UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________________________

FORM 10-Q

______________________________________________________

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly  period ended September 30, 2011

Commission file number  000-027307

(Exact name of registrant as specified in charter)

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

(919) 687-7800

(Registrant’s Telephone Number, Including Area Code)

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

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

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

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

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

Yes  o  No  x

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

As of November 2, 2011, there were 2,031,337 shares outstanding of the issuer's common stock, no par value.

INDEX

PART I	1
FINANCIAL INFORMATION	1
Item 1 - Financial Statements (unaudited)	1
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3 - Quantitative and Qualitative Disclosures about Market Risk	63
Item 4 - Controls and Procedures	63
PART II	64
OTHER INFORMATION	64
Item 1 - Legal Proceedings	64
Item 6 - Exhibits	65

i

M&F BANCORP, INC.

PART I

FINANCIAL INFORMATION

Item 1 - Financial Statements (unaudited)

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)	September 30, 2011			December 31, 2010
	(Unaudited)			***
ASSETS
Cash and cash equivalents	$	62,448		$	74,575
Investment securities available for sale, at fair value	31,108			20,627
Other invested assets	720			948
Loans, net of unearned income and deferred fees	194,849			201,771
Allowances for loan losses	(4,286		)	(3,851		)
Loans, net	190,563			197,920
Interest receivable	723			627
Bank premises and equipment, net	4,365			4,585
Cash surrender value of bank-owned life insurance	5,717			5,564
Other real estate owned	2,407			1,915
Deferred tax assets and taxes receivable, net	4,246			4,434
Other assets	1,486			1,150
TOTAL ASSETS	$	303,783		$	312,345
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Interest-bearing deposits	$	212,304		$	225,119
Noninterest-bearing deposits	48,315			44,565
Total deposits	260,619			269,684
Other borrowings	731			745
Other liabilities	5,066			5,506
Total liabilities	266,416			275,935
COMMITMENTS AND CONTINGENCIES
Stockholders' equity:
Series B Preferred Stock-  $1,000 liquidation value per share, 11,735 shares issued and outstanding as of September 30, 2011 and December 31, 2010	11,723			11,722
Common stock, no par value 10,000,000 shares authorized as of September 30, 2011 and December 31, 2010; 2,031,337 shares issued and outstanding as of September 30, 2011 and December 31, 2010	8,732			8,732
Retained earnings	17,686			17,264
Accumulated other comprehensive loss	(774		)	(1,308		)
Total stockholders' equity	37,367			36,410
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	303,783		$	312,345

See notes to consolidated financial statements.

***Derived from audited financial statements.

1

M&F BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except for share and per share data)	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(Unaudited)	2011			2010			2011			2010
Interest income:
Loans, including fees	$	2,759		$	3,118		$	8,458		$	9,422
Investment securities, including dividends
Taxable	186			102			472			308
Tax-exempt	73			69			204			223
Other	36			27			116			60
Total interest income	3,054			3,316			9,250			10,013
Interest expense:
Deposits	341			516			1,102			1,584
Borrowings	2			1			4			3
Total interest expense	343			517			1,106			1,587
Net interest income	2,711			2,799			8,144			8,426
Less provision for loan losses	264			156			437			424
Net interest income after provision for loan losses	2,447			2,643			7,707			8,002
Noninterest income:
Service charges	364			389			1,079			1,246
Rental income	88			76			261			226
Cash surrender value of life insurance	50			49			147			152
Realized gain on sale of securities	69			—			106			26
Realized gain on sale of other real estate owned	21			12			162			30
Realized gain (loss) on disposal of assets	—			—			104			(3		)
Other income (expense)	1			1			3			—
Total noninterest income	593			527			1,862			1,677
Noninterest expense:
Salaries and employee benefits	1,376			1,335			4,112			3,802
Occupancy and equipment	372			409			1,148			1,177
Directors fees	63			82			217			229
Marketing	55			56			198			165
Professional fees	335			239			818			735
Information technology	203			213			590			636
FDIC deposit insurance	144			174			488			606
OREO expense, net	35			268			185			550
Other	297			282			1,010			1,042
Total noninterest expense	2,880			3,058			8,766			8,942
Income before income taxes	160			112			803			737
Income tax expense	24			22			205			156
Net income	136			90			598			581
Less preferred stock dividends and accretion	(59		)	(122		)	(176		)	(417		)
Net income (loss) available (attributable) to common stockholders	$	77		$	(32	)	$	422		$	164
Basic and diluted earnings (loss) per share of common stock:	$	0.04		$	(0.02	)	$	0.21		$	0.08
Weighted average shares of common stock outstanding:
Basic and diluted	2,031,337			2,031,337			2,031,337			2,031,337
Dividends per share of common stock	$	—		$	—		$	—		$	0.0175

See notes to consolidated financial statements.

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M&F BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME
(Dollars in thousands)	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
(Unaudited)	2011			2010		2011			2010
Net income	$	136		$	90	$	598		$	581
Items of other comprehensive income, before tax:
Unrealized gains on securities available for sale, net of taxes	295			46		800			158
Reclassification adjustments for gains included in income before income tax expense	(69		)	—		(106		)	(26		)
Other comprehensive income before tax expense	226			46		694			132
Less: Changes in deferred income taxes related to change in unrealized gains on securities available for sale	33			18		160			50
Other comprehensive income, net of taxes	193			28		534			82
Total comprehensive income	$	329		$	118	$	1,132		$	663

See notes to consolidated financial statements

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M&F BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND OTHER COMPREHENSIVE LOSS
NINE MONTHS ENDED SEPTEMBER 30, 2011 and 2010
(Dollars in thousands except for share data) (Unaudited)	Number of Shares	Common Stock		Preferred Stock			Retained Earnings			Accumulated Other Comprehensive Loss			Total
Balances as of December 31, 2009	2,031,337	$	8,732	$	11,719		$	17,128		$	(1,024	)	$	36,555
Accretion of Series A preferred stock issuance costs				16			(16		)				—
Redemption of Series A preferred stock				(11,735		)							(11,735		)
Issuance of Series B preferred stock				11,721									11,721
Accretion of Series B preferred stock issuance costs				1			(1		)				—
Comprehensive income:
Net income							581						581
Other comprehensive income, net of tax										82			82
Total comprehensive income, net of tax													663
Dividends declared on preferred stock							(400		)				(400		)
Dividends declared on common stock ($0.0175 per share)							(35		)				(35		)
Balances as of September 30, 2010	2,031,337	$	8.732	$	11.722		$	17.257		$	(942	)	$	36,769
Balances as of December 31, 2010	2,031,337	$	8,732	$	11,722		$	17,264		$	(1,308	)	$	36,410
Accretion of Series B preferred stock issuance costs				1			(1		)				—
Comprehensive income:
Net income							598						598
Other comprehensive income, net of tax expense of $160										534			534
Total comprehensive income, net of tax expense of $374													1,132
Dividends declared on preferred stock							(175		)				(175		)
Balances as of September 30, 2011	2,031,337	$	8,732	$	11,723		$	17,686		$	(774	)	$	37,367

See notes to consolidated financial statements

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M&F BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
(Dollars in thousands)
(Unaudited)	2011			2010
Cash flows from operating activities:
Net income	$	598		$	581
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	437			424
Depreciation and amortization	260			306
(Gain) loss on disposition of asset	(104		)	3
Amortization of discounts/premiums on investments, net	18			(11		)
Loan purchase accounting amortization, net	130			130
Deferred loan origination fees and costs, net	71			102
Gains on sale of available for sale securities	(106		)	(26		)
Increase in cash surrender value of bank owned life insurance	(147		)	(152		)
Gain on sale of other real estate owned	(162		)	(30		)
Writedown of other real estate owned	80			502
Changes in:
Accrued interest receivable and other assets	(400		)	(116		)
Other liabilities	(440		)	260
Net cash provided by operating activities	235			1,973
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales	3,687			—
Maturities, prepayments and calls	1,723			1,968
Principal collections	2,407			2,720
Purchases	(17,289		)	(7,210		)
Net decrease in loans	5,392			3,849
Purchases of bank premises and equipment	(46		)	(132		)
Proceeds from sale of bank-owned life insurance policies	—			137
Payment of BOLI premium	(6		)	(6		)
Proceeds from disposition of asset	110			—
Proceeds from sale of real estate owned	914			110
Net cash (used in) provided by investing activities	(3,108		)	1,436
Cash flows from financing activities:
Net (decrease) increase in deposits	(9,065		)	37,513
Net decrease from other borrowings	(14		)	(7,015		)
Cash dividends	(175		)	(534		)
Net cash (used in) provided by  financing activities	(9,254		)	29,964
Net (decrease) increase in cash and cash equivalents	(12,127		)	33,373
Cash and cash equivalents as of the beginning of the period	74,575			30,313
Cash and cash equivalents as of the end of the period	$	62,448		$	63,686
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest	$	1,023		$	1,428
Income taxes	181			168

See notes to consolidated financial statements.

5

M&F BANCORP, INC.

Notes to Consolidated Financial Statements, September 30, 2011 (unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The Consolidated Financial Statements include the accounts and transactions of M&F Bancorp, Inc. (the “Company”) and its wholly-owned bank subsidiary, Mechanics and Farmers Bank (the “Bank”). All significant inter-company accounts and transactions have been eliminated in consolidation. The Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial statements and in accordance with the instructions for Form 10-Q and Rule 8-03 of Regulation S-X. The accompanying Consolidated Financial Statements and Notes are unaudited except for the balance sheet and footnote information as of December 31, 2010, which were derived from the Company’s audited consolidated Annual Report on Form 10-K for the year ended December 31, 2010.

The Consolidated Financial Statements included herein do not include all the information and notes required by GAAP and should be read in conjunction with the Consolidated Financial Statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

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

New Accounting Pronouncements –

In January 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-01, “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.”  This ASU required the disclosure of more granular information on the nature and extent of troubled debt restructurings and their effect on the allowance for loan and lease losses effective for the Company’s reporting period ended March 31, 2011.  The amendments in ASU No. 2011-01 deferred the effective date related to these disclosures, enabling creditors to provide such disclosures after the FASB completed its project clarifying the guidance for determining what constitutes a troubled debt restructuring.  As the provisions of ASU No. 2011-01 only deferred the effective date of disclosure requirements related to troubled debt restructurings, the adoption had no impact on the Company’s statements of income and condition.

In April 2011, the FASB issued ASU No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.”  The provisions of ASU No. 2011-02 provide additional guidance related to determining whether a creditor has granted a concession, include factors and examples for creditors to consider in evaluating whether a restructuring results in a delay in payment that is insignificant, prohibit creditors from using the borrower’s effective rate test to evaluate whether a concession has been granted to the borrower, and add factors for creditors to use in determining whether a borrower is experiencing financial difficulties.  A provision in ASU No. 2011-02 also ends the FASB’s deferral of the additional disclosures related to troubled debt restructurings as required by ASU No. 2010-20.  The provisions of ASU No. 2011-02 are effective for the Company’s reporting period ending September 30, 2011.  The adoption of ASU No. 2011-02 did not have a material impact on the Company’s statements of income and condition.

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.”  ASU No. 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and International Financial Reporting Standards (“IFRS”).  The changes to GAAP as a result of ASU No. 2011-04 are as follows:  (1) The concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets (that is, it does not apply to financial assets or any liabilities); (2) GAAP currently prohibits application of a blockage factor in valuing financial instruments with quoted prices in active markets, whereas  ASU No. 2011-04 extends that prohibition to all fair value measurements; (3) An exception is provided to the basic fair value measurement principles for an entity that holds a group of financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk that are managed on the basis of the entity’s net exposure to either of those risks.  This exception allows the entity, if certain criteria are met, to measure the fair value of the net asset or liability position in a manner consistent with how market participants would price the net risk position; (4) The fair value measurement of instruments classified within an entity’s shareholders’ equity is aligned with the guidance for liabilities; and (5) Disclosure requirements have been enhanced for recurring Level 3 fair value measurements to disclose quantitative information about unobservable inputs and assumptions used, to describe the valuation processes used by the entity, and to describe the sensitivity of fair value measurements to changes in unobservable inputs and interrelationships between those inputs.  In addition, entities must report the level in the fair value hierarchy of items that are not measured at fair value in the statement of condition but whose fair value must be disclosed.  The provisions of ASU No. 2011-04 are effective for the Company’s interim reporting period beginning on or after December 15, 2011.  The adoption of ASU No. 2011-04 is not expected to have a material impact on the Company’s statements of income and condition.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.”  The provisions of ASU No. 2011-05 allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  The statement(s) are required to be presented with equal prominence as the other primary financial statements.  ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity but does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  The provisions of ASU No. 2011-05 are effective for the Company’s interim reporting period beginning on or after December 15, 2011, with retrospective application required.  The Company adopted this ASU early.  The adoption of ASU No. 2011-05 resulted in presentation changes to the Company’s statements of income and the addition of a statement of comprehensive income.  The adoption of ASU No. 2011-05 did not have an impact on the Company’s statements of condition.

2. INVESTMENT SECURITIES

The main objectives of our investment strategy are to provide a source of liquidity while managing our interest rate risk, and to generate an adequate level of interest income without taking undue risks. Our investment policy permits investments in various types of securities, certificates of deposit and federal funds sold in compliance with various restrictions in the policy. As of September 30, 2011 and December 31, 2010, all investment securities were classified as available for sale.

Our available for sale securities totaled $31.1 million million and $20.6 million as of September 30, 2011 and December 31, 2010, respectively. Securities with a fair value of $0.6 million were pledged to the Federal Reserve Bank of Richmond (“FRB”) and an additional $5.3 million and $2.1 million in investments were pledged to public housing authorities in North Carolina and the North Carolina Department of State Treasurer as collateral for public deposits at September 30, 2011.  Securities with a fair value of $0.6 million were pledged to the FRB and an additional $0.4 million and $2.2 million in investments were pledged to public housing authorities in North Carolina and the North Carolina Department of State Treasurer as collateral for public deposits at December 31, 2010.  Our investment portfolio consists of the following securities:

• U.S. Government agency securities (“U.S. Agencies”)

• U.S. Government sponsored residential mortgage backed securities (“MBS”),

• Non-Government sponsored residential MBS, and

• Municipal securities (“Municipals”):

◦ North Carolina

◦ Out of state

The amortized cost, gross unrealized gains and losses and fair values of investment securities at September 30, 2011 and December 31, 2010 were:

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M&F BANCORP, INC.

Notes to Consolidated Financial Statements continued

(Dollars in thousands)	Amortized Cost		Gross  Unrealized  Gains		Gross Unrealized  Losses			Fair Value
(Unaudited)
September 30, 2011
U.S. Agencies	$	523	$	—	$	—		$	523
Government sponsored MBS
Residential	22,524		565		(5		)	23,084
Non-Government sponsored MBS
Residential	150		—		(1		)	149
Municipal securities
North Carolina	3,509		174		—			3,683
Out of state	3,564		105		—			3,669
Total at September 30, 2011	$	30,270	$	844	$	(6	)	$	31,108
December 31, 2010
Government sponsored MBS
Residential	$	13,554	$	326	$	(168	)	$	13,712
Non-Government sponsored MBS
Residential	201		4		—			205
Municipal securities
North Carolina	3,164		65		(43		)	3,186
Out of state	3,565		26		(67		)	3,524
Total at December 31, 2010	$	20,484	$	421	$	(278	)	$	20,627

Sales and calls of securities available for sale for the nine months ended September 30, 2011 and September 30, 2010 resulted in aggregate gross realized gains of $106.0 thousand and $26.0 thousand, respectively, and no realized losses.  During the three months ended September 30, 2011 and September 30, 2010 the Company realized gross gains of $69.0 thousand and $0.0 thousand, respectively, from the sale or call of securities.

The amortized cost and estimated market values of securities as of September 30, 2011 by contractual maturities are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. MBS, which are not due at a single maturity date, are grouped based upon the final payment date. MBS may mature earlier because of principal prepayments.

7

M&F BANCORP, INC.

Notes to Consolidated Financial Statements continued

(Dollars in thousands)	September 30, 2011
(Unaudited)	Fair Value		Amortized Cost
U.S. Agencies
Due after five years through ten years	$	523	$	523
Total US Agencies	$	523	$	523
Government sponsored MBS
Residential
Due after one year through five years	$	97	$	91
Due after five years through ten years	276		257
Due after ten years	22,711		22,176
Total government sponsored MBS	$	23,084	$	22,524
Non-Government sponsored MBS
Residential
Due after ten years	$	149	$	150
Municipal bonds
North Carolina
Due within one year	$	303	$	297
Due after one year through five years	2,490		2,364
Due after five years through ten years	890		848
Total North Carolina municipal bonds	$	3,683	$	3,509
Out of state
Due within one year	$	1,060	$	1,054
Due after one year through five years	1,391		1,355
Due after five years through ten years	1,218		1,155
Total out of state municipal bonds	$	3,669	$	3,564

As of September 30, 2011 and December 31, 2010, the fair value of securities with gross unrealized losses by length of time that the individual securities have been in an unrealized loss position is as follows:

(Dollars in thousands)	Less Than 12 Months					12 Months or Greater				Total
(Unaudited)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2011
Government sponsored MBS
Residential	$	1,077	$	(5	)	$	—	$	—	$	1,077	$	(5	)
Non-Government sponsored MBS
Residential	149		(1		)	—		—		149		(1		)
Total at September 30, 2011	$	1,226	$	(6	)	$	—	$	—	$	1,226	$	(6	)

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M&F BANCORP, INC.

