09 will be effective for the Company for reporting periods beginning after December 15, 2017. 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 consolidated financial statements.

 

In August 2015, the FASB issued amendments to the Interest topic of the ASC to clarify the Securities and Exchange Commission staff position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements. The amendments were effective upon issuance. The adoption of these amendments did not have a material effect on the Company’s consolidated financial statements.

 

In January 2016, the FASB amended the Financial Instruments topic of the ASC to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

 

In February 2016, the FASB amended the Leases topic of the ASC to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

 

In March 2016, the FASB amended the Revenue from Contracts with Customers topic of the ASC to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

 

In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. The amendments will be effective for the Company for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

 

In April 2016, the FASB amended the Revenue from Contracts with Customers topic of the ASC to clarify guidance related to identifying performance obligations and accounting for licenses of intellectual property. The amendments will be effective for the

10 

Index

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

Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

 

In May 2016, the FASB amended the Revenue from Contracts with Customers topic of the ASC to clarify guidance related to collectability, noncash consideration, presentation of sales tax, and transition. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

 

In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

 

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, 2016 and December 31, 2015, all investment securities were classified as available-for-sale.

 

Our available-for-sale securities totaled $75.0 million and $79.9 million as of June 30, 2016 and December 31, 2015, respectively. Securities with a fair value of $1.2 million were pledged to the Federal Reserve Bank of Richmond (“FRB”), and an additional $2.8 million and $19.6 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, 2016. Securities with a fair value of $0.8 million were pledged to the FRB and an additional $2.9 million and $19.6 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, 2015. Our investment portfolio consists of the following securities:

 

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

 

11 

Index

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

The amortized cost, gross unrealized gains and losses and fair values of investment securities at June 30, 2016 and December 31, 2015 were:

 

(Dollars in thousands)  Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair Value 
(Unaudited)                
June 30, 2016                    
U.S. Agencies  $17,793   $48   $(4)  $17,837 
MBS                    
Residential   55,171    448    (196)   55,423 
Municipals   1,666    38        1,704 
Total  $74,630   $534   $(200)  $74,964 
                     
December 31, 2015                    
U.S. Agencies  $30,681   $2   $(250)  $30,433 
MBS                    
Residential   41,323    20    (409)   40,934 
Municipals   8,489    98    (13)   8,574 
Total  $80,493   $120   $(672)  $79,941 

 

During the three months ended June 30, 2016 and 2015, there were $346 thousand and $94 thousand gross realized gains and $31 thousand and $94 thousand gross realized losses on sales or calls of securities, respectively. During the six months ended June 30, 2016 and 2015, there were $382 thousand and $206 thousand gross realized gains and $61 thousand and $177 thousand gross realized losses on sales or calls of securities, respectively.

 

The amortized cost and estimated market values of securities as of June 30, 2016 and December 31, 2015 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.

12 

Index

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

       
(Dollars in thousands)  As of June 30, 2016
(Unaudited)  Fair Value  Amortized Cost
U.S. Agencies          
Due within one year  $1,998   $2,000 
Due after one year through five years   10,833    10,793 
Due after five years through ten years   5,006    5,000 
Total U.S. Agencies  $17,837   $17,793 
           
MBS          
Residential          
Due within one year  $7,933   $7,907 
Due after one year through five years   21,926    21,826 
Due after five years through ten years   14,846    14,761 
Due after ten years   10,718    10,677 
Total MBS  $55,423   $55,171 
           
Municipals          
Due after one year through five years  $577   $576 
Due after five years through ten years   1,127    1,090 
Total Municipals  $1,704   $1,666 
           

 

(Dollars in thousands)  As of December 31, 2015
   Fair Value  Amortized Cost
U.S. Agencies          
Due within one year  $3,481   $3,500 
Due after one year through five years   21,998    22,181 
Due after five years through ten years   4,954    5,000 
Total U.S. Agencies  $30,433   $30,681 
           
MBS          
Residential          
Due within one year  $5,750   $5,812 
Due after one year through five years   15,526    15,672 
Due after five years through ten years   11,387    11,480 
Due after ten years   8,271    8,359 
Total MBS  $40,934   $41,323 
           
Municipals          
Due within one year  $262   $260 
Due after one year through five years   738    738 
Due after five years through ten years   7,169    7,091 
Due after ten years   405    400 
Total Municipals  $8,574   $8,489 

 

All securities owned as of June 30, 2016 and December 31, 2015 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 other-than-temporarily impaired as of June 30, 2016 or December 31, 2015.

 

As of June 30, 2016 and December 31, 2015, the Company held 29 and 71 investment positions, respectively, with unrealized losses of $200 thousand and $672 thousand, respectively. These investments were in U.S. Agencies, 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

13 

Index

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

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, 2016 and December 31, 2015, the fair value of securities with gross unrealized losses by length of time that the individual securities have been in an unrealized loss position was 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, 2016                        
U.S. Agencies  $3,997   $(4)  $   $   $3,997   $(4)
MBS                              
Residential   760    (3)   8,331    (193)   9,091    (196)
Total  $4,757   $(7)  $8,331   $(193)  $13,088   $(200)
                               

 

(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, 2015                        
U.S. Agencies  $27,060   $(237)  $987   $(13)  $28,047   $(250)
MBS                              
Residential   24,369    (193)   9,970    (216)   34,339    (409)
Municipals   1,405    (13)           1,405    (13)
Total  $52,834   $(443)  $10,957   $(229)  $63,791   $(672)

 

 

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% of its total assets as of December 31 of the prior year (up to a maximum of $15.0 million), 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, 2016 and December 31, 2015 was $0.3 million. 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, 2016 and December 31, 2015. Management has reviewed its investment in FHLB stock for impairment and does not believe it is impaired as of June 30, 2016 or December 31, 2015.

 

4.RECONCILIATIONS OF BASIC AND DILUTED INCOME (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 LOSS

 

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

14 

Index

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

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT

For the Three and Six Months Ended June 30, 2016 and 2015

 

(Dollars in thousands)

(Unaudited)            

 

   Unrealized
Gains and
Losses on
Available-for-
Sale
Securities
   Defined
Benefit
Pension Items
   Total 
Balance as of December 31, 2014  $(17)  $(1,651)  $(1,668)
Other comprehensive loss before reclassifications   (353)       (353)
Amounts reclassified from accumulated other comprehensive loss   (17)       (17)
Net current-period other comprehensive income   (370)       (370)
Balance as of June 30, 2015  $(387)  $(1,651)  $(2,038)
                
                
                
Balance as of March 31, 2015  $89   $(1,651)  $(1,562)
Other comprehensive loss before reclassifications   (476)       (476)
Amounts reclassified from accumulated other comprehensive loss            
Net current-period other comprehensive income   (476)       (476)
Balance as of June 30, 2015  $(387)  $(1,651)  $(2,038)
                
                
                
Balance as of December 31, 2015  $(350)  $(1,784)  $(2,134)
Other comprehensive income before reclassifications   764        764 
Amounts reclassified from accumulated other comprehensive income   (203)       (203)
Net current-period other comprehensive income   561        561 
Balance as of June 30, 2016  $211   $(1,784)  $(1,573)
                
                
Balance as of March 31, 2016  $144   $(1,784)  $(1,640)
Other comprehensive loss before reclassifications   266        266 
Amounts reclassified from accumulated other comprehensive income   (199)       (199)
Net current-period other comprehensive loss   67        67 
Balance as of June 30, 2016  $211   $(1,784)  $(1,573)
                
All amounts are net of tax.               

