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, 2013

Commission file number 000-027307

(Exact name of registrant as specified in charter)

North Carolina (State or Other Jurisdiction of Incorporation or Organization)	56-1980549 (I.R.S. Employer Identification No.)
2634 Durham Chapel Hill Blvd. Durham, North Carolina (Address of Principal Executive Offices)	27707-2800 (Zip Code)

(919) 687-7800

(Registrant’s Telephone Number, Including Area Code)

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

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

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

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

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

Yes  £  No  x

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

As of May, 14, 2013, there were 2,031,337 shares outstanding of the issuer's common stock, no par value.

INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012	3
Consolidated Statements of Income for the three months ended March 31, 2013 and 2012	4
Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2013 and 2012	5
Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2013 and 2012	6
Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012	7
Notes to Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 4. Controls and Procedures	43
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	44
Item 6. Exhibits	45
SIGNATURES	46

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M&F BANCORP, INC. AND SUBSIDIARY

PART I

FINANCIAL INFORMATION

Item 1 - Financial Statements

CONSOLIDATED BALANCE SHEETS
	March 31,			December 31,
(Dollars in thousands)	2013			2012
	(Unaudited)
ASSETS
Cash and cash equivalents	$	12,320		$	42,586
Investment securities available for sale, at fair value		60,401			60,811
Other invested assets		389			488
Loans, net of unearned income and deferred fees		179,635			175,222
Allowances for loan losses		(3,501	)		(3,499	)
Loans, net		176,134			171,723
Interest receivable		847			858
Bank premises and equipment, net		4,584			4,683
Cash surrender value of bank-owned life insurance		6,028			5,978
Other real estate owned		3,055			3,055
Deferred tax assets and taxes receivable, net		4,319			4,387
Other assets		1,534			1,530
TOTAL ASSETS	$	269,611		$	296,099
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Interest-bearing deposits	$	181,711		$	205,921
Noninterest-bearing deposits		44,988			44,958
Total deposits		226,699			250,879
Other borrowings		907			2,937
Other liabilities		5,843			6,004
Total liabilities		233,449			259,820
COMMITMENTS AND CONTINGENCIES
Stockholders' equity:
Series B Preferred Stock-  $1,000 liquidation value per share, 11,735 shares issued and outstanding as of March 31, 2013 and December 31, 2012		11,725			11,725
Common stock, no par value 10,000,000 shares authorized as of March 31, 2013 and December 31, 2012; 2,031,337 shares issued and outstanding as of March 31, 2013 and December 31, 2012		8,732			8,732
Retained earnings		17,181			17,230
Accumulated other comprehensive loss		(1,476	)		(1,408	)
Total stockholders' equity		36,162			36,279
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	269,611		$	296,099

See notes to consolidated financial statements.

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M&F BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
	For the Three Months Ended
	March 31,
(Dollars in thousands except for share and per share data)	2013			2012
(Unaudited)
Interest income:
Loans, including fees	$	2,454		$	2,592
Investment securities, including dividends
Taxable		180			209
Tax-exempt		9			40
Other		24			39
Total interest income		2,667			2,880
Interest expense:
Deposits		189			252
Borrowings		22			22
Total interest expense		211			274
Net interest income		2,456			2,606
Less provision for loan losses		—			—
Net interest income after provision for loan losses		2,456			2,606
Noninterest income:
Service charges		297			330
Rental income		95			89
Cash surrender value of life insurance		50			50
Realized gain on sale of securities		—			54
Realized gain on sale of other real estate owned		2			1
Other income		1			2
Total noninterest income		445			526
Noninterest expense:
Salaries and employee benefits		1,466			1,488
Occupancy and equipment		375			357
Directors fees		83			70
Marketing		42			36
Professional fees		281			220
Information technology		213			223
FDIC deposit insurance		102			135
OREO expense, net		35			101
Delivery expenses		39			53
Other		251			296
Total noninterest expense		2,887			2,979
Income before income taxes		14			153
Income tax expense		4			12
Net income		10			141
Less preferred stock dividends and accretion		(59	)		(59	)
Net income (loss) available to common stockholders	$	(49	)	$	82
Basic and diluted earnings (loss) per share of common stock:	$	(0.02	)	$	0.04
Weighted average shares of common stock outstanding:
Basic and diluted		2,031,337			2,031,337

See notes to consolidated financial statements.

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M&F BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
	For the Three Months Ended
(Dollars in thousands)	March 31,
(Unaudited)	2013			2012
Net income	$	10		$	141
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available for sale		(76	)		50
Tax effect		8			(1	)
Unrealized holding gains (losses) on securities available for sale, net of tax		(68	)		49
Reclassification adjustments for realized gains		—			(54	)
Tax effect		—			(1	)
Reclassification adjustments for realized gains, net of tax		—			(55	)
Other comprehensive loss, net of taxes		(68	)		(6	)
Comprehensive income  (loss)	$	(58	)	$	135

See notes to consolidated financial statements.

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M&F BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended March 31, 2013 and 2012
										Accumulated
	Number									Other
(Dollars in thousands except for share data)	of		Common		Preferred		Retained			Comprehensive
(Unaudited)	Shares		Stock		Stock		Earnings			Loss			Total
Balances as of December 31, 2011		2,031,337	$	8,732	$	11,724	$	17,380		$	(1,439	)	$	36,397
Net income								141						141
Other comprehensive loss, net of tax											(6	)		(6	)
Dividends declared on preferred stock								(59	)					(59	)
Balances as of March 31, 2012		2,031,337	$	8,732	$	11,724	$	17,462		$	(1,445	)	$	36,473
Balances as of December 31, 2012		2,031,337	$	8,732	$	11,725	$	17,230		$	(1,408	)	$	36,279
Net income								10						10
Other comprehensive loss, net of tax											(68	)		(68	)
Dividends declared on preferred stock								(59	)					(59	)
Balances as of March 31, 2013		2,031,337	$	8,732	$	11,725	$	17,181		$	(1,476	)	$	36,162

See notes to consolidated financial statements.

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M&F BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
	Three Months Ended
	March 31,
(Dollars in thousands)	2013			2012
(Unaudited)
Cash flows from operating activities:
Net income	$	10		$	141
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization		88			94
Amortization of discounts/premiums on investments, net		310			19
Loan purchase accounting amortization, net		43			43
Deferred loan origination fees and costs, net		30			42
Gains on sale of available for sale securities		—			(54	)
Increase in cash surrender value of bank owned life insurance		(50	)		(50	)
Changes in:
Accrued interest receivable and other assets		82			(1,253	)
Other liabilities		(161	)		(335	)
Net cash provided by (used in) operating activities		352			(1,353	)
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales		—			2,069
Maturities, prepayments and calls		—			375
Principal collections		4,162			1,596
Purchases		(4,137	)		(8,897	)
FHLB stock stock redemptions		99			—
Net (increase) decrease in loans		(6,494	)		9,075
Purchases of bank premises and equipment		(28	)		(58	)
Proceeds from sale of real estate owned		—			99
Net cash (used in) provided by investing activities		(6,398	)		4,259
Cash flows from financing activities:
Net decrease in deposits		(24,141	)		(6,503	)
Proceeds from other borrowings		31			201
Repayments of other borrowings		(51	)		(235	)
Cash dividends		(59	)		(59	)
Net cash used in financing activities		(24,220	)		(6,596	)
Net decrease in cash and cash equivalents		(30,266	)		(3,690	)
Cash and cash equivalents as of the beginning of the period		42,586			61,296
Cash and cash equivalents as of the end of the period	$	12,320		$	57,606
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest	$	259		$	324
Taxes	$	—		$	—
Noncash Transactions:
Net unrealized gain (loss) on investment securities available for sale, net of deferred income tax	$	(68	)	$	(6	)
Transfer of participation loans sold from other borrowings to loans	$	2,010		$	—

See notes to consolidated financial statements.