Notes to Consolidated Financial Statements continued

(Dollars in thousands)	Less Than 12 Months					12 Months or Greater				Total
Unaudited	Fair Value		Unrealized Losses			Fair Value		Unrealized  Losses		Fair Value		Unrealized Losses
December 31, 2010
Government sponsored MBS
Residential	$	7,725	$	(168	)	$	—	$	—	$	7,725	$	(168	)
Municipal securities
North Carolina	1,687		(43		)	—		—		1,687		(43		)
Out of state	2,085		(67		)	—		—		2,085		(67		)
Total at December 31, 2010	$	11,497	$	(278	)	$	—	$	—	$	11,497	$	(278	)

All securities owned as of September 30, 2011 and December 31, 2010 are investment grade. The Company evaluates securities for other-than-temporary impairment, at least on a quarterly basis. Consideration is given to the financial condition and near-term prospects of the issuer, the length of time and extent to which the fair value has been less than cost, and our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.  As of September 30, 2011 and December 31, 2010, the Company held three and twenty investment positions, respectively, with unrealized losses of $6.0 thousand and $278.0 thousand, respectively. These investments were in Municipals, U.S. Goverment sponsored MBS, and non-Goverment sponsored MBS. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. Management has determined that all declines in the market value of available for sale securities are not other-than-temporary, and will not be likely required to sell.

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

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

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

4. ACCUMULATED OTHER COMPREHENSIVE INCOME

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

5. LOANS AND ALLOWANCE FOR LOAN LOSSES

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

Non-Performing Loans and Leases— Generally, all classes of commercial loans and leases are placed on non-accrual status upon becoming contractually past due 90 days or more as to principal or interest (unless loans and leases are adequately secured

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by collateral, are in the process of collection, and are reasonably expected to result in repayment), when loans are renegotiated below market levels until there is a sustained period of repayment (of a minimum of six months), or where substantial doubt about full repayment of principal or interest is evident. For residential mortgage and home equity loan classes, loans are placed on non-accrual status at the earlier of the loan becoming contractually past due 120 days or more as to principal or interest or upon taking a partial charge-off on the loan. For automobile and other consumer loan classes, the entire outstanding balance on the loan is charged-off when the loan becomes 120 days past due as to principal or interest.

When a loan or lease is placed on non-accrual status, regardless of class, the accrued and unpaid interest receivable is reversed and the loan or lease is accounted for on the cash or cost recovery method until qualifying for return to accrual status. All payments received on non-accrual loans and leases are applied against the principal balance of the loan or lease. All classes of loans or leases may be returned to accrual status when all delinquent interest and principal become current in accordance with the terms of the loan or lease agreement and when doubt about repayment is resolved.

Generally, for all classes of loans and leases, a charge-off is recorded when it is probable that a loss has been incurred and when it is possible to determine a reasonable estimate of the loss. For all classes of commercial loans and leases, a charge-off is determined on a judgmental basis after due consideration of the debtor's prospects for repayment and the fair value of collateral.

Impaired Loans — A loan is considered impaired when, based on current information and events, it is probable that the Company will not be able to collect all amounts due from the borrower in accordance with the contractual terms of the loan, including scheduled interest payments. Impaired loans include all classes of commercial non-accruing loans. Impaired loans exclude smaller balance homogeneous loans (consumer and small business non-accruing loans), for which the loan to value supports full recovery through the collateral, that are collectively evaluated for impairment. All Troubled Debt Restructuring (“TDR”) loans are considered impaired until sustained performance under the revised terms has been achieved.

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

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

If a loan or a portion of a loan is classified as doubtful or is partially charged-off, the loan is generally classified as non-accrual. Loans that are on a current payment status or past due less than 90 days may also be classified as impaired if full repayment of principal and/or interest in accordance with the terms of the loan or lease agreement is in doubt.

Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrears) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance of interest and principal by the borrower in accordance with the contractual terms.

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

Loans Modified in a TDR —Loans are considered to have been modified in a TDR when, due to a borrower's financial difficulties, the Company makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a non-accrual loan that has been modified in a TDR will be removed from non-accrual status if it is clear the borrower will be able to perform under the revised terms after a minimum of six consecutive months of performance under the revised terms.  If the borrower's ability to meet the revised payment schedule is in question, and the loan is not supported by adequate collateral, the loan is charged-off or foreclosed.

Allowances for Loan Losses — The provision for loan losses is the amount charged against earnings, to establish an adequate

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allowance for loan losses. Loan losses and recoveries are charged to or credited to this allowance, rather than reported as a direct expense or recovery. As of September 30, 2011, the allowance for loan losses was $4.3 million compared to $3.9 million as of December 31, 2010, which represented approximately 2.20% and 1.91% of total loans outstanding on those respective dates. The increase in the allowance to loans outstanding was caused by (i) an increase in the specific reserve for impaired loans of $0.7 million, an increase in the specific reserve for TDRs of $0.1 million, offset by a decrease in the net of the quantitative and qualitative factors for the loans not evaluated individually of $0.3 million, and the overall decrease in loans outstanding of $6.9 million. Nonperforming assets, defined as non-accruing loans plus foreclosed properties, at September 30, 2011 were 5.78% of total assets compared to 4.64% at December 31, 2010. Nonperforming assets as a percentage of total loans as of September 30, 2011, was 9.01% compared to 7.18% at December 31, 2010.  For the nine months ended September 30, 2011, and September 30, 2010, the provision for loan losses was $0.4 million.

Of the non-accruing loans totaling $15.1 million at September 30, 2011, 91.98% of the outstanding balances are secured by real estate, which management believes mitigates the risk of loss.  TDRs in compliance with the modified terms totaled $8.6 million or 61.08% of total TDRs at September 30, 2011.  GAAP does not provide specific guidance on when a loan may be returned to accrual status.  Federal banking regulators have provided guidance that interest on impaired loans, including TDRs, should only be recorded when there has been a sustained period of repayment performance, the loan is well secured, and collection under any revised terms is assessed as probable.  

In analyzing its allowance for loan losses, the Company tracks its net loan loss history by loan type.  The quantitative net loss history utilizes the prior two year period by loan type for the reserve.  The quantitative loss experience by loan type is then applied against the unimpaired loan balances and homogenous impaired balances for which there is no specific reserve to determine the quantitative reserve.  Under Accounting Standards Codification (“ASC”) 310, the non-homogenous impaired loans, homogenous small balance real estate secured loans in process of foreclosure for which the value is less than the loan principal balance, and TDRs, are reviewed individually for impairment.  The second piece of the calculation is based on qualitative factors, including (i) policy, underwriting, charge-off and collection, (ii) national and local economic conditions, (iii) nature and volume of the portfolio, (iv) experience, ability, and depth of lending team, (v) trends of past due, classified loans, and restructurings, (vi) quality of loan review and board oversight, (vii) existence, levels, and effect of loan concentrations and (viii) effects of external factors such as competition and regulatory oversight, are adjusted quarterly based on historical information for any quantifiable factors, and applied in total to each loan balance by loan type. The Company continues to enhance its modeling of the portfolio and underlying risk factors through quarterly analytical reviews with the goal of ensuring it captures all pertinent factors contributing to risk of loss inherent in the loan portfolio.  The Company applies additional qualitative factors for non-homogenous classified loans including special mention, substandard, and doubtful loans not identified as impaired, when the loan has a loan to value exceeding 50% of the outstanding balance and is not current in its payments.

Management considers trends in internally risk-rated exposures, criticized exposures, cash-basis loans, and historical and forecasted write-offs.  In addition to a review of industry, geographic, and portfolio concentrations, including current developments within those segments, management considers the current business strategy and credit process, including credit-limit setting and compliance, credit approvals, loan underwriting criteria and loan workout procedures.  The quantitative portion of the allowance for loan losses is adjusted for qualitative factors to account for model imprecision and to incorporate the range of probable outcome inherent in the estimates used for the allowance.

Loans are generally placed on non-accrual status when the scheduled payments reach 90 days past due.  Loans are charged-off, with Board approval, when the Chief Credit Officer and his staff determine that all reasonable means of collection of the outstanding balances, except foreclosure, have been exhausted.  The Company continues its collection efforts subsequent to charge-off, which historically has resulted in some recoveries each year.

For all classes of commercial loans, a quarterly evaluation of specific individual borrowers is performed to identify impaired loans.  The identification of specific borrowers for review is based on a review of non-accrual loans as well as those loans specifically identified by management as exhibiting above average levels of risk through the loan classification.  The allowance for loan and lease losses attributed to impaired loans considers all available evidence, including as appropriate, the probability that a specific loan will default, the expected exposure of a loan in default, an estimate of loss given default, the present value of expected future cash flows discounted using the loan’s contractual effective rate, the secondary market value of the loan and the fair value of collateral.

A specific loss allowance is established for impaired loans based on significant conditions or circumstances related to the specific credits. The specific allowance amounts are determined by a method prescribed by ASC 310. The loans identified as impaired are accounted for in accordance with one of three valuations: (i) the present value of future cash flows discounted at the loan’s effective

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interest rate; (ii) the loan’s observable market price, or (iii) the fair value of the collateral, if the loan is collateral dependent, less estimated liquidation costs.  Factors considered by management in determining impairment include payment status, collateral value, alternate use of special purpose real estate which could adversely impact resale, 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. The significance of payment delays and payment shortfalls are considered on a loan by loan 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. Interest payments made on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest income may be accrued or recognized on a cash basis.

The Company's reserve for credit losses is comprised of two components, the allowance for loan and lease losses and the reserve for unfunded commitments (the "Unfunded Reserve").  The Unfunded Reserve is reflected in Other liabilities on the Consolidated Balance Sheets, and the expense is recorded in Other noninterest expense.

Most consumer loans are evaluated for impairment on a collective basis, because these loans are for smaller balances and are homogeneous. Impairment reserves are included in the allowance for loan losses through a charge to the provision for loan losses.

The process of assessing the adequacy of the allowance for loan losses is inherently subjective. Further, and particularly in terms of economic downturns, it is reasonably possible that future credit losses may exceed historical loss levels and may also exceed management’s current estimates of incurred credit losses inherent within the loan portfolio. As such, there can be no assurance that future loan charge-offs will not exceed management’s current estimate of what constitutes a reasonable allowance for loan losses.

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

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The composition of the loan portfolio, net of deferred fees and costs, by loan classification as of September 30, 2011 and December 31, 2010 was as follows:

	September 30, 2011			December 31, 2010
(Dollars in thousands)	Unaudited
Commercial	$	9,198		$	9,148
Commercial real estate:
Construction	1,642			1,187
Owner occupied	23,543			22,395
Other	22,534			24,265
Faith-based non-profit
Construction	6,027			9,840
Owner occupied	75,555			79,490
Other	7,759			2,127
Residential real estate:
First mortgage	31,387			32,284
Multifamily	7,618			7,892
Home equity	4,401			5,123
Construction	398			2,243
Consumer	1,694			2,218
Other loans	3,093			3,559
Loans, net of deferred fees	194,849			201,771
Allowance for loan losses	(4,286		)	(3,851		)
Loans, net of allowance for losses	$	190,563		$	197,920

The Bank has a concentration of loans to faith-based non-profit organizations, in which the Bank has specialized lending experience.  As of September 30, 2011, the percentage of loans in this niche, which included construction, owner occupied real estate secured, and other loans, comprised approximately 45.85% of the total loan portfolio  The reserve allocated for these loans is 28.77% of the total allowance.  Historically the Bank has experienced low levels of loan losses in this niche; however, repayment of these loans is generally dependent on voluntary contributions, some of which have been adversely affected by the current economic downturn.

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In 2010, management enhanced its loan-related disclosure classifications in its financial reports to present portfolio segments.  A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for loan losses.  The following table presents the reported investment in loans, net of deferred fees and costs, by portfolio segment and based on impairment method as of September 30, 2011:

	September 30, 2011
(Dollars in thousands)	Commercial		Commercial Real Estate		Faith- Based Non-Profit		Residential Real Estate		Consumer		Other Loans		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	113	$	63	$	677	$	—	$	—	$	853
Collectively evaluated for impairment	558		738		1,170		841		61		65		3,433
Total ending allowance balance	558		851		1,233		1,518		61		65		4,286
Loans:
Loans individually evaluated for impairment	$	1,180	$	5,911	$	13,117	$	2,450	$	—	$	—	$	22,658
Loans collectively evaluated for impairment	8,018		41,808		76,224		41,354		1,694		3,093		172,191
Total ending loans balance	$	9,198	$	47,719	$	89,341	$	43,804	$	1,694	$	3,093	$	194,849

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Notes to Consolidated Financial Statements continued

The following table presents the reported investment in loans, net of deferred fees and costs, by portfolio segment and based on impairment method as of December 31, 2010:

	December 31, 2010
(Dollars in thousands)	Commercial		Commercial Real Estate		Faith- Based Non-Profit		Residential Real Estate		Consumer		Other Loans		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	118	$	—	$	—	$	118
Collectively evaluated for impairment	651		651		1,289		927		105		110		3,733
Total ending allowance balance	$	651	$	651	$	1,289	$	1,045	$	105	$	110	$	3,851
Loans:
Loans individually evaluated for impairment	$	1,180	$	5,730	$	7,270	$	1,272	$	—	$	—	$	15,452
Loans collectively evaluated for impairment	7,968		42,117		84,187		46,270		2,218		3,559		186,319
Total ending loans balance	$	9,148	$	47,847	$	91,457	$	47,542	$	2,218	$	3,559	$	201,771

Total impaired loans including TDR loans was $22.7 million as of September 30, 2011 and $15.5 million as of December 31, 2010. Third quarter showed a $7.2 million increase of impaired loans compared to year-end 2010. The increases were centered in two faith based accounts which totaled $5.5 million and represented 76.39% percent of total impairment increases. One of the accounts has been restructured in a forbearance extension agreement and was current. Both loans are fully secured by real estate and are supported by the fair value of collateral. The majority of the remaining ten new accounts are secured by real estate and required an increase impairment allocation of $0.4 million against loan balances of $1.7 million.

The following tables show impaired loans, excluding TDR loans, with and without valuation allowances as of September 30, 2011 and December 31, 2010:

(Dollars in thousands)
Unaudited	September 30, 2011		December 31, 2010
Loans with no allocated allowance for loan losses	$	6,927	$	6,426
Loans with allocated allowance for loan losses	2,052		564
Total	$	8,979	$	6,990
Amount of the allowance for loan losses allocated	$	724	$	109

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	For the Nine Months Ended		For the Three Months Ended		For the Year Ended
(Dollars in thousands)	September 30, 2011		September 30, 2011		December 31, 2010
Average of impaired loans during the periods ended	$	8,661	$	9,203	$	5,337

The following table shows TDR loans with and without valuation allowances as of the periods ending September 30, 2011 and December 31, 2010:

(Dollars in thousands)	September 30, 2011		December 31, 2010
	Unaudited
Loans with no allocated allowance for loan losses	$	11,930	$	8,413
Loans with allocated allowance for loan losses	1,749		49
Total	$	13,679	$	8,462
Amount of the allowance for loan losses allocated	$	129	$	9

(Dollars in thousands)	For the Nine Months Ended		For the Three Months Ended		For the Year Ended
Unaudited	September 30, 2011		September 30, 2011		December 31, 2010
Average of TDR loans during the periods ended	$	12,000	$	13,332	$	7,335

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Notes to Consolidated Financial Statements continued

The following table presents loans individually evaluated for impairment, excluding TDR loans, by class of loans as of September 30, 2011

	September 30, 2011
(Dollars in thousands)	Unpaid Principal Balance		Total Exposure		Recorded Investment		Allowance for Loan Losses Allocated		Interest Earned Nine Months		Interest Earned Three Months
Unaudited
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction			—		—						—
Owner occupied	756		756		754		—		17		17
Other	58		58		58		—		—		—
Faith-based non-profit:
Construction	—		—		—		—		—		—
Owner occupied	5,795		5,795		5,790		—		61		61
Other	—		—		—		—		—		—
Residential real estate:
First mortgage	58		58		325		—		—		—
Multifamily	—		—		—		—		—		—
Home Equtiy	—		—		—		—		—		—
Construction	—		—		—		—		—		—
Consumer	—		—		—		—		—		—
Total impaired loans without allowance recorded	$	6,667	$	6,667	$	6,927	$	—	$	78	$	78
With an allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction	—		—		—		—		—		—
Owner occupied	285		285		285		39		—		—
Other	40		40		40		10		—		—
Faith-based non-profit			—
Construction	—		—		—		—		—		—
Owner Occupied	—		—		—		—		—		—
Other	—		—		—		—		—		—
Residential real estate:
First mortgage	1,306		1,306		950		284		26		9
Multifamily	315		315		315		140		—		—
Home equity	462		462		462		251		—		—
Construction	—		—		—		—		—		—
Consumer	—		—				—		—		—
Total impaired loans with allowance recorded	$	2,408	$	2,408	$	2,052	$	724	$	26	$	9
Total impaired loans	$	9,075	$	9,075	$	8,979	$	724	$	104	$	87

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The following table presents loans individually evaluated for impairment, excluding TDR     loans, by loan class, as of December 31, 2010.

	December 31, 2010
(Dollars in thousands)	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Interest Earned
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—
Commercial real estate:
Construction
Owner occupied	1,358		1,355		—		31
Other	65		65		—		4
Faith-based non-profit:
Construction
Owner occupied	4,474		4,466		—		247
Other	—		—		—		—
Residential real estate:
First mortgage	207		207		—		10
Multifamily	322		322		—		14
Home Equtiy	11		11		—		—
Construction	—		—		—		—
Consumer	—		—		—		—
Total impaired loans without allowance recorded	$	6,437	$	6,426	$	—	$	306
With an allowance recorded:
Commercial	$	—	$	—	$	—	$	—
Commercial real estate:
Construction	—		—		—		—
Owner occupied	—		—		—		—
Other	—		—		—		—
Faith-based non-profit:
Construction	—		—		—		—
Owner occupied	—		—		—		—
Other	—		—		—		—
Residential real estate:
First mortgage	324		323		8		13
Multifamily	143		143		61		3
Home equity	98		98		40		—
Construction	—		—		—		—
Consumer	—		—		—		—
Total impaired loans with allowance recorded	$	565	$	564	$	109	$	16
Total impaired loans	$	7,002	$	6,990	$	109	$	322

The recorded investment in loan balance is net of deferred fees and costs, and partial charge-offs where applicable.

