M&F BANCORP INC /NC/ - Quarter Report: 2016 March (Form 10-Q)

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 March 31, 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 May 11, 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 March 31, 2016 and December 31, 2015	3

Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015	4

Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2016 and 2015	5

Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2016 and 2015	6

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015	7

Notes to Consolidated Financial Statements	9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 4. Controls and Procedures	44

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	45

Item 6. Exhibits	46

SIGNATURES	48

Index

M&F BANCORP, INC. AND SUBSIDIARY

PART I

FINANCIAL INFORMATION

Item 1 – Financial

CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
(Dollars in thousands)	2016			2015
	(Unaudited)
ASSETS

Cash and cash equivalents:
Cash and due from banks	$	2,659		$	2,181
Interest-bearing cash		37,529			26,081
Federal funds sold		—			11
Total cash and cash equivalents		40,188			28,273
Interest-bearing time deposits		6,665			6,665
Investment securities available-for-sale, at fair value		78,888			79,941
Other invested assets		298			298
Loans, net of unearned income and deferred fees		160,692			164,849
Allowance for loan losses		(3,436	)		(3,435	)
Loans, net		157,256			161,414
Interest receivable		771			785
Bank premises and equipment, net		4,587			4,412
Cash surrender value of bank-owned life insurance		8,289			8,228
Other real estate owned ("OREO")		2,544			2,764
Deferred tax assets and taxes receivable, net		3,987			4,264
Other assets		1,215			1,206
TOTAL ASSETS	$	304,688		$	298,250
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Interest-bearing deposits	$	209,584		$	209,817
Noninterest-bearing deposits		52,948			44,883
Total deposits		262,532			254,700
Other borrowings		901			938
Other liabilities		4,677			6,388
Total liabilities		268,110			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		17,755			17,895
Accumulated other comprehensive loss		(1,640	)		(2,134	)
Total stockholders' equity		36,578			36,224

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	304,688		$	298,250

See notes to consolidated financial statements.

Index

M&F BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Three Months Ended
(Dollars in thousands except for share and per share data)	March 31,
(Unaudited)	2016			2015

Interest income:
Loans, including fees	$	1,979		$	2,205
Investment securities available-for-sale, including dividends
Taxable		365			330
Tax-exempt		54			4
Interest-bearing time deposits		28			15
Other		44			21

Total interest income		2,470			2,575
Interest expense:
Deposits		178			172
Borrowings		2			1

Total interest expense		180			173
Net interest income		2,290			2,402
Less provision for loan losses		—			—

Net interest income after provision for loan losses		2,290			2,402

Noninterest income:
Service charges		262			265
Rental income		54			43
Cash surrender value of life insurance		61			50
Net realized gains on sales of investment securities available-for-sale		6			29
Other income		45			4
Total noninterest income		428			391

Noninterest expense:
Salaries and employee benefits		1,393			1,344
Occupancy and equipment		332			353
Directors' fees		46			57
Marketing		68			38
Professional fees		137			165
Information technology		276			222
FDIC deposit insurance		137			143
OREO expenses, net		113			317
Delivery expenses		33			31
Other		273			315
Total noninterest expense		2,808			2,985

Loss before income tax benefit		(90	)		(192	)
Income tax benefit		(9	)		(23	)
Net loss		(81	)		(169	)

Less preferred stock dividends and accretion		(59	)		(59	)

Net loss available to common stockholders	$	(140	)	$	(228	)


Basic and diluted loss per share of common stock:	$	(0.07	)	$	(0.11	)
Weighted average shares of common stock outstanding:
Basic and diluted		2,031,337			2,031,337

See notes to consolidated financial statements.

Index

M&F BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	For the Three Months Ended
(Dollars in thousands)	March 31,
(Unaudited)	2016			2015

Net loss	$	(81	)	$	(169	)

Other comprehensive income:
Investment securities:
Unrealized holding gains on investment securities available-for-sale		786			199
Tax effect		(288	)		(75	)
Reclassification adjustments for net realized gains		(6	)		(29	)
Tax effect		2			11
Net of tax amount		494			106

Defined benefit pension plans:
Net actuarial losses		(78	)		(62	)
Tax effect		—			—
Prior service cost		78			62
Tax effect		—			—
Net of tax amount		—			—

Other comprehensive income, net of tax		494			106

Comprehensive income (loss)	$	413		$	(63	)

See notes to consolidated financial statements

Index

M&F BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 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
Net loss		—		—		—		(169	)		—			(169	)
Other comprehensive income, net of tax		—		—		—		—			106			106
Dividends declared on preferred stock		—		—		—		(59	)		—			(59	)

Balances as of March 31, 2015		2,031,337	$	8,732	$	11,729	$	17,557		$	(1,562	)	$	36,456

Balances as of December 31, 2015		2,031,337	$	8,732	$	11,731	$	17,895		$	(2,134	)	$	36,224
Net loss		—		—		—		(81	)		—			(81	)
Other comprehensive income, net of tax		—		—		—		—			494			494
Dividends declared on preferred stock		—		—		—		(59	)		—			(59	)

Balances as of March 31, 2016		2,031,337	$	8,732	$	11,731	$	17,755		$	(1,640	)	$	36,578

See notes to consolidated financial statements

Index

M&F BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF CASH FLOWS
	For the Three Months Ended
	March 31,
(Dollars in thousands)	2016			2015
(Unaudited)

Cash flows from operating activities:
Net loss	$	(81	)	$	(169	)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization		111			100
Amortization of discounts/premiums on investment securities available-for-sale, net		72			121
Net gains on sales of investment securities available-for-sale		(6	)		(29	)
Increase in cash surrender value of bank-owned life insurance		(61	)		(50	)
Gains at foreclosure		—			(13	)
Net losses on sales of OREO		46			4
Writedowns of OREO		62			215
Net changes in:
Accrued interest receivable and other assets		(4	)		120
Other liabilities		(1,711	)		(440	)

Net cash used in operating activities		(1,572	)		(141	)

Cash flows from investing activities:
Activity in available for sale securities:
Sales		3,695			9,580
Maturities and calls		16,900			4,500
Principal collections		1,345			2,537
Purchases		(20,173	)		(21,496	)
Purchases of interest bearing time deposits		—			(1,482	)
FHLB stock redemptions		—			3
Net decrease in loans		4,158			2,275
Purchases of bank premises and equipment		(286	)		(137	)
Proceeds from sales of OREO		112			213

Net cash provided by (used in) investing activities		5,751			(4,007	)

Cash flows from financing activities:
Net increase (decrease) in deposits		7,832			(149	)
Proceeds from other borrowings		32			158
Repayments of other borrowings		(69	)		(48	)
Cash dividends		(59	)		(59	)

Net cash provided by (used in) financing activities		7,736			(98	)

Net increase (decrease) in cash and cash equivalents		11,915			(4,246	)

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	$	40,188		$	28,858

See notes to consolidated financial statements.

