-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VsHfWRQ/b7NeyrII1ooQJQGG7NaoWylSKC5xJbHITJDTvYlvUgzsKOhAze+SNdh1 m7/cB5RNs27bMfe2PfGTmQ== 0000916641-03-000890.txt : 20030331 0000916641-03-000890.hdr.sgml : 20030331 20030331143239 ACCESSION NUMBER: 0000916641-03-000890 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: M&F BANCORP INC /NC/ CENTRAL INDEX KEY: 0001094738 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 561980549 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-27307 FILM NUMBER: 03629309 BUSINESS ADDRESS: STREET 1: 2634 CHAPTEL HILL BLVD STREET 2: PO BOX 19322 CITY: DURHAM STATE: NC ZIP: 27702-3221 BUSINESS PHONE: 9196831521 MAIL ADDRESS: STREET 1: 2634 CHAPTEL HILL BLVD STREET 2: PO BOX 19322 CITY: DURHAM STATE: NC ZIP: 27701-3221 10KSB 1 d10ksb.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 Commission file number 027307 M&F BANCORP, INC. ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) NORTH CAROLINA 56-1980549 ------------------------------- ------------------------------------ (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 2634 Chapel Hill Blvd. Durham, North Carolina 27707-2800 ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (919) 683-1521 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Securities to be Registered Pursuant to Section 12(b) of the Act: None Securities to be Registered Pursuant to Section 12(g) of the Act: Common Stock, no par value -------------------------- (Title of class) 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 if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-KSB. [X] State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of a specified date within 60 days prior to the date of filing. $10,543,716 based on the closing price of such common stock on February 24, 2003, which was $12.51 per share. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 842,823 shares of common stock, outstanding at March 15, 2003. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report of M&F Bancorp, Inc. for the year ended December 31, 2002 (the "Annual Report") are incorporated by reference into Part I, Part II and Part IV. Portions of the Proxy Statement for the 2002 Annual Meeting of Stockholders of M&F Bancorp, Inc. to be held on May 13, 2003 (the "Proxy Statement"), are incorporated by reference into Part III. This report contains certain forward-looking statements with respect to the financial condition, results of operations and business of the Company. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Company and on the information available to management at the time that these disclosures were prepared. These statements can be identified by the use of words like "expect," "anticipate," "estimate" and "believe," variations of these words and other similar expressions. 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. Factors that could cause actual results to differ materially include, but are not limited to, (1) competition in the Bank's markets, (2) changes in the interest rate environment, (3) general national, regional or local economic conditions may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and the possible impairment of collectibility of loans, (4) legislative or regulatory changes, including changes in accounting standards, (5) significant changes in the federal and state legal and regulatory environment and tax laws, (6) the impact of changes in monetary and fiscal policies, laws, rules and regulations and (7) other risks and factors identified in the Company's other filings with the Securities and Exchange Commission. The Company undertakes no obligation to update any forward-looking statements. 2 PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL M&F Bancorp, Inc. (the "Company") was formed in 1999 to serve as the holding company for Mechanics and Farmers Bank (the "Bank"). The Company is a bank holding company registered with the Board of Governors of the Federal Reserve System (the "Federal Reserve") under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company's sole activity consists of owning the Bank. The Company's principal source of income is any dividends which are declared and paid by the Bank on its capital stock. The Bank is a North Carolina-chartered bank and began operations in 1908. It is engaged primarily in the business of attracting deposits from the general public and using such deposits, together with other funds, to make consumer and commercial loans. The Bank makes secured personal, automobile, home improvement, residential mortgage, commercial real estate, construction and commercial loans. The Bank also makes some unsecured consumer loans. The Bank's primary source of revenue is interest income from its lending activities. The Bank's other major sources of revenue are interest and dividend income from investments, interest income from its interest-bearing investments with other depository institutions and fee income from its lending and deposit activities. The major expenses of the Bank are interest on deposits and general and administrative expenses such as salaries, employee benefits, federal deposit insurance premiums and branch occupancy and related expenses. As a North Carolina-chartered bank, the Bank is subject to examination and regulation by the Federal Deposit Insurance Corporation (the "FDIC") and the Commissioner of Banks, North Carolina Department of Commerce (the "Commissioner"). The Bank is further subject to certain regulations of the Federal Reserve governing reserves required to be maintained against deposits and other matters. The business and regulation of the Company and the Bank are also subject to legislative changes from time to time. See "SUPERVISION AND REGULATION." The Company has no operations and conducts no business of its own other than owning the Bank. Accordingly, the discussion of the business which follows concerns the business conducted by the Bank, unless otherwise indicated. MARKET AREA The Bank has three offices in Durham, North Carolina, two offices in Raleigh, North Carolina, two offices in Charlotte, North Carolina, and one office in Winston-Salem, North Carolina. All offices are located in metropolitan areas with employment spread primarily among service, manufacturing and governmental activities. All offices are located in areas of high competition among financial service providers. As of June 30, 2002, Durham had 12 commercial banks, and the Bank ranked 6th in deposit size. Raleigh had 20 commercial banks, and the Bank ranked 15th in deposit size. The Bank ranked 15th in deposit size out of 18 commercial banks in Charlotte. There were 12 commercial banks in Winston-Salem, and the Bank ranked 11th in deposit size. 3 LENDING ACTIVITIES General. The Bank's primary source of revenue is interest and fee income from its lending activities, consisting primarily of automobile, home equity, home improvement, personal, residential mortgage, commercial real estate, construction and commercial loans. The Bank also offers both personal and commercial overdraft protection in connection with its checking accounts. As of December 31, 2002, approximately 90.4% of the Bank's loan portfolio was secured by real property, 7.2% was secured by personal property, and 2.4% was unsecured. On December 31, 2002, the largest amount the Bank had outstanding to any one borrower and its affiliates was approximately $2.9 million. In addition to interest earned on loans, the Bank receives fees in connection with loan originations, loan modifications, late payments, loan assumptions and other miscellaneous services. Loan Portfolio Composition. The Bank's consolidated gross loan portfolio totaled approximately $140.7 million at December 31, 2002 representing 75.1% of the Bank's total assets. At December 31, 2002, approximately 20.2% of the Bank's gross loan portfolio was composed of adjustable rate loans, and approximately 79.8% of the Bank's gross loan portfolio was composed of fixed rate loans. At December 31, 2002, approximately $7.9 million, or 5.6%, of the Bank's gross loan portfolio was composed of consumer loans. On such date, approximately $75.2 million, or 53.4 %, of the Bank's gross loan portfolio was composed of commercial loans and approximately $57.6 million, or 41.0 %, consisted of real estate loans. Origination, Purchase and Sale of Loans. Residential mortgage loans generally are originated in conformity with purchase requirements of the Federal National Mortgage Association. Accordingly, the Bank believes such loans are saleable in the secondary market. However, the Bank did not purchase or sell any loans in fiscal 2002 or 2001. Asset Classification. Applicable regulations require each insured institution to "classify" its own assets on a regular basis. In addition, in connection with examinations of financial institutions, regulatory examiners have authority to identify problem assets and, if appropriate, classify them. Problem assets are classified as "substandard," "doubtful" or "loss," depending on the presence of certain characteristics as discussed below. An asset is considered "substandard" if not adequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard" with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a loss reserve is not warranted. As of December 31, 2002, the Bank had approximately $2.17 million of loans classified as "substandard," $92,600 of loans classified as "doubtful," and $64,300 loans classified as "loss." Total classified assets as of December 31, 2002 and 2001 were approximately $2.3 million and $2.5 million, respectively. In connection with the filing of periodic reports with regulatory agencies, the Bank reports any assets which possess credit deficiencies or potential weaknesses deserving close attention by management. These assets may be considered "special mention" assets and do not yet warrant adverse classification. At December 31, 2002, the Bank had approximately $4.9 million of loans in the "special mention" category, as compared to $2.0 million at December 31, 2001. When an insured institution classifies problem assets as either substandard or doubtful, it is required to establish general allowances for loan losses in an amount deemed prudent by management. These allowances represent loss allowances which have been established to recognize the inherent risks associated with lending activities and the risks associated with particular problem assets. When an insured institution classifies problem assets as "loss," it charges off the balance of the asset. The Bank's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the FDIC and the Commissioner which can order the establishment of additional loss allowances. 4 Allowance for Loan Losses. In originating loans, the Bank recognizes that credit losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a secured loan, the quality of the security for the loan as well as general economic conditions. It is management's policy to maintain an adequate allowance for loan losses based on, among other things, the Bank's historical loan loss experience, evaluation of economic conditions and regular review of delinquencies and loan portfolio quality. Specific allowances are provided for individual loans when ultimate collection is considered questionable by management after reviewing the current status of loans which are contractually past due and considering the net realizable value of the security for the loans. Management actively monitors the Bank's asset quality, charges off loans against the allowance for loan losses when appropriate and provides specific loss reserves when necessary. Although management believes it uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from the economic conditions in the assumptions used in making the initial determinations. INVESTMENTS Interest income from investment securities generally provides a significant source of income to the Bank. In addition, the Bank receives interest income from interest on federal funds invested overnight with other financial institutions. On December 31, 2002, the Bank's investment securities portfolio totaled approximately $30.5 million and consisted of U.S. Treasury and U.S. Government agency securities, corporate bonds, obligations of states and political subdivisions and equity securities. The Bank's investment strategy is intended, among other things, to (i) provide and maintain liquidity, (ii) maintain a balance of high quality, diversified investments to minimize risk, (iii) maximize returns, and (iv) manage interest rate risk. In terms of priorities, safety is considered more important than liquidity or return on investment. The Bank does not engage in hedging activities. DEPOSITS AND BORROWINGS General. Deposits are the primary source of the Bank's funds for lending and other investment purposes. In addition to deposits, the Bank derives funds from loan principal repayments, interest payments, investment income, interest from its Fed funds deposits, and otherwise from its operations. Loan repayments are a relatively stable source of funds while deposit inflows and outflows may be significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. They may also be used on a longer term basis for general business purposes. Deposits. In recent years, the Bank has experienced consistent deposit growth. On December 31, 2002 and 2001, the Bank's deposits totaled approximately $149.8 million and $135.4 million, respectively. The Bank attracts both short-term and long-term deposits from the general public by offering a variety of accounts and rates. The Bank offers savings accounts, interest-bearing and noninterest-bearing checking accounts, and fixed interest rate certificates with varying maturities. All deposit flows are greatly influenced by economic conditions, the general level of interest rates, competition and other factors. The Bank's deposits traditionally have been obtained primarily from its market areas. The Bank utilizes traditional marketing methods to attract new customers and deposits, including print media advertising and direct mailings. The Bank does not advertise for deposits outside of its local market area and it has no brokered deposits. 5 SUBSIDIARIES The Bank's wholly-owned subsidiary, Realty Services, Inc. ("Realty Services") was dissolved in May 2001, and all assets were transferred to the Bank. Realty Services, a North Carolina corporation, acquired and managed commercial properties for use as branch offices of the Bank. During the fiscal years ended December 31, 2001 and 2000, Realty Services had net losses of $169 and $9,432, respectively. The financial statements of Realty Services were consolidated with those of the Bank. COMPETITION The Bank faces strong competition both in attracting deposits and making loans. Its most direct competition for deposits has historically come from savings institutions, credit unions and other commercial banks located in its primary market area, including large financial institutions which have greater financial and marketing resources available to them. The Bank has also faced additional significant competition for investors' funds from short-term money market securities and other corporate and government securities. The ability of the Bank to attract and retain deposits depends on its ability to generally provide a rate of return, liquidity and risk comparable to that offered by competing investment opportunities. As of June 30, 2002, the Bank's market share of the deposits in Durham, North Carolina was approximately 2.37%, and less than one percent in Raleigh, Charlotte and Winston-Salem, North Carolina. EMPLOYEES As of December 31, 2002, the Bank had 93 full-time equivalent employees. SUPERVISION AND REGULATION Bank holding companies and commercial banks are extensively regulated under both federal and state law. The following is a brief summary of certain statutes and rules and regulations that affect or will affect the Company, the Bank and any subsidiaries. This summary is qualified in its entirety by reference to the particular statute and regulatory provisions referred to below and is not intended to be an exhaustive description of the statutes or regulations applicable to the business of the Company and the Bank. Supervision, regulation and examination of the Company and the Bank by the regulatory agencies are intended primarily for the protection of depositors rather than shareholders of the Company. Statutes and regulations which contain wide-ranging proposals for altering the structures, regulations and competitive relationship of financial institutions are introduced regularly. The Company cannot predict whether or in what form any proposed statute or regulation will be adopted or the extent to which the business of the Company and the Bank may be affected by such statute or regulation. 6 General. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the FDIC insurance funds in the event the depository institution becomes in danger of default or in default. For example, to avoid receivership of an insured depository institution subsidiary, a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become "undercapitalized" with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the bank's total assets at the time the bank became undercapitalized or (ii) the amount which is necessary (or would have been necessary) to bring the bank into compliance with all acceptable capital standards as of the time the bank fails to comply with such capital restoration plan. The Company, as a registered bank holding company, is subject to the regulation of the Federal Reserve. Under a policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. The Federal Reserve under the BHCA also has the authority to require a bank holding company to terminate any activity or to relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company. In addition, insured depository institutions under common control are required to reimburse the FDIC for any loss suffered by its deposit insurance funds as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the deposit insurance funds. The FDIC's claim for damages is superior to claims of stockholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions. As a result of the Company's ownership of the Bank, the Company is also registered under the bank holding company laws of North Carolina. Accordingly, the Company is also subject to regulation and supervision by the Commissioner. Capital Adequacy Guidelines for Holding Companies. The Federal Reserve has adopted capital adequacy guidelines for bank holding companies and banks that are members of the Federal Reserve system and have consolidated assets of $150 million or more. Bank holding companies subject to the Federal Reserve's capital adequacy guidelines are required to comply with the Federal Reserve's risk-based capital guidelines. Under these regulations, the minimum ratio of total capital to risk-weighted assets is 8%. At least half of the total capital is required to be "Tier I capital," principally consisting of common stockholders' equity, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less certain goodwill items. The remainder ("Tier II capital") may consist of a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, perpetual preferred stock, and a limited amount of the general loan loss allowance. In addition to the risk-based capital guidelines, the Federal Reserve has adopted a minimum Tier I capital (leverage) ratio, under which a bank holding company must maintain a minimum level of Tier I capital to average total consolidated assets of at least 3% in the case of a bank holding company which has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a Tier I capital (leverage) ratio of at least 1% to 2% above the stated minimum. Capital Requirements for the Bank. The Bank, as a North Carolina commercial bank, is required to maintain a surplus account equal to 50% or more of its paid-in capital stock. As a North Carolina chartered, FDIC-insured commercial bank which is not a member of the Federal Reserve System, the Bank is also subject to capital requirements imposed by the FDIC. Under the FDIC's regulations, state nonmember banks that (a) receive the highest rating during the examination process and (b) are not anticipating or experiencing any significant growth, are required to maintain a minimum leverage ratio of 3% of total consolidated assets; all other banks are required 7 to maintain a minimum ratio of 1% or 2% above the stated minimum, with a minimum leverage ratio of not less than 4%. The Bank exceeded all applicable capital requirements as of December 31, 2002. Dividend and Repurchase Limitations. The Company must obtain Federal Reserve approval prior to repurchasing Common Stock in excess of 10% of its net worth during any twelve-month period unless the Company (i) both before and after the redemption satisfies capital requirements for "well capitalized" state member banks; (ii) received a one or two rating in its last examination; and (iii) is not the subject of any unresolved supervisory issues. Although the payment of dividends and repurchase of stock by the Company are subject to certain requirements and limitations of North Carolina corporate law, except as set forth in this paragraph, neither the Commissioner nor the FDIC have promulgated any regulations specifically limiting the right of the Company to pay dividends and repurchase shares. However, the ability of the Company to pay dividends or repurchase shares may be dependent upon the Company's receipt of dividends from the Bank. North Carolina commercial banks, such as the Bank, are subject to legal limitations on the amounts of dividends they are permitted to pay. Dividends may be paid by the Bank from undivided profits, which are determined by deducting and charging certain items against actual profits, including any contributions to surplus required by North Carolina law. Also, an insured depository institution, such as the Bank, is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become "undercapitalized" (as such term is defined in the applicable law and regulations). Deposit Insurance Assessments. The Bank is subject to insurance assessments imposed by the FDIC. Under current law, the insurance assessment to be paid by members of the Bank Insurance Fund, such as the Bank, shall be as specified in a schedule required to be issued by the FDIC. FDIC assessments for deposit insurance range from 0 to 31 basis points per $100 of insured deposits, depending on the institution's capital position and other supervisory factors. Federal Home Loan Bank System. The FHLB system provides a central credit facility for member institutions. As a member of the FHLB of Atlanta, the Bank is required to own capital stock in the FHLB of Atlanta in an amount at least equal to the greater of 1% of the aggregate principal amount of its unpaid residential mortgage loans, home purchase contracts and similar obligations at the end of each calendar year, or 5% of its outstanding advances (borrowings) from the FHLB of Atlanta. On December 31, 2002, the Bank was in compliance with this requirement. Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as implemented by regulations of the FDIC, an insured institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution's discretion to develop, consistent with the CRA, the types of products and services that it believes are best suited to its particular community. The CRA requires the federal banking regulators, in connection with their examinations of insured institutions, to assess the institutions' records of meeting the credit needs of their communities, using the ratings of "outstanding," "satisfactory," "needs to improve," or "substantial noncompliance," and to take that record into account in its evaluation of certain applications by those institutions. All institutions are required to make public disclosure of their CRA performance ratings. The Bank received a "outstanding " rating in its last CRA examination which was conducted during December 1997. Prompt Corrective Action. The FDIC has broad powers to take corrective action to resolve the problems of insured depository institutions. The extent of these powers will depend upon whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized." Under the regulations, an institution is considered "well capitalized" if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier I risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any order or written directive to meet and maintain a specific capital level 8 for any capital measure. An "adequately capitalized" institution is defined as one that has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier I risk-based capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of an institution with the highest examination rating). An institution is considered (A) "undercapitalized" if it has (i) a total risk-based capital ratio of less than 8%, (ii) a Tier I risk-based capital ratio of less than 4% or (iii) a leverage ratio of less than 4% (or 3% in the case of an institution with the highest examination rating); (B) "significantly undercapitalized" if the institution has (i) a total risk-based capital ratio of less than 6%, or (ii) a Tier I risk-based capital ratio of less than 3% or (iii) a leverage ratio of less than 3% and (c) "critically undercapitalized" if the institution has a ratio of tangible equity to total assets equal to or less than 2%. Changes in Control. The BHCA prohibits the Company from acquiring direct or indirect control of more than 5% of the outstanding voting stock or substantially all of the assets of any bank or savings bank or merging or consolidating with another bank holding company or savings bank holding company without prior approval of the Federal Reserve. Similarly, Federal Reserve approval (or, in certain cases, non-disapproval) must be obtained prior to any person acquiring control of the Company. Control is conclusively presumed to exist if, among other things, a person acquires more than 25% of any class of voting stock of the Company or controls in any manner the election of a majority of the directors of the Company. Control is presumed to exist if a person acquires more than 10% of any class of voting stock and the stock is registered under Section 12 of the Securities Exchange Act of 1934 or the acquiror will be the largest shareholder after the acquisition. Federal Securities Law. The Company has registered its Common Stock with the SEC pursuant to Section 12(g) of the Securities Exchange Act of 1934. As a result of such registration, the proxy and tender offer rules, insider trading reporting requirements, annual and periodic reporting and other requirements of the Exchange Act are applicable to the Company. Transactions with Affiliates. Under current federal law, depository institutions are subject to the restrictions contained in Section 22(h) of the Federal Reserve Act with respect to loans to directors, executive officers and principal shareholders. Under Section 22(h), loans to directors, executive officers and shareholders who own more than 10% of a depository institution (18% in the case of institutions located in an area with less than 30,000 in population), and certain affiliated entities of any of the foregoing, may not exceed, together with all other outstanding loans to such person and affiliated entities, the institution's loans-to-one-borrower limit (as discussed below). Section 22(h) also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers and shareholders who own more than 10% of an institution, and their respective affiliates, unless such loans are approved in advance by a majority of the board of directors of the institution. Any "interested" director may not participate in the voting. The FDIC has prescribed the loan amount (which includes all other outstanding loans to such person), as to which such prior board of director approval is required, as being the greater of $25,000 or 5% of capital and surplus (up to $500,000). Further, pursuant to Section 22(h), the Federal Reserve requires that loans to directors, executive officers, and principal shareholders be made on terms substantially the same as offered in comparable transactions with non-executive employees of the Bank. The FDIC has imposed additional limits on the amount a bank can loan to an executive officer. Loans to One Borrower. The Bank is subject to the Commissioner's loans to one borrower limits which are substantially the same as those applicable to national banks. Under these limits, no loans and extensions of credit to any borrower outstanding at one time and not fully secured by readily marketable collateral shall exceed 15% of the unimpaired capital and unimpaired surplus of the bank. Loans and extensions of credit fully secured by readily marketable collateral may comprise an additional 10% of unimpaired capital and unimpaired surplus. The Gramm-Leach-Bliley Act. Federal legislation adopted by Congress during 1999, the Gramm-Leach-Bliley Act (the "GLB Act"), has dramatically changed various federal laws governing the banking, securities, and insurance industries. The GLB Act has expanded opportunities for banks and bank holding companies to provide services and engage in other revenue-generating activities that previously were prohibited to them. In general, the GLB Act (i) expands opportunities to affiliate with securities firms and insurance companies; (ii) overrides certain state laws that would prohibit certain banking and insurance affiliations; (iii) 9 expands the activities in which banks and bank holding companies may participate; (iv) requires that banks and bank holding companies engage in some activities only through affiliates owned or managed in accordance with certain requirements; (v) reorganizes responsibility among various federal regulators for oversight of certain securities activities conducted by banks and bank holding companies; and (vi) requires banks to adopt and implement policies and procedures for the protection of the financial privacy of their customers, including procedures that allow customers to elect that certain financial information not be disclosed to certain persons. The GLB Act has expanded opportunities for the Bank to provide other services and obtain revenues in the future but, at present, it has not had a significant effect on our respective operations as they are presently conducted. However, this expanded authority also may present us with new challenges as we compete with larger financial institutions that expand their services and products into the same areas that are now feasible for smaller, community-oriented financial institutions. The economic effects of the GLB Act on the banking industry, and on competitive conditions in the financial services industry generally, may be profound. USA Patriot Act. In response to the events of September 11, 2001, President George W. Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, on October 26, 2001. The USA PATRIOT Act gives the federal government new powers to address terrorist threats through many means, including broadened anti-money laundering requirements. For example, by way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act encourages information sharing among banks, bank regulatory agencies, and law enforcement bodies to prevent money laundering. Additionally, Title III of the USA PATRIOT ACT imposes several affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents, and parties registered under the Commodity Exchange Act. Pursuant to Section 352 of the USA PATRIOT Act, all financial institutions must establish anti-money laundering programs that include, at a minimum: (i) internal policies, procedures, and controls, (ii) specific designation of an anti-money laundering compliance officer, (iii) ongoing employee training programs, and (iv) an independent audit function to test the anti-money laundering program. Also, Section 326 of the Act requires certain minimum standards with respect to customer identification and verification. Section 312 of the Act requires financial institutions that establish, maintain, administer, or manage private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) to establish appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering. Furthermore, effective December 25, 2001, financial institutions were prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country), and are subject to certain recordkeeping obligations with respect to correspondent accounts of foreign banks. Bank regulators are directed to consider a company's effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications. Sarbanes-Oxley Act of 2002. On July 30, 2002, the Sarbanes-Oxley Act of 2002 was signed into law and became some of the most sweeping federal legislation addressing accounting, corporate governance and disclosure issues. The impact of the Sarbanes-Oxley Act is wide-ranging as it applies to all public companies and imposes significant new requirements for public company governance and disclosure requirements. Some of the provisions of the Sarbanes-Oxley Act became effective immediately while others have been and will be implemented over the coming months. In general, the Sarbanes-Oxley Act mandates important new corporate governance and financial reporting requirements intended to enhance the accuracy and transparency of public companies' reported financial results. It establishes new responsibilities for corporate chief executive officers, chief financial officers and audit committees in the financial reporting process and creates a new regulatory body to oversee auditors of public companies. It backs these requirements with new SEC enforcement tools, increases criminal penalties for federal mail, wire and securities fraud, and creates new criminal penalties for document and record destruction in connection with federal 10 investigations. It also increases the opportunity for more private litigation by lengthening the statute of limitations for securities fraud claims and providing new federal corporate whistleblower protection. The full impact of the Sarbanes-Oxley Act cannot be fully measured until the SEC completes its actions to implement the numerous provisions for which Congress has delegated implementation authority. The economic and operational effects of this new legislation on public companies, including the Company, will be significant in terms of the time, resources and costs associated with complying with the new law. Because the Sarbanes-Oxley Act, for the most part, applies equally to larger and smaller public companies, the Company will be presented with additional challenges as a smaller, community-oriented financial institution seeking to compete with larger financial institutions in its market. Other. Additional regulations require annual examinations of all insured depository institutions by the appropriate federal banking agency, with some exceptions for small, well-capitalized institutions and state chartered institutions examined by state regulators, and establish operational and managerial, asset quality, earnings and stock valuation standards for insured depository institutions, as well as compensation standards. The Bank is subject to examination by the FDIC and the Commissioner. In addition, the Bank is subject to various other state and federal laws and regulations, including state usury laws, laws relating to fiduciaries, consumer credit and equal credit, fair credit reporting laws and laws relating to branch banking. The Bank, as an insured North Carolina commercial bank, is prohibited from engaging as a principal in activities that are not permitted for national banks, unless (i) the FDIC determines that the activity would pose no significant risk to the appropriate deposit insurance fund and (ii) the Bank is, and continues to be, in compliance with all applicable capital standards. Under Chapter 53 of the North Carolina General Statutes, if the capital stock of a North Carolina commercial bank is impaired by losses or otherwise, the Commissioner is authorized to require payment of the deficiency by assessment upon the bank's shareholders, pro rata, and to the extent necessary, if any such assessment is not paid by any shareholder, upon 30 days notice, to sell as much as is necessary of the stock of such shareholder to make good the deficiency. ITEM 2. DESCRIPTION OF PROPERTY At December 31, 2002, the Company conducted its business from the headquarters office in Durham, North Carolina, and its eight branch offices in Durham, Raleigh, Charlotte and Winston-Salem, North Carolina. The following table sets forth certain information regarding the Bank's properties as of December 31, 2002. Unless indicated otherwise, the Bank owns the properties. Rentals paid by the Bank under leases totaled $36,901 for the fiscal year ended December 31, 2002. NET BOOK VALUE OF ADDRESS PROPERTY ----------------------------------------- -------------- Main Banking Office $ 6,163 116 West Parrish Street Durham, North Carolina (Leased) Corporate Office 3,131,970 2634 Chapel Hill Boulevard Durham, North Carolina Mutual Plaza -0- Durham, North Carolina (Leased) 11 NET BOOK VALUE OF ADDRESS PROPERTY ----------------------------------------- -------------- 2705 Chapel Hill Boulevard 318,529 Durham, North Carolina 13 East Hargett Street 55,712 Raleigh, North Carolina 1824 Rock Quarry Road 87,197 Raleigh, North Carolina (Lease Land Only) 2101 Beatties Ford Road 675 Charlotte, North Carolina 101 Beatties Ford Road 211,236 Charlotte, North Carolina 770 Martin Luther King Drive 909,901 Winston-Salem, North Carolina 100 Shanta Drive 585,000 Raleigh, North Carolina (Land Only) The total net book value of the Company's furniture, fixtures and equipment on December 31, 2002 was $685,946. All properties are considered by management to be in good condition and adequately covered by insurance. Additional information about the Company's property is set forth in Note 6 to the consolidated financial statements, which note is incorporated herein by reference. Any property acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until the time it is sold or otherwise disposed of by the Bank in an effort to recover its investment. At December 31, 2002, the Bank recorded $50,000 in real estate acquired in settlement of loans. ITEM 3. LEGAL PROCEEDINGS From time to time the Company may become involved in legal proceedings occurring in the ordinary course of business. However, subject to the uncertainties inherent in any litigation, management believes there currently are no pending or threatened proceedings that are reasonably likely to result in a material adverse change in the Company's financial condition or operations. 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Company's shareholders during the quarter ended December 31, 2001. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this Item is set forth under the section captioned "Shareholders' Equity and Dividends" on pages 24 and 25 of the Annual Report, which section is incorporated herein by reference. See "Item 1. BUSINESS--Supervision and Regulation-Dividend and Repurchase Limitations" above for regulatory restrictions which limit the ability of the Company to pay dividends. See "Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" below for information or equity compensation plans. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The information required by this Item is set forth in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 10 to 26 of the Annual Report, which section is incorporated herein by reference. ITEM 7. FINANCIAL STATEMENTS The consolidated financial statements of the Company set forth on pages 27 through 46 of the Annual Report are incorporated herein by reference. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The information required by this Item regarding directors and executive officers of the Company is set forth under the sections captioned "Proposal 1 - Election of Directors - Nominees for Election at this Annual Meeting" on pages 14 and 15 of the Proxy Statement and "Executive Officers" on page 6 of the Proxy Statement, which sections are incorporated herein by reference. The information required by this Item regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth under the section captioned "Section 16(a) Beneficial Ownership Reporting Compliance" set forth on page 3 of the Proxy Statement, which section is incorporated herein by reference. ITEM 10. EXECUTIVE COMPENSATION The information required by this Item is set forth under the sections captioned "Board of Directors and Its Committees - How Are Directors Compensated?" on page 7 and "Executive Compensation" on pages 8 through 14 13 of the Proxy Statement, which sections are incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference from the section captioned "Stock Ownership" on pages 3 through 5 of the Proxy Statement and "Executive Compensation - Equity Compensation Plan Information" on page 10 of the Proxy Statement, which sections are incorporated herein by reference. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See the section captioned "Executive Compensation - Indebtedness of and Transactions with Management" on page 14 of the Proxy Statement, which section is incorporated herein by reference. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 13(a)1 Consolidated Financial Statements (contained in the Annual Report attached hereto as Exhibit (13) and incorporated herein by reference) (a) Independent Auditors' Report (b) Consolidated Statements of Condition as of December 31, 2002 and 2001 (3) Consolidated Statements of Income for the Years Ended December 31, 2002, 2001 and 2000 (d) Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2002, 2001 and 2000 (e) Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 (f) Notes to Consolidated Financial Statements 13(a)2 Financial Consolidated Statement Schedules All schedules have been omitted as the required information is either inapplicable or included in the Notes to Consolidated Financial Statements. 13(a)3 Exhibits Exhibit (3)(i) Articles of Incorporation of M&F Bancorp, Inc., incorporated by reference to Exhibit (3) to the Form 10-QSB for the quarter ended September 30, 1999 filed with the Securities and Exchange Commission on November 12, 1999. Exhibit (3)(ii) Bylaws of M&F Bancorp, Inc., incorporated by reference to Exhibit (3) to the Form 10-QSB for the quarter ended September 30, 1999 filed with the Securities and Exchange Commission on November 12, 1999. Exhibit (3)(iii) Amended and Restated Article III, Section 5 of the Bylaws of M & F Bancorp, Inc., adopted by the shareholders of M & F Bancorp, Inc. on April 20, 2002, incorporated by reference to Exhibit 3(iii) to the 14 Form 10-QSB for the quarter ended March 31, 2002 filed with the Securities and Exchange Commission on May 14, 2002. Exhibit (4) Specimen Stock Certificate, incorporated by reference to Exhibit 4 to the Form 10-KSB for the year ended December 31, 2000 filed with the Securities and Exchange Commission on April 2, 2001. Exhibit (10)(a) Employment Agreement between Mechanics and Farmers Bank and Lee Johnson, Jr. incorporated by reference to Exhibit 10 to the Form 10-QSB for the quarter ended September 30, 2000 filed with the Securities and Exchange Commission on November 9, 2000. Exhibit (10)(b) Retention Bonus Agreement between Mechanics and Farmers Bank and Fohliette Becote incorporated by reference to Exhibit 10.03 to the Form 10-QSB for the quarter ended September 30, 1999 filed with the Securities and Exchange Commission on November 12, 1999. Exhibit (10)(c) Retention Bonus Agreement between Mechanics and Farmers Bank and Walter D. Harrington incorporated by reference to Exhibit 10.03 to the Form 10-QSB for the quarter ended September 30, 1999 filed with the Securities and Exchange Commission on November 12, 1999. Exhibit (10)(d) Retention Bonus Agreement between Mechanics and Farmers Bank and Harold G. Sellers incorporated by reference to Exhibit 10.03 to the Form 10-QSB for the quarter ended September 30, 1999 filed with the Securities and Exchange Commission on November 12, 1999. Exhibit (10)(e) Retention Bonus Agreement between Mechanics and Farmers Bank and Elaine Small incorporated by reference to Exhibit 10.03 to the Form 10-QSB for the quarter ended September 30, 1999 filed with the Securities and Exchange Commission on November 12, 1999. Exhibit (11) Statement Regarding Computation of Per Share Earnings. Exhibit (13) M&F Bancorp, Inc. 2002 Annual Report to Stockholders, excluding pages 2 through 9. Exhibit (21) Subsidiaries of M&F Bancorp, Inc. Exhibit (23) Consent of Deloitte & Touche LLP. Exhibit (99) Certification pursuant to 18 U.S.C. Section 1350. ITEM 14. CONTROLS AND PROCEDURES The Company maintains a system of internal controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. The Company's Board of Directors, operating through its audit committee which is composed entirely of independent outside directors, provides oversight to the Company's financial reporting process. 15 The Chief Executive Officer and the Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of a date within 90 days prior to the date of the filing of this Report, that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Bank's management, including the Chief Executive Officer and the Chief Financial Officer of the Company, as appropriate to allow timely decisions regarding required disclosure. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation. 16 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. M&F Bancorp, Inc. By: /s/ Lee Johnson, Jr. -------------------------------------- Lee Johnson, Jr. President and Chief Executive Officer Date: March 18, 2003 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature Title Date - ------------------------------- ---------------------------------- -------------- /s/ Lee Johnson, Jr. President, Chief Executive Officer March 18, 2003 - ------------------------------- and Director Lee Johnson, Jr. (Principal Executive Officer) /s/ Fohliette W. Becote Secretary and Treasurer March 18, 2003 - ------------------------------- (Principal Financial and Principal Fohliette W. Becote Accounting Officer) /s/ Benjamin S. Ruffin Director March 18, 2003 - ------------------------------- Benjamin S. Ruffin /s/ Joseph M. Sansom Director March 18, 2003 - ------------------------------- Joseph M. Sansom /s/ Aaron L. Spaulding Director March 18, 2003 - ------------------------------- Aaron L. Spaulding /s/ Genevia G. Fullbright Director March 18, 2003 - ------------------------------- Genevia G. Fullbright /s/ Maceo K. Sloan Director March 18, 2003 - ------------------------------- Maceo K. Sloan
17 CERTIFICATIONS I, Lee Johnson, Jr. certify that: 1. I have reviewed this annual report on Form 10-KSB of M & F Bancorp, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 18, 2003 /s/ Lee Johnson, Jr. ----------------------------------------- Lee Johnson, Jr. President and Chief Executive Officer 18 CERTIFICATIONS I, Fohliette W. Becote, certify that: 1. I have reviewed this annual report on Form 10-KSB of M & F Bancorp, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 18, 2003 /s/ Fohliette W. Becote ----------------------------------------- Fohliette W. Becote Secretary, Treasurer and Chief Financial Officer 19 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION - ----------- ---------------------------------------------------------------- Exhibit (11) Statement Regarding Computation of Per Share Earnings Exhibit (13) M&F Bancorp, Inc. 2002 Annual Report to Stockholders, excluding pages 2 through 9 Exhibit (21) Subsidiaries of M&F Bancorp, Inc. Exhibit (23) Consent of Deloitte & Touche LLP Exhibit (99) Certification Pursuant to 18 U.S.C. Section 1350 20 EX-11 3 dex11.txt EXHIBIT 11 EXHIBIT 11 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS The information required by this Exhibit is set forth in the Consolidated Statements of Income for the Years Ended December 31, 2002, 2001 and 2000 and Note 1 "Significant Accounting Policies - Earnings Per Share" on pages 29 and 33 of the Company's 2002 Annual Report, which sections are incorporated herein by reference. EX-13 4 dex13.txt EXHIBIT 13 EXHIBIT 13 2002 ANNUAL REPORT The 2002 Annual Report, excluding pages 2 through 9, is Exhibit 13 to this Form 10-KSB. BUILDING ON OUR LEGACY TO FACE A CHANGING WORLD [LOGO OF M&F BANCORP, INC.] 2002 ANNUAL REPORT M&F BANCORP, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL HIGHLIGHTS
For the Year December 31, December 31, Increase Percent Ended 2002 2001 (Decrease) Change - ------------------------------------------------------------------------------------------------------------- INCOME Net Income $ 1,035,750 $ 906,693 $ 129,057 14.23% - ------------------------------------------------------------------------------------------------------------- Dividends Declared $ 272,673 $ 273,192 $ (519) (0.19)% - ------------------------------------------------------------------------------------------------------------- Payout Ratio (Dividends/Net Income) 26.21% 30.13% (3.92)% (13.01)% - ------------------------------------------------------------------------------------------------------------- Return on Average Assets 0.58% 0.55% .03% 5.45% - ------------------------------------------------------------------------------------------------------------- Return on Average Equity 5.75% 5.12% .63% 12.30% - ------------------------------------------------------------------------------------------------------------- PER SHARE Net Income $ 1.22 $ 1.06 $ .16 15.09% - ------------------------------------------------------------------------------------------------------------- Cash Dividends Declared .32 .32 -- -- - ------------------------------------------------------------------------------------------------------------- Book Value $ 21.58 $ 20.91 $ .67 3.20% - ------------------------------------------------------------------------------------------------------------- Average Common Share Outstanding 846,676 853,725 (7,049) (.83)% - ------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA AT YEAR END (THOUSANDS) Assets $ 187,431 $ 168,096 $ 19,335 11.50% - ------------------------------------------------------------------------------------------------------------- Deposits 149,818 135,383 14,435 10.66% - ------------------------------------------------------------------------------------------------------------- Loans (Net) 138,134 120,380 19,773 16.43% - ------------------------------------------------------------------------------------------------------------- Investment Securities(1) 30,469 30,326 (143) (.47)% - ------------------------------------------------------------------------------------------------------------- Shareholders' Equity 18,187 17,853 334 1.87% - ------------------------------------------------------------------------------------------------------------- (1) - Includes Federal Home Loan Bank stock.
