UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

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 (§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 May13, 2015, there were 2,031,337 shares outstanding of the issuer's common stock, no par value.

M&F BANCORP, INC. AND SUBSIDIARY

INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014	3
Consolidated Statements of Income (Loss) for the Three Months Ended March 31, 2015 and 2014	4
Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2015 and 2014	5
Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2015 and 2014	6
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014	7
Notes to Consolidated Financial Statements	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 4. Controls and Procedures	44
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	45
Item 6. Exhibits	46
SIGNATURES	48

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M&F BANCORP, INC. AND SUBSIDIARY

PART I

FINANCIAL INFORMATION

Item 1 - Financial Statements

CONSOLIDATED BALANCE SHEETS
	March 31,			December 31,
(Dollars in thousands)	2015			2014
	(Unaudited)
ASSETS
Cash and cash equivalents
Cash and due from banks	$	2,896		$	2,871
Interest-bearing deposits		29,914			32,703
Total cash and cash equivalents		32,810			35,574
Investment securities available-for-sale, at fair value		74,660			69,703
Other invested assets		298			301
Loans, net of unearned income and deferred fees		172,697			175,088
Allowance for loan losses		(3,446	)		(3,440	)
Loans, net		169,251			171,648
Interest receivable		726			816
Bank premises and equipment, net		4,330			4,293
Cash surrender value of bank-owned life insurance		7,745			7,695
OREO		2,772			3,069
Deferred tax assets and taxes receivable, net		4,075			4,114
Other assets		1,117			1,172
TOTAL ASSETS	$	297,784		$	298,385
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Interest-bearing deposits	$	211,005		$	214,055
Noninterest-bearing deposits		44,706			41,805
Total deposits		255,711			255,860
Other borrowings		894			784
Other liabilities		4,723			5,163
Total liabilities		261,328			261,807
COMMITMENTS AND CONTINGENCIES
Stockholders' equity:
Series B Preferred Stock-  $1,000 liquidation value per share, 11,735 shares authorized, issued and outstanding		11,729			11,729
Series C Junior Participating Preferred Stock-  $0.01 par  value, 21,000 shares authorized, no shares issued or outstanding		—			—
Common stock, no par value, 10,000,000 shares authorized; 2,031,337 shares issued and outstanding		8,732			8,732
Retained earnings		17,557			17,785
Accumulated other comprehensive loss		(1,562	)		(1,668	)
Total stockholders' equity		36,456			36,578
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	297,784		$	298,385

See notes to consolidated financial statements.

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M&F BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (LOSS)
	For the Three Months Ended
	March 31,
(Dollars in thousands except for share and per share data)	2015			2014
(Unaudited)
Interest income:
Loans, including fees	$	2,205		$	2,493
Investment securities available-for-sale, including dividends
Taxable		330			319
Tax-exempt		4			8
Other		36			17
Total interest income		2,575			2,837
Interest expense:
Deposits		172			173
Borrowings		1			1
Total interest expense		173			174
Net interest income		2,402			2,663
Less provision for loan losses		—			—
Net interest income after provision for loan losses		2,402			2,663
Noninterest income:
Service charges		265			298
Rental income		43			48
Cash surrender value of life insurance		50			51
Net realized gains on sales of investment securities available-for-sale		29			—
Other income		4			56
Total noninterest income		391			453
Noninterest expense:
Salaries and employee benefits		1,344			1,303
Occupancy and equipment		353			365
Directors' fees		57			55
Marketing		38			36
Professional fees		165			203
Information technology		222			205
FDIC deposit insurance		143			149
OREO expenses, net		317			44
Delivery expenses		31			46
Other		315			296
Total noninterest expense		2,985			2,702
Income (loss) before income taxes		(192	)		414
Income tax expense (benefit)		(23	)		137
Net income (loss)		(169	)		277
Less preferred stock dividends and accretion		(59	)		(59	)
Net income (loss) available to common stockholders	$	(228	)	$	218
Basic and diluted earnings (loss) per share of common stock:	$	(0.11	)	$	0.11
Weighted average shares of common stock outstanding:
Basic and diluted		2,031,337			2,031,337

See notes to consolidated financial statements.

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M&F BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)	For the Three Months Ended
(Unaudited)	March 31,
	2015			2014
Net income (loss)	$	(169	)	$	277
Other comprehensive income:
Investment securities:
Unrealized holding gains on investment securities available-for-sale		141			310
Tax Effect		(53	)		(117	)
Reclassification adjustments for net realized gains		29			—
Tax Effect		(11	)		—
Net of tax amount		106			193
Defined benefit pension plans:
Net actuarial losses		(62	)		(54	)
Tax effect		—			—
Prior service cost		62			54
Tax effect		—			—
Net of tax amount		—			—
Other comprehensive income, net of tax		106			193
Comprehensive income (loss)	$	(63	)	$	470

See notes to consolidated financial statements  

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M&F BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 2015 and 2014
										Accumulated
	Number									Other
(Dollars in thousands except for share data)	of		Common		Preferred		Retained			Comprehensive
(Unaudited)	Shares		Stock		Stock		Earnings			Loss			Total
Balances as of December 31, 2013		2,031,337	$	8,732	$	11,727	$	17,103		$	(1,425	)	$	36,137
Net income		—		—		—		277			—			277
Other comprehensive income, net of tax		—		—		—		—			193			193
Dividends declared on preferred stock		—		—		—		(59	)		—			(59	)
Balances as of March 31, 2014		2,031,337	$	8,732	$	11,727	$	17,321		$	(1,232	)	$	36,548
Balances as of December 31, 2014		2,031,337	$	8,732	$	11,729	$	17,785		$	(1,668	)	$	36,578
Net loss		—		—		—		(169	)		—			(169	)
Other comprehensive income, net of tax		—		—		—		—			106			106
Dividends declared on preferred stock		—		—		—		(59	)		—			(59	)
Balances as of March 31, 2015		2,031,337	$	8,732	$	11,729	$	17,557		$	(1,562	)	$	36,456

See notes to consolidated financial statements  

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M&F BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
	For the Three Months Ended
	March 31,
(Dollars in thousands)	2015			2014
(Unaudited)
Cash flows from operating activities:
Net income (loss)	$	(169	)	$	277
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization		100			85
Amortization of discounts/premiums on investment securities available-for-sale, net		121			165
Deferred income tax provision		—			56
Net gains on sales of investment securities available-for-sale		(29	)		—
Increase in cash surrender value of bank-owned life insurance		(50	)		(51	)
Gain at foreclosure		(13	)		(13	)
Net losses on sales of OREO		4			—
Writedown of OREO		215			21
Net changes in:
Accrued interest receivable and other assets		120			470
Other liabilities		(440	)		(99	)
Net cash  provided by (used in) operating activities		(141	)		911
Cash flows from investing activities:
Activity in available for sale securities:
Sales		9,580			—
Maturities and calls		4,500			1,192
Principal collections		2,537			3,073
Purchases		(21,496	)		(4,957	)
FHLB stock redemptions		3			81
Net (increase) decrease in loans		2,275			(610	)
Purchases of bank premises and equipment		(137	)		(26	)
Proceeds from sales of OREO		213			—
Net cash used in  investing activities		(2,525	)		(1,247	)
Cash flows from financing activities:
Net decrease in deposits		(149	)		(1,850	)
Proceeds from other borrowings		158			31
Repayments of other borrowings		(48	)		(52	)
Cash dividends		(59	)		(59	)
Net cash used in financing activities		(98	)		(1,930	)
Net decrease in cash and cash equivalents		(2,764	)		(2,266	)
Cash and cash equivalents as of the beginning of the period		35,574			28,583
Cash and cash equivalents as of the end of the period	$	32,810		$	26,317

See notes to consolidated financial statements.

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M&F BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
	For the Three Months Ended
	March 31,
(Dollars in thousands)	2015			2014
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest	$	168		$	171
Income Taxes		—			12
Noncash Transactions:
Loans transferred to OREO		122	#		181
Net unrealized gain on investment securities available-for-sale, net of deferred income tax		88			193
Loans transferred to foreclosed assets		—			3
Loans transferred to other assets		—			(2,862	)

See notes to consolidated financial statements.

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

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

Basis of Presentation

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

The Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial statements and in accordance with the instructions for Form 10-Q and Rule 8-03 of Regulation S-X. The accompanying Consolidated Financial Statements and Notes are unaudited except for the balance sheet and footnote information as of December 31, 2014, which were derived from the Company’s audited consolidated Annual Report on Form 10-K as of and for the year ended December 31, 2014.

The Consolidated Financial Statements included herein do not include all the information and notes required by GAAP and should be read in conjunction with the Consolidated Financial Statements and the related notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2014.