Index

M&F BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
	For the Three Months Ended
	March 31,
(Dollars in thousands)	2016		2015


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest	$	186	$	168
Noncash Transactions:
Loans transferred to OREO		—		122
Net unrealized gains on investment securities available-for-sale, net of deferred income tax		494		106

See notes to consolidated financial statements.

Index

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

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.

Index

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

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, the Company will need to reevaluate all its previous consolidation conclusions. The amendments will be 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 will be 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 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 Accounting Standards Codification (“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.

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.

Index

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

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

Our available-for-sale securities totaled $78.9 million and $79.9 million as of March 31, 2016 and December 31, 2015, respectively. Securities with a fair value of $1.1 million were pledged to the Federal Reserve Bank of Richmond (“FRB”) and an additional $2.8 million and $18.5 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 March 31, 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”).

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

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
(Unaudited)
March 31, 2016
U.S. Agencies	$	22,289	$	51	$	(2	)	$	22,338
MBS
Residential		47,315		246		(277	)		47,284
Municipals		9,056		222		(12	)		9,266
Total	$	78,660	$	519	$	(291	)	$	78,888

December 31, 2015
U.S. Agencies	$	30,681	$	2	$	(250	)	$	30,433
MBS
Residential		41,323		20		(409	)		40,934
Municipals
North Carolina		8,489		98		(13	)		8,574
Total	$	80,493	$	120	$	(672	)	$	79,941

During the three months ended March 31, 2016 and 2015, there were $36 thousand and $112 thousand gross realized gains and $30 thousand and $83 thousand gross realized losses on sales or calls of securities, respectively.

The amortized cost and estimated market values of securities as of March 31, 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.

Index

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


(Dollars in thousands)	As of March 31, 2016
(Unaudited)	Fair Value		Amortized Cost
U.S. Agencies
Due after one year through five years	$	16,324	$	16,289
Due after five years through ten years		6,014		6,000
Total U.S. Agencies	$	22,338	$	22,289

MBS
Residential
Due within one year	$	5,312	$	5,320
Due after one year through five years		16,214		16,213
Due after five years through ten years		13,572		13,554
Due after ten years		12,186		12,228
Total MBS	$	47,284	$	47,315

Municipals
Due within one year	$	261	$	260
Due after one year through five years		1,313		1,318
Due after five years through ten years		7,283		7,078
Due after ten years		409		400
Total Municipals	$	9,266	$	9,056

(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 March 31, 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 March 31, 2016 or December 31, 2015.

As of March 31, 2016 and December 31, 2015, the Company held 39 and 71 investment positions, respectively, with unrealized losses of $291 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 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.

Index

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

As of March 31, 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
March 31, 2016
U.S. Agencies	$	994	$	(2	)	$	—	$	—		$	994	$	(2	)
MBS
Residential		10,362		(58	)		9,195		(219	)		19,557		(277	)
Municipals		1,406		(12	)		—		—			1,406		(12	)
Total	$	12,762	$	(72	)	$	9,195	$	(219	)	$	21,957	$	(291	)

(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	)

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 March 31, 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 March 31, 2016 and December 31, 2015. Management has reviewed its investment in FHLB stock for impairment and does not believe it is impaired as of March 31, 2016 or December 31, 2015.

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

Basic EPS is computed by dividing net 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 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.

ACCUMULATED OTHER COMPREHENSIVE LOSS

Accumulated other comprehensive loss includes net 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.

Index

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

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT

For the Three Months Ended March 31, 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 income before reclassifications		124			—			124
Amounts reclassified from accumulated other comprehensive income		(18	)		—			(18	)
Net current-period other comprehensive income		106			—			106
Balance as of March 31, 2015	$	89		$	(1,651	)	$	(1,562	)



Balance as of December 31, 2015	$	(350	)	$	(1,784	)	$	(2,134	)
Other comprehensive income before reclassifications		498			—			498
Amounts reclassified from accumulated other comprehensive income		(4	)		—			(4	)
Net current-period other comprehensive income		494			—			494
Balance as of March 31, 2016	$	144		$	(1,784	)	$	(1,640	)



All amounts are net of tax.

RECLASSIFICATION ADJUSTMENTS FROM ACCUMULATED OTHER COMPREHENSIVE LOSS

	For the Three Months Ended March 31,
(Dollars in thousands)	2016			2015
(Unaudited)
Detail about Accumulated Other Comprehensive Loss Components	Amount Reclassified from Accumulated Other Comprehensive Loss			Amount Reclassified from Accumulated Other Comprehensive Loss			Affected Line Item in the Consolidated Statements of Loss
Net unrealized holding gains - investment securities available-for-sale	$	(6	)	$	(29	)	Net realized gains on sales of investments
Income tax expense		2			11		Income tax expense
Total, net of tax		(4	)		(18	)	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	$	(4	)	$	(18	)

LOANS AND ALLOWANCE FOR LOAN LOSSES

The activity in the Company’s allowance for loan losses (“ALLL”) for the three month periods ended March 31, 2016 and 2015 and related asset balances at March 31, 2016 and December 31, 2015 is summarized as follows:

Index

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


	For the Three Months Ended March 31, 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 three months ended March 31, 2016
Charge-offs		—		—			—		—			—		(3	)		—			(3	)
Recoveries		—		—			—		3			—		1			—			4
Provision for loan losses		218		(152	)		166		(30	)		2		174			(378	)		—
Total ending ALLL balances as of March 31, 2016	$	547	$	687		$	1,395	$	383		$	23	$	401		$	—		$	3,436