Annual Meeting: The Annual Meeting of Shareholders of M&F Bancorp, Inc., a North Carolina Corporation, will be held in the auditorium of the M&F Bank Corporate Center, 2634 Chapel Hill Blvd., Durham, N.C. on Tuesday, May 13, 2003 at 10:00 a.m. All shareholders are cordially invited to attend. Transfer Agent: American Stock Transfer & Trust Company,59 Maiden Lane, New York, N.Y. 10007, Telephone 1-800-937-5449. Form 10-KSB: On the written request of any shareholder of record as of March 17, 2003, the Company will provide to said shareholder, without charge, a copy of the Company's Annual Report on Form 10-KSB, including the financial statements and all schedules as required to be filed with the Securities Exchange Commission under the Securities Exchange Act of 1934. All requests should be sent to: Lee Johnson, Jr., President/CEO, M&F Bancorp, Inc., Post Office Box 1932, Durham, North Carolina 27702-1932. For additional information about M&F Bancorp, Inc., please contact Lee Johnson, Jr., President/CEO, Elaine Small, Vice President, or Fohliette W. Becote, Secretary/Treasurer, at 919-683-1521. TOTAL ASSETS (Millions) [GRAPHIC APPEARS HERE] TOTAL SHAREHOLDERS' EQUITY (Millions) [GRAPHIC APPEARS HERE] NET INCOME (Millions) [GRAPHIC APPEARS HERE] TABLE OF CONTENTS A Message To Our Shareholders ................................ 2 Management's Discussion and Analysis ......................... 10 Report of Deloitte & Touche LLP .............................. 27 Financial Statements ......................................... 28 Board of Directors and Management ............................ 47 [LOGO APPEARS HERE] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DESCRIPTION OF BUSINESS Based in Durham, North Carolina, M&F Bancorp, Inc. is the holding company for Mechanics and Farmers Bank, a state chartered commercial bank that was organized in 1907. The holding company was established in 1999 through a tax free exchange of M&F Bancorp, Inc. common stock for existing shares of Mechanics and Farmers Bank common stock. The Bank provides a broad range of financial products and services through eight offices located in the North Carolina markets below: Number of Market Branches - ------ --------- Durham 3 Raleigh 2 Charlotte 2 Winston-Salem 1 SUMMARY The following discussion, analysis of earnings and related financial data should be read in conjunction with the audited financial statements and related notes to the consolidated financial statements. It is intended to assist you in understanding the financial condition as of December 31, 2002 and 2001 and the results of operations for the years ended 2002, 2001 and 2000 for the Company and its subsidiary. FORWARD-LOOKING STATEMENTS When used in the Annual Report, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or other similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Bank's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Bank's market area, and competition that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or occurrences after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. ASSET LIABILITY MANAGEMENT Asset liability management activities are designed to ensure long-term profitability, minimize risk, and maintain adequate liquidity and capital levels. It is the responsibility of the Bank's Asset Liability Committee to set policy guidelines and to establish long-term strategies with respect to interest rate exposure and liquidity. That committee, which is comprised of the Bank's executive management and two outside directors, meets regularly to review the Bank's interest rate and liquidity risk exposures in relation to present and anticipated market and business conditions. The committee also establishes funding and balance sheet management strategies that are intended to ensure that the potential impact on earnings and liquidity are within acceptable levels. Asset liability management is achieved through comprehensive planning processes, month-to-month analysis, yearly budgeting and long-range planning. Specific consideration is given to many variables, including but not limited to, interest rates, balance sheet volumes and maturities of both the earning assets and all deposit categories and borrowings. The interest rate sensitivity schedule is reflected in Table 1. Rate Sensitivity Analysis. This table reflects the Bank's interest sensitivity analysis as of December 31, 2002 and describes, at various cumulative intervals, the gap ratios (ratios of rate-sensitive assets to rate-sensitive liabilities) for assets and liabilities that management considers rate sensitive. When interest sensitive liabilities exceed interest sensitive assets, a negative interest sensitive gap 10 results. This gap shows the additional amount of liabilities being repriced during a period over interest sensitive assets during the period. The gap is positive when the reverse situation occurs. As of December 31, 2002,the one-year cumulative interest sensitivity gap was negative $84,992 versus negative $63,981 at December 31, 2001; the ratio of the cumulative interest sensitivity gap as a percent of total earning assets was a negative 49.32 percent as of December 31, 2002, compared with a negative 40.76 percent as of December 31, 2001. This incremental change was due to an increase in interest sensitive liabilities which exceeded the growth in interest sensitive assets with maturities within the twelve month period. LIQUIDITY Liquidity reflects the Bank's ability to meet its funding needs, which includes the extension of credit, meeting deposit withdrawals, and generally to sustain operations. In addition to its level of liquid assets, many other factors affect a bank's ability to meet liquidity needs, including access to additional funding sources, total capital position and general market conditions. Because a large portion of bank deposits are payable upon demand, banks must protect themselves against liquidity risk through the maintenance of adequate funds which are liquid, or can readily be converted into liquid assets. The Bank provides for liquidity by three methods: core deposits, borrowings from the Federal Home Loan Bank, and borrowings from the Federal Reserve Bank. Total deposits were approximately $149,818,000 at December 31, 2002. These figures compare with $135,383,000 as of December 31, 2001. The Bank had advances outstanding of $16,553,215 at the Federal Home Loan Bank as of December 31, 2002. The Bank has the availability of an additional $7.0 million from the Federal Home Loan Bank. The Bank also has a line of credit of $3,351,636 established at the Federal Reserve Bank available to meet liquidity needs. On December 31, 2002, the Bank's liquidity ratio was 12.90 percent, which was above state regulatory requirements. Management believes the core deposits, borrowings from the Federal Home Loan Bank and the Federal Reserve Bank, are adequate to meet the liquidity needs of the Bank. CRITICAL ACCOUNTING POLICIES We have established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Our significant accounting policies are described in the Notes to the Consolidated Financial Statements beginning on page 28. Certain accounting policies require us to make significant estimates and assumptions which have a material impact on the carrying value of certain assets and liabilities, and we consider these to be critical accounting policies. The estimates and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods. We believe the following are critical accounting policies that require management's judgment in making significant estimates and assumptions that are particularly susceptible to significant change. Allowance for Possible Loan Losses The allowance for possible loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. 11 A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. For a more detailed discussion on the allowance for possible loan losses, see "Table 7. Nonaccrual, Past Due," "Table 8. Loan Loss and Recovery Experience," "Table 9. Allocation of the Allowance for Loan Losses" on pages 21 and 23, and "Allowance for Possible Loan Losses" in Note 1 to the Consolidated Financial Statements for the year ended December 31, 2002 ("Significant Accounting Policies") on page 32. Pension Plans The Company maintains a qualified defined benefit cash balance pension plan (the "Qualified Plan"), which covers substantially all full time employees and an unfunded excess plan (the "Supplemental Plan") to provide benefits to a select group of highly compensated employees that would otherwise be provided under the Qualified Plan were there not maximum benefit and compensation limits applicable under the tax law. Our pension costs for both plans were approximately $188,000 and $154,000 for the fiscal years ended December 31, 2002 and 2001, respectively. The pension cost is determined based on a number of actuarial assumptions, including an expected long-term rate of return on Qualified Plan assets of 8 percent. In developing our expected long-term rate of return assumption, we evaluated input from our actuaries and investment advisors, including the expected return on the asset class, in which all assets are invested, a Value Builder mutual fund, and the historical return on the fund in which the assets are invested. The 10-year and 20-year compounded annual net rates of return for this fund are 8.77 percent and 8.87 percent, respectively. Gains or losses resulting from investment performance that deviate from the expected return are included in the total amount of accumulated experience gains or losses. Under the method prescribed by generally accepted accounting principals, the pension cost for any year includes the amortization of the excess of any previously unrecognized over 10 percent of the fair value of plan assets, or 10 percent the plan's projected benefit obligation, if greater, over the average expected future working lifetime of the covered employees. The discount rate that we utilize for determining the value of future obligations is based on a review of the yields on high quality fixed income securities, as measured by the yield on the highest rated long-term bonds given by a recognized rating agency. The discount rate determined on this basis has decreased from 7.00 percent at December 31, 2001 to 6.50 percent as of December 31, 2002. Due to the effect of 2002 investment performance of plan assets and the reduction in the discount rate, we estimate that total pension cost for all plans will be approximately $255,000 in fiscal 2003. Actual pension cost for subsequent fiscal periods will depend on future investment performance of plan assets, changes in the future discount rates and various other factors related to the characteristics of current and former employees participating in our pension plans. 12 A 50 basis point reduction in our expected long-term rate of return would have increased our total 2002 pension cost by approximately $13,000 (6.91 percent). A 50 basis point reduction in the assumed discount rate at December 31, 2002 and 2001 respectively would have increased our total 2002 pension cost by approximately $31,000 (16.49 percent). Even though during 2002 we contributed $497,000 to the Qualified Plan trust, the value of the Qualified Plan trust assets decreased from $2.51 million as of December 31, 2001 to $2.46 million as of December 31, 2002. This investment performance in conjunction with the reduction in the interest discount rate increased the value of unfunded Qualified Plan projected benefit obligations from $732,000 at December 31, 2001 to $1.00 million at December 31, 2002; similarly the Qualified Plans unfunded accumulated benefit obligation increased from $673,000 as of December 31, 2001 to $945,000 as of December 31, 2002. Because of the increase in the unfunded accumulated benefit obligation we were required under generally accepted accounting principles to make a balance sheet adjustment of $593,000 and $258,000 before taxes to Other Comprehensive Income during the year ended December 31, 2002 and 2001, respectively, in order to meet the required balance sheet recognition of an additional pension liability of $850,000 before taxes at December 31, 2002. Investment performance in conjunction with the reduction in the interest discount rate increased the value of the unfunded projected benefit obligation from $780,000 at December 31, 2001 to $916,000 at December 31, 2002 for the Supplemental Plan; similarly the excess plan unfunded accumulated benefit obligation increased from $557,162 as of December 31, 2001 to $686,000 at December 31, 2002. Because of the increase in the unfunded accumulated benefit obligation we were required under generally accepted accounting principles to make a balance sheet adjustment of $177,000 before taxes to Other Comprehensive Income at December 31, 2002. No adjustment was required for the year ended December 31, 2001. 2002 COMPARED WITH 2001 Interest and fees on loans increased $584,064 or 5.96 percent during 2002 which was the result of a 15.07 percent increase in loans outstanding offset by a reduction in the interest rates. The yield on the loan portfolio was 7.38 percent for 2002 compared to 8.01 percent for 2001. Interest and dividends on investments were $1,259,661, an 18.64 percent decrease from the $1,548,333 earned in 2001. The decrease on interest and dividends on investments was primarily the result of lower interest rates, a yield of 4.23 percent compared to 5.09 percent for the prior year. Interest on interest-bearing accounts decreased to $116,293 in 2002 from $353,931 which represents a 67.14 percent decrease from 2001. The decrease was the result of decreased balances and lower interest rates. Interest expense on deposits decreased $788,037 to $2,929,537 in 2002, or 21.20 percent from $3,717,574 in 2001 due to the lower interest rates. The cost of funds for 2002 was 2.49 percent compared to 3.49 percent for 2001. Interest on borrowed funds decreased to $617,648 from $629,245, a 1.84 percent decrease. The modest decrease was the result of lower interest rates. During periods of rising interest rates, the Bank's rate sensitive assets cannot be repriced as quickly as its rate sensitive liabilities. Thus, the Bank's net interest income will generally decrease. In periods of declining interest rates the opposite effect occurs. Provisions for possible loan losses increased $126,804 from the prior year's amount of $611,052 to $737,856, an increase of 20.75 percent. The increase is the result of management's evaluation of the classified loans. In addition to evaluating the status of specific loans as of December 31, 2002 management considered other factors such as declines in the local economy in the markets we serve. Service charges on deposit accounts remained relatively flat over 2001 increasing only 1.76 percent. Other no interest income increased $133,825 or 71.10 percent to $322,034 from $188,209 for the prior year. The significant increase resulted from $155,000 in increased cash value of bank owned life insurance policies offset by small changes in other miscellaneous income accounts. 13 Salary and employee benefits increased 10.95 percent to $4,843,331 from $4,365,391 for the prior year. The increase was the result of merit increases, the increased cost of insurance products, and the increase in the number of employees. The Company had 93 employees at December 31, 2002 compared to 85 employees at December 31, 2001. The increased number of employees was primarily the result of filling vacancies in 2002 which remained open for the majority of 2001. Occupancy expense increased $59,054 or 8.65 percent from the level in 2001. Equipment expenses decreased $17,659 or 3.19 percent from the prior year largely due to a lower depreciation partially offset by increased repair costs. Data processing increased by $89,796 or 29.71 percent from the prior year primarily as a result of higher courier costs associated with more automatic teller machines. Miscellaneous other expenses remained stable $1,631,052 in 2002 compared to $1,631,351 in 2001. This category is comprised of many other operating expense accounts that had minor increases/decreases, the net of which represents a net increase in the other expense category. 2001 COMPARED WITH 2000 Interest and fees on loans decreased $157,220 or 1.58 percent during 2001. Total interest and dividends decreased 1.58 percent from $12,011,286 to $11,699,056 which was the result of the significant reductions in the interest rates. Interest and dividends on investment securities were $1,548,333, a 16.94 percent decrease from the $1,864,121 earned in 2000. Interest on federal funds sold and interest-bearing deposits increased to $353,931 in 2001 from $193,153 in 2000, which represented an increase of 83.23 percent. Interest expense from deposits increased $170,340 to $3,717,574 in 2001, a 4.80 percent increase from interest expense on deposits of $3,547,234 in 2000 due primarily to an increase in average deposits during 2001 over 2000. Interest on borrowed funds increased $59,451 from the 2000 level of $569,794 or 10.43 percent. The increase in this account compared with 2000 is due to interest expense on a 1.9 million dollar Community Investment Program funds advance from the Federal Home Loan Bank at 7.26 percent with a scheduled maturity of July 16, 2018 which was outstanding for the full year in 2001 compared to approximately six months in 2000. Provisions for possible loan losses decreased $16,500 from the prior year's amount of $627,552 to $611,052, a decrease of 2.63 percent. This decrease is primarily attributable to a decrease in non-performing loans. Service charges on deposit accounts increased $180,692 or 14.73 percent from $1,226,610 in 2000 to $1,407,302 in 2001. The increase was the result of an increase in volume of activity of current customers. In 2001, income from other categories was $410,798, an increase of 10.25 percent from $372,599 in 2000. The majority of the increase in the category was attributed to increased rental income resulting from full occupancy of the corporate facility. Changes in other miscellaneous income are included in this income category and, therefore, subject this account to wide fluctuations. Other expenses, which are primarily comprised of noninterest expense items, decreased 3.66 percent to $7,369,592 from $7,649,657 in 2000. Personnel costs, which include salaries, bonuses and employee benefits, decreased 1.23 percent to $4,365,391 from $4,419,668 in 2000. The reduction in personnel costs was largely due to the reduction in incentive compensation for 2001 which was $31,057 compared to $112,745 for 2000. Occupancy expense decreased $63,887 or 10.98 percent from the level in 2000. The decrease in occupancy expense was the result primarily of lower security costs. Equipment expense of $552,849 reflected a decrease of $78,827 or 12.48 percent from 2000. The reduction was due to a reduction in the maintenance costs on equipment. Data processing expense increased 1.13 percent to $302,156 in 2001. Miscellaneous other expenses decreased 5.27 percent to $1,201,579 in 2001 from $1,268,417 in 2000. This category is comprised of many other operating expense accounts that had minor increases/decreases, the net of which represents the decrease in the other expense category. 14 FIVE-YEAR SUMMARY Financial Condition Data at December 31,
2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------- Assets $ 187,430,816 $ 168,096,297 $ 166,960,664 - ---------------------------------------------------------------------------------------------------------------- Total Investment Securities 30,468,615 30,325,700 31,044,082 - ---------------------------------------------------------------------------------------------------------------- Loans receivable, net 138,133,639 120,380,413 112,804,835 - ---------------------------------------------------------------------------------------------------------------- Deposits 149,817,765 135,383,213 135,146,259 - ---------------------------------------------------------------------------------------------------------------- Borrowed Funds 16,553,215 12,375,208 11,895,273 - ---------------------------------------------------------------------------------------------------------------- Shareholders' Equity 18,186,528 17,853,344 17,706,249 ================================================================================================================ 1999 1998 - -------------------------------------------------------------------------------------- Assets $ 157,744,370 $ 153,965,311 - -------------------------------------------------------------------------------------- Total Investment Securities 32,477,214 34,162,302 - -------------------------------------------------------------------------------------- Loans receivable, net 103,559,855 94,317,569 - -------------------------------------------------------------------------------------- Deposits 129,529,153 125,293,823 - -------------------------------------------------------------------------------------- Borrowed Funds 10,000,000 10,000,000 - -------------------------------------------------------------------------------------- Shareholders' Equity 16,299,350 16,496,856 ====================================================================================== Operating Data for the Years Ended December 31, Operating Income: 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------- Total Interest and Dividend Income 11,756,810 11,669,056 12,011,286 - ---------------------------------------------------------------------------------------------------------------- Total Interest Expense 3,547,185 4,346,819 4,117,028 - ---------------------------------------------------------------------------------------------------------------- Net Interest Income 8,209,625 7,352,237 7,894,258 - ---------------------------------------------------------------------------------------------------------------- Loan Loss Provision 737,856 611,052 627,552 - ---------------------------------------------------------------------------------------------------------------- Total Other Income 2,168,105 1,818,100 1,599,209 - ---------------------------------------------------------------------------------------------------------------- Total Other Expenses 8,143,124 7,369,592 7,649,657 - ---------------------------------------------------------------------------------------------------------------- Income Before Income Tax Expense 1,496,750 1,189,693 1,216,258 - ---------------------------------------------------------------------------------------------------------------- Income Tax Expense 461,000 283,000 314,000 - ---------------------------------------------------------------------------------------------------------------- Net Income $ 1,035,750 $ 906,693 $ 902,258 - ---------------------------------------------------------------------------------------------------------------- Per Share Data: Net Income - Basic and Diluted $ 1.23 $ 1.06 $ 1.06 - ---------------------------------------------------------------------------------------------------------------- Cash Dividends Declared $ 0.32 $ 0.32 $ 0.32 - ---------------------------------------------------------------------------------------------------------------- Weighted-Average Common Shares Outstanding 846,676 853,725 853,731 - ---------------------------------------------------------------------------------------------------------------- Operating Data for the Years Ended December 31, Operating Income: 1999 1998 - -------------------------------------------------------------------------------------- Total Interest and Dividend Income 10,858,643 10,439,791 - -------------------------------------------------------------------------------------- Total Interest Expense 3,585,065 3,353,961 - -------------------------------------------------------------------------------------- Net Interest Income 7,273,578 7,085,830 - -------------------------------------------------------------------------------------- Loan Loss Provision 244,305 392,035 - -------------------------------------------------------------------------------------- Total Other Income 1,625,650 1,560,954 - -------------------------------------------------------------------------------------- Total Other Expenses 7,231,406 6,585,226 - -------------------------------------------------------------------------------------- Income Before Income Tax Expense 1,423,517 1,669,523 - -------------------------------------------------------------------------------------- Income Tax Expense 353,000 455,499 - -------------------------------------------------------------------------------------- Net Income $ 1,070,517 $ 1,214,024 - -------------------------------------------------------------------------------------- Per Share Data: Net Income - Basic and Diluted $ 1.25 $ 1.42 - -------------------------------------------------------------------------------------- Cash Dividends Declared $ 0.35 $ 0.52 - -------------------------------------------------------------------------------------- Weighted-Average Common Shares Outstanding 853,820 853,830 - --------------------------------------------------------------------------------------
15 TABLE 1. RATE SENSITIVITY ANALYSIS
MATURITIES 3 MONTHS 4 TO 12 TOTAL WITHIN (DOLLARS IN THOUSANDS) OR LESS MONTHS 12 MONTHS - ------------------------------------------------------------------------------------------------------------- INTEREST EARNING ASSETS Loans $ 12,879 $ 15,424 $ 28,303 - ------------------------------------------------------------------------------------------------------------- Investment Securities 4,761 5,728 10,489 - ------------------------------------------------------------------------------------------------------------- In-Bearing Deposits 1,119 - 1,119 - ------------------------------------------------------------------------------------------------------------- Total Interest-Earning Assets $ 18,759 $ 21,152 $ 39,911 ============================================================================================================= Percent of Total Interest-Earning Assets 10.89% 12.27% 23.16% - ------------------------------------------------------------------------------------------------------------- Cumulative Percent of Total Interest Earning-Assets 10.89% 23.16% 23.16% - ------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES Time Deposits $100,000 or More $ 5,182 $ 8,459 $ 13,641 - ------------------------------------------------------------------------------------------------------------- Savings, Now and Money Market Deposits 78,931 - 78,931 - ------------------------------------------------------------------------------------------------------------- Other Time Deposits 9,579 12,740 22,319 - ------------------------------------------------------------------------------------------------------------- Borrowed Funds 6 10,006 10,012 - ------------------------------------------------------------------------------------------------------------- Total Interest-Bearing Liabilities $ 93,698 $ 31,205 $ 124,903 ============================================================================================================= Percent of Total Interest-Bearing Liabilities 66.54% 22.16% 88.70% - ------------------------------------------------------------------------------------------------------------- Cumulative Percent of Total Interest-Bearing Liabilities 66.54% 88.70% 88.70% - ------------------------------------------------------------------------------------------------------------- Ratio of Interest-Earning Assets to Interest-Bearing Liabilities (Gap Ratio) 20.02% 67.88% 31.95% - ------------------------------------------------------------------------------------------------------------- Cumulative Ratio of Interest-Earning Assets to Interest-Bearing Liabilities (Cumulative Gap Ratio) 20.01% 31.95% 31.95% - ------------------------------------------------------------------------------------------------------------- Interest Sensitivity Gap $ (74,939) $ (10,053) $ (84,992) - ------------------------------------------------------------------------------------------------------------- Cumulative Interest Sensitivity Gap (74,939) (84,992) (84,992) - ------------------------------------------------------------------------------------------------------------- Cumulative Interest Sensitivity Gap as a Percent of Total Interest-Earning Assets (43.49)% (49.32)% - ------------------------------------------------------------------------------------------------------------- OVER (DOLLARS IN THOUSANDS) 12 MONTHS TOTAL - ------------------------------------------------------------------------------------------ INTEREST EARNING ASSETS Loans $ 112,440 $ 140,743 - ------------------------------------------------------------------------------------------ Investment Securities 19,980 30,469 - ------------------------------------------------------------------------------------------ In-Bearing Deposits - 1,119 - ------------------------------------------------------------------------------------------ Total Interest-Earning Assets $ 132,420 $ 172,331 ========================================================================================== Percent of Total Interest-Earning Assets 76.84% 100.00% - ------------------------------------------------------------------------------------------ Cumulative Percent of Total Interest Earning-Assets 100.00% - ------------------------------------------------------------------------------------------ INTEREST-BEARING LIABILITIES Time Deposits $100,000 or More $ 3,283 $ 16,924 - ------------------------------------------------------------------------------------------ Savings, Now and Money Market Deposits - 78,931 - ------------------------------------------------------------------------------------------ Other Time Deposits 6,092 28,411 - ------------------------------------------------------------------------------------------ Borrowed Funds 6,541 16,553 - ------------------------------------------------------------------------------------------ Total Interest-Bearing Liabilities $ 15,916 $ 140,819 ========================================================================================== Percent of Total Interest-Bearing Liabilities 11.30% 100.00% - ------------------------------------------------------------------------------------------ Cumulative Percent of Total Interest-Bearing Liabilities 100.00% - ------------------------------------------------------------------------------------------ Ratio of Interest-Earning Assets to Interest-Bearing Liabilities (Gap Ratio) 831.99% - ------------------------------------------------------------------------------------------ Cumulative Ratio of Interest-Earning Assets to Interest-Bearing Liabilities (Cumulative Gap Ratio) 122.38% - ------------------------------------------------------------------------------------------ Interest Sensitivity Gap $ 116,504 $ 31,512 - ------------------------------------------------------------------------------------------ Cumulative Interest Sensitivity Gap 31,512 - ------------------------------------------------------------------------------------------ Cumulative Interest Sensitivity Gap as a Percent of Total Interest-Earning Assets (49.32)% 18.29% - ------------------------------------------------------------------------------------------