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

Segment Reporting

Based on an analysis performed by the Company, management has determined that the Company has only one operating segment, which is commercial banking. The chief operating decision-maker uses consolidated results to make operating and strategic decisions and therefore, the Company is not required to disclose additional segment information.

Use of Estimates

The financial statements are prepared in accordance with GAAP, which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2016. The Company will apply the guidance using a modified retrospective approach. The Company does not expect this guidance to have a material effect on its financial statements.

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

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

In January 2015, the FASB issued guidance that eliminated the concept of extraordinary items from U.S. GAAP. Existing U.S. GAAP required that an entity separately classify, present, and disclose extraordinary events and transactions. The amendments will eliminate the requirements for reporting entities to consider whether an underlying event or transaction is extraordinary, however, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The amendments may be applied either prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect these amendments to have a material effect on its financial statements.

In February 2015, the FASB issued guidance, which amends the consolidation requirements and significantly changes the consolidation analysis required under GAAP. Although the amendments are expected to result in the deconsolidation of many entities, the Company will need to reevaluate all its previous consolidation conclusions. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted (including during an interim period), provided that the guidance is applied as of the beginning of the annual period containing the adoption date. The Company does not expect these amendments to have a material effect on its financial statements.

In April 2015, the FASB issued guidance that will require debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This update affects disclosures related to debt issuance costs but does not affect existing recognition and measurement guidance for these items. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The Company does not expect these amendments to have a material effect on its financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

2. INVESTMENT SECURITIES

The main objectives of our investment strategy are to provide a source of liquidity while managing our interest rate risk, and to generate an adequate level of interest income without taking undue risks. Our investment policy permits investments in various types of securities, certificates of deposits and federal funds sold in compliance with various restrictions in the policy. As of March 31, 2015 and December 31, 2014, all investment securities were classified as available-for-sale.

Our available-for-sale securities totaled $74.7 million and $69.7 million as of March 31, 2015 and December 31, 2014, respectively. Securities with a fair value of $1.0 million were pledged to the Federal Reserve Bank of Richmond (“FRB”) and an additional $3.9 million and $17.4 million in investments were pledged to public housing authorities in North Carolina and the North Carolina Department of State Treasurer as collateral for public deposits at March 31, 2015. Securities with a fair value of $1.0 million were pledged to the FRB and an additional $3.8 million and $18.1 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 December 31, 2014. Our investment portfolio consists of the following securities:

· U.S. government agency securities (“U.S. Agencies”) ,

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

· Municipal securities (“Municipals”).

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

The amortized cost, gross unrealized gains and losses and fair values of investment securities at March 31, 2015 and December 31, 2014 were:

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
(Unaudited)
March 31, 2015
U.S. Agencies	$	29,374	$	70	$	(29	)	$	29,415
MBS
Residential		44,139		331		(240	)		44,230
Municipals
North Carolina		1,006		9		—			1,015
Total	$	74,519	$	410	$	(269	)	$	74,660
December 31, 2014
U.S. Agencies	$	12,373	$	26	$	(60	)	$	12,339
MBS
Residential		56,350		281		(276	)		56,355
Municipals
North Carolina		1,009		9		(9	)		1,009
Total	$	69,732	$	316	$	(345	)	$	69,703

During the three months ended March 31, 2015, there were $112 thousand gross realized gains and $83 thousand gross realized losses on sales or calls of securities compared to none during the comparable period of 2014.

The amortized cost and estimated market values of securities as of March 31, 2015 and December 31, 2014 by contractual maturities are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. MBS, which are not due at a single maturity date, are grouped based upon the final payment date. MBS may mature prior to the applicable final payment date because of principal prepayments.

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

(Dollars in thousands)	As of March 31, 2015
(Unaudited)	Fair Value		Amortized Cost
U.S. Agencies
Due within one year	$	1,507	$	1,497
Due after one year through five years		21,658		21,627
Due after five years through ten years		6,250		6,250
Total U.S. Agencies	$	29,415	$	29,374
MBS
Residential
Due within one year	$	8,238	$	8,239
Due after one year through five years		19,777		19,746
Due after five years through ten years		10,974		10,926
Due after ten years		5,241		5,228
Total MBS	$	44,230	$	44,139
Municipals
North Carolina
Due within one year	$	160	$	160
Due after one year through five years		266		260
Due after five years through ten years		589		586
Total Municipals	$	1,015	$	1,006

(Dollars in thousands)	As of December 31, 2014
	Fair Value		Amortized Cost
U.S. Agencies
Due within one year	$	2,498	$	2,499
Due after one year through five years		7,887		7,874
Due after five years through ten years		1,954		2,000
Total U.S. Agencies	$	12,339	$	12,373
MBS
Residential
Due within one year	$	10,114	$	10,139
Due after one year through five years		24,003		24,018
Due after five years through ten years		13,803		13,771
Due after ten years		8,435		8,422
Total MBS	$	56,355	$	56,350
Municipals
North Carolina
Due within one year	$	162	$	161
Due after one year through five years		268		260
Due after five years through ten years		579		588
Total Municipals	$	1,009	$	1,009

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

All securities owned as of March 31, 2015 and December 31, 2014 are investment grade. The unrealized losses were attributable to changes in market interest rates. The Company evaluates securities for other than temporary impairment on a quarterly basis. Consideration is given to the financial condition and near-term prospects of the issuer, the length of time and extent to which the fair value has been less than cost, and our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Based on these evaluations, the Company did not deem any securities to be impaired during 2014 or the first three months of 2015.

As of March 31, 2015 and December 31, 2014, the Company held 54 and 59investment positions, respectively, with unrealized losses of $269 thousand and $345 thousand, respectively. These investments were in U.S. Agencies, MBS and Municipals. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. Management had determined that all declines in market values of available-for-sale securities are not other-than-temporary, and the Company will not likely be required to sell these securities.

As of March 31, 2015 and December 31, 2014, the fair value of securities with gross unrealized losses by length of time that the individual securities have been in an unrealized loss position was as follows:

(Dollars in thousands)	Less Than 12 Months					12 Months or Greater					Total
(Unaudited)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
March 31, 2015
U.S. Agencies	$	8,982	$	(18	)	$	989	$	(11	)	$	9,971	$	(29	)
MBS
Residential		9,234		(74	)		10,929		(166	)		20,163		(240	)
Total	$	18,216	$	(92	)	$	11,918	$	(177	)	$	30,134	$	(269	)

(Dollars in thousands)	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2014
U.S. Agencies	$	5,982	$	(14	)	$	1,954	$	(46	)	$	7,936	$	(60	)
MBS
Residential		12,594		(73	)		13,476		(203	)		26,070		(276	)
Municipals
North Carolina		—		—			579		(9	)		579		(9	)
Total	$	18,576	$	(87	)	$	16,009	$	(258	)	$	34,585	$	(345	)

3. FEDERAL HOME LOAN BANK OF ATLANTA (“FHLB”)

To be a member of the FHLB System, the Bank is required to maintain an investment in capital stock of the FHLB in an amount equal to 0.09% of its total assets as of December 31 of the prior year (up to a maximum of $15.0 million), plus 4.5% of its outstanding FHLB advances. The carrying value of FHLB stock, which is included in Other Invested Assets on the Consolidated Balance Sheets, as of March 31, 2015 and December 31, 2014 was $0.3 million. No ready market exists for the FHLB stock, and it has no quoted market value; however, management believes that the cost approximates the market value as of March 31, 2015 and December 31, 2014. Management has reviewed its investment in FHLB stock for impairment and does not believe it is impaired as of March 31, 2015 or December 31, 2014. 

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Notes to Consolidated Financial Statements, continued

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

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

5. ACCUMULATED OTHER COMPREHENSIVE INCOME

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

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT

For the Three Months Ended March 31, 2015 and 2014

(Dollars in thousands)

(Unaudited)  

	Unrealized Gains and Losses on Available-for- Sale Securities			Defined Benefit Pension Items			Total
Balance as of December 31, 2013	$	(405	)	$	(1,020	)	$	(1,425	)
Other comprehensive income before reclassifications		193			—			193
Amounts reclassified from accumulated other comprehensive loss		—			—			—
Net current-period other comprehensive income		193			—			193
Balance as of March 31, 2014	$	(212	)	$	(1,020	)	$	(1,232	)
Balance as of December 31, 2014	$	(17	)	$	(1,651	)	$	(1,668	)
Other comprehensive income before reclassifications		88			—			88
Amounts reclassified from accumulated other comprehensive loss		18			—			18
Net current-period other comprehensive income		106			—			106
Balance as of March 31, 2015	$	89		$	(1,651	)	$	(1,562	)

All amounts are net of tax.  