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

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

Basis of Presentation

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

The Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial statements and in accordance with the instructions for Form 10-Q and Rule 8-03 of Regulation S-X. The accompanying Consolidated Financial Statements and Notes are unaudited except for the balance sheet and footnote information as of December 31, 2012, which were derived from the Company’s audited consolidated Annual Report on Form 10-K as of and for the year ended December 31, 2012.

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, 2012.

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.

NewAccountingPronouncements–

The Financial Accounting Standards Board (“FASB”) amended the Comprehensive Income topic of the Accounting Standards Codification (“ASC”) in February 2013. The amendments address reporting of amounts reclassified out of accumulated other comprehensive income. Specifically, the amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments do require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, in certain circumstances an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The amendments are effective for the Company on a prospective basis for reporting periods beginning after December 15, 2012. The adoption of these amendments did not have a material effect on the consolidated financial statements of the Company, although new disclosure are included in these 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.

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

2. INVESTMENT SECURITIES

The main objectives of our investment strategy are to provide a source of liquidity while managing our interest rate risk, and to generate an adequate level of interest income without taking undue risks. Our investment policy permits investments in various types of securities, certificates of deposits and federal funds sold in compliance with various restrictions in the policy. As of March 31, 2013 and December 31, 2012, all investment securities were classified as available-for-sale.

Our available-for-sale securities totaled $60.4 million and $60.8 million as of March 31, 2013 and December 31, 2012, respectively. Securities with a fair value of $1.1 million were pledged to the Federal Reserve Bank of Richmond (“Federal Reserve”) and an additional $4.5 million and $13.1 million in investments were pledged to public housing authorities in North Carolina and the North Carolina Department of State Treasurer as collateral for public deposits at March 31, 2013. Securities with a fair value of $1.1 million were pledged to the Federal Reserve and an additional $4.9 million and $2.6 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, 2012. Our investment portfolio consists of the following securities:

· U.S. government agency securities ,

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

· Municipal securities (“Municipals”)

The amortized cost, gross unrealized gains and losses and fair values of investment securities at March 31, 2013 and December 31, 2012 were:

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
(Unaudited)
March 31, 2013
US government agencies	$	2,000	$	1	$	(6	)	$	1,995
Government sponsored MBS
Residential		56,324		589		(50	)		56,863
Municipal securities
North Carolina		1,494		49		—			1,543
Total at March 31, 2013	$	59,818	$	639	$	(56	)	$	60,401
December 31, 2012
US government agencies	$	1,322	$	5		—		$	1,327
Government sponsored MBS
Residential		57,333		627		(29	)		57,931
Municipal securities
North Carolina		1,497		56		—			1,553
Total at December 31, 2012	$	60,152	$	688	$	(29	)	$	60,811

Sales and calls of securities available-for-sale for the three months ended March 31, resulted in aggregate gross realized gains of $54 thousand during 2012 compared to none during 2013. During the same three-month periods, the Company realized no gross losses.

The amortized cost and estimated market values of securities as of March 31, 2013 and December 31, 2012 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 earlier because of principal prepayments.

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

(Dollars in thousands)	As of March 31, 2013
(Unaudited)	Fair Value		Amortized Cost
US government agencies
Due after five years through ten years	$	1,995	$	2,000
Total US government agencies	$	1,995	$	2,000
Government sponsored MBS
Residential
Due within one year	$	13,592	$	13,443
Due after one year through five years		26,384		26,133
Due after five years through ten years		10,282		10,204
Due after ten years		6,605		6,544
Total government sponsored MBS	$	56,863	$	56,324
Municipal bonds
North Carolina
Due after one year through five years	$	936	$	890
Due after five years through ten years		607		604
Total North Carolina municipal bonds	$	1,543	$	1,494

(Dollars in thousands)	As of December 31, 2012
	Fair Value		Amortized Cost
US government agencies
Due within one year	$	1,005	$	1,000
Due after one year through five years		322		322
Total US government agencies	$	1,327	$	1,322
Government sponsored MBS
Residential
Due after one year through five years	$	135	$	126
Due after five years through ten years		171		161
Due after ten years		57,625		57,046
Total government sponsored MBS	$	57,931	$	57,333
Municipal bonds
North Carolina
Due within one year	$	488	$	466
Due after one year through five years		458		425
Due after five years through ten years		607		606
Total North Carolina municipal bonds	$	1,553	$	1,497

All securities owned as of March 31, 2013 and December 31, 2012 are investment grade. The unrealized losses were attributable to changes in market interest rates. The Company evaluates securities for other than temporary impairment on a quarterly basis. Consideration is given to the financial condition and near-term prospects of the issuer, the length of time and extent to which the fair value has been less than cost, and our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Based on these evaluations, the Company did not deem any securities to be impaired during 2012 or the first three months of 2013.

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

As of March 31, 2013 and December 31, 2012, the Company held 14 and 11 investment positions, respectively, with unrealized losses of $56 thousand and $29 thousand, respectively. These investments were in U.S. government and Government sponsored MBS. 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 will not likely be required to sell.

As of March 31, 2013 and December 31, 2012, the fair value of securities with gross unrealized losses by length of time that the individual securities have been in an unrealized loss position is as follows:

(Dollars in thousands)	Less Than 12 Months					12 Months or Greater				Total
(Unaudited)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2013
US government agencies	$	—	$	—		$	21	$	—	$	21	$	—
Government sponsored MBS
Residential		11,113		(56	)		—		—		11,113		(56	)
Total at March 31, 2013	$	11,113	$	(56	)	$	21	$	—	$	11,134	$	(56	)

(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, 2012
Government sponsored MBS
Residential	$	8,027	$	(29	)	$	21	$	—	$	8,048	$	(29	)
Total at December 31, 2012	$	8,027	$	(29	)	$	21	$	—	$	8,048	$	(29	)

The Company has stock in the Federal Home Loan Bank of Atlanta ("FHLB"), classified on the Consolidated Balance Sheets as Other invested assets, which is evaluated on a quarterly basis for other-than-temporary impairment. The FHLB has been issuing dividends and repurchasing excess stock on a pro-rata basis for several quarters. The Company believes that the investment in FHLB is not impaired.

3. FHLB STOCK

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 0.15% of its total assets as of December 31 of the prior year (up to a maximum of $20.0 million and $26.0 at March 31, 2013 and December 31, 2012, respectively), plus 4.5% of its outstanding FHLB advances. The carrying value of FHLB stock, which is included in Other invested assets, as of March 31, 2013 and December 31, 2012 was $0.4 million and $0.5 million, respectively. No ready market exists for the FHLB stock, and it has no quoted market value; however, management believes that the cost approximates the market value as of March 31, 2013 and December 31, 2012. The FHLB, of which the Bank is a member, has been impacted by the Recession that began in 2008. Management has reviewed its investment in FHLB stock for impairment and does not believe it is impaired as of March 31, 2013 or December 31, 2012.

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

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

5. ACCUMULATED OTHER COMPREHENSIVE INCOME

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

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

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended March 31, 2013 and 2012
	Unrealized Gains and Losses on Available-for- Sale Securities			Defined Benefit Pension Items			Total
Balance as of December 31, 2012	$	426		$	(1,834	)	$	(1,408	)
Other comprehensive loss before reclassifications		(68	)		—			(68	)
Amounts reclassified from acumulated other comprehensive income		—			—			—
Net current-period other comprehensive loss		(68	)		—			(68	)
Balance as of March 31, 2013	$	358		$	(1,834	)	$	(1,476	)
All amounts are net of tax.