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The following table presents TDRs by class of loans as of September 30, 2011:

	September 30, 2011
(Dollars in thousands)	Impaired Balance		Liquid Collateral		Total Exposure		Recorded Investment		Allowance for Loan Losses Allocated		Interest Earned Nine Months		Interest Earned Three Months
Unaudited
With no related allowance recorded:
Commercial	$	1,567	$	—	$	1,567	$	1,180	$	—	$	—	$	—
Commercial real estate:
Construction	635				635		635		—		—		—
Owner occupied	732		—		732		734		—		20		16
Other	2,609		—		2,609		2,609		—		4		1
Faith-based non-profit:
Construction	—		—		—		—		—		—		—
Owner occupied	6,412		—		6,412		6,411		—		297		110
Other	—		—		—		—		—		—		—
Residential real estate:
First mortgage	380		—		371		361		—		4		1
Multifamily	—		—		—		—		—		—		—
Home equity	—		—		—		—		—		—		—
Construction	—		—		—		—		—		—		—
Consumer	—		—		—		—		—		—		—
Total  TDRs with no allowance recorded	$	12,335	$	—	$	12,326	$	11,930	$	—	$	325	$	128
With an allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction	379		—		379		379		17		24		9
Owner occupied	—		—		—		—		—		—		—
Other	416		—		416		416		47		19		3
Faith-based non-profit
Construction	—		—		—		—		—		—		—
Owner occupied	916		—		916		917		63		33		15
Other	—		—		—		—		—		—		—
Residential real estate:
First mortgage	36		6		30		36		2		—		—
Multifamily	—		—		—		—		—		—		—
Home equity	—		—		—		—		—		—		—

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Construction	—		—		—		—		—		—		—
Consumer	—		—		—		—		—		—		—
Total TDRs with allowance recorded	$	1,747	$	6	$	1,741	$	1,749	$	129	$	76	$	27
Total TDR loans	$	14,082	$	6	$	14,067	$	13,679	$	129	$	401	$	155

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The following table presents TDRs by class of loans as of December 31, 2010:

	December 31, 2010
	Impaired Balance		Liquid Collateral			Total Exposure		Recorded Investment		Allowance for Loan Losses Allocated		Interest Earned
(Dollars in thousands)
With no related allowance recorded:
Commercial	$	1,180	$	—		$	1,180	$	1,180	$	—	$	—
Commercial real estate:
Construction	1,038		—			1,038		1,038		—		32
Owner occupied	744		—			744		744		—
Other	3,034		—			3,034		3,034		—		32
Faith-based and non-profit:
Construction	—		—			—		—		—		—
Owner occupied	2,301		(103		)	2,198		2,299		—		201
Other	—		—			—		—		—		—
Residential real estate:
First mortgage	118		(6		)	112		118		—		4
Multifamily	—		—			—		—		—		—
Home equity	—		—			—		—		—		—
Construction	—		—			—		—		—		—
Consumer	—		—			—		—		—		—
Total  TDRs with no allowance recorded	$	8,415	$	(109	)	$	8,306	$	8,413	$	—	$	269
With an allowance recorded:
Commercial	$	—	$	—		$	—	$	—	$	—	$	—
Commercial real estate:
Construction	—		—			—		—		—		—
Owner occupied	—		—			—		—		—		—
Other	—		—			—		—		—		—
Faith-based and non-profit:
Construction	—		—			—		—		—		—
Owner occupied	—		—			—		—		—		—
Other	—		—			—		—		—		—
Residential real estate:
First mortgage	49		—			49		49		9		2
Multifamily	—		—			—		—		—		—
Home equity	—		—			—		—		—		—
Construction	—		—			—		—		—		—
Consumer	—		—			—		—		—		—
Total TDRs with allowance recorded	$	49	$	—		$	49	$	49	$	9	$	2
Total TDR loans	$	8,464	$	(109	)	$	8,355	$	8,462	$	9	$	271

The recorded investment in loan balance is net of deferred fees and costs, and partial charge-offs, where applicable.

21

M&F BANCORP, INC.

Notes to Consolidated Financial Statements continued

The Bank modifies certain loans in a TDR where the borrowers are experiencing financial difficulties. These concessions typically result from loss mitigation recommendations developed by the Bank's problem loan team. Concessions could include reductions in below market interest rates, payment extensions, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and may only be returned to performing status after considering the borrower's sustained repayment performance for a reasonable period, generally six months.

When loans are modified, the Bank evaluates each loan for any possible impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the repayment source is the liquidation of underlying collateral, in which cases the Bank uses the fair value of the collateral, less selling costs, instead of discounted cash flows. If the Bank determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance allocation or a charge-off to the allowance.

The Bank completed thirteen TDR modifications within the last nine months. All of the TDRs were secured by real estate. Management has disclosed the recorded investment and number of all modifications for troubled debt restructurings within the last year that were in default in the current reporting period.

Of the loans restructured during the nine months ended September 30, 2011, 1 loan or $0.2 million was on nonaccrual. This loan resulted in a loss of $22.0 thousand of interest income for the nine months ending September 30, 2011. Based upon financial analysis and the fair value of collateral, the Bank has allocated $0.1 million of specific reserves to customers whose loans were troubled debt restructures.

The following table sets forth troubled debt restructurings for the periods presented:

	For the Three Months Ended
	September 30, 2011
	Number of Loans		Recorded Investment		Unpaid Principal Balance		Allowance
Dollars (000s)
Commercial	$	—	$	—	$	—	$	—
Commercial real estate:
Construction	—		—		—		—
Owner occupied	1		260		260		—
Other	—		—		—		—
Faith-based non-profit
Construction	—		—		—		—
Owner occupied	1		514		514		—
Other	—		—		—		—
Residential real estate:
First mortgage	—		—		—		—
Multifamily	—		—		—		—
Home equity	—		—		—		—
Construction	—		—		—		—
Consumer	—		—		—		—
Total TDR Loans	$	2	$	774	$	774	$	—

22

M&F BANCORP, INC.

Notes to Consolidated Financial Statements continued

The following tables display the TDR loans that were restructured during the nine months ended September 30, 2011

	For the Nine Months Ended
	September 30, 2011
	Number of Loans		Recorded Investment		Unpaid Principal Balance		Allowance
Dollars (000s)
Commercial	$	—	$	—	$	—	$	—
Commercial real estate:
Construction	—		—		—		—
Owner occupied	2		504		504		—
Other	2		469		469		47
Faith-based non-profit
Construction	—		—		—		—
Owner occupied	8		5,612		5,612		63
Other	—		—		—		—
Residential real estate:
First mortgage	1		248		248		—
Multifamily	—		—		—		—
Home equity	—		—		—		—
Construction	—		—		—		—
Consumer	—		—		—		—
Total TDR Loans	$	13	$	6,833	$	6,833	$	110

23

M&F BANCORP, INC.

Notes to Consolidated Financial Statements continued

For the three and nine months ended September 30, 2011, the following table presents a breakdown of the types of concessions made by loan class.
	Three months ended September 30, 2011					Nine months ended September 30, 2011
	Number of loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Below market interest rate
Commercial	—	$	—	$	—	—	$	—	$	—
Commercial real estate:
Construction	—	—		—		—	—		—
Owner occupied	—	—		—		—	—		—
Other	—	—		—		—	—		—
Faith-based non-profit
Construction	—	—		—		—	—		—
Owner occupied	—	—		—		3	3,388		3,388
Other	—	—		—		—	—		—
Residential real estate:
First mortgage	—	—		—		1	248		248
Multifamily	—	—		—		—	—		—
Home equity	—	—		—		—	—		—
Construction	—	—		—		—	—		—
Consumer	—	—		—		—	—		—
Other loans	—	—		—		—	—		—
Extended payment terms
Commercial	—	—		—		—	—		—
Commercial real estate:
Construction	—	—		—		—	—		—
Owner occupied	1	260		260		2	504		504
Other	—	—		—		2	469		469
Faith-based non-profit
Construction	—	—		—		—	—		—
Owner occupied	1	514		514		5	2,224		2,224
Other	—	—		—		—	—		—

24

M&F BANCORP, INC.

Notes to Consolidated Financial Statements continued

Residential real estate:
First mortgage	—	—		—		—	—		—
Multifamily	—	—		—		—	—		—
Home equity	—	—		—		—	—		—
Construction	—	—		—		—	—		—
Consumer	—	—		—		—	—		—
Other loans	—	—		—		—	—		—
Total	2	$	774	$	774	13	$	6,833	$	6,833

25

M&F BANCORP, INC.

Notes to Consolidated Financial Statements continued

The following table presents loans that were modified as troubled debt restructurings within the previous 9 which there was a payment default during the three and nine months ended September 30, 2011.
	Three months ended September 30, 2011			Nine months ended September 30, 2011
	Number of loans	Recorded Investment		Number of loans		Recorded Investment
Below market interest rate
Commercial	—	$	—	—		$	—
Commercial real estate:
Construction	—	—		—		—
Owner occupied	—	—		—		—
Other	—	—		—		—
Faith-based non-profit
Construction	—	—		—		—
Owner occupied	—	—		—		—
Other	—	—		—		—
Residential real estate:
First mortgage	—	—		1		248
Multifamily	—	—		—		—
Home equity	—	—		—		—
Construction	—	—		—		—
Consumer	—	—		—		—
Other loans	—	—		—		—
Extended payment terms
Commercial	—	—		—		—
Commercial real estate:
Construction	—	—		—		—
Owner occupied	—	—		—		—
Other	—	—		—		—
Faith-based non-profit
Construction	—	—		—		—
Owner occupied	—	—		—		—
Other	—	—		—		—
Residential real estate:				—
First mortgage	—	—		—		—
Multifamily	—	—		—		—
Home equity	—	—		—		—
Construction	—	—		—		—
Consumer	—	—		—		—
Other loans	—	—		—		—
Total	—	$	—	$	1	$	248

26

M&F BANCORP, INC.

Notes to Consolidated Financial Statements continued

The following table presents the successes and failures of the types of modifications within the previous 9 months as of September 30, 2011.
	Paid in full			Paying as restructured			Converted to non-accrual			Foreclosure/Default
	Number of loans	Recorded Investment		Number of loans	Recorded Investment		Number of loans	Recorded Investment		Number of loans	Recorded Investment
Below market interest rate	—	$	—	3	$	3,388	1	$	248	—	$	—
Extended payment terms	—	—		9	3,197		—	—		—	—
Total	—	$	—	12	$	6,585	1	$	248	—	$	—

The Bank had one TDR loan that became non-performing during the nine months ended September 30, 2011.

The following table presents the recorded investment in non-accrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2011:

(Dollars in thousands)	Nonaccrual		Number		Loans Past Due Over 90 Days Still Accruing		Number
Unaudited
Commercial	$	1,180	1		$	103	1
Commercial real estate:
Construction	635		1		—		—
Owner occupied	941		4		55		1
Other	2,595		3		413		3
Faith-based non-profit:
Construction
Owner occupied	5,838		4		185		2
Other	—				—		—
Residential real estate:
First mortgage	3,130		36		48		1
Multifamily	315		1		—		—
Home equity	477		6		21		1
Construction	—		—		—		—
Consumer	34		2		—		—
Total	$	15,145	$	58	$	825	$	9

27

M&F BANCORP, INC.

Notes to Consolidated Financial Statements continued

The following table presents the recorded investment in non-accrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2010:

	Nonaccrual		Number		Loans Past Due Over 90 Days Still Accruing		Number
(Dollars in thousands)
Commercial	$	1,180	1		$	—	—
Commercial real estate:
Construction	650		1		—		—
Owner occupied	1,808		7		70		1
Other	2,683		3		417		2
Faith-based and non-profit:
Construction	—		—		—		—
Owner occupied	3,356		3		3,256		2
Other	—		—		—		—
Residential real estate:
First mortgage	2,312		31		—		—
Multifamily	465		3		—		—
Home equity	118		4		—		—
Construction	—		—		—		—
Consumer	—		—		—		—
Total	$	12,572	$	53	$	3,743	$	5

Non-accrual loans and loans past due over 90 days still on accrual include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified impaired loans. Loans which principle or interest is in default for 90 days or more are classified as a nonaccrual unless they are well secured and in process of collection. Loans over 90 days still accruing were matured loans that were well secured and in process of collection. Borrowers have continued to make payments on these loans while administrative and legal due processes are proceeding which will enable the bank to extend or modify maturity dates.

Unrecognized income on non-accrual loans as of September 30, 2011 and December 31, 2010 was $1.6 million and $1.2 million, respectively.

Those loans over 90 days still accruing interest were in the process of modification.  In these cases, the borrowers are still making payments.

28

M&F BANCORP, INC.

Notes to Consolidated Financial Statements continued

The following table presents loans not past due and the aging of the recorded investment in past due loans as of September 30, 2011 by class of loans:

(Dollars in thousands)	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
Unaudited
Commercial	$	7	$	2	$	1,283	$	1,292	$	7,906	$	9,198
Commercial real estate:
Construction	—		—		635		635		1,007		1,642
Owner occupied	1,096		270		769		2,135		21,408		23,543
Other	416		—		3,007		3,423		19,111		22,534
Faith-based non-profit:
Construction	13		—		—		13		6,014		6,027
Owner occupied	218		236		2,987		3,441		72,114		75,555
Other	27		2		—		29		7,730		7,759
Residential real estate:
First mortgage	593		987		2,407		3,987		27,400		31,387
Multifamily	—		—		315		315		7,303		7,618
Home equity	169		246		494		909		3,492		4,401
Construction	—				—		—		398		398
Consumer	46		1		30		77		1,617		1,694
Other loans	—		—		—		—		3,093		3,093
Total	$	2,585	$	1,744	$	11,927	$	16,256	$	178,593	$	194,849

The following table presents loans not past due and the aging of the recorded investment in past due loans as of December 31, 2010 by class of loans:

	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
(Dollars in thousands)
Commercial	$	3	$	17	$	1,180	$	1,200	$	7,948	$	9,148
Commercial real estate:
Construction	—		—		650		650		537		1,187
Owner occupied	54		70		1,640		1,764		20,631		22,395
Other	92		—		3,100		3,192		21,073		24,265
Faith-based and non-profit:
Construction	—		—		—		—		9,840		9,840
Owner occupied	703		721		6,557		7,981		71,509		79,490
Other	—		—		—		—		2,127		2,127
Residential real estate:
First mortgage	1,172		226		2,226		3,624		28,660		32,284
Multifamily	—		—		465		465		7,427		7,892
Home equity	625		—		109		734		4,389		5,123
Construction	—		—		—		—		2,243		2,243
Consumer	18		2		—		20		2,198		2,218
Other loans	—		—		—		—		3,559		3,559
Total	$	2,667	$	1,036	$	15,927	$	19,630	$	182,141	$	201,771

29

M&F BANCORP, INC.

Notes to Consolidated Financial Statements continued

Non-accruals increased $2.6 million in the period ending September 30, 2011 from the period ending December 31, 2010, while the total loan past due from the tables above decreased by $3.4 million over the same period. The reason why the total loans past due declined in the tables above when total non-accruals increased is because the total loans past due in the tables above do not include loans less than 30 days past due. The table below shows that the Company has $3.5 million in non-accrual loans that are less than 30 days past due.

The following table displays all non-accrual loans and loans 90 or more days past due and still on accrual for the periods ended September 30, 2011.

(Dollars in thousands)	September 30, 2011
Unaudited	Amount		Number
Loans past due over 90 days still on accrual	$	825	$	9
Nonaccrual loans past due
Less than 30 days	$	3,478	$	9
30-59 days	565		6
60-89 days	—		—
90+ days	11,102		43
Nonaccrual loans	$	15,145	$	58

30

M&F BANCORP, INC.

Notes to Consolidated Financial Statements continued

Changes in the allowance for loan losses as of and for the three and nine months ended September 30, 2011 are as follows:

(Dollars in thousands)	Commercial			Commercial Real Estate			Faith- Based Non-Profit			Residential Real Estate			Consumer			Other Loans			Total
Unaudited
Allowance for loan losses:
Total ending allowance balance as of June 30, 2011	$	582		$	840		$	1,220		$	1,457		$	43		$	103		$	4,245
For the three months ended September 30, 2011
Charge-offs	(14		)	(19		)	—			(181		)	(8		)	(6		)	(228		)
Recoveries	—			3			—			—			—			3			6
Provision (decrease) increase	(10		)	27			13			242			26			(35		)	263
Total ending allowance balance as of September 30, 2011	$	558		$	851		$	1,233		$	1,518		$	61		$	65		$	4,286
Total ending allowance balance as of December 31, 2010	$	651		$	651		$	1,289		$	1,045		$	105		$	110		$	3,851
For the nine months ended September 30, 2011:
Charge-offs	(14		)	(19		)	—			(181		)	(8		)	(23		)	(245		)
Recoveries	95			129			—			2			6			11			243
Provision (decrease) increase	(174		)	90			(56		)	652			(42		)	(33		)	437
Total ending allowance balance as of September 30, 2011	$	558		$	851		$	1,233		$	1,518		$	61		$	65		$	4,286

31

M&F BANCORP, INC.