 

15 

Index

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

RECLASSIFICATION ADJUSTMENTS FROM ACCUMULATED OTHER COMPREHENSIVE LOSS

 

   For the Three Months Ended June 30,   For the Six Months Ended June 30,    
(Dollars in thousands)  2016   2015   2016   2015    
(Unaudited)                   
Detail about Accumulated Other Comprehensive Loss Components  Amount Reclassified
from Accumulated
Other Comprehensive
Loss
   Amount Reclassified
from Accumulated
Other Comprehensive
Loss
   Amount Reclassified
from Accumulated
Other Comprehensive
Loss
   Amount Reclassified
from Accumulated
Other Comprehensive
Loss
   Affected Line Item in the Consolidated
Statement of Income
Net unrealized holding gains - investment securities available-for-sale  $(315)  $   $(321)  $(29)  Net realized gains on sales of investments
Income tax expense   116        118    12   Income tax expense
Total, net of tax   (199)       (203)   (17)  Total, net of tax
                        
Amortization of defined benefit pension                  Salaries and employee benefits
Income tax expense                  Income tax expense
Total, net of tax                  Total, net of tax
                        
Total reclassifications for the period  $(199)  $   $(203)  $(17)   

 

16 

Index

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

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 ended June 30, 2016 and 2015 and related asset balances at June 30, 2016 and December 31, 2015 is summarized as follows:

 

   For the Three Months Ended June 30, 2016 
           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, 2016  $547   $687   $1,395   $383   $23   $401   $   $3,436 
For the three months ended June 30, 2016                                        
Charge-offs       (409)       (66)   (32)   (5)       (512)
Recoveries               2    14    1        17 
Provision for loan losses   (372)   847    (68)   24    14    (274)       171 
Total ending ALLL balances as of June 30, 2016  $175   $1,125   $1,327   $343   $19   $123   $   $3,112 
                                         

 

   For the Three Months Ended June 30, 2015 
           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, 2015  $271   $602   $1,440   $589   $29   $210   $305   $3,446 
For the three months ended June 30, 2015                                        
Charge-offs               (7)   (1)   (3)       (11)
Recoveries               2    1    1        4 
Provision for loan losses   5    342    10    (190)   (6)   (4)   (157)    
Total ending ALLL balances as of June 30, 2015  $276   $944   $1,450   $394   $23   $204   $148   $3,439 

17 

Index

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

   For the Six Months Ended June 30, 2016 
           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, 2015  $329   $839   $1,229   $410   $21   $229   $378   $3,435 
For the six months ended June 30, 2016                                        
Charge-offs       (409)       (66)   (32)   (8)       (515)
Recoveries               5    14    2        21 
Provision for loan losses   (154)   695    98    (6)   16    (100)   (378)   171 
Total ending ALLL balances as of June 30, 2016  $175   $1,125   $1,327   $343   $19   $123   $   $3,112 
                                         

 

   For the Six Months Ended June 30, 2015 
           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, 2014  $353   $579   $1,234   $685   $28   $265   $296   $3,440 
For the six months ended June 30, 2015                                        
Charge-offs               (7)   (1)   (7)       (15)
Recoveries               12    1    1        14 
Provision for loan losses   (77)   365    216    (296)   (5)   (55)   (148)    
Total ending ALLL balances as of June 30, 2015  $276   $944   $1,450   $394   $23   $204   $148   $3,439 

18 

Index

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

   June 30, 2016 
           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  $   $544   $517   $40   $   $   $   $1,101 
Collectively evaluated for impairment   175    581    810    303    19    123        2,011 
Total ending ALLL balance  $175   $1,125   $1,327   $343   $19   $123   $   $3,112 
                                         
Loans:                                        
Loans individually evaluated for impairment  $   $6,969   $13,277   $2,095   $   $   $   $22,341 
Loans collectively evaluated for impairment   10,099    41,434    65,331    19,056    979    4,247        141,146 
Total ending loans balance  $10,099   $48,403   $78,608   $21,151   $979   $4,247   $   $163,487 
                                         

 

   December 31, 2015 
           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  $   $303   $261   $67   $   $   $   $631 
Collectively evaluated for impairment   329    536    968    343    21    229    378    2,804 
Total ending ALLL balance  $329   $839   $1,229   $410   $21   $229   $378   $3,435 
                                         
Loans:                                        
Loans individually evaluated for impairment  $   $7,517   $16,325   $2,579   $   $   $   $26,421 
Loans collectively evaluated for impairment   7,540    36,523    69,130    19,960    1,035    4,240        138,428 
Total ending loans balance  $7,540   $44,040   $85,455   $22,539   $1,035   $4,240   $   $164,849 

19 

Index

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

The Bank experienced $495 thousand and $7 thousand in net charge-offs during the three months ended June 30, 2016 and 2015, respectively. Annualized net charge-offs as a percent of average loan balances outstanding totaled 1.26% and 0.02% during the three month periods ended June 30, 2016 and 2015, respectively. The Bank experienced $494 thousand and $1 thousand in net charge-offs during the six months ended June 30, 2016 and 2015, respectively. Annualized net charge-offs as a percent of average loan balances outstanding totaled 0.62% and 0.00% during the six month periods ended June 30, 2016 and 2015, respectively.

 

The decrease in unallocated reserve to none at June 30, 2016 from $378 thousand at December 31, 2015 was attributable to decreases in cash flows and/or collateral values of individually impaired loans.

 

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, 2016 and December 31, 2015 was as follows:

 

(Dollars in thousands)  June 30, 2016   December 31, 2015 
         
Commercial  $10,099   $7,540 
Commercial real estate:          
Construction   9,894    9,618 
Owner occupied   20,662    18,941 
Other   17,847    15,481 
Faith-based non-profit:          
Construction   1,738    4,800 
Owner occupied   74,566    78,228 
Other   2,304    2,427 
Residential real estate:          
First mortgage   15,792    16,467 
Multifamily   2,610    2,701 
Home equity   2,657    3,249 
Construction   92    122 
Consumer   979    1,035 
Other loans   4,247    4,240 
Loans, net of deferred fees   163,487    164,849 
ALLL   (3,112)   (3,435)
Loans, net of ALLL  $160,375   $161,414 

 

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, 2016, the percentage of loans in this segment, which included construction, real estate secured, and lines of credit, comprised 48.08% of the total loan portfolio and the reserve for these loans was 36.15% of the total allowance. Historically, the Bank has experienced low levels of loan losses in this niche; however, repayment of these loans is generally dependent on voluntary contributions, some of which have been adversely affected by the 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

20 

Index

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

principal and interest amounts contractually due (including any arrearages) are reasonably assured of repayment within a reasonable period, the borrower has demonstrated payment performance for a minimum of six months in accordance with the original or revised contractual terms of the loan, and when doubt about repayment is resolved.

 

Generally, for all classes of loans and leases, a charge-off is recorded when it is probable that a loss has been incurred and when it is possible to determine a reasonable estimate of the loss. For all classes of commercial loans and leases, a charge-off is determined on a 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.

 

21 

Index

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

 

The following tables present current loans and the aging of past due loans as of June 30, 2016 and December 31, 2015:

           90 Days             
June 30, 2016  30-59 Days   60-89 Days   Or More   Total Past         
(Dollars in thousands)  Past Due   Past Due   Past Due   Due   Current   Total 
                         
Commercial  $   $   $   $   $10,099   $10,099 
Commercial real estate:                              
Construction                   9,894    9,894 
Owner occupied   85            85    20,577    20,662 
Other   2,006            2,006    15,841    17,847 
Faith-based non-profit:                              
Construction                   1,738    1,738 
Owner occupied   145    940        1,085    73,481    74,566 
Other       64        64    2,240    2,304 
Residential real estate:                              
First mortgage   251    330    861    1,442    14,350    15,792 
Multifamily           18    18    2,592    2,610 
Home equity   51        189    240    2,417    2,657 
Construction           92    92        92 
Consumer                   979    979 
Other loans                   4,247    4,247 
Total  $2,538   $1,334   $1,160   $5,032   $158,455   $163,487 

           90 Days             
December 31, 2015  30-59 Days   60-89 Days   Or More   Total Past         
(Dollars in thousands)  Past Due   Past Due   Past Due   Due   Current   Total 
                               
Commercial  $   $   $   $   $7,540   $7,540 
Commercial real estate:                              
Construction   40            40    9,578    9,618 
Owner occupied   397            397    18,544    18,941 
Other       71        71    15,410    15,481 
Faith-based non-profit:                              
Construction                   4,800    4,800 
Owner occupied   237        355    592    77,636    78,228 
Other                   2,427    2,427 
Residential real estate:                              
First mortgage   688    161    1,376    2,225    14,242    16,467 
Multifamily   17            17    2,684    2,701 
Home equity   129        206    335    2,914    3,249 
Construction   122            122        122 
Consumer                   1,035    1,035 
Other loans   3            3    4,237    4,240 
Total  $1,633   $232   $1,937   $3,802   $161,047   $164,849 

22 

Index

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

The recorded investment and related information for impaired loans is summarized as follows for June 30, 2016, December 31, 2015 and June 30, 2015:

 

   June 30, 2016         
               For the Six Months Ended   For the Three Months Ended 
   Unpaid               Average       Average 
   Principal   Recorded   ALLL   Interest   Recorded   Interest   Recorded 
(Dollars in thousands)  Balance   Investment   Allocated   Earned   Investment   Earned   Investment 
                             
With no related allowance recorded:                                   
Commercial  $   $   $   $   $   $   $ 
Commercial real estate:                                   
Construction                            
Owner occupied   68    68        2    68    1    68 
Other   82    82        3    1,983    2    1,300 
Faith based non-profit:                                   
Construction                            
Owner occupied   3,106    3,109        75    4,849    15    4,270 
Other                            
Residential real estate:                                   
First mortgage   1,566    1,539        9    1,673    3    1,583 
Multifamily   17    17            13        17 
Home equity   273    273            293        277 
Construction                            
Consumer                            
Impaired loans with no allowance recorded  $5,112   $5,088   $   $89   $8,879   $21   $7,515 
                                    
With an allowance recorded:                                   
Commercial  $   $   $   $   $   $   $ 
Commercial real estate:                                   
Construction                            
Owner occupied   4,609    4,614    215    101    4,638    47    4,622 
Other   2,210    2,211    329    8    668    4    1,220 
Faith based non-profit:                                   
Construction                            
Owner occupied   10,171    10,198    517    250    10,721    133    10,525 
Other                            
Residential real estate:                                   
First mortgage   175    175    40    2    301    2    259 
Multifamily                            
Home equity                            
Construction   92    92            84        107 
Consumer                            
Impaired loans with allowance recorded  $17,257   $17,290   $1,101   $361   $16,412   $186   $16,733 
Total impaired loans  $22,369   $22,378   $1,101   $450   $25,291   $207   $24,248 

23 

Index

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

   December 31, 2015 
               Interest     
   Unpaid           Earned   Average 
   Principal   Recorded   ALLL   For the   Recorded 
(Dollars in thousands)  Balance   Investment   Allocated   Year   Investment 
                     
With no related allowance recorded:                         
Commercial  $   $   $   $   $ 
Commercial real estate:                         
Construction                   137 
Owner occupied   68    68        7    59 
Other   2,813    2,815        85    3,685 
Faith based non-profit:                         
Construction                    
Owner occupied   5,413    5,426        230    5,197 
Other                    
Residential real estate:                         
First mortgage   1,926    1,898        24    2,211 
Multifamily                    
Home equity   338    338        10    140 
Construction                    
Consumer                   1 
Impaired loans with no allowance recorded  $10,558   $10,545   $   $356   $11,430 
                          
With an allowance recorded:                         
Commercial  $   $   $   $   $1 
Commercial real estate:                         
Construction                   172 
Owner occupied   4,637    4,677    303    190    4,712 
Other                   18 
Faith based non-profit:                         
Construction                    
Owner occupied   10,912    10,983    261    567    11,583 
Other                    
Residential real estate:                         
First mortgage   343    343    67    2    775 
Multifamily                    
Home equity                   39 
Construction                    
Consumer                    
Impaired loans with allowance recorded  $15,892   $16,003   $631   $759   $17,300 
Total impaired loans  $26,450   $26,548   $631   $1,115   $28,730 

24 

Index

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

   June 30, 2015 
               For the Six Months Ended   For the Three Months Ended 
   Unpaid               Average       Average 
   Principal   Recorded   ALLL   Interest   Recorded   Interest   Recorded 
(Dollars in thousands)  Balance   Investment   Allocated   Earned   Investment   Earned   Investment 
                             
With no related allowance recorded:                                   
Commercial  $6   $   $   $   $   $   $ 
Commercial real estate:                                   
Construction   77    77        3    78    2    78 
Owner occupied   69    69        4    49    4    42 
Other   3,995    3,762        19    3,834    15    3,862 
Faith based non-profit:                                   
Construction                            
Owner occupied   1,446    1,448        33    5,668        7,747 
Other                            
Residential real estate:                                   
First mortgage   2,344    2,303        101    2,473    42    2,618 
Multifamily                            
Home equity   197    152        4    100    3    67 
Construction                            
Consumer   40    2            1        1 
Impaired loans with no allowance recorded  $8,174   $7,813   $   $164   $12,203   $66   $14,415 
                                    
With an allowance recorded:                                   
Commercial  $2   $2   $2   $   $2   $   $1 
Commercial real estate:                                   
Construction   272    272    1    10    275    5    277 
Owner occupied   4,663    4,677    317    95    4,749    38    4,779 
Other   71    72    3    2    18    2     
Faith based non-profit:                                   
Construction                            
Owner occupied   15,451    15,506    347    373    11,097    223    9,061 
Other                            
Residential real estate:                                   
First mortgage   287    287    15        1,186        1,471 
Multifamily                            
Home equity   4    4    1        59        94 
Construction                            
Consumer                            
Impaired loans with allowance recorded  $20,750   $20,820   $686   $480   $17,386   $268   $15,683 
Impaired loans  $28,924   $28,633   $686   $644   $29,589   $334   $30,098 

25 

Index

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

Reserve for Credit Losses - The Company's reserve for credit losses is comprised of two components, the ALLL and the reserve for unfunded commitments (the “Unfunded Reserve”).

 

Allowance for Loan Losses (“ALLL”) - The ALLL is a valuation allowance that is established through a provision for loan losses charged to expense. When management believes that the collectability of the principal is unlikely, loans are charged against the ALLL. Subsequent recoveries, if any, are credited to the ALLL.

 

The ALLL is management's estimate of probable losses that are inherent in the loan portfolio. The ALLL is based on regular quarterly assessments. The methodologies for measuring the appropriate level of the ALLL include the combination of a quantitative historical loss history by loan type and a qualitative analysis for loans not classified as impaired or TDRs Accounting Standards Codification 450 reserve ("ASC 450 reserve"), and a specific allowance method for impaired and TDR loans ("ASC 310 reserve"). The qualitative analysis for the ASC 450 reserve is patterned after the guidelines provided under SEC Staff Accounting Bulletin 102 and the Federal Financial Institutions Examination Council (“FFIEC”) Interagency Policy Statement on the Allowance for Loan and Lease Losses and include the following:

·Changes in lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices;
·Changes in national economic and business conditions and developments and the effect of unemployment on African Americans, who are the majority of our customers;
·Changes in the nature and volume of the loan portfolio;
·Changes in the experience, ability, and depth of lending management and staff;
·Changes in trends of the volume and severity of past due and classified loans; and changes in trends in the volume of non-accrual loans, troubled debt restructurings and classified loans;
·Changes in the quality of the loan review system and the degree of oversight by the Bank’s Board of Directors;
·The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
·The effect of external factors such as competition and legal and regulatory requirements.

 

Management has developed, from historical loan and economic information, quantitative drivers for certain qualitative factors. Management has identified which factors, by nature, are subjective, such as lending policies, competition and regulatory requirements. The quantitative drivers of qualitative factors, to which different weights are assigned based on management’s judgment, are reviewed and updated quarterly based on an updated five-year rolling data beginning December 31, 2015 and previously a four-year rolling data. The change in methodology resulted in a $425 thousand increase in the ALLL at December 31, 2015.

 

A specific ALLL is established for loans identified as impaired or TDRs, based on significant conditions or circumstances related to the specific credits. The specific allowance amounts are determined by a method prescribed by ASC 310, Receivables. Loans identified as impaired and non-accruing TDRs are accounted for in accordance with one of three valuations: (i) the present value of future cash flows discounted at the loan's effective interest rate; (ii) the loan's observable market price, or (iii) the fair value of the collateral, if the loan is collateral dependent, less estimated liquidation costs.

 

For commercial business, faith-based non-profit, real estate and certain consumer loans, the measurement of loan impairment is based on the present value of the expected future cash flows, discounted at the loan's effective interest rate, or on the fair value of the loan's collateral if the loan is collateral dependent. Most consumer loans are smaller balance and homogeneous, and are evaluated for impairment on a collective basis, applying the quantitative loss history and the qualitative factors. Impairment losses are included in the ALLL through a charge to the provision for loan losses.