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

6. LOANS AND ALLOWANCE FOR LOAN LOSSES

The activity in the ALLL for the first three months of 2013 and 2012 and related asset balances at March 31, 2013 and December 31, 2012 is summarized as follows:

	March 31, 2013
						Faith-
						Based		Residential
				Commercial		Non-		Real						Other
(Dollars in thousands)	Commercial			Real Estate		Profit		Estate			Consumer			Loans			Unallocated			Total
ALLL:
Beginning of year balance	$	90		$	881	$	1,246	$	937		$	30		$	54		$	261		$	3,499
Charge-offs		—			—		—		—			(7	)		—			—			(7	)
Recoveries		—			—		—		4			5			—			—			9
Provision for loan losses		(14	)		311		32		(90	)		(1	)		(6	)		(232	)		—
Balance at March 31, 2013	$	76		$	1,192	$	1,278	$	851		$	27		$	48		$	29		$	3,501

	March 31, 2012
							Faith-
							Based			Residential
				Commercial			Non-			Real						Other
(Dollars in thousands)	Commercial			Real Estate			Profit			Estate			Consumer			Loans		Unallocated		Total
ALLL:
Beginning of the balance	$	348		$	971		$	1,128		$	1,299		$	62		$	42	$	—	$	3,850
Charge-offs		—			(56	)		—			(98	)		(12	)		—		—		(166	)
Recoveries		—			4			1			4			4			—		—		13
Provision for loan losses		(284	)		133			(21	)		102			(8	)		10		68		—
Balance at March 31, 2012	$	64		$	1,052		$	1,108		$	1,307		$	46		$	52	$	68	$	3,697

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

	March 31, 2013
					Faith
					Based
			Commercial		Non-		Residential				Other
(Dollars in thousands)	Commercial		Real Estate		Profit		Real Estate		Consumer		Loans		Unallocated		Total
ALLL:
Ending ALLL balance attributable to loans:
Individually evaluated for impairment	$	—	$	209	$	27	$	288	$	—	$	—	$	—	$	524
Collectively evaluated for impairment		76		983		1,251		563		27		48		29		2,977
Total ending ALLL balance	$	76	$	1,192	$	1,278	$	851	$	27	$	48	$	29	$	3,501
Loans:
Loans individually evaluated for impairment	$	—	$	7,406	$	14,761	$	4,316	$	14	$	—	$	—	$	26,497
Loans collectively evaluated for impairment		2,382		46,631		71,317		28,937		1,218		2,653		—		153,138
Total ending loans balance	$	2,382	$	54,037	$	86,078	$	33,253	$	1,232	$	2,653	$	—	$	179,635

	December 31, 2012
					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	$	—	$	87	$	44	$	349	$	—	$	—	$	—	$	480
Collectively evaluated for impairment		90		794		1,202		588		30		54		261		3,019
Total ending ALLL balance	$	90	$	881	$	1,246	$	937	$	30	$	54	$	261	$	3,499
Loans:
Loans individually evaluated for impairment	$	—	$	4,837	$	14,907	$	2,443	$	16	$	—	$	—	$	22,203
Loans collectively evaluated for impairment		3,282		43,332		70,990		31,331		1,330		2,754		—		153,019
Total ending loans balance	$	3,282	$	48,169	$	85,897	$	33,774	$	1,346	$	2,754	$	—	$	175,222

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

The Bank experienced $2 thousand in net loan recoveries for the three months ended March 31, 2013 compared to $153 thousand in net loan charge-offs for the three months ended March 31, 2012. Annualized net charge-offs/(recoveries) as a percent of average loan balances outstanding totaled 0.00% and 0.35% during the three month periods ended March 31, 2013 and 2012, respectively, and 0.27% for the year ended December 31, 2012.

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, 2013 and December 31, 2012 was as follows:

(Dollars in thousands)	March 31, 2013			December 31, 2012
Commercial	$	2,382		$	3,282
Commercial real estate:
Construction		3,602			3,621
Owner occupied		17,759			18,377
Other		32,676			26,171
Faith-based non-profit
Construction		—			2,344
Owner Occupied		78,849			76,418
Other		7,229			7,135
Residential real estate:
First mortgage		24,274			24,702
Multifamily		5,750			5,828
Home equity		3,229			3,161
Construction		—			83
Consumer		1,232			1,346
Other loans		2,653			2,754
Loans, net of deferred fees		179,635			175,222
ALLL		(3,501	)		(3,499	)
Loans, net of ALLL	$	176,134		$	171,723

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, 2013, the percentage of loans in this niche, which included construction, real estate secured, and lines of credit, comprised approximately 47.92% of the total loan portfolio and the reserve for these loans was 36.50% of the total allowance. Historically the Bank has experienced low levels of loan losses in this niche; however, repayment of these loans is generally dependent on voluntary contributions which some have been adversely affected by the current economic downturn.

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

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

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

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

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

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

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

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

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

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

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

The following tables show past due loans and loans past due 90 days or more and still accruing for the quarters ended March 31, 2013 and December 31, 2012:

March 31, 2013					90 Days
	30-59 Days		60-89 Days		Or More		Total Past
(Dollars in thousands)	Past Due		Past Due		Past Due		Due		Current		Total
Commercial	$	88	$	5	$	—	$	93	$	2,289	$	2,382
Commercial real estate:
Construction		—		—		—		—		3,602		3,602
Owner occupied		—		2,588		1,317		3,905		13,854		17,759
Other		41		—		48		89		32,587		32,676
Faith-based non-profit
Construction		—		—		—		—		—		—
Owner Occupied		378		—		1,872		2,250		76,599		78,849
Other		—		—		—		—		7,229		7,229
Residential real estate:
First mortgage		1,960		739		808		3,507		20,767		24,274
Multifamily		—		—		—		—		5,750		5,750
Home equity		128		101		69		298		2,931		3,229
Construction		—		—		—		—		—		—
Consumer		6		—		—		6		1,226		1,232
Other loans		—		—		—		—		2,653		2,653
Total	$	2,601	$	3,433	$	4,114	$	10,148	$	169,487	$	179,635

December 31, 2012					Greater than
	30-59 Days		60-89 Days		90 Days Past		Total Past
(Dollars in thousands)	Past Due		Past Due		Due		Due		Current		Total
Commercial	$	—	$	353	$	—	$	353	$	2,929	$	3,282
Commercial real estate:
Construction		—		—		—		—		3,621		3,621
Owner occupied		—		—		263		263		18,114		18,377
Other		1,570		856		400		2,826		23,345		26,171
Faith-based non-profit
Construction		—		—		—		—		2,344		2,344
Owner Occupied		1,845		—		661		2,506		73,912		76,418
Other		—		—		—		—		7,135		7,135
Residential real estate:
First mortgage		787		548		2,812		4,147		20,555		24,702
Multifamily		—		—		—		—		5,828		5,828
Home equity		122		120		108		350		2,811		3,161
Construction		—		—		—		—		83		83
Consumer		8		9		—		17		1,329		1,346
Other loans		—		—		—		—		2,754		2,754
Total	$	4,332	$	1,886	$	4,244	$	10,462	$	164,760	$	175,222

At March 31, 2013 and December 31, 2012, the total recorded investment in impaired loans amounted to $26.5 million and $24.1 million, respectively. Of these impaired loans, $8.6 million and $8.7 million were on non-accrual at March 31, 2013 and December 31, 2012, respectively.