Notes to Consolidated Financial Statements continued

Changes in the allowance for loan losses as of and for the three and nine months ended September 30, 2010 are as follows:

(Dollars in thousands)	Commercial			Commercial Real Estate			Faith- Based Non-Profit		Residential Real Estate			Consumer			Other Loans			Total
Unaudited
Allowance for loan losses:
Total ending allowance balance as of June 30, 2010	$	415		$	692		$	1,259	$	1,201		$	87		$	141		$	3,795
For the three months ended September 30, 2010:
Charge-offs	(6		)	(27		)	—		(96		)	(14		)	—			(143		)
Recoveries	—			—			—		19			3			—			22
Provision (decrease) increase	99			33			5		40			55			(75		)	157
Total ending allowance balance as of September 30, 2010	$	508		$	698		$	1,264	$	1,164		$	131		$	66		$	3,831
Total ending allowance balance as of December 31, 2009	$	401		$	849		$	1,170	$	973		$	105		$	66		$	3,564
For the nine months ended September 30, 2010:
Charge-offs	(9		)	(27		)	—		(111		)	(48		)	—			(195		)
Recoveries	—			—			—		27			11			—			38
Provision (decrease) increase	116			(124		)	94		275			63			—			424
Total ending allowance balance as of September 30, 2010	$	508		$	698		$	1,264	$	1,164		$	131		$	66		$	3,831

The Company experienced $2.0 thousand in net loan charge offs for the nine months ended September 30, 2011 compared to $157.0 thousand in net loan charge offs for the nine months ended September 30, 2010. The Company experienced $222.0 thousand in net loan charge offs for the three months ended September 30, 2011 compared to $121.0 thousand in net loan charge offs for the three months ended September 30, 2010.  On a rolling eight quarter basis, net loan charge-offs as a percent of average loan balances outstanding decreased from 0.81% as of September 30, 2010 to 0.70% as of December 31, 2010, and decreased another 8 basis points (“bp”) to 0.62% as of September 30, 2011.

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

• Special Mention.  Loans classified as special mention have a potential weakness that deserves management’s close

32

M&F BANCORP, INC.

Notes to Consolidated Financial Statements continued

attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.  These loans exhibit a moderate likelihood of some loss related to those loans and leases that are considered special mention.

• Substandard.  Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of or repayment according to the original terms of the debt.  Substandard loans include loans within the mortgage and consumer portfolio segments that are past due 90 days or more as to principal or interest if the loan to value does not support full repayment.  Substandard loans are evaluated for impairment on an individual loan basis unless the substandard loan is a smaller balance homogenous loan that is not a TDR. These loans exhibit a distinct possibility that the Company will sustain some loss if the deficiencies related to the loans is not corrected in a timely manner.

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

• Pass.  Loans are classified as pass in all classes within the commercial, faith-based non-profit, mortgage, consumer, and other portfolio segments that are not identified as special mention, substandard, or doubtful, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement.   These loans exhibit a low likelihood of loss related to those loans that are considered pass.

Management’s definitions of risk characteristics were reviewed and updated during 2010.

As of September 30, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Unaudited
Commercial	$	7,795	$	210	$	1,193	$	—	$	9,198
Commercial real estate:
Construction	618		—		1,024		—		1,642
Owner occupied	18,477		2,019		3,047		—		23,543
Other	13,406		2,680		6,448		—		22,534
Faith-based and non-profit:
Construction	5,739				288		—		6,027
Owner occupied	50,331		7,182		18,042		—		75,555
Other	7,231		522		6		—		7,759
Residential real estate:
First mortgage	26,188		1,372		3,827		—		31,387
Multifamily	7,171		66		381		—		7,618
Home equity	3,453		—		948		—		4,401
Construction	398		—		—		—		398
Consumer	1,639		18		37		—		1,694
Other loans	3,093		—		—		—		3,093
Total	$	145,539	$	14,069	$	35,241	$	—	$	194,849

33

M&F BANCORP, INC.

Notes to Consolidated Financial Statements continued

As of September 30, 2011, the allowance for loan losses by class of loans, is as follows:

(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Unaudited
Commercial	$	548	$	9	$	1	$	—	$	558
Commercial real estate:
Construction	10				17		—		27
Owner occupied	321		36		61		—		418
Other	240		49		117		—		406
Faith-based and non-profit:
Construction	86		—		4		—		90
Owner occupied	773		110		139		—		1,022
Other	113		8		—		—		121
Residential real estate:
First mortgage	546		25		327		—		898
Multifamily	122		1		141		—		264
Home equity	83		—		265		—		348
Construction	8		—		—		—		8
Consumer	77		1		1		—		79
Other loans	47		—		—		—		47
Total	$	2,974	$	239	$	1,073	$	—	$	4,286

As of December 31, 2010, the risk category of loans by class of loans was as follows:

	Pass		Special Mention		Substandard		Doubtful		Total
(Dollars in thousands)
Commercial	$	7,495	$	234	$	1,419	$	—	$	9,148
Commercial real estate:
Construction	115		34		1,038		—		1,187
Owner occupied	17,312		1,759		3,324		—		22,395
Other	16,637		1,529		6,099		—		24,265
Faith-based and non-profit:
Construction	9,560		—		280		—		9,840
Owner occupied	59,893		2,940		16,657		—		79,490
Other	2,057		22		48		—		2,127
Residential real estate:
First mortgage	26,951		1,362		3,971		—		32,284
Multifamily	7,293		67		532		—		7,892
Home equity	4,544		73		506		—		5,123
Construction	2,243		—		—		—		2,243
Consumer	2,158		—		60		—		2,218
Other loans	437		—		3,122		—		3,559
Total	$	156,695	$	8,020	$	37,056	$	—	$	201,771

34

M&F BANCORP, INC.

Notes to Consolidated Financial Statements continued

As of December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

	Pass		Special Mention		Substandard		Doubtful		Total
(Dollars in thousands)
Commercial	$	629	$	19	$	3	$	—	$	651
Commercial real estate:
Construction	2				—		—		2
Owner occupied	312		23		33		—		368
Other	217		20		44		—		281
Faith-based and non-profit:
Construction	125		—		4		—		129
Owner occupied	933		40		157		—		1,130
Other	27		1		2		—		30
Residential real estate:
First mortgage	515		19		68		—		602
Multifamily	179		3		63		—		245
Home equity	120		2		46		—		168
Construction	30		—		—		—		30
Consumer	103		—		2		—		105
Other loans	66		—		44		—		110
Total	$	3,258	$	127	$	466	$	—	$	3,851

6. BORROWINGS

Borrowings as of September 30, 2011 and December 31, 2010 consisted of an FHLB borrowing of $0.7 million with an interest rate of 0.50% which matures in 2020.

(Dollars in thousands)	September 30, 2011
(Unaudited)	Amount		Maturity Date	Rate
Fixed Rate Note	$	730	2020	0.50	%

	December 31, 2010
	Amount		Maturity Date	Rate
Fixed Rate Note	$	745	2020	0.50	%

The Company has federal funds lines of credit with three correspondent banks totaling $12.0 million.  The Company periodically tests its federal funds lines of credit with these correspondent banks.  These lines were tested in the quarter ended September 30, 2011. The Company had unused borrowing capacity with the FHLB of $8.6 million and $10.2 million, respectively, as of September 30, 2011 and December 31, 2010.

7. EMPLOYEE BENEFIT PLANS

The Bank sponsors a noncontributory defined benefit cash balance pension plan (the “Cash Balance Plan”), covering all employees who qualify under length of service and other requirements. Under the Cash Balance Plan, retirement benefits are based on years of service and average earnings. The Bank’s funding policy is to contribute amounts to the Cash Balance Plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), plus such additional amounts as the Bank may determine to be appropriate. The contributions to the Cash Balance Plan paid during the three and nine months ended September 30, 2011 totaled $0.6 million and $0.7 million, respectively.  The contributions paid during the three and nine months ended September 30, 2010, totaled $0.3 million and $0.4 million. The Cash Balance Plan was not fully funded as of September 30, 2011 and December 31, 2010. The Bank does not expect to provide any additional funding to the Cash Balance Plan in 2011.  The measurement date for the Cash Balance Plan is December 31 and prior service costs and benefits are amortized on a straight-line basis over the average remaining service period of active participants.

The Bank sponsors a nonqualified Supplemental Executive Retirement Plan (“SERP”). The SERP, which is unfunded, provides certain individuals with pension benefits, outside the Bank’s noncontributory defined-benefit Cash Balance Plan, based on average earnings, years of service and age at retirement. Participation in the SERP is at the discretion of the Bank’s Board of Directors. The Company and Bank purchased bank owned life insurance (“BOLI”) in 2002, in the aggregate amount of approximately $12.8 million face value covering all the participants in the SERP. Increases in the cash surrender value of the BOLI policies totaled $50.0 thousand and $147.0 thousand for the three and nine months ended September 30, 2011. During the three and nine months periods ended September 30, 2010 the cash surrender value of the BOLI policies increased $49.0 thousand and $152.0 thousand, respectively.  The cash surrender value of the BOLI owned by the Bank was $5.7 million and $5.6 million as of September 30, 2011 and December 31, 2010, respectively. The Bank has the ability and the intent to keep this life insurance in force indefinitely. The insurance proceeds may be used, at the sole discretion of the Bank, to fund the benefits payable under the SERP. The Bank does not expect to contribute to the SERP in 2011.

The SERP and the Cash Balance Plan components of the net periodic benefit cost reflected in salaries and employee benefits expense for the nine months ended September 30, 2011 and September 30, 2010 were:

	Cash Balance Plan						SERP				Total
(Dollars in thousands)	2011			2010			2011		2010		2011			2010
(Unaudited)
Service cost	$	103		$	100		$	—	$	—	$	103		$	100
Interest cost	187			190			80		83		267			273
Expected return on plan assets	(181		)	(159		)	—		—		(181		)	(159		)
Amortization of prior service costs	1			1			3		3		4			4
Recognized net actuarial gain	114			114			3		—		117			114
Net periodic cost	$	224		$	246		$	86	$	86	$	310		$	332

The SERP and the Cash Balance Plan components of the net periodic benefit cost reflected in salaries and employee benefits expense for the three months ended September 30, 2011 and September 30, 2010 were:

(Dollars in thousands)	Cash Balance Plan						SERP				Total
(Unaudited)	2011			2010			2011		2010		2011			2010
Service cost	$	34		$	33		$	—	$	—	$	34		$	33
Interest cost	62			63			27		28		89			91
Expected return on plan assets	(60		)	(53		)	—		—		(60		)	(53		)
Amortization of prior service costs	—			—			1		1		1			1
Amortization of net loss	38			38			1		—		39			38
Net periodic cost	$	74		$	81		$	29	$	29	$	103		$	110

The Bank had a liability for the Cash Balance Plan of $0.9 million and $1.4 million for the periods ending September 30, 2011 and December 31, 2010, respectively.  The liability is included in Other Liabilities within the Consolidated Balance Sheets.  The accrued liability and accumulated benefit obligations for the SERP was $2.1 million  for the periods ending September 30, 2011 and December 31, 2010.   The balance is included in Other Liabilities within the Consolidated Balance Sheets.  The September 30, 2011 fair value of the pension plan assets is immaterially different from what was reported for December 31, 2010 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Retirement Plan Assets— In general, the plan’s investment management organizations make reasonable efforts to control market fluctuations through appropriate techniques including, but not limited to, adequate diversification.   The specific investment strategy adopted by the plan, referred to as the Long Term Growth of Capital Strategy attempts to achieve long-term growth of capital with little concern for current income.  Typical investors in this portfolio have a relatively aggressive investment philosophy, seeking long term growth, and are not looking for current dividend income.

Prohibited investments include commodities and futures contracts, private placements, options, transactions which would result in unrelated business taxable income, and other investments prohibited by ERISA.

Equity investments must be listed on the New York, American, World, or other similar stock exchanges traded in the over-the-counter market with the requirement that such stocks have adequate liquidity relative to the size of the investment.

Fixed income investments must have a credit rating of B or better from Standard and Poor’s or Moody’s.  The fixed income portfolio should be constructed so as to have an average maturity not exceeding 10 years.  No more than 5% of the fixed income portfolio should be invested in any one issuer.  (U.S. Treasury and agency securities are exempt from this restriction.)

Cash and equivalent instruments that are acceptable are repurchase agreements, bankers’ acceptances, U.S. treasury bills, money market funds, and certificates of deposit.

The portfolio shall be structured to meet financial objectives over a period of 11 or more years.  Over that time horizon, the total rate of return should equal at least 103% of the applicable blended benchmark returns and place in the top half of group performance.  Benchmarks which may be used for portfolio performance comparison are as follows:

• U.S. Large Cap Equities: S&P 500, Russell 1000, Russell 1000 Value, and Russell 1000 Growth

• U.S. Mid Cap Equities: S&P 400 Mid Cap, Russell Mid Cap Value, and Russell Mid Cap Growth

• U.S. Small Cap Equities: S&P 600 Small Cap, Russell 2000 Value, and Russell 2000 Growth

• Non-U.S. Equities: MSCI EAFE IL

• Fixed Income: Barclay's Capital Intermediate Government/Credit Index

• .

• Cash:  U.S. 3-Month Treasury Bill

401(k) Plan —The Bank sponsors a 401(k) plan. Participation in the 401(k) plan is voluntary.  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 each employee’s contribution, up to a maximum of 6% of compensation. The Bank’s contributions to the 401(k) plan were $43 thousand and $137 thousand, respectively, for the three and nine months ended September 30, 2011.  The Bank’s contributions to the 401(k) plan were $7 thousand and $79 thousand, respectively, for the three and nine months ended September 30, 2010.

Deferred Compensation Plan —The Bank sponsors a nonqualified deferred compensation plan. The plan, which is unfunded, permits certain management employees to defer compensation in order to provide retirement and death benefits. The plan allows participants to receive the balance of the 6% Bank matching contribution on the 401(k) plan that would otherwise be forfeited to comply with the Internal Revenue Code. At September 30, 2011 and December 31, 2010, the amount of the non-qualified deferred compensation plan liability was $0.2 million.

Post-retirement Benefits —The Bank provides certain post-retirement benefits to select former executive officers. As of September 30, 2011 and December 31, 2010, the amount of the liability for these benefits was approximately $0.2 million.

Split Dollar Benefits —In 2002, upon investing in BOLI policies, the Company granted certain executives a split dollar life benefit by which the beneficiaries of the executive would receive a portion of the non-cash surrender value death benefit of the BOLI upon the executive’s demise.  Thereafter, amounts are accrued by a charge to employee benefits. As of September 30, 2011 and December 31, 2010, $0.2 million was recorded in other liabilities for the split dollar benefit.

8. COMMITMENTS AND CONTINGENCIES

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

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

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

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

Financial instruments whose contract amounts represent credit risk as of September 30, 2011 and December 31, 2010, respectively, are commitments to extend credit (including availability of lines of credit), and standby letters of credit. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral deemed necessary by the Bank is based on management’s credit evaluation and underwriting guidelines for the particular loan.

Commitments outstanding at September 30, 2011 are summarized in the following table:

(Dollars in thousands)	Commercial letters of credit		Other commercial loan commitments		Total commitments
Unaudited
Less than one year	$	198	$	13,613	$	13,811
One to three years	—		1,187		1,187
Three to five years	333		5,699		6,032
More than five years	71		2,763		2,834
	$	602	$	23,262	$	23,864

9. FAIR VALUE MEASUREMENT

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

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

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

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

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

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

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

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

Assets and Liabilities Measured on a Recurring Basis:

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

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

Assets measured at fair value on a recurring basis as of September 30, 2011 were:

(Dollars in thousands) (Unaudited)
Description	September 30, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring:
US Agencies	$	523	$	—	$	523	$	—
Government sponsored MBS
Residential	23,084		—		23,084		—
Non-Government sponsored MBS
Residential	149		—		149		—
Municipal securities
North Carolina	3,683		—		3,683		—
Out of state	3,669		—		3,669		—
Mortgage Servicing Rights	60		—		—		60
Total	$	31,168	$	—	$	31,108	$	60

Assets measured at fair value on a recurring basis as of December 31, 2010 were:

(Dollars in thousands)
Description	December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring:
Government sponsored MBS
Residential	$	13,712	$	—	$	13,712	$	—
Non-Government sponsored MBS
Residential	205		—		205		—
Municipal securities
North Carolina	3,186		—		3,186		—
Out of state	3,524		—		3,524		—
Mortgage Servicing Rights	66		—		—		66
	$	20,693	$	—	$	20,627	$	66

The table below displays the change in all recurring Level 3 Assets from December 31, 2010 to September 30, 2011:

(Dollars in thousands)	Mortgage Servicing Rights
(Unaudited)
Beginning balance (December 31, 2010)	$	66
Amortization	5
Ending Balance (June 30, 2011)	$	61
Amortization	1
Ending Balance (September 30, 2011)	$	60

Assets and Liabilities Measured on a Nonrecurring Basis:

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

Other real estate owned (“OREO”): Foreclosed assets are adjusted to fair value, less estimated carrying costs and costs to sell, upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of the carrying value or the fair value, less estimated carry costs and costs to sell. Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. The Company records foreclosed assets as nonrecurring Level 3.

Assets measured at fair value on a nonrecurring basis as of September 30, 2011 were:

(Dollars in thousands) (Unaudited)
Description	September 30, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Nonrecurring:
Other real estate owned	$	2,407	$	—	$	—	$	2,407
Impaired and TDR loans	22,658		—		—		22,658
Total	$	25,065	$	—	$	—	$	25,065

Assets measured at fair value on a nonrecurring basis as of December 31, 2010 were:

(Dollars in thousands)
Description	December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Nonrecurring:
Other real estate owned	$	1,915	$	—	$	—	$	1,915
Impaired and TDR loans	15,452		—		—		15,452
Total	$	17,367	$	—	$	—	$	17,367

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

The Company had no transfers between any of the three levels in 2010 or 2011.