 

The Company uses several credit quality indicators to manage credit risk on an ongoing basis. The Company's credit risk rating system was developed to aid in the risk management process by grouping credits with similar risk profiles into pass (which includes internal watch), special mention, or criticized categories, which includes substandard, doubtful, and loss. Credit risk ratings are applied individually to all classes of loans. Internal credit reviews and external contracted credit review examinations are used to determine and validate loan risk grades. The credit review system takes into consideration factors such as: borrower's background and experience; historical and current financial condition; credit history and payment performance; economic conditions and their impact on various industries; type, market value and volatility of the market value of collateral; lien position; and the financial strength of guarantors.

 

The process of assessing the adequacy of the ALLL is necessarily subjective. Further, and particularly in periods of economic downturns, it is reasonably possible that future credit losses may exceed historical loss levels and may also exceed management's

26 

Index

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

current estimates of incurred losses inherent within the loan portfolio. As such, there can be no assurance that future loan charge-offs will not exceed management's current estimate of what constitutes a reasonable ALLL.

 

The Company and the Bank are subject to periodic examination by their federal and state regulators, and may be required by such regulators to recognize additions to the allowance for loan losses based on the regulators' assessment of credit information available to them at the time of their examinations.

 

Reserve for Unfunded Commitments - The Unfunded Reserve is a component of other liabilities and represents the estimate for probable credit losses inherent in unfunded commitments to extend credit. Unfunded commitments to extend credit include loans with usable balances available, new commitments to lend that are not yet funded, and standby and commercial letters of credit. The process used to determine the Unfunded Reserve is consistent with the process for determining the quantitative portion of the ASC 450 reserve, as adjusted for estimated funding probabilities and historical four year lookback quantitative loan loss factors. The level of the Unfunded Reserve is adjusted by recording an expense or recovery in other noninterest expense. The balances of $19 thousand and $10 thousand for June 30, 2016 and December 31, 2015, respectively, are reflected in other liabilities on the Consolidated Balance Sheets.

 

The following table presents non-accrual loans and loans past due over 90 days still on accrual by class of loans as of June 30, 2016 and December 31, 2015, respectively:

 

           90 Days     
           or More     
           Past Due     
June 30, 2016          Still     
(Dollars in thousands)  Non-accrual   Number   Accruing   Number 
                 
Commercial  $       $     
Commercial real estate:                    
Construction                
Owner occupied                
Other   2,224    3         
Faith-based non-profit:                    
Construction                
Owner occupied   13    1         
Other                
Residential real estate:                    
First mortgage   1,507    30         
Multifamily   18    1         
Home equity   273    4    7    1 
Construction   92    1         
Consumer                
Other loans                
Total  $4,127    40   $7    1 

27 

Index

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

           90 Days     
           or More     
           Past Due     
December 31, 2015          Still     
(Dollars in thousands)  Non-accrual   Number   Accruing   Number 
                 
Commercial  $       $     
Commercial real estate:                    
Construction                
Owner occupied                
Other   2,513    2         
Faith-based non-profit:                    
Construction                
Owner occupied   15    1    355    3 
Other                
Residential real estate:                    
First mortgage   2,154    36         
Multifamily                
Home equity   338    5         
Construction                
Consumer                
Other loans                
Total  $5,020    44   $355    3 

 

 

Non-accrual loans and loans past due over 90 days still accruing interest include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified impaired loans. Loans for which principal or interest is in default for 90 days or more are classified as a non-accrual unless they are well secured and in process of collection.

 

Those loans over 90 days still accruing interest were in the process of modification. In these cases, the borrowers are still making payments. Borrowers have continued to make payments on these loans while administrative and legal due processes are proceeding which will enable the Bank to extend or modify maturity dates.

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans for reserves according to the loan's classification as to credit risk. This analysis includes non-homogenous loans, such as commercial, commercial real estate and faith-based non–profit entities, and mortgage loans in process of foreclosure for which the loan to value does not support repayment in full. This analysis is performed on at least a quarterly basis. The Company uses the following definitions for risk ratings:

 

·Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Management believes that there is a moderate likelihood of some loss related to those loans and leases that are considered special mention.

 

·Substandard. Loans classified as substandard are inadequately protected by the current sound financial repayment capacity and debt service coverage of the obligor or of the collateral pledge, if any. Loans so classified have a well-defined weakness or weaknesses that may jeopardize the liquidation of our repayment according to the original terms of the debt. In addition to commercial and faith-based non-profit loans with identified weaknesses, substandard loans include loans within the mortgage and consumer portfolio segments that are past due 90 days or more as to principal or interest if the loan to value does not support full repayment. Substandard loans are evaluated for impairment on an individual loan basis unless the substandard loan is a smaller homogeneous loan that is not a TDR and is not in the process of foreclosure. These loans exhibit a distinct possibility that the Company will sustain some loss if the deficiencies related to the loss are not corrected in a timely manner.

 

28 

Index

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

·Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

·Loss. Based on current facts and circumstances, loans classified as loss are not expected to be repaid, or that collateral will be difficult to liquidate. Loans classified as loss are charged off to the ALLL with board approval.

 

·Pass. Loans not identified as special mention, substandard, doubtful or loss are classified as pass.

 

 

The following is a breakdown of loans by risk categories at March 31, 2016 and December 31, 2015:

 

June 30, 2016                    
(Dollars in thousands)  Pass   Special Mention   Substandard   Doubtful   Total 
                     
Commercial  $4,485   $   $5,614   $   $10,099 
Commercial real estate:                         
Construction   9,894                9,894 
Owner occupied   20,344    250    68        20,662 
Other   14,707    246    2,894        17,847 
Faith-based non-profit:                         
Construction   1,738                1,738 
Owner occupied   57,700    6,801    10,065        74,566 
Other   2,304                2,304 
Residential real estate:                         
First mortgage   13,640    1    2,151        15,792 
Multifamily   2,506    29    75        2,610 
Home equity   2,384        273        2,657 
Construction           92        92 
Consumer   966    8    5        979 
Other loans   4,247                4,247 
Total  $134,915   $7,335   $21,237   $   $163,487 

 

 

December 31, 2015                    
(Dollars in thousands)  Pass   Special Mention   Substandard   Doubtful   Total 
                     
Commercial  $1,869   $   $5,671   $   $7,540 
Commercial real estate:                         
Construction   9,618                9,618 
Owner occupied   18,601    272    68        18,941 
Other   11,720    394    3,367        15,481 
Faith-based non-profit:                         
Construction   4,800                4,800 
Owner occupied   61,836    7,243    9,149        78,228 
Other   2,427                2,427 
Residential real estate:                         
First mortgage   13,733    256    2,478        16,467 
Multifamily   2,613    30    58        2,701 
Home equity   3,070        179        3,249 
Construction   122                122 
Consumer   1,020    10    5        1,035 
Other loans   4,240                4,240 
Total  $135,669   $8,205   $20,975   $   $164,849 

 

29 

Index

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

Loans Modified as a TDR - Loans are considered to have been modified as a TDR when the Company makes certain concessions to a borrower experiencing financial difficulty. Concessions to the borrower at modification may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a non-accrual loan that has been modified as a TDR remains on non-accrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. In response to the extended economic downtown, management has elected to offer concessions to borrowers with identified financial weaknesses, even if the borrowers have continued making scheduled payments, working with the borrowers to enable them to continue to satisfy their loan repayment obligations to the Company.

 

The following tables present TDRs as of June 30, 2016 and December 31, 2015.

 

   Troubled Debt Restructurings 
   June 30, 2016 
           Non-accrual   Total 
   Accrual Status   Status   Modifications 
(Dollars in thousands)  Number   Amount   Number   Amount   Number   Amount 
                         
Commercial real estate:                              
Owner occupied   4   $4,677       $    4    4,677 
Other   1    68    2    2,210    3    2,278 
Faith-based non-profit:                              
Owner occupied   15    13,265    1    12    16    13,277 
Residential real estate:                              
First mortgage   4    206    2    119    6    325 
Total   24   $18,216    5   $2,341    29   $20,557 

 

   Troubled Debt Restructurings 
   December 31, 2015 
           Non-accrual   Total 
   Accrual Status   Status   Modifications 
(Dollars in thousands)  Number   Amount   Number   Amount   Number   Amount 
                         
Commercial real estate:                              
Owner occupied   4   $4,704       $    4    4,704 
Other   2    300    1    2,494    3    2,794 
Faith-based non-profit:                              
Owner occupied   20    16,309    1    16    21    16,325 
Residential real estate:                              
First mortgage   2    87    4    315    6    402 
Total   28   $21,400    6   $2,825    34   $24,225 

 

No loans were restructured during the three or six months ended June 30, 2016 or during the three months ended June 30, 2015. Two loans totaling $129 thousand were restructured during the six months ended June 30, 2015.