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

The recorded investment and related information for impaired loans is summarized as follows for March 31, 2013 and December 31, 2012:

	March 31, 2013
	At end of period						For Period Ended
	Unpaid						Interest		Average
	Principal		Recorded		ALLL		Income		Recorded
(Dollars in thousands)	Balance		Investment		Allocated		Recognized		Investment
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	295
Commercial real estate:
Construction		366		366		—		7		279
Owner occupied		524		524		—		8		581
Other		6,279		6,279		—		59		4,742
Faith based non-profit:
Construction		—		—		—		—		—
Owner occupied		14,336		14,336		—		142		10,193
Other		—		—		—		—		—
Residential real estate:
First mortgage		3,094		3,060		—		7		1,258
Multifamily		—		—		—		—		—
Home equity		103		103		—		—		92
Construction		—		—		—		—		—
Consumer		14		14		—		—		4
Impaired loans with no allowance recorded	$	24,716	$	24,682	$	—	$	223	$	17,444
With an allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction		—		—		—		—		—
Owner occupied		237		237		209		5		59
Other		—		—		—		—		501
Faith based non-profit:
Construction		—		—		—		—		—
Owner occupied		425		425		27		7		214
Other		—		—		—		—		—
Residential real estate:
First mortgage		1,153		1,153		288		—		660
Multifamily		—		—		—		—		—
Home equity		—		—		—		—		—
Construction		—		—		—		—		—
Consumer		—		—		—		—		—
Impaired loans with allowance recorded	$	1,815	$	1,815	$	524	$	12	$	1,434
Impaired loans	$	26,531	$	26,497	$	524	$	235	$	18,878

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

	March 31, 2012
	At end of period						For Period Ended
	Unpaid						Interest		Average
	Principal		Recorded		ALLL		Income		Recorded
(Dollars in thousands)	Balance		Investment		Allocated		Recognized		Investment
With no related allowance recorded:
Commercial	$	1,567	$	590	$	—	$	—	$	590
Commercial real estate:
Construction		618		618		—		—		623
Owner occupied		728		728		—		11		973
Other		5,114		5,114		—		31		4,492
Faith based non-profit:
Construction		—		—		—		—		—
Owner occupied		10,293		10,287		—		103		11,597
Other		—		—		—		—		—
Residential real estate:
First mortgage		610		600		—		1		761
Multifamily		—		—		—		—		—
Home equity		—		—		—		—		—
Construction		—		—		—		—		—
Consumer		—		—		—		—		—
Impaired loans with no allowance recorded	$	18,930	$	17,937	$	—	$	146	$	19,036
With an allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction		377		377		14		10		378
Owner occupied		241		242		102		5		469
Other		416		416		76		8		228
Faith based non-profit:
Construction		—		—		—		—		—
Owner occupied		904		904		50		17		907
Other		—		—		—		—		—
Residential real estate:
First mortgage		33		33		4		—		415
Multifamily		—		—		—		—		—
Home equity		—		—		—		—		231
Construction		—		—		—		—		—
Consumer		—		—		—		—		1
Impaired loans with allowance recorded	$	1,971	$	1,972	$	246	$	40	$	2,629
Impaired loans	$	20,901	$	19,909	$	246	$	186	$	21,665

19

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

	December 31, 2012
	At end of period						For Period Ended
	Unpaid						Interest		Average
	Principal		Recorded		ALLL		Income		Recorded
(Dollars in thousands)	Balance		Investment		Allocated		Recognized		Investment
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	295
Commercial real estate:
Construction		371		371		—		31		300
Owner occupied		530		530		—		38		635
Other		4,312		3,698		—		129		4,473
Faith based non-profit:
Construction		—		—		—		—		—
Owner occupied		14,479		14,479		—		567		12,261
Other		—		—		—		—		1,611
Residential real estate:
First mortgage		814		814		—		19		2,671
Multifamily		—		—		—		—		—
Home equity		86		86		—		3		111
Construction		—		—		—		—		—
Consumer		16		16		—		—		4
Impaired loans with no allowance recorded	$	20,608	$	19,994	$	—	$	787	$	22,361
With an allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction		—		—		—		—		—
Owner occupied		238		238		87		15		60
Other		—		—		—		—		500
Faith based non-profit:
Construction		—		—		—		—		214
Owner occupied		428		428		44		30		—
Other		—		—		—		—		—
Residential real estate:
First mortgage		1,543		1,543		349		45		757
Multifamily		—		—		—		—		—
Home equity		—		—		—		—		—
Construction		—		—		—		—		—
Consumer		—		—		—		—		—
Impaired loans with allowance recorded	$	2,209	$	2,209	$	480	$	90	$	1,531
Impaired loans	$	22,817	$	22,203	$	480	$	877	$	23,892

Impaired loans not included in the above December 31, 2012 table are recorded investments of $1.9 million in homogeneous first mortgage residential real estate loans, which are collectively measured for impairment. Total impaired loans were $24.1 million as of December 31, 2012.

The recorded investment in TDRs, which are included in total impaired loans, was $21.1 million $20.0 million and $20.2 million at March 31, 2013, March 31, 2012 and December 31, 2012, respectively.

20

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

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

Allowances for Loan Losses - 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 ("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 Securities Exchange Commission (“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 updated quarterly and eight-quarter rolling data. The quantitative loss history is based on an eight-quarter rolling history of losses incurred by different loan types within the loan portfolio.

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.

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

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.

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 eight quarter rolling 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 $29.8 thousand and $54.4 thousand for March 31, 2013 and December 31, 2012, respectively, are reflected in other liabilities on the Consolidated Balance Sheets.

The following table presents the recorded investment in non-accrual loans and loans past due over 90 days still on accrual by class of loans as of March 31, 2013 and December 31, 2012, respectively:

					Loans Past
					Due Over
					90 Days
March 31, 2013					Still
(Dollars in thousands)	Non-accrual		Number		Accruing		Number
Commercial	$	—		—	$	—		—
Commercial real estate:
Construction		—		—		—		—
Owner occupied		34		1		1,283		4
Other		47		1		—		—
Faith-based non-profit
Construction		—		—		—		—
Owner Occupied		5,150		3		1,872		3
Other		—		—		—		—
Residential real estate:
First mortgage		3,378		43		428		6
Multifamily		—		—		—		—
Home equity		34		4		53		2
Construction		—		—		—		—
Consumer		14		3		—		—
Other loans		—		—		—		—
Total	$	8,657		55	$	3,636		15

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

					Loans Past
					Due Over
					90 Days
December 31, 2012					Still
(Dollars in thousands)	Non-accrual		Number		Accruing		Number
Commercial	$	—		—	$	—		—
Commercial real estate:
Construction		—		—		—		—
Owner occupied		39		1		224		4
Other		49		1		351		1
Faith-based non-profit
Construction		—		—		—		—
Owner Occupied		5,241		4		661		3
Other		—		—		—		—
Residential real estate:
First mortgage		3,384		44		357		6
Multifamily		—		—		—		—
Home equity		3		1		101		1
Construction		—		—		—		—
Consumer		16		2		—		—
Other loans		—		—		—		—
Total	$	8,732		53	$	1,694		15

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.

Unrecognized income on non-accrual loans at March 31, 2013 and December 31, 2012 was $1.2 million.

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.

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

· 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.

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

The following is a breakdown of loans by risk categories at March 31, 2013 and December 31, 2012:

March 31, 2013
(Dollars in thousands)	Pass		Special Mention		Substandard		Doubful		Total
Commercial	$	2,374	$	—	$	8	$	—	$	2,382
Commercial real estate:
Construction		3,050		—		552		—		3,602
Owner occupied		12,694		3,239		1,826		—		17,759
Other		28,140		947		3,589		—		32,676
Faith-based non-profit
Construction		—		—		—		—		—
Owner Occupied		61,342		5,427		12,080		—		78,849
Other		7,153		76		—		—		7,229
Residential real estate:
First mortgage		18,333		2,022		3,919		—		24,274
Multifamily		5,648		39		63		—		5,750
Home equity		2,899		—		330		—		3,229
Construction		—		—		—		—		—
Consumer		1,213		—		19		—		1,232
Other loans		2,653		—		—		—		2,653
Total	$	145,499	$	11,750	$	22,386	$	—	$	179,635

December 31, 2012
(Dollars in thousands)	Pass		Special Mention		Substandard		Doubful		Total
Commercial	$	3,274	$	—	$	8	$	—	$	3,282
Commercial real estate:
Construction		3,065		—		556		—		3,621
Owner occupied		13,379		3,151		1,847		—		18,377
Other		21,582		966		3,623		—		26,171
Faith-based non-profit
Construction		2,344		—		—		—		2,344
Owner Occupied		58,732		5,313		12,373		—		76,418
Other		7,059		76		—		—		7,135
Residential real estate:
First mortgage		19,465		1,731		3,506		—		24,702
Multifamily		5,702		63		63		—		5,828
Home equity		2,853		—		308		—		3,161
Construction		83		—		—		—		83
Consumer		1,323		2		21		—		1,346
Other loans		2,754		—		—		—		2,754
Total	$	141,615	$	11,302	$	22,305	$	—	$	175,222

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 modifiedas 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. Since the economic crisis began in 2008, 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 meeting their obligations to repay the debt to the Company.

