10QSB

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

Commission File Number 0-27307

M&F BANCORP, INC.

(Exact name of small business issuer as specified in its charter)

North Carolina	56-1980549
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

2634 Chapel Hill Blvd., P.O. Box 1932, Durham, North Carolina 27707

(Address of principal executive offices)

(919) 683-1521

(Issuer’s telephone number, including area code)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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  ¨

State the number of shares outstanding of each of the issuer’s class of common equity, as of the latest practicable date:

Common Stock no par value 842,823

Outstanding at November 7, 2003

Transitional Small Business Disclosure Format (Check one):    Yes  ¨    No  x

M&F BANCORP, INC.

INDEX

		Page
PART I.	FINANCIAL INFORMATION (unaudited)
Item 1.	Consolidated Condensed Financial Statements
	Consolidated Condensed Balance Sheets as of September 30, 2003 and December 31, 2002	3
	Consolidated Condensed Statements of Income for the nine-month periods ended September 30, 2003 and September 30, 2002	4
	Consolidated Condensed Statements of Income for the three-month periods ended September 30, 2003 and September 30, 2002	5
	Consolidated Condensed Statements of Shareholders’ Equity for the nine-month periods ended September 30, 2003 and September 30, 2002	6
	Consolidated Condensed Statements of Cash flows for the nine-month periods ended September 30, 2003 and September 30, 2002	7
	Notes to Consolidated Condensed Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Controls and Procedures	16
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	18
Item 2.	Changes in Securities	18
Item 3.	Defaults Upon Senior Securities	18
Item 4.	Submission of Matters to a Vote of Security Holders	18
Item 5.	Other Information	18
Item 6.	Exhibits and Reports on Form 8-K	18
Signature Page		20
Exhibits		22

2

PART I: FINANCIAL INFORMATION

ITEM 1 Financial Statements

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands)

	September 30, 2003			December 31, 2002
	(Unaudited)			(Audited)
ASSETS
Cash and amounts due from fin. institutions	$	7,269		$	4,759
Interest-earning deposits in financial institutions		12,640			1,119
Cash and cash equivalents		19,909			5,878
Securities available for sale (cost of $24,071 and $28,718, respectively)		25,255			28,753
Securities held to maturity (fair value $913 and $920, respectively)		884			883
Loans, net of unearned income		150,827			140,156
Commercial, financial and agricultural loans		84,515			75,239
Real estate-construction loans		8,852			8,532
Real estate-mortgage loans		52,458			51,620
Installment loans to individuals		5,615			5,352
Total Loans		151,440			140,743
Unearned income		(613	)		(587	)
Allowance for loan losses		(2,275	)		(2,022	)
Net loans		148,552			138,134
Premises and equipment, net		6,274			5,992
Other assets		8,280			7,791
TOTAL ASSETS	$	209,154		$	187,431
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Interest-bearing deposits		139,565			124,221
Non-interest-bearing deposits		35,652			25,597
Total Deposits		175,217			149,818
Other borrowings		11,835			16,553
Other liabilities		3,074			2,873
Total liabilities		190,126			169,244
Shareholders’ Equity:
Common stock		5,892			5,892
Retained earnings		13,141			12,378
Accumulated other comprehensive (loss)		(5	)		(83	)
Total shareholders’ equity		19,028			18,187
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY	$	209,154		$	187,431

See notes to condensed consolidated financial statements.

3

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(unaudited)

(in thousands, except per share data)

Nine months ended:	September 30, 2003		September 30, 2002
Interest income:
Interest on loans	$	8,146	$	7,685
Securities:
Taxable		441		704
Tax exempt		303		310
Other interest		103		92
Total interest income		8,993		8,791
Interest expense:
Interest on deposits		2,092		2,206
Interest on federal funds & borrowings		460		464
Total interest expense		2,552		2,670
Net interest income		6,441		6,121
Provision for loan losses		375		553
Net interest income after provision for loan losses		6,066		5,568
Non-interest income		1,533		1,416
Salaries & employee benefits		4,001		3,642
Other non-interest expense		2,146		2,215
Income before taxes		1,452		1,127
Income tax expense		461		307
Net income	$	991	$	820
Earnings per common share:
Basic and diluted	$	1.18	$	0.97
Weighted average common shares outstanding:
Basic and diluted		843		848
Dividends per common share	$	0.27	$	0.24

See notes to condensed consolidated financial statements.