Cash and Cash Equivalents: The carrying amount of cash, due from banks, and federal funds sold approximates fair value.

Other Invested Assets: The carrying value of other invested assets approximates fair value based on redemption provisions.

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

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

For all loans, assumptions regarding the characteristics and segregation of loans, maturities, credit risk, cash flows, and discount rates are judgmentally determined using specific borrower and other available information.

Accrued Interest Receivable and Payable: The fair value of interest receivable and payable is estimated to approximate the carrying amounts.

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

Borrowings: The fair value of borrowings is based on the discounted value of estimated cash flows. The discounted rate is estimated using market rates currently offered for similar advances or borrowings.

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

As of September 30, 2011 and December 31, 2010, the carrying amounts and associated estimated fair value of financial assets and liabilities of the Company are as follows:

(Dollars in thousands)	September 30, 2011				December 31, 2010
(Unaudited)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:
Cash and cash equivalents	$	62,448	$	62,448	$	74,575	$	74,575
Marketable securities	31,108		31,108		20,627		20,627
Loans, net of allowances for loan losses	190,563		196,756		197,920		202,826
Accrued interest receivable	723		723		627		627
Liabilities:
Deposits	$	260,619	$	260,489	$	269,684	$	269,596
Other borrowings	731		660		745		780
Accrued interest payable	249		249		306		306

10. SUBSEQUENT EVENTS:

From late September to the end of October, the Company sold all existing ATMs. One of the ATMs was recently installed, and was leased back through a capital lease that included the installation of all new ATMs in the remaining locations that had ATMs.  The full value of the capital lease will be recorded in the fourth quarter of 2011. There was no material gain/loss from the sales.

35

M&F BANCORP, INC.

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

SELECTED FINANCIAL DATA

The following tables sets forth selected financial information for the Company, including balance sheets and operational data as of and for the three and nine months ended September 30, 2011 and  September 30, 2010 portions of which have been derived from, and are qualified by reference to, and should be read in conjunction with, the Consolidated Financial Statements and notes thereto included elsewhere in this report.

Selected Balance Sheet Data	As of September 30,
(Dollars in thousands)	2011			2010
(Unaudited)
Cash and due from banks	$	62,448		$	63,686
Securities	31,108			20,467
Gross loans	194,849			205,742
Allowance for loan losses	(4,286		)	(3,831		)
Total assets	303,783			305,251
Deposits	260,619			262,320
Borrowings	731			751
Stockholders' equity	37,367			36,769

Summary of Operations	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(Dollars in thousands)	2011			2010			2011			2010
(Unaudited)
Interest income	$	3,054		$	3,316		$	9,250		$	10,013
Interest expense	343			517			1,106			1,587
Net interest income	2,711			2,799			8,144			8,426
Provision for loan losses	264			156			437			424
Net interest income after provision for loan losses	2,447			2,643			7,707			8,002
Other operating income	593			527			1,862			1,677
Other operating expense	2,880			3,058			8,766			8,942
Pre-tax net income	160			112			803			737
Income tax expense	24			22			205			156
Preferred dividends and accretion	(59		)	(122		)	(176		)	(417		)
Net income (loss) (1)	$	77		$	(32	)	$	422		$	164

36

M&F BANCORP, INC.

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2011			2010			2011			2010
Per Share Data (1)
Net income (loss)-basic and diluted	$	0.04		$	(0.02	)	$	0.21		$	0.08
Common stock dividends	$	—		$	—		$	—		$	0.0175
Book value per share of common stock (2)	12.62			12.32			12.62			12.32
Average common shares outstanding	2,031,337			2,031,337			2,031,337			2,031,337
Selected Ratios (1)
Return (loss) on average assets	0.10		%	(0.04		)%	0.18		%	0.07		%
Return (loss) on average stockholders' equity	0.83			(0.35		)	1.52			0.59
Dividend payout ratio	$	—		$	—		$	—		$	0.18
Average stockholders' equity to average total assets	12.26			12.50			12.11			12.57
Net interest margin (3)	3.85			4.08			3.84			4.10

(1) available to common stockholders

(2) stockholders equity reduced by liquidation value of preferred stock

(3) on a tax equivalent basis

37

M&F BANCORP, INC. AND SUBSIDIARY

INTRODUCTION

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements represent expectations and beliefs of M&F Bancorp, Inc. (the “Company”) and Mechanics and Farmers Bank (the “Bank”), including but not limited to the Company’s operations, performance, financial condition, growth or strategies.  These forward-looking statements are identified by words such as “expects”, “anticipates”, “should”, “estimates”, “believes” and variations of these words and other similar statements.  For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements.  Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements.  These forward-looking statements involve estimates, assumptions, risks and uncertainties that could cause actual results to differ materially from current projections depending on a variety of important factors, including without limitation:

• Concerns regarding the recent downgrade of the U.S. Government’s credit rating could have a material adverse effect on our business, financial condition, liquidity, and results of operations;

• We are likely to be impacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which became law on July 21, 2010.  Much of the Act will require the adoption of regulations by a number of different regulatory bodies, the precise nature, extent and timing of many of these reforms and the impact on us is still uncertain;

• The Bank’s failure to satisfy the requirements of the Memorandum of Understanding with the Commissioner of Banking of North Carolina and the Regional Director of the Federal Deposit Insurance Corporation’s (“FDIC”) Atlanta Regional Office (the “Bank MOU”);

• The Company’s failure to satisfy the requirements of the Memorandum of Understanding (the “Company MOU”) with the Federal Reserve Bank of Richmond ("FRB");

• The effect of the requirements in the Bank MOU, the Company MOU, and any further regulatory actions;

• Regulatory limitations or prohibitions with respect to the operations or activities of the Company and/or the Bank;

• Revenues are lower than expected;

• Credit quality deterioration which could cause an increase in the provision for credit losses;

• Competitive pressure among depository institutions increases significantly;

• Changes in consumer spending, borrowings and savings habits;

• Our ability to successfully integrate acquired entities or to achieve expected synergies and operating efficiencies within expected time-frames or at all;

• Technological changes and security and operations risks associated with the use of technology;

• The cost of additional capital is more than expected;

• A change in the interest rate environment reduces interest margins;

• Asset/liability repricing risks, ineffective hedging and liquidity risks;

• Counterparty risk;

• General economic conditions, particularly those affecting real estate values, either nationally or in the market area in which we do or anticipate doing business, are less favorable than expected;

• The effects of the FDIC deposit insurance premiums and assessments;

• The effects of and changes in monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System;

• Volatility in the credit or equity markets and its effect on the general economy;

• Demand for the products or services of the Company and the Bank, as well as their ability to attract and retain qualified people;

• The costs and effects of legal, accounting and regulatory developments and compliance; and

• Regulatory approvals for acquisitions cannot be obtained on the terms expected or on the anticipated schedule.

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IMPACT OF RECENT DEVELOPMENTS ON THE BANKING INDUSTRY

Congress enacted the Dodd-Frank Act on July 21, 2010. This new law significantly changed the current bank regulatory structure and affected the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act is a significant piece of legislation that will have major effects on the financial services industry, including the Company, and the financial condition and operations of banks and bank holding companies, including the Bank. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations. Although some of these regulations have been promulgated or issued for comment in recent months, many of these required regulations are still being drafted. Consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

Certain provisions of the Dodd-Frank Act will have a near-term effect on us. For example, the federal prohibitions on paying interest on demand deposits were eliminated on July 21, 2011, thus allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse effect on our interest expense and could adversely impact our ability to compete with larger financial institutions that have more diverse sources of revenues which may allow them to offer higher interest rates on certain types of demand deposit accounts. Many of the provisions of the Dodd-Frank Act are focused on financial institutions that are significantly larger than the Company and the Bank. As rules and regulations are promulgated by the federal agencies, the Bank will have to address each to ensure compliance with applicable provisions of the Act and compliance costs are expected to increase.

It is expected that the Dodd-Frank Act and the regulations it requires could increase the interest expense of the Bank and comparable financial institutions. Although neither the possible increase in the Bank’s interest expense, nor any one or more of the other aspects of Dodd-Frank Act discussed above may have a material effect upon the Company’s future financial performance by themselves, the specific impact of the Dodd-Frank Act cannot be determined with specificity until after all required or otherwise proposed regulations are issued in final form. We believe that our operating income will be adversely affected, as will the operating expenses of other community financial institutions, in the future as a consequence of the implementation of the Dodd-Frank Act. Because of the current uncertainty about the schedule of implementation, the breadth of the regulations expected to be issued, and other similar factors, we cannot quantify the amount of any adverse impact. 

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

EXECUTIVE SUMMARY

As discussed in more detail below, the following is an executive summary of the Company’s significant results for the three months ended September 30, 2011.

• Net income before preferred stock dividends was $0.1 million for the three months ended September 30, 2011 and $0.1 million for the three months ended September 30, 2010.  For the three months ended September 30, 2011, net income available to common stockholders was $77 thousand, or $0.04 per common share. For the three months ended September 30, 2010, net loss was $32 thousand, or $0.02 per common share.

• Interest income on loans decreased by $0.4 million or 11.51% while interest income on investments and cash increased$0.1 million resulting in total interest income being $0.3 million less in the three months ended September 30, 2011 compared to the three months ended September 30, 2010.  Average loans outstanding for the three months ended September 30, 2011decreased$10.8 million from the September 30, 2010 level of $207.1 million, and the rate for average loan interest earned decreased40 basis points ("bps") compared to September 30, 2010, in part due to the increase in non-performing assets during the three months ended September 30, 2011 compared to the same period in 2010.

• Interest expense on deposits decreased$0.2 million and interest expense on borrowings remained unchanged, resulting in total interest expense being 0.2 million less in the three months ended September 30, 2011 compared to the three months ended September 30, 2010.  Average interest-bearing deposits outstanding increased$6.0 million during the three months ended September 30, 2011 from the level of $203.6 million; however, the average cost of those deposits decreased36 bps in the three months ended September 30, 2011 compared to the same period in September 30, 2010.  Average borrowings in the three months ended September 30, 2011decreased slightly compared to the September 30, 2010 balance, and the average rate paid on borrowings increased to 1.06%. The cause of the borrowing rate increase was due to an accrued interest expense related to a new capital lease that was still under negotiation.

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• Net interest income, due to the above factors, decreased $0.1 million, or 3.25% in the three months ended September 30, 2011 compared to the three months ended September 30, 2010.  The net interest margin, on a tax equivalent (“TE”) basis for the three months ended September 30, 2011 was 3.85% compared to 4.08% for the three months ended September 30, 2010, a decrease of 23bps.

• The ending balance of the Allowance for Loan Losses as a percentage of loans outstanding increased in 2011 to 2.20% as of September 30, 2011 compared to 1.91% as of December 31, 2010.  The provision for loan losses increased$0.1 million due to an increase in specific reserves for impaired loans.

• Noninterest income increased by $0.1 million in the quarter ended September 30, 2011 over the same period in 2010, mainly due to a realized gain on the sale of other real estate owned (“OREO”) and AFS securites, partially offset by declines in service charge fees.

• Noninterest expense decreased $0.2 million in the three months ended September 30, 2011 over the same period in 2010 largely driven by a decrease in OREO related expenses.  The decrease in OREO related expenses was partially offset by an increase in salaries and employees benefits.

• Preferred stock dividends in the quarters ended September 30, 2011 and September 30, 2010 were $59 thousand and $122 thousand, respectively.  The reduction in preferred dividends was the result of a reduction in the dividend yield from 4.15% to 2% for September 30, 2010 and September 30, 2011, respectively.

As discussed in more detail below, the following is an executive summary of the Company’s significant results for the nine months ended September 30, 2011.

• Net income before preferred stock dividends was $0.6 million for the nine months ended September 30, 2011 and $0.6 million for the nine months ended September 30, 2010.  For the nine months ended September 30, 2011, net income available to common stockholders was $0.4 million, or $0.21 per common share. For the nine months ended September 30, 2010, net income available to common stockholders was $0.2 million, or $0.08 per common share.

• Interest income on loans decreased by $1.0 million or 10.23% while interest income on investments and cash increased$0.2 million resulting in total interest income declining $0.8 million in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.  Average loans outstanding for the nine months ended September 30, 2011 decreased $9.6 million from the September 30, 2010 level, and the rate for average loan interest decreased36 bps compared to the nine months ended September 30, 2010, mainly due to the increase in non-performing assets during the nine months ended September 30, 2011 compared to the same period in 2010.

• Interest expense on deposits decreased$0.5 million and interest expense on borrowings remained flat, resulting in total interest expense being $0.5 million less in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.  Average interest-bearing deposits outstanding increased$11.7 million during the nine months ended September 30, 2011 from September 30, 2010; however, the average cost of those deposits decreased36 bps in the nine months ended September 30, 2011 compared to the same period in September 30, 2010.  Average borrowings in the nine months ended September 30, 2011decreased$14.0 thousand compared to the September 30, 2010 balance, and the cost of those borrowings increased18 bps during the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. The cause of the borrowing rate increase was due to an accrued interest expense related to a new capital lease that was still under negotiation.

• Net interest income, due to the above factors, decreased$0.3 million in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.  The net interest margin, on a TE basis for the nine months ended September 30, 2011 was 3.84% compared to 4.10% for the nine months ended September 30, 2010, a decrease of 26 bps.

• The ending balance of the Allowance for Loan Losses as a percentage of loans outstanding increased to 2.20% as of September 30, 2011 compared to 1.91% as of December 31, 2010.  Notwithstanding, the $9.6 milliondecrease in average loans outstanding compared to December 31, 2010, and net charge offs of $0.0 million during the nine months ended September 30, 2011, management estimate of inherent losses in the loan portfolio caused the Company to record a loan loss provision of $0.4 million for the nine months ended September 30, 2011, and September 30, 2010.

• Noninterest income increased by $0.2 million in the nine months ended September 30, 2011 over the same period in 2010, mainly due to a realized gain on the disposal of assets and sale of OREO and AFS securities, partially offset by declines in service charge fees.

• Noninterest expense decreased by $0.2 million in the nine months ended September 30, 2011 over the same period in 2010 with an increase of $0.3 million in salaries and employee benefits, which was offset by declines in miscellaneous charge-offs, FDIC insurance expense, and OREO expenses.

• Preferred stock dividends in the nine months ended September 30, 2011 and September 30, 2010 were $0.2 million and $0.4 million, respectively.  The reduction in preferred dividends was the result of a reduction in the dividend yield from 4.55% to 2% for September 30, 2010 and September 30, 2011, respectively.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

The Company’s significant accounting policies are discussed below and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Management believes that the following accounting policies are the most critical to aid in fully understanding and evaluating the Company’s reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting policies and related disclosures with the Audit Committee of the Board of Directors.

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

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

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

• Foreclosed Assets– Foreclosed assets represent properties acquired through foreclosure or physical possession.  Write-downs to fair value of foreclosed assets at the time of transfer are charged to allowance for loan losses.  Subsequent to foreclosure, the Company periodically evaluates the value of foreclosed assets held for sale and records an impairment charge for any subsequent declines in fair value less selling costs.  Subsequent declines in value are charged to operations.  Fair value is based on an assessment of information available at the end of a reporting period and depends upon a number of factors, including historical experience, economic conditions, and issues specific to individual properties.  The evaluation of these factors involves subjective estimates and judgments that may change.

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

• The fair value hierarchy defines Level 1 and 2 valuations as those that are based on quoted prices for identical instruments traded in active markets and quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 3 valuations are based on model-based techniques that use at least one significant

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assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that we believe market participants would use in pricing the asset or liability.  Financial assets that are recorded at fair value on a recurring basis include available-for-sale investment securities, and mortgage servicing rights.

RESULTS OF OPERATIONS

Three months ended September 30, 2011 compared with three months ended September 30, 2010

• Net income before preferred stock dividends was $0.1 million for the three months ended September 30, 2011 and September 30, 2010. Net income available to common stockholders for the three months ended September 30, 2011 was $77.0 thousand or $0.04 per share. Net loss available to common stockholders for the three months ended September 30, 2010 was $32.0 thousand or $0.02 per share.

• Net operating income before income taxes and preferred dividends for the three months ended September 30, 2011 and September 30, 2010 was $0.2 million and $0.1 million, respectively.

◦ Net interest margin decreased from 4.08% for the three months ended September 30, 2010 to 3.85% for the three months ended September 30, 2011 due to:

▪ Average loans outstanding decreased$10.8 million in 2011 over 2010, while yields on average loans decreased from 6.02% for the three months ending September 30, 2010 to 5.62% for the three months ending September 30, 2011, resulting in a $0.4 millionlower interest income from loans. Income from loans decreased in part due to the decrease in average loans outstanding, as well as a $4.0 million increase in average non-accrual loans to $14.6 million for the three months ended September 30, 2011 compared to $9.5 million for the three months ended September 30, 2010.  As of September 30, 2011, non-accrued interest income was $1.9 million, or an 81.90% increase over the non-accrued interest income at September 30, 2010, of $1.1 million.

▪ Average interest bearing deposits outstanding increased$6.0 million in 2011 over 2010.  Despite the increase in average deposits, interest expense decreased by $0.2 million in the three months ended September 30, 2011 compared to the same period in 2010 due to a reduction in our average yield on deposits.

▪ Average borrowings outstanding decreased$20.0 thousand from the 2010 average balance, and the average rate paid on borrowings increased0.52% to 1.06%. The cause of the borrowing rate increase was due to an accrued interest expense related to a new capital lease that was still under negotiation.

◦ Noninterest income increased$0.1 million in 2011 from 2010, predominantly due to the realized gain on sale of OREO and AFS securities.  The realized gain was offset by declines in service charge fees.