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

The following tables present TDRs as of March 31, 2013 and December 31, 2012.

	Troubled Debt Restructurings
	March 31, 2013
					Non-accrual				Total
	Accrual Status				Stauts				Modifications
(Dollars in thousands)	Number		Amount		Number		Amount		Number		Amount
Commercial real estate:
Construction		2	$	366		—	$	—		2	$	366
Owner occupied		4		727		—		—		4		727
Other		5		4,660		—		—		5		4,660
Faith-based non-profit:
Owner occpied		17		9,612		3		5,150		20		14,762
Residential real estate:
First mortgage		2		284		4		299		6		583
		30	$	15,649		7	$	5,449		37	$	21,098

	Troubled Debt Restructurings
	December 31, 2012
					Non-accrual				Total
	Accrual Status				Stauts				Modifications
(Dollars in thousands)	Number		Amount		Number		Amount		Number		Amount
Commercial real estate:
Construction		2	$	371		—	$	—		2	$	371
Owner occupied		4		730		—		—		4		730
Other		5		3,648		—		—		5		3,648
Faith-based non-profit:
Owner occpied		17		9,666		4		5,241		21		14,907
Residential real estate:
First mortgage		2		285		4		309		6		594
		30	$	14,700		8	$	5,550		38	$	20,250

No loans were restructured during the three months ended March 31, 2013. Loans totaling $3.2 million were restructured during the 12 months ended March 31, 2013. All loans restructured during that period were paying as restructured as of March 31, 2013. During the three months ended March 31, 2012, two loans were restructured totaling $1.4 million. One loan with a balance of $169 thousand, that was restructured during the previous 12 months, defaulted. The Company defines default as the loan becoming more than 90 days past due, foreclosured upon or charged-off. Of the loans restructure during the 15 months ended March 31, 2012, $8.0 million were paying as restructured as of March 31, 2012.

The following table shows loans newly restructured during the three months ended March 31, 2012. There were no restructures during the three months ended March 31, 2013.

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

	For the Three Months Ended
	March 31, 2012
			Pre-modification Outstanding		Post-Modification Oustanding
(Dollars in thousands)	Number of loans		Recorded Investment		Recorded Investment
Extended payment terms
Commercial real estate:
Owner occupied		1		82		82
Other		1		1,354		1,359
		2	$	1,436	$	1,441

The following table presents 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, 2013 and 2012.

	March 31, 2013				March 31, 2012
	Foreclosure/Default				Foreclosure/Default
	Number of		Recorded		Number of		Recorded
(Dollars in thousands)	Loans		Investment		Loans		Investment
Below market interest rate		—	$	—		1	$	169
Extended payment terms		—				—
Total		—	$	—		1	$	169

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 is generally determined by the present value of future cash flows, collateral value, or liquidation value. Defaults generally reduce the present value of the future cash flows and can negatively influence the collateral values if the declining real estate values are affecting the sale of collateral.

7. OTHER REAL ESTATE OWNED (“OREO”)

At the time of foreclosure, real estate is recorded at fair market value based on appraised value less estimated costs to sell, such as realtor, legal and recording fees and expenses. Subsequent to foreclosure, properties are appraised annually and adjusted to the lower of carrying amount or fair market value less estimated costs to sell. At March 31, 2013 and December 31, 2012, OREO totaled $3.1 million.

8. BORROWINGS

Borrowings as of March 31, 2013 consisted of an FHLB borrowing of $0.7 million with an interest rate of 0.50% that matures in 2020 and a capital lease of $0.2 million with an interest rate of 1.60%. Borrowings as of December 31, 2012 consisted of an FHLB borrowing of $0.7 million with an interest rate of 0.50% that matures in 2020, a capital lease of $0.2 million with an interest rate of 1.60%, and $2.0 million in loan participations sold (that do not qualify for "sold" treatment under GAAP), with an effective interest rate of 4.45%.

The Company has federal funds lines of credit with three correspondent banks totaling $10.0 million at March 31, 2013 and December 31, 2012. 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, 2013. The Company had unused borrowing capacity with the FHLB of $6.4 million as of March 31, 2013 and $7.5 million as of December 31, 2012, respectively. In addition, the Company has the ability to borrow from the Federal Reserve Bank to the extent of investment securities pledged to the Federal Reserve.

9. COMMITMENTS AND CONTINGENCIES

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

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

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

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

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

Financial instruments whose contract amounts represent credit risk as of March 31, 2013 and December 31, 2012, respectively, are commitments to extend credit (including availability of lines of credit), and standby letters of credit. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. 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, 2013 are summarized in the following table:

(Dollars in thousands)	Commercial letters of credit		Other loan commitments		Total commitments
Less than one year	$	—	$	4,311	$	4,311
One to three years		209		11,212		11,421
Three to five years		71		8,947		9,018
More than five years		—		1,839		1,839
Total	$	280	$	26,309	$	26,589

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.

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

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.

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. government agency securities, mortgage-backed securities issued by government-sponsored entities, municipal bonds 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, 2013 were:

(Dollars in thousands)			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Description	March 31, 2013		(Level 1)		(Level 2)		(Level 3)
Recurring:
US government agencies	$	1,995	$	—	$	1,995	$	—
Government sponsored MBS
Residential		56,863		—		56,863		—
Non-Government sponsored MBS
North Carolina		1,543		—		1,543		—
Total	$	60,401	$	—	$	60,401	$	—

Assets measured at fair value on a recurring basis as of December 31, 2012 were:

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

(Dollars in thousands)			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Description	December 31, 2012		(Level 1)		(Level 2)		(Level 3)
Recurring:
US government agencies	$	1,327	$	—	$	1,327	$	—
Government sponsored MBS
Residential		57,931		—		57,931		—
Non-Government sponsored MBS
North Carolina		1,553		—		1,553		—
Total	$	60,811	$	—	$	60,811	$	—

There were no recurring Level 3 Assets at March 31, 2013 or December 31, 2012.

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

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.

Other real estate owned (“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.

Repossessed Collateral: Repossessed collateral is adjustedtofairvalue,lessestimatedcoststosell,upontransferof theloansto repossessions.Subsequently, repossessed assetsarecarriedatthelowerofthecarryingvalueorthefairvalue,lessestimatedcoststosell.Fairvalueisbaseduponindependentmarketprices,appraised values ofthecollateral, ormanagement’s estimation of the value ofthecollateral.The Companyrecords repossessed collateral asnonrecurringLevel 3.