4

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(unaudited)

(in thousands, except per share data)

Three months ended:	September 30, 2003		September 30, 2002
Interest income:
Interest on loans	$	2,703	$	2,615
Securities:
Taxable		129		159
Tax exempt		85		181
Other interest		43		19
Total interest income		2,960		2,974
Interest expense:
Interest on deposits		690		724
Interest on federal funds & other borrowings		150		155
Total interest expense		840		879
Net interest income		2,120		2,095
Provision for loan losses		125		184
Net interest income after provision for loan losses		1,995		1,911
Non-interest income		502		420
Salaries & employee benefits		1,310		1,221
Other non-interest expense		677		794
Income before taxes		510		316
Income tax expense		110		83
Net income	$	400	$	233
Earnings per share common equivalent shares:
Basic and diluted	$	0.47	$	0.28
Weighted average common shares outstanding:
Basic and diluted		843		843
Dividends per common share	$	0.09	$	0.08

See notes to condensed consolidated financial statements.

5

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY

(unaudited)

(in thousands, except share data)

	September 30, 2003			September 30, 2002
Beginning balance, January 1	$	18,187		$	17,853
Net income		991			820
Other comprehensive income		78			441
Common stock repurchase (10,902 shares @ $9.75)		—			(106	)
Dividends		(228	)		(203	)
Ending Balance, September 30	$	19,028		$	18,805

See notes to condensed consolidated financial statements.

6

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands, except per share data)

Nine months ended:	September 30, 2003			September 30, 2002
Cash flows from operating activities:
Net income	$	991		$	820
Adjustments to reconcile net income to net cash from operating activities:
Provision for possible loan losses		375			553
Depreciation and amortization		218			281
Deferred income taxes		(11	)		86
Gain on disposal of assets		9			(45	)
Deferred loan fees		(26	)		143
Income taxes receivable		(253	)		(496	)
Interest receivable		(250	)		54
Prepaid expenses and other assets		(233	)		163
Accrued expenses and other liabilities		(116	)		259
Net cash provided by operating activities		954			1,300
Cash flows from investing activities:
Proceeds from sales, calls and maturities of securities (AFS)		12,182			3,130
Purchase of securities (AFS)		(8,525	)		(3,200	)
Proceeds from maturity of securities (HTM)					530
Net increase in loans		(10,701	)		(13,743	)
Purchase of premises and equipment		(331	)		(168	)
Net cash used in investing activities		(7,375	)		(13,431	)
Cash flows from financing activities:
Net increase in demand and savings deposits		15,217			17,000
Net increase in certificates of deposit		10,181			(2,293	)
Repayment of FHLB Borrowings		(4,718	)		—
Cash dividends		(228	)		(203	)
Common Stock repurchase					(106	)
Net cash provided by financing activities		20,452			14,398
Net increase in cash and cash equivalents		14,031			2,267
Cash and cash equivalents at the beginning of the period		5,878			9,815
Cash and cash equivalents at the end of the period	$	19,909		$	12,082

See notes to condensed consolidated financial statements.

7

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation

The consolidated financial statements include the accounts and transactions of M&F Bancorp, Inc. (the “Company”) and its wholly owned bank subsidiary, Mechanics & Farmers Bank (“M&F Bank”). All significant intercompany accounts and transactions have been eliminated in consolidation. The financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and instructions from Regulation S-B.

The condensed consolidated financial statements included herein 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-KSB for the year ended December 31, 2002.

In the opinion of management, all adjustments consisting of normal recurring adjustments necessary for a fair presentation have been included.

Certain 2002 amounts have been reclassified to conform to 2003 classifications.

2. Loans and Allowance for Possible Loan Losses

Interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in process of collection. In all cases, loans are placed on non-accrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on non-accrual status or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The allowance for possible loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the

8

loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

For the homogeneous pools of loans that have not been specially identified, estimates of losses are largely based on charge-off trends, expected default rates, general economic conditions and overall portfolio quality.

3. Earnings Per Share

Earnings per share are calculated on the basis of the weighted-average number of common shares outstanding. For the three-month and nine-month periods ended September 30, 2003 and September 30, 2002, 82,200 stock options were excluded from the computations of diluted earnings per share because the impact of their inclusion would be anti-dilutive due to option prices being in excess of market price.