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

RECLASSIFICATION ADJUSTMENTS FROM ACCUMULATED OTHER COMPREHENSIVE LOSS
	For the Three Months Ended March 31,
(Dollars in thousands)	2015			2014
(Unaudited)
Detail about Acumulated Other Comprehensive Income Components	Amount Reclassified from Accumulated Other Comprehensive Loss			Amount Reclassified from Accumulated Other Comprehensive Loss
Net unrealized holding gain - investment securities available-for-sale	$	29		$	—
Income tax expense		(11	)		—
Total, net of tax		18			—
Total reclassifications for the period	$	18		$	—

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

6. LOANS AND ALLOWANCE FOR LOAN LOSSES

The activity in the Company’s allowance for loan losses (“ALLL”) for the three month periods ended March 31, 2015 and 2014 and related asset balances at March 31, 2015 and December 31, 2014 is summarized as follows:

	For the Three Months Ended March 31, 2015
						Faith-
						Based		Residential
				Commercial		Non-		Real					Other
(Dollars in thousands)	Commercial			Real Estate		Profit		Estate			Consumer		Loans			Unallocated		Total
ALLL:
Total ending ALLL balances as of December 31, 2014	$	353		$	579	$	1,234	$	685		$	28	$	265		$	296	$	3,440
For the three months ended March 31, 2015
Charge-offs		—			—		—		—			—		(4	)		—		(4	)
Recoveries		—			—		—		10			—		—			—		10
Provision for loan losses		(82	)		23		206		(106	)		1		(51	)		9		—
Total ending ALLL balances as of March 31, 2015	$	271		$	602	$	1,440	$	589		$	29	$	210		$	305	$	3,446

	For the Three Months Ended March 31, 2014
							Faith-
							Based			Residential
				Commercial			Non-			Real						Other
(Dollars in thousands)	Commercial			Real Estate			Profit			Estate			Consumer			Loans			Unallocated		Total
ALLL:
Total ending ALLL balances as of December 31, 2013	$	184		$	808		$	1,883		$	493		$	19		$	106		$	—	$	3,493
For the three months ended March 31, 2014
Charge-offs		—			—			—			(7	)		(1	)		(6	)		—		(14	)
Recoveries		—			—			—			4			—			3			—		7
Provision for loan losses		(6	)		(109	)		(87	)		122			1			(66	)		145		—
Total ending ALLL balances as of March 31, 2014	$	178		$	699		$	1,796		$	612		$	19		$	37		$	145	$	3,486

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

	March 31, 2015
					Faith
					Based
			Commercial		Non-		Residential				Other
(Dollars in thousands)	Commercial		Real Estate		Profit		Real Estate		Consumer		Loans		Unallocated		Total
ALLL:
Ending ALLL balance attributable to loans:
Individually evaluated for impairment	$	3	$	28	$	227	$	184	$	—	$	—	$	—	$	442
Collectively evaluated for impairment		268		574		1,213		405		29		210		305		3,004
Total ending ALLL balance	$	271	$	602	$	1,440	$	589	$	29	$	210	$	305	$	3,446
Loans:
Loans individually evaluated for impairment	$	3	$	8,993	$	16,454	$	4,024	$	2	$	—	$	—	$	29,476
Loans collectively evaluated for impairment		6,699		31,552		77,736		21,423		1,257		4,554		—		143,221
Total ending loans balance	$	6,702	$	40,545	$	94,190	$	25,447	$	1,259	$	4,554	$	—	$	172,697

	December 31, 2014
					Faith
					Based
			Commercial		Non-		Residential				Other
(Dollars in thousands)	Commercial		Real Estate		Profit		Real Estate		Consumer		Loans		Unallocated		Total
ALLL:
Ending ALLL balance attributable to loans:
Individually evaluated for impairment	$	—	$	11	$	6	$	259	$	—	$	—	$	—	$	276
Collectively evaluated for impairment		353		568		1,228		426		28		265		296		3,164
Total ending ALLL balance	$	353	$	579	$	1,234	$	685	$	28	$	265	$	296	$	3,440
Loans:
Loans individually evaluated for impairment	$	—	$	9,012	$	16,807	$	4,450	$	—	$	—	$	—	$	30,269
Loans collectively evaluated for impairment		7,253		31,051		78,555		22,176		1,232		4,552		—		144,819
Total ending loans balance	$	7,253	$	40,063	$	95,362	$	26,626	$	1,232	$	4,552	$	—	$	175,088

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

The Bank experienced $(6) thousand and $7 thousand in net loan charge-offs/(recoveries) for the three months ended March 31, 2015 and 2014, respectively. Annualized net charge-offs/(recoveries) as a percent of average loan balances outstanding totaled (0.01)% and 0.02% during the three month periods ended March 31, 2015 and 2014, respectively, and 0.06% for the year ended December 31, 2014.

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

A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its ALLL. The composition of the loan portfolio, net of deferred fees and costs, by loan classification as of March 31, 2015 and December 31, 2014 was as follows:

(Dollars in thousands)	March 31, 2015			December 31, 2014
Commercial	$	6,702		$	7,253
Commercial real estate:
Construction		7,487			2,557
Owner occupied		17,633			18,013
Other		15,425			19,493
Faith-based non-profit:
Construction		1,932			6,156
Owner Occupied		88,998			84,499
Other		3,260			4,707
Residential real estate:
First mortgage		18,359			18,995
Multifamily		2,955			3,001
Home equity		4,011			4,124
Construction		122			506
Consumer		1,259			1,232
Other loans		4,554			4,552
Loans, net of deferred fees		172,697			175,088
ALLL		(3,446	)		(3,440	)
Loans, net of ALLL	$	169,251		$	171,648

The Bank has a concentration of loans to faith-based non-profit organizations, in which the Bank has specialized lending experience. As of March 31, 2015, the percentage of loans in this segment, which included construction, real estate secured, and lines of credit, comprised approximately 54.54% of the total loan portfolio and the reserve for these loans was 41.79% of the total allowance. Historically, the Bank has experienced low levels of loan losses in this niche; however, repayment of these loans is generally dependent on voluntary contributions, some of which have been adversely affected by the economic downturn.

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

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

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

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

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

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

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

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

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

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

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

The following tables present loans not past due and the aging of past due loans as of March 31, 2015 and December 31, 2014:

					90 Days
March 31, 2015	30-59 Days		60-89 Days		Or More		Total Past
(Dollars in thousands)	Past Due		Past Due		Past Due		Due		Current		Total
Commercial	$	150	$	—	$	—	$	150	$	6,552	$	6,702
Commercial real estate:
Construction		—		—		—		—		7,487		7,487
Owner occupied		87		69		360		516		17,117		17,633
Other		—		—		3,602		3,602		11,823		15,425
Faith-based non-profit:												—
Construction		—		—		—		—		1,932		1,932
Owner occupied		694		464		1,329		2,487		86,511		88,998
Other		—		—		15		15		3,245		3,260
Residential real estate:												—
First mortgage		740		115		2,456		3,311		15,048		18,359
Multifamily		84		—		—		84		2,871		2,955
Home equity		—		135		25		160		3,851		4,011
Construction		—		—		—		—		122		122
Consumer		40		—		2		42		1,217		1,259
Other loans		—		—		8		8		4,546		4,554
Total	$	1,795	$	783	$	7,797	$	10,375	$	162,322	$	172,697

					90 Days
December 31, 2014	30-59 Days		60-89 Days		Or More		Total Past
(Dollars in thousands)	Past Due		Past Due		Past Due		Due		Current		Total
Commercial	$	3	$	—	$	—	$	3	$	7,250	$	7,253
Commercial real estate:
Construction		—		—		—		—		2,557		2,557
Owner occupied		69		321		42		432		17,581		18,013
Other		25		1,188		3,602		4,815		14,678		19,493
Faith-based non-profit:
Construction		—		—		—		—		6,156		6,156
Owner occupied		1,923		435		674		3,032		81,467		84,499
Other		—		—		15		15		4,692		4,707
Residential real estate:
First mortgage		745		103		3,322		4,170		14,825		18,995
Multifamily		—		—		—		—		3,001		3,001
Home equity		47		—		23		70		4,054		4,124
Construction		—		—		—		—		506		506
Consumer		11		—		—		11		1,221		1,232
Other loans		—		8		—		8		4,544		4,552
Total	$	2,823	$	2,055	$	7,678	$	12,556	$	162,532	$	175,088

At March 31, 2015 and December 31, 2014, the total recorded investment in impaired loans amounted to $29.5 million and $30.7 million, respectively.