 

30 

Index

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

The following table shows loans newly restructured during the six months ended June 30, 2015.

 

   TDR Modifications 
   For the Six Months Ended June 30, 2015 
       Pre-modification Outstanding   Post-Modification Outstanding 
(Dollars in thousands)  Number of Loans   Recorded Investment   Recorded Investment 
             
Below market interest rates               
Residential real estate:               
First mortgage   2   $129   $125 
Total   2   $129   $125 

 

There was one loan, a residential real estate – first mortgage, in the amount of $120 thousand modified as a TDR and with a payment default, with the payment default occurring within 12 months of the restructure date, and the payment default occurring during the three and six months ended June 30, 2016. There were no loans modified as TDRs and with a payment default, with the payment default occurring within 12 months of the restructure date, and the payment default occurring during the three or six months ended June 30, 2015. The Company defines default as the loan becoming 90 days or more past due, foreclosed upon or charged-off. The following table shows TDR defaults for the three and six months ended June 30, 2016 and 2015.

 

   During the Three Months Ended 
   June 30, 2016   June 30, 2015 
   Default   Default 
   Number of   Recorded   Number of   Recorded 
(Dollars in thousands)  Loans   Investment   Loans   Investment 
                 
Below market interest rate and extended payment terms      $       $ 
Below market interest rate                
Extended payment terms   1    120         
Total   1   $120       $ 
                     

 

   During the Six Months Ended 
   June 30, 2016   June 30, 2015 
   Default   Default 
   Number of   Recorded   Number of   Recorded 
(Dollars in thousands)  Loans   Investment   Loans   Investment 
                 
Below market interest rate and extended payment terms      $       $ 
Below market interest rate                
Extended payment terms   1    120         
Total   1   $120       $ 

 

TDR defaults can result in a higher ALLL and a corresponding higher provision for loan losses because they generally negatively impact the timing of and expected collections from these impaired loans. Impaired loans, which include TDRs, are evaluated for specific additions to the ALLL by subtracting the recorded investment in these impaired loans from their fair values. Fair values are generally determined by the present value of future cash flows, collateral value, or liquidation value. Defaults generally reduce the present value of the future cash flows and can negatively influence the collateral values if the declining real estate values are affecting the sale of collateral.

 

7.OTHER REAL ESTATE OWNED (“OREO”)

 

At the time of foreclosure, real estate is recorded at fair market value based on appraised value less estimated costs to sell, such as realtor, legal and recording fees and expenses. Subsequent to foreclosure, properties are appraised annually and adjusted to the lower of carrying amount or fair market value less estimated costs to sell. At June 30, 2016 and December 31, 2015, OREO totaled $2.7 million and $2.8 million, respectively. At June 30, 2016 and December 31, 2015, $0.2 million of OREO was comprised of residential real estate; the remainder was commercial real estate. Also as of June 30, 2016 and December 31, 2015, $0.8 million of consumer

31 

Index

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

mortgage loans collateralized by residential real estate were in the process of foreclosure. OREO excludes bank-owned property held for Company use at June 30, 2016 and December 31, 2015.

 

8.BORROWINGS

 

Borrowings as of June 30, 2016 consisted of an FHLB borrowing of $0.6 million with an interest rate of 0.50% that matures in 2020, and capital leases of $0.3 million with a blended interest rate of 1.86%. Borrowings as of December 31, 2015 consisted of an FHLB borrowing of $0.6 million with an interest rate of 0.50% that matures in 2020 and capital leases of $0.3 million with a blended rate of 1.83%.

 

The Company has federal funds lines of credit with three correspondent banks totaling $10.0 million at June 30, 2016 and December 31, 2015. The Company periodically tests its federal funds lines of credit with its correspondent banks. These lines were tested during the three months ended March 31, 2016. The Company had unused borrowing capacity with the FHLB of $7.9 million as of June 30, 2016 and $6.1 million as of December 31, 2015. In addition, the Company has the ability to borrow from the FRB to the extent of investment securities pledged to the FRB.

 

9.COMMITMENTS AND CONTINGENCIES

 

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized on the Consolidated Balance Sheets. The contractual amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.

 

The Bank’s exposure to credit losses in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank utilizes the same credit policies in making commitments and conditional obligations as it does for balance sheet instruments.

 

Commitments to extend credit are agreements to lend to a customer as long as there is not a violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, upon extension of credit is based on management’s credit evaluation of the counter parties. Collateral varies and may include real estate, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

 

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. To the extent deemed necessary, collateral of varying types and amounts is held to secure customer performance under certain of those letters of credit outstanding.

 

Financial instruments whose contract amounts represent credit risk as of June 30, 2016 and December 31, 2015, respectively, are commitments to extend credit (including availability of lines of credit), and standby letters of credit. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral deemed necessary by the Bank is based on management’s credit evaluation and underwriting guidelines for the particular loan.

 

Commitments outstanding at June 30, 2016 are summarized in the following table:

 

(Dollars in thousands)  Commercial
letters of credit
   Other loan
commitments
   Total
commitments
 
             
Less than one year  $269   $8,162   $8,431 
One to three years       5,868    5,868 
Three to five years       2,410    2,410 
More than five years   93    6,145    6,238 
Total  $362   $22,585   $22,947 

32 

Index

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

10.FAIR VALUE MEASUREMENT

 

Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. Fair value measurements are required to be separately disclosed by level within the fair value hierarchy. The Company bases fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

For assets and liabilities recorded at fair value, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy.

 

Fair value measurements for assets and liabilities where there exists limited or no observable market data and, therefore, are based primarily upon estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.

 

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment, OREO, and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

 

33 

Index

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

 

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

Level 1 —Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange.

 

Level 2 —Valuations are obtained from readily available pricing sources via independent providers for market transactions involving similar assets or liabilities. The Company’s principal market for these securities is the secondary institutional markets and valuations are based on observable market data in those markets. Level 2 securities include U. S. Agencies, state and municipal bonds and MBS.

 

Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets.

 

Assets and Liabilities Measured on a Recurring Basis:

 

Available-for-Sale Investment Securities: Investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Level 1 securities include those traded on nationally recognized securities exchanges, U.S. Treasury securities, and money market funds. Level 2 securities include U.S. Agencies, MBS, Municipals and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

 

Mortgage Servicing Rights: Mortgage servicing rights do not trade in an active market with readily observable market data. As a result, the Company estimates the fair value of mortgage servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income. The Company stratifies its mortgage servicing portfolio on the basis of loan type. The assumptions used in the discounted cash flow model are those that we believe market participants would use in estimating future net servicing income, including estimates of loan prepayment rates, servicing costs, ancillary income, impound account balances, and discount rates. Significant assumptions in the valuation of mortgage servicing rights include changes in interest rates, estimated loan repayment rates, and the timing of cash flows, among other factors. Mortgage servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.

 

 

Assets measured at fair value on a recurring basis as of June 30, 2016 were:

 

(Dollars in thousands)      Quoted Prices in   Significant Other   Significant 
       Active Markets for   Observable   Unobservable 
       Identical Assets   Inputs   Inputs 
Description  June 30, 2016   (Level 1)   (Level 2)   (Level 3) 
Recurring:                    
                     
U.S. Agencies  $17,837   $   $17,837   $ 
MBS                    
Residential   55,423        55,423     
Municipals   1,704        1,704     
Mortgage servicing rights   13            13 
Total  $74,977   $   $74,964   $13 

34 

Index

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

 

Assets measured at fair value on a recurring basis as of December 31, 2015 were:

 

(Dollars in thousands)      Quoted Prices in   Significant Other   Significant 
       Active Markets for   Observable   Unobservable 
       Identical Assets   Inputs   Inputs 
Description  December 31, 2015   (Level 1)   (Level 2)   (Level 3) 
Recurring:                    
                     
U.S. Agencies  $30,433   $   $30,433   $ 
MBS                    
Residential   40,934        40,934     
Municipals   8,574        8,574     
Mortgage servicing rights   14            14 
Total  $79,955   $   $79,941   $14 

 

35 

Index

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

The table below displays changes in all recurring Level 3 Assets from December 31, 2015 to June 30, 2016 and December 31, 2014 to December 31, 2015.