4. Regulatory Capital Requirements

The Company is subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. As of September 30, 2003 and December 31, 2002, the capital levels are as indicated below:

	Capital
	Risk Based		(a) Tier 1		(b) Tier 1		Minimum Required Capital
September 30, 2003	12.99	%	11.42	%	8.66	%	6.00	%
December 31, 2002	13.42	%	11.85	%	9.38	%	6.00	%

a) to risk weighted assets

b) to average assets

5. Common Stock Cash Dividends

On September 17, 2003, the Board of Directors of the Company declared a quarterly cash dividend of $0.09 per share to all shareholders of record on October 2, 2003 payable October 10, 2003. The dividend reduced shareholders’ equity by $75,854.

On June 18, 2003, the Board of Directors of the Company declared a quarterly cash dividend of $0.09 per share to all shareholders of record on July 2, 2003 payable July 11, 2003. The dividend reduced shareholders’ equity by $75,854.

On March 18, 2003, the Board of Directors of the Company declared a quarterly cash dividend of $0.09 per share to all shareholders of record on April 2, 2003 payable April 11, 2003. The dividend reduced shareholders’ equity by $75,854.

6. Pro Forma Net Income with Stock Option Compensation Costs Determined Using Fair Value Method

The Company accounts for compensation costs related to the Company’s employee stock option plan using the intrinsic value method. Therefore, no compensation cost has been recognized for stock option awards because the options are granted at exercise prices based on the market value of the Company stock on the date of grant. Had compensation cost for the Company’s employee stock option plan been determined using the fair value method, the Company’s pro forma net income and earnings per share for the

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three-month and nine-month periods ended September 30, 2003 and 2002 would have been as follows (in thousands):

	Three Months Ended September 30						Nine Months Ended September 30
	2003			2002			2003			2002
Net income:
As reported	$	400		$	233		$	991		$	820
Deduct – total stock based employee compensation expense determined under fair value based method for all awards		(3	)		(3	)		(10	)		(10	)
Pro forma	$	397		$	230		$	981		$	810
Basic and diluted earnings per share:
As reported	$	0.47		$	0.28		$	1.18		$	0.97
Pro forma	$	0.47		$	0.27		$	1.16		$	0.96

7. New Accounting Standards

Effective January 1, 2003, the Company adopted the Financial Accounting Standards Board (“FASB”) Interpretation No. 45, (FIN 45) Guarantor’s Accounting and Disclosure Requirements of Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Adoption of this interpretation did not have any impact on the Company.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” The objective of this interpretation is to provide guidance on how to identify a variable interest entity (“VIE”) and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE need to be included in a company’s consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the company’s interest in the VIE is such that the company will absorb a majority of the VIE’s expected losses and/or receive a majority of the entity’s expected residual returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. The provisions of this interpretation became effective for the Company on January 31, 2003. The adoption of FIN 46 did not have an impact on the Company’s financial position and results of operations.

New Accounting Standards – In October 2002, the FASB issued SFAS No. 147, “Acquisitions of Certain Financial Institutions,” which provides guidance on the accounting for the acquisition of a financial institution and supersedes the specialized accounting guidance provided in SFAS No. 72, “Accounting for Certain Acquisitions of Banking or Thrift Institutions.” SFAS No. 147 became effective upon issuance and requires companies to cease amortization of unidentified intangible assets associated with certain branch acquisitions and reclassify these assets to goodwill. SFAS No. 147 also modifies SFAS No. 144 to include in its scope long-term customer-relationship intangible assets and thus subject those intangible assets to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions required for other long-lived assets.

Although SFAS No. 147 may affect how future business combinations, if undertaken, are accounted for and disclosed in the financial statements, the issuance of the new guidance had no effect on the Company’s results of operations or financial position because the Company does not have any assets subject to the specialized accounting guidance provided in SFAS No. 72 or SFAS No. 147.

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ITEM 2

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

Critical Accounting Policies

The accounting and reporting policies of the Company and its subsidiary are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry.

Certain accounting policies require us to make significant estimates and assumptions which have a material impact on the carrying value of certain assets and liabilities, and we consider these to be critical accounting policies. Two of the more critical accounting and reporting policies include the Company’s accounting for the allowance for possible loan losses and pension costs. The estimates and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods.