	For the Three Months Ended March 31, 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 three months ended March 31, 2015
Charge-offs		—			—		—		—			—		(4	)		—		(4	)
Recoveries		—			—		—		10			—		—			—		10
Provision for loan losses		(82	)		23		206		(106	)		1		(51	)		9		—
Total ending ALLL balances as of March 31, 2015	$	271		$	602	$	1,440	$	589		$	29	$	210		$	305	$	3,446

Index

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

	March 31, 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	$	—	$	252	$	546	$	72	$	—	$	—	$	—	$	870
Collectively evaluated for impairment		547		435		849		311		23		401		—		2,566
Total ending ALLL balance	$	547	$	687	$	1,395	$	383	$	23	$	401	$	—	$	3,436

Loans:
Loans individually evaluated for impairment	$	—	$	7,442	$	16,260	$	2,387	$	—	$	—	$	—	$	26,089
Loans collectively evaluated for impairment		9,742		31,361		68,480		19,685		1,072		4,263		—		134,603
Total ending loans balance	$	9,742	$	38,803	$	84,740	$	22,072	$	1,072	$	4,263	$	—	$	160,692

	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

Index

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

The Bank experienced $1 thousand and $6 thousand in net recoveries during the three months ended March 31, 2016 and 2015, respectively. Annualized net recoveries as a percent of average loan balances outstanding totaled 0.00% and 0.01% during the three month periods ended March 31, 2016 and 2015, respectively.

The decrease in unallocated reserve to none at March 31, 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 March 31, 2016 and December 31, 2015 was as follows:

(Dollars in thousands)	March 31, 2016			December 31, 2015

Commercial	$	9,742		$	7,540
Commercial real estate:
Construction		9,661			9,618
Owner occupied		16,188			18,941
Other		12,954			15,481
Faith-based non-profit:
Construction		4,885			4,800
Owner occupied		77,509			78,228
Other		2,346			2,427
Residential real estate:
First mortgage		16,228			16,467
Multifamily		2,656			2,701
Home equity		3,067			3,249
Construction		121			122
Consumer		1,072			1,035
Other loans		4,263			4,240
Loans, net of deferred fees		160,692			164,849
ALLL		(3,436	)		(3,435	)
Loans, net of ALLL	$	157,256		$	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 March 31, 2016, the percentage of loans in this segment, which included construction, real estate secured, and lines of credit, comprised 52.73% of the total loan portfolio and the reserve for these loans was 40.60% 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 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.

Index

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

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

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

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

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

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

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

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

Index

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

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

					90 Days
March 31, 2016	30-59 Days		60-89 Days		Or More		Total Past
(Dollars in thousands)	Past Due		Past Due		Past Due		Due		Current		Total

Commercial	$	—	$	—	$	—	$	—	$	9,742	$	9,742
Commercial real estate:
Construction		—		—		—		—		9,661		9,661
Owner occupied		—		—		—		—		16,188		16,188
Other		70		—		—		70		12,884		12,954
Faith-based non-profit:
Construction		—		—		—		—		4,885		4,885
Owner occupied		14		—		—		14		77,495		77,509
Other		—		—		—		—		2,346		2,346
Residential real estate:
First mortgage		602		234		1,341		2,177		14,051		16,228
Multifamily		—		—		17		17		2,639		2,656
Home equity		127		—		188		315		2,752		3,067
Construction		—		—		121		121		—		121
Consumer		1		32		—		33		1,039		1,072
Other loans		—		—		—		—		4,263		4,263
Total	$	814	$	266	$	1,667	$	2,747	$	157,945	$	160,692

					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

Index

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

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

	March 31, 2016
							For the Three Months Ended
	Unpaid								Average
	Principal		Recorded		ALLL		Interest		Recorded
(Dollars in thousands)	Balance		Investment		Allocated		Earned		Investment

With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction		—		—		—		—		—
Owner occupied		68		68		—		1		68
Other		2,519		2,520		—		39		2,667
Faith based non-profit:
Construction		—		—		—		—		—
Owner occupied		5,424		5,430		—		61		5,427
Other		—		—		—		—		—
Residential real estate:
First mortgage		1,653		1,626		—		395		1,762
Multifamily		17		17		—		—		9
Home equity		280		280		—		1		309
Construction		—		—		—		—		—
Consumer		—		—		—		—		—
Impaired loans with no allowance recorded	$	9,961	$	9,941	$	—	$	497	$	10,242

With an allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction		—		—		—		—		—
Owner occupied		4,627		4,631		251		54		4,654
Other		229		230		1		4		115
Faith based non-profit:
Construction		—		—		—		—		—
Owner occupied		10,836		10,854		546		155		10,917
Other		—		—		—		—		—
Residential real estate:
First mortgage		344		344		71		—		344
Multifamily		—		—		—		—		—
Home equity		—		—		—		—		—
Construction		121		121		1		—		61
Consumer		—		—		—		—		—
Impaired loans with allowance recorded	$	16,157	$	16,180	$	870	$	213	$	16,091
Total impaired loans	$	26,118	$	26,121	$	870	$	710	$	26,333

Index

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

	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

Index

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

	March 31, 2015
							For the Three Months
	Unpaid								Average
	Principal		Recorded		ALLL		Interest		Recorded
(Dollars in thousands)	Balance		Investment		Allocated		Earned		Investment

With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction		77		78		—		1		78
Owner occupied		42		42		—		—		42
Other		4,087		3,852		—		4		3,862
Faith based non-profit:
Construction		—		—		—		—		—
Owner occupied		5,717		5,730		—		59		7,747
Other		—		—		—		—		—
Residential real estate:										—
First mortgage		2,488		2,354		—		59		2,618
Multifamily		—		—		—		—		—
Home equity		125		115		—		1		67
Construction		—		—		—		—		—
Consumer		11		2		—		—		1
Impaired loans with no allowance recorded	$	12,547	$	12,173	$	—	$	124	$	14,415

With an allowance recorded:
Commercial	$	3	$	—	$	3	$	—	$	1
Commercial real estate:
Construction		274		275		1		5		277
Owner occupied		4,748		4,759		27		57		4,779
Other		—		—		—		—		—
Faith based non-profit:
Construction		—		—		—		—		—
Owner occupied		10,737		10,761		227		150		9,061
Other		—		—		—		—		—
Residential real estate:
First mortgage		1,515		1,515		171		—		1,471
Multifamily		—		—		—		—		—
Home equity		43		43		13		—		94
Construction		—		—		—		—		—
Consumer		—		—		—		—		—
Impaired loans with allowance recorded	$	17,320	$	17,353	$	442	$	212	$	15,683
Total impaired loans	$	29,867	$	29,526	$	442	$	336	$	30,098

Index

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

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 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.