 

(Dollars in thousands)  Mortgage Servicing Rights 
     
Beginning balance (December 31, 2015)  $14 
Amortization   1 
Ending Balance (June 30, 2016)  $13 

 

 

(Dollars in thousands)  Mortgage Servicing Rights 
     
Beginning balance (December 31, 2014)  $22 
Amortization   8 
Ending Balance (December 31, 2015)  $14 

 

 

Assets and Liabilities Measured on a Nonrecurring Basis:

 

Impaired Loans: Impaired loans are evaluated and valued at the time the loan is identified as impaired, and are carried at the lower of cost or market value. Market value is measured based on the value of the collateral securing these loans or net present value of expected future cash flows discounted at the loan’s effective interest rate. Collateral may be real estate and/or business assets including equipment, inventory, and/or accounts receivable. The value of business equipment, inventory, and accounts receivable collateral is based on net book value on the business’ financial statements and, if necessary, discounted based on management’s review and analysis. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and the client’s selling costs and other expenses. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. The Company records impaired loans as nonrecurring Level 3, when management believes the underlying collateral is worth less than the appraised value.

 

OREO: OREO is adjusted to fair value, less estimated carrying costs and costs to sell, upon transfer of the loans to OREO. Subsequently, OREO is carried at the lower of the carrying value or the fair value, less estimated costs to sell. Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. The Company records OREO as nonrecurring Level 3.

 

 

36 

Index

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

Assets measured at fair value on a nonrecurring basis as of June 30, 2016 and December 31, 2015 were:

 

(Dollars in thousands)      Quoted Prices in   Significant Other   Significant 
       Active Markets for   Observable   Unobservable 
       Identical Assets   Inputs   Inputs 
Description  June 30, 2016   (Level 1)   (Level 2)   (Level 3) 
Nonrecurring:                    
                     
OREO  $2,687   $   $   $2,687 
Impaired loans:                    
Commercial real estate   6,431            6,431 
Faith-based non-profit   12,790            12,790 
Residential real estate   2,056            2,056 
Total  $23,964   $   $   $23,964 

 

 

(Dollars in thousands)      Quoted Prices in   Significant Other   Significant 
       Active Markets for   Observable   Unobservable 
       Identical Assets   Inputs   Inputs 
Description  December 31, 2015   (Level 1)   (Level 2)   (Level 3) 
Nonrecurring:                    
                     
OREO  $2,764   $   $   $2,764 
Impaired loans:                    
Commercial real estate   7,257            7,257 
Faith-based non-profit   16,148            16,148 
Residential real estate   2,512            2,512 
Total  $28,681   $   $   $28,681 

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

(Dollars in thousands)         Significant  Significant 
       Valuation  Unobservable  Unobservable 
Description  June 30, 2016   Technique  Inputs  Input Value 
Nonrecurring:                
                 
OREO  $2,687   discounted appraisals  collateral discounts    6-20%  
Impaired loans   21,277   discounted appraisals  collateral discounts    6-20%  
Total  $23,964            

 

 

(Dollars in thousands)         Significant  Significant 
       Valuation  Unobservable  Unobservable 
Description  December 31, 2015   Technique  Inputs  Input Value 
Nonrecurring:                
OREO  $2,764   discounted appraisals  collateral discounts    6-20%  
Impaired loans   25,917   discounted appraisals  collateral discounts    6-20%  
Total  $28,681            

 

The Company discloses estimated fair values for its significant financial instruments. The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The methodologies for other financial assets and liabilities are discussed below.

 

The Company had no transfers between any of the three levels in 2015 or 2016.

 

37 

Index

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

Cash and Cash Equivalents: The carrying amount of cash, due from banks, and federal funds sold approximates fair value, and is therefore considered Level 1 input.

 

Loans (other than impaired), net of allowances for loan losses: Fair values are estimated for portfolios of loans with similar financial characteristics. The majority of the Company’s loans and lending-related commitments are not carried at fair value on a recurring basis on the Consolidated Balance Sheets, nor are they actively traded.

 

The fair value of performing loans is calculated by discounting scheduled cash flows through their individual contractual maturity, using discount rates that reflect the credit risk, overhead expenses, interest rate earned and again, contractual maturity of each loan. The maturity is based on contractual maturities for each loan, modified as required by an estimate of the effect of historical prepayments and current economic conditions.

 

For all loans, assumptions regarding the characteristics and segregation of loans, maturities, credit risk, cash flows, and discount rates are determined using specific borrower and other available information and are therefore considered a Level 3 input.

 

Accrued Interest Receivable and Payable: The fair value of interest receivable and payable is estimated to approximate the carrying amounts and is therefore considered a Level 1 input.

 

Deposits: The fair value of deposits with no stated maturity, such as demand deposits, checking accounts, savings and money market accounts, is equal to the carrying amount and is therefore considered a Level 1 input. The fair value of certificates of deposit is based on the discounted value of contractual cash flows, where the discount rate is estimated using the market rates currently offered for deposits of similar remaining maturities and is therefore considered a Level 2 input.

 

Borrowings: The fair value of borrowings is based on the discounted value of estimated cash flows. The discounted rate is estimated using market rates currently offered for similar advances or borrowings and is therefore considered a Level 3 input.

 

Off-Balance Sheet Instruments: Since the majority of the Company’s off-balance sheet instruments consist of non-fee-producing variable rate commitments, the Company has determined they do not have a distinguishable fair value.

 

As of June 30, 2016 and December 31, 2015, the carrying amounts and associated estimated fair value of financial assets and liabilities of the Company are as follows:

 

   June 30, 2016 
(Dollars in thousands)  Carrying   Estimated             
   Amount   Fair Value   Level 1   Level 2   Level 3 
                     
Assets:                         
Cash, cash equivalents and interest-bearing time deposits  $39,595   $39,595   $39,595   $   $ 
Investment securities available for sale   74,964    74,964        74,964     
Loans, net of allowances for loan losses   160,375    164,086            164,086 
Accrued interest receivable   684    684    684         
                          
Liabilities:                         
Non-maturity deposits  $124,343   $124,343   $124,343   $   $ 
Maturity deposits   129,817    129,187        129,187     
Other borrowings   864    842            842 
Accrued interest payable   121    121    121         

38 

Index

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

   December 31, 2015 
(Dollars in thousands)  Carrying    Estimated             
   Amount   Fair Value   Level 1   Level 2   Level 3 
                     
Assets:                         
Cash, cash equivalents and interest-bearing time deposits  $34,938   $34,938   $34,938   $   $ 
Investment securities available for sale   79,941    79,941        79,941     
Loans, net of allowances for loan losses   161,414    165,105            165,105 
Accrued interest receivable   785    785    785         
                          
Liabilities:                         
Non-maturity deposits  $121,315   $121,315   $121,315   $   $ 
Maturity deposits   133,385    132,687        132,687     
Other borrowings   938    889            889 
Accrued interest payable   95    95    95         

 

39 

Index

M&F BANCORP, INC. AND SUBSIDIARY

ITEM 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

INTRODUCTION

 

The following discussion and analysis is intended to aid the reader in understanding and evaluating the M&F Bancorp, Inc.’s (“Company”) consolidated results of operations and financial condition. This discussion is designed to provide more comprehensive information about the major components of the Company’s results of operations, financial condition, liquidity, and capital resources than may be obtained from reading the financial statements alone. This discussion should be read in conjunction with, and is qualified in its entirety by reference to, the Company’s Consolidated Financial Statements, including the related notes thereto presented under Item 1 in this Quarterly Report on Form 10-Q. All information presented is consolidated data unless otherwise specified.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements represent expectations and beliefs of the Company and Mechanics and Farmers Bank (the “Bank”), including but not limited to the Company’s operations, performance, financial condition, growth or strategies. These forward-looking statements are identified by words such as “expects”, “anticipates”, “should”, “estimates”, “believes” and variations of these words and other similar statements. For this purpose, any statements contained in this quarterly Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. These forward-looking statements involve estimates, assumptions, risks and uncertainties that could cause actual results to differ materially from current projections depending on a variety of important factors, including but not limited to those risk factors identified in the section headed "Risk Factors", beginning on page 10 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the Securities and Exchange Commission (the "SEC") on March 16, 2016 (the "Annual Report"). The Company undertakes no obligation to update any forward-looking statement, whether written or not, which may be made from time to time by or on behalf of the Company.