The recorded investment and related information for impaired loans is summarized as follows for March 31, 2015, December 31, 2014 and March 31, 2014:

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

	March 31, 2015
							For the Three Months Ended
	Unpaid								Average
	Principal		Recorded		ALLL		Interest		Recorded
(Dollars in thousands)	Balance		Investment		Allocated		Earned		Investment
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction		77		78		—		1		78
Owner occupied		42		42		—		—		42
Other		4,087		3,852		—		4		3,862
Faith based non-profit:
Construction		—		—		—		—		—
Owner occupied		5,717		5,730		—		59		7,747
Other		—		—		—		—		—
Residential real estate:
First mortgage		2,488		2,354		—		59		2,618
Multifamily		—		—		—		—		—
Home equity		125		115		—		1		67
Construction		—		—		—		—		—
Consumer		11		2		—		—		1
Impaired loans with no allowance recorded	$	12,547	$	12,173	$	—	$	124	$	14,415
With an allowance recorded:
Commercial	$	3	$	3	$	3	$	—	$	1
Commercial real estate:
Construction		274		275		1		5		277
Owner occupied		4,748		4,759		27		57		4,779
Other		—		—		—		—		—
Faith based non-profit:
Construction		—		—		—		—		—
Owner occupied		10,737		10,761		227		150		9,061
Other		—		—		—		—		—
Residential real estate:
First mortgage		1,515		1,515		171		—		1,471
Multifamily		—		—		—		—		—
Home equity		43		43		13		—		94
Construction		—		—		—		—		—
Consumer		—		—		—		—		—
Impaired loans with allowance recorded	$	17,320	$	17,356	$	442	$	212	$	15,683
Impaired loans	$	29,867	$	29,529	$	442	$	336	$	30,098

21

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

	December 31, 2014
	Unpaid								Average
	Principal		Recorded		ALLL		Interest		Recorded
(Dollars in thousands)	Balance		Investment		Allocated		Earned		Investment
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction		77		78		—		6		186
Owner occupied		42		42		—		16		2,818
Other		3,855		3,872		—		100		3,017
Faith based non-profit:
Construction		—		—		—		—		—
Owner occupied		9,744		9,764		—		558		9,937
Other		—		—		—		—		40
Residential real estate:
First mortgage		2,894		2,881		—		172		2,717
Multifamily		—		—		—		—		—
Home equity		20		20		—		2		70
Construction		—		—		—		—		—
Consumer		—		—		—		—		8
Impaired loans with no allowance recorded	$	16,632	$	16,657	$	—	$	854	$	18,793
With an allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction		278		279		1		23		176
Owner occupied		4,760		4,800		10		200		1,164
Other		—		—		—		—		1,714
Faith based non-profit:
Construction		—		—		—		—		—
Owner occupied		7,063		7,361		6		327		6,801
Other		—		—		—		—		—
Residential real estate:
First mortgage		1,426		1,427		242		76		644
Multifamily		—		—		—		—		—
Home equity		145		145		17		6		112
Construction		—		—		—		—		—
Consumer		—		—		—		—		—
Impaired loans with allowance recorded	$	13,672	$	14,012	$	276	$	632	$	10,611
Impaired loans	$	30,304	$	30,669	$	276	$	1,486	$	29,404

22

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

	March 31, 2014
							For the Three Months Ended
	Unpaid								Average
	Principal		Recorded		ALLL		Interest		Recorded
(Dollars in thousands)	Balance		Investment		Allocated		Earned		Investment
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction		359		361		—		7		362
Owner occupied		3,159		3,159		—		32		3,171
Other		867		869		—		6		3,186
Faith based non-profit:
Construction		—		—		—		—		—
Owner occupied		8,502		8,518		—		128		11,361
Other		—		—		—		—		—
Residential real estate:
First mortgage		2,750		2,744		—		19		2,931
Multifamily		—		—		—		—		—
Home equity		82		83		—		1		80
Construction		—		—		—		—		—
Consumer		8		8		—		—		10
Impaired loans with no allowance recorded	$	15,727	$	15,742	$	—	$	193	$	21,101
With an allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction		—		—		—		—		—
Owner occupied		—		—		—		—		—
Other		4,660		4,676		5		49		2,338
Faith based non-profit:
Construction		—		—		—		—		—
Owner occupied		8,075		8,089		746		102		5,794
Other		—		—		—		—		—
Residential real estate:
First mortgage		545		523		196		3		573
Multifamily		—		—		—		—		—
Home equity		78		78		19		1		105
Construction		—		—		—		—		—
Consumer		—		—		—		—		—
Impaired loans with allowance recorded	$	13,358	$	13,366	$	966	$	155	$	8,810
Impaired loans	$	29,085	$	29,108	$	966	$	348	$	29,911

23

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

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

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

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

· Changes in lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices;

· Changes in national economic and business conditions and developments and the effect of unemployment on African Americans, who are the majority of our customers;

· Changes in the nature and volume of the loan portfolio;

· Changes in the experience, ability, and depth of lending management and staff;

· Changes in trends of the volume and severity of past due and classified loans; and changes in trends in the volume of non-accrual loans, troubled debt restructurings and classified loans;

· Changes in the quality of the loan review system and the degree of oversight by the Bank’s Board of Directors;

· The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and

· The effect of external factors such as competition and legal and regulatory requirements.

Management has developed, from historical loan and economic information, quantitative drivers for certain qualitative factors. Management has identified which factors, by nature, are subjective, such as lending policies, competition and regulatory requirements. The quantitative drivers of qualitative factors, to which different weights are assigned based on management’s judgment, are reviewed and updated quarterly based on an updated 4-year rolling data for periods beginning December 31, 2014 and previously an eight-quarter rolling data. The quantitative loss history is based on a 4-year rolling history of losses incurred by different loan types within the loan portfolio for periods beginning December 31, 2014 and previously an eight-quarter rolling history of losses. The change in methodology resulted in a $375 thousand increase in the ALLL at December 31, 2014.

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

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

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

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

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

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

Reserve for Unfunded Commitments - The Unfunded Reserve is a component of other liabilities and represents the estimate for probable credit losses inherent in unfunded commitments to extend credit. Unfunded commitments to extend credit include loans with usable balances available, new commitments to lend that are not yet funded, and standby and commercial letters of credit. The process used to determine the Unfunded Reserve is consistent with the process for determining the quantitative portion of the ASC 450 reserve, as adjusted for estimated funding probabilities and historical eight quarter rolling quantitative loan loss factors. The level of the Unfunded Reserve is adjusted by recording an expense or recovery in other noninterest expense. The balances of $38 thousand and $34 thousand for March 31, 2015 and December 31, 2014, respectively, are reflected in other liabilities on the Consolidated Balance Sheets.

The following table presents the recorded investment in non-accrual loans and loans past due over 90 days still on accrual by class of loans as of March 31, 2015 and December 31, 2014, respectively:

					90 Days
					or More
					Past Due
March 31, 2015					Still
(Dollars in thousands)	Non-accrual		Number		Accruing		Number
Commercial	$	3		1	$	—		—
Commercial real estate:
Construction		—		—		—		—
Owner occupied		42		1		318		1
Other		3,628		4		—		—
Faith-based non-profit:
Construction		—		—		—		—
Owner occupied		22		—		1,307		1
Other		—		1		15		7
Residential real estate:
First mortgage		3,405		35		81		4
Multifamily		—		—		—		—
Home equity		158		5		7		1
Construction		—		—		—		—
Consumer		2		1		—		—
Other loans		—		—		8		1
Total	$	7,260		48	$	1,736		15

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

					90 Days
					or More
					Past Due
December 31, 2014					Still
(Dollars in thousands)	Non-accrual		Number		Accruing		Number
Commercial	$	—		—	$	—		—
Commercial real estate:
Construction		—		—		—		—
Owner occupied		42		1		—		—
Other		2,860		3		771		1
Faith-based non-profit:
Construction		—		—		—		—
Owner occupied		133		2		541		2
Other		—		—		15		1
Residential real estate:
First mortgage		2,720		33		1,696		8
Multifamily		—		—		—		—
Home equity		165		7		—		—
Construction		—		—		—		—
Consumer		—		—		—		1
Other loans		—		—		—		—
Total	$	5,920		46	$	3,023		13

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

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

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

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

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

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

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

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

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

The following is a breakdown of loans by risk categories at March 31, 2015 and December 31, 2014:

March 31, 2015
(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	763	$	3,144	$	2,795	$	—	$	6,702
Commercial real estate:
Construction		7,136		—		351		—		7,487
Owner occupied		17,226		296		111		—		17,633
Other		10,245		444		4,736		—		15,425
Faith-based non-profit:
Construction		1,932		—		—		—		1,932
Owner occupied		73,808		8,027		7,163		—		88,998
Other		3,260		—		—		—		3,260
Residential real estate:
First mortgage		14,247		81		4,031		—		18,359
Multifamily		2,864		31		60		—		2,955
Home equity		3,800		—		211		—		4,011
Construction		122		—		—		—		122
Consumer		1,240		13		6		—		1,259
Other loans		4,554		—		—		—		4,554
Total	$	141,197	$	12,036	$	19,464	$	—	$	172,697

December 31, 2014
(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	1,279	$	3,159	$	2,815	$	—	$	7,253
Commercial real estate:
Construction		2,202		—		355		—		2,557
Owner occupied		17,596		306		111		—		18,013
Other		14,263		457		4,773		—		19,493
Faith-based non-profit:
Construction		6,156		—		—		—		6,156
Owner occupied		68,963		6,160		9,376		—		84,499
Other		4,707		—		—		—		4,707
Residential real estate:
First mortgage		14,328		88		4,579		—		18,995
Multifamily		2,910		31		60		—		3,001
Home equity		3,910		—		214		—		4,124
Construction		506		—		—		—		506
Consumer		1,213		14		5		—		1,232
Other loans		4,552		—		—		—		4,552
Total	$	142,585	$	10,215	$	22,288	$	—	$	175,088

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

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

The following tables present TDRs as of March 31, 2015 and December 31, 2014.

	Troubled Debt Restructurings
	March 31, 2015
					Non-accrual				Total
	Accrual Status				Status				Modifications
(Dollars in thousands)	Number		Amount		Number		Amount		Number		Amount
Commercial real estate:
Construction		2	$	351		—	$	—		2	$	351
Owner occupied		4		4,748		—		—		4		4,748
Other		2		223		2		2,830		4		3,053
Faith-based non-profit:
Owner occupied		20		16,432		1		22		21		16,454
Other		—		—		—		—		—		—
Residential real estate:
First mortgage		3		147		2		155		5		302
Total		31	$	21,901		5	$	3,007		36	$	24,908

	Troubled Debt Restructurings
	December 31, 2014
					Non-accrual				Total
	Accrual Status				Status				Modifications
(Dollars in thousands)	Number		Amount		Number		Amount		Number		Amount
Commercial real estate:
Construction		2	$	355		—	$	—		2	$	355
Owner occupied		4		4,760		—		—		4		4,760
Other		2		224		2		2,830		4		3,054
Faith-based non-profit:
Owner occupied		20		16,391		1		22		21		16,413
Other		—		—		—		—		—		—
Residential real estate:
First mortgage		1		23		2		164		3		187
Total		29	$	21,753		5	$	3,016		34	$	24,769

Two loans totaling $129 thousand were restructured during the three and 12 months ended March 31, 2015. All loans restructured during that period were paying as restructured as of March 31, 2015. No loans were restructured during the three months ended March 31, 2014. Loans totaling $3.1 million were restructured during the 12 months ended March 31, 2014. One loan totaling $2.6 million was placed on non-accrual during the 12 months ended March 31, 2014 due to delinquency. All loans restructured during that period were paying as restructured as of March 31, 2014.

The following table shows loans newly restructured during the three months ended March 31, 2015. There were no restructures during the three months ended March 31, 2014.

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

March 31, 2015			Pre-modification Outstanding		Post-Modification Outstanding
(Dollars in thousands)	Number of loans		Recorded Investment		Recorded Investment
Below market interest rates
Residential real estate:
First mortgage		2	$	129	$	125
Total		2	$	129	$	125

There were no loans modified as TDRs and with a payment default, with the payment default occurring within 12 months of the restructure date, and the payment default occurring during the three months ended March 31, 2015 and 2014. The Company defines default as the loan becoming 90 days or more past due, foreclosed upon or charged-off.

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

7. OTHER REAL ESTATE OWNED (“OREO”)

At the time of foreclosure, real estate is recorded at fair market value based on appraised value less estimated costs to sell, such as realtor, legal and recording fees and expenses. Subsequent to foreclosure, properties are appraised annually and adjusted to the lower of carrying amount or fair market value less estimated costs to sell. At March 31, 2015 and December 31, 2014, OREO totaled $2.8 million and $3.1 million, respectively. At March 31, 2015, the Company $855 thousand of OREO was comprised of residential real estate foreclosed properties. Also as of March 31, 2015 $2.0 million of consumer mortgage loans collateralized by residential real estate property were in the process of foreclosure according to local requirements of the applicable jurisdictions.

8. BORROWINGS

Borrowings as of March 31, 2015 consisted of an FHLB borrowing of $0.7 million with an interest rate of 0.50% that matures in 2020, and capital leases of $0.2 million with a blended interest rate of 1.76%. Borrowings as of December 31, 2014 consisted of an FHLB borrowing of $0.7 million with an interest rate of 0.50% that matures in 2020 and capital leases of $0.1 million with a blended rate of 1.60%.

The Company has federal funds lines of credit with three correspondent banks totaling $10.0 million at March 31, 2015 and December 31, 2014. The Company periodically tests its federal funds lines of credit with its correspondent banks. These lines were tested during the three months ended March 31, 2015. The Company had unused borrowing capacity with the FHLB of $6.1 million as of March 31, 2015 and $6.6 million as of December 31, 2014, respectively. In addition, the Company has the ability to borrow from the FRB to the extent of investment securities pledged to the FRB.

9. COMMITMENTS AND CONTINGENCIES

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

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

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

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

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

Financial instruments whose contract amounts represent credit risk as of March 31, 2015 and December 31, 2014, respectively, are commitments to extend credit (including availability of lines of credit), and standby letters of credit. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral deemed necessary by the Bank is based on management’s credit evaluation and underwriting guidelines for the particular loan.

Commitments outstanding at March 31, 2015 are summarized in the following table:

(Dollars in thousands)	Commercial letters of credit		Other loan commitments		Total commitments
Less than one year	$	177	$	12,842	$	13,019
One to three years		250		5,294		5,544
Three to five years		—		2,508		2,508
More than five years		93		1,353		1,446
Total	$	520	$	21,997	$	22,517

10. FAIR VALUE MEASUREMENT

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

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

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

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

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.

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

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

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

Assets and Liabilities Measured on a Recurring Basis:

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

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

(Dollars in thousands)			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Description	March 31, 2015		(Level 1)		(Level 2)		(Level 3)
Recurring:
U.S. Agencies	$	29,415	$	—	$	29,415	$	—
MBS
Residential		44,230		—		44,230		—
Municipals
North Carolina		1,015		—		1,015		—
Mortgage servicing rights		21		—		—		21
Total	$	74,681	$	—	$	74,660	$	21

Assets measured at fair value on a recurring basis as of December 31, 2014 were:

(Dollars in thousands)			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Description	December 31, 2014		(Level 1)		(Level 2)		(Level 3)
Recurring:
U.S. Agencies	$	12,339	$	—	$	12,339	$	—
MBS
Residential		56,355		—		56,355		—
Municipals
North Carolina		1,009		—		1,009		—
Mortgage servicing rights		22		—		—		22
Total	$	69,725	$	—	$	69,703	$	22

The table below displays changes in all recurring Level 3 Assets from December 31, 2014 to March 31, 2015 and December 31, 2013 to December 31, 2014.

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Notes to Consolidated Financial Statements, continued

(Dollars in thousands)	Mortgage Servicing Rights
Beginning balance (December 31, 2014)	$	22
Amortization		1
Ending Balance (March 31, 2015)	$	21

(Dollars in thousands)	Mortgage Servicing Rights
Beginning balance (December 31, 2013)	$	25
Amortization		3
Ending Balance (December 31, 2014)	$	22

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

Assets and Liabilities Measured on a Nonrecurring Basis:

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

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

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

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

Assets measured at fair value on a nonrecurring basis as of March 31, 2015 and December 31, 2014 were:

(Dollars in thousands)			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Description	March 31, 2015		(Level 1)		(Level 2)		(Level 3)
Nonrecurring:
OREO	$	2,772	$	—	$	—	$	2,772
Impaired loans:
Commercial real estate		8,978		—		—		8,978
Faith-based non-profit		16,264		—		—		16,264
Residential real estate		3,843		—		—		3,843
Consumer		2		—		—		2
Total	$	31,859	$	—	$	—	$	31,859

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

(Dollars in thousands)			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Description	December 31, 2014		(Level 1)		(Level 2)		(Level 3)
Nonrecurring:
OREO	$	3,069	$	—	$	—	$	3,069
Impaired loans:
Commercial real estate		9,060		—		—		9,060
Faith-based non-profit		17,119		—		—		17,119
Residential real estate		4,214		—		—		4,214
Total	$	33,462	$	—	$	—	$	33,462

Quantitative Information about Level 3 Fair Value Measurements

(Dollars in thousands)				Significant	Significant
			Valuation	Unobservable	Unobservable
Description	March 31, 2015		Technique	Inputs	Input Value
Nonrecurring:
OREO	$	2,772	discounted appraisals	collateral discounts		6-20%
Impaired loans		29,087	discounted appraisals	collateral discounts		6-20%
Total	$	31,859

(Dollars in thousands)				Significant	Significant
			Valuation	Unobservable	Unobservable
Description	December 31, 2014		Technique	Inputs	Input Value
Nonrecurring:
OREO	$	3,069	discounted appraisals	collateral discounts		6-20%
Impaired loans		30,393	discounted appraisals	collateral discounts		6-20%
Total	$	33,462

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 2014 or 2015.