Index

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

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 $12 thousand and $10 thousand for March 31, 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 March 31, 2016 and December 31, 2015, respectively:

					90 Days
					or More
					Past Due
March 31, 2016					Still
(Dollars in thousands)	Non-accrual		Number		Accruing		Number

Commercial	$	—		—	$	—		—
Commercial real estate:
Construction		—		—		—		—
Owner occupied		—		—		—		—
Other		2,449		2		—		—
Faith-based non-profit:
Construction		—		—		—		—
Owner occupied		14		1		—		—
Other		—		—		—		—
Residential real estate:
First mortgage		1,756		32		—		1
Multifamily		17		1		—		—
Home equity		280		3		—		—
Construction		122		1		—		—
Consumer		—		—		—		1
Other loans		—		—		—		—
Total	$	4,638		40	$	—		2

Index

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

					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.

Index

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

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:

March 31, 2016
(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total

Commercial	$	4,100	$	—	$	5,642	$	—	$	9,742
Commercial real estate:
Construction		9,661		—		—		—		9,661
Owner occupied		15,858		262		68		—		16,188
Other		9,342		252		3,360		—		12,954
Faith-based non-profit:
Construction		4,885		—		—		—		4,885
Owner occupied		60,593		6,969		9,947		—		77,509
Other		2,346		—		—		—		2,346
Residential real estate:
First mortgage		13,811		6		2,411		—		16,228
Multifamily		2,552		29		75		—		2,656
Home equity		2,787		—		280		—		3,067
Construction		—		—		121		—		121
Consumer		1,058		9		5		—		1,072
Other loans		4,263		—		—		—		4,263
Total	$	131,256	$	7,527	$	21,909	$	—	$	160,692

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

Index

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

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 March 31, 2016 and December 31, 2015.

	Troubled Debt Restructurings
	March 31, 2016
					Non-accrual				Total
	Accrual Status				Status				Modifications
(Dollars in thousands)	Number		Amount		Number		Amount		Number		Amount

Commercial real estate:
Construction		—	$	—		—	$	—		—	$	—
Owner occupied		4		4,694		—		—		4		4,694
Other		2		299		1		2,432		3		2,731
Faith-based non-profit:
Owner occupied		20		16,246		1		14		21		16,260
Other		—		—		—		—		—		—
Residential real estate:
First mortgage		4		212		2		178		6		390
Total		30	$	21,451		4	$	2,624		34	$	24,075

	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:
Construction		—	$	—		—	$	—		—	$	—
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
Other		—		—		—		—		—		—
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 months ended March 31, 2016. Two loans totaling $129 thousand were restructured during the three months ended March 31, 2015.

Index

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

The following table shows loans newly restructured during the three months ended March 31, 2015.

	TDR Modifications
	For the Three Months Ended March 31, 2015
March 31, 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 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 months ended March 31, 2016 or 2015. The Company defines default as the loan becoming 90 days or more past due, foreclosed upon or charged-off.

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.

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 March 31, 2016 and December 31, 2015, OREO totaled $2.5 million and $2.8 million, respectively. At March 31, 2016 and December 31, 2015, $0.1 million and $0.2 million, respectively, of OREO was comprised of residential real estate; the remainder was commercial real estate. Also as of March 31, 2016 and December 31, 2015, $0.5 million of consumer mortgage loans collateralized by residential real estate were in the process of foreclosure. OREO excludes bank-owned property held for Company use at March 31, 2016 and December 31, 2015.

BORROWINGS

Borrowings as of March 31, 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 1.85%. 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 March 31, 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 $6.4 million as of March 31, 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.

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.

Index

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

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 March 31, 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 March 31, 2016 are summarized in the following table:

(Dollars in thousands)	Commercial letters of credit		Other loan commitments		Total commitments

Less than one year	$	19	$	15,295	$	15,314
One to three years		250		5,496		5,746
Three to five years		—		3,308		3,308
More than five years		93		1,194		1,287
Total	$	362	$	25,293	$	25,655

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.

Index

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

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.

Assets measured at fair value on a recurring basis as of March 31, 2016 were:

(Dollars in thousands)			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Description	March 31, 2016		(Level 1)		(Level 2)		(Level 3)
Recurring:

U.S. Agencies	$	22,338	$	—	$	22,338	$	—
MBS
Residential		47,284		—		47,284		—
Municipals		9,266		—		9,266		—
Mortgage servicing rights		13		—		—		13
Total	$	78,901	$	—	$	78,888	$	13

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

Index

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

The table below displays changes in all recurring Level 3 Assets from December 31, 2015 to March 31, 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 (March 31, 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: Foreclosed assets are adjusted to fair value, less estimated carrying costs and costs to sell, upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are 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 foreclosed assets as nonrecurring Level 3.

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.

Index

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

Assets measured at fair value on a nonrecurring basis as of March 31, 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	March 31, 2016		(Level 1)		(Level 2)		(Level 3)
Nonrecurring:

OREO	$	2,544	$	—	$	—	$	2,544
Impaired loans:
Commercial real estate		7,197		—		—		7,197
Faith-based non-profit		15,738		—		—		15,738
Residential real estate		2,316		—		—		2,316
Consumer		—		—		—		—
Total	$	27,795	$	—	$	—	$	27,795

(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

Valuation

Unobservable

Description

March 31, 2016

Technique

Inputs

Input Value

Nonrecurring:

OREO

2,544

discounted appraisals

collateral discounts

6-20%

Impaired loans

25,251

discounted appraisals

collateral discounts

6-20%

Total

27,795

(Dollars in thousands)

Significant

Valuation

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.

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

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

	March 31, 2016
(Dollars in thousands)	Carrying		Estimated
	Amount		Fair Value		Level 1		Level 2		Level 3

Assets:
Cash and cash equivalents	$	46,853	$	46,853	$	46,853	$	—	$	—
Investment securities available for sale		78,888		78,888		—		78,888		—
Loans, net of allowances for loan losses		157,256		161,553		—		—		161,553
Accrued interest receivable		771		771		771		—		—

Liabilities:
Non-maturity deposits	$	132,560	$	132,560	$	132,560	$	—	$	—
Maturity deposits		129,972		129,222		—		129,222		—
Other borrowings		901		873		—		—		873
Accrued interest payable		89		89		89		—		—

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

	December 31, 2015
(Dollars in thousands)	Carrying Amount		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		—		—

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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 Company’s 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 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.