 

IMPACT OF RECENT DEVELOPMENTS ON THE BANKING INDUSTRY

 

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act was intended primarily to overhaul the financial regulatory framework following the global financial crisis and has impacted, and will continue to impact, all financial institutions including the Company and the Bank. The Dodd-Frank Act contains provisions that have, among other things, established a Bureau of Consumer Financial Protection (the "CFPB"), established a systemic risk regulator, consolidated certain federal bank regulators and imposed increased corporate governance and executive compensation requirements on financial institutions. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations and to prepare numerous studies and reports for the U.S. Congress. The federal agencies are given significant discretion in drafting and implementing regulations. Many regulations have been promulgated, and more additional regulations are expected to be issued in 2016 and thereafter. Consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

 

Many of the provisions of the Dodd-Frank Act are focused on financial institutions that are significantly larger than the Company and the Bank. As rules and regulations are promulgated by the federal agencies, the Bank will have to address each to ensure compliance with applicable provisions of the Act and compliance costs are expected to increase.

 

It is expected that the Dodd-Frank Act and the regulations it requires could increase the non-interest expense and compliance costs of the Bank and comparable financial institutions. Although neither the possible increase in the Bank’s interest expense and compliance costs, nor any one or more of the other aspects of Dodd-Frank Act discussed above, may have a material effect upon the Company’s future financial performance by themselves, the specific impact of the Dodd-Frank Act cannot be determined with specificity until after all required or otherwise proposed regulations are issued in final form. We believe that our operating income will be adversely affected, as

40 

Index

M&F BANCORP, INC. AND SUBSIDIARY

will the operating expenses of other community financial institutions, in the future as a consequence of the implementation of the Dodd-Frank Act. Because of the current uncertainty about the schedule of implementation, the breadth of the regulations expected to be issued, and other similar factors, we cannot quantify the amount of any adverse impact.

 

The banking industry, including the Company, is operating in a challenging and volatile economic environment. The effects of the downturn in the housing market have adversely impacted credit markets, consumer confidence and the broader economy. Although the Bank remains profitable year over year, it has not been immune to the impact of the recent recession or the increased focus of banking regulators upon capital and liquidity levels.

 

EXECUTIVE SUMMARY

 

As discussed in more detail below, the following is an executive summary of the Company’s significant results for the three months ended June 30, 2016.

 

·Net income before preferred stock dividends and accretion was $50 thousand and $318 thousand for the three months ended June 30, 2016 and 2015, respectively. Net income (loss) available to common stockholders was $(9) thousand or $(0.00) per share and $259 thousand or $0.13 per share for the three months ended June 30, 2016 and 2015, respectively.
·Net interest income totaled $2.2 million and $2.5 million for the three months ended June 30, 2016 and 2015, respectively. The net interest margin on a federal tax equivalent (“TE”) basis for the three months ended June 30, 2016 was 3.22% compared to 3.58% for the three months ended June 30, 2015, a decrease of 36 basis points (“bps”).
·The balance of the ALLL as a percentage of loans outstanding was 1.90% and 2.08% as of June 30, 2016 and December 31, 2015, respectively. Loans outstanding decreased $1.3 million from $164.8 million at December 31, 2015 to $163.5 million at June 30, 2016. Net charge-offs were $495 thousand and $7 thousand during the three months ended June 30, 2016 and 2015, respectively. The provision for loan losses for the three months ended June 30, 2016 and 2015 totaled $171 thousand and none, respectively.
·Noninterest income increased by $323 thousand during the second quarter of 2016 compared to the same period in 2015 primarily due to $315 thousand in net realized gains on the sales of investment securities and the recognition of $26 thousand in income from expired loan commitment fees with no such activities during the comparable period in 2015.
·Noninterest expense increased $256 thousand during the second quarter of 2016 compared to the same period in 2015 primarily due to increases in net OREO expenses and information technology.
·Preferred stock dividends and accretion in the quarters ended June 30, 2016 and 2015 were $59 thousand. The dividend yield for the three months ended June 30, 2016 and 2015 was 2.00%.

 

As discussed in more detail below, the following is an executive summary of the Company’s significant results for the six months ended June 30, 2016.

 

·Net income (loss) before preferred stock dividends and accretion was $(31) thousand and $149 thousand for the six months ended June 30, 2016 and 2015, respectively. Net income (loss) available to common stockholders was $(148) thousand or $(0.07) per share and $32 thousand or $0.02 per share for the six months ended June 30, 2016 and 2015, respectively.
·Net interest income totaled $4.5 million and $4.9 million for the six months ended June 30, 2016 and 2015, respectively. The net interest margin on a TE basis for the six months ended June 30, 2016 was 3.25% compared to 3.49% for the six months ended June 30, 2015, a decrease of 24 bps.
·The balance of the ALLL as a percentage of loans outstanding was 1.90% and 2.08% as of June 30, 2016 and December 31, 2015, respectively. Loans outstanding decreased $1.3 million from $164.8 million at December 31, 2015 to $163.5 million at June 30, 2016. Net charge-offs were $494 thousand and $1 thousand during the six months ended June 30, 2016 and 2015, respectively. The provision for loan losses for the six months ended June 30, 2016 and 2015 totaled $171 thousand and none, respectively.

41 

Index

M&F BANCORP, INC. AND SUBSIDIARY

·Noninterest income increased by $359 thousand during the first six months of 2016 compared to the same period in 2015. The increase was primarily due to the $321 thousand in net gains on sales of securities during the 2016 period compared to $29 thousand during comparable 2015 period, $26 thousand in income from expired loan commitments compared during 2016 compared to none during the comparable 2015 period, and $18 thousand from insurance proceeds related to failed payments on a residential real estate first mortgage 1oan during 2016 compared to none during the comparable 2015 period. Noninterest expense increased $77 thousand during the first six months of 2016 compared to the same period in 2015 primarily due to increases in net information technology and salaries and employee benefits.
·Preferred stock dividends and accretion in the six months ended June 30, 2016 and 2015 were $117 thousand. The dividend yield for the six months ended June 30, 2016 and 2015 was 2.00%.

 

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The following discussion and analysis of the Company’s financial condition and results of operations are based on the Company’s Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires the Company to make estimates and judgments regarding uncertainties that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to the allowance for loan losses, investment values, income taxes, contingencies, and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. However, because future events and their effects cannot be determined with certainty, actual results may differ from these estimates under different assumptions or conditions, and the Company may be exposed to gains or losses that could be material.

 

The Company’s significant accounting policies are discussed below and in the Annual Report. Management believes that the following accounting policies are the most critical to aid in fully understanding and evaluating the Company’s reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting policies and related disclosures with the Audit and Risk Committee of the Board of Directors.

 

·Allowance for Loan and Lease Losses (“ALLL”) – The Company records an estimated ALLL for loan losses based on known problem loans and estimated risks inherent within the existing loan portfolio. The allowance calculation takes into account historical loss trends, current market, and economic conditions. If economic conditions were to decline significantly or the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional increases to the allowance may be required.

 

·Investments – The Company records an investment impairment charge when it believes an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions and associated market values of investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.

 

·Deferred Taxes – The Company assesses the need to record a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. The Company considers anticipated future taxable income and ongoing prudent and feasible tax planning strategies in determining the need for the valuation allowance which, at this time, it deems not to be necessary. In the event the Company were to determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

 

·OREO – OREO represents properties acquired through foreclosure or physical possession. OREO is adjusted to net realizable value, which is fair value less estimated carrying costs and costs to sell, upon transfer of the loans to OREO. Write-downs to net realizable value of OREO at the time of transfer are charged to allowance for loan losses. Subsequent to foreclosure, the Company periodically evaluates the value of OREO held for sale and records an impairment charge for any subsequent declines in net realizable. Subsequent declines in value are charged to operations. Net realizable value is based on an assessment of information available at the end of a reporting period and depends upon a number of factors, including historical experience, economic conditions, and issues specific to individual properties less estimated carrying costs and costs to sell. The evaluation of these factors involves subjective estimates and judgments that may change.