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

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

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

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

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

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Notes to Consolidated Financial Statements, continued

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

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

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

As of March 31, 2015 and December 31, 2014, the carrying amounts and associated estimated fair value of financial assets and liabilities of the Company are as follows:

	March 31, 2015
(Dollars in thousands)	Carrying		Estimated
	Amount		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	32,810	$	32,810	$	32,810	$	—	$	—
Investment securities available for sale		74,660		74,660		—		74,660		—
Loans, net of allowances for loan losses		169,251		172,915		—		—		172,915
Accrued interest receivable		726		726		726		—		—
Liabilities:
Non-maturity deposits	$	122,162	$	122,162	$	122,162	$	—	$	—
Maturity deposits		133,549		132,871		—		132,871		—
Other borrowings		894		841		—		—		841
Accrued interest payable		81		81		81		—		—

	December 31, 2014
(Dollars in thousands)	Carryingt		Estimated
	Amount		Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	35,574	$	35,574	$	35,574	$	—	$	—
Investment securities available for sale		69,703		69,703		—		69,703		—
Loans, net of allowances for loan losses		171,648		175,165		—		—		175,165
Accrued interest receivable		816		816		816		—		—
Liabilities:
Non-maturity deposits	$	119,383	$	119,383	$	119,383	$	—	$	—
Maturity deposits		136,477		135,965		—		135,965		—
Other borrowings		784		734		—		—		734
Accrued interest payable		76		76		76		—		—

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

INTRODUCTION

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements represent expectations and beliefs of the Company and Mechanics and Farmers Bank (the “Bank”), including but not limited to the Company’s operations, performance, financial condition, growth or strategies. These forward-looking statements are identified by words such as “expects”, “anticipates”, “should”, “estimates”, “believes” and variations of these words and other similar statements. For this purpose, any statements contained in this quarterly Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. These forward-looking statements involve estimates, assumptions, risks and uncertainties that could cause actual results to differ materially from current projections depending on a variety of important factors, including but not limited to those risk factors identified in the section headed "Risk Factors", beginning on page 10 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the Securities and Exchange Commission (the "SEC") on March 18, 2015 (the "Annual Report"). The Company undertakes no obligation to update any forward-looking statement, whether written or not, which may be made from time to time by or on behalf of the Company.

IMPACT OF RECENT DEVELOPMENTS ON THE BANKING INDUSTRY

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act was intended primarily to overhaul the financial regulatory framework following the global financial crisis and has impacted, and will continue to impact, all financial institutions including the Company and the Bank. The Dodd-Frank Act contains provisions that have, among other things, established a Bureau of Consumer Financial Protection (the "CFPB"), established a systemic risk regulator, consolidated certain federal bank regulators and imposed increased corporate governance and executive compensation requirements on financial institutions. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations and to prepare numerous studies and reports for the U.S. Congress. The federal agencies are given significant discretion in drafting and implementing regulations. Many regulations have been promulgated, and more additional regulations are expected to be issued in 2015 and thereafter. Consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

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

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

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

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EXECUTIVE SUMMARY

As discussed in more detail below, the following is an executive summary of the Company’s significant results for the three months ended March 31, 2015.

· Net income (loss) before preferred stock dividends and accretion was $(169) thousand and $277 thousand for the three months ended March 31, 2015 and 2014, respectively. Net income (loss) available to common stockholders was $(228) thousand or $(0.11) per share and $218 thousand or $0.11 per share for the quarters ended March 31, 2015 and 2014, respectively.

· Net interest income totaled $2.4 million and $2.7 million for the three months ended March 31, 2015 and 2014, respectively. The net interest margin on a tax equivalent (“TE”) basis for the three months ended March 31, 2015 was 3.40% compared to 3.76% for the three months ended March 31, 2014, a decrease of 36 basis points (“bps”).

· The balance of the ALLL as a percentage of loans outstanding increased slightly to 2.00% as of March 31, 2015 compared to 1.96% as of December 31, 2014. Loans outstanding decreased $2.4 million from $175.1 million at December 31, 2014 to $172.7 million at March 31, 2015. Net charge-offs (recoveries) were $(6) thousand and $7 thousand during the three months ended March 31, 2015 and 2014, respectively. There was no provision for loan losses for the quarters ended March 31, 2015 or 2014.

· Noninterest income decreased by $62 thousand during the first quarter of 2015 compared to the same period in 2014 due to the realization of a $55 thousand death benefit gain on a bank-owned life insurance (“BOLI”) policy during 2014 compared to none during 2015, and a $33 thousand decrease in service charge income during 2015 as compared to 2014, partially off-set with $29 thousand realized gains on sales of investments during 2015 compared to none during the comparable period of 2014.

· Noninterest expense increased $283 thousand in the first quarter of 2015 compared to the same period in 2014 primarily due to increases in salaries and benefits, information technology, net OREO expenses and other miscellaneous expenses.

· Preferred stock dividends and accretion in the quarters ended March 31, 2015 and 2014 were $59 thousand. The dividend yield for the three months ended March 31, 2015 and 2014 was 2.00%.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

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

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

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

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

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

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FINANCIAL CONDITION

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

Assets. Total assets decreased from $298.4 million at December 31, 2014 to $297.8 million at March 31, 2015. Cash and cash equivalents decreased from $35.6 million at December 31, 2014 to $32.8 million at March 31, 2015. Investment securities increased by $5.0 million to $74.7 million at March 31, 2015 primarily due to net purchases of investments. Gross loans decreased $2.4 million primarily due to loan payoffs. OREO decreased slightly from $3.1 million at December 31, 2014 to $2.8 million at March 31, 2015. Other assets decreased $55 thousand during the three-month period primarily due to amortization of prepaid expenses.

Liabilities. Total liabilities decreased from $261.8 million at December 31, 2014 to $261.3 million at March 31, 2015. The change was primarily driven by a $440 thousand decrease in Other liabilities consisting of sundry items such as accrued salaries payable and deferred compensation expenses among others. Interest-bearing deposits decreased $3.1 million, while noninterest-bearing deposits increased $2.9 million. The decrease in interest-bearing deposits was primarily the result of decreases in total time deposits and savings. We believe a significant portion of that decrease to be temporary. Other borrowings increased by $110 thousand due to purchases of equipment under long-term lease, partially offset by principal payments on long-term leases and other long-term debt.

Stockholders’ Equity. Total consolidated stockholders’ equity totaled $36.5 million at March 31, 2015 and $36.6 at December 31, 2014. For the three months ended March 31, 2015, retained earnings decreased from $17.8 million to $17.6 million. The net decrease in retained earnings was comprised of $169 thousand net loss, and dividends and accretion on preferred stock of $59 thousand. The Company did not pay a common stock dividend during the first three months of 2015. Accumulated other comprehensive loss represents the unrealized loss on available-for-sale securities and the unrealized loss related to the deferred pension liability, net of deferred taxes. Accumulated other comprehensive loss was in a net unrealized loss position of $1.6 million and $1.7 million at March 31, 2015 and December 31, 2014, respectively.

RESULTS OF OPERATIONS

Three months ended March 31, 2015 compared with three months ended March 31, 2014

General. Net loss before preferred stock dividends was $169 thousand for the three months ended March 31, 2015 compared to net income of $277 thousand for the three months ended March 31, 2014. Preferred stock dividends and accretion in the quarters ended March 31, 2015 and 2014 were $59 thousand. Dividend yield on the Company’s preferred stock for the three months ended March 31, 2015 and 2014 was 2.00%. Net income (loss) available to common stockholders was $(228) thousand or $(0.11) per share and $218 thousand or $0.11 per share for the three months ended March 31, 2015 and 2014, respectively.