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M&F BANCORP, INC. AND SUBSIDIARY

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 March 31, 2016.

Net loss before preferred stock dividends and accretion was $81 thousand and $169 thousand for the three months ended March 31, 2016 and 2015, respectively. Net loss available to common stockholders was $140 thousand or $0.07 per share and $228 thousand or $0.11 per share for the three months ended March 31, 2016 and 2015, respectively.

Net interest income totaled $2.3 million and $2.4 million for the three months ended March 31, 2016 and 2015, respectively. The net interest margin on a federal tax equivalent (“TE”) basis for the three months ended March 31, 2016 was 3.28% compared to 3.40% for the three months ended March 31, 2015, a decrease of 12 basis points (“bps”).

The balance of the ALLL as a percentage of loans outstanding was 2.14% and 2.08% as of March 31, 2016 and December 31, 2015, respectively. Loans outstanding decreased $4.1 million from $164.8 million at December 31, 2015 to $160.7 million at March 31, 2016. Net recoveries were $1 thousand and $6 thousand during the three months ended March 31, 2016 and 2015, respectively. There was no provision for loan losses for the three months ended March 31, 2016 or 2015.

Noninterest income increased by $37 thousand during the first quarter of 2016 compared to the same period in 2015 primarily due to the collection of insurance proceeds related to foreclosed properties with no such proceeds during the comparable period in 2015.

Noninterest expense decreased $177 thousand during the first quarter of 2016 compared to the same period in 2015 primarily due to decreases in net OREO expenses.

Preferred stock dividends and accretion in the quarters ended March 31, 2016 and 2015 were $59 thousand. The dividend yield for the three months ended March 31, 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 on Form 10-K. 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.

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M&F BANCORP, INC. AND SUBSIDIARY

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 foreclosed assets. Write-downs to net realizable value of foreclosed assets at the time of transfer are charged to allowance for loan losses. Subsequent to foreclosure, the Company periodically evaluates the value of foreclosed assets 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.

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.

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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 increased from $298.3 million at December 31, 2015 to $304.7 million at March 31, 2016. Cash and cash equivalents increased from $28.3 million at December 31, 2015 to $40.2 million at March 31, 2016. Interest-bearing time deposits remained unchanged at $6.7 million. Investment securities decreased by $1.1 million to $78.9 million at March 31, 2016 primarily due to calls/maturities of investments. Gross loans decreased $4.2 million to $160.7 million during the three-month period due to loan payoffs. OREO decreased from $2.8 million at December 31, 2015 to $2.5 million at March 31, 2016. Other assets remained unchanged at $1.2 million.

Liabilities. Total liabilities increased from $262.0 million at December 31, 2015 to $268.1 million at March 31, 2016. The change was primarily driven by a $7.8 million increase in total deposits, partially offset by a $37 thousand decrease in other borrowings and a $1.7 million decrease in other liabilities. Deposits increased from $254.7 million at December 31, 2015 to $262.5 million at March 31, 2016. Interest-bearing deposits decreased $233 thousand, while noninterest-bearing deposits increased $8.1 million. 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 $37 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 March 31, 2016. Retained earnings decreased from $17.9 million at December 31, 2015 to $17.8 million at March 31, 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 three 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 March 31, 2016 and December 31, 2015, respectively.

RESULTS OF OPERATIONS

Three months ended March 31, 2016 compared with three months ended March 31, 2015

General. Net loss before preferred stock dividends was $81 thousand for the three months ended March 31, 2016, compared to $169 thousand for the three months ended March 31, 2015. Preferred stock dividends and accretion in the quarters ended March 31, 2016 and 2015 were $59 thousand. Dividend yield on the Company’s preferred stock for the three months ended March 31, 2016 and 2015 was 2.00%. Net loss available to common stockholders was $140 thousand or $0.07 per share and $228 thousand or $0.11 per share for the three months ended March 31, 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 $112 thousand, or 4.66%, to $2.3 million for the three months ended March 31, 2016 compared to the comparable period of 2015. Average earning assets were $282.9 million and $283.1 million for the three months ended March 31, 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 3.28% and 3.40% for the three months ended March 31, 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 13 bps to 3.19% for the three months ended March 31, 2016 from 3.32% for the three months ended March 31, 2015. The yield on average interest-earning assets was 3.53% and 3.64% for the three months ended March 31, 2016 and 2015, respectively, a decrease of 11 bps, while the interest rate on average interest-bearing liabilities for those periods was 0.34% and 0.32%, respectively.

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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 4.08% for the three months ended March 31, 2016 to $2.5 million from $2.6 million for the three months ended March 31, 2015. The average balances of loans, which had overall yields of 4.93% and 5.06% for the three months ended March 31, 2016 and 2015, respectively, decreased to $160.6 million for the three months ended March 31, 2016 from $174.4 million for the three months ended March 31, 2015. The average balance of investment securities increased $9.1 million to $80.0 million for the three months ended March 31, 2016 from $70.9 million for the three months ended March 31, 2015. The TE yield on investment securities increased to 2.23% for the three months ended March 31, 2016 from 1.89% for the three months ended March 31, 2015. The average balances of federal funds and other short-term investments increased to $35.6 million for the three months ended March 31, 2016 from $34.5 million for the three months ended March 31, 2015. The average yield in this category was 0.49% and 0.24% during the three months ended March 31, 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 March 31, 2016 from $3.3 million at March 31, 2015 with corresponding yields of 1.68% and 1.82%, respectively. Management invested funds in these short-term assets to leverage excess liquidity.

Interest expense was $180 thousand and $173 thousand for the three months ended March 31, 2016 and 2015, respectively. Average total interest-bearing deposits, including savings, interest-bearing demand deposits and time deposits decreased to $210.1 million for the three months ended March 31, 2016 from $213.6 million for the three months ended March 31, 2015. The average rate paid on interest-bearing deposits increased two bps to 0.34% for the three months ended March 31, 2016 from 0.32% for the three months ended March 31, 2015.