 

42 

Index

M&F BANCORP, INC. AND SUBSIDIARY

·Fair Value Estimates – Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market inputs. For financial instruments that are traded actively and have quoted market prices or observable market inputs, there is minimal subjectivity involved in measuring fair value. However, when quoted market prices or observable market inputs are not fully available, significant management judgment may be necessary to estimate fair value. In developing our fair value measurements, we maximize the use of observable inputs and minimize the use of unobservable inputs.

 

·The fair value hierarchy defines Level 1 and 2 valuations as those that are based on quoted prices for identical instruments traded in active markets and quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 3 valuations are based on model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that we believe market participants would use in pricing the asset or liability. Financial assets that are recorded at fair value on a recurring basis include available-for-sale investment securities.

43 

Index

M&F BANCORP, INC. AND SUBSIDIARY

FINANCIAL CONDITION

 

The Company’s financial condition is measured in terms of its asset and liability composition, asset quality, capital resources and liquidity.

 

Assets. Total assets decreased from $298.3 million at December 31, 2015 to $296.7 million at June 30, 2016. Cash and cash equivalents increased from $28.3 million at December 31, 2015 to $32.9 million at June 30, 2016. Interest-bearing time deposits remained unchanged at $6.7 million. Investment securities decreased by $5.0 million to $75.0 million at June 30 primarily due to calls/maturities of investments. Gross loans decreased $1.4 million to $163.5 million during the six-month period due to loan payoffs. OREO decreased from $2.8 million at December 31, 2015 to $2.7 million at June 30, 2016. Other assets decreased slightly from $1.2 million at December 31, 2015 to $1.l million at June 30, 2016.

 

Liabilities. Total liabilities decreased from $262.0 million at December 31, 2015 to $260.1 million at June 30, 2016. The change was driven by a $1.3 million decrease in other liabilities, a $540 thousand decrease in total deposits and a $74 thousand decrease in other borrowings. Deposits decreased from $254.7 million at December 31, 2015 to $254.2 million at June 30, 2016. Interest-bearing deposits decreased $6.2 million, while noninterest-bearing deposits increased $5.7 million. The decrease in interest-bearing deposits was primarily related to a $2.8 million decrease in money market accounts due to customer account balance fluctuations and a $2.9 million decrease in CDARS. The increase in noninterest-bearing deposits was attributable to increased deposits of a few large public funds and commercial accounts. We believe the majority of this increase to be temporary due to account seasonality. Other borrowings decreased by $74 thousand due to purchases of equipment under long-term lease partially offset by principal payments on long-term leases and other long-term debt. The decrease in other liabilities was primarily attributable to purchases of loans during 2015, which did not settle until the first quarter of 2016.

 

Stockholders’ Equity. Total consolidated stockholders’ equity increased from $36.2 million at December 31, 2015 to $36.6 million at June 30, 2016. Retained earnings decreased from $17.9 million at December 31, 2015 to $17.7 million at June 30, 2016 as a result of net operating losses and dividends on preferred stock. The Company did not pay a common stock dividend during the first six months of 2016. Accumulated other comprehensive loss represents the unrealized gain on available-for-sale securities and the unrealized loss related to the deferred pension liability, net of deferred taxes. Accumulated other comprehensive loss totaled $1.6 million and $2.1 million at June 30, 2016 and December 31, 2015, respectively.

 

RESULTS OF OPERATIONS

 

Three months ended June 30, 2016 compared with three months ended June 30, 2015

 

General. Net income before preferred stock dividends was $50 thousand for the three months ended June 30, 2016, compared to $318 thousand for the three months ended June 30, 2015. Preferred stock dividends and accretion in the quarters ended June 30, 2016 and 2015 were $59 thousand. Dividend yield on the Company’s preferred stock for the three months ended June 30, 2016 and 2015 was 2.00%. Net income (loss) available to common stockholders was $(9) thousand or $(0.00) per share and $259 thousand or $0.13 per share for the three months ended June 30, 2016 and 2015, respectively.

 

Net Interest Income. Net interest income, the difference between total interest income from loans and investments, and total interest expenses from deposits and borrowings, is the Company’s principal source of earnings. The amount of net interest income is determined by the volume of interest-earning assets, the level of rates earned on those assets, and the volume and cost of underlying funding from deposits and borrowings. Net interest income decreased $259 thousand, or 10.41%, to $2.2 million for the three months ended June 30, 2016 compared to the comparable period of 2015. Average earning assets were $278.5 million and $279.1 million for the three months ended June 30, 2016 and 2015, respectively. Net interest margin is the total of net interest income divided by average earning assets. On a federal TE basis, net interest margin was 3.22% and 3.58% for the three months ended June 30, 2016 and 2015, respectively. Net interest spread is the difference between rates earned on interest-earning assets and the interest paid on deposits and borrowed funds. The net interest spread decreased 37 bps to 3.13% for the three months ended June 30, 2016 from 3.50% for the three months ended June 30, 2015. The yield on average interest-earning assets was 3.49% and 3.81% for the three months ended June 30, 2016 and 2015, respectively, a decrease of 32 bps, while the interest rate on average interest-bearing liabilities for those periods was 0.36% and 0.31%, respectively.

 

44 

Index

M&F BANCORP, INC. AND SUBSIDIARY

The Company’s balance sheet is asset sensitive and, as a result, interest-earning assets are re-pricing faster than interest-bearing liabilities. In theory, the Company is better positioned for a rising rate environment.

 

Interest income decreased 8.90% for the three months ended June 30, 2016 to $2.4 million from $2.7 million for the three months ended June 30, 2015. The average balances of loans, which had overall yields of 4.93% and 5.25% for the three months ended June 30, 2016 and 2015, respectively, decreased to $158.3 million for the three months ended June 30, 2016 from $174.3 million for the three months ended June 30, 2015. The average balance of investment securities increased $4.8 million to $78.0 million for the three months ended June 30, 2016 from $73.2 million for the three months ended June 30, 2015. The TE yield on investment securities increased to 2.09% for the three months ended June 30, 2016 from 1.84% for the three months ended June 30, 2015. The average balances of federal funds and other short-term investments increased to $35.5 million for the three months ended June 30, 2016 from $27.7 million for the three months ended June 30, 2015. The average yield in this category was 0.48% and 0.23% during the three months ended June 30, 2016 and 2015, respectively. The increase in yield reflects an increase in the federal funds target rate. The average balances of interest-bearing time deposits increased to $6.7 million at June 30, 2016 from $4.0 million at June 30, 2015 with corresponding yields of 1.74% and 1.89%, respectively. Management invested funds in these short-term assets to leverage excess liquidity.

 

Interest expense was $187 thousand and $164 thousand for the three months ended June 30, 2016 and 2015, respectively. Average total interest-bearing deposits, including savings, interest-bearing demand deposits and time deposits decreased to $206.5 million for the three months ended June 30, 2016 from $210.9 million for the three months ended June 30, 2015. The average rate paid on interest-bearing deposits increased five bps to 0.36% for the three months ended June 30, 2016 from 0.31% for the three months ended June 30, 2015.

 

The average rate on borrowings was 0.90% for the three months ended June 30, 2016 and 2015. The average borrowings outstanding increased to $887 thousand at June 30, 2016 from $885 thousand during the three months ended June 30, 2015. The interest expense on borrowed funds totaled $2 thousand for the three months ended June 30, 2016 and 2015.

 

The following table, Average Balances, Interest Earned or Paid, and Interest Yields/Rates reflects the Company’s effective yield on earning assets and cost of funds. Yields and costs are computed by dividing income or expense for the year by the respective daily average asset or liability balance. Changes in net interest income from year to year can be explained in terms of fluctuations in volume and rate. In the table, the amount earned on nontaxable securities is reflected as actual, whereas the rate on nontaxable securities is stated at the federal TE rate.

45 

Index

M&F BANCORP, INC. AND SUBSIDIARY

Average Balances, Interest Earned or Paid, and Interest Yields/Rates
For the Three Months Ended June 30, 2016 and 2015
(Dollars in thousands)  2016   2015 
(Unaudited)  Average
Balance
   Amount
Earned/Paid
   Average
Rate
   Average
Balance
   Amount
Earned/Paid
   Average
Rate
 
Assets                              
Loans receivable (1)  $158,293   $1,949    4.93%  $174,264