Allowance for Possible Loan Losses

The allowance for possible loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owned. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

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For homogeneous pools of loans that have not been specifically identified, estimates of losses are largely based on charge-off trends, expected default rates, general economic conditions and overall portfolio quality. This evaluation is inherently subjective as it requires material estimates and unanticipated future adverse changes, in such conditions could result in material adjustments to the allowance for loan losses that could adversely impact earnings in future periods.

See “Non-performing assets and allowance for loan losses” herein for a complete discussion.

Pension Plans

The Company maintains a qualified defined benefit cash balance pension plan (the “Qualified Plan”), which covers substantially all full time employees and an unfunded excess plan to provided benefits to a select group of highly compensated employees to provided benefits that would otherwise be provided under the Qualified Plan but for maximum benefit and compensation limits applicable under the tax law.

The benefit cost and obligation are dependent on assumptions used by actuaries in calculating such amounts. The assumptions include discount rates, inflation, salary growth and long-term return on plan assets.

Please also refer to Note 1 in the “Notes to Consolidated Financial Statements” in the Company’s Annual Report for the year ended December 31, 2002 on Form 10-KSB on file with the Securities and Exchange Commission for details regarding all of the Company’s critical and significant accounting policies.

General

The following discussion and analysis of earnings and related financial data should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Annual Report on Form 10-KSB for the year ended December 31, 2002. It is intended to assist you in understanding the financial condition and the results of operations for the nine months ended September 30, 2003 and 2002.

Forward-Looking Statements

When used in this report, the words or phrases “will likely result,” “should,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or other similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the market area, and competition that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above and other factors could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or occurrences after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

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Financial Condition

Total assets increased 11.58 percent to $209,154,000 at September 30, 2003 from $187,431,000 at December 31, 2002 primarily due to a $14.3 million increase in interest bearing deposits in financial institutions and a $10.7 million increase in gross loans outstanding. The Company funded the growth in loans and interest-bearing deposits in financial institutions through the significant growth in deposits.

Total loans increased 7.60 percent to $151,440,000 at September 30, 2003 from $140,743,000 at December 31, 2002. Management increased the required sales calls for lenders. The increased sales focus resulted in an increased volume of commercial loan closings during 2003. The increase is not expected to impact the quality of loans made as the lending standards and policies have not been compromised. Management continues its effort to add more adjustable rate loans to the portfolio in an effort to reduce the interest rate sensitivity of the loan portfolio. This effort is normally achieved in the area of commercial loans which are primarily secured by real estate.

The investment portfolio balance as of September 30, 2003 was $26,139,000 compared to $29,636,000 at December 31, 2002. Maturing investment securities and deposits were used to fund loan demand and satisfy liquidity needs. Approximately 96.62 and 97.02 percent of the portfolio was classified as available-for-sale at September 30, 2003 and December 31, 2002 respectively. All securities purchased during 2003 and 2002 were classified as available-for-sale.

The increase in interest-earning deposits in financial institutions is due to the Company’s desire to enhance liquidity and to fund expected loan growth.

Deposits increased 16.95 percent to $175,217,000 at September 30, 2003 from $149,818,000 at December 31, 2002. The majority of the growth was a result of increased balances on certificates of deposit of 22.48 percent. The Company priced the accounts favorably to attract deposits to meet the increased loan growth and provide liquidity. The increase in non-interest bearing deposits of $10.0 million when comparing September 30, 2003 with December 31, 2002, was largely attributed to several customers receiving funds at quarter’s end. The funds are not anticipated to remain in non-interest bearing deposits long-term.

Total shareholders’ equity increased 4.62 percent to $19,028,000 as of September 30, 2003 from $18,187,000 at December 31, 2002. The increase was primarily due to year-to-date net income of $991,000 partially offset by dividends declared of $228,000.

Results of Operations – Comparison for the nine months and three months ended September 30, 2003 and 2002

Net income for the nine months ended September 30, 2003 increased 20.85 percent to $991,000 compared to $820,000 for the same period in 2002. Total interest income was $8,993,000 for the nine months ended September 30, 2003 compared to $8,791,000 for the comparable period in 2002. The primary reason for the increase was attributed to the increase in interest income on loans of $461,000 which was partially offset by decreases in interest income on securities of $270,000 for the nine months ended September 30, 2003 compared with the comparable period in 2002.