The average rate on borrowings increased to 0.87% for the three months ended March 31, 2016 from 0.51% for the three months ended March 31, 2015. The average borrowings outstanding increased to $924 thousand at March 31, 2016 from $786 thousand during the three months ended March 31, 2015. The interest expense on borrowed funds totaled $2 thousand and $1 thousand for the three months ended March 31, 2016 and 2015, respectively.

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 TE rate.

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M&F BANCORP, INC. AND SUBSIDIARY

Average Balances, Interest Earned or Paid, and Interest Yields/Rates
For the Three Months Ended March 31, 2016 and 2015
(Dollars in thousands)	2016									2015
	Average Balance			Amount Earned/Paid			Average Rate			Average Balance			Amount Earned/Paid			Average Rate
Assets
Loans receivable (1):	$	160,585		$	1,979			4.93	%	$	174,360		$	2,205			5.06	%
Taxable securities		72,123			365			2.02			70,517			330			1.87
Nontaxable securities(2)		7,907			54			4.14			420			4			5.77
Interest-bearing time deposits		6,665			28			1.68			3,302			15			1.82
Federal funds sold and other short-term investments		35,648			44			0.49			34,490			21			0.24
Total interest earning assets		282,928			2,470			3.53	%		283,089			2,575			3.64	%
Cash and due from banks		2,427									2,452
Other assets		21,655									21,125
Allowance for loan losses		(3,435	)								(3,439	)
Total assets	$	303,575								$	303,227

Liabilities and Equity
Savings deposits	$	55,186		$	14			0.10	%	$	57,366		$	16			0.11	%
Interest-bearing demand deposits		22,511			5			0.09			21,792			4			0.07
Time deposits		132,363			159			0.48			134,397			152			0.45
Total interest-bearing deposits		210,060			178			0.34			213,555			172			0.32
Borrowed funds		924			2			0.87			786			1			0.51
Total interest-bearing liabilities		210,984			180			0.34	%		214,341			173			0.32	%
Noninterest-bearing deposits		48,923									46,047
Other liabilities		7,168									6,218
Total liabilities		267,075									266,606
Stockholders' equity		36,500									36,621
Total liabilities and stockholders' equity	$	303,575								$	303,227

Net interest income				$	2,290								$	2,402

Non-taxable securities					54									4
Tax equivalent adjustment (3)					28									2

Tax equivalent net interest income				$	2,318								$	2,404			`
Net interest spread (4)								3.19	%								3.32	%
Net interest margin (5)					3.28	%								3.40	%

(1) Loans receivable include nonaccrual loans for which accrual of interest income has not been recorded.

(2) The tax equivalent rate is computed using a federal marginal tax rate of 34.00% for 2016 and 2015.

(3) The tax equivalent rate is computed using a federal marginal tax rate of 34.00% for 2016 and 2015.

(4) Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(5) Net interest margin represents net interest income divided by average interest-earning assets.

Provision for loan losses. There was no provision for loan losses for the three months ended March 31, 2016 or 2015.

Noninterest Income. Noninterest income increased 9.46% or $37 thousand for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. The increase was primarily due to the collection of insurance proceeds related to foreclosed properties during the quarter ended March 31, 2016, with no such proceeds during the comparable period in 2015. Service charge income decreased by $3 thousand as a result of lower customer based activities. Rental income increased by $11 thousand to $54 thousand for the three months ended March 31, 2016 when compared to the same period in 2015. The increase in rental income was driven by increased occupancy of the Company’s head quarter’s during the first quarter of 2016 as compared to the same period in 2015. Cash surrender value of life insurance generated $61 thousand and $50 thousand during the first quarter of 2016 and 2015, respectively. The increase was primarily attributable to an additional $300 thousand investment, which occurred during December 2015. The Company realized $6 thousand and $29 thousand in net gains on sales of securities during the first quarter of 2016 and 2015, respectively.

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M&F BANCORP, INC. AND SUBSIDIARY

Noninterest Expense. Noninterest expense represents the costs of operating the Company and the Bank. Management regularly monitors all categories of noninterest expense with the goal of improving productivity and operating performance. Noninterest expense decreased 5.93% to $2.8 million for the three months ended March 31, 2016 from $3.0 million for the three months ended March 31, 2015.

Salaries and employee benefits expenses for the three months ended March 31, 2016 and 2015 were $1.4 million and $1.3 million, respectively. The increase was primarily reflective of increased staffing.

Occupancy expense decreased by $21 thousand during the three months ended March 31, 2016 to $332 thousand from the same period in 2015. The decrease was primarily due to decreased security guard and rental expenses.

Directors’ fees decreased by $11 thousand or 19.30% to $46 thousand during the three months ended March 31, 2016 from $57 thousand in the comparable 2015 period as a result of reduced committee and board meetings achieved through streamlining approval processes.

Marketing expenses increased $30 thousand or 78.95% from $38 thousand in the first quarter of 2015 to $68 thousand for the corresponding 2016 period as a result of new branding initiatives and increased marketing efforts.

Professional fees decreased by $28 thousand or 16.97% from $165 thousand in the first quarter of 2015 to $137 thousand in the corresponding period of 2016 primarily as a result of reductions in the utilization of consultants and outside legal services.

Information technology costs increased by 24.32% or $54 thousand to $276 thousand in the first quarter of 2016 compared to the comparable period in 2015. The increase was primarily related to communication charges related to outsourcing technical services.

FDIC deposit insurance expense decreased from $143 thousand for the three months ended March 31, 2015 to $137 thousand for the three months ended March 31, 2016. The decrease represents lower average deposit balances.

Net OREO expenses decreased $204 thousand from $317 thousand in the first quarter of 2015 to $113 thousand in the corresponding 2016 period. Principally, write-downs during the 2016 period decreased by $153 thousand to $62 thousand compared to $215 thousand during the corresponding 2015 period and net expenses associated with maintaining OREO decreased from $102 thousand during the 2015 period to $51 thousand during 2016, primarily attributable to mold abatement on a property in 2015, net losses on sales of OREO in 2016, and lower OREO expenditures offset by increased rent for OREO properties in 2016.

Delivery expenses increased from $31 thousand for the three months ended March 31, 2015 to $33 thousand for the comparable 2016 period due to increased activities.