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

Assets measured at fair value on a nonrecurring basis as of March 31, 2013 and December 31, 2012 were:

(Dollars in thousands)			Quoted Prices in		Significant Other		Significant
(Unaudited)			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Description	March 31, 2013		(Level 1)		(Level 2)		(Level 3)
Nonrecurring:
Other real estate owned	$	3,055	$	—	$	—	$	3,055
Repossessed collateral		590		—		—		590
Impaired loans:
Commercial		7,197		—		—		7,197
Faith-based non-profit		14,734		—		—		14,734
Residential real estate		4,028		—		—		4,028
Consumer		14		—		—		14
Mortgage Servicing Rights		33		—		—		33
Total	$	29,651	$	—	$	—	$	29,651

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

(Dollars in thousands)			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Description	December 31, 2012		(Level 1)		(Level 2)		(Level 3)
Nonrecurring:
Other real estate owned	$	3,055	$	—	$	—	$	3,055
Repossessed collateral		590		—		—		590
Impaired loans:
Commercial		—		—		—		—
Commercial real estate		4,749		—		—		4,749
Faith-based non-profit		14,863		—		—		14,863
Residential real estate		3,916		—		—		3,916
Consumer		16		—		—		16
Mortgage Servicing Rights		36		—		—		36
Total	$	27,225	$	—	$	—	$	27,225

Quantitative Information about Level 3 Fair Value Measurements

(Dollars in thousands)				Significant	Significant
			Valuation	Unobservable	Unobservable
Description	March 31, 2013		Technique	Inputs	Input Value
Nonrecurring:
Other real estate owned	$	3,055	discounted appraisals	collateral discounts		6-20%
Repossessed collateral		590	discounted appraisals	collateral discounts		20-50%
Impaired loans		25,973	discounted appraisals	collateral discounts		6-20%
Mortgage Servicing Rights		33	discounted cash flows	PSA speed		426%
Total	$	29,651		cost to service		6.00%
				discount rate		10.00%

(Dollars in thousands)				Significant	Significant
			Valuation	Unobservable	Unobservable
Description	December 31, 2012		Technique	Inputs	Input Value
Nonrecurring:
Other real estate owned	$	3,055	discounted appraisals	collateral discounts		6-20%
Repossessed collateral		590	discounted appraisals	collateral discounts		20-50%
Impaired loans		23,544	discounted appraisals	collateral discounts		6-20%
Mortgage Servicing Rights		36	discounted cash flows	PSA speed		426%
Total	$	27,225		cost to service		6.00%
				discount rate		10.00%

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 2012 or 2013.

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.

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

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, 2013 and December 31, 2012, the carrying amounts and associated estimated fair value of financial assets and liabilities of the Company are as follows:

	March 31, 2013
(Dollars in thousands)	Carrying		Estimated
	Amount		Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	12,320	$	12,320	$	12,320	$	—	$	—
Marketable securities		60,401		60,401		—		60,401		—
Loans, net of allowances for loan losses		171,134		179,487		—		—		179,487
Accrued interest receivable		847		847		847		—		—
Liabilities:
Non-maturity deposits	$	118,506	$	118,506		118,506		—		—
Maturity deposits		108,193		107,739		—		107,739		—
Other borrowings		907		844		—		—		844
Accrued interest payable		71		71		71		—		—

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

	December 31, 2012
(Dollars in thousands)	Carrying		Estimated
	Amount		Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	42,586	$	42,586	$	42,586	$	—	$	—
Marketable securities		60,811		60,811		—		60,811		—
Loans, net of allowances for loan losses		171,723		175,041		—		—		175,041
Accrued interest receivable		858		858		858		—		—
Liabilities:
Non-maturity deposits	$	116,276	$	116,276		116,276		—		—
Maturity deposits		134,603		134,322		—		134,322		—
Other borrowings		2,937		2,871		—		—		2,871
Accrued interest payable		119		119		119		—		—

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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, 2012, filed with the Securities and Exchange Commission (the "SEC") on March 29, 2013 (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

In2010,theDodd-FrankWallStreetReformandConsumerProtectionAct(the “Dodd-FrankAct”)wassignedintolaw.TheDodd-Frank Act wasintended primarily to overhaul the financial regulatoryframework following the global financial crisis and has impacted,and will continueto impact, all financial institutionsincludingthe Companyand the Bank. The Dodd-Frank Act contains provisions that have, among other things, establishedaBureau of Consumer Financial Protection (the "CFPB"), establishedasystemic risk regulator, consolidated certain federal bank regulators and imposed increased corporate governance and executive compensationrequirements on financial institutions. The Dodd-FrankAct requires variousfederal agencies to adopt a broad range of new implementingrules and regulations and to preparenumerous studies and reports for the U.S. Congress.The federal agencies are given significant discretionin draftingand implementingregulations. Manyregulations havebeenpromulgated, and more additionalregulations areexpected to be issued in 2013and thereafter. Consequently, many ofthedetails and much oftheimpact oftheDodd-Frank Act may not beknown formany months oryears.

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.

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, it has not been immune to the impact of the recent recession or the increased focus of banking regulators upon capital and liquidity levels.

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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, 2013.

· Net income before preferred stock dividends was $10 thousand for the three months ended March 31, 2013 and $153 thousand for the three months ended March 31, 2012. For the three months ended March 31, 2013, net loss available to common stockholders was $49 thousand or $0.02 per common share. For the three months ended March 31, 2012, net income available to common stockholders was $82 thousand or $0.04 per common share.

· Interest income on loans decreased by $138 thousand or 5.32%, while interest income on investments and cash decreased $75 thousand resulting in total interest income being $2.7 million – a decrease of $213 thousand over the comparable period in 2012. Average loans outstanding for the three months ended March 31, 2013 decreased $9.2 million from the March 31, 2012, and the rate for average loan interest earned decreased 2 basis points compared to March 31, 2012.

· Interest expense on deposits decreased $63 thousand and interest expense on borrowings remained unchanged, resulting in total interest expense being $63 thousand less in the three months ended March 31, 2013 compared to the three months ended March 31, 2012. Average interest-bearing deposits outstanding decreased $8.4 million compared to the three months ended March 31, 2012, and the average cost of those deposits decreased 11 bps in the three months ended March 31, 2013 compared to the same period in March 31, 2012. Average borrowings in the three months ended March 31, 2013 decreased $7 thousand compared to March 31, 2012, and the cost of those borrowings increased 1bp during the comparable period.

· Net interest income, due to the above factors, decreased $150 thousand in the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The net interest margin, on a tax equivalent (“TE”) basis for the three months ended March 31, 2013 was 3.61% compared to 3.69% for the three months ended March 31, 2012, a decrease of 8 bps.

· The balance of the ALLL as a percentage of loans outstanding decreased slightly in 2013 to 1.95% as of March 31, 2013 compared to 2.00% as of December 31, 2012. The $9.2 million decrease in average loans outstanding, and net recoveries of $2 thousand during the three months ended March 31, 2013 compared to net charge-offs of $153 thousand during the three months ended March 31, 2012. No provision was made during either quarter ended March 31, 2013 or 2012.

· Noninterest income decreased by $81 thousand in the first quarter of 2013 compared to the same period in 2012, mainly due to realized gains on the sales of investment securities of $54 thousand in the 2012 period compared to none during the 2013 period, coupled with declines in overdraft income of $11 thousand and insufficient funds fees $12 thousand in the 2013 period.

· Noninterest expense decreased $92 thousand in 2013 compared to the same period in 2012 primarily driven by decreases in salaries and employee benefits, net OREO expense, FDIC deposit insurance premiums, delivery expense and other expense. The decrease was partially offset by increases in occupancy and equipment, director fees and professional fees.

· Preferred stock dividends in the quarters ended March 31, 2013 and March 31, 2012 were $59 thousand. The dividend yield for the three months ended March 31, 2013 and 2012 was 2.00%.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

· 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.

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· 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.

· Foreclosed Assets- Foreclosed assets represent properties acquired through foreclosure or physical possession. Write-downs to fair 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 fair value less selling costs. Subsequent declines in value are charged to operations. Fair 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. 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.

FINANCIAL CONDITION

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

Assets.Total assets decreased from $296.1 million at December 31, 2012 to $269.6 million at March 31, 2013. The largest component of asset decline was in cash and cash equivalents, which decreased $30.3 million from December 31, 2012 to March 31, 2013. The decrease in cash was primarily caused by the decrease of $24.2 million in total deposits and an increase in loans. Investment securities decreased by $410 thousand, primarily due to net premium amortization during the period. Gross loans increased $4.4 million primarily due to the purchase of $9.0 million in loan participations, partially off-set by loan run-off. Other real estate owned (“OREO”) remained unchanged at $3.1 million at March 31, 2013.