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Interest income on loans increased $461,000 primarily due to an increase in the average loans outstanding to $146,115,000 from $130,940,000 for the nine months ended September 30, 2003 and 2002, respectively, partially offset by a decline in yield from 7.89 percent to 7.49 percent. Interest income on securities decreased 36.29 percent when comparing the nine months ended September 30, 2003 with the same period in 2002. This decrease was the result of a lower yield on securities. The yield on the securities portfolio for the period ended September 30, 2003 declined 90 basis points compared to a yield of 3.82 percent for the same period in 2002.

Total interest expense decreased 4.42 percent to $2,552,000 for the nine months ended September 30, 2003 from $2,670,000 for the nine months ended September 30, 2002. The decrease in interest expense is primarily the result of time deposits repricing during the nine months ended September 30, 2003 at significantly lower rates. The rates paid on time deposits were approximately 2.39 percent for the nine months ended September 30, 2003 as compared to 3.37 percent, for the comparable period in 2002. This decrease in rates more than offset a higher volume of deposits.

During the nine months ended September 30, 2003, the Company decreased the loan loss provision 32.19 percent from $553,000 during the nine months ended September 30, 2002 to $375,000. The decrease in the provision for loan losses is the result of management’s assessment of the Company’s delinquency ratios, non-performing assets, total classified assets, charge-off history and composition of the loans in the portfolio in determining the adequacy of the current allowance for loan losses. Although non-performing assets have increased significantly from December 31, 2002, management’s assessment did not result in an increase in the provision for loan losses over budgeted levels given the current and projected balance of the allowance for loan losses.

Non-interest income during the nine months ended September 30, 2003 increased 8.26 percent to $1,533,000 from $1,416,000 for the same period in the prior year due to a small decrease in various activity-based fee accounts. Non-interest expense increased 4.95 percent from $5,857,000 during the nine months ended September 30, 2002 to $6,147,000 during the nine months ended September 30, 2003.

Net income for the three months ended September 30, 2003 increased 71.67 percent to $233,000 compared to $400,000 for the same period in 2002, primarily as a result of a significant decrease in the Company’s cost of funds on deposits. Total interest income was $2,960,000 for the three months ended September 30, 2003 compared to $2,974,000 for the comparable period in 2002. The primary reason for the increase was attributed to the increase in interest income on loans of $88,000 which was partially offset by decreases in interest income on securities of $126,000 for the three months ended September 30, 2003 compared with the comparable period in 2002.

Interest income on loans increased $88,000 primarily due to an increase in the average loans outstanding to $146,115,000 from $130,940,000 for the three months ended September 30, 2003 and 2002, respectively, partially offset by a decline in yield from 7.99 percent to 7.40 percent. Interest income on securities decreased 37.06 percent when comparing the three months ended September 30, 2003 with the same period in 2002. This decrease was the result of a lower yield on securities. The yield on the securities portfolio for the period ended September 30, 2003 declined 110 basis points compared to a yield of 3.46 percent for the same period in 2002.

Total interest expense decreased 4.43 percent to $840,000 for the three months ended September 30, 2003 from $879,000 for the three months ended September 30, 2002. The decrease in interest expense is primarily the result of time deposits repricing during the three months ended September

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30, 2003 at significantly lower rates. The rates paid on time deposits were approximately 2.33 percent for the three months ended September 30, 2003 as compared to 2.98 percent, for the comparable period in 2002. This decrease in rates more than offset a higher volume of deposits.

During the three months ended September 30, 2003, the Company decreased the loan loss provision 32.06 percent from $184,000 during the three months ended September 30, 2002 to $125,000. The decrease in the provision for loan losses is the result of management’s assessment of the Company’s delinquency ratios, non-performing assets, charge-off history and composition of loans in the portfolio.

Non-interest income during the three months ended September 30, 2003 increased 19.52 percent to $502,000 from $420,000 for the same period in the prior year due to income from bank-owned life insurance. Non-interest expense decreased 1.39 percent from $2,015,000 during the three months ended September 30, 2002 to $1,987,000 during the three months ended September 30, 2003. The increase in this category was primarily due to increased salaries from salary increases during the quarter and increased pension costs resulting from plan modifications.