(1) Includes Federal Home Loan Bank Stock During periods of rising interest rates, the Bank's rate sensitive assets cannot be repriced as quickly as its rate sensitive liabilities. Thus, the Bank's net interest income will generally decrease. In periods of declining interest rates, the opposite effect would be expected to occur. TOTAL DEPOSITS (Millions) [GRAPHIC APPEARS HERE] TOTAL LOANS (Millions) [GRAPHIC APPEARS HERE] DIVIDENDS (Per Share) [GRAPHIC APPEARS HERE] 16 The following table reflects the average yields on assets and average costs of liabilities for the years ended December 31, 2002, 2001 and 2000. The average yields and costs are derived by dividing income or expense by the average balances of interest-earning assets and interest-bearing liabilities, respectively, for the periods presented. TABLE 2. AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS
(DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31 - ----------------------------------------------------------------------------------------------------------------------------------- 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- AVERAGE AVERAGE AMOUNT PAID AVERAGE AVERAGE AMOUNT PAID BALANCE RATE OR EARNED BALANCE RATE OR EARNED - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS - ----------------------------------------------------------------------------------------------------------------------------------- LOANS (1) $ 127,601 8.14% $ 10,381 $ 115,467 8.48% $ 9,797 - ----------------------------------------------------------------------------------------------------------------------------------- TAXABLE SECURITIES 20,643 4.11% 848 20,926 5.36% 1,121 - ----------------------------------------------------------------------------------------------------------------------------------- NON-TAXABLE SECURITIES 9,147 4.50% 412 9,488 4.50% 427 - ----------------------------------------------------------------------------------------------------------------------------------- FEDERAL FUNDS SOLD 0 0.00% 0 103 1.94% 2 - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING DEPOSITS 6,367 1.82% 116 8,074 4.36% 352 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST-EARNING ASSETS $ 163,758 7.18% $ 11,757 $ 154,058 7.59% $ 11,699 - ----------------------------------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS 5,368 4,994 - ----------------------------------------------------------------------------------------------------------------------------------- BANK PREMISES AND EQUIPMENT, NET 5,202 5,271 - ----------------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS 2,097 569 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 176,425 $ 11,757 $ 164,892 $ 11,699 =================================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING DEMAND $ 20,989 0.52% $ 109 $ 20,011 0.55% $ 110 - ----------------------------------------------------------------------------------------------------------------------------------- SAVINGS 50,800 2.64% 1,343 38,100 3.07% 1,170 - ----------------------------------------------------------------------------------------------------------------------------------- TIME DEPOSITS 45,901 3.22% 1,477 47,472 5.14% 2,438 - ----------------------------------------------------------------------------------------------------------------------------------- BORROWED FUNDS 11,893 5.20% 618 11,949 5.26% 629 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST BEARING LIABILITIES $ 129,583 2.74% $ 3,547 $ 117,532 3.70% $ 4,347 - ----------------------------------------------------------------------------------------------------------------------------------- NON-INTEREST-BEARING DEPOSITS 26,806 26,911 - ----------------------------------------------------------------------------------------------------------------------------------- OTHER LIABILITIES 2,194 2,482 - ----------------------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY 17,842 17,697 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 176,425 $ 3,547 $ 164,622 $ 4,347 =================================================================================================================================== YIELD ON INTEREST-EARNING ASSETS - ----------------------------------------------------------------------------------------------------------------------------------- NEW YIELD ON INTEREST-EARNING ASSETS AND NET INTEREST INCOME 5.01% $ 8,210 4.77% $ 7,352 - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST RATE SPREAD (2) 4.44% 3.89% - ----------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31 - ------------------------------------------------------------------------------------ 2002 - ------------------------------------------------------------------------------------ AVERAGE AVERAGE AMOUNT PAID BALANCE RATE OR EARNED - ------------------------------------------------------------------------------------ ASSETS - ------------------------------------------------------------------------------------ LOANS (1) $ 109,103 9.12% $ 9,954 - ------------------------------------------------------------------------------------ TAXABLE SECURITIES 22,112 6.36% 1,407 - ------------------------------------------------------------------------------------ NON-TAXABLE SECURITIES 10,316 4.43% 457 - ------------------------------------------------------------------------------------ FEDERAL FUNDS SOLD 580 8.45% 49 - ------------------------------------------------------------------------------------ INTEREST-BEARING DEPOSITS 2,228 6.46% 144 - ------------------------------------------------------------------------------------ TOTAL INTEREST-EARNING ASSETS $ 144,339 8.32% $ 12,011 - ------------------------------------------------------------------------------------ CASH AND DUE FROM BANKS 5,241 - ------------------------------------------------------------------------------------ BANK PREMISES AND EQUIPMENT, NET 5,209 - ------------------------------------------------------------------------------------ OTHER ASSETS 2,168 - ------------------------------------------------------------------------------------ TOTAL ASSETS $ 156,957 $ 12,011 ==================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------ INTEREST-BEARING DEMAND $ 20,942 0.56% $ 117 - ------------------------------------------------------------------------------------ SAVINGS 36,779 3.22% 1,184 - ------------------------------------------------------------------------------------ TIME DEPOSITS 42,731 5.26% 2,246 - ------------------------------------------------------------------------------------ BORROWED FUNDS 11,036 5.16% 570 - ------------------------------------------------------------------------------------ TOTAL INTEREST BEARING LIABILITIES $ 111,488 3.69% $ 4,117 - ------------------------------------------------------------------------------------ NON-INTEREST-BEARING DEPOSITS 26,738 - ------------------------------------------------------------------------------------ OTHER LIABILITIES 2,141 - ------------------------------------------------------------------------------------ SHAREHOLDERS' EQUITY 16,590 - ------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 156,957 $ 4,117 ==================================================================================== YIELD ON INTEREST-EARNING ASSETS - ------------------------------------------------------------------------------------ NEW YIELD ON INTEREST-EARNING ASSETS AND NET INTEREST INCOME 5.47% $ 7,894 - ------------------------------------------------------------------------------------ INTEREST RATE SPREAD (2) 4.63% - ------------------------------------------------------------------------------------
/1/ Average loans, net of the allowance for possible loan losses and unearned income. These figures include non-accrual loans, the effect of which is to lower the average rates. /2/ The interest rate spread is the interest earning assets rate less interest earning liabilities rate. 17 The following table analyzes the dollar amount of changes in interest income and interest expense for the major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between variations due to changes in volume and those due to changes in rates. TABLE 3. VOLUME AND RATE VARIANCE ANALYSIS
(DOLLARS IN THOUSANDS) 2002 COMPARED TO 2001 2001 COMPARED TO 2000 - --------------------------------------------------------------------------------------------------------------- INTEREST INCOME ON INTEREST-BEARING ASSETS VOLUME RATE TOTAL VOLUME RATE TOTAL - --------------------------------------------------------------------------------------------------------------- LOANS $ 1,400 $ (816) $ 584 $ 618 $ (775) $ (157) - --------------------------------------------------------------------------------------------------------------- TAXABLE SECURITIES 20 (292) (272) (28) (259) (287) - --------------------------------------------------------------------------------------------------------------- NON-TAXABLE SECURITIES (11) (5) (16) (14) (15) (29) - --------------------------------------------------------------------------------------------------------------- INTEREST-BEARING DEPOSITS (45) (193) (238) 254 (93) 161 - --------------------------------------------------------------------------------------------------------------- TOTAL INTEREST INCOME $ 1,364 $ (1,306) $ 58 $ 830 $ (1,142) $ (312) =============================================================================================================== INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES TIME DEPOSITS $100M OR MORE $ 123 $ (414) $ (291) $ (79) $ 47 $ (32) - --------------------------------------------------------------------------------------------------------------- SAVINGS, NOW, AND MONEY MARKET DEPOSIT 316 (144) 172 32 (53) (21) - --------------------------------------------------------------------------------------------------------------- OTHER TIME DEPOSITS (217) (453) (670) 230 (7) 223 - --------------------------------------------------------------------------------------------------------------- OTHER BORROWINGS 206 (217) (11) (1) 60 59 - --------------------------------------------------------------------------------------------------------------- TOTAL INTEREST EXPENSE ON TOTAL INTEREST-BEARING LIABILITIES $ 428 $ (1,228) $ (800) $ 182 $ 47 $ 229 ===============================================================================================================
The rate/volume variance for each category has been allocated on a consistent basis between rate and volume variances based on the percentage of the rate or volume variance to the sum of the two absolute variances. Income on nonaccrual loans is included in the volume and rate variance analysis table only to the extent that it represents interest payments received. INVESTMENT SECURITIES The investment portfolio is managed to provide a balance between liquidity and attractive yields. An increasing amount of emphasis is being placed on managing the interest rate risk of the Bank. Therefore, future investment activity will be influenced by the asset liability mix and maturity requirements of the Bank. The investment portfolio is categorized as "available for sale" and "held to maturity." The "available for sale" portion of the portfolio can be used to meet the liquidity needs of the Bank, while the "held to maturity" portion is intended primarily for investment purposes. On December 31, 2002, $28,752,532 or 97.02 percent of the Bank's investment portfolio was classified as available for sale. Bank policy prohibits trading within the portion of the bond portfolio classified as "securities to be held to maturity." Additionally, more of the bonds in the "available for sale" portfolio have maturities of five years or greater and, therefore these securities are subject to greater market volatility than similar securities with maturities of two years or less. Tables 4 and 4.1 show maturities of investment securities held by the Bank at December 31, 2002, and 2001, respectively, along with weighted average yields. 18 TABLE 4. INVESTMENT PORTFOLIO MATURITY SCHEDULE 2002
CARRYING VALUE AFTER ONE YEAR BUT AFTER FIVE YEARS BUT (DOLLARS IN THOUSANDS) WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS - -------------------------------------------------------------------------------------------------------------------------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD - -------------------------------------------------------------------------------------------------------------------------------- US GOVERNMENT AGENCIES $ 757 5.95% $ 10,320 4.48% $ 0 0.00% $ 0 0.00% - -------------------------------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES 0 0.00% 0 0.00% 0 0.00% 3,572 5.92% - -------------------------------------------------------------------------------------------------------------------------------- STATE AND POLITICAL SUBDIVISIONS(1) 0 0.00% 2,394 7.62% 936 7.43% 5,897 7.07% - -------------------------------------------------------------------------------------------------------------------------------- CORPORATE 0 0.00% 0 0.00% 0 0.00% 3,724 2.49% - -------------------------------------------------------------------------------------------------------------------------------- OTHER(2) 0 0.00% 0 0.00% 0 0.00% 2,036 0.00% - -------------------------------------------------------------------------------------------------------------------------------- TOTAL $ 757 5.95% $ 12,714 4.95% $ 936 7.43% $ 15,229 4.71% ================================================================================================================================
/1/ Yield on tax-exempt investments has been adjusted to a taxable-equivalent basis using prevailing federal and state rates. /2/ Also includes items with no stated maturity. TABLE 4.1 INVESTMENT PORTFOLIO MATURITY SCHEDULE 2001
CARRYING VALUE AFTER ONE YEAR BUT AFTER FIVE YEARS BUT (DOLLARS IN THOUSANDS) WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS - --------------------------------------------------------------------------------------------------------------------------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD - --------------------------------------------------------------------------------------------------------------------------------- US GOVERNMENT AGENCIES $ 5,672 5.18% $ 4,152 5.26% $ 0 0.00% $ 0 0.00% - --------------------------------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES 614 6.14% 859 6.76% 0 0.00% 3,909 6.26% - --------------------------------------------------------------------------------------------------------------------------------- STATE AND POLITICAL SUBDIVISIONS(1) 530 5.94% 1,647 6.48% 7,309 4.44% 0 0.00% - --------------------------------------------------------------------------------------------------------------------------------- CORPORATE 999 5.23% 0 0.00% 3,194 3.08% 0 0.00% - --------------------------------------------------------------------------------------------------------------------------------- OTHER(2) 0 0.00% 0 0.00% 0 0.00% 686 0.00% - --------------------------------------------------------------------------------------------------------------------------------- TOTAL $ 7,815 5.31% $ 6,685 5.76% $ 10,053 4.07% $ 4,595 5.32% =================================================================================================================================
/1/ Yield on tax-exempt investments has been adjusted to a taxable-equivalent basis using prevailing federal and state rates. /2/ Also includes items with no stated maturity. LOAN PORTFOLIO Total loans outstanding on December 31, 2002 were $140,743,338, an increase of 15.07 percent from the $122,309,239 in loans at December 31, 2001. Competition for loan originations remained intense in our markets in 2002, with many institutions targeting the Bank's traditional markets because of their need to improve their community reinvestment ratings. The Bank's increase in total loans outstanding was primarily due to marketing to small businesses, churches and loan participations with other banks. The Bank maintains a diversified mix of loans, as can be seen in the table below. Commercial loans are spread throughout a variety of industries, with loans to churches accounting for approximately 63.60 percent of the commercial loan portfolio and no other particular industry group or related industries accounting for a significant portion of the commercial loan portfolio. Loans to churches make up 34 percent of the Bank's total loans outstanding at December 31, 2002. Real estate loans include of mortgages for construction, land development, permanent financing and other purposes and are residential and other properties. As of December 31, 2002, approximately $75,229,000, or 53.46 percent of the loan portfolio, was comprised of commercial, financial and agricultural loans, a decrease from 58.50 percent in the same category at the end of 2001. Real estate mortgages remaining relatively stable at 34.88 percent in 2002 compared to 34.28 percent in 2001. The other categories of loans, real estate construction and installment loans to individuals, represented 6.06 percent and 5.60 percent, respectively, of the loan portfolio as of December 31, 2002, compared to 1.13 percent and 6.09 percent, respectively, as 19 of December 31, 2001. The Bank has no foreign loans. Loans made to directors, officers and other related parties to the Bank totaled $4,109,000 at December 31, 2002. New loans to such parties totaled $3,164,000 while repayments totaled $766,000 during 2002. At December 31, 2002, the Bank had outstanding loan commitments of approximately $23,997,000, compared to $16,279,000 at the end of 2001. Historically, only a small percentage of these lines have been activated. The following Table 5 describes the Bank's loan portfolio composition. On such date, total fixed rate loans maturing more than one year on December 31, 2002 were $100,225,000 and total floating rate loans were $12,215,000. TABLE 5. LOAN PORTFOLIO COMPOSITION
(DOLLARS IN THOUSANDS) DECEMBER 31, - --------------------------------------------------------------------------------------------------------- 2002 % 2001 % 2000 % - --------------------------------------------------------------------------------------------------------- COMMERCIAL, FINANCIAL, AND AGRICULTURAL $ 75,229 53.46% $ 71,563 58.50% $ 64,638 56.24% - --------------------------------------------------------------------------------------------------------- REAL ESTATE- CONSTRUCTION 8,532 6.06% 1,377 1.13% 8,486 7.39% - --------------------------------------------------------------------------------------------------------- REAL ESTATE- MORTGAGE 49,098 34.88% 41,926 34.28% 34,112 29.68% - --------------------------------------------------------------------------------------------------------- INSTALLMENT LOANS TO INDIVIDUALS 7,884 5.60% 7,443 6.09% 7,690 6.69% - --------------------------------------------------------------------------------------------------------- TOTAL $ 140,743 100.00% $ 122,309 100.00% $ 114,926 100.00% ========================================================================================================= (DOLLARS IN THOUSANDS) DECEMBER 31, - ------------------------------------------------------------------------------- 1999 % 1998 % - ------------------------------------------------------------------------------- COMMERCIAL, FINANCIAL, AND AGRICULTURAL $ 57,654 54.78% $ 51,665 53.93% - ------------------------------------------------------------------------------- REAL ESTATE- CONSTRUCTION 4,844 4.60% 747 0.78% - ------------------------------------------------------------------------------- REAL ESTATE- MORTGAGE 35,087 33.34% 36,493 38.09% - ------------------------------------------------------------------------------- INSTALLMENT LOANS TO INDIVIDUALS 7,658 7.28% 6,899 7.20% - ------------------------------------------------------------------------------- TOTAL $ 105,243 100.00% $ 95,804 100.00% ===============================================================================
Tables 6 and 6.1 describe the maturities of loans with fixed rates and adjustable rates as of December 31, 2002. TABLE 6. LOAN MATURITIES-FIXED RATES
ONE YEAR AFTER ONE YEAR AFTER FIXED RATES (DOLLARS IN THOUSANDS) OR LESS THROUGH FIVE YEARS FIVE YEARS TOTAL - ------------------------------------------------------------------------------------------------ COMMERCIAL, FINANCIAL, AND AGRICULTURAL $ 7,619 $ 45,240 $ 7,180 $ 60,039 - ------------------------------------------------------------------------------------------------ REAL ESTATE-CONSTRUCTION 133 0 0 133 - ------------------------------------------------------------------------------------------------ REAL ESTATE-MORTGAGE 3,395 12,023 33,186 48,604 - ------------------------------------------------------------------------------------------------ INSTALLMENT LOANS TO INDIVIDUALS 971 2,538 58 3,567 - ------------------------------------------------------------------------------------------------ TOTALS $ 12,118 $ 59,801 $ 40,424 $ 112,343 ================================================================================================
20 TABLE 6.1 LOAN MATURITIES-FLOATING RATES
FLOATING RATES (DOLLARS IN THOUSANDS) ONE YEAR AFTER ONE YEAR AFTER OR LESS THROUGH FIVE YEARS FIVE YEARS TOTAL - ----------------------------------------------------------------------------------------------- COMMERCIAL, FINANCIAL, AND AGRICULTURAL $ 6,654 $ 5,567 $ 2,968 $ 15,189 - ----------------------------------------------------------------------------------------------- REAL ESTATE-CONSTRUCTION 7,514 885 0 8,399 - ----------------------------------------------------------------------------------------------- REAL ESTATE-MORTGAGE 222 267 6 495 - ----------------------------------------------------------------------------------------------- INSTALLMENT LOANS TO INDIVIDUALS 1,795 0 2,522 4,317 - ----------------------------------------------------------------------------------------------- TOTALS $ 16,185 $ 6,719 $ 5,496 $ 28,400 ===============================================================================================
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS A loan is placed on non-accrual status when, in management's judgment, the collection of interest income becomes doubtful. Interest receivable that has been accrued in prior years and is subsequently determined to have doubtful collectibility is charged to the appropriate interest income account. Interest on loans that are classified as non-accrual is recognized when received. Past due loans are loans whose principal or interest is past due 90 days or more. In some cases, where borrowers are experiencing financial difficulties, loans may be restructured to provide terms significantly different from the original terms. TABLE 7. NONACCRUAL, PAST DUE, AND RESTRUCTURED LOANS
DECEMBER 31, - ---------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 2002 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------- NON-ACCRUAL LOANS $ 386 $ 434 $ 2,795 $ 518 $ 539 - ---------------------------------------------------------------------------------------------- ACCRUING LOANS PAST DUE 90 DAYS OR MORE 587 263 475 1,300 1,163 - ---------------------------------------------------------------------------------------------- RESTRUCTURED LOANS 611 914 1,329 725 - ---------------------------------------------------------------------------------------------- TOTAL $ 1,584 $ 1,611 $ 4,599 $ 2,543 $ 1,702 ==============================================================================================
At December 31, 2002 and 2001, nonaccrual, past due, and restructured loans were approximately 1.13 percent and 1.32 percent, respectively, of the total loans outstanding on such dates. Non-accrual and restructured loans decreased significantly in 2002. Management continues to work towards reducing the level of delinquencies through enhanced collection efforts and adherence to sound loan underwriting procedures. However, due to the uncertainties regarding trends in consumer credit and credit worthiness, it is not possible for us to accurately estimate the future impact of charge-offs in any of our loan categories. Charge-offs totaled $283,000 in 2002, or $221,000 net of recoveries and $907,000 in 2001 or $854,000 net of recoveries. Charge-offs were significantly higher in 2001 primarily due to the Bank incurring a $638,000 loss on the foreclosure liquidations of collateral on two loans. The amount of interest from non-accrual loans that would have been earned for 2002, 2001, and 2000, was $40,000, $54,000, and $128,000, respectively. These amounts are not included in income. Interest paid and included in income on non-accrual loans was $21,000, $41,000, and $62,000 for 2002, 2001, and 2000, respectively. Payments received on non-accrual loans are applied first to principal before collecting any interest due. 21 PROVISION AND ALLOWANCE FOR LOAN LOSSES Management considers the allowance for probable loan losses adequate to cover loan losses on the loans outstanding as of each reporting period. It must be emphasized, however, that the determination of the allowance using the Bank's procedures and methods rests upon various assumptions such as delinquency ratios, adversely classified loans, five year average charge-off history, loan growth, the current ratio of outstanding loans to the allowance for loan losses and future factors affecting loans. No assurance can be given that the Bank will not, in any particular period, sustain loan losses that are sizable in relation to the amount reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for possible loan losses or future charges to earnings. The allowance for loan losses is created by direct charges to operations. Losses on loans are charged against the allowance for loan losses in the accounting period in which they are determined by management to be uncollectible. Recoveries during the period are credited to the allowance for loan losses. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical matter, at the loan's observable market value or fair value of the collateral if the loan is collateral dependent. Loans measured by fair value of the underlying collateral are commercial loans, others consist of small balance homogenous loans and are measured collectively. The Bank classifies a loan as impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. At December 31, 2002 and 2001, the recorded investment in loans that are considered to be impaired, totaled approximately $1,584,000 and $1,611,000, respectively. The average recorded balance of impaired loans during 2002 and 2001 was $1,363,000 and $3,318,000 at December 31, 2002 and 2001, respectively. The related allowance for loan losses for these loans was $150,000 and $205,000 at December 31, 2002 and 2001, respectively. For the years ended December 31, 2002, 2001 and 2000, the Bank recognized interest income on those impaired loans of approximately $21,000, $41,000 and $62,000, respectively. Management realizes that general economic trends greatly affect loan losses, and no assurances can be made that further charges to the loan loss allowance may not be significant in relation to the amount provided during a particular period or that further evaluation of the loan portfolio based on conditions then prevailing may not require sizable additions to the allowance, thus necessitating similarly sizable charges to operations. The allowance for loan losses was 1.44%, 1.23% and 1.53% of net loans outstanding at December 31, 2002, 2001 and 2000, respectively, which was consistent with both management's desire for adequate reserves and the credit quality ratings of the loan portfolio. The allowance for loan losses was much lower at December 31, 2001 due to the Bank incurring significantly higher charge-offs (net of recoveries) on foreclosure liquidations of collateral on two significant loans. The ratio of net charge-offs during the year to average loans outstanding during the period were 0.17%, 0.74% and 0.20% at December 31, 2002, 2001 and 2000, respectively. These ratios reflect management's conservative lending, and effective efforts to recover credit losses. 22 The following table summarizes the Bank's balances of loans outstanding, average loans outstanding, changes in the allowance arising from charge-offs and recoveries by category, and additions to the allowance that have been charged to expenses for years 1998 through 2002. TABLE 8. LOAN LOSS AND RECOVERY EXPERIENCE
(DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31, --------------------------------------------------------- 2002 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------- ALLOWANCE FOR POSSIBLE LOAN LOSSES AT BEGINNING OF YEAR $ 1,505 $ 1,748 $ 1,342 $ 1,150 $ 1,089 - ---------------------------------------------------------------------------------------------------- LOANS CHARGED OFF: - ---------------------------------------------------------------------------------------------------- COMMERCIAL, FINANCIAL & AGRICULTURAL 181 623 113 41 116 - ---------------------------------------------------------------------------------------------------- REAL ESTATE CONSTRUCTION 0 0 0 0 0 - ---------------------------------------------------------------------------------------------------- REAL ESTATE-MORTGAGE 3 182 36 3 0 - ---------------------------------------------------------------------------------------------------- INSTALLMENT LOANS TO INDIVIDUALS 99 102 189 127 283 - ---------------------------------------------------------------------------------------------------- TOTAL CHARGE-OFFS 283 907 338 171 399 - ---------------------------------------------------------------------------------------------------- RECOVERIES OF LOANS PREVIOUSLY CHARGED OFF: - ---------------------------------------------------------------------------------------------------- COMMERCIAL, FINANCIAL, AND AGRICULTURAL 19 7 26 13 26 - ---------------------------------------------------------------------------------------------------- REAL ESTATE CONSTRUCTION 0 0 0 0 0 - ---------------------------------------------------------------------------------------------------- REAL ESTATE-MORTGAGE 0 14 11 0 0 - ---------------------------------------------------------------------------------------------------- INSTALLMENT LOANS TO INDIVIDUALS 43 32 79 106 42 - ---------------------------------------------------------------------------------------------------- TOTAL RECOVERIES 62 53 116 119 68 - ---------------------------------------------------------------------------------------------------- NET CHARGE-OFFS 221 854 222 52 331 - ---------------------------------------------------------------------------------------------------- ADDITIONS TO THE ALLOWANCE CHARGED TO EXPENSE 738 611 628 244 392 - ---------------------------------------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSES AT END OF YEAR $ 2,022 $ 1,505 $ 1,748 $ 1,342 $ 1,150 ==================================================================================================== RATIO OF NET-CHARGE OFFS DURING YEAR TO AVERAGE OUTSTANDING LOANS DURING YEAR 0.17% 0.74% 0.20% 0.05% 0.35% - ----------------------------------------------------------------------------------------------------
The following table sets forth the composition of the allowance for loan losses by type of loan at December 31 of the years indicated. The allowance is allocated to specific categories of loans for statistical purposes only, and may be applied to loan losses incurred in any loan category. TABLE 9. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
2002 2001 2000 - -------------------------------------------------------------------------------------------------------------------------- % OF LOANS % OF LOANS % OF LOANS IN CATEGORY IN CATEGORY IN CATEGORY TO TOTAL TO TOTAL TO TOTAL (DOLLARS IN THOUSANDS) AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS - -------------------------------------------------------------------------------------------------------------------------- COMMERCIAL, FINANCIAL AND AGRICULTURAL $ 876 53.46% $ 650 58.50% $ 1,151 56.24% - -------------------------------------------------------------------------------------------------------------------------- REAL ESTATE-CONSTRUCTION 26 6.06% 5 1.13% 24 7.39% - -------------------------------------------------------------------------------------------------------------------------- REAL ESTATE-MORTGAGE 402 34.88% 449 34.28% 305 29.68% - -------------------------------------------------------------------------------------------------------------------------- INSTALLMENT LOANS TO INDIVIDUALS 275 5.60% 261 6.09% 177 6.69% - -------------------------------------------------------------------------------------------------------------------------- UNALLOCATED 443 N/A 140 N/A 91 N/A - -------------------------------------------------------------------------------------------------------------------------- TOTAL $ 2,022 100.00% $ 1,505 100.00% $ 1,748 100.00% ========================================================================================================================== 1999 1998 - ---------------------------------------------------------------------------------------------------- % OF LOANS % OF LOANS IN CATEGORY IN CATEGORY TO TOTAL TO TOTAL (DOLLARS IN THOUSANDS) AMOUNT LOANS AMOUNT LOANS - ---------------------------------------------------------------------------------------------------- COMMERCIAL, FINANCIAL AND AGRICULTURAL $ 312 54.78% $ 503 53.93% - ---------------------------------------------------------------------------------------------------- REAL ESTATE-CONSTRUCTION 15 4.60% 2 0.78% - ---------------------------------------------------------------------------------------------------- REAL ESTATE-MORTGAGE 299 33.34% 276 38.09% - ---------------------------------------------------------------------------------------------------- INSTALLMENT LOANS TO INDIVIDUALS 290 7.28% 261 7.20% - ---------------------------------------------------------------------------------------------------- UNALLOCATED 426 N/A 108 N/A - ---------------------------------------------------------------------------------------------------- TOTAL $ 1,342 100.00% $ 1,150 100.00 ====================================================================================================
23 DEPOSITS Total deposits as of December 31, 2002 were approximately $149,817,765 compared to $135,383,213 at the end of 2001, an increase of $14,434,552 or 10.66 percent. Savings accounts, demand deposits, and time deposits of less than $100,000 are considered core deposits by the Bank. The Bank continued its marketing effort to increase this stable source of funds. Core deposits totaled $135,383,000 at the end of 2002,versus $121,055,000 at the end of 2001. Increased efforts to extend the maturities of our deposit structure had minimal impact during 2002. As reflected in Table 1, Rate Sensitivity Analysis, approximately 87.70 percent of interest-bearing liabilities deposits can be repriced in one year or less. This maturity structure contributes greatly to the negative gap or mismatch of assets and liabilities and contributes to an increased interest rate risk for the Bank. The Bank is committed to offering a wide range of competitively priced deposits. Our savings account rate has remained competitive. The average amounts and rates of deposits for the years ended December 31, 2002, 2001, and 2000 are summarized below. The Bank has no foreign deposits. TABLE 10. AVERAGE DEPOSITS
YEAR ENDED DECEMBER 31, 2002 2001 2000 AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE (Dollars In Thousands) AMOUNT RATE AMOUNT RATE AMOUNT RATE - ----------------------------------------------------------------------------------------------------------- INTEREST-BEARING DEMAND DEPOSITS $ 20,989 0.52% $ 20,011 0.55% $ 20,942 0.57% - ----------------------------------------------------------------------------------------------------------- SAVINGS DEPOSITS 50,800 2.64% 38,100 3.07% 36,779 3.22% - ----------------------------------------------------------------------------------------------------------- TIME DEPOSITS 45,901 3.22% 47,472 5.14% 42,731 5.26% - ----------------------------------------------------------------------------------------------------------- TOTAL INTEREST-BEARING DEPOSITS 117,690 2.74% 105,583 3.52% 100,452 3.53% - ----------------------------------------------------------------------------------------------------------- NON-INTEREST BEARING DEPOSITS 26,806 0.00% 26,911 0.00% 26,738 0.00% - ----------------------------------------------------------------------------------------------------------- TOTAL DEPOSITS $ 144,496 2.45% $ 132,494 2.80% $ 127,190 2.75% - -----------------------------------------------------------------------------------------------------------
A substantial portion of the Bank's deposit base is in time deposits with little dependence on deposits of $100,000 or more, which tend to be less stable. The time deposits are principally non-business certificates of deposit and individual retirement accounts. Deposits of state and local governments and municipal entities are collateralized by investment securities. The Bank does not purchase brokered deposits. The following table is a maturity schedule of time deposits as of December 31, 2002. TABLE 11. TIME DEPOSIT MATURITY SCHEDULE
3 MONTHS 4 TO 6 7 TO 12 OVER 12 (Dollars In Thousands) OR LESS MONTHS MONTHS MONTHS TOTAL - ----------------------------------------------------------------------------------------------------- TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE $ 5,182 $ 4,705 $ 3,754 $ 3,283 $ 16,924 - ----------------------------------------------------------------------------------------------------- TIME CERTIFICATES OF DEPOSIT LESS THAN $100,000 9,579 7,237 5,503 6,092 28,411 - ----------------------------------------------------------------------------------------------------- TOTAL $ 14,761 $ 11,942 $ 9,257 $ 9,375 $ 45,335 =====================================================================================================
SHAREHOLDERS' EQUITY AND DIVIDENDS The Bank is subject to a North Carolina State banking capital requirement of at least five percent of total assets. In addition, the Bank is subject to the capital requirements of the Federal Deposit Insurance Corporation ("FDIC"). The FDIC requires the Bank to maintain a (i) Tier 1 capital to risk-weighted assets ratio of 4.00 percent, (ii) a total capital to risk-weighted assets ratio of 8.00 percent and (iii) a leverage ratio of 4.00 percent. At December 31, 2002 and December 31, 2001, the Bank had capital to total assets ratios of 10.43 percent and 11.37 percent, respectively, Tier 1 capital to risk-weighted assets ratios of 11.85 percent and 13.91 percent, respectively, total capital to risk-weighted assets ratios of 13.42 percent and 15.63 percent, respectively and leverage ratios of 9.38 percent and 10.29 percent, respectively. Shareholders' equity, which 24 consists of common stock, surplus and retained earnings provides all of the Company's capital. As of December 31, 2002, there were 842,823 shares of common stock outstanding which were held by approximately 1,220 shareholders of record on March 17, 2003, not including persons or entities whose stock is held in nominee or "street" name through various brokerage firms or banks. There is no established market for the Company's common stock, excluding limited sporadic quotations, although the Company's common stock is quoted over-the-counter through the National Daily Quotation System "pink sheets" published by the National Quotation Bureau, Inc. The table below shows the stock prices of the Company stock for the previous eight quarters. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. 2002 QUARTER 1 QUARTER 2 QUARTER 3 QUARTER 4 - ------------------------------------------------------------------------------ HIGH $ 12.00 $ 12.75 $ 15.50 $ 13.50 - ------------------------------------------------------------------------------ LOW $ 10.00 $ 10.01 $ 11.60 $ 11.75 - ------------------------------------------------------------------------------ CLOSE $ 10.05 $ 12.55 $ 11.76 $ 12.25 - ------------------------------------------------------------------------------ 2001 QUARTER 1 QUARTER 2 QUARTER 3 QUARTER 4 - ------------------------------------------------------------------------------ HIGH $ 10.38 $ 10.59 $ 13.00 $ 10.80 - ------------------------------------------------------------------------------ LOW $ 10.25 $ 10.17 $ 10.38 $ 10.50 - ------------------------------------------------------------------------------ CLOSE $ 10.41 $ 10.41 $ 10.50 $ 10.80 - ------------------------------------------------------------------------------ The dividends that may be paid by the Bank to the Company, as the Bank's sole shareholder, are subject to legal limitations. Dividends may not be paid unless the Bank's capital surplus is at least fifty percent of its paid-in capital. In addition, the Bank may not pay dividends when it is insolvent or would become insolvent as a result of the payment or when the payment would reduce its capital below regulatory capital requirements. Cash dividends declared per share for each period are shown in the below. DIVIDENDS DECLARED 2002 2001 2000 - ------------------------------------------------------------------- March $ .08 $ .08 $ .08 - ------------------------------------------------------------------- June .08 .08 .08 - ------------------------------------------------------------------- September .08 .08 .08 - ------------------------------------------------------------------- December .08 .08 .08 - ------------------------------------------------------------------- The following table shows return on average assets (net income divided by average assets), return on average equity (net income divided by average shareholders' equity), dividend pay out ratio (dividends declared per share divided by net income per share) and shareholders' equity to assets ratio (average shareholders' equity divided by average total assets) for each of the years listed below. TABLE 12. RETURN ON ASSETS AND EQUITY 2002 2001 2000 - ------------------------------------------------------------------------- RETURN ON AVERAGE ASSETS 0.58% 0.55% 0.57% - ------------------------------------------------------------------------- RETURN ON AVERAGE EQUITY 5.75% 5.12% 5.44% - ------------------------------------------------------------------------- DIVIDEND PAYOUT 26.21% 30.13% 30.28% - ------------------------------------------------------------------------- AVERAGE SHAREHOLDERS' EQUITY TO AVERAGE ASSETS 10.14% 10.73% 10.57% - ------------------------------------------------------------------------- 25 The following table sets forth the relationship of significant components of the Company's balance sheet at December 31, 2002 and 2001. TABLE 13. DISTRIBUTION OF ASSETS AND LIABILITIES
2002 2001 -------------------------------------------------- ASSETS (DOLLARS IN THOUSANDS) AMOUNT PERCENT AMOUNT PERCENT - -------------------------------------------------------------------------------------------------- LOANS (NET) $ 138,134 73.70% $ 120,380 71.61% - -------------------------------------------------------------------------------------------------- INVESTMENT SECURITIES (1) 30,469 16.25% 30,326 18.04% - -------------------------------------------------------------------------------------------------- FEDERAL FUNDS SOLD/INT. BEARING DEPOSITS 1,119 0.60% 4,327 2.57% - -------------------------------------------------------------------------------------------------- TOTAL EARNINGS ASSETS $ 169,722 90.55% $ 155,033 92.22% - -------------------------------------------------------------------------------------------------- CASH & DUE FROM BANKS $ 4,759 2.54% $ 5,488 3.27% - -------------------------------------------------------------------------------------------------- BANK PREMISES & EQUIPMENT 5,992 3.20% 5,141 3.06% - -------------------------------------------------------------------------------------------------- OTHER ASSETS 6,958 3.71% 2,434 1.45% - -------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 187,431 100.00% $ 168,096 100.00% ================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------------------------- DEMAND DEPOSITS $ 25,552 13.63% $ 25,585 15.22% - -------------------------------------------------------------------------------------------------- SAVINGS, NOW & MMDA 78,931 42.11% 62,227 37.02% - -------------------------------------------------------------------------------------------------- TIME DEPOSITS $100,000 OR MORE 16,923 9.03% 14,328 8.52% - -------------------------------------------------------------------------------------------------- OTHER TIME DEPOSITS 28,412 15.16% 33,243 19.78% - -------------------------------------------------------------------------------------------------- TOTAL DEPOSITS $ 149,818 79.93% $ 135,383 80.54% - -------------------------------------------------------------------------------------------------- BORROWED FUNDS $ 16,553 8.84% $ 12,375 7.36% - -------------------------------------------------------------------------------------------------- ACCRUED EXPENSES & OTHER LIABILITIES 2,873 1.53% 2,485 1.48% - -------------------------------------------------------------------------------------------------- TOTAL LIABILITIES $ 169,244 90.30% $ 150,243 89.38% - -------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY 18,187 9.70% 17,853 10.62% - -------------------------------------------------------------------------------------------------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 187,431 100.00% $ 168,096 100.00% ==================================================================================================
/1/ Includes Federal Home Loan Bank Stock MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The management of the Company is responsible for the preparation of all financial statements, related financial data and other information in this report. The financial statements are prepared in accordance with generally accepted accounting principles and include amounts based on management's estimates and judgment where appropriate. Financial information appearing in this annual report is consistent with the financial statements. The Company's accounting system and related internal accounting controls are designed to provide reasonable assurances that transactions are authorized and recorded in accordance with established procedures, that assets are safeguarded, and that proper and reliable records are maintained. The purpose of these procedures is to ensure that we meet our responsibility for the fairness and integrity of these financial statements. Our internal auditors constantly monitor internal controls and coordinate audit coverage with our independent certified public accountants. The management of the Company is responsible for complying with the designated safety and soundness laws and regulations. Management has complied with all applicable safety and soundness regulations during the year ended December 31, 2002. The Audit Committee of the Board of Directors meets regularly with management, the internal auditor and the independent certified public accountants to review matters relating to financial reporting, internal accounting control and the nature, extent and results of our audit efforts. Our financial statements have been audited by Deloitte & Touche LLP, independent auditors, who render an independent professional opinion on the Company's financial statements. Their appointment was recommended by the Audit Committee, approved by the Board of Directors, and ratified by the shareholders. Their audit provides an objective assessment of the degree to which the Company's management meets its responsibility for financial reporting. ********** 26 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders M&F Bancorp, Inc. and Subsidiary Durham, North Carolina We have audited the accompanying consolidated balance sheets of M&F Bancorp, Inc. and subsidiary (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP Raleigh, North Carolina January 24, 2003 27 CONSOLIDATED BALANCE SHEETS
ASSETS December 31, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and Cash Equivalents - Cash and Amounts Due from Banks (Notes 2 and 13): $ 5,878,135 $ 9,815,086 - ------------------------------------------------------------------------------------------------------------------------------------ Securities available for sale at fair market value (amortized cost of $27,718,326 and $27,484,273 at December 31, 2002 and 2001, respectively) (Notes 3 and 13) 28,752,532 28,239,158 - ------------------------------------------------------------------------------------------------------------------------------------ Securities to be held to maturity at amortized cost (fair value of $919,943 and $1,445,057 at December 31, 2002 and 2001, respectively) (Notes 3 and 13) 883,383 1,412,742 - ------------------------------------------------------------------------------------------------------------------------------------ Federal Home Loan Bank Stock, at cost 832,700 673,800 - ------------------------------------------------------------------------------------------------------------------------------------ Loans (Notes 4 and 13) 140,743,338 122,309,239 - ------------------------------------------------------------------------------------------------------------------------------------ Less: Allowance for possible loan losses (Note 5) 2,022,360 1,505,404 - ------------------------------------------------------------------------------------------------------------------------------------ Deferred loan fees 587,339 423,422 - ------------------------------------------------------------------------------------------------------------------------------------ Net Loans 138,133,639 120,380,413 - ------------------------------------------------------------------------------------------------------------------------------------ Interest Receivable (Note 4) 995,838 949,782 - ------------------------------------------------------------------------------------------------------------------------------------ Income Taxes Receivable (Note 9) 139,298 498,156 - ------------------------------------------------------------------------------------------------------------------------------------ Premises and equipment, net (Note 6) 5,992,329 5,141,090 - ------------------------------------------------------------------------------------------------------------------------------------ Foreclosed real estate, net 50,000 132,734 - ------------------------------------------------------------------------------------------------------------------------------------ Deferred income taxes, net (Note 9) 929,000 508,000 - ------------------------------------------------------------------------------------------------------------------------------------ Cash surrender value of life insurance (Note 10) 4,465,199 55,529 - ------------------------------------------------------------------------------------------------------------------------------------ Prepaid expenses and other assets 378,764 289,807 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 187,430,817 $ 168,096,297 ==================================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES: DEPOSITS (NOTES 7 AND 13): Demand $ 79,049,869 $ 59,897,379 - ------------------------------------------------------------------------------------------------------------------------------------ Passbook savings 25,433,055 27,915,066 - ------------------------------------------------------------------------------------------------------------------------------------ Certificates 45,334,841 47,570,768 - ------------------------------------------------------------------------------------------------------------------------------------ Total Deposits 149,817,765 135,383,213 - ------------------------------------------------------------------------------------------------------------------------------------ Other Borrowings (Notes 4, 11, and 13) 16,553,215 12,375,208 - ------------------------------------------------------------------------------------------------------------------------------------ Accrued Expenses and Other Liabilities (Note 10) 2,873,309 2,484,532 - ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities 169,244,289 150,242,953 - ------------------------------------------------------------------------------------------------------------------------------------ Commitments and contingencies (Notes 6 and 8) SHAREHOLDERS' EQUITY (NOTES 10 AND 14): Common stock, no par value at December 31, 2002 and 2001, respectively, authorized 5,000,000 shares; issued and outstanding 853,725 shares at December 31, 2001 and 2000, respectively 5,892,059 5,998,353 - ------------------------------------------------------------------------------------------------------------------------------------ Retained earnings 12,377,618 11,614,541 - ------------------------------------------------------------------------------------------------------------------------------------ Accumulated other comprehensive income (loss), net of tax effect of $42,834 in 2002 and $256,728 in 2001 (83,149) 240,450 - ------------------------------------------------------------------------------------------------------------------------------------ Total Shareholders' Equity 18,186,528 17,853,344 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 187,430,817 $ 168,096,297 ====================================================================================================================================
See notes to consolidated financial statements. 28 CONSOLIDATED STATEMENTS OF INCOME
Year End December 31, 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------- Interest and Dividend Income - Interest and fees on loans (Note 4) $ 10,380,856 $ 9,796,792 $ 9,954,012 - --------------------------------------------------------------------------------------------------------------- Interest and dividends on investment securities: Taxable 848,081 1,120,702 1,407,350 - --------------------------------------------------------------------------------------------------------------- Tax-exempt 411,580 427,631 456,771 - --------------------------------------------------------------------------------------------------------------- Other interest income 116,293 353,931 193,153 - --------------------------------------------------------------------------------------------------------------- Total Interest and Dividend Income 11,756,810 11,699,056 12,011,286 - --------------------------------------------------------------------------------------------------------------- Interest Expense: Deposits (Note 7) 2,929,537 3,717,574 3,547,234 - --------------------------------------------------------------------------------------------------------------- Borrowed funds (Note 11) 617,648 629,245 569,794 - --------------------------------------------------------------------------------------------------------------- Total Interest Expense 3,547,185 4,346,819 4,117,028 - --------------------------------------------------------------------------------------------------------------- Net Interest Income 8,209,625 7,352,237 7,894,258 - --------------------------------------------------------------------------------------------------------------- Provision for Possible Loan Losses (Note 5) 737,856 611,052 627,552 - --------------------------------------------------------------------------------------------------------------- Net Interest Income after Provision for Possible Loan Losses 7,471,769 6,741,185 7,266,706 - --------------------------------------------------------------------------------------------------------------- Other Income: Service charges on deposit accounts 1,432,058 1,407,302 1,226,610 - --------------------------------------------------------------------------------------------------------------- Other service charges, commissions and fees 147,796 145,478 138,920 - --------------------------------------------------------------------------------------------------------------- Net loss on sales of available-for-sale securities (6,433) (7,742) (28,627) - --------------------------------------------------------------------------------------------------------------- Rental Income 272,650 249,553 205,689 - --------------------------------------------------------------------------------------------------------------- Other 322,034 188,209 139,875 - --------------------------------------------------------------------------------------------------------------- Total Other Income 2,168,105 1,982,800 1,682,467 - ---------------------------------------------------------------------------------------------------------------- Other Expenses: Salary and employee benefits (Note 10) 4,843,331 4,365,391 4,419,668 - --------------------------------------------------------------------------------------------------------------- Occupancy costs (Note 6) 741,599 682,545 664,990 - --------------------------------------------------------------------------------------------------------------- Equipment expense (Note 6) 535,190 552,849 631,676 - --------------------------------------------------------------------------------------------------------------- Data processing 391,952 302,156 298,790 - --------------------------------------------------------------------------------------------------------------- Contributions 8,094 50,350 32,944 - --------------------------------------------------------------------------------------------------------------- Telephone 133,345 185,490 179,217 - --------------------------------------------------------------------------------------------------------------- Armored car services 211,152 193,932 237,213 - --------------------------------------------------------------------------------------------------------------- Other 1,278,461 1,201,579 1,268,417 - --------------------------------------------------------------------------------------------------------------- Total Other Expenses 8,143,124 7,534,292 7,732,915 - --------------------------------------------------------------------------------------------------------------- Income Before Income Tax Expense 1,496,750 1,189,693 1,216,258 - --------------------------------------------------------------------------------------------------------------- Income Tax - Expense (Note 9) 461,000 283,000 314,000 - --------------------------------------------------------------------------------------------------------------- Net Income $ 1,035,750 $ 906,693 $ 902,258 - --------------------------------------------------------------------------------------------------------------- Weighted Average Shares Outstanding 846,676 853,725 853,731 - --------------------------------------------------------------------------------------------------------------- Earnings Per Share - basic and diluted $ 1.22 $ 1.06 $ 1.06 - --------------------------------------------------------------------------------------------------------------- CASH DIVIDENDS DECLARED PER SHARE $ 0.32 $ 0.32 $ 0.32 ===============================================================================================================