Net Interest Income. Net interest income, the difference between total interest income from loans and investments, and total interest expenses from deposits and borrowings, is the Company’s principal source of earnings. The amount of net interest income is determined by the volume of interest-earning assets, the level of rates earned on those assets, and the volume and cost of underlying funding from deposits and borrowings. Net interest income decreased $261 thousand, or 9.80%, to $2.4 million for the three months ended March 31, 2015 compared to the comparable period of 2014. Average earning assets for the three months ended March 31, 2015 were $283.1 million, down 0.32% compared to $284.0 million for the three months ended March 31, 2014. Net interest margin is the total of net interest income divided by average earning assets. On a fully TE basis, net interest margin was 3.40% and 3.76% for the three months ended March 31, 2015 and 2014, respectively. Net interest spread is the difference between rates earned on interest-earning assets and the interest paid on deposits and borrowed funds. The net interest spread decreased 35 bps to 3.32% for the three months ended March 31, 2015 from 3.67% for the three months ended March 31, 2014. The yield on average interest-earning assets was 3.64% and 4.00% for the three months ended March 31, 2015 and 2014, respectively, a decrease of 36 bps, while the interest rate on average interest-bearing liabilities for those periods was 0.32% and 0.33%, respectively,

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

Interest income decreased 9.24% for the three months ended March 31, 2015 to $2.6 million from $2.8 million for the three months ended March 31, 2014. The average balances of loans, which had overall yields of 5.06% and 5.29% for the three months ended March 31, 2015 and 2014, respectively, decreased from $188.6 million for the three months ended March 31, 2014 to $174.4 million for the three months ended March 31, 2015. The average balance of investment securities increased $5.8 million from $65.1 million for the three months ended March 31, 2014 to $70.9 million for the three months ended March 31, 2015. The TE yield on investment securities decreased from 2.04% for the three months ended March 31, 2014 to 1.89% for the three months ended March 31, 2015. The average balances of federal funds and other short-term investments increased from $30.3 million for the three months ended March 31, 2014 to $37.8 million for the three months ended March 31, 2015. The average yield in this category was 0.38% and 0.22% during the first quarters of 2015 and 2014, respectively.

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Interest expense decreased 0.57% for the three months ended March 31, 2015 to $173 thousand from $174 thousand for the three months ended March 31, 2014. Average total interest-bearing deposits, including savings, interest-bearing demand deposits and time deposits increased from $211.6 million for the three months ended March 31, 2014 to $213.6 million for the three months ended March 31, 2015. The average rate paid on interest-bearing deposits decreased one bps from 0.33% for the three months ended March 31, 2014 to 0.32% for the three months ended March 31, 2015.

The average rate on borrowings increased from 0.48% for the three months ended March 31, 2014 to 0.51% for the three months ended March 31, 2015. The average borrowings outstanding decreased from $838 thousand during the three months ended March 31, 2014 to $786 thousand during the three months ended March 31, 2015. The interest expense on borrowed funds remained unchanged at $1 thousand for the first quarters of 2015 and 2014.

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 March 31, 2015 and 2014

(Dollars in thousands)	2015									2014
	Average Balance			Amount Earned/Paid			Average |Rate			Average Balance			Amount Earned/Paid			Average Rate
Assets
Loans receivable (1):	$	174,360		$	2,205			5.06	%	$	188,616		$	2,493			5.29	%
Taxable securities		70,517			330			1.87			64,223			319			1.99
Nontaxable securities(2)		420			4			6.08			888			8			5.81
Federal funds sold and other interest on short-term investments		37,792			36			0.38			30,277			17			0.22
Total interest earning assets		283,089			2,575			3.64	%		284,004			2,837			4.00	%
Cash and due from banks		2,452									3,125
Other assets		21,125									21,002
Allowance for loan losses		(3,439	)								(3,489	)
Total assets	$	303,227								$	304,642
Liabilities and Equity
Savings deposits	$	57,366		$	16			0.11	%	$	51,910		$	16			0.12	%
Interest-bearing demand deposits		21,792			4			0.07			21,808			4			0.07
Time deposits		134,397			152			0.45			137,873			153			0.44
Total interest-bearing deposits		213,555			172			0.32			211,591			173			0.33
Borrowed funds		786			1			0.51			838			1			0.48
Total interest-bearing liabilities		214,341			173			0.32	%		212,429			174			0.33	%
Noninterest-bearing deposits		46,047									51,304
Other liabilities		6,218									4,570
Total liabilities		266,606									268,303
Stockholders' equity		36,621									36,339
Total liabilities and stockholders' equity	$	303,227								$	304,642
Net interest income				$	2,402								$	2,663
Non-taxable securities					4									8
Tax equivalent adjustment (3)					2									5
Tax equivalent net interest income				$	2,404								$	2,668			`
Net interest spread (4)								3.32	%								3.67	%
Net interest margin (5)					3.40	%								3.76	%

(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 37.30% for 2015 and 37.96% for 2014.

(3) The tax equivalent adjustment is computed using a  blended tax rate of 37.30% for 2015 and 37.96% for 2014.

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

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

Provision for loan losses. There was no provision for loan losses during the first quarter of 2015 or 2014.

Noninterest Income. Noninterest income decreased 13.69% or $62 thousand for the three months ended March 31, 2015 compared to the three months ended March 31, 2014. Service charge income decreased by $33 thousand as a result of lower customer based activities. Rental income decreased by $5 thousand for the three months ended March 31, 2015 when compared to the same period in 2014. The decrease in rental income was driven by lower occupancy and occupancy rates during the first quarter of 2015 as compared to the same period in 2014. Other income decreased $52 thousand from March 31, 2014 to March 31, 2015. During the first quarter of 2014, the Company realized a $55 thousand gain on a BOLI policy; no such gain was recognized during the first quarter of 2015. During the first quarter of 2015, the Company realized $29 thousand in gains on sales of investments compared to none during the comparable period of 2014, which partially offset the aforementioned decreases.

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 increased 10.47% to $3.0 million for the three months ended March 31, 2015 from $2.7 million for the three months ended March 31, 2014.

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Salaries and employee benefits expenses for the three months ended March 31, 2015 and 2014 were $1.3 million.

Occupancy expense decreased by $12 thousand during the three months ended March 31, 2015 from the same period in 2014. The decrease was primarily due to lower security and rental expenses during the more recent period.

Directors’ fees increased by $2 thousand or 3.64% from $55 thousand in the first quarter of 2014 to $57 thousand in the corresponding 2015 period as a result of additional committee meetings.

Professional fees decreased by $38 thousand or 18.72% from $203 thousand in the first quarter of 2014 to $165 thousand in the corresponding period of 2015 primarily as a result of reductions in the utilization of consultants.

Information technology costs increased by 8.29% or $17 thousand to $222 thousand in the first quarter of 2015, compared to the comparable period in 2014.

FDIC deposit insurance expense decreased from $149 thousand for the three months ended March 31, 2014 to $143 thousand for the three months ended March 31, 2015. The decrease represents lower FDIC insurance premiums related to the composition and outstanding average deposit balances.

Net OREO expenses increased $273 thousand from $44 thousand in the first quarter of 2014 to $317 thousand in the corresponding 2015 period. Principally, write-downs during the 2015 period increased by $194 thousand to $215 thousand compared to $21 thousand during the corresponding 2014 period and expenses associated with maintaining OREO increased from $51 thousand during the 2014 period to $123 thousand during 2015, primarily attributable to mold abatement on a property.

Delivery expenses decreased from $46 thousand for the quarter ended March 31, 2014 to $31 thousand for the quarter ended March 31, 2015. The decrease reflects outsourcing of statement rendering to a third party.

Other expenses increased $19 thousand for the three months ended March 31, 2015 from the three months ended March 31, 2014. The increase in other expenses was primarily driven by a $56 thousand increase in loan related expenses, partially offset with decreases in other miscellaneous expenses.

Provision for Income Taxes. The Company recorded an income tax expense (benefit) of $(23) thousand and $137 thousand for the three months ended March 31, 2015 and 2014, respectively. The overall effective rate was 11.98% and 33.09% for the three months ended March 31, 2015 and 2014, respectively. The decrease in the effective tax rate during 2015 was largely driven by a reduction in state income tax rates and decreased taxable income.

ASSET QUALITY

ALLL. The provision for loan losses is the amount charged against earnings, to establish an adequate allowance for loan losses. Loan losses and recoveries are charged to or credited to this allowance, rather than reported as a direct expense or recovery. As of March 31, 2015 and December 31, 2014, the allowance for loan losses was $3.4 million, which represented approximately 2.00% and 1.96% of total loans outstanding on those respective dates.