◦ Noninterest expense decreased in 2011 by $0.2 million.  The change was caused by an increase in salaries and employee benefits mainly due to additions in problem asset management which partially offset by declines in FDIC deposit insurance and OREO expenses.

◦ The above decrease in the net interest income was amplified by an increase in the loan provision from $0.2 million to $0.3 million during the three months ended September 30, 2010, and September 30, 2011, respectively.

Net Interest Income.  Net interest income, the difference between total interest income from loans and investments, and total interest expenses from deposits and borrowings, is the Company’s principal source of earnings. The amount of net interest income is determined by the volume of interest-earning assets, the level of rates earned on those assets, and the volume and cost of underlying funding from deposits and borrowings. Net interest income before the provision for loan losses decreased$0.1 million, or 3.25%, for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. Net interest spread is the difference between rates earned on interest-earning assets and the interest paid on deposits and borrowed funds. Net interest margin is the total of net interest income divided by average earning assets. Average earning assets for the three months ended September 30, 2011 was $286.7 million, up 2.90% compared to $278.6 million for the three months ended September 30, 2010. On a fully TE basis, net interest margin was 3.85% and 4.08% for the three months ended September 30, 2011 and September 30, 2010, respectively. The net interest spread decreased14 bps to 3.67% for the three months ended September 30, 2011, from 3.81% for the three months ended September 30, 2010. The yield on average interest-earning assets was 4.32% and 4.82% for the three months ended September 30, 2011 and September 30, 2010, respectively, a decrease of 50 bps, while the interest rate on average interest-bearing liabilities for those periods was 0.65% and 1.01%, respectively, a decrease of 36  bps due to the ongoing low interest rate environment and large low yielding cash holdings at the Federal Reserve Bank of Richmond (the "FRB").

The Company’s balance sheet remains asset sensitive and, as a result, interest-earning assets are repricing faster than interest-bearing liabilities. As loans and time deposits mature and reprice, the margin may be negatively impacted based on competitive

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pricing to retain these loans and deposits. 

Interest income decreased7.9% for the three months ended September 30, 2011 to $3.1 million, from $3.3 million for the three months ended September 30, 2010. The average balances of loans, which had overall yields of 5.62% for the three months ended September 30, 2011 and 6.02% for the three months ended September 30, 2010, respectively, decreased from $207.1 million for the three months ended September 30, 2010 to $196.2 million for the three months ended September 30, 2011. The average balance of investment securities increased $13.5 million, from $17.5 million for the three months ended September 30, 2010 to $31.0 million for the three months ended September 30, 2011. The TE yield on investment securities decreased from 4.90% for the three months ended September 30, 2010 to 3.93% for the three months ended September 30, 2011. In the low interest rate environment, higher yield investments that are amortizing or being called are not being replaced by the same yields on new investments. The average balances of federal funds and other short-term investments increased from $54.0 million for the three months ended September 30, 2010 to $59.4 million for the three months ended September 30, 2011, and the average yield in this category increased4 bps from 0.20% to 0.24% over the same time period.  This increase in the average balances year over year for federal funds sold and other short-term investments combined with decreasing loan balances had a negative impact on net interest margin. The average deposit yield increased due to actively managing the cash at a higher yielding deposit account.

Interest expense decreased33.66% for the three months ended September 30, 2011, to $0.3 million, from $0.5 million for the three months ended September 30, 2010.  Average total interest-bearing deposits, including savings, interest-bearing demand deposits and time deposits increased from $204.3 million for the three months ended September 30, 2010, to $210.3 million for the three months ended September 30, 2011. The average rate paid on interest-bearing deposits decreased36 bps from 1.01% for the three months ended September 30, 2010 to 0.65% for the three months ended September 30, 2011, primarily caused by the decreases in rates paid on time deposits.

The average borrowings outstanding decreased$20.0 thousand from the three months ended September 30, 2010 to the three months ended September 30, 2011. The average rate on borrowings increased from 0.52% to 1.06% for the three months ended September 30, 2011. The cause of the borrowing rate increase was due to an accrued interest expense related to a new capital lease that was still under negotiation.

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

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Average Balances, Interest Earned or Paid, and Interest Yields/Rates For the Three Months Ended September 30, 2011 and 2010
(Dollars in thousands)	2011							2010
(Unaudited)	Average Balance			Amount Earned/Paid		Average Rate		Average  Balance			Amount Earned/Paid		Average  Rate
Assets
Loans receivable (1):	$	196,242		$	2,759	5.62	%	$	207,084		$	3,118	6.02	%
Taxable securities	23,968			186		3.10		10,778			102		3.79
Nontaxable securities(2)	7,076			73		6.72		6,731			69		6.67
Federal funds sold and other interest on short-term investments	59,419			36		0.24		54,027			27		0.20
Total interest earning assets	286,705			3,054		4.32	%	278,620			3,316		4.82	%
Cash and due from banks	2,088							1,939
Other assets	19,601							18,820
Allowance for loan losses	(4,164		)					(3,826		)
Total assets	$	304,230						$	295,553
Liabilities and Equity
Savings deposits	$	56,649		$	45	0.32	%	$	52,166		$	45	0.35	%
Interest-bearing demand deposits	22,918			14		0.24		26,463			25		0.38
Time deposits	129,951			282		0.87		124,928			446		1.43
Total interest-bearing deposits	209,518			341		0.65		203,557			516		1.01
Borrowed funds	753			2		1.06		773			1		0.52
Total interest-bearing liabilities	210,271			343		0.65	%	204,330			517		1.01	%
Non-interest-bearing deposits	51,343							48,697
Other liabilities	5,332							5,579
Total liabilities	266,946							258,606
Stockholders' equity	37,284							36,947
Total liabilities and stockholders' equity	$	304,230						$	295,553
Net interest income				$	2,711						$	2,801
Non-taxable securities				73							69
Tax equivalent adjustment (3)				46							43
Tax equivalent net interest income				$	2,757						$	2,842
Net interest spread (4)						3.67	%						3.81	%
Net interest margin (5)				3.85		%					4.08		%

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

(2) The tax equivalent rate is computed using a blended federal and state tax rate of 38.55%

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

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

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

Noninterest Income.  Noninterest income increased12.52%, or $0.1 million, for three months ended September 30, 2011.  The increase was primarily the result of a realized gain from the sale of OREO and AFS securities.  The realized gain was offset by a reduction in service charge fees.

Noninterest Expense. Noninterest expense represents the costs of operating the Company and the Bank. Management regularly

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monitors all categories of noninterest expense with the goal of improving productivity and operating performance. Noninterest expense decreased5.82% to $2.9 million for the three months ended September 30, 2011 from $3.1 million for the three months ended September 30, 2010. The largest impact to noninterest expense was an increase in salaries and employee benefits, offset by reductions in OREO expenses and miscellaneous charge-offs.

Salary and employee benefits expenses for the three months ended September 30, 2011 and September 30, 2010 were $1.4 million and $1.3 million, respectively.  The increase in salaries and employee benefits was mainly due to additions in problem asset management.

Occupancy expense was $0.4 million in the three months ended September 30, 2011 and the same period in 2010.

Data processing and communications costs were $0.2 million, both in the three months ended September 30, 2011 and the same period in 2010.

Directors and advisory board fees were $0.1 million for each the three month periods ended September 30, 2011 and 2010. Professional fees increased$0.1 million in the three months ended September 30, 2011 compared to the same period in 2010.  OREO expense, net decreased$0.2 million, due to a decrease in OREO write-downs for the three months ended September 30, 2011. All other noninterest expense remained relatively unchanged over these two periods.

Provision for Income Taxes.  The Company recorded an income tax expense of $24.0 thousand and $22.0 thousand for the three months ended September 30, 2011 and September 30, 2010, respectively. The overall effective rate decreased from a tax expense of 19.64% in the three months ended September 30, 2010 to a tax expense of 15.00% in the three months ended September 30, 2011, due to an increase in tax exempt interest income and permanent tax to book differences increasing.

Nine months ended September 30, 2011 compared with nine months ended September 30, 2010

• Net income before preferred stock dividends was $0.6 million for the nine months ended September 30, 2011 and September 30, 2010. Net income available to common stockholders for the nine months ended September 30, 2011 was $0.4 million or $0.21 per share. Net income available to common stockholders for the nine months ended September 30, 2010 was $0.2 million or $0.08 per share.

• Net operating income before income taxes and preferred dividends for the nine months ended September 30, 2011 and September 30, 2010 was $0.8 million and $0.7 million, respectively

◦ Net interest margin decreased from 4.10% for the nine months ended September 30, 2010 to 3.84% for the nine months ended September 30, 2011 due to:

▪ Average loans outstanding decreased$9.6 million in 2011 over 2010 and average yield decreased from 6.07% for the nine months ended June 30, 2010 to 5.71% for the nine months ended September 30, 2011, resulting in $1.0 million less interest income from loans. Interest income from loans decreased in part due to the decrease in average loans outstanding, as well as a $4.3 million increase in average non-accrual loans to $13.8 million for the nine months ended September 30, 2011 compared to $9.5 million for the nine months ended September 30, 2010.  As of September 30, 2011, non-accrued interest income was $1.6 million, or a 71.10% increase over the non-accrued interest income at September 30, 2010, of $0.9 million.

▪ Average interest bearing deposits outstanding increased$11.7 million in 2011 over 2010.  Despite the large increase in average deposits, interest expense declined by $0.5 million in the nine months ended September 30, 2011 compared to the same period in 2010 due to a reduction in our average yield on deposits.

▪ Average borrowings outstanding decreased$14.0 thousand from the 2010 average balance, and the average rate paid on borrowings increased from 0.52% in 2010 to 0.70% in 2011. The cause of the borrowing rate increase was due to an accrued interest expense related to a new capital lease that was still under negotiation.

◦ Noninterest income increased$0.2 million in 2011 from 2010, predominantly due to the realized gain on disposal of assets and sale of OREO.  The realized gains were offset by declines in service charge fees.    

◦ Noninterest expense decreased in 2011 by $0.2 million.  An increase in salaries and employee benefits was more than offset by declines in FDIC insurance expense, and OREO expenses.

◦ Loan loss provision remained flat during the nine months ended September 30, 2011 at $0.4 million, compared to the loan provision for the nine months ended September 30, 2010.

Net Interest Income.  Net interest income, the difference between total interest income from loans and investments, and total interest expenses from deposits and borrowings, is the Company’s principal source of earnings. The amount of net interest income is determined by the volume of interest-earning assets, the level of rates earned on those assets, and the volume and cost of

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M&F BANCORP, INC. AND SUBSIDIARY

underlying funding from deposits and borrowings. Net interest income before the provision for loan losses decreased $0.3 million, or 3.35%, from $8.4 million for the nine months ended September 30, 2010, to $8.1 million for the nine months ended September 30, 2011. Net interest spread is the difference between rates earned on interest-earning assets and the interest paid on deposits and borrowed funds. Net interest margin represents net interest income divided by average earning assets. Average earning assets for the nine months ended September 30, 2011 was $287.5 million, up 3.17% compared to $278.6 million for the nine months ended September 30, 2010. On a fully TE basis, net interest margin was 3.84% and 4.10% for the nine months ended September 30, 2011 and September 30, 2010, respectively. The net interest spread decreased15 bps to 3.67% for the nine months ended September 30, 2011, from 3.82% for the nine months ended September 30, 2010. The yield on average interest-earning assets was 4.35% and 4.86% for the nine months ended September 30, 2011 and September 30, 2010, respectively, a decrease of 51 bps, while the interest rate on average interest-bearing liabilities for those periods was 0.68% and 1.04%, respectively, a decrease of 36  bps due to the ongoing low interest rate environment.

Interest income decreased7.62% for the nine months ended September 30, 2011 to $9.3 million, from $10.0 million for the nine months ended September 30, 2010. The average balances of loans, which had overall yields of 5.71% for the nine months ended September 30, 2011 and 6.07% for the nine months ended September 30, 2010, respectively, decreased from $207.1 million for the nine months ended September 30, 2010 to $197.4 million for the nine months ended September 30, 2011. The average balance of investment securities increased $9.2 million from $17.5 million for the nine months ended September 30, 2010 to $26.7 million for the nine months ended September 30, 2011. The TE yield on investment securities decreased from 5.11% for the nine months ended September 30, 2010 to 4.01% for the nine months ended September 30, 2011. In the low interest rate environment, higher yield investments that are amortizing or being called are not being replaced by the same yields on new investments. The average balances of federal funds and other short-term investments increased from $54.0 million for the nine months ended September 30, 2011 to $63.3 million for the nine months ended September 30, 2011, and the average yield in this category increased9 bps from 0.15% to 0.24% over the same time period.  The increase in the average balances year over year for federal funds sold and other short-term investments combined with the decrease in loans outstanding had a negative impact on net interest margin. The average deposit yield increased due to actively managing the cash at a higher yielding deposit account.

Interest expense decreased in the nine months ended September 30, 2011, to $1.1 million, from $1.6 million for the nine months ended September 30, 2010.  Average total interest-bearing deposits, including savings, interest-bearing demand deposits and time deposits increased from $203.6 million for the nine months ended September 30, 2010, to $215.3 million for the nine months ended September 30, 2011. The average rate paid on interest-bearing deposits decreased36 bps from 1.04% for the nine months ended September 30, 2010 to 0.68% for the nine months ended September 30, 2011, primarily caused by the decreases in rates paid on time deposits.

The average rate on borrowings increased from 0.52% for the nine months ended September 30, 2010 to 0.70% for the nine months ended September 30, 2011. The average borrowings outstanding decreased$14.0 thousand from the nine months ended September 30, 2010 to the nine months ended September 30, 2011. The interest expense on borrowed funds increased slightly to $4.0 thousand in 2011.

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

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M&F BANCORP, INC. AND SUBSIDIARY

Average Balances, Interest Earned or Paid, and Interest Yields/Rates For the Nine Months Ended September 30, 2011 and 2010
(Dollars in thousands)	2011							2010
(Unaudited)	Average Balance			Amount Earned/Paid		Average Rate		Average  Balance			Amount Earned/Paid		Average  Rate
Assets
Loans receivable (1):	$	197,442		$	8,458	5.71	%	$	207,084		$	9,422	6.07	%
Taxable securities	20,032			472		3.14		10,778			308		3.81
Nontaxable securities (2)	6,668			204		6.64		6,731			223		7.19
Federal funds sold and other interest on short-term investments	63,310			116		0.24		54,027			60		0.15
Total interest earning assets	287,452			9,250		4.35	%	278,620			10,013		4.86	%
Cash and due from banks	2,174							1,939
Other assets	19,365							18,931
Allowance for loan losses	(3,966		)					(3,826		)
Total assets	$	305,025						$	295,664
Liabilities and Equity
Savings deposits	$	59,929		$	146	0.32	%	$	52,166		$	128	0.33	%
Interest-bearing demand deposits	24,390			47		0.26		26,463			73		0.37
Time deposits	130,986			909		0.93		124,928			1,383		1.48
Total interest-bearing deposits	215,305			1,102		0.68		203,557			1,584		1.04
Borrowed funds	759			4		0.70		773			3		0.52
Total interest-bearing liabilities	216,064			1,106		0.68	%	204,330			1,587		1.04	%
Non-interest-bearing deposits	46,547							48,567
Other liabilities	5,480							5,595
Total liabilities	268,091							258,492
Stockholders' equity	36,934							37,171
Total liabilities and stockholders' equity	$	305,025						$	295,663
Net interest income				$	8,144						$	8,426
Non-taxable securities				204							223
Tax equivalent adjustment (3)				128							140
Tax equivalent net interest income				$	8,272						$	8,566
Net interest spread (4)						3.67	%						3.82	%
Net interest margin (5)				3.84		%					4.10		%

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

(2) The tax equivalent rate is computed using a blended federal and state tax rate of 38.55%

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

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

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

Noninterest Income.  Noninterest income increased11.03%, or $0.2 million, for the nine months ended September 30, 2011.  The increase was primarily the result of realized gain from the disposal of an asset and the sale of OREO.  In June 2011, the Company sold a branch that it closed in September of 2009 for a gain that comprised the majority of the realized gain for the period.  The realized gain was partially offset by a reduction in service charge fees.  Rental income increased by $35.0 thousand for the nine months ended September 30, 2011 when compared to the same period in 2010.  The increase in rental income was driven by

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M&F BANCORP, INC. AND SUBSIDIARY

improved occupancy rates in 2011.

Noninterest Expense. Noninterest expense represents the costs of operating the Company and the Bank. Management regularly monitors all categories of noninterest expense with the goal of improving productivity and operating performance. Noninterest expense decreased$0.2 million for the nine months ended September 30, 2011 from the nine months ended September 30, 2010. The largest impactsto noninterest expense was an increase in salaries and employee benefits, which was more than offset by reductions in FDIC insurance expense, and OREO expenses.

Salary and employee benefits expenses for the nine months ended September 30, 2011 and September 30, 2010 were $4.1 million and $3.8 million, respectively. The average number of full time equivalent employees increased in the nine months ended September 30, 2011 from the September 30, 2010 average employees, mainly due to additions in problem asset management, resulting in an increase in salaries and wages expense.  Benefits were unchanged at $0.7 million in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.

Occupancy expense and Director fees were unchanged, at $1.1 million and $0.2 million, respectively, in the nine months ended September 30, 2011 compared to the same period in 2010.

Data processing and communications costs decreased by 7.23%, or $46.0 thousand, to $590.0 thousand in the nine months ended September 30, 2011, mainly due to decreased core processing charges.

Professional fees increased by $83.0 thousand in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010, due to an increase in legal fees.

In the nine months ended September 30, 2011, FDIC insurance premiums decreased$0.1 million from $0.6 million to $0.5 million in the same period 2010, due to a decrease in our insurance rate, as well as a special assessment that the Company paid in 2010 and not in 2011.