See notes to consolidated financial statements 29 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED COMMON STOCK OTHER NUMBER COMPREHENSIVE RETAINED OF SHARES AMOUNT INCOME (LOSS) EARNINGS - ----------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 2000 853,800 $ 5,999,528 $ (52,152) $ 10,351,974 - ----------------------------------------------------------------------------------------------------------------------- Dividends paid (273,192) - ----------------------------------------------------------------------------------------------------------------------- Repurchase and retirement of common stock (75) (1,175) - ----------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income for year 902,258 - ----------------------------------------------------------------------------------------------------------------------- Other comprehensive income net of tax effect of $397,929: Unrealized gains on securities, net of tax 760,115 - ----------------------------------------------------------------------------------------------------------------------- Reclassification adjustment 18,893 - ----------------------------------------------------------------------------------------------------------------------- Other comprehensive income 779,008 - ----------------------------------------------------------------------------------------------------------------------- Total comprehensive income - ----------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 853,725 5,998,353 726,856 10,981,040 - ----------------------------------------------------------------------------------------------------------------------- Dividends paid (273,192) - ----------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income 906,693 - ----------------------------------------------------------------------------------------------------------------------- Other comprehensive income net of tax effect of $114,041: Unrealized loss on AFS securities, net of tax (233,807) - ----------------------------------------------------------------------------------------------------------------------- Reclassification adjustment 5,109 - ----------------------------------------------------------------------------------------------------------------------- Net unrealized gain on securities (228,698) - ----------------------------------------------------------------------------------------------------------------------- Minimum pension liability, net of tax (Note 10) (257,708) - ----------------------------------------------------------------------------------------------------------------------- Other comprehensive income (486,406) - ----------------------------------------------------------------------------------------------------------------------- Total comprehensive income - ----------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2001 853,725 5,998,353 240,450 11,614,541 - ----------------------------------------------------------------------------------------------------------------------- Dividends paid (272,673) - ----------------------------------------------------------------------------------------------------------------------- Repurchase and retirement of common stock (10,902) (106,294) - ----------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income 1,035,750 - ----------------------------------------------------------------------------------------------------------------------- Other comprehensive income net of tax effect of $252,563: Unrealized gains on AFS securities, net of tax 188,596 - ----------------------------------------------------------------------------------------------------------------------- Reclassification adjustment (4,245) - ----------------------------------------------------------------------------------------------------------------------- Net unrealized gain on securities 184,351 - ----------------------------------------------------------------------------------------------------------------------- Minimum pension liability adjustment (507,950) - ----------------------------------------------------------------------------------------------------------------------- Other comprehensive income (323,599) - ----------------------------------------------------------------------------------------------------------------------- Total comprehensive income - ----------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2002 842,823 $ 5,892,059 $ (83,149) $ 12,377,618 - ----------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY COMPREHENSIVE (NOTE O) INCOME - ------------------------------------------------------------------------------------ BALANCE, JANUARY 1, 2000 $ 16,299,350 - ------------------------------------------------------------------------------------ Dividends paid (273,192) - ------------------------------------------------------------------------------------ Repurchase and retirement of common stock (1,175) - ------------------------------------------------------------------------------------ Comprehensive income: Net income for year 902,258 $ 902,258 - ------------------------------------------------------------------------------------ Other comprehensive income net of tax effect of $397,929: Unrealized gains on securities, net of tax 760,115 - ------------------------------------------------------------------------------------ Reclassification adjustment 18,893 - ------------------------------------------------------------------------------------ Other comprehensive income 779,008 779,008 - ------------------------------------------------------------------------------------ Total comprehensive income $ 1,681,266 - ------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 2000 17,706,249 - ------------------------------------------------------------------------------------ Dividends paid (273,192) - ------------------------------------------------------------------------------------ Comprehensive income: Net income 906,693 906,693 - ------------------------------------------------------------------------------------ Other comprehensive income net of tax effect of $114,041: Unrealized loss on AFS securities, net of tax (233,807) - ------------------------------------------------------------------------------------ Reclassification adjustment 5,109 - ------------------------------------------------------------------------------------ Net unrealized gain on securities (228,698) - ------------------------------------------------------------------------------------ Minimum pension liability, net of tax (Note 10) (257,708) - ------------------------------------------------------------------------------------ Other comprehensive income (486,406) (486,406) - ------------------------------------------------------------------------------------ Total comprehensive income $ 420,287 - ------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 2001 17,853,344 - ------------------------------------------------------------------------------------ Dividends paid (272,673) - ------------------------------------------------------------------------------------ Repurchase and retirement of common stock (106,294) - ------------------------------------------------------------------------------------ Comprehensive income: Net income 1,035,750 $ 1,035,750 - ------------------------------------------------------------------------------------ Other comprehensive income net of tax effect of $252,563: Unrealized gains on AFS securities, net of tax 188,596 - ------------------------------------------------------------------------------------ Reclassification adjustment (4,245) - ------------------------------------------------------------------------------------ Net unrealized gain on securities 184,351 - ------------------------------------------------------------------------------------ Minimum pension liability adjustment (507,950) - ------------------------------------------------------------------------------------ Other comprehensive income (323,599) (323,599) - ------------------------------------------------------------------------------------ Total comprehensive income $ 712,151 - ------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 2002 $ 18,186,528 - ------------------------------------------------------------------------------------
30 CONSOLIDATED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES: Year Ended December 31, 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------- Net Income $ 1,035,750 $ 906,693 $ 902,258 - --------------------------------------------------------------------------------------------------------------------- Adjustment to reconcile net income to net cash (used in) provided by operating activities: Provision for possible loan losses 737,856 611,052 627,552 - --------------------------------------------------------------------------------------------------------------------- Depreciation and amortization 359,066 415,989 415,534 - --------------------------------------------------------------------------------------------------------------------- (Amortization) Accretion on securities 7,146 (6,051) (10,486) - --------------------------------------------------------------------------------------------------------------------- Deferred income tax (benefit) provision (167,000) 28,000 (147,000) - --------------------------------------------------------------------------------------------------------------------- (Gain) loss on sale or disposal of assets - 278 (1,000) - --------------------------------------------------------------------------------------------------------------------- (Gain) loss on sale of available-for-sale securities (6,433) 7,742 28,627 - --------------------------------------------------------------------------------------------------------------------- Changes in operating assets and liabilities: Deferred loan fees 163,917 50,380 31,889 - --------------------------------------------------------------------------------------------------------------------- Interest receivable (46,056) 87,957 (136,964) - --------------------------------------------------------------------------------------------------------------------- Income taxes receivable 358,858 (301,085) (74,300) - --------------------------------------------------------------------------------------------------------------------- Prepaid expenses and other assets (342,627) (20,377) 361 - --------------------------------------------------------------------------------------------------------------------- Accrued expenses and other liabilities (468,143) 506,745 297,016 - --------------------------------------------------------------------------------------------------------------------- Other - (22,890) (3,306) - --------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by operating activities 1,632,334 2,264,433 1,930,181 - --------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Proceeds from sales and maturities of securities available for sale 9,645,353 10,583,073 4,692,432 - --------------------------------------------------------------------------------------------------------------------- Proceeds from maturities of securities held to maturity 530,000 - - - --------------------------------------------------------------------------------------------------------------------- Purchase of securities available for sale (10,039,660) (10,201,992) (2,096,776) - --------------------------------------------------------------------------------------------------------------------- Purchase of life insurance (4,156,000) - - - --------------------------------------------------------------------------------------------------------------------- Net increase in loans (18,575,053) (8,707,013) (10,008,094) - --------------------------------------------------------------------------------------------------------------------- Purchase of premises and equipment (1,207,517) (182,337) (793,818) - --------------------------------------------------------------------------------------------------------------------- Proceeds from sale of assets - 16,100 1,000 - --------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (23,802,877) (8,492,169) (8,205,256) - --------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net increase (decrease) in demand deposit and passbook savings 16,670,479 (2,877,029) 1,896,164 - --------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in certificates of deposit (2,235,927) 3,113,983 3,720,942 - --------------------------------------------------------------------------------------------------------------------- FHLB Borrowings 4,700,000 500,000 1,900,000 - --------------------------------------------------------------------------------------------------------------------- Repayment of FHLB Borrowings (521,993) (20,065) (4,727) - --------------------------------------------------------------------------------------------------------------------- Repurchase and retirement of common stock (106,294) - (1,175) - --------------------------------------------------------------------------------------------------------------------- Cash dividends (272,673) (273,192) (273,192) - --------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 18,233,592 443,697 7,238,012 - --------------------------------------------------------------------------------------------------------------------- (Decrease) increase in cash and cash equivalents 3,936,951 (5,784,039) 962,937 - --------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, beginning of year 9,815,086 15,599,125 14,636,188 - --------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents, End of Year $ 5,878,135 $ 9,815,086 $ 15,599,125 ===================================================================================================================== SUPPLEMENTARY CASH FLOW INFORMATION: Cash paid for interest $ 2,975,025 $ 4,412,337 $ 3,980,064 - --------------------------------------------------------------------------------------------------------------------- Cash paid for income taxes, net of refunds received 438,650 624,000 477,000 - --------------------------------------------------------------------------------------------------------------------- SIGNIFICANT NON-CASH TRANSACTIONS: Loans transferred to other real estate owned $ 82,734 $ 29,997 $ 103,322 - ---------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - The consolidated financial statements include the accounts and transactions of M&F Bancorp, Inc. (the "Company") and Mechanics and Farmers Bank (the "Bank"), its wholly owned Bank subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. Nature of Operations - The Bank is a state chartered commercial bank with eight offices in North Carolina: three in Durham, two in Raleigh, two in Charlotte and one in Winston-Salem. The Bank operates in a single business segment and offers a wide variety of banking services and products. Cash and Cash Equivalents - Substantially, all of the cash and cash equivalents are comprised of highly liquid short-term investments that are carried at cost, which approximates market value. Cash equivalents include demand and time deposits (with original maturities of 90 days or less) at other financial institutions and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Investment Securities - The accounting for investment securities is dependent upon their classification as held to maturity, available for sale, or trading securities. Such securities classified as held to maturity are carried at cost, adjusted for the amortization of premiums and accretion of discounts. Securities classified as available for sale and trading securities are carried at market value. At December 31, 2002, 2001 and 2000, the Company did not have any securities classified as trading. Unrealized holding gains and losses for securities available for sale are reported as other comprehensive income. In order for the securities to qualify as securities held to maturity, the Bank must have both the positive intention and the ability to hold them to maturity. Management utilizes these criteria in determining the accounting treatment accorded such securities. Gains and losses on the sale of available-for-sale securities are determined using the specific-identification method. Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary are adjusted to their fair value with the related write-downs included in earnings as realized losses. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. Loans - The Bank grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans throughout North Carolina. The ability of the Bank's debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area. Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Allowance for Possible Loan Losses - The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions at each balance sheet date. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment 32 shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, the fair value of the collateral if the loan is collateral dependent, or a combination of the above methods. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment. Financial Instruments - In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments, consisting of commitments to extend credit, commitments under credit card arrangements, and commercial letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. (See Note 8.) Premises and Equipment - Premises and equipment are stated at cost less accumulated depreciation and amortization. For financial reporting purposes, depreciation and amortization are computed by the straight-line and declining- balance methods and are charged to operations over the estimated useful lives of the assets, which range from 15 to 75 years for premises and 3 to 50 years for furniture and equipment. Leasehold improvements are amortized over the terms of the respective leases or the useful lives of the improvements, whichever is shorter. Foreclosed Real Estate - Real estate acquired through foreclosure is carried at the lower of cost or estimated net realizable value. There is no allowance for loss on foreclosed real estate at December 31, 2002, 2001 and 2000. In addition, no amounts were provided for losses on foreclosed real estate during 2002, 2001, or 2000. Cash Surrender Value of Life Insurance - The Company maintains life insurance on officers and directors with the Company as beneficiary. The related cash surrender value of the policies at December 31, 2002 and 2001 was $4,465,199 and $55,529. Effective December 30, 2002, the Company purchased single premium policies totaling $4,156,000 covering officers and directors. Certain policies are utilized to fund pension liabilities for officers of the Company (see Note 10). Income Taxes - Deferred income taxes are provided on temporary differences between the financial statement carrying values and the tax bases of assets and liabilities. (See Note 9.) Earnings Per Share - Earnings per share are calculated on the basis of the weighted-average number of shares outstanding. There were no dilutive potential common shares outstanding for each of the three years in the period ended December 31, 2002. Stock-Based Compensation - The Company measures compensation costs related to employee incentive stock options using the intrinsic value of the equity instrument granted (i.e., the excess of the market price of the stock to be issued over the exercise price of the equity instrument at the date of grant) rather than the fair value of the equity instrument. Pro Forma Net Income with Stock Option Compensation Costs Determined Using Fair Value Method - The Company accounts for compensation costs related to the Company's employee stock option plan using the intrinsic value method. Therefore, no compensation cost has been recognized for stock option awards because the options are granted at exercise prices based on the market value of the Company stock on the date of grant. Had compensation cost for the Company's employee stock option plan been determined using the fair value method, the Company's pro forma net income and earnings per share for the years ended December 31, 2002, 2001 and 2000 would have been as follows:
2002 2001 2000 - -------------------------------------------------------------------------------------- Net income: As reported $ 1,035,750 $ 906,693 $ 902,258 - -------------------------------------------------------------------------------------- Deduct - total stock based employee compensation expense determined under fair value based method for all awards (18,586) (18,586) (43,455) - -------------------------------------------------------------------------------------- Pro forma 1,017,164 888,107 858,803 - -------------------------------------------------------------------------------------- Basic and diluted earnings per share: As reported $ 1.22 $ 1.06 $ 1.06 - -------------------------------------------------------------------------------------- Pro forma $ 1.20 $ 1.04 $ 1.01 - --------------------------------------------------------------------------------------
33 Comprehensive Income - Accounting principles generally accepted in the United States of America require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as separate components of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. Presentation - Certain amounts for 2000 and 2001 have been reclassified to conform to the 2002 presentation. New Accounting Pronouncements - The Company adopted the Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, effective January 1, 2001. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of condition and measure those instruments at fair value. The adoption of this statement did not have any impact on the Company. On July 2, 2001, The Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues. SAB No. 102 expresses the SEC's views on the development, documentation and application of a systematic methodology for determining the allowance for loan and lease losses in accordance with accounting principles generally accepted in the United States of America. A concurrent statement was also issued by the Federal Financial Institutions Examination Council. The Company believes that it is currently in compliance with the requirements of SAB No. 102. In October 2002, the FASB issued SFAS 147, Acquisitions of Certain Financial Institutions. This statement relates to the application of the purchase method of accounting apply to all acquisitions of financial institutions, except transactions between two or more mutual enterprises. This statement is effective for all acquisitions consummated after October 1, 2002. Acquisitions after October 1, 2002 will be accounted for under this statement applying the purchase method of accounting. In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements of Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal yearend. Management does not believe this interpretation will be material for the Company. In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, Accounting for Stock Based Compensation - Transition and Disclosure. This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The effective date for this standard shall be effective for financial statements for fiscal years ended after December 15, 2002. The Company adopted the disclosure provisions of SFAS 148 for the year ended December 31, 2002. Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and pension liabilities. Actual results could differ from those estimates. 2. CASH AMOUNTS DUE FROM BANKS The Federal Reserve Bank ("Federal Reserve") and banking laws of North Carolina require certain banks to maintain average balances in relation to specific percentages of its customers' deposits as a reserve. At December 31, 2002, such requirement was $1,605,000, which was satisfied by usable vault cash of $2,283,502 and a Federal Reserve balance of $1,108,811. 34 3. INVESTMENT SECURITIES The amortized cost and estimated fair value of investment securities at December 31 are as follows: Securities available for sale:
SECURITIES AVAILABLE FOR SALE: 2002 ------------------------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 10,950,701 $ 126,200 $ - $ 11,076,901 - ------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities 3,483,319 88,575 - 3,571,894 - ------------------------------------------------------------------------------------------------------------------- Corporate debt securities 4,203,763 - (479,737) 3,724,026 - ------------------------------------------------------------------------------------------------------------------- Obligations of states and political subdivisions 8,068,501 276,728 (1,215) 8,344,014 - ------------------------------------------------------------------------------------------------------------------- Equity securities 1,012,042 1,023,655 - 2,035,697 - ------------------------------------------------------------------------------------------------------------------- TOTAL $ 27,718,326 $ 1,515,158 $ (480,952) $ 28,752,532 ===================================================================================================================
SECURITIES AVAILABLE FOR SALE: 2002 ------------------------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------------------- Obligations of states and political subdivisions $ 883,383 36,560 - 919,943 ===================================================================================================================
SECURITIES AVAILABLE FOR SALE: 2001 ------------------------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 9,823,840 $ 174,327 $ - $ 9,998,167 - ------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities 5,382,468 50,713 - 5,433,181 - ------------------------------------------------------------------------------------------------------------------- Corporate debt securities 4,192,980 - (437,325) 3,755,655 - ------------------------------------------------------------------------------------------------------------------- Obligations of states and political subdivisions 8,072,943 - (291,364) 7,781,579 - ------------------------------------------------------------------------------------------------------------------- Equity securities 12,042 1,258,534 - 1,270,576 - ------------------------------------------------------------------------------------------------------------------- TOTAL $ 27,484,273 $ 1,483,574 $ (728,689) $ 28,239,158 ===================================================================================================================
SECURITIES TO BE HELD TO MATURITY: 2001 ------------------------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------------------- Obligations of states and political subdivisions $ 1,412,742 $ 32,315 $ - $ 1,445,057 ===================================================================================================================
For the years ended December 31, 2002, 2001 and 2000, the Bank had gross realized gains of $-0-, $-0-, and $160, respectively, and gross realized losses of $6,433, $7,742, and $28,787, respectively, on sales of securities available for sale. The scheduled maturities of securities to be held to maturity and securities available for sale at December 31, 2002 are as follows:
SECURITIES TO BE SECURITIES AVAILABLE HELD TO MATURITY FOR SALE -------------------------------------------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE - -------------------------------------------------------------------------------------- Due in one year or less $ - $ - $ 750,000 $ 757,031 - -------------------------------------------------------------------------------------- Due from one to five years 883,383 919,943 11,609,636 11,830,884 - -------------------------------------------------------------------------------------- Due from five to ten years - - 878,906 936,047 - -------------------------------------------------------------------------------------- Due after ten years - - 13,467,742 13,192,873 - -------------------------------------------------------------------------------------- No stated maturity - - 1,012,042 2,035,697 - -------------------------------------------------------------------------------------- TOTAL $ 883,383 $919,943 $ 27,718,326 $ 28,752,532 ======================================================================================
For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, are grouped based upon the final payment date. The mortgage-backed securities may mature earlier because of principal prepayments. Investment securities having an aggregate par value of $23,156,148 and $16,575,000 at December 31, 2002 and 2001, respectively, were pledged as collateral to secure public funds on deposit and for other purposes as required by law. 35 4. LOANS Loans at December 31 are summarized as follows: 2002 2001 - -------------------------------------------------------------------------- Commercial, financial and agricultural $ 75,229,274 $ 71,563,612 - -------------------------------------------------------------------------- Real estate construction 8,532,048 1,376,903 - -------------------------------------------------------------------------- Real estate mortgage 49,097,736 41,925,703 - -------------------------------------------------------------------------- Installment loans to individuals 7,884,280 7,443,021 - -------------------------------------------------------------------------- TOTAL $ 140,743,338 $ 122,309,239 ========================================================================== At December 31, 2002 and 2001, the Bank had loans totaling approximately $973,000 and $697,000, respectively, that were contractually delinquent for 90 days or more, in a nonaccrual status or in process of foreclosure. Restructured loans at December 31, 2002 and 2001 totaled approximately $611,000 and $914,000, respectively. If income on nonaccrual loans had been accrued, such income would have been approximately $40,000, $54,000 and $128,000 for 2002, 2001 and 2000, respectively. These amounts are not included in income. Interest paid and included in income on nonaccrual loans was approximately $21,000, $41,000 and $62,000 for 2002, 2001 and 2000, respectively. Qualifying first mortgage loans collateralize Federal Home Loan Bank ("FHLB") advances. (See Note 11.) 5. ALLOWANCE FOR POSSIBLE LOAN LOSSES Allowance for possible loan losses for the years ended December 31, are summarized as follows: 2002 2001 2000 - ------------------------------------------------------------------------------- Balance at beginning of year $ 1,505,404 $ 1,747,748 $1,342,095 - ------------------------------------------------------------------------------- Provision for possible loan losses 737,856 611,052 627,552 - ------------------------------------------------------------------------------- Loans charged off (282,997) (906,428) (337,683) - ------------------------------------------------------------------------------- Recoveries 62,097 53,032 115,784 - ------------------------------------------------------------------------------- Balance at end of year $ 2,022,360 $ 1,505,404 $1,747,748 =============================================================================== At December 31, 2002 and 2001, the Bank had impaired loans totaling approximately $1,584,000 and $1,611,000, respectively. At December 31, 2002 and 2001, the Bank had reserves of $150,000 and $205,000 for impaired loans, respectively. At December 31, 2002 and 2001, no additional funds were committed to be advanced on impaired loans. 6. PREMISES, EQUIPMENT AND LEASES Major classifications of premises and equipment at December 31 are summarized as follows:
2002 2001 - ---------------------------------------------------------------------------------- Land $ 687,359 $ 102,359 - ---------------------------------------------------------------------------------- Premises 6,626,031 6,189,412 - ---------------------------------------------------------------------------------- Furniture, equipment and leasehold improvements 3,702,614 3,512,880 - ---------------------------------------------------------------------------------- Construction in progress 39,979 45,651 - ---------------------------------------------------------------------------------- Total 11,055,983 9,850,302 - ---------------------------------------------------------------------------------- Less accumulated depreciation (5,063,654) (4,709,212) ================================================================================== Premises and equipment, net $ 5,992,329 $ 5,141,090 ==================================================================================
The Bank leases premises and equipment under various operating lease agreements that provide for the payment of property taxes, insurance and maintenance costs. Generally, operating leases provide for one or more renewal options on the same basis as current rental terms. However, certain leases require increased rentals under cost-of-living escalation clauses. Certain of the leases also provide purchase options. 36 Future minimum lease commitments for noncancelable operating leases with initial or remaining terms of one year or more consist of the following: Year Ending December 31: Amount 2003 $ 124,470 - ----------------------------------------------------------------------- 2004 96,165 - ----------------------------------------------------------------------- 2005 37,405 - ----------------------------------------------------------------------- 2006 14,587 - ----------------------------------------------------------------------- 2007 10,731 - ----------------------------------------------------------------------- Thereafter 39,800 - ----------------------------------------------------------------------- Total minimum payments $ 323,158 ======================================================================= Rent expense for all operating leases amounted to approximately $166,000 in 2002, $161,000 in 2001, and $193,000 in 2000. 7. DEPOSITS Included in deposits are certificates of deposit of $100,000 or more of approximately $16,925,000 and $14,328,000 at December 31, 2002 and 2001, respectively. For the years ended December 31, 2002, 2001 and 2000, interest expense on certificates of deposit of $100,000 or more totaled approximately $485,000, $776,000, and $808,000, respectively. At December 31, 2002, the scheduled maturities of certificates of deposit are as follows: 2003 $ 35,959,409 - ---------------------------------------------------------------------- 2004 6,498,247 - ---------------------------------------------------------------------- 2005 1,662,522 - ---------------------------------------------------------------------- 2006 470,842 - ---------------------------------------------------------------------- 2007 741,698 - ---------------------------------------------------------------------- Thereafter 2,123 - ---------------------------------------------------------------------- Total Certificates $ 45,334,841 ====================================================================== 8. COMMITMENTS AND CONTINGENCIES In the normal course of business, the Bank has various commitments to extend credit which are not reflected in the financial statements. At December 31, 2002 and 2001, the Bank had outstanding loan commitments of approximately $23,997,000 and $16,279,000, respectively. Commitments under standby letters of credit amounted to approximately $1,415,300 and $110,000 at December 31, 2002 and 2001, respectively. These letters of credit represent agreements, whereby the Bank guarantees to lend funds to customers up to a predetermined maximum amount. The Bank approves lines of credit to customers through home equity and overdraft protection loans. At December 31, 2002 and 2001, in addition to actual advances made on such loans, the Bank's customers have available additional lines of credit on home equity and consumer overdraft protection loans. Available lines available on home equity loans at December 31, 2002 and 2001 were $1,183,000 and $709,000, respectively. However, consumer overdraft protection loans had available lines of credit of $909,000 and $715,000 as of December 31, 2002 and 2001, respectively. Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company's consolidated financial statements. 37 9. INCOME TAXES The components of income tax expense for the years ended December 31 are summarized as follows: 2002 2001 2000 - ----------------------------------------------------------------------- Current tax provision $ 628,000 $ 255,000 $ 461,000 - ----------------------------------------------------------------------- Deferred tax (expense) benefit (167,000) 28,000 (147,000) - ----------------------------------------------------------------------- Income tax expense $ 461,000 $ 283,000 $ 314,000 ======================================================================= Changes in deferred taxes of $94,900, $114,109 and $397,929 related to unrealized gains and losses on securities available for sale during 2002, 2001 and 2000, respectively, were allocated to shareholders' equity in the respective years. Changes in deferred taxes of $349,180, related to an additional minimum pension liability during 2002, was allocated to shareholder's equity. The approximate tax effect of each type of temporary difference at December 31, is summarized as follows: 2002 2001 - ---------------------------------------------------------------- Deferred tax assets: - ---------------------------------------------------------------- Accrued pension expense $ 278,723 $ 357,890 - ---------------------------------------------------------------- Additional minimum pension liability 349,180 - - ---------------------------------------------------------------- Bad debt reserve 544,554 384,556 - ---------------------------------------------------------------- Deferred loan fees 199,015 143,283 - ---------------------------------------------------------------- Interest on non performing loans 109,750 77,614 - ---------------------------------------------------------------- Deferred gain on foreclosed real estate 32,222 34,198 - ---------------------------------------------------------------- Other 4,657 4,141 - ---------------------------------------------------------------- TOTAL $ 1,518,101 $ 1,001,682 ================================================================ Deferred tax liabilities: - ---------------------------------------------------------------- Depreciation $ (237,031) $ (236,512) - ---------------------------------------------------------------- Unrealized gain on securities available for sale, net (351,628) (256,728) - ---------------------------------------------------------------- Prepaid expenses and other (442) (442) - ---------------------------------------------------------------- TOTAL (589,101) (493,682) ================================================================ NET DEFERRED TAX ASSETS $ 929,000 $ 508,000 ================================================================ A reconciliation of income taxes computed for the years ended December 31 at the statutory federal income tax rate (34%) to the provision for income tax follows: 2002 2001 2000 - ----------------------------------------------------------------------------- Income tax at statutory federal rate $ 508,895 $ 404,496 $ 413,528 - ----------------------------------------------------------------------------- Effect of tax exempt interest income (132,982) (139,207) (151,876) - ----------------------------------------------------------------------------- State taxes, net of federal benefit 70,620 - - - ----------------------------------------------------------------------------- Other, net 14,467 17,711 52,348 - ----------------------------------------------------------------------------- TOTAL $ 461,000 $ 283,000 $ 314,000 ============================================================================= Income taxes receivable totaled approximately $139,000 and $498,000 at December 31, 2002 and 2001, respectively. The Bank made income tax payments of approximately $644,000, $624,000, and $477,000, in 2002, 2001 and 2000, respectively. 38 10. RETIREMENT AND STOCK COMPENSATION PLANS The Bank sponsors a noncontributory defined-benefit cash balance pension plan (the "Plan"), covering all employees who qualify under length of service and other requirements. Under the Plan, retirement benefits are based on years of service and average earnings. The Bank's funding policy is to contribute amounts to the Plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as the Bank may determine to be appropriate. The Plan's assets are invested in Flag Investor Mutual Funds by Intercarolina Financial Services. The following sets forth the Plan's funded status and amounts recognized in the balance sheets at December 31, 2002 and 2001. RETIREMENT PLAN 2002 2001 - -------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ (3,242,374) $ (2,985,361) - -------------------------------------------------------------------------------- Service cost (61,381) (59,601) - -------------------------------------------------------------------------------- Interest cost (208,595) (208,371) - -------------------------------------------------------------------------------- Actuarial loss (99,832) (63,153) - -------------------------------------------------------------------------------- Benefits and expenses paid 137,411 74,112 - -------------------------------------------------------------------------------- Benefit obligation at end of year (3,474,771) (3,242,374) ================================================================================ CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year 2,510,514 2,327,444 - -------------------------------------------------------------------------------- Actual return on plan assets (408,672) 91,926 - -------------------------------------------------------------------------------- Employer contribution 497,280 165,256 - -------------------------------------------------------------------------------- Benefits and expenses paid (137,411) (74,112) - -------------------------------------------------------------------------------- Fair value of plan assets at end of year 2,461,711 2,510,514 - -------------------------------------------------------------------------------- Funded status (1,013,060) (731,860) - -------------------------------------------------------------------------------- Unrecognized net actuarial gain 1,058,971 340,780 - -------------------------------------------------------------------------------- Unrecognized prior service cost (162,717) (194,992) - -------------------------------------------------------------------------------- Accrued Liability $ (116,806) $ (586,072) ================================================================================ AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET CONSIST OF: 2002 2001 - -------------------------------------------------------------------------------- Accrued benefit liability $ (967,136) $ (672,912) - -------------------------------------------------------------------------------- Accumulated other comprehensive income 850,330 86,840 - -------------------------------------------------------------------------------- Net amounts recognized $ (116,806) $ (586,072) - -------------------------------------------------------------------------------- WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31 2002 2001 - -------------------------------------------------------------------------------- Discount rate 6.50% 7.00% - -------------------------------------------------------------------------------- Expected return on plan assets 8.00% 8.00% - -------------------------------------------------------------------------------- Rate of compensation increase 6.00% 6.00% - -------------------------------------------------------------------------------- Net periodic pension cost for the Plan for the years ended December 31, 2002, 2001 and 2000 includes the following: 2002 2001 2000 - ---------------------------------------------------------------------------- Service costs $ 61,381 $ 59,601 $ 51,595 - ---------------------------------------------------------------------------- Interest cost 208,595 208,371 197,601 - ---------------------------------------------------------------------------- Expected return on Plan assets (209,687) (188,835) (178,328) - ---------------------------------------------------------------------------- Amortization of prior service cost (32,275) (987) (985) - ---------------------------------------------------------------------------- Net periodic pension cost $ 28,014 $ 78,150 $ 69,883 ============================================================================ 39 The Bank sponsors a nonqualified Supplemental Executive Retirement Plan ("SERP"). The SERP, which is unfunded, provides certain individuals pension benefits, outside the Bank's noncontributory defined-benefit cash balance pension plan, based on average earnings, years of service and age at retirement. As a method of funding the benefits, the Bank has purchased life insurance in the aggregate amount of approximately $4,700,000, covering all the participants in the SERP, with the Bank as beneficiary. The Bank intends to keep this life insurance in force indefinitely. During fiscal year ended December 31, 2000, the Bank amended the SERP to increase benefits payable to certain executives. EXECUTIVE RETIREMENT PLAN
2002 2001 - -------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $ (779,584) $ (518,219) - -------------------------------------------------------------------------------------------- Service cost (11,034) (8,855) - -------------------------------------------------------------------------------------------- Interest cost (57,267) (50,801) - -------------------------------------------------------------------------------------------- Actuarial loss (99,311) (233,102) - -------------------------------------------------------------------------------------------- Benefits and expenses paid 31,393 31,393 - -------------------------------------------------------------------------------------------- Benefit obligation at end of year (915,803) (779,584) - -------------------------------------------------------------------------------------------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year Employer contribution 31,393 31,393 - -------------------------------------------------------------------------------------------- Benefits and expenses paid (31,393) (31,393) - -------------------------------------------------------------------------------------------- Fair value of plan assets at end of year Funded status (915,803) (779,584) - -------------------------------------------------------------------------------------------- Unrecognized net actuarial loss 213,371 170,868 - -------------------------------------------------------------------------------------------- Unrecognized prior service cost 16,242 51,554 -------------------------------------------------------------------------------------------- Accrued Liability $ (686,190) $ (557,162) - -------------------------------------------------------------------------------------------- AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS CONSIST OF: 2002 2001 - -------------------------------------------------------------------------------------------- Accrued benefit liability (879,535) (779,584) - -------------------------------------------------------------------------------------------- Intangible Asset 16,242 51,554 - -------------------------------------------------------------------------------------------- Accumulated other comprehensive income 177,103 170,868 - -------------------------------------------------------------------------------------------- Net amounts recognized $ (686,190) $ (557,162) - -------------------------------------------------------------------------------------------- Weighted-average assumptions as of December 31 2002 2001 - -------------------------------------------------------------------------------------------- Discount rate 6.50% 7.00% - -------------------------------------------------------------------------------------------- Expected return on plan assets N/A N/A - -------------------------------------------------------------------------------------------- Rate of compensation increase 6.00% 6.00% - --------------------------------------------------------------------------------------------
Net periodic pension cost for the SERP for the years ended December 31, 2002, 2001 and 2000 includes the following 2002 2001 2000 - ------------------------------------------------------------------------ Service cost $ 11,034 $ 8,855 $ 3,502 - ------------------------------------------------------------------------ Interest cost 57,267 50,801 35,007 - ------------------------------------------------------------------------ Amortization of prior service cost 92,120 15,834 75,293 - ------------------------------------------------------------------------ Net periodic pension cost $ 160,421 $ 75,490 $113,802 ======================================================================== 40 401(k) Plan - The Bank sponsors a 401(k) plan. Participation in the 401(k) plan is voluntary and employees become eligible after completing 90 days of service and attaining age 21. Employees may elect to contribute up to 12% of their compensation to the 401(k) plan. The Bank matches 100% of employee contributions up to 6% of each employee's compensation. The 401(k) plan investments are managed by Intercarolina Financial Services. The Bank's contributions to the 401(k) plan were $151,172, $147,707 and $144,889 for 2002, 2001 and 2000, respectively. Deferred Compensation Plan - The Bank sponsors a nonqualified deferred compensation plan. The plan, which is unfunded, provides for certain management employees to defer compensation in order to provide retirement and death benefits on behalf of such employees. The plan allows certain management employees to receive the balance of the 6% company match on the 401(k) plan that would otherwise be forfeited to comply with the Internal Revenue Code. As a method of funding the benefits, the Bank maintains a liability for the participants. At December 31, 2002 and 2001, the amount of the liability was $285,000 and $224,000, respectively. Stock Option Plan - The Company has a stock option plan (the "Option Plan") under which the Company may grant options to selected officers of the Company for up to 85,500 shares of common stock. Under the plan, the exercise price of each option equals the market price of the Company's stock on the date of grant, and an option's maximum term is 10 years. Options vest over 5 years based on years of service and become 100% vested at either age 55, with 30 years of service, or at age 65. The fair value of each option grant is estimated on the date of grant, using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants: dividend yield of 4.76%; expected volatility of 26.28%; risk-free interest rate of 5.50%; and expected life of 5 years. A summary of the status of the Option Plan as of December 31, 2002, 2001, and 2000 and the changes during the years ending on those dates is presented below:
2002 2001 2000 ----------------------------------------------------------------------------------------- WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE FIXED OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE - -------------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 59,400 $ 15.67 82,200 $ 15.67 82,200 $ 15.67 - -------------------------------------------------------------------------------------------------------------------------------- Granted - - - - - - - -------------------------------------------------------------------------------------------------------------------------------- Options Forfeited - - 22,800 $ 15.67 - - - -------------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 59,400 $ 15.67 59,400 $ 15.67 82,200 $ 15.67 - -------------------------------------------------------------------------------------------------------------------------------- Options exercisable at end of year 54,240 45,720 48,120 - --------------------------------------------------------------------------------------------------------------------------------
No options were granted in 2002, 2001 or 2000. At December 31, 2002, 2001 and 2000, 82,200 options outstanding under the Option Plan have an exercise price of $15.67 and a weighted-average remaining contractual life of 6.99 years, 7.99 years, and 8.99 years, respectively. 41 11. BORROWED FUNDS Borrowed funds at December 31 are summarized as follows: 2002 2001 - ---------------------------------------------------------------------------- Fixed-rate advances from the FHLB: Advance maturing October 8, 2008, 4.64% $ 10,000,000 $ 10,000,000 - ---------------------------------------------------------------------------- Advance maturing July 16, 2018, 7.26% 1,853,215 1,875,208 - ---------------------------------------------------------------------------- Variable Advance from the FHLB: - ---------------------------------------------------------------------------- Advance maturing January 3, 2002, 2.00% 500,000 - ---------------------------------------------------------------------------- Advance maturing January 22, 2003, 1.90% 4,700,000 - - ---------------------------------------------------------------------------- $ 16,553,215 $ 12,375,208 ============================================================================ The contractual maturities of borrowed funds are as follows: YEAR ENDING DECEMBER 31: - ------------------------------------------------------- 2003 $ 4,724,175 - ------------------------------------------------------- 2004 26,574 - ------------------------------------------------------- 2005 29,212 - ------------------------------------------------------- 2006 32,111 - ------------------------------------------------------- 2007 35,298 - ------------------------------------------------------- Thereafter 11,705,845 - ------------------------------------------------------- Total $ 16,553,215 ======================================================= The advance maturing July 16, 2018 requires quarterly principal repayments. Pursuant to collateral agreements with the FHLB, advances are secured by all stock in the FHLB and qualifying first mortgage loans. The Bank also periodically borrows funds on an overnight basis via advances from the Federal Reserve and the purchase of federal funds. At December 31, 2002 and 2001, overnight borrowings outstanding were $4,700,000 and $500,000, respectively. The Bank has the availability of an additional $7.0 million from the FHLB. The Bank also has a line of credit of $3,351,636 established at the Federal Reserve. 12. RELATED-PARTY TRANSACTIONS The Bank has, and expects to have in the future, banking transactions in the ordinary course of business with several of its directors, officers and their associates on the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with others in the normal course of business. Those transactions do not involve more than the normal risk of collectibility nor do they present any unfavorable features. The aggregate amount of loans to such related parties at December 31, 2002 and 2001 was approximately $4,109,000 and $1,711,000, respectively. During 2002, new loans to such related parties totaled approximately $3,164,000 and repayments were approximately $766,000. 13. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate that value: Cash and Cash Equivalents - Carrying amount is a reasonable estimate of fair value. Securities - Fair value for securities, excluding Federal Home Loan Bank ("FHLB") stock, are based on quoted market prices. The carrying value of FHLB stock approximates fair value based on commitments on hand from investors or prevailing market prices. Loans - Fair value of variable-rate mortgage loans is estimated using quoted market prices. For non-mortgage variable-rate loans, the carrying amount is considered a reasonable estimate of fair value. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers. Deposits - The fair value of demand and passbook savings accounts is the amount payable on demand at December 31, 2002 and 2001. The fair value of fixed-maturity certificate accounts is estimated using the present value of the projected cash flows using rates currently offered for similar deposits with similar maturities. 42 Borrowed Funds - The fair value of borrowed funds due within one year is the amount payable at the reporting date. The fair value of long-term borrowed funds is estimated by discounting the future cash flows using the current rates at which similar loans could be obtained with similar credit ratings and for the same remaining maturities. Commitments to Extend Credit - The actual committed amount for mortgage loan originations and for unused lines of credit is considered a reasonable estimate of fair value.