Non-performing assets and allowance for loan losses

The allowance for loan losses is calculated based upon an evaluation of pertinent factors underlying the types and qualities of the Company’s loans. Management considers such factors as the repayment status of a loan, the estimated net realizable value of the underlying collateral, the borrower’s ability to repay the loan, current and anticipated economic conditions which might affect the borrower’s ability to repay the loan and the Company’s past statistical history concerning charge-offs. The September 30, 2003 allowance for loan losses was $2,275,000 or 1.50 percent of total loans outstanding compared with $2,022,000 or 1.44 percent of total loans outstanding at December 31, 2002. The loan loss allowance increased based on the result of management’s assessment of the Company’s delinquency ratios, charge-off history and composition of loans in the portfolio. Management also considered non-performing assets and total classified assets in establishing the allowance for loan losses.

The ratio of non-performing assets to total assets is one indicator of the exposure to credit risk. Non-performing assets of the Company consist of non-accruing loans, accruing loans delinquent 90 days or more, restructured loans, and foreclosed assets which have been acquired as a result of foreclosure or deed-in-lieu-of foreclosure. The following table provides certain information regarding non-performing assets.

	09/30/03			12/31/02
	(Dollars in Thousands)
Non-Accruing Loans	$	1,362			386
Accruing Loans Delinquent 90 days or more		605			587
Foreclosed Assets		139			50
Restructured Loans		724			611
Total Non-Performing Assets	$	2,830		$	1,634
Percentage of total assets		1.35	%		.87	%

Non-accruing loans increased significantly from year end due to several residential mortgages in varying stages of foreclosure. Despite this increase, management considers the allowance of loan losses of $2,275,000 at September 30, 2003 to be sufficient to cover the potential loan losses.

15

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, as well as providing funds to meet the basic needs for on-going operations of the Company and regulatory requirements. The Company’s liquidity position increased from 12.90 percent at December 31, 2002 to 17.88 for the period ended September 30, 2003.

The Company places great significance on monitoring and managing its asset/liability position. The Company’s policy for managing its interest margin (or net yield on interest-earning assets) is to maximize net interest income while maintaining a stable deposit base. The Company’s deposit base has not historically been subject to the levels of volatility experienced in national financial markets in recent years; however, the Company does realize the importance of minimizing such volatility while at the same time maintaining and improving earnings. Gap analysis, a common method historically used to estimate interest rate sensitivity, measures the difference or gap between the volume of interest-earning assets and interest-bearing liabilities repricing over various time periods. However, this method addresses only the magnitude of funding mismatches and does not address the magnitude or relative timing of rate changes. Therefore, management prepares on a quarterly basis earnings projections based on a range of interest rate scenarios of rising, flat and declining rates in order to more accurately measure interest rate risk.

Interest-bearing liabilities and the variable rate loans are generally repriced to current market rates. The Company’s balance sheet is liability-sensitive, meaning that in a given period there will be more liabilities than assets subject to immediate repricing as the market rates change. Because most of the Bank’s loans are fixed rate mortgages, they reprice less rapidly than rate sensitive interest-bearing deposits. During periods of rising rates, this results in decreased net interest income. The opposite occurs during periods of declining rates.

In addition to the gap analysis described above, the Company uses a modeling technique which projects net interest income under varying interest rate scenarios and the theoretical impact of immediate and sustained rate changes referred to as “rate shocks.” “Rate shocks” measure the estimated theoretical impact on the Bank’s tax equivalent net interest income and market value of equity from hypothetical immediate changes in interest rates as compared to the estimated theoretical impact of rates remaining unchanged. The prospective effects of these hypothetical interest rate changes are based upon numerous assumptions including relative and estimated levels of key interest rates.

The Company has not experienced a change in the mix of its rate-sensitive assets and liabilities or in market interest rates that it believes would result in a material change in its interest rate sensitivity since reported at December 31, 2002.

Item 3

Controls and Procedures

The Company maintains a system of internal controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. The Company’s Board of Directors, operating through its audit committee which is composed entirely of independent outside directors, provides oversight to the Company’s financial reporting process.

16

The Company’s management, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of the end of the period covered by this Report, that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer of the Company, as appropriate to allow timely decisions regarding required disclosure.

There were no significant changes in 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.