Other expenses decreased$32.0 thousand for the nine months ended September 30, 2011 from the nine months ended September 30, 2010.  The reduction in other expenses was driven by a reduction in miscellaneous charge-offs.

Provision for Income Taxes.  The Company recorded an income tax expense of $0.2 million for the nine months ended September 30, 2011 and September 30, 2010. The overall effective rate increased from 21.17% in the nine months ended September 30, 2010 to 25.53% in the nine months ended September 30, 2011 due to a decrease in tax exempt interest income and permanent tax to book differences decreasing.

ASSET QUALITY

Provision and Allowance for Loan Losses. The provision for loan losses is the amount charged against earnings, to establish an adequate allowance for loan losses. Loan losses and recoveries are charged to or credited to this allowance, rather than reported as a direct expense or recovery. As of September 30, 2011, the allowance for loan losses was $4.3 million compared to $3.9 million as of December 31, 2010, which represented approximately 2.20% and 1.91% of total loans outstanding on those respective dates. Nonperforming assets, defined as non-accruing loans plus foreclosed properties, at September 30, 2011 were 5.78% of total assets compared to 4.64% at December 31, 2010. Nonperforming assets as a percentage of total loans as of September 30, 2011 was 9.01% compared to 7.18% at December 31, 2010.  For the nine months ended September 30, 2011 the provision for loan losses remained at $0.4 million, the same level as the provision during the corresponding period in 2010.

Of the non-accruing loans totaling $15.1 million at September 30, 2011, 91.98% of the outstanding balances are secured by real estate, which management believes mitigates the risk of loss.  Troubled debt restructurings (“TDRs”) in compliance with the modified terms totaled $8.6 million or 61.08% of total TDRs at September 30, 2011.  GAAP does not provide specific guidance on when a loan may be returned to accrual status.  Federal banking regulators have provided guidance that interest on impaired loans, including TDRs, should only be recorded when there has been a sustained period of repayment performance, the loan is well secured, and collection under any revised terms is assessed as probable.  

In analyzing its allowance for loan losses, the Company tracks its net loan loss history by loan type.  The quantitative net loss history utilizes the prior two year periods by loan type for the reserve.  The quantitative loss experience by loan type is then applied against the unimpaired loan balances and homogenous impaired balances for which there is no specific reserve to determine the quantitative reserve.  Under Accounting Standards Codification (“ASC”) 310, the non-homogenous impaired loans, homogenous small balance real estate secured loans in process of foreclosure for which the value is less than the loan principal balance, and TDRs, are reviewed individually for impairment.  The second piece of the calculation is based on qualitative factors, including

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M&F BANCORP, INC. AND SUBSIDIARY

(i) policy, underwriting, charge-off and collection (ii) national and local economic conditions, (iii) nature and volume of the portfolio, (iv) experience, ability, and depth of lending team, (v) trends of past due, classified loans, and restructurings, (vi) quality of loan review and board oversight, (vii) existence, levels, and effect of loan concentrations and (viii) effects of external factors such as competition and regulatory oversight, are adjusted quarterly based on historical information for any quantifiable factors, and applied in total to each loan balance by loan type. The Company continues to enhance its modeling of the portfolio and underlying risk factors through quarterly analytical reviews with the goal of ensuring it captures all pertinent factors contributing to risk of loss inherent in the loan portfolio.  The Company applies additional qualitative factors for non-homogenous classified loans including internal watch, special mention, substandard, and doubtful loans not identified as impaired, when the loan has a loan to value exceeding 50% of the outstanding balance and is not current in its payments.

Management considers trends in internally risk-rated exposures, criticized exposures, cash-basis loans, and historical and forecasted write-offs.  In addition to a review of industry, geographic, and portfolio concentrations, including current developments within those segments, management considers the current business strategy and credit process, including credit-limit setting and compliance, credit approvals, loan underwriting criteria and loan workout procedures.  The quantitative portion of the allowance for loan losses is adjusted for qualitative factors to account for model imprecision and to incorporate the range of probable outcome inherent in the estimates used for the allowance.

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

For all classes of commercial loans, a quarterly evaluation of specific individual borrowers is performed to identify impaired loans.  The identification of specific borrowers for review is based on a review of non-accrual loans as well as those loans specifically identified by management as exhibiting above average levels of risk through the loan classification.  The allowance for loan and lease losses attributed to impaired loans considers all available evidence, including as appropriate, the probability that a specific loan will default, the expected exposure of a loan in default, an estimate of loss given default, the present value of expected future cash flows discounted using the loan’s contractual effective rate, the secondary market value of the loan and the fair value of collateral.

A specific loss allowance is established for impaired loans based on significant conditions or circumstances related to the specific credits. The specific allowance amounts are determined by a method prescribed by ASC 310. The loans identified as impaired are accounted for in accordance with one of three valuations: (i) the present value of future cash flows discounted at the loan’s effective interest rate; (ii) the loan’s observable market price, or (iii) the fair value of the collateral, if the loan is collateral dependent, less estimated liquidation costs.  Factors considered by management in determining impairment include payment status, collateral value, alternate use of special purpose real estate which could adversely impact resale, 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. The significance of payment delays and payment shortfalls are considered on a loan by loan 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. Interest payments made on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest income maybe accrued or recognized on a cash basis.

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M&F BANCORP, INC. AND SUBSIDIARY

Loans at September 30, 2011 and December 31, 2010 were as follows:

(Dollars in thousands)	September 30, 2011			December 31, 2010
Unaudited
Commercial	$	9,198		$	9,148
Commercial real estate:
Construction	1,642			1,187
Owner occupied	23,543			22,395
Other	22,534			24,265
Faith-based non-profit
Construction	6,027			9,840
Owner occupied	75,555			79,490
Other	7,759			2,127
Residential real estate:
First mortgage	31,387			32,284
Multifamily	7,618			7,892
Home equity	4,401			5,123
Construction	398			2,243
Consumer	1,694			2,218
Other loans	3,093			3,559
Loans, net of deferred fees	194,849			201,771
Allowance for loan losses	(4,286		)	(3,851		)
Loans, net of allowance for losses	$	190,563		$	197,920

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M&F BANCORP, INC. AND SUBSIDIARY

Activity in the allowance for loan losses for the three and nine months ending September 30, 2011 and September 30, 2010 were as follows:

(Dollars in thousands)	Commercial			Commercial Real Estate			Faith- Based Non-Profit			Residential Real Estate			Consumer			Other Loans			Total
Unaudited
Allowance for loan losses:
Total ending allowance balance as of June 30, 2011	$	582		$	840		$	1,220		$	1,457		$	43		$	103		$	4,245
For the three months ended September 30, 2011
Charge-offs	(14		)	(19		)	—			(181		)	(8		)	(6		)	(228		)
Recoveries	—			3			—			—			—			3			6
Provision (decrease) increase	(10		)	27			13			242			26			(35		)	263
Total ending allowance balance as of September 30, 2011	$	558		$	851		$	1,233		$	1,518		$	61		$	65		$	4,286
Total ending allowance balance as of December 31, 2010	$	651		$	651		$	1,289		$	1,045		$	105		$	110		$	3,851
For the nine months ended September 30, 2011:
Charge-offs	(14		)	(19		)	—			(181		)	(8		)	(23		)	(245		)
Recoveries	95			129			—			2			6			11			243
Provision (decrease) increase	(174		)	90			(56		)	652			(42		)	(33		)	437
Total ending allowance balance as of September 30, 2011	$	558		$	851		$	1,233		$	1,518		$	61		$	65		$	4,286

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M&F BANCORP, INC. AND SUBSIDIARY

(Dollars in thousands)	Commercial			Commercial Real Estate			Faith- Based Non-Profit		Residential Real Estate			Consumer			Other Loans			Total
Unaudited
Allowance for loan losses:
Total ending allowance balance as of June 30, 2010	$	415		$	692		$	1,259	$	1,201		$	87		$	141		$	3,795
For the three months ended September 30, 2010:
Charge-offs	(6		)	(27		)	—		(96		)	(14		)	—			(143		)
Recoveries	—			—			—		19			3			—			22
Provision (decrease) increase	99			33			5		40			55			(75		)	157
Total ending allowance balance as of September 30, 2010	$	508		$	698		$	1,264	$	1,164		$	131		$	66		$	3,831
Total ending allowance balance as of December 31, 2009	$	401		$	849		$	1,170	$	973		$	105		$	66		$	3,564
For the nine months ended September 30, 2010:
Charge-offs	(9		)	(27		)	—		(111		)	(48		)	—			(195		)
Recoveries	—			—			—		27			11			—			38
Provision (decrease) increase	116			(124		)	94		275			63			—			424
Total ending allowance balance as of September 30, 2010	$	508		$	698		$	1,264	$	1,164		$	131		$	66		$	3,831

The Company experienced $2.0 thousand in net loan charge offs for the nine months ended September 30, 2011 compared to $0.2 million in net loan charge-offs for the nine months ended September 30, 2010. The Company experienced $0.2 million in net loan charge offs for the three months ended September 30, 2011 compared to $0.1 million in net loan charge offs for the three months ended September 30, 2010.  In a rolling eight quarter basis, net loan charge-offs as a percent of average loan balances outstanding decreased from 0.81% as of September 30, 2010 to 0.70% as of December 31, 2010, and decreased 8 basis points (“bp”) to 0.62% as of September 30, 2011.

In 2010, management changed its loan-related disclosure classifications in its financial reports to present portfolio segments.  A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for loan losses.  

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M&F BANCORP, INC. AND SUBSIDIARY

The following table presents the allowance for loan losses and the reported investment in loans by portfolio segment and based on impairment method as of September 30, 2011:

	September 30, 2011
(Dollars in thousands)	Commercial		Commercial Real Estate		Faith- Based Non-Profit		Residential Real Estate		Consumer		Other Loans		Total
Unaudited
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	113	$	63	$	677	$	—	$	—	$	853
Collectively evaluated for impairment	558		738		1,170		841		61		65		3,433
Total ending allowance balance	558		851		1,233		1,518		61		65		4,286
Loans:
Loans individually evaluated for impairment	$	1,180	$	5,911	$	13,117	$	2,450	$	—	$	—	$	22,658
Loans collectively evaluated for impairment	8,018		41,808		76,224		41,354		1,694		3,093		172,191
Total ending loans balance	$	9,198	$	47,719	$	89,341	$	43,804	$	1,694	$	3,093	$	194,849

Total impaired loans including TDR loans was $22.7 million as of September 30, 2011 and $15.5 million as of December 31, 2010. Third quarter showed a $7.2 million increase of impaired loans compared to year-end 2010. The increases were centered in two faith based accounts which totaled $5.5 million and represented 76.39% percent of total impairment increases. One of the accounts has been restructured in a forbearance extension agreement and was current. Both loans are fully secured by real estate and are supported by the fair value of collateral. The majority of the remaining ten new accounts are secured by real estate and required an increase impairment allocation of $351.9 thousand against loan balances of $1.7 million.

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M&F BANCORP, INC. AND SUBSIDIARY

Impaired loan balances at September 30, 2011 and December 31, 2010 were as follows:

	September 30, 2011
(Dollars in thousands)	Unpaid Principal Balance		Total Exposure		Recorded Investment		Allowance for Loan Losses Allocated		Interest Earned Nine Months		Interest Earned Three Months
Unaudited
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction			—		—						—
Owner occupied	756		756		754		—		17		17
Other	58		58		58		—		—		—
Faith-based non-profit:
Construction	—		—		—		—		—		—
Owner occupied	5,795		5,795		5,790		—		61		61
Other	—		—		—		—		—		—
Residential real estate:
First mortgage	58		58		325		—		—		—
Multifamily	—		—		—		—		—		—
Home Equtiy	—		—		—		—		—		—
Construction	—		—		—		—		—		—
Consumer	—		—		—		—		—		—
Total impaired loans without allowance recorded	$	6,667	$	6,667	$	6,927	$	—	$	78	$	78
With an allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction	—		—		—		—		—		—
Owner occupied	285		285		285		39		—		—
Other	40		40		40		10		—		—
Faith-based non-profit			—
Construction	—		—		—		—		—		—
Owner Occupied	—		—		—		—		—		—
Other	—		—		—		—		—		—
Residential real estate:
First mortgage	1,306		1,306		950		284		26		9
Multifamily	315		315		315		140		—		—
Home equity	462		462		462		251		—		—
Construction	—		—		—		—		—		—
Consumer	—		—				—		—		—
Total impaired loans with allowance recorded	$	2,408	$	2,408	$	2,052	$	724	$	26	$	9
Total impaired loans	$	9,075	$	9,075	$	8,979	$	724	$	104	$	87

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M&F BANCORP, INC. AND SUBSIDIARY

	December 31, 2010
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Interest Earned
(Dollars in thousands)
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—
Commercial real estate:
Construction
Owner occupied	1,358		1,355		—		31
Other	65		65		—		4
Faith-based non-profit:
Construction
Owner occupied	4,474		4,466		—		247
Other	—		—		—		—
Residential real estate:
First mortgage	207		207		—		10
Multifamily	322		322		—		14
Home Equtiy	11		11		—		—
Construction	—		—		—		—
Consumer	—		—		—		—
Total impaired loans without allowance recorded	$	6,437	$	6,426	$	—	$	306
With an allowance recorded:
Commercial	$	—	$	—	$	—	$	—
Commercial real estate:
Construction	—		—		—		—
Owner occupied	—		—		—		—
Other	—		—		—		—
Faith-based non-profit:
Construction	—		—		—		—
Owner occupied	—		—		—		—
Other	—		—		—		—
Residential real estate:
First mortgage	324		323		8		13
Multifamily	143		143		61		3
Home equity	98		98		40		—
Construction	—		—		—		—
Consumer	—		—		—		—
Total impaired loans with allowance recorded	$	565	$	564	$	109	$	16
Total impaired loans	$	7,002	$	6,990	$	109	$	322

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M&F BANCORP, INC. AND SUBSIDIARY

TDRs balances at September 30, 2011 were as follows:

	September 30, 2011
(Dollars in thousands)	Impaired Balance		Liquid Collateral		Total Exposure		Recorded Investment		Allowance for Loan Losses Allocated		Interest Earned Nine Months		Interest Earned Three Months
Unaudited
With no related allowance recorded:
Commercial	$	1,567	$	—	$	1,567	$	1,180	$	—	$	—	$	—
Commercial real estate:
Construction	635				635		635		—		—		—
Owner occupied	732		—		732		734		—		20		16
Other	2,609		—		2,609		2,609		—		4		1
Faith-based non-profit:
Construction	—		—		—		—		—		—		—
Owner occupied	6,412		—		6,412		6,411		—		297		110
Other	—		—		—		—		—		—		—
Residential real estate:
First mortgage	380		—		371		361		—		4		1
Multifamily	—		—		—		—		—		—		—
Home equity	—		—		—		—		—		—		—
Construction	—		—		—		—		—		—		—
Consumer	—		—		—		—		—		—		—
Total  TDRs with no allowance recorded	$	12,335	$	—	$	12,326	$	11,930	$	—	$	325	$	128
With an allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction	379		—		379		379		17		24		9
Owner occupied	—		—		—		—		—		—		—
Other	416		—		416		416		47		19		3
Faith-based non-profit
Construction	—		—		—		—		—		—		—
Owner occupied	916		—		916		917		63		33		15
Other	—		—		—		—		—		—		—
Residential real estate:
First mortgage	36		6		30		36		2		—		—
Multifamily	—		—		—		—		—		—		—
Home equity	—		—		—		—		—		—		—
Construction	—		—		—		—		—		—		—
Consumer	—		—		—		—		—		—		—
Total TDRs with allowance recorded	$	1,747	$	6	$	1,741	$	1,749	$	129	$	76	$	27
Total TDR loans	$	14,082	$	6	$	14,067	$	13,679	$	129	$	401	$	155

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M&F BANCORP, INC. AND SUBSIDIARY

TDRs balances at December 31, 2010 were as follows:

	December 31, 2010
	Impaired Balance		Liquid Collateral			Total Exposure		Recorded Investment		Allowance for Loan Losses Allocated		Interest Earned
(Dollars in thousands)
With no related allowance recorded:
Commercial	$	1,180	$	—		$	1,180	$	1,180	$	—	$	—
Commercial real estate:
Construction	1,038		—			1,038		1,038		—		32
Owner occupied	744		—			744		744		—
Other	3,034		—			3,034		3,034		—		32
Faith-based and non-profit:
Construction	—		—			—		—		—		—
Owner occupied	2,301		(103		)	2,198		2,299		—		201
Other	—		—			—		—		—		—
Residential real estate:
First mortgage	118		(6		)	112		118				4
Multifamily	—		—			—		—		—		—
Home equity	—		—			—		—		—		—
Construction	—		—			—		—		—		—
Consumer	—		—			—		—		—		—
Total  TDRs with no allowance recorded	$	8,415	$	(109	)	$	8,306	$	8,413	$	—	$	269
With an allowance recorded:
Commercial	$	—	$	—		$	—	$	—	$	—	$	—
Commercial real estate:
Construction	—		—			—		—		—		—
Owner occupied	—		—			—		—		—		—
Other	—		—			—		—		—		—
Faith-based and non-profit:
Construction	—		—			—		—		—		—
Owner occupied	—		—			—		—		—		—
Other	—		—			—		—		—		—
Residential real estate:
First mortgage	49		—			49		49		9		2
Multifamily	—		—			—		—		—		—
Home equity	—		—			—		—		—		—
Construction	—		—			—		—		—		—
Consumer	—		—			—		—		—		—
Total TDRs with allowance recorded	$	49	$	—		$	49	$	49	$	9	$	2
Total TDR loans	$	8,464	$	(109	)	$	8,355	$	8,462	$	9	$	271

Loans which principle or interest is in default for 90 days or more are classified as a nonaccrual unless they are well secured and in process of collection. Loans over 90 days still accruing were matured loans that were well secured and in process of collection. Borrowers have continued to make payments on these loans while administrative and legal due processes are proceeding which will enable the bank to extend or modify maturity dates.