Liabilities. Total liabilities decreased from $259.8 million at December 31, 2012 to $233.4 million at March 31, 2013. The change was primarily driven by $28.4 million decrease in Bank’s time deposits greater than $100,000 – primarily Certificate of Deposit Account Registry Service (“CDARS”) deposits, which are subject to significant volatility due to seasonality. Other borrowings decreased by $2.0 million, primarily due to the reclassification of previously non-qualifying loan participation purchases not meeting the treatment for sales under GAAP.

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Stockholders’ Equity. Total consolidated stockholders’ equity decreased from $36.3 million at December 31, 2012 to $36.2 million at March 31, 2013. For the three months ended March 31, 2013, the net decrease in retained earnings was comprised of $10 thousand of net income, offset by dividends on preferred stock of $59 thousand. The Company did not pay a common stock dividend in the first quarter of 2013. Accumulated other comprehensive loss represents the unrealized gain or loss on available-for-sale securities and the unrealized gain or loss related to the deferred pension liability, net of deferred taxes. Accumulated other comprehensive loss was in a net unrealized loss position of $1.5 million at March 31, 2013 compared to $1.4 million at December 31, 2012.

RESULTS OF OPERATIONS

Three months ended March 31, 2013 compared with three months ended March 31, 2012

· Net income before preferred stock dividends was $10 thousand and $141 thousand for the three months ended March 31, 2013 and March 31, 2012, respectively. Net loss available to common stockholders for the three months ended March 31, 2013 was $49 thousand or $0.02 per share. Net income available to common stockholders for the three months ended March 31, 2012 was $82 thousand or $0.04 per share.

· Net operating income before income taxes and preferred dividends for the three months ended March 31, 2013 and March 31, 2012 was $14 thousand and $153 thousand respectively.

o Net interest margin decreased from 3.69% for the three months ended March 31, 2012 to 3.61% for the three months ended March 31, 2013 due to:

§ Average loans outstanding decreased $9.2 million in the first quarter of 2013 over the comparable period in 2012, while average yield decreased 2 bps to 5.63%. The combined effect resulted in a $138 thousand decrease in interest income from loans.

§ Average interest bearing deposits outstanding decreased $8.4 million in the first quarter of 2013 over the comparable period in 2012. Interest expense declined by $63 thousand in the three months ended March 31, 2013 compared to the same period in 2012 due to an 11 bps reduction in the average yield on deposits coupled with a decrease in average balances outstanding.

§ Average borrowings outstanding decreased $7 thousand from the 2012 average balance, and the average rate paid on borrowings increased from 3.01% in in the first quarter of 2012 to 3.02% in during the comparable period in 2013.

o Noninterest income decreased $81 thousand in the first quarter of 2013 from the comparable period in 2012, predominantly due to the realized gain on the sale of investment securities of $54 thousand in the first quarter of 2012, coupled with declines in overdraft fee income of $11 thousand and insufficient funds fees of $12 thousand in the comparable quarter of 2012.

o Noninterest expense decreased $92 thousand in 2013 compared to the same period in 2012 primarily driven by decreases in salaries and employee benefits of $22 thousand, net OREO expense of $66 thousand, FDIC deposit insurance premiums of $33 thousand, delivery expenses of $14 thousand and other expense of $45 thousand, partially off-set by increases in professional fees of $61 thousand, occupancy and equipment expense of $18 thousand and directors fees of $13 thousand.

o Preferred stock dividends in the quarters ended March 31, 2013 and March 31, 2012 were $59 thousand. Dividend yield for the three months ended March 31, 2013 and 2012 was 2.00%.

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 $150 thousand, or 5.76%, from $2.6 million for the three months ended March 31, 2012, to $2.5 million for the three months ended March 31, 2013. Net interest spread is the difference between rates earned on interest-earning assets and the interest paid on deposits and borrowed funds. Net interest margin is the total of net interest income divided by average earning assets. Average earning assets for the three months ended March 31, 2013 was $273.1 million, down 4.31% compared to $285.3 million for the three months ended March 31, 2012. On a fully TE basis, net interest margin was 3.61% and 3.69% for the three months ended March 31, 2013 and March 31, 2012, respectively. The net interest spread decreased 6 bps to 3.49% for the three months ended March 31, 2013, from 3.55% for the three months ended March 31, 2012. The yield on average interest-earning assets was 3.91% and 4.07% for the three months ended March 31, 2013 and March 31, 2012, respectively, a decrease of 16 bps, while the interest rate on average interest-bearing liabilities for those periods was 0.42% and 0.52%, respectively, a decrease of 10 bps due to the ongoing low interest rate environment.

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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 7.40% for the three months ended March 31, 2013 to $2.7 million from $2.9 million for the three months ended March 31, 2012. The average balances of loans, which had overall yields of 5.63% for the three months ended March 31, 2013 and 5.65% for the three months ended March 31, 2012, respectively, decreased from $183.5 million for the three months ended March 31, 2012 to $174.3 million for the three months ended March 31, 2013. The average balance of investment securities increased $22.6 million from $38.7 million for the three months ended March 31, 2012 to $61.3 million for the three months ended March 31, 2013. The TE yield on investment securities decreased from 2.83% for the three months ended March 31, 2012 to 1.27% for the three months ended March 31, 2013. The average balances of federal funds and other short-term investments decreased from $63.2 million for the three months ended March 31, 2012 to $37.5 million for the three months ended March 31, 2013. The average yield in this category was 0.26% and 0.25% during the first quarter of 2013 and 2012, respectively.

Interest expense decreased 22.99% for the three months ended March 31, 2013 to $211 thousand from $274 thousand for the three months ended March 31, 2012. Average total interest-bearing deposits, including savings, interest-bearing demand deposits and time deposits decreased from $206.3 million for the three months ended March 31, 2012, to $198.0 million for the three months ended March 31, 2013. The average rate paid on interest-bearing deposits decreased 11 bps from 0.49% for the three months ended March 31, 2012 to 0.38% for the three months ended March 31, 2013, primarily in response to the decreases in rates paid on time deposits.

The average rate on borrowings increased from 3.01% for the three months ended March 31, 2012 to 3.02% for the three months ended March 31, 2013. The average borrowings outstanding decreased $7 thousand from the three months ended March 31, 2012 to the three months ended March 31, 2013. The interest expense on borrowed funds remained unchanged at $22 thousand in the first quarter of 2013 compared to the same period in 2012.

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, 2013 and 2012
(Dollars in thousands)	2013									2012
(Unaudited)	Average Balance			Amount Earned/Paid			Average Rate			Average Balance			Amount Earned/Paid			Average Rate
Assets
Loans receivable (1):	$	174,307		$	2,454			5.63	%	$	183,475		$	2,592			5.65	%
Taxable securities		60,376			180			1.19			34,806			209			2.40
Nontaxable securities(2)		891			9			6.58			3,895			40			6.68
Federal funds sold and other interest on short-term investments		37,488			24			0.26			63,188			39			0.25
Total interest earning assets		273,062			2,667			3.91	%		285,364			2,880			4.07	%
Cash and due from banks		2,671									2,344
Other assets		20,898									20,945
Allowance for loan losses		(3,523	)								(3,895	)
Total assets	$	293,109								$	304,758
Liabilities and Equity
Savings deposits	$	52,204		$	22			0.17	%	$	55,804		$	32			0.23	%
Interest-bearing demand deposits		24,479			5			0.08			26,093			9			0.13
Time deposits		121,307			162			0.53			124,447			211			0.68
Total interest-bearing deposits		197,990			189			0.38			206,344			252			0.49
Borrowed funds		2,918			22			3.02			2,925			22			3.01
Total interest-bearing liabilities		200,908			211			0.42	%		209,269			274			0.52	%
Non-interest-bearing deposits		50,065									52,586
Other liabilities		6,010									5,992
Total liabilities		256,983									267,847
Stockholders' equity		36,126									36,911
Total liabilities and stockholders' equity	$	293,109								$	304,758
Net interest income				$	2,456								$	2,606
Non-taxable securities					9									40
Tax equivalent adjustment (3)					6									25
Tax equivalent net interest income				$	2,462								$	2,631
Net interest spread (4)								3.49	%								3.55	%
Net interest margin (5)					3.61	%								3.69	%

(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 blended federal and state tax rate of 38.55% 

(3) The tax equivalent adjustment is computed using a  blended tax rate of 38.55%.   