Other expenses decreased $42 thousand for the three months ended March 31, 2016 from $315 thousand for the three months ended March 31, 2015. The decrease in other expenses was primarily driven by a $63 thousand decrease in consumer real estate loan related expenses and $22 thousand decrease in impaired loans legal expenses partially offset by increases in other sundry expenses.

Provision for Income Taxes. The Company recorded income tax benefit of $9 thousand and $23 thousand for the three months ended March 31, 2016 and 2015, respectively. The overall effective rate was 10.00% and 11.98% for the three months ended March 31, 2016 and 2015, respectively. The decrease in the effective tax rate during 2016 was largely driven by a reduction in state income tax rates and a decrease in taxable income.

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M&F BANCORP, INC. AND SUBSIDIARY

ASSET QUALITY

ALLL. The provision for loan losses is the amount charged against earnings, to establish an adequate allowance for loan losses. Loan losses and recoveries are charged to or credited to this allowance, rather than reported as a direct expense or recovery. As of March 31, 2016 and December 31, 2015, the allowance for loan losses was $3.4 million, which represented 2.14% and 2.08%, respectively, of total loans outstanding.

Nonperforming assets, defined as loans 90 days and over past due, non-accruing loans and OREO, at March 31, 2016 were 2.36% of total assets compared to 4.94% at December 31, 2015.

Of the non-accruing loans totaling $4.6 million at March 31, 2016, 100.00% of the outstanding balance is secured by real estate, which management believes mitigates the risk of loss. The recorded investment in TDRs in compliance with their modified terms totaled $21.4 million or 88.73% of total recorded investment in TDRs at March 31, 2016. GAAP does not provide specific guidance on when a loan may be returned to accrual status. Federal banking regulators have provided guidance that interest on impaired loans, including TDRs, should only be recorded when there has been a sustained period of repayment performance, the loan is well secured, and collection under any revised terms is assessed as probable. The Company follows this Federal banking regulators guidance.

Loans are generally placed on non-accrual status when the scheduled payments reach 90 days past due. Loans are charged-off, with Board approval, when the Chief Credit Officer and his staff determine that all reasonable means of collection of the outstanding balances, except through foreclosure, have been exhausted. The Company continues its collection efforts subsequent to charge-off, which results in some recoveries each year. See Note 6 to the consolidated financial statements for additional discussion of loans and ALLL.

Past due loans decreased from $3.8 million at December 31, 2015 to $2.7 million at March 31, 2016. Approximately $0.8 million of past due loans represent loans that had matured and were in the process of being renewed at December 31, 2015 compared to none at March 31, 2016. The decrease in past dues reflects management’s efforts to renew matured loans in a timelier manner and address past due loans earlier in the delinquency stage rather than later.

Liquidity and Capital Resources

Liquidity, Interest Rate Sensitivity and Market Risks

The objectives of the Company’s liquidity management policy include providing adequate funds to meet the needs of depositors and borrowers at all times, providing funds to meet the basic needs for on-going operations of the Company, and to meet regulatory requirements. The 42.25% liquidity ratio is the sum of cash, overnight funds, and un-pledged, marketable securities divided by the sum of deposits and short-term borrowings (less the full amount of pledged deposits). Management believes that core deposit activity, $6.4 million in available borrowing capacity from the FHLB of Atlanta at March 31, 2016, and Fed Funds accommodations of $10.0 million will be adequate to meet the short-term and long-term liquidity needs of the Company. The Company had $0.6 million outstanding from the FHLB as of March 31, 2016. The maximum outstanding balance from FHLB at any time during the first three months of 2016 was $0.6 million. The Company periodically draws on its Fed Funds accommodations to test the lines availability.

The Company participates in the Certificate of Deposit Account Registry Service (“CDARS”) program, which enables depositors to receive FDIC insurance coverage for deposits otherwise exceeding the maximum insurable amount. Through the CDARS program, deposits in excess of the maximum insurable amount are placed with multiple participating financial institutions. All of the Bank’s CDARS brokered deposits are reciprocal, relationship-based deposits. There are several large depositors in the CDARS program and the largest continuing depositor has renewed annual $25 million in deposits for several years. There is no guarantee, however, this trend will continue. In management’s opinion, this and other large depositors have stable and long-term relationships with the Bank.

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M&F BANCORP, INC. AND SUBSIDIARY

Capital Resources

The Company and the Bank are subject to various regulatory capital requirements administered by their federal and state banking regulators. Failure to satisfy minimum capital requirements may result in certain mandatory and additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s Consolidated Financial Statements. The Bank is required to obtain the non-objection of its regulators before engaging in any transactions that would materially change the composition of the Bank’s balance sheet. Also, the Bank’s Memorandum of Understanding with its regulators requires the Bank to maintain a tier 1 leverage capital ratio of not less than 8.00%, and a total risk based capital ratio of not less than 10.00%.

In July 2013, the Board of Governors of the Federal Reserve System and the FDIC issued final rules implementing the Basel III regulatory capital framework and related Dodd-Frank Act requirements. The final rules revise minimum capital requirements and adjust prompt corrective action thresholds. The final rules revise the regulatory capital elements, add a new Common Equity Tier 1 capital ratio, and increase the minimum Tier 1 capital ratio requirement. The final rules also permit certain banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income and implement a new capital conservation buffer. The new capital conservation buffer requirement was phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase by that amount each year until fully implemented in January 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that may be utilized for such actions. The final rules took effect for community banks on January 1, 2015, subject to a transition period for certain parts of the rules.

As shown in the accompanying table, the Company and the Bank have capital levels exceeding the minimum levels for “well capitalized” banks and bank holding companies compared to regulatory standards as of March 31, 2016 and December 31, 2015.