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M&F BANCORP, INC. AND SUBSIDIARY

The following table presents the recorded investment by loan class and the number of non-accrual and loans past due over 90 days still on accrual as of September 30, 2011:

(Dollars in thousands)	Nonaccrual		Number		Loans Past Due Over 90 Days Still Accruing		Number
Unaudited
Commercial	$	1,180	1		$	103	1
Commercial real estate:
Construction	635		1		—		—
Owner occupied	941		4		55		1
Other	2,595		3		413		3
Faith-based non-profit:
Construction
Owner occupied	5,838		4		185		2
Other	—				—		—
Residential real estate:
First mortgage	3,130		36		48		1
Multifamily	315		1		—		—
Home equity	477		6		21		1
Construction	—		—		—		—
Consumer	34		2		—		—
Total	$	15,145	$	58	$	825	$	9

The following table presents the recorded investment by loan class and the number of non-accrual and loans past due over 90 days still on accrual as of December 31, 2010:

	Nonaccrual		Number		Loans Past Due Over 90 Days Still Accruing		Number
(Dollars in thousands)
Commercial	$	1,180	1		$	—	—
Commercial real estate:
Construction	650		1		—		—
Owner occupied	1,808		7		70		1
Other	2,683		3		417		2
Faith-based and non-profit:
Construction	—		—		—		—
Owner occupied	3,356		3		3,256		2
Other	—		—		—		—
Residential real estate:
First mortgage	2,312		31		—		—
Multifamily	465		3		—		—
Home equity	118		4		—		—
Construction	—		—		—		—
Consumer	—		—		—		—
Total	$	12,572	$	53	$	3,743	$	5

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M&F BANCORP, INC. AND SUBSIDIARY

The following table presents the aging of the recorded investment in loans as of September 30, 2011 by class of loans:

(Dollars in thousands)	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
Unaudited
Commercial	$	7	$	2	$	1,283	$	1,292	$	7,906	$	9,198
Commercial real estate:
Construction	—		—		635		635		1,007		1,642
Owner occupied	1,096		270		769		2,135		21,408		23,543
Other	416		—		3,007		3,423		19,111		22,534
Faith-based non-profit:
Construction	13		—		—		13		6,014		6,027
Owner occupied	218		236		2,987		3,441		72,114		75,555
Other	27		2		—		29		7,730		7,759
Residential real estate:
First mortgage	593		987		2,407		3,987		27,400		31,387
Multifamily	—		—		315		315		7,303		7,618
Home equity	169		246		494		909		3,492		4,401
Construction	—				—		—		398		398
Consumer	46		1		30		77		1,617		1,694
Other loans	—		—		—		—		3,093		3,093
Total	$	2,585	$	1,744	$	11,927	$	16,256	$	178,593	$	194,849

The Company has allocated $129.0 thousand and $9.0 thousand of specific reserves to customers whose loan terms have been modified in TDRs as of September 30, 2011 and December 31, 2010, respectively.  The Company has not committed to lend additional amounts as of September 30, 2011 and December 31, 2010 to customers with outstanding loans that are classified as TDRs.

Credit Quality Indicators:

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

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

• Substandard.  Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of or repayment according to the original terms of the debt.  Substandard loans include loans within the mortgage and consumer portfolio segments that are past due 90 days or more as to principal or interest if the loan to value does not support full repayment.  Substandard loans are evaluated for impairment on an individual loan basis unless the substandard loan is a smaller balance homogenous loan that is not a TDR. Management believes that there is a distinct possibility that the Company will sustain some loss if the deficiencies related to the loans is not corrected in a timely manner.

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

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

The provision for loan losses assigned to these ratings by portfolio class as of September 30, 2011 is as follows:

(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Unaudited
Commercial	$	548	$	9	$	1	$	—	$	558
Commercial real estate:
Construction	10				17		—		27
Owner occupied	321		36		61		—		418
Other	240		49		117		—		406
Faith-based and non-profit:
Construction	86		—		4		—		90
Owner occupied	773		110		139		—		1,022
Other	113		8		—		—		121
Residential real estate:
First mortgage	546		25		327		—		898
Multifamily	122		1		141		—		264
Home equity	83		—		265		—		348
Construction	8		—		—		—		8
Consumer	77		1		1		—		79
Other loans	47		—		—		—		47
Total	$	2,974	$	239	$	1,073	$	—	$	4,286

Our ability to manage credit risk depends in large part on our ability to properly identify and manage problem loans.  To do so, we operate a credit risk rating system under which our credit management personnel assign a numeric credit risk rating to each loan at the time of origination and review loans on a regular basis.

Each loan officer is responsible for monitoring his or her loan portfolio, recommending a credit risk rating for each loan in his or her portfolio and ensuring the credit risk ratings are appropriate.  These credit risk ratings are then ratified by our Chief Credit Officer or the Directors’ Loan Committee.  Credit risk ratings are determined by evaluating a number of factors including, a borrower’s financial strength, cash flow coverage, collateral protection and guarantees.  The credit risk ratings and methodology applied are reviewed annually by management and the board of directors.

FINANCIAL CONDITION

The Company’s financial condition is measured in terms of its asset and liability composition, asset quality, capital resources and liquidity. The growth and composition of the Company’s liabilities for the period ending September 30, 2011, and December 31, 2010, reflect organic growth resulting from internal business development activities.  While gross loans were down for the period ending September 30, 2011, versus December 31, 2010, the Bank continues to develop relationships and business in the commercial, and faith-based non-profit organizations operating within its footprint.

Total assets decreased from $312.3 million as of December 31, 2010 to $303.8 million as of September 30, 2011. The decline in assets was led by a $6.9 million decline in loans. The largest component of asset that increased was in investment securities available for sale, which increased$10.5 million from December 31, 2010 to September 30, 2011. The increase in investment securities available for sale was impacted by the management decision to move low yielding cash into higher yielding low risk bonds.  Cash and cash equivalents declined $12.1 million to $62.4 million from December 31, 2010.  Gross loans decreased$6.9 million and OREO increased$0.5 million in 2011.  Total liabilities decreased from $275.9 million as of December 31, 2010 to $266.4 million as of September 30, 2011, led by a decline in total deposits of $9.1 million.

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M&F BANCORP, INC. AND SUBSIDIARY

Total consolidated stockholders’ equity increased from $36.4 million as of December 31, 2010 to $37.4 million as of September 30, 2011. For the nine months ended September 30, 2011, the net increase in retained earnings was comprised of $0.6 million of net income, offset by dividends declared to preferred stockholders of $0.2 million. The Company did not declare or pay a common stock dividend in the first nine months of 2011.  Accumulated other comprehensive loss represents the unrealized gain or loss on available for sale securities and the unrealized gain or loss related to the deferred pension liability, net of deferred taxes.  Accumulated other comprehensive loss was in a net unrealized loss position of $0.8 million at September 30, 2011, a decrease of $0.5 million from the net unrealized loss of $1.3 million as of December 31, 2010.

ASSETS

Cash and Cash Equivalents.  Cash and cash equivalents, including noninterest-bearing and interest-bearing cash, fed funds sold and short-term investments, decreased$12.1 million from $74.6 million as of December 31, 2010 to $62.4 million as of September 30, 2011. The decrease in cash was the result of the purchases in investment securities of $17.3 million and the $9.1 million decrease in deposits.

Loan Portfolio.  Gross loans were $194.8 million and $201.8 million as of September 30, 2011 and December 31, 2010, respectively. The commercial loan portfolio is comprised mainly of loans to small- and mid-sized businesses. A significant portion of the loan portfolio is collateralized by owner-occupied real estate. An adverse change in the economy affecting real estate values generally, or in our primary markets in particular, could impair the value of underlying collateral and/or our ability to sell such collateral.  

The Bank has a concentration of loans to faith-based non-profit organizations, in which the Bank has specialized lending experience.  As of September 30, 2011, the percentage of loans in this niche, which included construction, real estate secured, and lines of credit, totaled approximately 45.85% of the total loan portfolio and the reserve for these loans is 28.77% of the total allowance.  Historically the Bank has experienced low levels of loan losses in this specialty; however, repayment of loans is primarily dependent on voluntary contributions, which appears to have been adversely affected by the current economic downturn.  Management monitors the loan portfolio for changes in trends of past due loans and has seen a recent increase in the past due status of some loans in this concentration. The Bank has implemented policies and procedures to help manage this concentration risk and track the performance of the loans.

Traditionally, the Bank has not issued high-risk mortgage products such as Adjustable Rate Mortgages (“ARM”), interest only residential mortgages and other sub-prime mortgages.  While the Bank does not engage in sub-prime lending, a small balance of loans may be deemed sub-prime based on borrowers’ credit scores.  No loans in the portfolio have terms that permit the borrower to pay less than the interest due on the loan balance.  Historically, the Bank has made very few acquisition and development loans or construction development loans with interest reserves built into the loans.

Of the loan balances outstanding at September 30, 2011, 92.82% or $180.9 million is secured by real estate, and 1.25% or $2.4 million, is secured by cash deposits.  Junior liens at September 30, 2011, constituted $4.4 million, or 2.26% of the loan balances outstanding. 

The Bank’s market areas are the Research Triangle (Raleigh and Durham, North Carolina), the Piedmont Triad (Greensboro and Winston-Salem, North Carolina) and Charlotte, North Carolina. The economic trends of the areas in North Carolina served by the Bank are influenced by the significant industries within these regions. The ultimate collectability of the Bank’s loan portfolio is susceptible to changes in the market conditions of these geographic regions.

Liquidity and Capital Resources

Liquidity, Interest Rate Sensitivity and Market Risks

The objectives of the Company’s liquidity management policy include providing adequate funds to meet the needs of depositors and borrowers at all times, providing funds to meet the basic needs for on-going operations of the Company, and to meet regulatory requirements. The 35.84% liquidity ratio is the sum of cash, overnight funds, and un-pledged, marketable U.S. Government and US Agencies divided by the sum of deposits and short-term borrowings (less the full amount of pledged deposits). Management believes that core deposit activity, $8.6 million in available borrowing capacity from the Federal Home Loan Bank of Atlanta ("FHLB") at September 30, 2011, and Fed Funds accommodations of $12.0 million will be adequate to meet the short-term and long-term liquidity needs of the Company.  The Company had $0.7 million outstanding from the FHLB as of September 30, 2011. The maximum outstanding balance from FHLB at any time during the third quarter quarter of 2011 was $0.7 million.  The Company

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periodically draws on its Fed Funds accommodations to test the lines availability.

The Company participates in the Certificate of Deposit Account Registry Service (“CDARS”) program, which enables depositors to receive FDIC insurance coverage for deposits otherwise exceeding the maximum insurable amount.  Through the CDARS program, deposits in excess of the maximum insurable amount are placed with multiple participating financial institutions.  All of the Bank’s CDARS deposits are reciprocal, relationship-based deposits.  There are several large depositors in the CDARS program, and the largest depositor has renewed $20 million in deposits annually for several years.  There is no guarantee, however that this trend will continue.  In management’s opinion, the large depositors have stable and long-term relationships with the Bank.

Capital Resources

The Company and the Bank are subject to various regulatory capital requirements administered by their federal and state banking regulators. Failure to satisfy minimum capital requirements may result in certain mandatory and additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s Consolidated Financial Statements.  At the Company’s  annual Strategic Planning session in September 2009, the Board of Directors of the Bank directed management to limit material changes to the balance sheet, and to focus on asset quality, liquidity, and managing the Bank through the challenging economic environment.  Subsequently, the Board established higher liquidity targets which management achieved by December 31, 2009.  The Bank is required to obtain the non-objection of its regulators before engaging in any transactions that would materially change the composition of the Bank’s balance sheet.  Also, the Bank MOU requires the Bank to maintain a tier 1 leverage capital ratio of not less than 8.00%, and a total risk based capital ratio of not less than 10.00%.

The September 30, 2011 and December 31, 2010 regulatory capital levels of the Company and Bank compared to the regulatory standards were:

	September 30, 2011
(Dollars in thousands)	Actual				For Capital Adequacy Purposes				To Be Well Capitalized
(Unaudited)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total capital (to risk weighted assets)
Company	$	36,776	18.85	%	$	15,608	8.00	%	$	19,510	10.00	%
Bank	34,315		17.64		15,567		8.00		19,458		10.00
Tier 1 (to risk weighted assets)
Company	$	34,321	17.59	%	$	7,804	4.00	%	$	11,706	6.00	%
Bank	31,866		16.38		7,783		4.00		11,675		6.00
Tier 1 (to average total assets)
Company	$	34,321	11.42	%	$	12,016	4.00	%	$	15,021	5.00	%
Bank	31,866		10.60		12,024		4.00		15,030		5.00

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M&F BANCORP, INC. AND SUBSIDIARY

	December 31, 2010
(Dollars in thousands)	Actual				For Capital Adequacy Purposes				To Be Well Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total capital (to risk weighted assets)
Company	$	36,461	18.19	%	$	16,037	8.00	%	$	20,046	10.00	%
Bank	33,733		16.84		16,023		8.00		20,028		10.00
Tier 1 (to risk weighted assets)
Company	$	33,939	16.93	%	$	8,019	4.00	%	$	12,028	6.00	%
Bank	31,214		15.59		8,011		4.00		12,017		6.00
Tier 1 (to average total assets)
Company	$	33,939	11.77	%	$	11,534	4.00	%	$	14,418	5.00	%
Bank	31,214		10.42		11,979		4.00		14,973		5.00

Item 3 - Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4 - Controls and Procedures

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

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

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 6. Exhibits

Exhibits and Index of Exhibits

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

Exhibit No.	Exhibit Description
Exhibit 3(i)(a)	Amended and Restated Articles of Incorporation of the Company, incorporated by reference to Exhibit 3(i) to the Form 10-QSB for the quarter ended September 30, 1999, filed with the SEC on November 12, 1999.
Exhibit 3(i)(b)	Articles of Amendment, adopted by the Shareholders of the Company on May 3, 2000, filed with the North Carolina Department of the Secretary of State on July 12, 2000, and incorporated by reference to Exhibit 3(v) to the Form 10-KSB for the three months ended December 31, 2005, filed with the SEC on March 31, 2006.
Exhibit 3(i)(c)	Articles of Amendment, adopted by the Shareholders of the Company on June 9, 2010, filed with the North Carolina Department of the Secretary of State on June 11, 2010, and incorporated by reference to Exhibit 4.1 to the Form 8-K filed with the SEC on June 26, 2010.
Exhibit 3(i)(d)	Articles of Amendment, adopted by the Board of Directors of the Company on June 10, 2010, filed with the North Carolina Department of the Secretary of State on June 25, 2010, and incorporated by reference to Exhibit 4.2 to the Form 8-K filed with the SEC on June 26, 2010.
Exhibit 3(i)(e)	Articles of Amendment, adopted by the Board of Directors of the Company on July 27, 2010, filed with the North Carolina Department of the Secretary of State on August 20, 2010, and incorporated by reference to Exhibit 4.1 to the Form 8-K filed with the SEC on August 23, 2010.
Exhibit 3(ii)	Restated Bylaws of the Company, incorporated by reference to Exhibit 99.1 to the Form 8K filed with the SEC on April 6, 2010.
Exhibit 4(i)	Specimen Stock Certificate, incorporated by reference to Exhibit 4 to the Form 10-KSB for the three months ended December 31, 2000, filed with the SEC on April 2, 2001.
Exhibit 4(ii)	Form of Certificate for the Fixed Rate Cumulative Perpetual Preferred Stock, Series B, incorporated by reference to Exhibit 4.2 to the Form 8-K filed with the SEC on August 23, 2010.
Exhibit 10(i) *	Employment Agreement dated January 12, 2007 by and among Kim D. Saunders, the Company and the Bank, incorporated by reference to Exhibit 99.1 to the Form 8-K filed with the SEC on January 18, 2007.
Exhibit 10(ii)	Letter Agreement and certain side letters, all dated August 20, 2010, between the Company and the United States Department of the Treasury, with respect to the issuance and sale of the Fixed Rate Cumulative Perpetual Preferred Stock, Series B, incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on August 23, 2010.
Exhibit 10(iii) *	Employment Agreement Amendment, dated June 26, 2010, among the Company, the Bank and Kim D. Saunders, incorporated by reference to Exhibit 10.2 to the Form 8-K filed with the SEC on June 26, 2010.

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M&F BANCORP, INC. AND SUBSIDIARY

Exhibit 31(i)	Certification of Kim D. Saunders.
Exhibit 31(ii)	Certification of Lyn Hittle.
Exhibit 32	Certification pursuant to 18 U.S.C. Section 1350.
Exhibit 101	The following materials from the Company’s 10-Q Report for the three and six months ended June 30, 2011, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Other Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (vi) the Consolidated Statements of Cash Flows, and (vii) the Notes to the Consolidated Financial Statements tagged as blocks of texts.
*management contracts and compensatory arrangements

SIGNATURES

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

		M&F Bancorp, Inc.
Date:	November 14, 2011	By:	/s/ Kim D. Saunders
			Kim D. Saunders
			President, Chief Executive Officer
		By:	/s/ Lyn Hittle
			Lyn Hittle
			Chief Financial Officer

INDEX TO EXHIBITS

Exhibit 31(i)	Certification of Kim D. Saunders.
Exhibit 31(ii)	Certification of Lyn Hittle.
Exhibit 32	Certification pursuant to 18 U.S.C. Section 1350.

65