DECEMBER 31, 2002 DECEMBER 31, 2001 ----------------------------------------------------- CARRYING FAIR CARRYING FAIR (DOLLARS IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE - --------------------------------------------------------------------------------------------- FINANCIAL ASSETS: - --------------------------------------------------------------------------------------------- Cash and cash equivalents $ 5,878 $ 5,878 $ 9,815 $ 9,815 - --------------------------------------------------------------------------------------------- Investment securities* 30,469 30,505 30,326 30,358 - --------------------------------------------------------------------------------------------- Loans, net 138,130 143,080 120,380 125,018 - --------------------------------------------------------------------------------------------- FINANCIAL LIABILITIES: - --------------------------------------------------------------------------------------------- Deposits 149,818 150,525 135,383 136,219 - --------------------------------------------------------------------------------------------- Long term debt 16,553 17,154 12,353 12,896 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- UNRECOGNIZED FINANCIAL INSTRUMENTS: - --------------------------------------------------------------------------------------------- Commitments to extend credit 20,916 16,279 - --------------------------------------------------------------------------------------------- Standby letters of credit 1,415 110 =============================================================================================
* Includes Federal Home Loan Bank Stock 43 14. REGULATORY MATTERS The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2002 and 2001, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2002, the most recent notification received from the Federal Deposit Insurance Corporation categorized the Bank was well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Company's category. The Bank's actual capital amounts and ratios are also presented in the table below.
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ----------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ------------------------------------------------------------------------------------------------------------------------------ As of December 31, 2002: Total Capital (to risk weighted assets) $ 19,541 13.42% $ 11,650 8.00% $ 14,563 10.00% - ------------------------------------------------------------------------------------------------------------------------------ Tier 1 Capital (to risk weighted assets) 17,257 11.85% 5,825 4.00% 8,738 6.00% - ------------------------------------------------------------------------------------------------------------------------------ Tier 1 Capital (to average assets) 17,257 9.38% 7,359 4.00% 9,199 5.00% - ------------------------------------------------------------------------------------------------------------------------------ As of December 31, 2001: Total Capital (to risk weighted assets) $ 19,083 15.63% $ 9,783 8.00% $ 12,222 10.00% - ------------------------------------------------------------------------------------------------------------------------------ Tier 1 Capital (to risk weighted assets) 17,011 13.91% 4,892 4.00% 7,335 6.00% - ------------------------------------------------------------------------------------------------------------------------------ Tier 1 Capital (to average assets) 17,011 10.29% 6,613 4.00% 8,266 5.00% - ------------------------------------------------------------------------------------------------------------------------------
The Bank is also subject to limits on dividend payments. The Bank may pay dividends only out of undivided profits. The Bank is prohibited from paying a dividend if i) surplus is less than 50% of its paid-in capital stock, or ii) insolvency or when payment of a dividend would render it insolvent or be contrary to its Articles of Incorporation. Additionally, there are statutory provisions regarding the ascertainment of undivided profits from which dividends may be paid; and banking regulators may restrict or prohibit the payment of dividends by banks which have been found to have inadequate capital. Payment of dividends by the Bank to the Company is subject to various restrictions. Under applicable banking regulations, the Bank may not declare a cash dividend if the effect thereof would be to reduce its net worth to an amount less than the minimum required by federal and state banking regulations. In connection with the 3-for-2 stock split accounted for as a 50% dividend on January 21, 2000, in lieu of fractional shares, the Bank repurchased and retired 75 shares of its common stock. The Bank paid cash dividends of $956,197, $850,179, and $503,846 to the Company during 2002, 2001 and 2000, respectively. 44 15. PARENT COMPANY CONDENSED FINANCIAL INFORMATION Condensed financial information pertaining only to the Company at December 31, 2002 and 2001 and for the three years ended December 31, 2002, is as follows:
2002 2001 - -------------------------------------------------------------------------------------------------- ASSETS Cash $ 877,467 $ 504,119 - -------------------------------------------------------------------------------------------------- Investment in subsidiary 17,189,321 17,246,114 - -------------------------------------------------------------------------------------------------- Other assets 187,161 191,409 - -------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 18,253,949 $ 17,941,642 ================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------------------------- Accrued expenses and other liabilities $ 67,421 $ 88,298 - -------------------------------------------------------------------------------------------------- Shareholders' equity 18,186,528 17,853,344 - -------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 18,253,949 $ 17,941,642 ================================================================================================== 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------- CONDENSED STATEMENT OF INCOME Dividends from Bank subsidiary $ 956,197 $ 850,179 $ 503,846 - --------------------------------------------------------------------------------------------------------------------- Other income 9,346 3,764 - - --------------------------------------------------------------------------------------------------------------------- Total income 965,543 853,943 503,846 - --------------------------------------------------------------------------------------------------------------------- Other expenses 196,680 144,113 229,660 - --------------------------------------------------------------------------------------------------------------------- Income before income taxes and equity in undistributed net 768,863 709,830 274,186 income of subsidiary - --------------------------------------------------------------------------------------------------------------------- Equity in undistributed earnings of Bank subsidiary 915,218 310,063 570,411 - --------------------------------------------------------------------------------------------------------------------- Income tax (expense) benefit (648,331) (113,200) 57,661 - --------------------------------------------------------------------------------------------------------------------- Net income $ 1,035,750 $ 906,693 $ 902,258 - --------------------------------------------------------------------------------------------------------------------- STATEMENT OF CASH FLOWS 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------- Operating activities - - --------------------------------------------------------------------------------------------------------------------- Net income $ 1,035,750 $ 906,693 902,258 - --------------------------------------------------------------------------------------------------------------------- Income tax (benefit) expense 648,412 113,200 (57,661) - --------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net cash provided by operations: Decrease in other assets 4,248 6,777 29,447 - --------------------------------------------------------------------------------------------------------------------- (Decrease) increase in other liabilities (20,877) 20,000 5,684 - --------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 1,667,533 1,046,670 879,728 - --------------------------------------------------------------------------------------------------------------------- Investing activities - Undistributed earnings in subsidiary (168,522) (310,063) (570,411) - --------------------------------------------------------------------------------------------------------------------- Financing activities - Cash dividends (272,673) (273,192) (273,192) - --------------------------------------------------------------------------------------------------------------------- Repurchase and retirement of common stock (106,294) - (1,175) - --------------------------------------------------------------------------------------------------------------------- Cash used in financing activities (378,967) (273,192) (274,367) - --------------------------------------------------------------------------------------------------------------------- INCREASE IN CASH $ 373,348 $ 463,415 $ 34,950 - --------------------------------------------------------------------------------------------------------------------- CASH, BEGINNING OF PERIOD $ 504,119 $ 40,704 $ 5,754 - --------------------------------------------------------------------------------------------------------------------- CASH, END OF PERIOD $ 877,467 $ 504,119 $ 40,704 - ---------------------------------------------------------------------------------------------------------------------
45 16. QUARTERLY FINANCIAL DATA (UNAUDITED) YEAR ENDED DECEMBER 31, 2002
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER - ----------------------------------------------------------------------------------------------------------- (In thousands, except share data) Total interest and dividend income $ 2,902 $ 2,915 $ 2,974 $ 2,966 - ----------------------------------------------------------------------------------------------------------- Total Interest Expense 907 884 879 877 - ----------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 1,995 2,031 2,095 2,089 - ----------------------------------------------------------------------------------------------------------- Provision for Loans 184 185 184 185 - ----------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 1,811 1,846 1,911 1,904 - ----------------------------------------------------------------------------------------------------------- Non-interest income 503 493 420 752 - ----------------------------------------------------------------------------------------------------------- Non-interest expense 2,050 1,792 2,015 2,286 - ----------------------------------------------------------------------------------------------------------- Income before taxes 264 547 316 370 - ----------------------------------------------------------------------------------------------------------- Income tax expense 70 154 83 154 - ----------------------------------------------------------------------------------------------------------- NET INCOME $ 194 $ 393 $ 233 $ 216 =========================================================================================================== Net earnings per share-basic and diluted 0.23 0.46 0.28 0.25 - ----------------------------------------------------------------------------------------------------------- Weighted average shares outstanding 854 846 843 843 - -----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2001
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER - ----------------------------------------------------------------------------------------------------------- Total interest and dividend income $ 3,083 $ 2,903 $ 2,822 $ 2,891 - ----------------------------------------------------------------------------------------------------------- Total Interest Expense 1,136 1,162 1,062 987 - ----------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 1,947 1,741 1,760 1,904 - ----------------------------------------------------------------------------------------------------------- Provision for Loans 134 138 147 192 - ----------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 1,813 1,603 1,613 1,712 - ----------------------------------------------------------------------------------------------------------- Non-interest income 426 614 499 444 - ----------------------------------------------------------------------------------------------------------- Non-interest expense 1,950 1,987 1,766 1,831 - ----------------------------------------------------------------------------------------------------------- Income before taxes 289 230 346 325 - ----------------------------------------------------------------------------------------------------------- Income tax expense 59 68 89 67 - ----------------------------------------------------------------------------------------------------------- NET INCOME $ 230 $ 162 $ 257 $ 258 =========================================================================================================== Net earnings per share-basic and diluted 0.27 0.19 0.30 0.30 - ----------------------------------------------------------------------------------------------------------- Weighted average shares outstanding 854 854 854 854 - -----------------------------------------------------------------------------------------------------------
46 M&F BANCORP, INC. BOARD OF DIRECTORS Benjamin S. Ruffin Chairman M&F Bancorp, Inc. The Ruffin Group Winston-Salem, NC Joseph M. Sansom Vice Chairman M&F Bancorp, Inc. Managing Partner Sansom Associates, LLC Raleigh, NC Willie T. Closs, Jr. Executive Vice President NC Mutual Life Insurance Company Durham, NC Genevia Gee Fulbright Vice President Fulbright & Fulbright, CPA, PA Durham, NC Lee Johnson, Jr. President and CEO M&F Bancorp, Inc. Durham, NC Maceo K. Sloan Chairman, President and CEO Sloan Financial Group, Inc. Durham, NC Aaron L. Spaulding Founder, President and CEO Prestige Travel Durham, NC OFFICERS Lee Johnson, Jr. President and CEO M&F Bancorp, Inc. Durham, NC E. Elaine Small Vice President Assistant Corporate Secretary M&F Bancorp, Inc. Durham, NC Fohliette W. Becote Secretary/Treasurer M&F Bancorp, Inc. Durham, NC COMMITTEES AUDIT COMMITTEE Genevia G. Fulbright, Chairman Maceo K. Sloan, Secretary Willie T. Closs, Jr. Benjamin S. Ruffin Joseph M. Sansom STRATEGIC ISSUES AND PLANNING COMMITTEE Maceo K. Sloan, Chairman E. Elaine Small, Secretary Fohliette W. Becote Genevia Gee Fulbright W. Donald Harrington Lee Johnson, Jr. Benjamin S. Ruffin Joseph M. Sansom Harold G. Sellars Aaron L. Spaulding GENERAL COUNSEL William A. Marsh, Jr. SPECIAL COUNSEL Brooks, Pierce, McLendon, Humphrey & Leonard, LLP Womble, Carlyle, Sandridge & Rice, LLP 47 MECHANICS AND FARMERS BANK BOARD OF DIRECTORS Benjamin S. Ruffin* Chairman, Board of Directors Mechanics and Farmers Bank President The Ruffin Group Winston-Salem, NC Aaron L. Spaulding* Vice Chairman, Board of Directors Mechanics and Farmers Bank Founder, President and CEO Prestige Travel Durham, NC Lee Johnson, Jr.* President and CEO Mechanics and Farmers Bank Durham, NC Cedric L. Russell Funeral Director and General Manager Russell Funeral Home Winston-Salem, NC Joseph M. Sansom* Managing Partner Sansom Associates, LLC Raleigh, NC John C. Scarborough III President and CEO Scarborough and Hargett Funeral Home Durham, NC James A. Stewart Broker/Consultant Anthony Allenton Commercial Real Estate Durham, NC Connie J. White Management Consultant Durham, NC DIRECTORS EMERITI William J. Kennedy III Lem Long, Jr. Walter S. Tucker John W. Winters CORPORATE OFFICERS Lee Johnson, Jr. President and CEO E. Elaine Small Executive Vice President/Operations Group Executive Fohliette W. Becote Senior Vice President/Chief Financial Officer/Financial Group Executive/ Corporate Secretary Isaiah T. Cummings Senior Vice President/Chief Lending Officer/Banking Group Executive W. Donald Harrington Senior Vice President/Chief Credit Officer/ Credit Group Executive William J. Pickens Senior Vice President/Business Development Officer/Assistant to the President Harold G. Sellars Senior Vice President/Quality Assurance/ Lending Administrator Evelyn Acree Senior Vice President/City Executive, Winston-Salem Stanley Green, Jr. Senior Vice President/City Executive/ Security Officer, Raleigh Jacque Johnson, Jr. Senior Vice President/City Executive, Charlotte Nathan Farrior Vice President/City Executive, Durham Julia V. Banks Vice President/Branch Operations Support Brendalyn Alexander Assistant Vice President Loan Review Officer/Assistant Corporate Secretary Anne DeLoatch Assistant Vice President/Senior Banking Center Service Manager/Assistant Security Officer/Assistant Corporate Secretary, Durham BANKING OFFICERS Tanya Dial-Bethune Manager/Assistant Security Officer/ Assistant Corporate Secretary, Charlotte Julie Farrington Sales Executive, Customer Relations Manager, Chapel Hill Boulevard Branch, Durham John Jackson Manager/Assistant Security Officer/ Assistant Corporate Secretary, Winston- Salem Lucera B. Parker Marketing Director Sheila Winston-Graves Senior Banking Center Service Manager OTHER OFFICERS Saundra H. Quick Executive Secretary/Assistant Corporate Secretary *Executive Committee 48 INTERNAL AUDIT Anthony C. Powell Audit and Risk Manager Peggy Gill Audit Risk Consultant Valerie M. Quiett, Esquire, Compliance Officer ASSET LIABILITY COMMITTEE Aaron L. Spaulding, Chairman Fohliette W. Becote, Secretary W. Donald Harrington Lee Johnson, Jr. E. Elaine Small Isaiah T. Cummings Connie J. White AUDIT COMMITTEE** Genevia G. Fulbright, Chairman Maceo K. Sloan, Secretary Willie T. Closs, Jr. Benjamin S. Ruffin Joseph M. Sansom **M&F Bancorp, Inc. COMPENSATION COMMITTEE Benjamin S. Ruffin, Chairman Joseph M. Sansom, Secretary James A. Stewart Lem Long, Jr., Ex officio EDP AND TECHNOLOGY COMMITTEE Joseph M. Sansom, Chairman E. Elaine Small, Secretary Julia V. Banks Fohliette W. Becote Joseph Ellerbee W. Donald Harrington Lee Johnson, Jr. Alice Lyon Anthony C. Powell Isaiah T. Cummings James A. Stewart Connie J. White LOAN REVIEW COMMITTEE W. Donald Harrington, Chairman Isaiah T. Cummings, Vice Chair Brendalyn Alexander, Secretary Nathan Farrior Evelyn Acree Stanley Green, Jr. Jacque Johnson, Jr. Lee Johnson, Jr. William J. Pickens Harold G. Sellars* *Alternate MARKETING & ADVERTISING COMMITTEE Benjamin S. Ruffin, Chairman Lucera B. Parker, Secretary Fohliette W. Becote W. Donald Harrington Lee Johnson, Jr. William J. Pickens Cedric L. Russell Isaiah T. Cummings E. Elaine Small Aaron L. Spaulding PERSONNEL COMMITTEE James A. Stewart, Chairman Fohliette W. Becote, Secretary W. Donald Harrington Lee Johnson, Jr. J. C. Scarborough III Isaiah T. Cummings E. Elaine Small Aaron L. Spaulding CITY ADVISORY BOARDS DURHAM James A. Stewart, Chairman Nathan Farrior, Secretary Isaiah T. Cummings Ralph M. Bullock Fredrick A. Davis Moses L. Best, Jr. Ostine Swan H. James Williams Lee Johnson, Jr., Ex officio CHARLOTTE Lem Long, Jr., Chairman Jacque Johnson, Jr., Secretary Isaiah T. Cummings Walter S. Tucker Jewett L. Walker Anthony V. Hunt Edward J. High Julius C. Cousar Lee Johnson, Jr., Ex officio RALEIGH Joseph M. Sansom, Chairman Stanley Green, Jr., Secretary Isaiah T. Cummings Hortense A. Francis Dumas A. Harshaw, Jr. Lorraine G. Stephens Michelle H. Keaton-Barrows Ned A. Harris Lee Johnson, Jr., Ex officio WINSTON-SALEM Benjamin S. Ruffin, Chairman Evelyn Acree, Secretary Isaiah T. Cummings Cedric L. Russell Serenus T. Churn, Sr. Gwen M. Allen John M. Berry Eugenia L. Parent Michael A. Grace Lee Johnson, Jr., Ex officio 49 EX-21 5 dex21.txt EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF M&F BANCORP, INC. M&F Bancorp, Inc. has one subsidiary, Mechanics and Farmers Bank, a commercial bank organized under the laws of North Carolina. Mechanics and Farmers Bank had one subsidiary, Realty Services, Inc., a corporation organized under the laws of North Carolina, which was dissolved in May 2001. EX-23 6 dex23.txt EXHIBIT 23 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statement No. 333-95973 of M & F Bancorp, Inc. on Form S-8 of our report dated January 24, 2003, incorporated by reference in the Annual Report on Form 10-KSB of M&F Bancorp, Inc. for the year ended December 31, 2002. /s/ DELOITTE & TOUCHE LLP Raleigh, North Carolina March 28, 2003 EX-99 7 dex99.txt EXHIBIT 99 EXHIBIT 99 M & F BANCORP, INC. CERTIFICATION OF PERIODIC FINANCIAL REPORT PURSUANT TO 18 U.S.C. SECTION 1350 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officers of M & F Bancorp, Inc. (the "Company") certify that the Annual Report on Form 10-KSB of the Company for the fiscal year ended December 31, 2002 fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and information contained in that Form 10-KSB fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 18, 2003 /s/ Lee Johnson, Jr. ------------------------------- Lee Johnson, Jr. Chief Executive Officer Dated: March 18, 2003 /s/ Fohliette W. Becote ------------------------------- Fohliette W. Becote Chief Financial Officer *This certification is made solely for purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose. -----END PRIVACY-ENHANCED MESSAGE-----