Nonperforming assets, defined as loans 90 days and over past due, non-accruing loans plus OREO and other repossessed assets, at March 31, 2015 were 3.95% of total assets compared to 4.03% at December 31, 2014.

Of the non-accruing loans totaling $7.3 million at March 31, 2015, 99.93% of the outstanding balance is secured by real estate, which management believes mitigates the risk of loss. The recorded investment in TDRs in compliance with their modified terms totaled $21.7 million or 87.07% of total recorded investment in TDRs at March 31, 2015. GAAP does not provide specific guidance on when a loan may be returned to accrual status. Federal banking regulators have provided guidance that interest on impaired loans, including TDRs, should only be recorded when there has been a sustained period of repayment performance, the loan is well secured, and collection under any revised terms is assessed as probable. The Company follows this Federal banking regulators guidance.

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

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Past due loans decreased from $12.6 million at December 31, 2014 to $10.4 million at March 31, 2015. Approximately $2.2 million and $3.5 million of past due loans represent loans that had matured and were in the process of being renewed at March 31, 2015 and December 31, 2014, respectively.

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 32.69% liquidity ratio is the sum of cash, overnight funds, and un-pledged, marketable securities divided by the sum of deposits and short-term borrowings (less the full amount of pledged deposits). Management believes that core deposit activity, $6.1 million in available borrowing capacity from the FHLB of Atlanta at March 31, 2015, and Fed Funds accommodations of $10.0 million will be adequate to meet the short-term and long-term liquidity needs of the Company. The Company had $652 thousand outstanding from the FHLB as of March 31, 2015. The maximum outstanding balance from FHLB at any time during the first three months of 2015 was $658 thousand. The Company periodically draws on its Fed Funds accommodations to test the lines availability.

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

Capital Resources

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

In July 2013, the Board of Governors of the Federal Reserve System and the FDIC issued final rules implementing the Basel III regulatory capital framework and related Dodd-Frank Act requirements. The final rules revise minimum capital requirements and adjust prompt corrective action thresholds. The final rules revise the regulatory capital elements, add a new Common Equity Tier 1 capital ratio, and increase the minimum Tier 1 capital ratio requirement. The final rules also permit certain banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income and implement a new capital conservation buffer. The final rules took effect for community banks on January 1, 2015, subject to a transition period for certain parts of the rules. 

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

The final rules implementing the Basel III regulatory capital framework are complex and subject to interpretation. While management can give no assurance that a regulatory entity will not interpret the rules differently, management does not believe that any differences in interpretation will result in a material impact on capital ratios.

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The March 31, 2015 and December 31, 2014 regulatory capital levels of the Company and Bank compared to the regulatory standards were:

	March 31, 2015
						For Capital
						Adequacy					To Be Well
(Dollars in thousands)	Actual					Purposes					Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk weighted assets)
Company	$	40,021		19.72	%	$	16,238		8.00	%		n/a		n/a
Bank		39,065		19.27			16,219		8.00		$	20,274		10.00	%
Tier 1 (to risk weighted assets)
Company	$	37,472		18.46	%	$	12,179		6.00	%		n/a		n/a
Bank		36,520		18.01			12,164		6.00		$	16,219		8.00	%
Common Equity Tier 1
Company	$	26,070		12.84		$	9,134		4.50	%		n/a		n/a
Bank		36,520		18.01			9,123		4.50		$	13,178		6.50	%
Tier 1 (to average total assets)
Company	$	37,472		12.38	%	$	12,105		4.00	%		n/a		n/a
Bank		36,520		12.08			12,097		4.00		$	15,121		5.00	%

	December 31, 2014
						For Capital
						Adequacy					To Be Well
(Dollars in thousands)	Actual					Purposes					Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk weighted assets)
Company	$	38,101		19.03	%	$	16,014		8.00	%		n/a		n/a
Bank		36,991		18.50			15,997		8.00		$	19,996		10.00	%
Tier 1 (to risk weighted assets)
Company	$	35,587		17.78	%	$	8,007		4.00	%		n/a		n/a
Bank		34,479		17.24			7,999		4.00		$	11,998		6.00	%
Tier 1 (to average total assets)
Company	$	35,587		11.90	%	$	11,959		4.00	%		n/a		n/a
Bank		34,479		11.54			11,953		4.00		$	14,941		5.00	%

Item 4 — Controls and Procedures

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

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

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PART II

OTHER INFORMATION

Item 1 - Legal Proceedings

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

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ITEM 6. EXHIBITS
The following exhibits are filed with or incorporated by reference into this report.
Exhibit No.	Description of Exhibit
Exhibit 3(i)(a)	Amended and Restated Articles of Incorporation of the Company, incorporated by reference to Exhibit 3(i) to the Form 10-QSB for the quarter ended September 30, 1999, filed with the SEC on November 12, 1999.
Exhibit 3(i)(b)	Articles of Amendment, adopted by the Shareholders of the Company on May 3, 2000, filed with the North Carolina Department of the Secretary of State on July 12, 2000, and incorporated by reference to Exhibit 3(v) to the Form 10KSB for the year ended December 31, 2005, filed with the SEC on March 31, 2006.
Exhibit 3(i)(c)	Articles of Amendment, adopted by the Shareholders of the Company on June 9, 2009, filed with the North Carolina Department of the Secretary of State on June 11, 2009, and incorporated by reference to Exhibit 4.1 to the Form 8-K filed with the SEC on June 26, 2009.
Exhibit 3(i)(d)	Articles of Amendment, adopted by the Board of Directors of the Company on June 10, 2009, filed with the North Carolina Department of the Secretary of State on June 25, 2009, and incorporated by reference to Exhibit 4.2 to the Form 8-K filed with the SEC on June 26, 2009.
Exhibit 3(i)(e)	Articles of Amendment, adopted by the Board of Directors of the Company on July 27, 2010, filed with the North Carolina Department of the Secretary of State on August 20, 2010, and incorporated by reference to Exhibit 4.1 to the Form 8-K Filed with the SEC on August 23, 2010.
Exhibit 3(i)(f)	Articles of Amendment, adopted by the Board of Directors of the Company and filed with the North Carolina Department of the Secretary of State on September 23, 2014, incorporated by reference to Exhibit 3.1 to the Form 8-K filed with the SEC on September 23, 2014.
Exhibit 3(ii)	Amended and Restated Bylaws of the Company, dated November 12, 2014, incorporated by reference to Exhibit 3(ii) to the Form 10-Q for the quarter ended September 30, 2014, filed with the SEC on November 12, 2014.
Exhibit 4(i)	Specimen Stock Certificate, incorporated by reference to Exhibit 4 to the Form 10-KSB for the year ended December 31, 2000, filed with the SEC on April 2, 2001.
Exhibit 4(ii)	Form of Certificate for the Fixed Rate Cumulative Perpetual Preferred Stock, Series B, incorporated by reference to Exhibit 4.2 to the Form 8-K filed with the SEC on August 23, 2010.
Exhibit 4(iii)	Rights Agreement, dated as of September 23, 2014, between the Company and American Stock Transfer & Trust Company, LLC, as Rights Agent, incorporated by reference to Exhibit 4.1 to the Form 8-K filed with the SEC on September 23, 2014.
Exhibit 10(i)	Letter Agreement and certain side letters, all dated August 20, 2010, between the Company and the United States Department of the Treasury, with respect to the issuance and sale of the Fixed Rate Cumulative Perpetual Preferred Stock, Series B, incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on August 23, 2010.

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Exhibit 10(ii)*	Employment Agreement, dated August 11, 2014, among the Company, the Bank and James H. Sills, III, incorporated by reference to Exhibit 99.1 to the Form 8-K filed with the SEC on August 14, 2014.
Exhibit 31(i)	Certification of James H. Sills, III.
Exhibit 31(ii)	Certification of Randall C. Hall.
Exhibit 32	Certification pursuant to 18 U.S.C. Section 1350.
Exhibit 101	Financial information submitted in XBRL format.

* Management contracts and compensatory arrangements.

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SIGNATURES

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

	M&F Bancorp, Inc.
Date: May 13, 2015	By:	/s/ James H. Sills, III
		James H. Sills, III
		President, Chief Executive Officer
	By:	/s/ Randall C. Hall
		Randall C. Hall
		Chief Financial Officer

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Index to Exhibits

Exhibit No.	Description of Exhibit
Exhibit 31(i)	Certification of James H. Sills, III.
Exhibit 31(ii)	Certification of Randall C. Hall.
Exhibit 32	Certification pursuant to 18 U.S.C. Section 1350.
Exhibit 101	Financial information submitted in XBRL format.

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