(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. AsofMarch 31, 2013 and December 31, 2012, the ALLL was $3.5 million, whichrepresented approximately 1.95% and 2.00% ofloans outstanding,netofunearnedincomeanddeferredcosts("netloans outstanding"), onthose respective dates. During the fourth quarter of 2012, the Company converted from a spreadsheet calculated ALLL to a more robust system provided by a third party servicing company. Historic quantitative and qualitative factors were carried forward to the new system as well as an eight quarter look back period for measuring loss histories. Slight variations in loss history calculations from the old system to the new system resulted in a variance of approximately $261 thousand at December 31, 2012. Management elected to retain the variance as an unallocated reserve as the team continued to validate and integrate nuances in the new system. During the quarter ended March 31, 2013, management determined it was comfortable with the model’s calculation methodology and therefore allocated a significant portion of the previously unallocated reserve to accommodate qualitative and qunatiative adjustments in the loan portfolio for the quarter. At March 31, 2013, the unallocated reserve totaled $29 thousand. For the periods ended March 31, 2013 and 2012, there was no provision for loan losses. We believe the allowance for loan losses is appropriate based on asset quality indicators and other factors

Noninterest Income. Noninterest income decreased 15.40%, or $81 thousand, for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. During 2012, the Company realized $54 thousand from gains on the sales of investment securities, compared to none during the comparable period in 2013. Service charge income decreased by $33 thousand primarily due to lower fees earned from overdraft and non-sufficient-fee (“NSF”) income, which is customer activity based. Rental income increased by $6 thousand for the three months ended March 31, 2013 when compared to the same period in 2012. The increase in rental income was driven by higher occupancy rates during the first quarter of 2013 as compared to the same period in 2012.

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 3.09% to $2.9 million for the three months ended March 31, 2013 from $3.0 million for the three months ended March 31, 2012.

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Salary and employee benefits expenses for the three months ended March 31, 2013 and March 31, 2012 were $1.5 million. Salaries decreased $2 thousand, while employee benefits decreased $20 thousand. The decrease in employee benefits was primarily due to decreased retirement benefit costs associated with the Company’s deferred compensation plans.

Occupancy expense increased $18 thousand in the three months ended March 31, 2013 from the same period in 2012. Increases in security services and building maintenance and repairs led to the increase in occupancy expense.

Information technology costs decreased by 4.48%, or $10 thousand, to $213 thousand in 2013, mainly due to decreased core processing charges.

Directors and advisory board fees increased by $13 thousand for the period ended March 31, 2012 to $83 thousand. The increase reflects an increased number of meetings held during the period. Professional fees increased by $61 thousand in 2013 compared to 2012 due to the increased use of consultants and audit expenses. OREO expenses decreased $66 thousand during the period.

In the first quarter of 2013, FDIC insurance premiums decreased $33 thousand due to a decrease in our insurance rate.

Other expenses decreased $45 thousand for the three months ended March 31, 2013 from the three months ended March 31, 2012. The reduction in other expenses was primarily driven by a reduction in appraisal fees of $47 thousand.

Provision for Income Taxes. The Company recorded an income tax expense of $4 thousand for the three months ended March 31, 2013 and $12 thousand for the three months ended March 31, 2012. The overall effective rate increased from a tax expense of 7.84% in 2012 to a tax expense of 28.57% in 2013. The lower effective tax rate during 2012 was largely driven by permanent differences in non-taxable income in proportion to taxable income during the period.

ASSET QUALITY

Provision and Allowance for Loan Losses (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, 2013 and December 31, 2012, the allowance for loan losses was $3.5 million, which represented approximately 1.95% and 2.00% of total loans outstanding on those respective dates. Nonperforming assets, defined as non-accruing loans plus OREO and other repossessed assets, at March 31, 2013 were 4.56% of total assets compared to 4.18% at December 31, 2012.

Of the non-accruing loans totaling $8.7 million at March 31, 2013, 99.84% of the outstanding balance is secured by real estate, which management believes mitigates the risk of loss. Troubled debt restructurings (“TDRs”) in compliance with the modified terms totaled $14.6 million or 69.44% of total TDRs at March 31, 2013. 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 currently uses 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.

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 25.12% liquidity ratio is the sum of cash, overnight funds, and un-pledged, marketable US government agency securities divided by the sum of deposits and short-term borrowings (less the full amount of pledged deposits). Management believes that core deposit activity, $9.1 million in available borrowing capacity from the FHLB of Atlanta at March 31, 2013, 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 $697 thousand outstanding from the FHLB as of March 31, 2013. The maximum outstanding balance from FHLB at any time during the first quarter of 2013 was $703 thousand. The Company periodically draws on its Fed Funds accommodations to test the lines availability.

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The Company participates in the 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 $20 million in deposits for several years. There is no guarantee, however, this trend will continue. In management’s opinion, the large depositors have stable and long-term relationships with the Bank.

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%.

The March 31, 2013 and December 31, 2012 regulatory capital levels of the Company and Bank compared to the regulatory standards were:

	March 31, 2013
						For Capital
						Adequacy					To Be Well
(Dollars in thousands)	Actual					Purposes					Capitalized
(Unaudited)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk weighted assets)
Company	$	36,745		18.70	%	$	15,718		8.00	%	$	19,647		10.00	%
Bank		35,087		17.89			15,687		8.00			19,609		10.00
Tier 1 (to risk weighted assets)
Company	$	34,276		17.45	%	$	7,859		4.00	%	$	11,788		6.00	%
Bank		32,623		16.64			7,843		4.00			11,765		6.00
Tier 1 (to average total assets)
Company	$	34,276		11.86	%	$	11,565		4.00	%	$	14,456		5.00	%
Bank		32,623		11.39			11,459		4.00			14,324		5.00

	December 31, 2012
						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	$	36,646		19.15	%	$	15,311		8.00	%	$	19,138		10.00	%
Bank		34,860		18.45			15,211		8.00			19,014		10.00
Tier 1 (to risk weighted assets)
Company	$	34,239		17.89	%	$	7,655		4.00	%	$	11,483		6.00	%
Bank		32,483		17.19			7,606		4.00			11,409		6.00
Tier 1 (to average total assets)
Company	$	34,239		11.56	%	$	11,851		4.00	%	$	14,813		5.00	%
Bank		32,483		11.02			11,786		4.00			14,733		5.00

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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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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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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(ii)	Restated Bylaws of the Company, incorporated by reference to Exhibit 99.1 to the Form 8-K filed with the SEC on April 6, 2009.
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 10(i)*	Employment Agreement dated January 12, 2007 by and among Kim D. Saunders, the Company and the Bank, incorporated by reference to Exhibit 99.1 to the Form 8-K filed with the SEC on January 18, 2007.
Exhibit 10(ii)	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.
Exhibit 10(iii) *	Employment Agreement Amendment, dated June 26, 2009, among the Company, the Bank and Kim D. Saunders, incorporated by reference to Exhibit 10.2 to the Form 8-K filed with the SEC on June 26, 2009.
Exhibit 31(i)	Certification of Kim D. Saunders.
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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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 14, 2013	By:	/s/ Kim D. Saunders
		Kim D. Saunders
		President, Chief Executive Officer
	By:	/s/ Randall C. Hall
		Randall C. Hall
		Chief Financial Officer

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Index to Exhibits

Exhibit No.	Description of Exhibit
Exhibit 31(i)	Certification of Kim D. Saunders.
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.

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