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M&F BANCORP, INC. AND SUBSIDIARY

	March 31, 2016

						For Capital
						Adequacy					To Be Well
(Dollars in thousands)	Actual					Purposes					Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk weighted assets)
Company	$	40,040		20.79	%	$	15,407		8.00	%		n/a		n/a
Bank		39,084		20.33			15,379		8.00		$	19,224		10.00	%
Tier 1 (to risk weighted assets)
Company	$	37,617		19.53	%	$	11,555		6.00	%		n/a		n/a
Bank		36,666		19.07			11,534		6.00		$	15,379		8.00	%
Common Equity Tier 1
Company	$	26,126		13.57	%	$	8,666		4.50	%		n/a		n/a
Bank		36,666		19.07			8,651		4.50		$	12,495		6.50	%
Tier 1 (to average total assets)
Company	$	37,617		12.34	%	$	12,192		4.00	%		n/a		n/a
Bank		36,666		12.04			12,183		4.00		$	15,228		5.00	%

	December 31, 2015

						For Capital
						Adequacy					To Be Well
(Dollars in thousands)	Actual					Purposes					Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk weighted assets)
Company	$	40,252		20.39	%	$	15,790		8.00	%		n/a		n/a
Bank		39,629		20.10			15,769		8.00		$	19,712		10.00	%
Tier 1 (to risk weighted assets)
Company	$	37,768		19.13	%	$	11,843		4.00	%		n/a		n/a
Bank		37,149		18.85			11,827		4.00		$	15,769		6.00	%
Common Equity Tier 1
Company	$	26,391		13.37	%	$	8,882		4.00	%		n/a		n/a
Bank		37,149		18.85			8,870		4.00		$	12,812		5.00	%
Tier 1 (to average total assets)
Company	$	37,768		12.55	%	$	12,037		4.00	%		n/a		n/a
Bank		37,149		12.35			12,028		4.00		$	15,035		5.00	%

Item 4 — Controls and Procedures

The Company’s management, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer (its principal executive officer and principal financial officer, respectively), has concluded, based on its evaluation as of the end of the period covered by this report, that the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, (“the Exchange Act”) are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and formats.

There were no changes in internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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M&F BANCORP, INC. AND SUBSIDIARY

PART II

OTHER INFORMATION

Item 1 - Legal Proceedings

From time to time, the Company becomes involved in legal proceedings occurring in the ordinary course of business. Management believes there currently are no pending or threatened proceedings that are reasonably likely to result in a material effect on the Company’s consolidated financial condition or results of operations.

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M&F BANCORP, INC. AND SUBSIDIARY

ITEM 6. EXHIBITS
The following exhibits are filed with or incorporated by reference into this report.

Exhibit No.		Description of Exhibit

Exhibit 3(i)(a)		Amended and Restated Articles of Incorporation of the Company, incorporated by reference to Exhibit 3(i) to the Form 10-QSB for the quarter ended September 30, 1999, filed with the SEC on November 12, 1999.

Exhibit 3(i)(b)		Articles of Amendment, adopted by the Shareholders of the Company on May 3, 2000, filed with the North Carolina Department of the Secretary of State on July 12, 2000, and incorporated by reference to Exhibit 3(v) to the Form 10KSB for the year ended December 31, 2005, filed with the SEC on March 31, 2006.

Exhibit 3(i)(c)		Articles of Amendment, adopted by the Shareholders of the Company on June 9, 2009, filed with the North Carolina Department of the Secretary of State on June 11, 2009, and incorporated by reference to Exhibit 4.1 to the Form 8-K filed with the SEC on June 26, 2009.

Exhibit 3(i)(d)		Articles of Amendment, adopted by the Board of Directors of the Company on June 10, 2009, filed with the North Carolina Department of the Secretary of State on June 25, 2009, and incorporated by reference to Exhibit 4.2 to the Form 8-K filed with the SEC on June 26, 2009.

Exhibit 3(i)(e)		Articles of Amendment, adopted by the Board of Directors of the Company on July 27, 2010, filed with the North Carolina Department of the Secretary of State on August 20, 2010, and incorporated by reference to Exhibit 4.1 to the Form 8-K Filed with the SEC on August 23, 2010.

Exhibit 3(i)(f)		Articles of Amendment, adopted by the Board of Directors of the Company and filed with the North Carolina Department of the Secretary of State on September 23, 2014, incorporated by reference to Exhibit 3.1 to the Form 8-K filed with the SEC on September 23, 2014.

Exhibit 3(ii)		Amended and Restated Bylaws of the Company, dated November 12, 2014, incorporated by reference to Exhibit 3(ii) to the Form 10-Q for the quarter ended September 30, 2014, filed with the SEC on November 12, 2014.

Exhibit 4(i)		Specimen Stock Certificate, incorporated by reference to Exhibit 4 to the Form 10-KSB for the year ended December 31, 2000, filed with the SEC on April 2, 2001.

Exhibit 4(ii)		Form of Certificate for the Fixed Rate Cumulative Perpetual Preferred Stock, Series B, incorporated by reference to Exhibit 4.2 to the Form 8-K filed with the SEC on August 23, 2010.

Exhibit 4(iii)		Rights Agreement, dated as of September 23, 2014, between the Company and American Stock Transfer & Trust Company, LLC, as Rights Agent, incorporated by reference to Exhibit 4.1 to the Form 8-K filed with the SEC on September 23, 2014.

Exhibit 10(i)		Letter Agreement and certain side letters, all dated August 20, 2010, between the Company and the United States Department of the Treasury, with respect to the issuance and sale of the Fixed Rate Cumulative Perpetual Preferred Stock, Series B, incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on August 23, 2010.

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M&F BANCORP, INC. AND SUBSIDIARY


Exhibit 10(ii)*		Employment Agreement, dated August 11, 2014, among the Company, the Bank and James H. Sills III, incorporated by reference to Exhibit 99.1 to the Form 8-K filed with the SEC on August 14, 2014.
Exhibit 31(i)		Certification of James H. Sills III.

Exhibit 31(ii)		Certification of Randall C. Hall.

Exhibit 32		Certification pursuant to 18 U.S.C. Section 1350.
Exhibit 101		Financial information submitted in XBRL format.

* Management contracts and compensatory arrangements.

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M&F BANCORP, INC. AND SUBSIDIARY

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	M&F Bancorp, Inc.

Date: May 11, 2016	By:	/s/ James H. Sills III
		James H. Sills III
		President, Chief Executive Officer

	By:	/s/ Randall C. Hall
		Randall C. Hall
		Chief Financial Officer

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M&F BANCORP, INC. AND SUBSIDIARY

Index to Exhibits

Exhibit No.		Description of Exhibit

Exhibit 31(i)		Certification of James H. Sills III.

Exhibit 31(ii)		Certification of Randall C. Hall.

Exhibit 32		Certification pursuant to 18 U.S.C. Section 1350.

Exhibit 101		Financial information submitted in XBRL format.