17

PART II

Other Information

ITEM 1. Legal Proceedings: Not applicable

ITEM 2. Changes in Securities: Not applicable

ITEM 3. Defaults upon Senior Securities: Not applicable

ITEM 4. Submission of Matters to a Vote of Security Holders: None

ITEM 5. Other Information: Not applicable

ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit (3)(i) Articles of Incorporation of M&F Bancorp, Inc., incorporated by reference to Exhibit (3) to the Form 10-QSB for the quarter ended September 30, 1999 filed with the Securities and Exchange Commission on November 12, 1999.

Exhibit (3)(ii) Bylaws of M&F Bancorp, Inc., incorporated by reference to Exhibit (3) to the Form 10-QSB for the quarter ended September 30, 1999 filed with the Securities and Exchange Commission on November 12, 1999.

Exhibit (3)(iii) Amended and Restated Article III, Section 5 of the Bylaws of M&F Bancorp, Inc., adopted by the shareholders of M&F Bancorp, Inc. on April 30, 2002, incorporated by reference to Exhibit 3(iii) to the Form 10-QSB for the quarter ended March 31, 2002 filed with the Securities and Exchange Commission on May 14, 2002.

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

Exhibit (10)(a) Employment Agreement between Mechanics and Farmers Bank and Lee Johnson, Jr. incorporated by reference to Exhibit 10(a) to the Form 10-QSB for the quarter ended September 30, 2000 filed with the Securities and Exchange Commission on November 9, 2000.

Exhibit (10)(b) Retention Bonus Agreement between Mechanics and Farmers Bank and Fohliette Becote incorporated by reference to Exhibit 10(b) to the Form 10-QSB for the quarter ended September 30, 1999 filed with the Securities and Exchange Commission on November 12, 1999.

Exhibit (10)(c) Retention Bonus Agreement between Mechanics and Farmers Bank and Walter D. Harrington incorporated by reference to Exhibit 10(c) to the Form 10-QSB for the quarter ended September 30, 1999 filed with the Securities and Exchange Commission on November 12, 1999.

Exhibit (10)(d) Retention Bonus Agreement between Mechanics and Farmers Bank and Harold G. Sellars incorporated by reference to Exhibit 10(d) to the Form 10-QSB for the quarter ended September 30, 1999 filed with the Securities and Exchange Commission on November 12, 1999.

Exhibit (10)(e) Retention Bonus Agreement between Mechanics and Farmers Bank and Elaine Small incorporated by reference to Exhibit 10(e) to the Form 10-QSB for the quarter ended September 30, 1999 filed with the Securities and Exchange Commission on November 12, 1999.

Exhibit (31.1) Certification of Lee Johnson, Jr.

Exhibit (31.2) Certification of Fohliette W. Becote

18

Exhibit (32) Certification Pursuant to 18 U.S.C. Section 1850

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the nine months ended September 30, 2003.

19

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

M&F Bancorp, Inc.
(Registrant)
Date: November 7, 2003
By:	/s/    Lee Johnson Jr.
	Lee Johnson, Jr.
	President/Chief Executive Officer
By:	/s/    Fohliette W. Becote
	Fohliette W. Becote      Secretary/Treasurer

20

EX-31.1

EXHIBIT (31.1)

CERTIFICATION

I, Lee Johnson, Jr., certify that:

1. I have reviewed this Quarterly Report on Form 10-QSB of M&F Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4. The small business issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) [Reserved];

c) Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5. The small business issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Dated: November 7, 2003 /s/ Lee Johnson, Jr. President/Chief Executive Officer

EX-31.2

EXHIBIT (31.2)

CERTIFICATION

I, Fohliette W. Becote, certify that:

2. I have reviewed this Quarterly Report on Form 10-QSB of M&F Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4. The small business issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) [Reserved];

c) Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5. The small business issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Dated: November 7, 2003 /s/ Fohliette W. Becote Secretary/Treasurer/Chief Financial Officer

EX-32

EXHIBIT (32)

M & F BANCORP, INC.

Certification of Periodic Financial Report

Pursuant to 18 U.S.C. Section 1350

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officers of M & F Bancorp, Inc. (the “Company”) certify that the Quarterly Report on Form 10-QSB of the Company for the fiscal quarter ended September 30, 2003 fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and information contained in that Form 10-QSB fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 7, 2003	/s/ Lee Johnson, Jr. Lee Johnson, Jr. Chief Executive Officer
Dated: November 7, 2003	/s/ Fohliette W. Becote Fohliette W. Becote Chief Financial Officer

*This certification is made solely for purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose.