10KSB

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB

ANNUAL REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

Commission file number 027307

M&F BANCORP, INC.

(Name of Small Business Issuer in Its Charter)

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

(919) 683-1521

(Issuer’s Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Act: None

Securities registered under Section 12(g) of the Act:

Common Stock, no par value

(Title of class)

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  ¨

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  x

State issuer’s revenues for its most recent fiscal year. $15,395,530

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of a specified date within the past 60 days. $18,938,808 based on the closing price of such common stock on March 18, 2005 which was $12.00 per share.

State the number of shares outstanding of each of the registrant’s classes of common equity, as of the latest practicable date. 1,685,646 shares of common stock outstanding at March 18, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report of M&F Bancorp, Inc. for the year ended December 31, 2004 (the “Annual Report”) are incorporated by reference into Part I, Part II and Part III.

Portions of the Proxy Statement for the 2005 Annual Meeting of Stockholders of M&F Bancorp, Inc. to be held on May 10, 2005 (the “Proxy Statement”), are incorporated by reference into Part III.

This report contains certain forward-looking statements with respect to the financial condition, results of operations and business of the Company. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Company and on the information available to management at the time that these disclosures were prepared. These statements can be identified by the use of words like “expect,” “anticipate,” “estimate” and “believe,” variations of these words and other similar expressions. Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, (1) competition in the Bank’s markets, (2) changes in the interest rate environment, (3) general national, regional or local economic conditions may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and the possible impairment of collectibility of loans, (4) legislative or regulatory changes, including changes in accounting standards, (5) significant changes in the federal and state legal and regulatory environment and tax laws, (6) the impact of changes in monetary and fiscal policies, laws, rules and regulations and (7) other risks and factors identified in the Company’s other filings with the Securities and Exchange Commission. The Company undertakes no obligation to update any forward-looking statements.

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

General

M&F Bancorp, Inc. (the “Company”) was formed in 1999 to serve as the holding company for Mechanics and Farmers Bank (the “Bank”). The Company is a bank holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (the “BHCA”). The Company’s sole activity currently consists of owning the Bank The Company’s principal source of income is any dividends which are declared and paid by the Bank on its capital stock. The Company used such income to pay dividends to shareholders and cover expenses.

The Bank is a North Carolina-chartered bank and began operations in 1908. It is engaged primarily in the business of attracting deposits from the general public and using such deposits, together with other funds, to make consumer and commercial loans. The Bank makes secured personal, automobile, home improvement, residential mortgage, commercial real estate, construction and commercial loans. The Bank also makes some unsecured consumer loans. The Bank’s primary source of revenue is interest income from its lending activities. The Bank’s other major sources of revenue are interest and dividend income from investments, interest income from its interest-bearing investments with other depository institutions, grants, and fee income from its lending and deposit activities. The major expenses of the Bank are interest on deposits and general and administrative expenses such as salaries, employee benefits, federal deposit insurance premiums and branch occupancy and related expenses.

As a North Carolina-chartered bank, the Bank is subject to examination and regulation by the Federal Deposit Insurance Corporation (the “FDIC”) and the Commissioner of Banks, North Carolina Department of Commerce (the “Commissioner”). The Bank is further subject to certain regulations of the Federal Reserve, including governing reserves required to be maintained against deposits and other matters. The business and regulation of the Company and the Bank are also subject to legislative changes from time to time. See “SUPERVISION AND REGULATION” for additional discussion.

Market Area

The Bank has three offices in Durham, North Carolina, two offices in Raleigh, North Carolina, three offices in Charlotte, North Carolina, and one office in Winston-Salem, North Carolina. All offices are located in metropolitan areas with employment spread primarily among service, manufacturing and governmental activities. All offices are located in areas of high competition among financial service providers. As of June 30, 2004, based on the Federal Deposit Insurance Corporation Summary of Deposit Data, Durham had 11 commercial banks and savings associations, and the Bank ranked 7th in deposit size. Raleigh had 15 commercial banks and savings associations, and the Bank ranked 12th in deposit size. The Bank ranked 15th in deposit size out of 16 commercial banks and savings associations in the Charlotte metropolitan area. There were 12 commercial banks and savings associations in Winston-Salem, and the Bank ranked 10th in deposit size.

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Lending Activities

General. The Bank’s primary source of revenue is interest and fee income from its lending activities, consisting primarily of automobile, home equity, home improvement, personal, residential mortgage, commercial real estate, construction and commercial loans. The Bank also offers both personal and commercial overdraft protection in connection with its checking accounts. As of December 31, 2004, approximately 91.77% of the Bank’s loan portfolio was secured by real property, 7.41% was secured by personal property, and less than one percent was unsecured. On December 31, 2004, the largest amount the Bank had outstanding to any one borrower and its affiliates was approximately $3.0 million. In addition to interest earned on loans, the Bank receives fees in connection with loan originations, loan modifications, late payments, loan assumptions and other miscellaneous services.

Loan Portfolio Composition. The Bank’s consolidated gross loan portfolio totaled approximately $169.3 million at December 31, 2004 representing 73.43% of the Bank’s total assets. At December 31, 2004, approximately 26.70% of the Bank’s gross loan portfolio was composed of adjustable rate loans, and approximately 73.30% of the Bank’s gross loan portfolio was composed of fixed rate loans. At December 31, 2004, approximately $8.3 million, or 4.91%, of the Bank’s gross loan portfolio was composed of consumer loans. On such date, approximately $108.3 million, or 63.97%, of the Bank’s gross loan portfolio was composed of commercial loans and approximately $52.7 million, or 31.12%, consisted of real estate loans.

Origination, Purchase and Sale of Loans. Residential mortgage loans generally are originated in conformity with purchase requirements of the Federal National Mortgage Association. Accordingly, the Bank believes such loans are saleable in the secondary market. The Bank did not purchase any loans in fiscal 2004. In September 2004 and December 2003, the Bank sold $3.3 million and $8.3 million, respectively, in residential mortgages in the secondary market for gains of $112, 774 and $82,296.

Asset Classification. Applicable regulations require each insured institution to “classify” its own assets on a regular basis. In addition, in connection with examinations of financial institutions, regulatory examiners have authority to identify problem assets and, if appropriate, classify them. Problem assets are classified as “substandard,” “doubtful” or “loss,” depending on the presence of certain characteristics as discussed below.

An asset is considered “substandard” if not adequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a loss reserve is not warranted.

As of December 31, 2004, the Bank had approximately $6.8 million of loans classified as “substandard,” $80,000 of loans classified as “doubtful,” and no loans classified as “loss.” Total classified assets as of December 31, 2004 and 2003 were approximately $6.9 million and $2.7 million, respectively.

In connection with the filing of periodic reports with regulatory agencies, the Bank reports any assets that possess credit deficiencies or potential weaknesses deserving close attention by management. These assets may be considered “special mention” assets and do not yet warrant adverse classification. At December 31, 2004, the Bank had approximately $9.0 million of loans in the “special mention” category, as compared to $7.6 million at December 31, 2003.

When an insured institution classifies problem assets as either substandard or doubtful, it is required to establish general allowances for loan losses in an amount deemed prudent by management. These allowances represent loss allowances that have been established to recognize the inherent risks associated with lending activities and the risks associated with particular problem assets. When an insured institution classifies problem assets as “loss,” it charges off the balance of the asset. The Bank’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the FDIC and the Commissioner which can order the establishment of additional loss allowances.

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Allowance for Loan Losses. In originating loans, the Bank recognizes that credit losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a secured loan, the quality of the security for the loan as well as general economic conditions. It is management’s policy to maintain an adequate allowance for loan losses based on, among other things, the Bank’s historical loan loss experience, evaluation of economic conditions and regular review of delinquencies and loan portfolio quality. Specific allowances are provided for individual loans when ultimate collection is considered questionable by management after reviewing the current status of loans which are contractually past due and considering the net realizable value of the security for the loans.

Management actively monitors the Bank’s asset quality, charges off loans against the allowance for loan losses when appropriate and provides specific loss reserves when necessary. Although management believes it uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from the economic conditions in the assumptions used in making the initial determinations.

Investments

Interest income from investment securities generally provides a significant source of income to the Bank. In addition, the Bank receives interest income from interest on federal funds invested overnight with other financial institutions.

On December 31, 2004, the Bank’s investment securities portfolio totaled approximately $27.1 million and consisted of U.S. Treasury and U.S. Government agency securities, corporate bonds, obligations of states and political subdivisions, and mortgage backed securities and equity securities.

The Bank’s investment strategy is intended, among other things, to (i) provide and maintain liquidity, (ii) maintain a balance of high quality, diversified investments to minimize risk, (iii) maximize returns, and (iv) manage interest rate risk. In terms of priorities, safety is considered more important than liquidity or return on investment. The Bank does not engage in hedging activities.

Deposits and Borrowings

General. Deposits are the primary source of the Bank’s funds for lending and other investment purposes. In addition to deposits, the Bank derives funds from loan principal repayments, interest payments, investment income, interest from its Fed funds deposits, and otherwise from its operations. Loan repayments are a relatively stable source of funds while deposit inflows and outflows may be significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. They may also be used on a longer-term basis for general business purposes.

Deposits. In recent years, the Bank has experienced consistent deposit growth. On December 31, 2004 and 2003, the Bank’s deposits totaled approximately $189.0 million and $185.9 million, respectively.

The Bank attracts both short-term and long-term deposits from the general public by offering a variety of accounts and rates. The Bank offers savings accounts, interest-bearing and noninterest-bearing checking accounts, and fixed interest rate certificates with varying maturities. All deposit flows are greatly influenced by economic conditions, the general level of interest rates, competition and other factors. The Bank’s deposits traditionally have been obtained primarily from its market areas. The Bank utilizes traditional marketing methods to attract new customers and deposits, including print media advertising and direct mailings. The Bank does not advertise for deposits outside of its local market area and it has no brokered deposits. The Bank does participate in a national listing service, QwickRate^®, to offer deposits to other financial institutions.

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Competition

The Bank faces strong competition both in attracting deposits and making loans. Its most direct competition for deposits has historically come from savings institutions, credit unions and other commercial banks located in its primary market area, including large financial institutions which have greater financial and marketing resources available to them. The Bank has also recently faced additional significant competition for investors’ funds from short-term money market securities and other corporate and government securities. The ability of the Bank to attract and retain deposits depends on its ability generally to provide a rate of return, liquidity and risk comparable to that offered by competing investment opportunities. As of June 30, 2004, based on the Federal Deposit Insurance Corporation Summary of Deposits Report, the Bank’s market share of the deposits in Durham, North Carolina was approximately 3.06%, and less than one percent in Raleigh, Charlotte and Winston-Salem, North Carolina.

Employees

As of December 31, 2004, the Bank had 96 full-time equivalent employees.

Supervision and Regulation

Bank holding companies and commercial banks are subject to extensive federal and state governmental regulation and supervision. The following is a brief summary of some of the basic statutes and regulations that apply to the Company and Bank, but it is not a complete discussion of all the laws that affect the Company’s and Bank’s business. Supervision, regulation and examination of the Company and the Bank by the regulatory agencies are intended primarily for the protection of depositors rather than shareholders of the Company.

General. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the FDIC in the event the depository institution becomes in danger of or in default. For example, to avoid receivership of an insured depository institution subsidiary, a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become “undercapitalized” with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the bank’s total assets at the time the bank became undercapitalized or (ii) the amount which is necessary (or would have been necessary) to bring the bank into compliance with all acceptable capital standards as of the time the bank fails to comply with such capital restoration plan.

The Company, as a registered bank holding company, is subject to the regulation and supervision of the Federal Reserve. Under a policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. The Federal Reserve under the BHCA also has the authority to require a bank holding company to terminate any activity or to relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.

In addition, insured depository institutions under common control are required to reimburse the FDIC for any loss suffered by its deposit insurance funds as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the deposit insurance funds. The FDIC’s claim for damages is superior to claims of stockholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions.

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As a result of the Company’s ownership of the Bank, the Company is also registered under the bank holding company laws of North Carolina. Accordingly, the Company is also subject to regulation and supervision by the Commissioner.

Sarbanes-Oxley Act of 2002. On July 30, 2002, the Sarbanes-Oxley Act of 2002 was signed into law and became some of the most sweeping federal legislation addressing accounting, corporate governance and disclosure issues. The impact of the Sarbanes-Oxley Act is wide-ranging as it applies to all public companies and imposes significant new requirements for public company governance and disclosure requirements. Some of the provisions of the Sarbanes-Oxley Act became effective immediately while others are still in the process of being implemented.

In general, the Sarbanes-Oxley Act mandates important new corporate governance and financial reporting requirements intended to enhance the accuracy and transparency of public companies’ reported financial results. It establishes new responsibilities for corporate chief executive officers, chief financial officers and audit committees in the financial reporting process and creates a new regulatory body to oversee auditors of public companies. It backs these requirements with new SEC enforcement tools, increases criminal penalties for federal mail, wire and securities fraud, and creates new criminal penalties for document and record destruction in connection with federal investigations. It also increases the opportunity for more private litigation by lengthening the statute of limitations for securities fraud claims and providing new federal corporate whistleblower protection.

The economic and operational effects of this new legislation on public companies, including the Company, have been and will continue to be significant in terms of the time, resources and costs associated with complying with the new law. Because the Sarbanes-Oxley Act, for the most part, applies equally to larger and smaller public companies, we will be presented with additional challenges as a smaller, community-oriented financial institution seeking to compete with larger financial institutions in our market.

USA Patriot Act. The USA Patriot Act of 2001 was enacted in response to the terrorist attacks that occurred in New York, Pennsylvania and Washington, D.C. on September 11, 2001. The Act is intended to strengthen the ability of U.S. law enforcement and the intelligence community to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Act on financial institutions of all kinds is significant and wide ranging. The Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including standards for verifying customer identification at account opening, and rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.

The Gramm-Leach-Bliley Act. The federal Gramm-Leach-Bliley Act enacted in 1999 (the “GLB Act”) dramatically changed various federal laws governing the banking, securities and insurance industries. The GLB Act has expanded opportunities for banks and bank holding companies to provide services and engage in other revenue-generating activities that previously were prohibited to them. However, this expanded authority also may present the Company with new challenges as its larger competitors are able to expand their services and products into areas that are not feasible for smaller, community oriented financial institutions. The GLB Act likely will have a significant economic impact on the banking industry and on competitive conditions in the financial services industry generally.

Capital Adequacy Guidelines for Holding Companies. The Federal Reserve has adopted capital adequacy guidelines for bank holding companies and banks that are members of the Federal Reserve system and have consolidated assets of $150 million or more. Bank holding companies subject to the Federal Reserve’s capital adequacy guidelines are required to comply with the Federal Reserve’s risk-based capital guidelines. Under these regulations, the minimum ratio of total capital to risk-weighted assets is 8%. At least half of the total capital is required to be “Tier I capital,” principally consisting of common stockholders’ equity, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less certain goodwill items. The remainder (“Tier II capital”) may consist of a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, perpetual preferred stock, and a limited amount of the general loan loss allowance. In addition to the risk-based capital guidelines, the Federal Reserve has adopted a minimum Tier I capital (leverage) ratio, under which a bank holding company must maintain a minimum level of Tier I capital to average total consolidated assets of at least 3% in the case of a bank holding company which has the highest

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regulatory examination rating and is not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a Tier I capital (leverage) ratio of at least 1% to 2% above the stated minimum. The Bank exceeded all applicable capital requirements as of December 31, 2004.

Capital Requirements for the Bank. The Bank, as a North Carolina commercial bank, is required to maintain a surplus account equal to 50% or more of its paid-in capital stock. As a North Carolina chartered, FDIC-insured commercial bank which is not a member of the Federal Reserve System, the Bank is also subject to capital requirements imposed by the FDIC. Under the FDIC’s regulations, state nonmember banks that (a) receive the highest rating during the examination process and (b) are not anticipating or experiencing any significant growth, are required to maintain a minimum leverage ratio of 3% of total consolidated assets; all other banks are required to maintain a minimum ratio of 1% or 2% above the stated minimum, with a minimum leverage ratio of not less than 4%. The Bank exceeded all applicable capital requirements as of December 31, 2004.

Dividend and Repurchase Limitations. The Company must obtain Federal Reserve approval prior to repurchasing Common Stock in excess of 10% of its net worth during any twelve-month period unless the Company (i) both before and after the redemption satisfies capital requirements for “well capitalized” state member banks; (ii) received a one or two rating in its last examination; and (iii) is not the subject of any unresolved supervisory issues.

Although the payment of dividends and repurchase of stock by the Company are subject to certain requirements and limitations of North Carolina corporate law, except as set forth in this paragraph, neither the Commissioner nor the FDIC have promulgated any regulations specifically limiting the right of the Company to pay dividends and repurchase shares. However, the ability of the Company to pay dividends or repurchase shares may be dependent upon the Company’s receipt of dividends from the Bank.

North Carolina commercial banks, such as the Bank, are subject to legal limitations on the amounts of dividends they are permitted to pay. Dividends may be paid by the Bank from undivided profits, which are determined by deducting and charging certain items against actual profits, including any contributions to surplus required by North Carolina law. Also, an insured depository institution, such as the Bank, is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized” (as such term is defined in the applicable law and regulations).

FDIC Insurance Assessments. The Bank is subject to insurance assessments imposed by the FDIC. Under current law, the insurance assessment to be paid by members of the Bank Insurance Fund, such as the Bank, shall be as specified in a schedule required to be issued by the FDIC. FDIC assessments for deposit insurance range from 0 to 27 basis points per $100 of insured deposits, depending on the institution’s capital position and other supervisory factors.

Federal Home Loan Bank System. The FHLB system provides a central credit facility for member institutions. In December 2004, the FHLB of Atlanta implemented a new capital plan. As a member of the FHLB of Atlanta and under the new capital plan, the Bank is required to own capital stock in the FHLB of Atlanta in an amount at least equal to 0.20% (or 20 basis points) of the Bank’s total assets at the end of each calendar year, plus 4.50% of its outstanding advances (borrowings) from the FHLB of Atlanta under the new activity based stock ownership requirement. On December 31, 2004, the Bank was in compliance with this requirement.

Community Reinvestment. Under the Community Reinvestment Act (“CRA”), as implemented by regulations of the FDIC, an insured institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution’s discretion to develop, consistent with the CRA, the types of products and services that it believes are best suited to its particular community. The CRA requires the federal banking regulators, in connection with their examinations of insured institutions, to assess the institutions’ records of meeting the credit needs of their communities, using the ratings of “outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance,” and to take that record into account in its evaluation of certain applications by those institutions. All institutions are required to make public disclosure of their CRA performance ratings. The Bank received a “outstanding “ rating in its last CRA examination which was conducted during October 2003.

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Prompt Corrective Action. The FDIC has broad powers to take corrective action to resolve the problems of insured depository institutions. The extent of these powers will depend upon whether the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized.” Under the regulations, an institution is considered “well capitalized” if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier I risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure. An “adequately capitalized” institution is defined as one that has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier I risk-based capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of an institution with the highest examination rating). An institution is considered (A) “undercapitalized” if it has (i) a total risk-based capital ratio of less than 8%, (ii) a Tier I risk-based capital ratio of less than 4% or (iii) a leverage ratio of less than 4% (or 3% in the case of an institution with the highest examination rating); (B) “significantly undercapitalized” if the institution has (i) a total risk-based capital ratio of less than 6%, or (ii) a Tier I risk-based capital ratio of less than 3% or (iii) a leverage ratio of less than 3% and (c) “critically undercapitalized” if the institution has a ratio of tangible equity to total assets equal to or less than 2%. At December 31, 2004 the Company was classified as well capitalized.

Changes in Control. The BHCA prohibits the Company from acquiring direct or indirect control of more than 5% of the outstanding voting stock or substantially all of the assets of any bank or savings bank or merging or consolidating with another bank holding company or savings bank holding company without prior approval of the Federal Reserve. Similarly, Federal Reserve approval (or, in certain cases, non-disapproval) must be obtained prior to any person acquiring control of the Company. Control is conclusively presumed to exist if, among other things, a person acquires more than 25% of any class of voting stock of the Company or controls in any manner the election of a majority of the directors of the Company. Control is presumed to exist if a person acquires more than 10% of any class of voting stock and the stock is registered under Section 12 of the Securities Exchange Act of 1934 or the acquiror will be the largest shareholder after the acquisition.

Federal Securities Law. The Company has registered its common stock with the SEC pursuant to Section 12(g) of the Securities Exchange Act of 1934. As a result of that registration, the proxy and tender offer rules, insider trading reporting requirements, annual and periodic reporting and other requirements of the Exchange Act are applicable to the Company.

Restrictions on Transactions with Affiliates. The Bank is subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of:

• a bank’s loans or extensions of credit to, or investment in, its affiliates;

• assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve Board;

• the amount of loans or extensions of credit by a bank to third parties which are collateralized by the securities or obligations of the bank’s affiliates; and

• a bank’s guarantee, acceptance or letter of credit issued on behalf of one of its affiliates.

The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. The Bank also must comply with other provisions designed to avoid the taking of low-quality assets from an affiliate.

The Bank also is subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibits a bank from engaging in the above transactions with its affiliates unless the transactions are on terms substantially the same, or at least as favorable to the bank or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

Federal law also places restrictions on the Bank’s ability to extend credit to its executive officers, directors, principal shareholders and their related interests. These extensions of credit (1) must be made on

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substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features.

Other. The federal banking agencies, including the FDIC, have developed joint regulations requiring annual examinations of all insured depository institutions by the appropriate federal banking agency, with some exceptions for small, well-capitalized institutions and state-chartered institutions examined by state regulators, and establishing operational and managerial, asset quality, earnings and stock valuation standards for insured depository institutions, as well as compensation standards when such compensation would endanger the insured depository institution or would constitute an unsafe practice.

In addition, the Bank is subject to various other state and federal laws and regulations, including state usury laws, laws relating to fiduciaries, consumer credit and equal credit, fair credit reporting laws and laws relating to branch banking. The Bank does not believe that these regulations have had or will have a material adverse effect on its current operations.

ITEM 2. DESCRIPTION OF PROPERTY

At December 31, 2004, the Company conducted its business from the headquarters office in Durham, North Carolina, and its eight branch offices in Durham, Raleigh, Charlotte and Winston-Salem, North Carolina. The following table sets forth certain information regarding the Bank’s properties as of December 31, 2004. Unless indicated otherwise, the Bank owns the properties. Rent expense incurred by the Bank under leases totaled $124,000 for the fiscal year ended December 31, 2004.

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Address	Net Book Value of Property
Main Banking Office 116 West Parrish Street Durham, North Carolina (Leased)	$	4,687
Corporate Office 2634 Chapel Hill Boulevard Durham, North Carolina		3,334,926
Mutual Plaza Durham, North Carolina (Leased)		-0-
2705 Chapel Hill Boulevard Durham, North Carolina		335,931
13 East Hargett Street Raleigh, North Carolina		49,117
1824 Rock Quarry Road Raleigh, North Carolina (Lease Land Only)		78,934
2101 Beatties Ford Road Charlotte, North Carolina		433
101 Beatties Ford Road Charlotte, North Carolina		191,391
770 Martin Luther King Drive Winston-Salem, North Carolina		840,200
100 Shanta Drive Raleigh, North Carolina (Land Only)		590,478
3225 Sugar Creek Road Charlotte, North Carolina (Leased)		110,040

The total net book value of the Company’s furniture, fixtures and equipment on December 31, 2004 was $1,249,895. All properties are considered by management to be in good condition and adequately covered by insurance. Additional information about the Company’s property is set forth in Note 6 to the consolidated financial statements, which note is incorporated herein by reference.

Any property acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until the time it is sold or otherwise disposed of by the Bank in an effort to recover its investment. At December 31, 2004, the Bank recorded $509,189 in real estate acquired in settlement of loans.

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ITEM 3. LEGAL PROCEEDINGS

From time to time the Company may become involved in legal proceedings occurring in the ordinary course of business. However, subject to the uncertainties inherent in any litigation, management believes there currently are no pending or threatened proceedings that are reasonably likely to result in a material adverse change in the Company’s financial condition or operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of the Company’s shareholders during the quarter ended December 31, 2004.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The information required by this Item is set forth under the section captioned “Shareholders’ Equity and Dividends” of the Annual Report, which section is incorporated herein by reference. See “Item 1. BUSINESS–Supervision and Regulation–Dividend and Repurchase Limitations” above for regulatory restrictions which limit the ability of the Company to pay dividends. See “Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT” below for information on equity compensation plans.

The Company did not repurchase any shares of Common Stock during the fourth quarter of 2004.

ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The information required by this Item is set forth in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Annual Report, which section is incorporated herein by reference. See also the information set forth under Item 1—”Description of Business” above which section is incorporated herein by reference.

ITEM 7. FINANCIAL STATEMENTS

The consolidated financial statements and notes to the financial statements of the Company set forth in the Annual Report are incorporated herein by reference.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

12

ITEM 8A. CONTROLS AND PROCEDURES

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), 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 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 have been 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.

ITEM 8B. OTHER INFORMATION

Not applicable.

13

PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a) Directors and Executive Officers - The information required by this Item regarding directors and executive officers of the Company is set forth under the sections captioned “Proposal 1 – Election of Directors – Nominees for Election at this Annual Meeting” in the Proxy Statement and “Executive Officers” in the Proxy Statement, which sections are incorporated herein by reference. The information required by this Item regarding the Company’s audit committee and procedures by which stockholders may recommend nominees to the Company’s Board of Directors is set forth under the section captioned “The Board of Directors and Its Committees” in the Proxy Statement, which section is incorporated herein by reference.

(b) Section 16(a) Compliance - The information required by this Item regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth under the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement, which section is incorporated herein by reference.

(c) Audit Committee Financial Expert - The Board of Directors has determined that Genevia Gee Fulbright, Chairperson of the Audit Committee, Maceo K. Sloan and Willie T. Closs, Jr. qualify as “audit committee financial experts” and are “independent” as defined under applicable SEC and NASD rules and regulations.

(d) Code of Ethics - The Company has adopted a Code of Ethics that is applicable to its principal executive and senior financial officers, as required by Section 406 of the Sarbanes-Oxley Act of 2002 and applicable SEC rules. A copy of the Company’s Code of Ethics for Principal Executive and Senior Financial Professionals adopted by the Board of Directors is attached as Exhibit 14 to this report and is available on “Investor Information” page of the Company’s website at www.mfbonline.com. In addition, the Bank has a Code of Ethics applicable to all of its officers and employees.

In the event that the Company makes any amendment to, or grants any waivers of, a provision of its Code of Ethics for Principal Executive and Senior Financial Professionals that requires disclosure under applicable SEC rules, the Company intends to disclose such amendment or waiver by posting that information on the Company’s website.

ITEM 10. EXECUTIVE COMPENSATION

The information required by this Item is set forth under the sections captioned “Board of Directors and Its Committees – How Are Directors Compensated?” in the Proxy Statement, which sections are incorporated herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item is incorporated by reference from the section captioned “Stock Ownership” and “Executive Compensation – Equity Compensation Plan Information” in the Proxy Statement, which sections are incorporated herein by reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See the section captioned “Executive Compensation – Indebtedness of and Transactions with Management” in the Proxy Statement, which section is incorporated herein by reference.

14

ITEM 13. EXHIBITS

13(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 SEC 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 SEC on November 12, 1999.
Exhibit	(3)(iii)	Amended and Restated Article III, Section 5 of the Bylaws of M & F Bancorp, Inc., adopted by the shareholders of M & F Bancorp, Inc. on April 20, 2002, incorporated by reference to Exhibit 3(iii) to the Form 10-QSB for the quarter ended March 31, 2002 filed with the SEC on May 14, 2002.
Exhibit	(4)	Specimen Stock Certificate, incorporated by reference to Exhibit 4 to the Form 10-KSB for the year ended December 31, 2000 filed with the SEC on April 2, 2001.
Exhibit	(10)(a)	Employment Agreement between Mechanics and Farmers Bank and Lee Johnson, Jr. incorporated by reference to Exhibit 10 to the Form 10-QSB for the quarter ended September 30, 2000 filed with the SEC on November 9, 2000.
Exhibit	(10)(b)	Retention Bonus Agreement between Mechanics and Farmers Bank and Fohliette Becote incorporated by reference to Exhibit 10.03 to the Form 10-QSB for the quarter ended September 30, 1999 filed with the SEC on November 12, 1999.
Exhibit	(10)(c)	Retention Bonus Agreement between Mechanics and Farmers Bank and Walter D. Harrington incorporated by reference to Exhibit 10.03 to the Form 10-QSB for the quarter ended September 30, 1999 filed with the SEC on November 12, 1999.
Exhibit	(10)(d)	Retention Bonus Agreement between Mechanics and Farmers Bank and Harold G. Sellers incorporated by reference to Exhibit 10.03 to the Form 10-QSB for the quarter ended September 30, 1999 filed with the SEC on November 12, 1999.
Exhibit	(10)(e)	Retention Bonus Agreement between Mechanics and Farmers Bank and Elaine Small incorporated by reference to Exhibit 10.03 to the Form 10-QSB for the quarter ended September 30, 1999 filed with the SEC on November 12, 1999.
Exhibit	(10)(f)	Supplemental Executive Retirement Plan incorporated by reference to Exhibit 10(f) to the Form 10-KSB for the year ended December 31, 2003 filed with the SEC on March 30, 2004.
Exhibit	(10)(g)	Summary of Retirement Package Benefits for Lee Johnson, Jr.
Exhibit	(10)(h)	2004 President and CEO Incentive Compensation Program
Exhibit	(10)(i)	2004 Executive Incentive Compensation Program

15

Exhibit	(10)(j)	2004 City Executives Incentive Compensation Program
Exhibit	(10)(k)	2004 Loan Production Incentive Compensation Program
Exhibit	(10)(l)	2004 Incentive Compensation Program – Branch Customer Service Plan
Exhibit	(10)(m)	2004 Corporate Support and Tellers Incentive Compensation Program
Exhibit	(11)	Statement Regarding Computation of Per Share Earnings.
Exhibit	(13)	M&F Bancorp, Inc. 2004 Annual Report to Stockholders.
Exhibit	(14)	M&F Bancorp, Inc. Code of Ethics for Principal Executive and Senior Financial Professionals incorporated by reference to Exhibit 14 to the Form 10-KSB for the year ended December 31, 2003 filed with the SEC on March 30, 2004.
Exhibit	(21)	Subsidiaries of M&F Bancorp, Inc.
Exhibit	(23)	Consent of Deloitte & Touche LLP.
Exhibit	(31.1)	Certification of Lee Johnson, Jr.
Exhibit	(32.2)	Certification of Allan E. Sturges
Exhibit	(32)	Certification pursuant to 18 U.S.C. Section 1350.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is set forth under the sections captioned “Audit Fees Paid to Independent Auditor” and “Pre-Approval of Audit and Permissible Non-Audit Services” in the Proxy Statement, which sections are incorporated herein by reference.

16

SIGNATURES

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

	M&F Bancorp, Inc.
Date: March 30, 2005	By:	/s/ Lee Johnson, Jr.
		Lee Johnson, Jr.
		President and Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

Signature	Title	Date
/s/ Lee Johnson, Jr. Lee Johnson, Jr.	President, Chief Executive Officer and Director (Principal Executive Officer)	March 30, 2005
/s/ Allan Sturges Allan Sturges	Acting Chief Financial Officer (Acting Principal Financial and Principal Accounting Officer)	March 30, 2005
/s/ Willie T. Closs, Jr. Willie T. Closs, Jr.	Director	March 30, 2005
/s/ Genevia G. Fulbright Genevia G. Fulbright	Director	March 30, 2005
/s/ Joseph M. Sansom Joseph M. Sansom	Director	March 30, 2005
/s/ Maceo K. Sloan Maceo K. Sloan	Director	March 30, 2005
/s/ Aaron L. Spaulding Aaron L. Spaulding	Director	March 30, 2005

17

INDEX TO EXHIBITS

Exhibit No.	Description
Exhibit (10)(g)	Summary of Retirement Package Benefits for Lee Johnson, Jr.
Exhibit (10)(h)	2004 President and CEO Incentive Compensation Program
Exhibit (10)(i)	2004 Executive Incentive Compensation Program
Exhibit (10)(j)	2004 City Executives Incentive Compensation Program
Exhibit (10)(k)	2004 Loan Production Incentive Compensation Program
Exhibit (10)(l)	2004 Incentive Compensation Program – Branch Customer Service Plan
Exhibit (10)(m)	2004 Corporate Support and Tellers Incentive Compensation Program
Exhibit (11)	Statement Regarding Computation of Per Share Earnings
Exhibit (13)	M&F Bancorp, Inc. 2004 Annual Report to Stockholders.
Exhibit (21)	Subsidiaries of M&F Bancorp, Inc.
Exhibit (23)	Consent of Deloitte & Touche LLP
Exhibit (31.1)	Certification of Lee Johnson, Jr.
Exhibit (31.2)	Certification of Allan E. Sturges
Exhibit (32)	Certification Pursuant to 18 U.S.C. Section 1350

18

EX-10.(G)

EXHIBIT (10)(g)

SUMMARY OF RETIREMENT PACKAGE BENEFITS FOR LEE JOHNSON, JR.

In September 2004, the Bank agreed to provide Mr. Johnson with a retirement package which will provide for certain benefits to Mr. Johnson upon his retirement which is scheduled to occur not later than June 30, 2006. In connection with the retirement package, the Bank has agreed to:

(a) pay an amount equal to the cost of health coverage (to be converted to a Medicare Supplement at age 65), dental insurance and long-term health care insurance for Mr. Johnson’s lifetime with a maximum annual benefit of $8,500,

(b) enter into a two year agreement with Mr. Johnson for professional/consulting service for a retainer of $30,000 per year and

(c) to amend the Supplemental Executive Retirement Plan to provide a benefit equivalent to 65% of Mr. Johnson’s average compensation based on the highest three years of the last ten years (offset by the cash balance benefit).

The Board of Directors has received Mr. Johnson’s written indication of intent to retire on or before June 30, 2006. The appropriate personnel of the Bank have been authorized to take action to executive the above transactions upon Mr. Johnson’s actual retirement.

19

EX-10.(H)

EXHIBIT (10)(h)

The Sage Group
CONSULTANTS TO MANAGEMENT	10409 LESLIE DRIVE
	RALEIGH, NORTH CAROLINA 27601
	(919) 844-9783
	E-mail: steve@sagegroupconsulting.com

MEMORANDUM

DATE:	May 1, 2004
TO:	Ben Ruffin, Board Compensation Committee Chairman
FROM:	Steven A. Savia, CMC
RE:	Final 2004 President and CEO Incentive Compensation Program
CC:	Compensation Committee Members
	Lee Johnson, President M&F Bank

This year’s incentive compensation program will have multiple components.

1. Executive Plan

2. City Executive Plan

3. Loan Production Plan

4. Branch Customer Service Plan

5. Corporate Support/Teller Plan

The Board Compensation Committee determined that the President and CEO be separated out from all other plans. That position’s measurement factors are in some cases less quantifiable.

Therefore, we offer the following incentive plan for President and CEO.

Key components of the plan include the following.

1. Threshold Level of Net Income - the Threshold level for 2004 will be $1.448 million (2003 = $1.389 million). This is consistent with the other incentive plans as a trigger for plans being initiated. It represents a “stretch plan”, i.e., a plan that is perceived as difficult to achieve, especially if there is little change in the interest rate environment.

2. Key measures – the measures for the President and CEO shall be as follows:

a. Net Income (15%)

b. Implementation of Strategic Plan Objectives (25%)

i.	Growth in Assets Above Plan/Budget
ii.	Increase in Average Number of Products/Services per Customer
iii.	Efficiency Ratio (Cost Controls)
iv.	Bank Organization

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v. Development/Modification of Strategic Plan

c. Evaluation of and by Direct Reports (15%)

d. Evaluation by Board of Directors (10%)

e. Judgment in Decision-making Relative to Opportunities for External Growth (10%)

f. Involvement and Visibility in the Bank’s Markets (25%)

Notice that some of the factors are quantitative and others are not. Each is defined below before we move on to the calculation of award.

• Net Income (15%) – The basis of this measure is the absolute amount of net income (before incentives) above Threshold. This is a stretch plan that will be difficult to achieve. It is 15% of the performance measure. If the incumbent achieves plan, this factor achieves 10%. If the Bank’s net income exceeds plan, the participant gets the full 15%.

• Implementation of Strategic Plan Objectives (25%) – One of the primary roles of the CEO is to provide vision and direction for the future. This has been accomplished for M&F Bank by the development of a strategic plan. That plan continues to be the primary driver for the Bank’s future.

• Growth in Assets Above Plan/Budget – The primary focus of the strategic plan is growth. The Bank recognizes that with growth, profitability will come, especially as the interest rate environment improves. The measure for success in this subcategory is the percentage of growth above the plan and budget. The strategic plan calls for the Bank’s assets to be $238,499,750 by the end of 2004. The budget calls for $245,045,259. Success would be defined as meeting $238,499,750. Superior success in this category would be meeting $245,045,259. Exceptional success would be exceeding $245,045,259 in assets. Success would yield 1%; Superior would yield 2.5%; and Exceptional would yield 4%.

• Increase in Average Number of Products/Services per Customer – The Bank’s plan calls for increasing the product penetration for existing customers. We recognize that it is less costly to sell additional products and services to existing customers that to go out and obtain new customers. Our revenues increase without significant increase in marginal cost. Success would be defined as increasing the average number of products/services to existing customers by .3. Superior success would be to increase the average number by .75; Exceptional success would be increasing the average number by 1. Success would yield 1%; Superior would yield 2.5%; and Exceptional would yield 4%.

• Efficiency Ratio (Cost Controls) – Cost control is an issue with all Boards of Directors. The efficiency ratio of the Bank basically describes the cost to the Bank for earning one dollar. The Bank is projecting its 2003 efficiency ratio to be 79.15%. That means that it costs the Bank $0.7915 to earn each dollar. The budget for 2004 calls for an efficiency ratio of 90.70%. Increases to efficiency ratio usually indicate additional investments that need to be made to maintain or improve the Bank’s infrastructure. We believe that a Bank’s efficiency ratio should fall in the range of 65% to 75%. There are exceptions, especially in times of significant expansion, for a short period immediately following an acquisition, or in the case of a significant system upgrade. Success for this factor for 2004 will be to achieve an efficiency ratio of 85%. Superior success would be to achieve an efficiency ratio of 82%. Exceptional Success would be to achieve an efficiency ratio of 79%. Success would yield 1%; Superior would yield 2.5%; and Exceptional would yield 4%.

• Bank Organization – The strategic plan has as a significant strategy to “organize the Bank consistent with our desire to grow and in a manner that facilitates the most effective and profitable growth.” There are various incremental changes to the organizational structure cited in the plan. Changes in the structure that improve the efficiency and lines of communication will be considered as successful. This is a subjective measure and the Board will determine if the participant achieves Success, Superior Success, or Exceptional Success. Success would yield 1%; Superior would yield 2.5%; and Exceptional would yield 4%.

21

• Development/Modification of Strategic Plan – No strategic plan is successful in driving an organization if it remains static. It must be a document that changes to reflect accomplishments and changes in the environment. Presenting an updated strategic plan and obtaining concurrence from the Board is a measure of success. The Board Compensation Committee will determine if the participant achieves Success, Superior Success, or Exceptional Success. Success would yield 1%; Superior would yield 2.5%; and Exceptional would yield 4%.

• Evaluation of and by Direct Reports (15%) – A measure of success is completing timely and constructive performance evaluations for one’s direct subordinates. This year, for executive management and senior management (including City Executives) we will be instituting a “360” performance evaluation system. This means that subordinates will also complete an evaluation of their supervisors primarily focused on the effectiveness of their supervisor in providing supervision, assisting in preparation for advancement, and providing direction in the achievement of goals.

Evaluations by subordinates will be sent directly to The Sage Group for compilation. A report will be prepared and provided to the Compensation Committee Chair. Success for this factor will be the timely completion of all subordinate performance evaluations (prior to deadline). Success will also be defined as a “satisfactory” evaluation by subordinates under the “360” performance evaluation. Superior Success will be to receive an average “above average” evaluation from subordinates; Exceptional Success will be to receive an average “excellent” evaluation from subordinates. Success would yield 5%; Superior would yield 10%; and Exceptional would yield 15%.

• Evaluation by Board of Directors (10%) – The Board of Directors should set expectations and goals for the President and CEO. The Board should also be in a position to judge leadership, vision, and capacity for driving the Bank toward and beyond its goals. The Sage Group will be presented to the Chair of the Compensation Committee to enable the Board to establish evaluation expectations. Success will be based on receiving a satisfactory evaluation from the Board or the committee designated by the Board to perform such an evaluation. Superior or exceptional success will correspond to those evaluations. Success would yield 5%; Superior would yield 8%; and Exceptional would yield 10%.

• Judgment Relative to Opportunities for External Growth (10%) – Throughout the year there will be various opportunities for the Bank to undertake transactions that will result in growth through acquisition. Recognizing it is not appropriate for the Bank to undertake every deal nor is it advisable to pursue any particular transaction, the Board’s Compensation Committee will evaluate the judgment demonstrated by the President and CEO in assessing the risks associated with the transactions considered, in making decisions regarding the level of investment to make in determining the desirability of pursuing transactions, and in making the decision to go forward or cease further evaluation. Success would yield 3.5%; Superior would yield 7%; and Exceptional would yield 10%.

• Involvement and Visibility in the Bank’s Markets (25%) – The President and CEO is the key person in the organization to represent the Bank in the various communities it serves. While he cannot be at every function, there are critical functions at which it is appropriate and necessary that the President represent the Bank. The evaluation of this factor will be based on the President being in attendance for key events (branch openings, new product or service kick offs, press conferences, significant community events). Also a measure of success for this factor is the amount of times the President is quoted in the media. This factor is a somewhat subjective measure and the Compensation Committee will determine if the participant achieves Success, Superior Success, or Exceptional Success. Success would yield 15%; Superior would yield 20%; and Exceptional would yield 25%.

22

AWARD PAYOUTS

Below is a description of the basis for payouts for this plan as described above.

The total of all factors equals 100%. The President and CEO will be eligible to earn up to a maximum of 50% of his base salary. Therefore, if the incumbent achieves 100% of the factors above, he will receive a payout of $76,672. If the incumbent achieves 50% of the factor measures, he will receive a payout of $38,336.

23

EX-10.(I)

EXHIBIT (10)(i)

The Sage Group

CONSULTANTS TO MANAGEMENT	10409 LESLIE DRIVE
	RALEIGH, NORTH CAROLINA 27601
	(919) 844-9783
	E-mail: steve@sagegroupconsulting.com

MEMORANDUM

DATE:	May 1, 2004
TO:	Lee Johnson, President M&F Bank
FROM:	Steven A. Savia, CMC
RE:	Final 2004 Executive Incentive Compensation Program
CC:

This year’s incentive compensation program will have multiple components.

1. Executive Plan

2. City Executive Plan

3. Loan Production Plan

4. Branch Customer Service Plan

5. Corporate Support/Teller Plan

This memo addresses the Executive Plan.

Overall for all plans, we will put in place the following:

1. Threshold level of Net Income - the Threshold level for 2004 will be $1.448 million (2003 = $1.389 million).

2. Key factor measures for each of the employee participants. Schedule B presents the 2004 executive management measures.

3. Once the threshold has been exceeded, the overall Bank pool will be created by 65% percent of the increase in net income marginal difference between budgeted net income ($1.484 million) and actual. The Executive Management Plan Pool will be composed of 26% of the increase in net income marginal difference between budgeted net income ($1.484 million) and actual.

The Executive Plan is based on the assumption that the award will be a percent of base salary. The Bank’s income would therefore always be more than budget if awards were being made.

Schedule A is a listing of the quantitative measures that the program will include and where in the Bank’s information system or other reporting processes the data for those measures is found. Other measures, especially those using scorecard methodology, are noted in the specific schedules of personnel.

Non-quantifiable or project specific related measures may require the individual participants to submit support documentation detailing the achievement and the role they played in the achievement, especially if there is no correlating system measure.

24

SCHEDULE A – PERFORMANCE FACTORS

Measurement Factor	Where Available
Growth in Average Assets	General Ledger/ Finance
Return on Average Assets	General Ledger/ Finance
Efficiency Ratio	General Ledger/ Finance
Total Deposits	General Ledger/ Finance
Total Assets	General Ledger/ Finance
Growth in Portfolio Loan Levels	Credit Administration
Net Income	General Ledger/ Finance
Percent Recovery Of Loan Loss	General Ledger/ Credit Administration
Service Charge Income	General Ledger/ Finance
Classified Loans as a % of Capital	General Ledger/ Credit Administration
Non-Performing Assets as % of Loan Loss Reserve	General Ledger/ Credit Administration
Income per Employee	General Ledger/ Finance
Assets per Employee	General Ledger/ Finance
Level of Earning Assets	General Ledger/ Finance
Audit Exceptions	Internal Audit
Loan Originations ($)	Loan Production (Retail Bank Admin)
Loan Origination (#)	Loan Production (Retail Bank Admin)
Average Closing Days	Credit Administration
Exceptions From Quality Control	Credit Administration
CRA Rating	Compliance
Target Customer Calls (#)	Loan Production (Retail Bank Admin)
% Loan Portfolio > 30 Days Delinquent	Credit Administration
Document Exceptions Not Cleared 30 Days	Credit Administration
Operating Losses	General Ledger
Transactions per Employee	Operations
Loans Processed (#)	Credit Administration
Delinquencies as % of Loan Portfolio	Credit Administration
Monthly Branch Mystery Shop Score	Operations
New Deposit Accounts Opened	Operations/Branch Reports
Deposit Accounts Closed	Operations/Branch Reports
Loan Referrals	Loan Production (Retail Bank Admin)
Branch Profitability	Finance

Each of the above factors relates to one or more positions in the Bank as a measure of their contribution to the Bank. In some cases the measure is an overall measure of the success of the Bank as a whole (such as Return on Average Assets). In other cases, the measure is more specific to the nature of the position, e.g., Growth in Portfolio Loan Levels for the Retail Banking Group Executive and City Executives; Number of New Deposit Accounts for Customer Service Representatives and Branch Operations Managers.

Schedule B is a listing of the senior and executive management employees that will be included in the Senior and Executive Management Plan.

25

SCHEDULE B – EXECUTIVE AND SENIOR MANAGEMENT PLAN PARTICIPANTS

EXECUTIVE MANAGEMENT	POSITION
Becote, Fohliette	SVP/CFO/Financial Group Executive
Christopher, Wesley	SVP/Retail Banking Group Executive
Small, Elaine	EVP/Operations Group Executive
SENIOR MANAGEMENT	POSITION
Harrington, Walter	SVP/Credit Administration
Parker, Lucera	Marketing Director
Powell, Anthony	Audit Risk Manager
Satterfield, Debbie	VP Manager of Commercial Lending and Senior Underwriter
Sellars, Harold	SVP/Quality Assurance/Lending Administrator
Sturges, Allan	VP and Controller

The next step is putting the factors with the personnel and their positions. Schedule G, beginning on the next page, has the measures and the weighted percentage for each employee who will participate in the Executive/Senior Management Plan this year. A number of the measures are less quantifiable than in the past year, reflecting the scorecard approach. These are special projects for which the individual is responsible and the successful completion of those projects. Where necessary we have provided definitions for the factors and their measures. These definitions will also appear in the full Program Plan Document.

SCHEDULE G – 2004 EXECUTIVE AND SENIOR MANAGEMENT PLAN PARTICIPANTS – 2004 MEASURES

EMPLOYEE

MEASUREMENT FACTORS

Becote, Fohliette

Efficiency Ratio (25%) – Standard Definition in Plan Document Contributions to Income (20%) – The position has the ability to contribute to the Bank’s income through a variety of initiatives within scope of responsibility and occasionally outside the specific scope of responsibility. This factor tracks specific addition to income directly resulting from projects initiated or substantially managed by the employee. Levels will be based on achieving increments of $25,000. Facilities Management – Achieving budget on revenue and expenses (15%) – This factor is based on the management of the corporate facility as well as responsibility for the Bank’s other facilities. Achievement of budgeted revenues and maintaining the budget level of expenses is deemed satisfactory. Achieving additional revenues above budget or reduced expenditures results in an incentive award.

26

	Net Income (15%) – Standard Definition in Plan Document Special Project Completion (10%) – The successful completion of special projects assigned by the CEO or the Board of Directors through the CEO as defined by the objectives set out in the assignment. Audit Exceptions (10%) – Standard Definition in Plan Document Performance Evaluation (5%) – Standard Definition in Plan Document
Christopher, Wesley	Total Portfolio Loan Levels (30%) - Standard Definition in Plan Document Net Income (15%) - Standard Definition in Plan Document Non-Performing Assets as % of LLR (15%) - Standard Definition in Plan Document Audit Exceptions (5%) - Standard Definition in Plan Document Target Prospect Calls (number) (20%) - Standard Definition in Plan Document Performance Evaluation (15%) - Standard Definition in Plan Document
Harrington, Walter	Credit Administration (15%) – defined as maintenance of the on-line credit policies, including timely updates as needed; administration of updated procedures required to maintain Bank Compliance; timely reporting to all users regarding the condition and quality of the loan portfolio. Classified Loans as a % of Capital (10%) - Standard Definition in Plan Document Complete Securitization of Loans in Portfolio (15%) – This is a special project to be completed to protect the Bank’s position. Successful completion is defined as having all loans at the end of the year in a position for securitization and potential sale. Non-Performing Assets as % of LLR (15%) Standard Definition in Plan Document Audit Exceptions (15%) - Standard Definition in Plan Document % Loan Portfolio > 30 Days Delinquent (15%) - Standard Definition in Plan Document External Audit Exceptions to Loan Portfolio (5%) - Standard Definition in Plan Document Performance Evaluation (10%) - Standard Definition in Plan Document
Parker, Lucera	Total Deposits (15%) - Standard Definition in Plan Document Total Portfolio Loan Levels (15%) - Standard Definition in Plan Document

27

	Net Income (5%) - Standard Definition in Plan Document Media Hits (35%) - Standard Definition in Plan Document Increase in Average Number of Products/Services per Customer (25%) – Success would be defined as increasing the average number of products/services to existing customers by .3. Superior success would be to increase the average number by .75; Exceptional success would be increasing the average number by 1. Performance Evaluation (5%) - Standard Definition in Plan Document
Powell, Anthony	Total Internal Audits Conducted (30%) – The total number of internal audits conducted versus the number determined necessary at the beginning of the year External Audit Exceptions (30%) - Standard Definition in Plan Document Document Exceptions Not Cleared 30 Days (25%) - - Standard Definition in Plan Document Performance Evaluation (15%) - - Standard Definition in Plan Document
Sellars, Harold	Net Income (20%) - Standard Definition in Plan Document Non-Interest Income and Fees (10%) - Standard Definition in Plan Document Document Exceptions Not Cleared 30 Days (15%) - Standard Definition in Plan Document Complete ARTA training for loan personnel (10%) – Special project Total Document Exceptions (15%) - Standard Definition in Plan Document Average Days to Commitment (15%) - Standard Definition in Plan Document Performance Evaluation (15%) - Standard Definition in Plan Document
Small, Elaine	New Systems, Products, Services, Training and Efficiencies (30%) - Standard Definition in Plan Document Net Income (15%) - Standard Definition in Plan Document System Up-time (25%) - Standard Definition in Plan Document Audit Exceptions (15%) - Standard Definition in Plan Document Performance Evaluation (15%) - Standard Definition in Plan Document

28

Satterfield, Debbie

Total Portfolio Loan Levels (30%) - Standard Definition in Plan Document Net Income (15%) - Standard Definition in Plan Document Non-Performing Assets as % of LLR (15%) - Standard Definition in Plan Document Audit Exceptions (5%) - Standard Definition in Plan Document Total Document Exceptions (10%) - Standard Definition in Plan Document Average Days to Commitment (15%) - Standard Definition in Plan Document Performance Evaluation (10%) - Standard Definition in Plan Document

Sturges, Allan

Net Income (15%) – Standard Definition in Plan Document Audit Exceptions (10%) - Standard Definition in Plan Document Budget/Financial Statement Software (10%) – Research and evaluate options for budget and financial statement preparation and present a recommendation to the CFO. Regulatory Reporting (30%) – Timely completion of regulatory reports for the FDIC and FRB and preparing first draft of SEC reports. Transfer Pricing Model Software (10%) – Development or identification of transfer pricing model for branch financial statement preparation. Efficiency Ratio (20%) – Standard Definition in Plan Document Performance Evaluation (5%) - Standard Definition in Plan Document

AWARD PAYOUTS

Below is a description of the basis for payouts for the Executive Plan.

The Bank-wide pool from which this plan’s awards are distributed is based on 65% of the difference between budgeted and actual, assuming actual exceeds budget. 40% of that pool is available to the executives of the Bank (see Schedule B, page 4). Thus, if the Bank exceeds its net income threshold of $1.448 million by $200,000, then the Bank-wide pool available for incentive awards is $130,000 of which $52,000 would be available for Executive participants.

Based on the available pool, measures of success are weighted against the percent for each individual’s performance factors. A percent is created and multiplied by the individual participant’s base salary to create an incentive payment. As the Bank’s achievement of its goals grows, the pool also grows larger.

29

EX-10.(J)

EXHIBIT (10)(j)

The Sage Group
CONSULTANTS TO MANAGEMENT	10409 LESLIE DRIVE
	RALEIGH, NORTH CAROLINA 27601
	(919) 844-9783
	E-mail: steve@sagegroupconsulting.com

MEMORANDUM

DATE:	May 1, 2004
TO:	Lee Johnson, President M&F Bank
FROM:	Steven A. Savia, CMC
RE:	Final 2004 City Executives Incentive Compensation Program
CC:

This year’s incentive compensation program will have multiple components.

1. Executive Plan

2. City Executive Plan

3. Loan Production Plan

4. Branch Customer Service Plan

5. Corporate Support/Teller Plan

This memo addresses the Executive Plan.

Overall for all plans, we will put in place the following:

1. Threshold level of Net Income - the Threshold level for 2004 will be $1.448 million (2003 = $1.389 million).

2. Key factor measures for each of the employee participants. Schedule C presents the 2004 executive management measures.

3. Once the threshold has been exceeded, the overall Bank pool will be created by 65% percent of the increase in net income marginal difference between budgeted net income ($1.484 million) and actual. The City Executive Plan Pool will be composed of 30% of the overall Bank pool.

The City Executive plan is based on the assumption that the award will be a percent of base salary. The plan has no budget implications since the awards would be made based on a percentage of the marginal increase beyond the budget. The Bank’s income would therefore always be more than budget if awards were being made.

Schedule A is a listing of the measures that the program will include and where in the Bank’s information system or other reporting processes the data for those measures is found.

30

SCHEDULE A – PERFORMANCE FACTORS

Measurement Factor	Where Available
Growth in Average Assets	General Ledger/ Finance
Return on Average Assets	General Ledger/ Finance
Efficiency Ratio	General Ledger/ Finance
Total Deposits	General Ledger/ Finance
Total Assets	General Ledger/ Finance
Growth in Portfolio Loan Levels	Credit Administration
Net Income	General Ledger/ Finance
Percent Recovery Of Loan Loss	General Ledger/ Credit Administration
Service Charge Income	General Ledger/ Finance
Classified Loans as a % of Capital	General Ledger/ Credit Administration
Non-Performing Assets as % of Loan Loss Reserve	General Ledger/ Credit Administration
Income per Employee	General Ledger/ Finance
Assets per Employee	General Ledger/ Finance
Level of Earning Assets	General Ledger/ Finance
Audit Exceptions	Internal Audit
Loan Originations ($)	Loan Production (Retail Bank Admin)
Loan Origination (#)	Loan Production (Retail Bank Admin)
Average Closing Days	Credit Administration
Exceptions From Quality Control	Credit Administration
CRA Rating	Compliance
Target Customer Calls (#)	Loan Production (Retail Bank Admin)
% Loan Portfolio > 30 Days Delinquent	Credit Administration
Document Exceptions Not Cleared 30 Days	Credit Administration
Operating Losses	General Ledger
Transactions per Employee	Operations
Loans Processed (#)	Credit Administration
Delinquencies as % of Loan Portfolio	Credit Administration
Monthly Branch Mystery Shop Score	Operations
New Deposit Accounts Opened	Operations/Branch Reports
Deposit Accounts Closed	Operations/Branch Reports
Loan Referrals	Loan Production (Retail Bank Admin)
Branch Profitability	Finance

Each of the above factors relates to one or more positions in the Bank as a measure of their contribution to the Bank. In some cases the measure is an overall measure of the success of the Bank as a whole (such as Return on Average Assets). In other cases, the measure is more specific to the nature of the position, e.g., Growth in Portfolio Loan Levels for the Retail Banking Group Executive and City Executives; Number of New Deposit Accounts for Customer Service Representatives and Branch Operations Managers.

Schedule C is a listing of the City Executive employees that would be included in the City Executive plan.

SCHEDULE C – CITY EXECUTIVE PLAN PARTICIPANTS

EMPLOYEE	POSITION
Acree, Evelyn	SVP/City Executive – Winston-Salem
Green, Stanley Jr.	SVP/ City Executive - Raleigh
Johnson, Jacque	SVP/ City Executive - Charlotte
Smith, Queron	SVP/ City Executive - Durham

31

The next step is putting the factors with the personnel and their positions. Schedule H below has the measures and the weighted percentage for each employee participating in the Plan this year. The absolute measures may be different for each individual recognizing the difference in cities.

SCHEDULE H – CITY EXECUTIVE PLAN PARTICIPANTS – 2004 MEASURES

EMPLOYEE	MEASUREMENT FACTORS
Acree, Evelyn	Growth in City Loan Portfolio (30%), Total Deposit Growth for the City (30%), City Operations Management (15%) •      Non-Interest & Fee Income •      Non-Interest Expense •      Net City Earnings Recovery of Charged-off Loans (5%), Business Development Quarterly Goals (10%), Average Delinquencies as % of Loan Portfolio (5%) Performance Evaluation (5%)
Green, Stanley Jr.	Growth in City Loan Portfolio (30%), Total Deposit Growth for the City (30%), City Operations Management (15%) •      Non-Interest & Fee Income •      Non-Interest Expense •      Net City Earnings Recovery of Charged-off Loans (5%), Business Development Quarterly Goals (10%), Average Delinquencies as % of Loan Portfolio (5%) Performance Evaluation (5%)
Johnson, Jacque	Growth in City Loan Portfolio (30%), Total Deposit Growth for the City (30%), City Operations Management (15%) •      Non-Interest & Fee Income •      Non-Interest Expense •      Net City Earnings Recovery of Charged-off Loans (5%), Business Development Quarterly Goals (10%), Average Delinquencies as % of Loan Portfolio (5%) Performance Evaluation (5%)
Smith, Queron	Growth in City Loan Portfolio (30%), Total Deposit Growth for the City (30%), City Operations Management (15%) •      Non-Interest & Fee Income •      Non-Interest Expense •      Net City Earnings Recovery of Charged-off Loans (5%), Business Development Quarterly Goals (10%), Average Delinquencies as % of Loan Portfolio (5%) Performance Evaluation (5%)

32

AWARD PAYOUTS

Below is a description of the basis for payouts for the various plans described above.

City Executive Plan –

The pool from which this plan’s awards are distributed is based on the 30% of the overall Bank pool or 15% of the total difference between budgeted and actual net income. The Bank-wide pool from which this plan’s awards are distributed is based on 65% of the difference between budgeted and actual, assuming actual exceeds budget. 30% of that pool is available to the City Executives of the Bank (see Schedule C, page 4). Thus, if the Bank exceeds its net income threshold of $1.448 million by $200,000, then the Bank-wide pool available for incentive awards is $130,000 of which $30,000 would be available for Executive participants.

33

EX-10.(K)

EXHIBIT (10)(k)

The Sage Group
CONSULTANTS TO MANAGEMENT	10409 LESLIE DRIVE
	RALEIGH, NORTH CAROLINA 27601
	(919) 844-9783
	E-mail: steve@sagegroupconsulting.com

MEMORANDUM

DATE:	May 1, 2004
TO:	Lee Johnson, President M&F Bank
FROM:	Steven A. Savia, CMC
RE:	Final 2004 Loan Production Incentive Compensation Program
CC:

This year’s incentive compensation program will have multiple components.

1. Executive Plan

2. City Executive Plan

3. Loan Production Plan

4. Branch Customer Service Plan

5. Corporate Support/Teller Plan

This memo describes the Loan Production Plan.

We worked with Wes Christopher to develop a new incentive plan for branch/commercial lenders. This year that plan recognizes the various roles involved in loan production. It awards a portion of the fee income to those who exceed their budgeted goal. The plan does not include the City Executives, as they will have their own plan this year.

The Loan Production Plan differs from the Executive and City Executive Plans in that it is based on meeting individual thresholds of loan production. These thresholds are monthly but are measured quarterly. Thus, a participant that fails to meet a monthly target could make that up during the quarter in which the incentive is granted.

We also have created a new approach toward rewarding mortgage loan personnel.

Schedule D on the following page is a listing of the Loan Officer, including Mortgage Loan, employees that are included in the Loan Production Plan.

34

SCHEDULE D – LOAN OFFICER PLAN PARTICIPANTS

EMPLOYEE	LOCATION
Cato, Leslie	Charlotte
Cheek, Julie	Durham
Clarke, Brian	Raleigh
Daniels, Aubra	Sr. Mort. Loan Closer/Jr. Underwriter
Dial-Bethune, Tanya	Charlotte
Dowdy, Scottie	Durham
Drayton-Harvey, JoAnn	Raleigh
Gibson, Sam	Raleigh
Greene, Keith	Charlotte
Jackson, John	Winston-Salem
Nichols, Cheryl	Mortgage Loan Production
Pickens, William	Corporate Business Development
Reavis, Michele	Mortgage Loan Manager
Stroud, James	Mortgage Loan Production

For Loan Production Plan Participants, the measures will be based on individual goals and measured against those goals. This plan is not based on percent of salary. It is built on an incentive for the volume generated and a percent of the fees generated by the loans originated. Additionally, the loan volume may be divided among multiple participants depending on the origination roles in which they are involved. Schedule I provides a sample of the measures for these participants.

SCHEDULE I – LOAN PRODUCTION PLAN THRESHOLDS

A – COMMERCIAL

EMPLOYEE	QUARTERLY LOAN VOLUME		QUARTERLY FEE INCOME GOAL
Cato, Leslie	$	900,000	$	4,500
Cheek, Julie	$	900,000	$	4,500
Clarke, Brian	$	1,500,000	$	7,500
Dial-Bethune, Tanya	$	900,000	$	4,500
Dowdy, Scottie	$	900,000	$	4,500
Drayton-Harvey, JoAnn	$	900,000	$	4,500
Gibson, Sam	$	1,800,000	$	9,000
Greene, Keith	$	900,000	$	4,500
Jackson, John	$	900,000	$	4,500
Pickens, William	$	1,800,0000	$	9,000

35

COMMERCIAL LOAN PRODUCTION AWARD PAYOUTS

Below is a description of the basis for payouts for the various plans described above.

Loan Officer Plan –

This plan pays out on a quarterly basis. The pool is based on a schedule that allots a percentage of the fees collected as a result of loan origination activities. While this is somewhat similar to the 2003 Loan Officer Plan, it differs in a couple of ways:

1.0 Awards are made only on the difference of actual versus the threshold (thus a loan officer with a threshold of $900,000 will be awarded additional compensation above base salary for all of the loan value in excess of the $900,000);

2.0 There are two factors in the computation of award: volume above threshold (0.5 cents on each dollar above the threshold); and, percentage of total fees collected (5 cents for total fees collected); and,

3.0 A percentage is allocated to each of the origination functions (identification/referral; negotiation; underwriting; closing). Thus, credit for a loan can be divided among multiple individuals involved in the loan. Those factors are broken out as follows:

3.1. Loan Originator – defined as the person who identifies the potential borrower and either follows up the opportunity personally or refers the opportunity to another loan officer. The finder may not be a loan officer, in which case is provided for under his or her own incentive plan. This factor is valued at 20% of the total credit.

3.2. Loan Negotiator – defined as the person who, following up on the opportunity, negotiates the structure of the transaction to the point of presenting the transaction for underwriting. The value of this factor is 30% of the credit.

3.3. Loan Underwriter – defined as the person who is responsible for completing all aspects of underwriting the loan for presentation to the Loan Committee for approval, including documentation of supporting financial data, financial analysis, identification of repayment capability, investigation of collateral value (as appropriate), identification of compliance with Bank policies (and support for approval in spite of not meeting specific policies if approval is still sought), and preparation of the credit memorandum. This factor is valued at 40% of the credit.

3.4. Closer – defined as the person who has responsibility for closing tasks on behalf of the Bank, including ensuring that all required documents are properly executed such that the Bank’s position in being repaid, including access to any supporting collateral, is secure. The value for this factor is 10% of the credit.

4.0 Example: the Bank obtains a loan for $800,000. Credit toward an individual’s threshold is broken down according to the factors above.

4.1. Originator - $160,000

4.2. Negotiator - $240,000

4.3. Underwriter - $320,000

4.4. Closer - $80,000

36

A single loan officer could get credit for the entire $800,000 or any portion thereof, depending on the role played, toward her or his monthly/quarterly threshold.

5.0 Example: Actual award will be calculated based on volume and actual fees collected. The following example shows how the calculation is made:

5.1. Threshold = $900,000

5.2. Roles Credit = $1,350,000

5.2.1. Finder = $400,000 (Identified $2,000,000 in loans)

5.2.2. Negotiator = $360,000 (Negotiated $1,200,000 in loans)

5.2.3. Underwriter = $480,000 (Underwrote $1,200,000 in loans)

5.2.4. Closer = $110,000 (Closed $1,100,000 in loans)

5.3. Award Calculation = (5.2 – 5.1) = $450,000

5.4. Volume = $0.005 on volume over threshold

5.4.1. ($450,000 x $0.005) = $2,250.00

5.5. Fees Collected (on 5.3 assuming 1%) = $4,500

5.5.1. ($0.05 x $4,500) = $225.00

5.6. Incentive Award = (5.4.1. + 5.5.1.) = $2,475.00

B - MORTGAGE LOAN DEPARTMENT

Incentive payouts (% of basis points of origination fees)

Monthly volume	$0-$500k		$501-$750k		$751-$999k		$1MM+
Nichols, Cheryl	-0-	%	-0-	%	30	%	35	%
Stroud, James
Daniels, Aubra	-0-	%	2	%	3.125	%	3.75	%
Reavis, Michele	-0-	%	3	%	3.75	%	4.5	%

Case Example 1

Assume that on each loan we collected a 1% fee on all loans. Also assume that the production for an individual Mortgage Loan Officer is $850,000.

Under this example, the award for the month would be spread as follows:

Fees Collected: $8,000.00

Mortgage Loan Officer (Field Producer) Incentive: $2,400.00 ($8,000 x 30%)

Mortgage Loan Processor Incentive: $250.00 ($8,000 x 3.125%)

Mortgage Loan Underwriter Incentive: $300.00 ($8,000 x 3.75%)

Total Incentive Paid Out: $2,950.00

37

Case Example 2

Assume that on each loan we collected a 1% fee on all loans. Also assume that the production for an individual Mortgage Loan Officer is $1,345,000.

Under this example, the award for the month would be spread as follows:

Fees Collected: $13,450.00

Mortgage Loan Officer (Field Producer) Incentive: $4,035.00 ($13,450 x 30%)

Mortgage Loan Processor Incentive: $420.31 ($13,450 x 3.125%)

Mortgage Loan Underwriter Incentive: $300.00 ($13,450 x 3.75%)

Total Incentive Paid Out: $2,950.00

Fees Retained By Bank: $5,050.00

38

EX-10.(L)

EXHIBIT (10)(l)

The Sage Group
CONSULTANTS TO MANAGEMENT	10409 LESLIE DRIVE
	RALEIGH, NORTH CAROLINA 27601
	(919) 844-9783
	E-mail: steve@sagegroupconsulting.com

MEMORANDUM

DATE:	May 1, 2004
TO:	Lee Johnson, President M&F Bank
FROM:	Steven A. Savia, CMC
RE:	Final 2004 Incentive Compensation Program – Branch Customer Service Plan
CC:

This year’s incentive compensation program will have multiple components.

1. Executive Plan

2. City Executive Plan

3. Loan Production Plan

4. Branch Customer Service Plan

5. Corporate Support/Teller Plan

This memo describes the Branch Customer Service Plan.

This is a new plan this year. We have segmented Branch Customer Service personnel from Corporate Support Personnel and Tellers. This plan is described below.

1. Threshold level of Net Income - the Threshold level for 2004 will be $1.448 million (2003 = $1.389 million).

2. Schedule J presents the 2004 key measures for participants in the Branch Customer Service Plan.

3. Once the threshold has been exceeded, the overall Bank pool will be created by 65% percent of the increase in net income marginal difference between budgeted net income ($1.484 million) and actual. The Branch Customer Service Plan Pool will be based on 30% of the overall Bank pool.

The Branch Customer Service plan is based on the assumption that the award will be a percent of base salary. The plan has no budget implications since the awards would be made based on a pool created from a percentage of the marginal increase beyond the budget. The Bank’s income would therefore always be more than budget if awards were being made.

Schedule A is a listing of the measures that the program will include and where in the Bank’s information system or other reporting processes the data for those measures is found.

39

SCHEDULE A – PERFORMANCE FACTORS

Measurement Factor	Where Available
Growth in Average Assets	General Ledger/ Finance
Return on Average Assets	General Ledger/ Finance
Efficiency Ratio	General Ledger/ Finance
Total Deposits	General Ledger/ Finance
Total Assets	General Ledger/ Finance
Growth in Portfolio Loan Levels	Credit Administration
Net Income	General Ledger/ Finance
Percent Recovery Of Loan Loss	General Ledger/ Credit Administration
Service Charge Income	General Ledger/ Finance
Classified Loans as a % of Capital	General Ledger/ Credit Administration
Non-Performing Assets as % of Loan Loss Reserve	General Ledger/ Credit Administration
Income per Employee	General Ledger/ Finance
Assets per Employee	General Ledger/ Finance
Level of Earning Assets	General Ledger/ Finance
Audit Exceptions	Internal Audit
Loan Originations ($)	Loan Production (Retail Bank Admin)
Loan Origination (#)	Loan Production (Retail Bank Admin)
Average Closing Days	Credit Administration
Exceptions From Quality Control	Credit Administration
CRA Rating	Compliance
Target Customer Calls (#)	Loan Production (Retail Bank Admin)
% Loan Portfolio > 30 Days Delinquent	Credit Administration
Document Exceptions Not Cleared 30 Days	Credit Administration
Operating Losses	General Ledger
Transactions per Employee	Operations
Loans Processed (#)	Credit Administration
Delinquencies as % of Loan Portfolio	Credit Administration
Monthly Branch Mystery Shop Score	Operations
New Deposit Accounts Opened	Operations/Branch Reports
Deposit Accounts Closed	Operations/Branch Reports
Loan Referrals	Loan Production (Retail Bank Admin)
Branch Profitability	Finance

Each of the above factors relates to one or more positions in the Bank as a measure of their contribution to the Bank. In some cases the measure is an overall measure of the success of the Bank as a whole (such as Return on Average Assets). In other cases, the measure is more specific to the nature of the position, e.g., Growth in Portfolio Loan Levels for the Retail Banking Group Executive and City Executives; Number of New Deposit Accounts for Customer Service Representatives and Branch Operations Managers.

Schedule E below lists the participants in this plan.

40

SCHEDULE E – BRANCH CUSTOMER SERVICE PLAN PARTICIPANTS

EMPLOYEE	POSITION
Claxton, Amy	Customer Service Representative
Corpening, Lori	Loan Support
Deloatch, Anne	AVP/Senior Banking Center Service Mgr.
Hart, Takisha	Customer Service Representative
Mackey, Shemeka	Customer Service Representative
Moore, Geraldine	Sec./ Loan Support
Morgan, Wendy	Sec./ Loan Support
Mungo, Audrey	Banking Center Service Manager
Polite, Karen	Customer Service Representative
Ray, LaRevia	Customer Service Representative
Thorpe, Lenora	Customer Service Representative
Winston-Graves, Sheila	Senior Banking Center Service Manager
Woods, Jacqueline	Loan Support

The next step is putting the factors with the personnel and their positions. For Branch Customer Service Plan Participants, the measures will be the same for each participant but measured by City for these employees. Schedule J provides suggested measures for these participants.

41

SCHEDULE J – BRANCH CUSTOMER SERVICE PLAN PARTICIPANTS - 2004 MEASURES

EMPLOYEE	MEASUREMENT FACTORS
Claxton, Amy Corpening, Lori Deloatch, Anne * Hart, Takisha Mackey, Shemeka Moore, Geraldine Morgan, Wendy Mungo, Audrey * Polite, Karen Ray, LaRevia Thorpe, Lenora Winston-Graves, Sheila * Woods, Jacqueline	Average City Mystery Shop Score (15%), Total Deposits for the City (10%), Deposit Customer Retention (20%), Cross Sell of Services (15%), Number of New Deposit Accounts (15%), Loan Referrals (10%), Branch Profitability (15%) * City Profitability (15%)

AWARD PAYOUTS

Below is a description of the basis for payouts for the various plans described above.

Branch Customer Service Plan -

The overall Bank pool will be created by 65% percent of the increase in net income marginal difference between budgeted net income ($1.484 million) and actual. The Branch Customer Service Plan Pool will be based on 30% of the overall Bank pool. Thus, if the Bank achieves $200,000 above the threshold, the overall Bank pool is $130,000. The Branch Customer Service pool would therefore be $39,000. Another way to calculate the pool is to take 19.5% of the marginal difference of the increase in net income above budgeted income for the Bank.

This plan pays out on a quarterly basis. Quarterly payouts are based on up to 5% of base compensation not to exceed $1,000 per quarter.

Since payouts occur on a quarterly basis but are based on annual results, that payout must be based on annualized quarterly results. As such, a small percentage holdback will be maintained and paid out with payment for the final quarter. 15% of the calculated payout will be held back from the first three quarters. If the branch or city from which results are measured does not achieve its annual threshold, the fourth quarter payment will not be made and the hold back portion will be forfeited.

42

EX-10.(M)

EXHIBIT (10)(m)

The Sage Group
CONSULTANTS TO MANAGEMENT	10409 LESLIE DRIVE
	RALEIGH, NORTH CAROLINA 27601
	(919) 844-9783
	E-mail: steve@sagegroupconsulting.com

MEMORANDUM

DATE:	May 1, 2004
TO:	Lee Johnson, President M&F Bank
FROM:	Steven A. Savia, CMC
RE:	Final 2004 Corporate Support and Tellers Incentive Compensation Program
CC:

This year’s incentive compensation program will have multiple components.

1. Executive Plan

2. City Executive Plan

3. Loan Production Plan

4. Branch Customer Service Plan

5. Corporate Support/Teller Plan

This memo describes the plan for Corporate Support Personnel and Tellers. This plan remains essentially the same as in the previous year.

Schedule F on the following pages provides the list of participants in the Corporate Support/Teller Incentive Program.

SCHEDULE F – CORPORATE SUPPORT/TELLER

PLAN PARTICIPANTS

EMPLOYEE	POSITION
Bailey, Tabitha	P-T Teller
Ennis, Claytius	Teller
Evans, Danita	Teller
Harrison, David	Teller
Lee, Tracie	Teller
Rogers, Charlene	P/T Teller

43

Strickland, Cynthia	Teller
Suggs, Kimberly	Teller
Alexander, Brendalyn	Credit Review Officer
Allen, Nicole	Compliance Assistant
Banks, Julia	VP/Branch Operations Support
Bass, Sherri	Treasury Manager
Bonnette, Kevin	EDP Coordinator
Bradley, Barbara	Loan Documentation Specialist
Brooks, Kinon	Operations Tech I
Brown, Eleanor	Operations Clerk II
Carter, Latonia	Operations Accounting Assistant
Curtis, Catina	Operations Technician
Douglas, Denise	Electronic Services Clerk
Ellis, Faye	Receptionist/Secretary
Farkas, Donna	Accounting Assistant
Forbes, Todd	Operations Tech I
Gill, Peggy	Internal Auditor
Hailey-Jones, Vermont	Loan Services Coordinator
Harris, Davon	Finance Assistant
Hollingsworth, Tammie	Staff Accountant
Lester, Patricia	Operations Accounting Assistant
Lyon, Alice	EDP Operations Manager
Mallory, Renee	Human Resources Assistant
Mitchell, Pamala E	Loan Operations Coordinator
Parker, Charles	Facility Support Services Coordinator
Parker, Kevin	P/T Network Technician
Quick, Saundra	Executive Assistant
Quiett, Valerie	Compliance Officer
Rollins, Sharlene	Loan Procedures Coordinator
Rouse, Jane	Electronic Services Clerk

44

Shands, Artis	Account Services Manager 1
Spruill, Ruth	Loan Documentation Specialist
Sturges, Allan	VP and Controller
Thornton, Chevez	Loan Operations Manager
Williams, Stephanie	Human Resources Manager
Wright, Danielle	Credit Analyst
Wright, K. Lynette	Electronic Services Clerk
Alston, Sheila	Teller Supervisor
McClain, Ann	Teller
Artis, Pearline	Teller
Evans, April	Teller
Graham, Angela	Teller
Jones-Davis, Tiffany	Teller
Ray, Lisa	Teller
Boomer, Betty	Teller
Harrington, Yvonne	P/T Teller
Plummer, Lynette	Teller
Johnson, Melanie	Teller
Williams, Jarvis	Teller Supervisor
Grimes, Michelle	Teller
Davis, Rochelle	Teller

For the purpose of the Plan, employees will be divided into two groups:

• Tellers (includes working Teller Supervisors)

• Corporate Support (Financial Accounting, Credit Administration, Operations Group personnel, Marketing and other support staff)

Tellers

Incentive compensation for Tellers will be based on individual CAP and shop scores. Working Teller Supervisors’ awards shall be based on the individual and branch CAP scores. Regular and part-time tellers must have a minimum average CAP score of 80 and an average shop score of 80 for the quarter to be eligible to participate.

Monthly Individual CAP	Amount
95 or above	$150 for each month achieved
90 to 94	$100 for each month achieved
85 to 89	$ 75 for each month achieved
80 to 84	$ 60 for each month achieved

45

Part-time tellers (20 hours or less or an employee whose primary job is not a teller) will receive one-half of the award amounts.

Working Teller Supervisors whose primary responsibility is to operate a teller’s window and to supervise all tellers will be paid based on the average monthly CAP and Shop score of their branch (provided their individual average for the quarter is at least 85 for both the CAP and Shop scores). The monthly Shop score of the branch must be at least 80 in addition to the CAP score to qualify for payment.

Monthly Branch Score	Amount
95 or above	$175 for each month achieved
90 to 94	$125 for each month achieved
85 to 89	$100 for each month achieved
80 to 84	$ 85 for each month achieved

The incentive will be paid each quarter within 45 days of the quarter ending March 31, June 30, September 30 and December 31, respectively.

Incentive compensation will be paid only on new funds for both loans and deposits. Incentive compensation will be based upon the individual achieving the quarterly threshold levels specified in the City Performance Objectives and Goals to be eligible for inclusion in the incentive calculation. Neither loans nor deposits will be counted should the individual fail to attain their minimum quarterly established goal.

New loan and/or deposit accounts from the same customer that are of the same type and term will be combined and considered as one account for the purpose of this incentive program. Incentives for deposits other than certificates of deposit will be based on an average balance year-to-date and the account must have been opened for at least 30 days to be eligible. This information must be verified quarterly prior to payment. Certificates of deposit with a term of 90 days or less will only be paid 25% of the incentive amount due for other certificates. Renewal of such certificates will not qualify for incentive consideration.

Corporate Support Personnel/Departments

Corporate Support is defined as the supporting departments within the corporate offices: Financial Accounting, Credit Administration, Operations Group, Marketing, Internal Audit and Compliance and other support staff as may be added from time to time:

When the Bank meets the annualized budgeted net income for the applicable quarter, the individuals within this group shall share in an incentive pool of 5% of net income after taxes for the quarter. The amount an individual receives shall be based on the percentage as his/her salary to the total salaries within his/her respective assigned department up to a maximum of $1,000 per quarter. Extraordinary accounting items will not be considered for purposes of payment of any incentives.

Performance evaluations will impact individual payment amounts. Any employee with a performance evaluation of less than satisfactory or any employee on probation will not be eligible to receive an incentive award.

The incentive will be paid each quarter within 45 days of the quarter ending March 31, June 30, September 30 and December 31, respectively.

46

EX-11

Exhibit 11

STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS

The information required by this Exhibit is set forth in the Consolidated Statements of Income for the Years Ended December 31, 2004, 2003 and 2002 and Note 1 “Significant Accounting Policies - Earnings Per Share” in the Company’s 2004 Annual Report, which sections are incorporated herein by reference.

47

EX-13

2004

ANNUAL

REPORT

M&F BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED FINANCIAL HIGHLIGHTS

For the Year Ended	December 31, 2004			December 31, 2003			Increase (Decrease)			Percent Change
Income
Net Income	$	1,138,618		$	1,275,447		$	(136,829	)	(10.72	)%
Dividends Declared	$	337,129		$	303,416		$	33,713		11.11	%
Payout Ratio (Dividends/Net Income)		29.62	%		23.79	%		5.83	%	24.51	%
Return on Average Assets		0.51	%		0.63	%		(0.12	)%	(19.05	)%
Return on Average Equity		5.73	%		7.16	%		(1.47	)%	(20.53	)%
Per Share (2)
Net Income – Basic	$	0.68		$	0.76		$	(0.08	)	(10.52	%)
Cash Dividends Declared		20			18			02		11.11	%
Book Value	$	12.07		$	11.52		$	0.55		4.77	%
Average Common Share Outstanding		1,685,686			1,685,686			0		0	%
Balance Sheet Data
At Year End ( In Thousands)
Assets	$	230,541		$	220,210		$	10,331		4.69	%
Deposits		189,059			185,898			3,161		1.70	%
Loans (Net)		166,164			147,969			18,195		12.30	%
Investment Securities (1)		28,270			32,092			(3,822	)	(11.91	)%
Shareholders’ Equity		20,340			19,417			923		4.75	%

(1) – Includes Federal Home Loan Bank Stock.

(2) All share and per share gives retroactive effect to the 100% stock dividend declared in November 2004.

Annual Meeting: The Annual Meeting of Shareholders of M&F Bancorp, Inc., a North Carolina Corporation, will be held in the auditorium of the M&F Corporate Center, 2634 Durham-Chapel Hill Blvd., Durham, NC on Tuesday, May 10, 2005 at 10:00 a.m. All shareholders are cordially invited to attend.

Transfer Agent: American Stock Transfer & Trust Company, 6201 15^th Avenue, 3^rd Floor, Brooklyn, NY 11219, Telephone 1-877-777-0800.

Form 10-KSB: On the written request of any shareholder of record as of March 15, 2005, the Company will provide to said shareholder, without charge, a copy of the Company’s Annual Report on Form 10-KSB, including the financial statements and all schedules as required to be filed with the Securities Exchange Commission under the Securities Exchange Act of 1934.

All requests should be sent to: Lee Johnson, Jr., President/CEO, M&F Bancorp, Inc., Post Office Box 1932, Durham, North Carolina 27702-1932.

For additional information about M&F Bancorp, Inc., please contact Lee Johnson, Jr., President/CEO or Elaine Small, Vice President, or Allan E. Sturges, Acting Chief Financial Officer, at 919-683-1521.

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TABLE OF CONTENTS

Messages To Our Shareholders

Management’s Discussion and Analysis

Report of Deloitte & Touche LLP

Financial Statements

Board of Directors and Management

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Message from the Chairman

It is a privilege to serve as Chairman of M&F Bancorp, Inc. I am deeply humbled to follow in the footsteps of such legendary trailblazers as C. C. Spaulding, John H. Wheeler, and W. J. Kennedy, Jr. As a youngster growing up in Durham these individuals were among the heroes who inspired my entrepreneurial curiosity. Their leadership, character, and keen business acumen anchored the cornerstone on which M&F Bancorp continues to build today. It follows that I am obligated to uphold the traditions and standards of excellence that they and others have set forth for this noble community institution. This can only be achieved through the combined efforts of our dedicated Board of Directors, officers, and staff working along with the communities that we serve.

M&F Bancorp, Inc. is transitioning into much more than a one-subsidiary holding company. While financial services will remain our core focus for many years we have tremendous potential to expand both our product–line and client base. Our holding company structure offers a platform through which many other services and products can be offered, leveraging the investments we have made in the “brand” of our subsidiary, Mechanics and Farmers Bank. As a Board, we realize that the transition to a more diversified financial institution will come with some short-term sacrifices. But we also expect that these investments will lay the groundwork for even better results in the years to come. Increasing long-term shareholder value through future growth is our ultimate goal.

In closing, I would like to thank our talented family of employees for their tireless efforts and of course our shareholders for their loyal support. On behalf of the Board and myself, I would like to extend our appreciation to Lee Johnson, who has announced his intention to retire. We owe him our thanks for his many years of outstanding service to this institution. Additionally, I would like to express our gratitude to Ben Ruffin, who served as a Director of this institution for 26 years, most recently as Chairman of the Board. The year 2005 is likely to be challenging as we deal with increasing regulatory demands and a slowly recovering economy, however I believe that, with your help, M&F Bancorp will successfully meet the objectives and goals that we have set forth.

Sincerely,

/s/ Maceo K. Sloan

Maceo K. Sloan,

Chairman of the Board

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Message from the President

Two thousand and four was another successful year for your Company. Although earnings declined, our balance sheet continued to expand. We continued to invest heavily in our communities and, in fact, Mechanics and Farmers Bank, your Company’s wholly-owned subsidiary, received a generous grant in recognition of all that we have done to support underserved markets. We also implemented several initiatives to enhance our long-term profitability and to better identify new market opportunities. Finally, we continued to build upon our franchise, as evidenced by the opening of a new M&F Bank office in Charlotte. In sum, we continued to move forward on many fronts in 2004.

Financial Results

Net income decreased 11% in 2004 to $1.1 million, or $0.68 per share, from $1.3 million or $0.76 per share, in 2003. The decrease in earnings was primarily attributable to higher noninterest expense and an increase in the Company’s effective income tax rate. Partially offsetting these two factors were positive comparisons in net interest income, noninterest income and the provision for loan losses.

Net interest income increased 9% to $9.4 million in 2004 from $8.6 million in 2003, while noninterest income, including a grant of $0.439 million that is discussed more fully below, increased 15% to $2.8 million from $2.4 million for the same respective periods. Noninterest expense, reflecting higher audit, pension and occupancy costs, increased 14% to $10.0 million in 2004 from $8.8 million in 2003. Earnings also benefited from a slightly lower provision for loan losses, which was $0.465 million in 2004 versus $0.500 million in 2003. The effective income tax rate in 2004 was 35% in 2004 versus 27% in 2003. Pretax income in 2004 was essentially unchanged from 2003.

Balance sheet growth reflected the strong loan demand and competitive deposit environment that has characterized our markets. Gross loans grew 12% to $169.3 million at year-end 2004 from $150.8 million at the end of 2003, while deposits increased 2% to $189.1 million from $185.9 million over the same time frame. Total assets grew 5% to $230.5 million at December 31, 2004, up from $220.2 million at December 31, 2003, and stockholders’ equity increased to $20.3 million, or 8.8% of assets.

Moving Forward at Mechanics and Farmers Bank

As was mentioned previously, one of the more gratifying aspects of the year was the receipt of a grant of $439,249 from the Community Development Financial Institution (“CDFI”) Fund through its Bank Enterprise Award Program (“BEA”). This fund, which is a part of the U.S. Department of the Treasury, supports community-minded financial institutions throughout the country by providing financial incentives to expand services within economically distressed communities. A number of factors were considered in awarding the grant to M&F Bank, including such factors as our long-standing support (through both lending and depository activities) to community development corporations and other organizations that have similar objectives.

While the BEA grant was certainly a high profile acknowledgement of our investment in the community, the fruits of many of these investments are much less visible, yet no less important. For example, for several years, we have conducted Financial Literacy programs that are designed to teach people of all ages to be more financially responsible. Society often does an inadequate job teaching financial responsibility, especially to young people. This shortcoming, though, has created an excellent opportunity for M&F Bank to play an important role in their lives. We have invested in the belief that when people acquire increasing financial responsibilities, that they not only remember the lessons we helped to teach them but also will remember that it was M&F Bank that invested in their financial education. This will be the return on our investment, but for us, it is not just about the money. It is simply the right thing to do.

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Another significant event of 2004 was the opening of our third branch location in Charlotte, which represented M&F Bank’s ninth office. The Renaissance Center branch is located at 3225 W. Sugar Creek Road and we already have attracted many new customer relationships to the Bank through that location. This branch represents the first new office we have opened in the past 20 years, and reflects a renewed commitment to expand into new markets.

While we remain committed to entering new markets, we also adopted initiatives to make our existing operations more profitable. For example, we implemented a pricing model that should better enable us to manage our margins and objectively establish pricing strategies for both loans and deposits. We also implemented a market analysis system that should allow us to identify opportunities in the market more quickly. Finally, through an affiliation with a third-party organization, Community Trust of the Southeast, we have developed the capability to offer a broad range of new services, including asset management, employee benefit and trust services. All of these initiatives will ultimately enhance service, provide additional fee income, and enhance long-term earnings growth.

Outlook for Your Company

Two thousand and five is likely to be a challenging year. The bulk of expenses related to complying with the requirements of the Sarbanes-Oxley Act of 2002, which was passed by the U.S. Congress to protect investors from the possibility of fraudulent accounting activities by corporations, will be incurred in 2005 and years beyond. Complying with this Act will not only result in significant cost increases, but also will require heavy investments of time and effort by staff and directors. Additionally, 2005’s results will likely not include another grant like the one we received in 2004. Nevertheless, we remain quite upbeat about our long-term prospects, as our new Chairman, Maceo K. Sloan, indicated in his letter.

As a final note, I want to express my sincere appreciation to each of you for the help and support that you have been to me over the past several years. As most of you are probably aware, I will be retiring in the near future. It has been a pleasure to have been a part of the M&F Bancorp family, and I am grateful that I had an opportunity to play a role in its success. I wish all of you well, and ask that you continue to support M&F Bancorp, our Company, in any way that you can.

Sincerely,

/s/ Lee Johnson, Jr.

Lee Johnson, Jr.

President and Chief Executive Officer

6

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

DESCRIPTION OF BUSINESS

Based in Durham, North Carolina, M&F Bancorp, Inc. (the “Company”) is the holding company for Mechanics and Farmers Bank (the “Bank”), a state chartered commercial bank that was organized in 1907 and began operations in 1908. The holding company was established in 1999 through a tax-free exchange of M&F Bancorp, Inc. common stock for existing shares of Mechanics and Farmers Bank common stock. The Bank provides a broad range of financial products and services through nine offices located in the North Carolina markets below:

Market	Number of Branches
Durham	3
Raleigh	2
Charlotte	3
Winston-Salem	1

SUMMARY

The following discussion, analysis of earnings and related financial data should be read in conjunction with the audited financial statements and related notes to the consolidated financial statements. It is intended to assist you in understanding the financial condition as of December 31, 2004 and 2003 and the results of operations for the years ended 2004, 2003 and 2002 for the Company and its subsidiary.

FORWARD-LOOKING STATEMENTS

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

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

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ASSET LIABILITY MANAGEMENT

Asset liability management activities are designed to ensure long-term profitability, minimize risk, and maintain adequate liquidity and capital levels. It is the responsibility of the Bank’s Asset Liability Committee to set policy guidelines and to establish long-term strategies with respect to interest rate exposure and liquidity. That committee, which is comprised of the Bank’s executive management and three outside directors, meets regularly to review the Bank’s interest rate and liquidity risk exposures in relation to present and anticipated market and business conditions. The committee also establishes funding and balance sheet management strategies that are intended to ensure that the potential impact on earnings and liquidity are within acceptable levels.

Asset liability management is achieved through comprehensive planning processes, month-to-month analysis, yearly budgeting and long-range planning. Specific consideration is given to many variables, including but not limited to, interest rates, balance sheet volumes and maturities of both the earning assets and all deposit categories and borrowings.

The interest rate sensitivity schedule is reflected in Table 1. Rate Sensitivity Analysis. This table reflects the Bank’s interest sensitivity analysis as of December 31, 2004 and describes, at various cumulative intervals, the gap ratios (ratios of rate-sensitive assets to rate-sensitive liabilities) for assets and liabilities that management considers rate sensitive. When interest sensitive liabilities exceed interest sensitive assets, a negative interest sensitive gap results. This gap shows the additional amount of liabilities being repriced during a period over interest sensitive assets during the period. The gap is positive when the reverse situation occurs. As of December 31, 2004, the one-year cumulative interest sensitivity gap was negative $78,397 versus negative $69,648 at December 31, 2003; the ratio of the cumulative interest sensitivity gap as a percent of total earning assets was a negative 25.19 percent as of December 31, 2004, compared with a negative 35.29 percent as of December 31, 2003. This incremental change was due to a slowing in the growth in interest sensitive liabilities, such as deposits, as compared to the growth in interest sensitive assets with maturities within the twelve month period.

LIQUIDITY

Liquidity reflects the Bank’s ability to meet its funding needs, which includes the extension of credit, meeting deposit withdrawals, and generally to sustain operations. In addition to its level of liquid assets, many other factors affect a bank’s ability to meet liquidity needs, including access to additional funding sources, total capital position and general market conditions.

Because a large portion of bank deposits are payable upon demand, banks must protect themselves against liquidity risk through the maintenance of adequate funds which are liquid, or can readily be converted into liquid assets. The Bank provides for liquidity by three methods: core deposits, borrowings from the Federal Home Loan Bank, and borrowings from the Federal Reserve Bank. Total deposits and core deposits were approximately $189,059,000 at December 31, 2004 and 2003, respectively. These figures compare with $185,898,000 as of December 31, 2003. The Bank had advances outstanding of $16,802,000 and $11,829,000 at the Federal Home Loan Bank as of December 31, 2004 and 2003, respectively. The Bank has the availability of an additional $10,300,000 from the Federal Home Loan Bank. The Bank also has a line of credit of $3,683,727 established at the Federal Reserve Bank available to meet liquidity needs.

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The Bank has recently sold residential mortgage loans as a tool to enhance the Bank’s liquidity position. In 2004, the Bank sold approximately $3,300,000 in residential mortgage loans as compared to approximately $8,300,000 in 2003. At December 31, 2004 the Bank had approximately $41,063,000 in outstanding unfunded loan commitments. Based on its historical experience, the Bank expects to fund approximately $25,237,000 of these outstanding loan commitments in the next twelve months.

On December 31, 2004, the Bank’s liquidity ratio was 18.73 percent, which is less than the Bank’s target of 20.00 percent. Management believes the core deposit activity, available borrowings from the Federal Home Loan Bank and the Federal Reserve, will be adequate to meet the short-term and long-term liquidity needs of the Bank.

CRITICAL ACCOUNTING POLICIES

We have established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements. Certain accounting policies require us to make significant estimates and assumptions which have a material impact on the carrying value of certain assets and liabilities, and we consider these to be critical accounting policies. The estimates and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods.

We believe the following are critical accounting policies that require management’s judgment in making significant estimates and assumptions that are particularly susceptible to significant change.

Allowance for Possible Loan Losses

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

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, any adverse situations that may affect the borrower’s ability to repay, estimated value of underlying associated 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

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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, or a combination of the above methods.

Large groups of homogeneous smaller balance loans are collectively evaluated for impairment.

For a more detailed discussion on the allowance for possible loan losses, see “Table 7. Non-accrual, Past Due, and restructured loans” “Table 8. Loan Loss and Recovery Experience,” “Table 9. Allocation of the Allowance for Loan Losses” and “Allowance for Possible Loan Losses” in Note 1 to the Consolidated Financial Statements for the year ended December 31, 2004 (“Significant Accounting Policies”).

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 provide benefits to a select group of highly compensated employees to provide benefits that would otherwise be provided under the Qualified Plan but for maximum benefit and compensation limits applicable under the tax law.

Our pension costs for both plans approximated $338,000 and $373,000 for the fiscal years ended December 31, 2004 and 2003, respectively. The pension cost is calculated based on a number of actuarial assumptions, including an expected long-term rate of return on Qualified Plan assets of 8.00%. In developing our expected long-term rate of return assumption, we evaluated input from our actuaries and investment advisors, including the expected return of the asset class, in which all assets are invested, a balanced mutual fund. The 10-year compounded annual net rate of return for this fund is 11.82%.

We base our determination of pension expense (or income) on the fair market value of assets at each measurement date. Gains or losses resulting from investment performance that deviate from the expected return are included in the total amount of accumulated experience gains or losses. Under the method prescribed by generally accepted accounting principles, the pension cost for any year includes the amortization of the excess of any previously unrecognized gains or losses over 10.00% of the fair value of plan assets, or 10% of the plan’s projected benefit obligation, if greater, over the average expected future working lifetime of the covered employees.

The discount rate that we utilize for determining the value of future obligations is based on a review of the yields of high quality fixed income securities, as measured by the yield on highest rated long-term bonds given by a recognized rating agency. The discount rate determined on this basis has decreased from 6.0 percent at December 31, 2003 to 5.75 percent as of December 31, 2004. Due to the effect of 2004 investment performance of plan assets and the reduction in the discount rate, we estimate that total pension costs for all plans will be approximately $355,900 in fiscal 2005. Actual pension cost for subsequent fiscal periods will depend on future investment performance of plan assets, changes in the future discount rates and various other factors related to the characteristics of current and former employees participating in our pension plans.

A 100 basis point reduction in our expected long-term rate of return would have increased our total 2004 pension cost by approximately $34,000 (10.06 percent). A 100 basis point reduction in the assumed discount rate at December 31, 2003 would have increased our total 2004 pension cost by approximately $25,000 (6.60 percent).

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During 2004, the Bank contributed $108,000 to the Qualified Plan trust and the value of the Qualified Plan trust assets increased to $3,669,000 as of December 31, 2004 from $3,372,000 as of December 31, 2003. The effect of this investment performance, offset somewhat by the reduction in the interest discount rate, increased the value of unfunded Qualified Plan projected benefit obligations from $411,000 at December 31, 2003 to $483,000 at December 31, 2004. Because of the increase in the unfunded accumulated benefit obligation we were required under applicable accounting standards to make a balance sheet adjustment to add $114 thousand to Other Comprehensive Income at December 31, 2004.

The Company also maintains a Supplemental Executive Retirement Plan. During 2004, the Bank contributed $31,000 to this plan. The unfunded accumulated benefit obligation for this plan increased to $2,300,000 in 2004 from $1,800,000 in 2003.

Executive Overview

In the opinion of management, the Company achieved some significant financial goals during 2004, most notably:

• Total assets growth in excess of 4.00%

• Gross loan growth of 12.00% net of a $3,300,000 loan sale

• Increase in market value of common stock shares in excess of 26.00%

The Company generated the majority of its earnings from traditional banking services such as lending and deposit services. During 2004 the Company received a BEA Grant Award of $439,249 for its services in economically distressed communities. The grant will enable the company to continue its services and financial literacy efforts in these markets. With increased competition narrowing the interest margin, the Company will look for additional opportunities to enhance fee revenue.

As management looks forward there are several key challenges that the company will face, namely:

• Improving operating efficiency

• Intense competition

• Increased costs to comply with the requirements of the Sarbanes-Oxley Act of 2002

• Economic environment of local markets.

The Company will continue its emphasis on quality personal services and enhanced technology to meet these challenges. The Company has developed both long-term and short-term strategic objectives to obtain profitable growth. Management will continually monitor and modify these objectives as the industry changes.

2004 Compared with 2003

Interest and fees on loans increased $642,802 or 5.87 percent during 2004 which was the result of a 12.22 percent increase in loans outstanding offset by lower interest rates. The yield on the loan portfolio was 7.12 percent for 2004 compared to 7.64 percent for 2003. Interest and dividends on investments were $894,703, a 2.05 percent decrease from the $913,460 earned in 2003. The decrease was primarily the result of lower interest rates, a yield of 3.26 percent compared to 3.46 percent for the prior year. Interest on interest-bearing accounts increased to $152,579 in 2004 from $146,742, which represents a 3.98 percent increase from 2003. The increase was the result of higher interest rates. Interest expense on deposits decreased $170,394 to $2,580,195 in 2004, or 6.19 percent from $2,750,589 in 2003 due to the lower interest rates.

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The cost of deposits for 2004 was 1.36 percent compared to 1.48 percent for 2003. Interest on borrowed funds increased to $618,041 from $611,782, a 1.02 percent increase.

During periods of rising interest rates, the Bank’s rate sensitive assets cannot be repriced as quickly as its rate sensitive liabilities. Thus, the Bank’s net interest income will generally decrease. In periods of declining interest rates the opposite effect occurs.

Provisions for possible loan losses decreased $34,924 from the prior year’s amount of $499,608 to $464,684, a decrease of 6.99 percent. The decrease is the result of management’s evaluation of the classified loans. In addition to evaluating the status of specific loans management considered others factors such as the national and local economy.

Service charges on deposit accounts decreased $119,386 from 2003 to 2004, decreasing 8.38 percent. Other noninterest income increased $471,325 or 47.93 percent to $1,454,696 from $983,371 for the prior year. The significant increase resulted from the recognition of a BEA grant of approximately $439,000 in 2004.

Salary and employee benefits increased 9.38 percent to $5,824,171 from $5,324,930 for the prior year. The increase was the result of merit increases and the increased cost of insurance products and personnel costs related to the opening of a new branch in Charlotte. The Company had 96 employees at December 31, 2004 compared to 97 employees at December 31, 2003. The decreased number of employees was primarily the result of unfilled vacancies in 2004. Occupancy expense increased $64,756 or 8.15 percent from the level in 2003. Equipment expenses increased $70,221 or 15.24 percent from the prior year largely due to the opening of a new branch in Charlotte. Data processing increased by $2,161 or 0.56 percent from the prior year. Miscellaneous other expenses increased $566,460 from $1,487,651 in 2003 to $2,054,111 in 2004. This category is comprised of many other operating expense accounts some of which had substantial increases such as audit expense and consulting expense on a year to year basis, the net of which represents a net increase in the other expense category.

2003 Compared With 2002

Interest and fees on loans increased $565,133 or 5.44 percent during 2003 which was the result of a 7.19 percent increase in loans outstanding offset by a reduction in interest rates. The yield on the loan portfolio was 7.64 percent for 2003 compared to 8.14 percent for 2002. Interest and dividends on investments were 913,460, a 27.48 percent decrease from the $1,259,661 earned in 2002. The decrease was primarily the result of lower interest rates, a yield of 3.46 percent compared to 4.13 percent for the prior year. Interest on interest-bearing accounts increased to $146,742 in 2003 from $116,293 which represents a 26.18 percent increase from 2002. The increase was the result of increased balances offset by lower interest rates. Interest expense on deposits decreased $178,948 to $2,750,589 in 2003, or 6.11 percent from $2,929,537 in 2002 due to a lower cost of funds. The cost of funds for 2003 was 1.48 percent compared to 1.96 percent for 2002. Interest on borrowed funds decreased to $611,782 from $617,648, a .95 percent decrease. The modest decrease was the result of lower outstanding balances. During periods of rising interest rates, the Bank’s rate sensitive assets cannot be repriced as quickly as its rate sensitive liabilities. Thus, the Bank’s net interest income will generally decrease. In periods of declining interest rates the opposite effect occurs (See Table 1).

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Provisions for possible loan losses decreased $238,248 from the prior year’s amount of $737,856 to $499,608, a decrease of 32.29 percent. The decrease is the result of management’s evaluation of the classified loans. In addition to evaluating the status of specific loans management considered other factors such as the national and local economy.

Service charges on deposit accounts remained relatively flat over 2002 decreasing only .55 percent. Other noninterest income increased $247,324 or 33.60 percent to $983,371 from $736,047 for the prior year. The significant increase resulted from an increased cash value of bank owned life insurance policies offset by small changes in other miscellaneous income accounts.

Salary and employee benefits increased 9.94 percent to $5,324,930 from $4,843,331 for the prior year. The increase was the result of merit increases, the increased cost of insurance products, and the increase in the number of employees to 97 at December 31, 2003 compared to the 93 employees at December 31, 2002. The increased number of employees was primarily the result of filling vacancies in 2003 which remained open for the majority of 2002. Occupancy expense increased $53,271 or 7.18 percent from the level in 2002. Equipment expensed decreased $74,409 or 13.90 percent from the prior year largely due to a lower depreciation partially offset by increased repair costs. Data processing decreased by $6,703 or 1.71 percent from the prior year. Miscellaneous other expenses increased $214,193 from $1,278,461 in 2002 to $1,492,654 in 2003. This category is comprised of many other operating expense accounts that had minor increases/decreases, the net of which represents a net increase in the other expense category.

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Five-Year Summary

Financial Condition Data at December 31,

	2004		2003		2002		2001		2000
Assets	$	230,540,804	$	220,210,469	$	187,430,816	$	168,096,297	$	166,960,664
Total Investment Securities		28,270,267		32,091,525		30,468,615		30,325,700		31,044,082
Loans receivable, net		166,163,601		147,968,938		138,133,639		120,380,413		112,804,835
Deposits		189,059,168		185,897,710		149,817,765		135,383,213		135,146,259
Borrowed funds		16,802,466		11,829,040		16,553,215		12,375,208		11,895,273
Shareholders’ Equity		20,339,767		19,417,052		18,186,528		17,853,344		17,706,249

Operating Data for the Years Ended December 31,

Operating Income	2004		2003		2002		2001		2000
Total Interest and Dividend Income		12,636,073		12,006,191		11,756,810		11,669,056		12,011,286
Total Interest Expense		3,198,236		3,362,371		3,547,185		4,346,819		4,117,028
Net Interest Income		9,437,837		8,643,820		8,209,625		7,352,237		7,894,258
Loan Loss Provision		464,684		499,608		737,856		611,052		627,552
Total Other Income		2,759,457		2,407,518		2,168,105		1,818,100		1,599,209
Total Other Expenses		9,991,862		8,803,283		8,143,124		7,369,592		7,649,657
Income Before Income Tax Expense		1,740,748		1,748,447		1,496,750		1,189,693		1,216,258
Income Tax Expense		602,130		473,000		461,000		283,000		314,000
Net Income		1,138,618		1,275,447		1,035,750		906,693		902,258
Per Share Data:
Net Income - Basic (Note 1)	$	0.68	$	0.76	$	0.61	$	0.53	$	0.53
Net Income – Diluted (Note 1)	$	0.66	$	0.76	$	0.61	$	0.53	$	0.53
Cash Dividends Declared	$	0.20	$	0.18	$	0.16	$	0.16	$	0.16
Weighted - Average Common Shares Outstanding (Note 1)		1,685,686		1,685,686		1,693,352		1,707,450		1,707,462

Note – Per Share Data and Weighted Average Common Shares Outstanding give retroactive effect to the 100% stock dividend declared in November 2004.

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TABLE 1. RATE SENSITIVITY ANALYSIS

AT DECEMBER 31, 2004

(Dollars In Thousands)	3 Months or Less			4 to 12 Months			Maturities Total Within 12 Months			Over 12 Months			Total
Interest Earning Assets
Loans	$	9,455		$	24,886		$	34,341		$	134,953		$	169,294
Investment Securities (1)		4,457			1,891			6,348			21,922			28,270
Interest-Bearing Deposits		15,236			—			15,236			—			15,236
Total Interest-Earning Assets	$	29,148		$	26,777		$	55,925		$	156,875		$	212,800
Percent of Total Interest-Earning Assets		13.70	%		12.58	%		26.28	%		73.72	%		100.00	%
Cumulative Percent of Total Interest-Earning Assets		13.70	%		26.28	%		26.28	%		100.00	%
Interest-Bearing Liabilities
Time Deposits $100,000 or More	$	6,472		$	6,950		$	13,422		$	9,369		$	22,791
Savings, Now and Money Market Deposits		93,891			—			93,891			—			93,891
Other Time Deposits		11,705			15,275			26,980			13,748			40,728
Borrowed Funds		7			22			29			16,773			16,802
Total Interest-Bearing Liabilities	$	112,075		$	22,247		$	134,322		$	39,890		$	174,212
Percent of Total Interest-Bearing Liabilities		64.33	%		12.77	%		77.10	%		22.90	%		100.00	%
Cumulative Percent of Total Interest-Bearing Liabilities		64.33	%		77.10	%		77.10	%		100.00	%
Ratio of Interest-Earning Assets to Interest-Bearing Liabilities (Gap Ratio)		26.01	%		120.36	%		41.64	%		393.27	%
Cumulative Ratio of Interest-Earning Assets to Interest-Bearing Liabilities (Cumulative Gap Ratio)		26.01	%		41.64	%		41.64	%		122.15	%
Interest Sensitivity Gap		(82,927	)		4,530			(78,397	)		116,985			38,588
Cumulative Interest Sensitivity Gap		(82,927	)		(78,397	)		(78,397	)		38,588
Cumulative Interest Sensitivity Gap as a Percent of Total Interest-Earning Assets					(-25.19	%)		(-25.19	%)		18.13	%

(1) Includes Federal Home Loan Bank stock

During periods of rising interest rates, the Bank’s rate sensitive assets cannot be repriced as quickly as its rate sensitive liabilities. Thus, the Bank’s net interest income will generally decrease. In periods of declining interest rates, the opposite effect would be expected to occur.

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The following table reflects the average yields on assets and average costs of liabilities for the years ended December 31, 2004, 2003 and 2002. The average yields and costs are derived by dividing income or expense by the average balances of interest-earning assets and interest-bearing liabilities, respectively, for the periods presented.

TABLE 2. AVERAGE BALANCES AND

NET INTEREST INCOME ANALYSIS

(Dollars in Thousands)	Year Ended December 31,
	2004						2003						2002
	AVERAGE BALANCE		AVERAGE RATE		AMOUNT PAID OR EARNED		AVERAGE BALANCE		AVERAGE RATE		AMOUNT PAID OR EARNED		AVERAGE BALANCE		AVERAGE RATE		AMOUNT PAID OR EARNED
ASSETS
LOANS (1)	$	162,640	7.12	%	$	11,588	$	143,216	7.64	%	$	10,946	$	127,601	8.14	%	$	10,381
TAXABLE SECURITIES		18,865	2.76	%		520		17,492	2.92	%		510		20,643	4.11	%		848
NON-TAXABLE SECURITIES		8,571	4.38	%		375		8,950	4.51	%		404		9,147	4.50	%		412
FEDERAL FUNDS SOLD		—	0.00	%		—		—	0.00	%		—		—	0.00	%		—
INTEREST-BEARING DEPOSITS		8,992	1.70	%		153		11,640	1.26	%		147		6,367	1.82	%		116
TOTAL INTEREST-EARNING ASSETS	$	199,068	6.35	%	$	12,636	$	181,298	6.62	%	$	12,007	$	163,758	7.18	%	$	11,757
CASH AND DUE FROM BANKS		4,982						6,110						5,368
BANK PREMISES AND EQUIPMENT, NET		6,658						6,143						5,202
OTHER ASSETS		11,101						9,436						2,097
TOTAL ASSETS	$	221,809			$	12,636	$	202,987			$	12,007	$	176,425			$	11,757
LIABILITIES AND SHAREHOLDERS’ EQUITY
INTEREST-BEARING DEMAND	$	22,465	0.52	%	$	117	$	19,656	0.62	%	$	122	$	20,989	0.52	%	$	109
SAVINGS	$	71,952	1.67	%	$	1,205	$	65,886	2.06	%	$	1,360	$	50,800	2.64	%	$	1,343
TIME DEPOSITS	$	56,459	2.23	%	$	1,259	$	53,774	2.36	%	$	1,269	$	45,901	3.22	%	$	1,477
BORROWED FUNDS		12,887	4.80	%		618		12,434	4.92	%		612		11,893	5.20	%		618
TOTAL INTEREST-BEARING LIABILITIES	$	163,763	1.95	%	$	3,199	$	151,750	2.22	%	$	3,363	$	129,583	2.74	%	$	3,547
NONINTEREST-BEARING DEPOSITS		33,483						29,281						26,806
OTHER LIABILITIES		4,555						4,142						2,194
SHAREHOLDERS’ EQUITY		20,008						17,814						17,842
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	221,809			$	3,199	$	202,987			$	3,363	$	176,425			$	3,547
YIELD ON INTEREST-EARNING ASSETS
NET YIELD ON NET INTEREST-EARNING			4.74	%	$	9,437			4.74	%	$	8,644			5.01	%	$	8,210
ASSETS AND NET INTEREST INCOME
INTEREST RATE SPREAD (2)			4.39	%					4.37	%					4.44	%

(1) Average loans, net of the allowance for possible loan losses and unearned income. These figures include non-accrual loans, the effect of which is to lower the average rates.

(2) The interest rate spread is the interest earning assets rate less interest earning liabilities rate.

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The following table analyzes the dollar amount of changes in interest income and interest expense for the major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between variations due to changes in volume and those due to changes in rates.

TABLE 3. INTEREST RATE AND VOLUME VARIANCE ANALYSIS

(Dollars In Thousands)	2004 Compared to 2003									2003 Compared to 2002
	Volume			Rate			Total			Volume			Rate			Total
INTEREST INCOME ON INTEREST-BEARING ASSETS
LOANS	$	1,488		$	(846	)	$	642		$	744		$	(179	)	$	565
TAXABLE SECURITIES		40			(30	)		10			39			(377	)		(338	)
NON-TAXABLE SECURITIES		(17	)		(12	)		(29	)					(8	)		(8	)
INTEREST BEARING DEPOSITS		(33	)		40			7			75			(45	)		30
TOTAL INTEREST INCOME	$	1,478		$	(848	)	$	630		$	858		$	(609	)	$	249
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
TIME DEPOSITS $100M OR MORE	$	25		$	(25	)	$	—		$	14		$	(37	)	$	(23	)
SAVINGS, NOW, AND MONEY MARKET DEPOSIT		142			(303	)		(161	)		261			(232	)		29
OTHER TIME DEPOSITS		39			(49	)		(10	)		231			(416	)		(185	)
OTHER BORROWINGS		22			(15	)		7			(205	)		199			(6	)
TOTAL INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES	$	228		$	(392	)	$	(164	)	$	301		$	(486	)	$	(185	)

The rate/volume variance for each category has been allocated on a consistent basis between rate and volume variances based on the percentage of the rate or volume variance to the sum of the two absolute variances. Income on non-accrual loans is included in the volume and rate variance analysis table only to the extent that it represents interest payments received.

INVESTMENT SECURITIES

The investment portfolio is managed to provide a balance between liquidity and attractive yields. An increasing amount of emphasis is being placed on managing the interest rate risk of the Bank. Therefore, future investment activity will be influenced by the asset liability mix and maturity requirements of the Bank. The investment portfolio is categorized as “available for sale” and “held to maturity.” The “available for sale” portion of the portfolio can be used to meet the liquidity needs of the Bank, while the “held to maturity” portion is intended primarily for investment purposes. On December 31, 2004, $26,690,847 or 98.58 percent of the Bank’s investment portfolio was classified as available for sale.

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Bank policy prohibits trading within the portion of the bond portfolio classified as “securities to be held to maturity.” Additionally, more of the bonds in the “available for sale” portfolio have maturities of five years or greater and, therefore these securities are subject to greater market volatility than similar securities with maturities of two years or less. Tables 4 and 4.1 show maturities of investment securities held by the Bank at December 31, 2004, and 2003, respectively, along with weighted average yields.

TABLE 4.0 INVESTMENT PORTFOLIO MATURITY SCHEDULE 2004

	WITHIN ONE YEAR				AFTER ONE YEAR BUT WITHIN FIVE YEARS				AFTER FIVE YEARS BUT WITHIN TEN YEARS				AFTER TEN YEARS
AMORTIZED COST (DOLLARS IN THOUSANDS)	AMOUNT		YIELD		AMOUNT		YIELD		AMOUNT		YIELD		AMOUNT		YIELD
US TREASURY	$	—	0.00	%	$	—	0.00	%	$	—	0.00	%	$	—	0.00	%
US GOVERNMENT AGENCIES		1,995	2.31	%		6,996	2.14	%		—	0.00	%		—	0.00	%
MORTGAGE-BACKED SECURITIES		48	5.12	%		1,657	4.04	%		1,544	4.76	%		1,344	5.47	%
STATE AND POLITICAL SUBDIVISIONS		546	4.80	%		6,829	4.44	%		665	4.35	%		—	0.00	%
CORPORATE BONDS		—	0.00	%		3,224	2.88	%		—	0.00	%		1,000	2.17	%
OTHER (2)		—	0.00	%		—	0.00	%		—	0.00	%		11	0.00	%
TOTAL	$	2,589	2.99	%	$	18,706	3.26	%	$	2,209	4.56	%	$	2,355	4.10	%

1 Yield on tax-exempt investments has been adjusted to a taxable-equivalent basis using prevailing federal and state rates.

2 Also includes items with no stated maturities.

TABLE 4.1 INVESTMENT PORTFOLIO MATURITY SCHEDULE 2003

	WITHIN ONE YEAR				AFTER ONE YEAR BUT WITHIN FIVE YEARS				AFTER FIVE YEARS BUT WITHIN TEN YEARS				AFTER TEN YEARS
AMORTIZED COST (DOLLARS IN THOUSANDS)	AMOUNT		YIELD		AMOUNT		YIELD		AMOUNT		YIELD		AMOUNT		YIELD
US TREASURY	$	—	0.00	%	$	—	0.00	%	$	—	0.00	%	$	—	0.00	%
US GOVERNMENT AGENCIES		1,018	2.14	%		8,953	1.78	%		—	0.00	%		—	0.00	%
MORTGAGE-BACKED SECURITIES		—	0.00	%		—	0.00	%		1,954	2.95	%		4,067	1.50	%
STATE AND POLITICAL SUBDIVISIONS		856	3.44	%		1,753	1.15	%		696	1.84	%		5,988	2.85	%
CORPORATE BONDS		—	0.00	%		—	0.00	%		—	0.00	%		4,021	0.60	%
OTHER (2)		—	0.00	%		—	0.00	%		—	0.00	%		1,193	0.00	%
TOTAL	$	1,874	2.34	%	$	10,706	1.61	%	$	2,650	2.50	%	$	15,269	1.30	%

1 Yield on tax-exempt investments has been adjusted to a taxable-equivalent basis using prevailing federal and state rates.

2 Also includes items with no stated maturities.

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LOAN PORTFOLIO

Total loans outstanding on December 31, 2004 were $169,294,002, an increase of 12.22 percent from the $150,865,193 in loans at December 31, 2003. Competition for loan originations remained strong in our markets in 2004, with many institutions targeting the Bank’s traditional markets because of their desire to improve their community reinvestment ratings. The Bank’s increase in total loans outstanding was primarily due to continued marketing to small businesses, churches and loan participations with other banks.

The Bank maintains a diversified mix of loans. Commercial loans are spread throughout a variety of industries, with loans to churches accounting for approximately 51.71 percent of the commercial loan portfolio and no other particular industry group or related industries accounting for a significant portion of the commercial loan portfolio. Loans to churches make up 33% of the Bank’s total loans outstanding at December 31, 2004. Real estate loans include mortgages for construction, land development, permanent financing and other purposes.

As of December 31, 2004, approximately $108,310,000, or 63.98 percent of the loan portfolio, was comprised of commercial, financial and agricultural loans, an increase from 62.96 percent in the same category at the end of 2003. Real estate mortgages decreased to 22.30 percent in 2004 compared to 26.86 percent in 2003. The other categories of loans, real estate construction and installment loans to individuals, represented 8.82 percent and 4.90 percent, respectively, of the loan portfolio as of December 31, 2004, compared to 4.92 percent and 5.26 percent, respectively, as of December 31, 2003. The Bank has no foreign loans. Loans made to directors, officers and other related parties to the Bank totaled $4,086,000 at December 31, 2004. New loans to such parties totaled $573,000 exclusive of advances on existing lines of credit while payments totaled $830,000 during 2004 exclusive of payments on existing lines of credit.

At December 31, 2004, the Bank had outstanding unfunded loan commitments of approximately $41,063,000, compared to $29,975,000 at the end of 2003. This increase in outstanding loan commitments coincides with the loan activity on a year to year basis. Based on its historical experience, the Bank anticipates approximately $25,237,000 of these loan commitments will fund in 2005. The following Table 5 describes the Bank’s loan portfolio composition. At December 31, 2004, total fixed rate loans were $124,106,000 and total floating rate loans were $45,188,000.

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TABLE 5. LOAN PORTFOLIO COMPOSITION

(Dollars In Thousands)	December 31,
	2004		%		2003		%		2002		%		2001		%		2000		%
Commerc., Financial, & Agricul.	$	108,310	63.98	%	$	94,978	62.96	%	$	75,229	53.45	%	$	71,563	58.51	%	$	64,638	56.24	%
Real Est.- Construc.		14,937	8.82	%		7,429	4.92	%		8,532	6.06	%		1,377	1.13	%		8,486	7.38	%
Real Est.- Mortg.		37,744	22.30	%		40,526	26.86	%		49,098	34.88	%		41,926	34.28	%		34,112	29.68	%
Installmt. Loans to Individs.		8,303	4.90	%		7,932	5.26	%		7,884	5.60	%		7,443	6.09	%		7,690	6.69	%
TOTAL	$	169,294	100.00	%	$	150,865	100.00	%	$	140,743	100.00	%	$	122,309	100.00	%	$	114,926	100.00	%

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Tables 6 and 6.1 describe the maturities of loans with fixed rates and adjustable rates as of December 31, 2004.

TABLE 6. LOAN MATURITIES-FIXED RATES

Fixed Rates (Dollars In Thousands)	One Year or Less		After One Year Through Five Years		After Five Years		Total
COMMERCIAL, FINANCIAL, AND AGRICULTURAL	$	11,438	$	62,866	$	5,333	$	79,637
REAL ESTATE-CONSTRUCTION		2,783		3,000		—		5,783
REAL ESTATE-MORTGAGE		2,295		11,584		22,039		35,918
INSTALLMENT LOANS TO INDIVIDUALS		971		1,797		—		2,768
TOTALS	$	17,487	$	79,247	$	27,372	$	124,106

TABLE 6.1 LOAN MATURITIES-FLOATING RATES

Floating Rates (Dollars In Thousands)	One Year or Less		After One Year Through Five Years		After Five Years		Total
COMMERCIAL, FINANCIAL, AND AGRICULTURAL	$	8,446	$	16,084	$	4,143	$	28,673
REAL ESTATE-CONSTRUCTION		6,466		2,688		—		9,154
REAL ESTATE-MORTGAGE		140		227		1,459		1,826
INSTALLMENT LOANS TO INDIVIDUALS		1,801		1456		2,278		5,535
TOTALS	$	16,853	$	20,455	$	7,880	$	45,188

NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS

A loan is placed on non-accrual status when, in management’s judgment, the collection of interest income becomes doubtful. Interest receivable that has been accrued in prior years and is subsequently determined to have doubtful collectibility is charged to the appropriate interest income account. Interest on loans that are classified as non-accrual is recognized when received. Past due loans are loans whose principal or interest is past due 90 days or more. In some cases, where borrowers are experiencing financial difficulties, loans may be restructured to provide terms significantly different from the original terms.

TABLE 7. NON-ACCRUAL, PAST DUE, & RESTRUCTURED LOANS

	December 31,
(Dollars In Thousands)	2004		2003		2002		2001		2000
NON-ACCRUAL LOANS	$	1,546	$	1,009	$	386	$	434	$	2,795
ACCRUING LOANS PAST DUE 90 DAYS OR MORE		2,089		725		587		263		475
RESTRUCTURED LOANS		52		500		611		914		1,329
TOTAL	$	3,687	$	2,234	$	1,584	$	1,611	$	4,599

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At December 31, 2004 and 2003, non-accrual, past due, and restructured loans were approximately 2.18 percent and 1.48 percent, respectively, of the total loans outstanding on such dates. Non-accrual and restructured loans increased significantly in 2004. Management continues to work towards reducing the level of delinquencies through enhanced collection efforts and adherence to sound loan underwriting procedures. Management regularly reviews the loan portfolio, including these loans, for collectability and, as explained below, provides an allowance for loan losses. However, due to the uncertainties regarding trends in consumer credit and credit worthiness, it is possible that the future impact of charge-offs in any of our loan categories may exceed such allowance.

Charge-offs totaled $347,000 in 2004, or $229,000 net of recoveries and $279,000 or $246,000 net of recoveries in 2003. The amount of interest from non-accrual loans that would have been earned for 2004, 2003, and 2002, was $104,000, $38,000, and $40,000, respectively. These amounts are not included in income. Interest paid and included in income on non-accrual loans was $34,000, $42,000, and $21,000 for 2004, 2003, and 2002, respectively. Payments received on non-accrual loans are applied first to past due principal amounts before recording any interest income.

PROVISION AND ALLOWANCE FOR LOAN LOSSES

Management considers the allowance for probable loan losses adequate to cover loan losses on the loans outstanding as of each reporting period. It must be emphasized, however, that the determination of the allowance using the Bank’s procedures and methods rests upon various assumptions such as delinquency ratios, adversely classified loans, five year average charge-off history, loan growth, the current ratio of outstanding loans to the allowance for loan losses and future factors affecting loans. No assurance can be given that the Bank will not, in any particular period, sustain loan losses that are sizable in relation to the amount reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for possible loan losses or future charges to earnings.

The allowance for loan losses is created by direct charges to operations. Losses on loans are charged against the allowance for loan losses in the accounting period in which they are determined by management to be uncollectible. Recoveries during the period are credited to the allowance for loan losses.

Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical matter, at the loan’s observable market value or fair value of the collateral if the loan is collateral dependent. Loans measured by fair value of the underlying collateral are commercial loans, others consist of homogenous small balance loans and are measured collectively. The Bank classifies a loan as impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. At December 31, 2004 and 2003, the recorded investment in loans that are considered to be impaired, totaled approximately $3,687,000 and $2,234,000, respectively. The average recorded balance of impaired loans was $2,395,000 and $2,250,000 at December 31, 2004 and 2003, respectively. The related allowance for loan losses for these loans was $351,000 and $189,000 at December 31, 2004 and 2003, respectively. Impaired loans of $3,621,000 and $2,234,000 for 2004 and 2003 were collateralized with real estate.

Management realizes that general economic trends greatly affect loan losses, and no assurances can be made that further charges to the loan loss allowance may not be significant in relation to the amount provided during a particular period or that further evaluation of the loan portfolio based on conditions then prevailing may not require sizable additions to the allowance, thus necessitating similarly sizable charges to operations. The allowance for loan losses was 1.51%, 1.54% and 1.44% of net loans

22

outstanding at December 31, 2004, 2003 and 2002, respectively, which was consistent with both management’s desire for strong reserves and the credit quality ratings of the loan portfolio. The allowance for loan losses was higher at December 31, 2004 as the Bank incurred direct charge-offs (net of recoveries) approximately $235 thousand less than the provision addition to the allowance for loan losses for the year. The ratio of net charge-offs during the year to average loans outstanding during the period were 0.14%, 0.17% and 0.17% at December 31, 2004, 2003 and 2002, respectively. These ratios reflect management’s conservative lending, and effective efforts to recover credit losses.

The following table summarizes the Bank’s balances of loans outstanding, average loans outstanding, changes in the allowance arising from charge-offs and recoveries by category, and additions to the allowance that have been charged to expenses for years 2000 through 2004.

TABLE 8. LOAN LOSS AND RECOVERY EXPERIENCE

	Year Ended December 31,
(Dollars In Thousands)	2004			2003			2002			2001			2000
ALLOWANCE FOR POSSIBLE LOAN LOSSES AT BEGINNING OF YEAR	$	2,276		$	2,022		$	1,505		$	1,748		$	1,342
LOANS CHARGED OFF:
COMMERCIAL, FINANCIAL & AGRICULTURAL		67			58			181			623			113
REAL ESTATE CONSTRUCTION		0			0			0			0			0
REAL ESTATE-MORTGAGE		174			16			3			182			36
INSTALLMENT LOANS TO INDIVIDUALS		106			205			99			102			189
TOTAL CHARGE-OFFS		347			279			283			907			338
RECOVERIES OF LOANS PREVIOUSLY CHARGED OFF:
COMMERCIAL, FINANCIAL, AND AGRICULTURAL		3			15			19			7			26
REAL ESTATE CONSTRUCTION		0			0			0			0			0
REAL ESTATE-MORTGAGE		89			0			0			14			11
INSTALLMENT LOANS TO INDIVIDUALS		26			18			43			32			79
TOTAL RECOVERIES		118			33			62			53			116
NET CHARGE-OFFS		229			246			221			854			222
ADDITIONS TO THE ALLOWANCE CHARGED TO EXPENSE		465			500			738			611			628
ALLOWANCE FOR LOAN LOSSES AT END OF YEAR		2,512			2,276			2,022			1,505			1,748
RATIO OF NET-CHARGE OFFS DURING YEAR TO AVERAGE OUTSTANDING LOANS DURING YEAR		0.14	%		0.17	%		0.17	%		0.74	%		0.20	%

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The following table sets forth the composition of the allowance for loan losses by type of loan at December 31 of the years indicated. The allowance is allocated to specific categories of loans for statistical purposes only, and may be applied to loan losses incurred in any loan category.

TABLE 9. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

	Amount		2004		Amount		2003		Amount		2002		Amount		2001		Amount		2000
(Dollars in Thousands)			% of Loans in Category to Total Loans				% of Loans in Category to Total Loans				% of Loans in Category to Total Loans				% of Loans in Category to Total Loans				% of Loans in Category to Total Loans
Commer., Finan., & Agricul.	$	1,841	73.29	%	$	1,259	55.31	%	$	876	43.32	%	$	650	43.19	%	$	1,151	65.84	%
Real Est.-Constr.		44	1.75	%		37	1.63	%		26	1.29	%		5	0.33	%		24	1.37	%
Real Est.-Mortg.		457	18.19	%		710	31.20	%		402	19.88	%		449	29.84	%		305	17.45	%
Installmt. Loans to Individs.		170	6.77	%		270	11.86	%		275	13.60	%		261	17.34	%		177	10.13	%
Unalloc.			0.00	%			0.00	%		443	21.91	%		140	9.30	%		91	5.21	%
TOTAL	$	2,512	100.00	%	$	2,276	100.00	%	$	2,022	100.00	%	$	1,505	100.00	%	$	1,748	100.00	%

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DEPOSITS

Total deposits, which include core deposits, were approximately $189,059,168 at December 31, 2004 as compared to $185,897,710 at the end of 2003, an increase of $3,161,458 or 1.70 percent. The Bank considers savings accounts, demand deposits, and time deposits of less than $100,000 core deposits. The Bank continued its marketing effort to increase this stable source of funds. Increased efforts to extend the maturities of our deposit structure had minimal impact during 2004. As reflected in Table 1, Rate Sensitivity Analysis, approximately 77.10 percent of interest-bearing liabilities deposits can be repriced in one year or less. This maturity structure contributes greatly to the negative gap of assets and liabilities and contributes to an increased interest rate risk for the Bank.

The Bank is committed to offering a wide range of competitively priced deposits. Our savings account rate has remained competitive. The average amounts and rates of deposits for the years ended December 31, 2004, 2003, and 2002 are summarized below. The Bank has no foreign deposits.

TABLE 10. AVERAGE DEPOSITS

	Year Ended December 31,
	2004				2003				2002
(Dollars in Thousand)	Average Amount		Average Rate		Average Amount		Average Rate		Average Amount		Average Rate
INTEREST-BEARING DEMAND DEPOSITS	$	22,465	0.52	%	$	19,656	0.62	%	$	20,989	0.52	%
SAVINGS DEPOSITS		71,952	1.67	%		65,886	2.06	%		50,800	2.64	%
TIME DEPOSITS		56,459	2.23	%		53,774	2.36	%		45,901	3.22	%
TOTAL INTEREST-BEARING DEPOSITS		150,876	1.71	%		139,316	1.97	%		117,690	2.74	%
NONINTEREST-BEARING DEPOSITS		33,483	0.00	%		29,281	0.00	%		26,806	0.00	%
TOTAL DEPOSITS	$	184,359	1.40	%	$	168,597	1.63	%	$	144,496	2.45	%

The time deposits are principally non-business certificates of deposit and individual retirement accounts. Deposits of state and local governments and municipal entities are collateralized by investment securities. The Bank participates in a national certificate of deposit gathering program through Quick Rate to facilitate deposit growth and liquidity needs of the institution. As of December 31, 2004, the Bank had approximately $21,082,000 in Quick Rate certificates of deposit.

25

The following table is a maturity schedule of time deposits as of December 31, 2004.

TABLE 11. TIME DEPOSIT MATURITY SCHEDULE

(Dollars In Thousands)	3 Months or Less		4 to 6 Months		7 to 12 Months		Over 12 Months		Total
TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE	$	6,472	$	2,149	$	4,801	$	9,369	$	22,791
TIME CERTIFICATES OF DEPOSIT LESS THAN $100,000		11,705		7,433		7,842		13,748		40,728
TOTAL	$	18,177	$	9,582	$	12,643	$	23,117	$	63,519

SHAREHOLDERS’ EQUITY AND DIVIDENDS

The Bank is subject to a North Carolina State banking capital requirement of at least 5.00% of total assets. In addition, the Bank is subject to the capital requirements of the Federal Deposit Insurance Corporation (“FDIC”). The FDIC requires the Bank to maintain a (i) Tier 1 capital to risk-weighted assets ratio of 4.00%, (ii) a total capital to risk-weighted assets ratio of 8.00% and (iii) a leverage ratio of 4.00%. At December 31, 2004 and December 31, 2003, the Bank had capital to total assets ratios of 8.54% and 8.82%, respectively, Tier 1 capital to risk-weighted assets ratios of 10.48% and 11.23%, respectively, total capital to risk-weighted assets ratios of 12.00% and 12.82%, respectively, and leverage ratios of 8.61% and 8.65%, respectively. Shareholders’ equity, which consists of common stock, surplus, other comprehensive income and retained earnings provides all of the Company’s capital.

As of December 31, 2004, there were 1,685,686 shares of common stock outstanding after giving effect to the 100% stock dividend on November 2004, which were held by approximately 1,220 shareholders of record on March 15, 2005, not including persons or entities whose stock is held in nominee or “street” name through various brokerage firms or banks. The Company’s common stock is quoted on the OTC Bulletin Board under the symbol “MFBP”

In November 2004, the Board of Directors approved a 100% stock dividend. Each shareholder of record at the close of business on December 20, 2004 was entitled to receive one additional share of stock for each share of stock owned on the record date. The payment date was January 10, 2005. This stock dividend increased the number of common stock shares outstanding to 1,685,646 as of December 31, 2004 from 842,823. Also, outstanding stock options increased to 110,400 from 55,200 at a grant price of $7.84.

26

The table below shows the stock prices of the Company’s stock for the previous eight quarters. These quotations reflect inter-dealer prices, without retail mark-up, mark down or commission and may not represent actual transactions. The prices shown in the accompanying table have not been restated to reflect the 100% stock dividend declared in November 2004.

2004	Quarter 1		Quarter 2		Quarter 3		Quarter 4
High	$	12.50	$	12.13	$	11.03	$	12.50
Low	$	9.88	$	9.63	$	10.00	$	10.13
Close	$	11.50	$	10.05	$	10.13	$	12.50
2003	Quarter 1		Quarter 2		Quarter 3		Quarter 4
High	$	6.75	$	9.00	$	8.85	$	9.95
Low	$	6.26	$	6.53	$	8.05	$	8.40
Close	$	6.51	$	9.00	$	8.35	$	9.88

The dividends that may be paid by the Bank to the Company, as the Bank’s sole shareholder, are subject to legal limitations. Dividends may not be paid unless the Bank’s capital surplus is at least fifty percent of its paid-in capital. In addition, the Bank may not pay dividends when it is insolvent or would become insolvent as a result of the payment or when the payment would reduce its capital below regulatory capital requirements.

Cash dividends declared per share for each period are shown in the table below. These cash dividends have been restated to retroactively reflect the 100% common stock dividend in November 2004.

DIVIDENDS DECLARED

	2004		2003		2002
March	$	.05	$	.045	$	.04
June		.05		.045		.04
September		.05		.045		.04
December		.05		.045		.04

27

The following table shows return on average assets (net income divided by average assets), return on average equity (net income divided by average shareholders’ equity), dividend payout ratio (dividends declared per share divided by net income per share) and shareholders’ equity to assets ratio (average shareholders’ equity divided by average total assets) for each of the years listed below.

TABLE 12. RETURN ON ASSETS AND EQUITY

	2004		2003		2002
RETURN ON AVERAGE ASSETS	0.51	%	0.63	%	0.58	%
RETURN ON AVERAGE EQUITY	5.73	%	7.16	%	5.75	%
DIVIDEND PAYOUT	29.62	%	23.79	%	26.21	%
AVERAGE SHAREHOLDERS’ EQUITY TO AVERAGE ASSETS	9.02	%	8.78	%	10.14	%

28

The following table sets forth the relationship of significant components of the Company’s balance sheet at December 31, 2004 and 2003.

TABLE 13. DISTRIBUTION OF ASSETS & LIABILITIES

	2004				2003
(Dollars In Thousands)	Amount		Percent		Amount		Percent
ASSETS
LOANS (NET)	$	166,164	72.08	%	$	147,969	67.19	%
INVESTMENT SECURITIES (1)		28,270	12.26	%		32,092	14.57	%
FEDERAL FUNDS SOLD/INT. BEARING DEPOSITS		15,236	6.61	%		14,420	6.55	%
TOTAL EARNINGS ASSETS
	$	209,670	90.95	%	$	194,481	88.31	%
CASH & DUE FROM BANKS		4,432	1.93	%		11,491	5.22	%
BANK PREMISES & EQUIPMENT		6,196	2.69	%		6,320	2.87	%
OTHER ASSETS		10,243	4.40	%		7,918	3.60	%
TOTAL ASSETS	$	230,541	100.00	%	$	220,210	100.00	%
LIABILITIES AND SHAREHOLDERS’ EQUITY
DEMAND DEPOSITS		31,593	13.70	%		37,794	17.16	%
SAVINGS, NOW & MMDA		93,947	40.75	%		94,380	42.86	%
TIME DEPOSITS $100,000 OR MORE		22,791	9.89	%		17,432	7.92	%
OTHER TIME DEPOSITS		40,728	17.67	%		36,292	16.48	%
TOTAL DEPOSITS	$	189,059	82.01	%	$	185,898	84.42	%
BORROWED FUNDS		16,802	7.28	%		11,829	5.37	%
ACCRUED EXPENSES AND OTHER LIABILITIES		4,340	1.88	%		3,066	1.39	%
TOTAL LIABILITIES	$	210,201	91.18	%	$	200,793	91.18	%
SHAREHOLDERS’ EQUITY		20,340	8.82	%		19,417	8.82	%
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY	$	230,541	100.00	%	$	220,210	100.00	%

(1) Includes Federal Home Loan Bank Stock

29

TABLE 14. COMMITMENTS AND CONTINGENCIES

		Payments Due by Period
(In thousands) Contractual Obligations	Total	Less than 1 Year	1-3 years	4-5 years	Over 5 years
Deposits without a Stated Maturity	125,540	125,540	—	—	—
Term Deposits	63,519	40,402	22,702	415	—
Long-Term Debt	16,802	29	2,067	13,082	1,624
Interest on Long-Term Debt	3,978	802	1,513	822	841
Operating Leases	574	95	161	58	260
Unfunded Pension and Post Retirement Benefits	5,076	538	1,057	1,027	2,454
	215,489	167,406	27,500	15,404	5,179
		Amount of Commitment Expiration per Period
Other Commercial Commitments	Total Amounts Committed	Less than 1 Year	1-3 years	4-5 years	Over 5 years
Lending Commitments	30,313	25,237	5,027	38	11
Standby Letters of Credit	3,600	1,600	2,000	—	—

The Bank has outstanding loan commitments of $10,750,000 through minority bank loan programs that the Bank never expects to fund. Therefore these loans commitments are excluded from the funding requirements in the table above.

30

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING

The management of the Company is responsible for the preparation of all financial statements, related financial data and other information in this report. The financial statements are prepared in accordance with generally accepted accounting principles in the United States and include amounts based on management’s estimates and judgment where appropriate. Financial information appearing in this annual report is consistent with the financial statements.

The Company’s accounting system and related internal accounting controls are designed to provide reasonable assurances that transactions are authorized and recorded in accordance with established procedures, that assets are safeguarded, and that proper and reliable records are maintained. The purpose of these procedures is to ensure that we meet our responsibility for the fairness and integrity of these financial statements.

Our internal auditors constantly monitor internal controls.

The management of the Company is responsible for complying with the designated safety and soundness laws and regulations. Management has complied with all applicable safety and soundness regulations during the year ended December 31, 2004.

The Audit Committee of the Board of Directors meets regularly with management, the internal auditor and the independent registered public accounting firm to review matters relating to financial reporting, internal accounting control and the nature, extent and results of our audit efforts.

Our financial statements have been audited by Deloitte & Touche LLP, independent registered public accounting firm, who render an independent opinion on the Company’s financial statements. Their appointment for 2004 was approved by the Audit Committee, ratified by the Board of Directors, and ratified by the shareholders.

*  *  *  *  *  *

31

M&F Bancorp, Inc. and Subsidiary

Consolidated Financial Statements as of and for the Years Ended December 31, 2004, 2003 and 2002, and Report of Independent Registered Public Accounting Firm

32

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

M&F Bancorp, Inc. and Subsidiary

Durham, North Carolina

We have audited the accompanying consolidated balance sheets of M&F Bancorp, Inc. and subsidiary (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

Raleigh, North Carolina

March 30, 2005

33

M&F BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2004 AND 2003

	2004		2003
ASSETS
CASH AND CASH EQUIVALENTS—Cash and amounts due from banks (Notes 2 and 13)	$	19,668,099	$	25,858,891
SECURITIES AVAILABLE FOR SALE AT FAIR MARKET VALUE (Amortized cost of $25,474,621 and $29,274,816 at December 31, 2004 and 2003, respectively) (Notes 3 and 13)		26,690,847		30,615,303
SECURITIES TO BE HELD TO MATURITY AT AMORTIZED COST (Fair value of $387,759 and $894,906 at December 31, 2004 and 2003, respectively) (Notes 3 and 13)		384,720		884,122
FEDERAL HOME LOAN BANK INVESTMENT—At cost		1,194,700		592,100
LOANS (Notes 4 and 13)		169,294,002		150,865,193
Less:
Allowance for possible loan losses (Note 5)		2,511,973		2,275,886
Deferred loan fees		618,428		620,369
Net loans		166,163,601		147,968,938
ASSETS HELD FOR SALE		590,478		—
INTEREST RECEIVABLE (Note 4)		1,200,927		1,159,515
INCOME TAXES RECEIVABLE (Note 9)		348,763		670,362
PREMISES AND EQUIPMENT—Net (Note 6)		6,195,554		6,320,255
FORECLOSED REAL ESTATE—Net		509,189		214,028
DEFERRED INCOME TAXES—Net (Note 9)		898,870		775,303
CASH SURRENDER VALUE OF LIFE INSURANCE (Note 10)		4,924,027		4,714,210
PREPAID EXPENSES AND OTHER ASSETS		1,771,029		437,442
TOTAL ASSETS	$	230,540,804	$	220,210,469

34

M&F BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2004 AND 2003

	2004		2003
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits (Notes 7 and 13):
Demand	$	72,443,645	$	98,654,534
Passbook savings		53,096,293		33,519,404
Certificates		63,519,230		53,723,772
Total deposits		189,059,168		185,897,710
Other borrowings (Notes 4, 11, and 13)		16,802,466		11,829,040
Accrued expenses and other liabilities (Note 10)		4,339,403		3,066,667
Total liabilities		210,201,037		200,793,417
COMMITMENTS AND CONTINGENCIES (Notes 6 and 8)
SHAREHOLDERS’ EQUITY (Notes 10 and 14):
Common stock, no par value at December 31, 2004 and 2003, respectively, authorized 5,000,000 shares; issued and outstanding, 1,685,646 and 842,843 at December 31, 2004 and 2003, respectively		5,900,488		5,892,059
Retained earnings		14,142,709		13,349,649
Accumulated other comprehensive income—net of tax effect of $152,778 and $90,329 in 2004 and 2003, respectively		296,570		175,344
Total shareholders’ equity		20,339,767		19,417,052
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	230,540,804	$	220,210,469

35

M&F BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

	2004		2003			2002
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans (Note 4)	$	11,588,791	$	10,945,989		$	10,380,856
Interest and dividends on investment securities:
Taxable		519,570		509,874			848,081
Tax-exempt		375,133		403,586			411,580
Other interest income		152,579		146,742			116,293
Total interest and dividend income		12,636,073		12,006,191			11,756,810
INTEREST EXPENSE:
Deposits (Note 7)		2,580,195		2,750,589			2,929,537
Borrowed funds (Note 11)		618,041		611,782			617,648
Total interest expense		3,198,236		3,362,371			3,547,185
NET INTEREST INCOME		9,437,837		8,643,820			8,209,625
PROVISION FOR POSSIBLE LOAN LOSSES (Note 5)		464,684		499,608			737,856
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES		8,973,153		8,144,212			7,471,769
OTHER INCOME:
Service charges on deposit accounts		1,304,761		1,424,147			1,432,058
Other service charges, commissions and fees		135,330		136,727			147,796
Net gain (loss) on sales of available-for-sale securities		1,266		(54	)		(6,433	)
Rental income		306,633		283,111			272,650
Other (Note 4)		1,011,467		563,587			322,034
Total other income		2,759,457		2,407,518			2,168,105
OTHER EXPENSES:
Salary and employee benefits (Note 10)		5,824,171		5,324,930			4,843,331
Occupancy costs (Note 6)		859,626		794,870			741,599
Equipment expense (Note 6)		531,002		460,781			535,190
Data processing		387,410		385,249			391,952
Contributions		54,962		35,285			8,094
Telephone		103,384		86,682			133,345
Armored car sevices		177,196		227,835			211,152
Other		2,054,111		1,487,651			1,278,461
Total other expenses		9,991,862		8,803,283			8,143,124
INCOME BEFORE INCOME TAX EXPENSE		1,740,748		1,748,447			1,496,750
INCOME TAX—Expense (Note 9)		602,130		473,000			461,000
NET INCOME	$	1,138,618	$	1,275,447		$	1,035,750

36

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

	Common Stock					Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Shareholders’ Equity (Note 15)			Comprehensive Income
	Number of Shares		Amount
BALANCE—December 31, 2001	853,725		$	5,998,353		$	240,450		$	11,614,541		$	17,853,344		$	420,287
Dividends										(272,673	)		(272,673	)
Repurchase and retirement of common stock	(10,902	)		(106,294	)								(106,294	)
Comprehensive income:
Net income										1,035,750			1,035,750		$	1,035,750
Other comprehensive income net of tax effect of $252,563:
Unrealized gains on securities						$	188,596									188,596
Reclassification adjustment							(4,245	)								(4,245	)
Net unrealized gain on securities							184,351									184,351
Minimum pension liability (Note 10)							(507,950	)								(507,950	)
Other comprehensive income							(323,599	)					(323,599	)		(323,599	)
Total comprehensive income
BALANCE—December 31, 2002	842,823			5,892,059		$	(83,149	)		12,377,618			18,186,528		$	712,151
Dividends										(303,416	)		(303,416	)
Repurchase and retirement of common stock
Comprehensive income:
Net income										1,275,477			1,275,447		$	1,275,447
Other comprehensive income net of tax effect of $130,581:
Unrealized gain on securities							180,710									180,710
Minimum pension liability (Note 10)							77,783									77,783
Other comprehensive income							258,493						258,493			258,493
Total comprehensive income
BALANCE—December 31, 2003	842,823			5,892,059			175,344			13,349,649			19,417,052		$	1,533,940
Cash Dividends										(337,129	)		(337,129	)
Stock Dividends (Note 1)	842,823			8,429						(8,429	)
Repurchase and retirement of common stock
Comprehensive income:
Net income										1,138,618			1,138,618		$	1,138,618
Other comprehensive income net of tax effect of $:(152,779)
Unrealized gain on securities							(60,578	)								(60,578	)
Minimum pension liability (Note 10)							181,804									181,804
Other comprehensive income							121,226						121,226			121,226
Total comprehensive income
BALANCE—December 31, 2004	842,823		$	5,900,488		$	296,570		$	14,142,709		$	20,339,767		$	1,259,844

37

M&F BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

	2004			2003			2002
OPERATING ACTIVITIES:
Net Income	$	1,138,618		$	1,275,447		$	1,035,750
Adjustment to reconcile net income to net cash provided by operating activities:
Provision for possible loan losses		464,684			499,608			737,856
Depreciation and amortization		293,797			263,358			346,200
(Amortization) Accretion on securities		1,532			(5,928	)		7,146
Deferred income tax (benefit) provision		(174,795	)		9,492			(167,000	)
(Gain) loss on sale or disposal of assets		(112,769	)		(92,685	)		—
(Gain) loss on sale of available-for-sale securities		(1,226	)		54			6,433
Changes in operating assets and liabilities:
Deferred loan fees		1,941			33,030			163,917
Interest receivable		(41,412	)		(163,677	)		(46,056	)
Income taxes receivable		321,599			(531,064	)		358,858
Prepaid expenses and other assets		(1,333,587	)		(58,678	)		(342,627	)
Accrued expenses and other liabilities		1,569,097			312,081			(468,143	)
Increase in cash value of life insurance		(209,817	)		(249,013	)		(4,156,000	)
Other		781			—			—
Net cash provided by operating activities		1,918,443			1,292,025			(2,523,666	)
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and principal on securities available for sale		7,744,845			13,842,924			9,645,353
Proceeds from maturities of securities held to maturity		500,000			—			530,000
Purchase of securities available for sale		(4,552,501	)		(15,145,490	)		(10,039,660	)
Purchase of Bank Owned Life Insurance		—			—			(4,156,000	)
Net increase in loans		(22,192,276	)		(18,738,072	)		(18,575,053	)
Purchase of premises and equipment		(759,574	)		(621,777	)		(1,207,517	)
Proceeds from sale of assets		3,352,478			8,298,792			—
Net cash used in investing activities		(15,907,028	)		(12,363,623	)		(23,802,877	)

38

M&F BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

	2004			2003			2002
FINANCING ACTIVITIES:
Net increase (decrease) in demand deposit and passbook savings	$	(6,634,000	)	$	27,691,014		$	16,670,479
Net increase (decrease) in certificates of deposit		9,795,458			8,388,931			(2,235,927	)
FHLB borrowings		5,000,038			—			4,700,000
Repayment of FHLB borrowings		(26,574	)		(4,724,175	)		(521,993	)
Repurchase and retirement of common stock		—			—			(106,294	)
Cash dividends		(337,129	)		(303,416	)		(272,673	)
Net cash provided by financing activities		7,797,793			31,052,354			18,233,592
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(6,190,792	)		19,980,756			(3,936,951	)
CASH AND CASH EQUIVALENTS:
Beginning of year		25,858,891			5,878,135			9,815,086
End of Year	$	19,668,099		$	25,858,891		$	5,878,135
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid for interest	$	2,534,673		$	3,198,696		$	2,975,025
Cash paid for income taxes—net of refunds received	$	425,897		$	994,572		$	438,650
SIGNIFICANT NON-CASH TRANSACTIONS:
Loans transferred to other real estate owned	$	295,161		$	164,028		$	82,734
Stock dividend (Note 1)		8,429

(Concluded)

See notes to consolidated financial statements.

39

M&F BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

1. SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations—M&F Bancorp (the “Company”), Inc. is the bank holding company for Mechanics and Farmers Bank (the “Bank”), a state chartered commercial bank incorporated in North Carolina in 1907 and began operations in 1908. The Bank has nine offices in North Carolina: three in Durham, two in Raleigh, three in Charlotte and one in Winston-Salem. The Company, headquartered in Durham, operates in a single business segment and offers a wide variety of consumer and commercial banking services and products in North Carolina.

Basis of Presentation—The consolidated financial statements include the accounts and transactions of M&F Bancorp, Inc. and Mechanics and Farmers Bank, its wholly owned Bank subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

Stock Dividend – In November 2004, the Board of Directors approved a 100% stock dividend, each shareholder of record at the close of business on December 20, 2004 was entitled to receive one additional share of stock for each share of stock owned on the record date (“the stock dividend”). The payment date was January 10, 2005. The stock dividend increased the number of common shares to 1,685,646 as of December 31, 2004 from 842,823. Also, outstanding stock options increased to 110,400 from 55,200 at a grant price of $7.84. This stock dividend has been retroactively applied for purposes of calculating earnings per share for the years 2004, 2003, and 2002.

Cash and Cash Equivalents—Substantially all of the cash and cash equivalents are comprised of highly liquid short-term investments that are carried at cost, which approximates market value. Cash equivalents include demand and time deposits (with original maturities of 90 days or less) at other financial institutions and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.

Investment Securities—The accounting for investment securities is dependent upon their classification as held to maturity, available for sale, or trading securities. Such securities classified as held to maturity are carried at cost, adjusted for the amortization of premiums and accretion of discounts. Securities classified as available for sale and trading securities are carried at market value. At December 31, 2004, and 2003, the Company did not have any securities classified as trading.

Unrealized holding gains and losses for securities available for sale are reported as other comprehensive income. In order for the securities to qualify as securities held to maturity, the Bank must have both the positive intention and the ability to hold them to maturity. Management utilizes these criteria in determining the accounting treatment accorded such securities. Gains and losses on the sale of available-for-sale securities are determined using the specific-identification method. Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary are included in earnings as realized losses. Premiums and discounts are recognized in interest income using the interest method over the period to maturity.

Investments in Federal Home Loan Bank Stock are carried at cost, which the Company believes to reflect fair value.

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Loans—The Bank grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans throughout North Carolina. The ability of the Bank’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in process of collection. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. Past due status is based on contractual terms of the loan.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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

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

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

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Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment.

Financial Instruments—In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments, consisting of commitments to extend credit, commitments under credit card arrangements, and commercial letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. (See Note 8.)

Mortgage Servicing Rights—The Bank allocates the total cost of a whole mortgage loans purchased to mortgage servicing rights and loans based on relative fair values. Amounts capitalized as mortgage servicing rights are amortized over the period of, and in proportion to, estimated future net servicing income. The Bank assesses its capitalized mortgage servicing rights for impairment based on independent appraisals of the market value of those rights. Impairments are recognized as a valuation allowance. The independent appraisals value such rights in consideration of prevailing interest rates, prepayment and default rates, and other relevant factors as appropriate. At December 31, 2004 and 2003, the fair values of mortgage servicing rights were $82,324 and $62,352, respectively, and are presented as a component of other assets in the consolidated balance sheets.

Premises and Equipment—Premises and equipment are stated at cost less accumulated depreciation and amortization. For financial reporting purposes, depreciation and amortization are computed by the straight-line method and are charged to operations over the estimated useful lives of the assets, which range from 15 to 30 years for premises and 3 to 30 years for furniture and equipment. Leasehold improvements are amortized over the terms of the respective leases or the useful lives of the improvements, whichever is shorter. Maintenance and repairs are charged to operations in the year incurred. Gains and losses on dispositions are included in current operations. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. If the sum of the expected cash flows attributable to an asset is less than the stated amount of the asset, an impairment loss is recognized in the current period and charged to operations.

Foreclosed Real Estate—Real estate acquired through foreclosure is carried at the lower of cost or estimated net realizable value. Any initial losses at the time of foreclosure are charged against the allowance for loan losses with subsequent losses or writedowns included in the consolidated statements of income as a component of other income. There is no allowance for loss on foreclosed real estate at December 31, 2004 and 2003. In addition, no amounts were provided for losses on foreclosed real estate during 2004, 2003, or 2002.

Cash Surrender Value of Life Insurance—The Bank maintains life insurance on officers and directors with the Company as beneficiary. The related cash surrender value of the policies at December 31, 2004 and 2003 was $4,924,027 and $4,714,210, respectively. During 2004, the cash surrender value of these policies increased $249,013. Policies have been purchased to fund pension liabilities for officers of the Company. During 2003, the cash surrender value of these policies increased $249,011 to $4,714,210 from $4,465,199 in 2002. (see Note 10).

Income Taxes—Provisions for income taxes are based on amounts reported in the consolidated statements of income (after exclusion of non-taxable income such as interest on state and municipal securities) and include changes in deferred income taxes. Deferred taxes are computed using the asset and liability approach. The tax effects of differences between the tax and financial accounting basis of assets and liabilities are reflected in the balance sheet at the tax rates expected to be in effect when the differences reverse. (See Note 9.)

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Income and Expenses—The Company uses the accrual method of accounting, except for immaterial amounts of loan income and other fees which are recorded as income when collected. The recognition of certain loan origination fee income and certain loan origination costs is deferred when such loans are originated and amortized over the life of the loan.

Earnings Per Share—Earnings per share are calculated on the basis of the weighted-average number of shares of common stock outstanding for the purpose of computing the basic and diluted earnings per share. The stock dividend increased the number of common shares outstanding to 1,685,646 as of December 31, 2004. Also, outstanding stock options increased to 110,400 from 55,200 at a grant price of $7.84. This stock dividend has been retroactively applied for purposes of calculating earnings per share for the years 2004, 2003, and 2002.

Stock-Based Compensation—The Company measures compensation costs related to employee incentive stock options using the intrinsic value of the equity instrument granted (i.e., the excess of the market price of the stock to be issued over the exercise price of the equity instrument at the date of grant) rather than the fair value of the equity instrument. No compensation costs have been recognized for stock option awards because the options are granted at exercise prices based on the market value of the Company stock on the date of grant. Had compensation cost for the Company’s employee stock option plan been determined using the fair value method, the Company’s pro forma net income and earnings per share for the years ended December 31, 2004, 2003 and 2002 would have been as follows:

Net income as reported	$	1,138,618		$	1,275,447		$	1,035,750
Deduct—Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(16,754	)		(18,586	)		(18,586	)
Pro forma net income	$	1,121,864		$	1,256,861		$	1,017,164
Basic earnings per share (Note 1)
As reported	$	0.68		$	0.76		$	0.61
Pro forma	$	0.67		$	0.75		$	0.60
Diluted earnings per share (Note 1)
As reported	$	0.66		$	0.76		$	0.61
Pro forma	$	0.65		$	0.75		$	0.60

At December 31, 2004, 2003, 2002, stock options outstanding under the Option Plan were 110,400 for each year respectively after giving effect to the stock dividend described above.

The Company estimated an option value at $1.09. In order to compute its estimation of compensation expense associated with the fair value method using the Black-Scholes Model, the following assumptions were used:

Risk-free rate	5.50	%
Average expected term (years)	5.00
Expected volitility	18.22	%
Expected dividend yield	4.76	%

Comprehensive Income—Accounting principles generally accepted in the United States of America require that recognized revenue, expenses, gains and losses be included in net income. Although

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certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as separate components of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and pension liabilities. Actual results could differ from those estimates

New Accounting Pronouncements—In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46) Consolidation of Variable Interest Entities – An Interpretation of Accounting Research Bulletin 51 – Consolidated Financial Statements. This interpretation provides guidance related to identifying variable interest entities and determining whether such entities should be consolidated. FIN 46 requires an enterprise to consolidate a variable interest entity when the enterprise (a) absorbs a majority of the variable interest entity’s expected losses, (b) receives the majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Prior to the effective date of FIN 46, entities were generally consolidated by an enterprise that had control through ownership of a majority voting interest in the entity. FIN 46 originally applied immediately to variable interest entities created or obtained after January 31, 2003. During 2003, the Company did not participate in the creation of, or obtain a new variable interest in, any variable interest entity. In December 2003, the FASB issued FIN 46R, a revision to FIN 46, which modified certain requirements of FIN 46 and allowed for the optional deferral of the effective date of FIN 46R until March 31, 2004. The Company has evaluated the effect of FIN 46R on its financial statements, and has concluded that there is no material impact on the consolidated results of operations or consolidated financial condition of the Company.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149 clarifies the conditions which a contract with an initial net investment meets the characteristic of a derivative; clarifies when a derivative contains a financial component; amends the definition of “an underlying” to conform it to language used in FASB interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, including the Indirect Guarantees of Indebtedness of Others; and amends certain other existing pronouncements. This Statement is effective for contracts entered into or modified by the Company after June 30, 2003. All provisions of this Statement are applied prospectively. The application of this Statement did not have a material effect on the Company’s results of operations or financial position.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. It clarifies when an issuer must classify certain financial instruments as liabilities (or assets, in some circumstances), rather than including them within stockholders’ equity or separately classifying them as mezzanine equity. This Statement was effective for the Company for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for the Company

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in the third quarter of 2003. The Company has not issued any financial instruments within the scope of SFAS No. 150; therefore, the application of SFAS No. 150 did not affect the Company’s results of operations, financial position, or disclosures.

In May 2004, FASB issued FASB Staff No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP FAS 106-2), which supersedes FSP FAS 106-1, in response to the December 2003 enactment of the Medicare Prescription Drug, Improvement and Modernization Act of 2003(“the Act”). FSP FAS 106-2 provides guidance on the accounting for the effects of the Act for employees that sponsor postretirement health care plans that provide prescription drug benefits. The Company believes that its plans are eligible for the subsidy provided by the Act but has not determined the effect on its financial statements.

In September 2004, the FASB issued FASB Staff Position (FSP) EITF 03-1-1, which delays the recognition and measurement provisions of EITF 03-1 pending the issuance of further implementation guidance. The delay applies to both debt and equity securities and specifically applies to impairments caused by interest rate and sector spreads. In addition, the provisions of EITF 03-1 that have been delayed relate to the requirements that a company declare its intent to hold the security to recovery and designate a recovery period in order to avoid recognizing an other- than-temporary impairment charge through earnings. The FASB will be issuing implementation guidance related to this topic. Once issued, the Company will evaluate the impact of adopting EITF 03-1.

In December 2004, the FASB Statement No. 123 (revised 2004) (SFAS 123(R)), “Share-based Payment”, which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation”. FASB 123(R) eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 and requires that such transactions be accounted for using a fair value-based method. Statement 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Company will be required to apply SFAS 123(R) as of July 1, 2005.

Statement 123 (R) may be adopted using one of two methods: (1) A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123 (R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted employees prior to the effective of Statement 123 (R) that remain unvested on the effective date. (2) A “modified prospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. The Company has not adopted Statement 123 (R) at this time and is still evaluating its impact.

2. CASH AMOUNTS DUE FROM BANKS

The Federal Reserve Bank (“Federal Reserve”) and banking laws of North Carolina require certain banks to maintain average balances in relation to specific percentages of its customers’ deposits as a reserve. At December 31, 2004, such requirement for the Bank was $1,866,000, which was satisfied by usable vault cash of $2,141,000 and a Federal Reserve balance of $807,000.

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3. INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses, and estimated fair value of investment securities at December 31, are as follows:

	2004
	Amortized Cost		Net Unrealized Gains		Net Unrealized (Losses)			Fair Value
Securities available for sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	8,992,315			$	(119,783	)	$	8,872,532
Mortgage-backed securities		4,591,731		23,603					4,615,334
Corporate debt securities		4,224,243				(131,216	)		4,093,027
Obligations of states and political subdivisions		7,654,290		319,805					7,974,095
Other securities		—							—
Equity securities		12,042		1,123,817					1,135,859
Total	$	25,474,621	$	1,467,225	$	(250,999	)	$	26,690,847
Securities to be held to maturity— Obligations of states and political subdivisions	$	384,720	$	3,039		—		$	387,759
	2003
	Amortized Cost		Net Unrealized Gains		Net Unrealized (Losses)			Fair Value
Securities available for sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	9,997,136	$	—	$	(26,661	)	$	9,970,475
Mortgage-backed securities		5,987,768		33,240					6,021,008
Corporate debt securities		4,213,953				(192,948	)		4,021,005
Obligations of states and political subdivisions		8,063,917		345,871		—			8,409,788
Other Securities		1,000,000		—		—			1,000,000
Equity securities		12,042		1,180,985		—			1,193,027
Total	$	29,274,816	$	1,560,096	$	(219,609	)	$	30,615,303
Securities to be held to maturity— Obligations of states and political subdivisions	$	884,122	$	10,784	$	—		$	894,906

The unrealized losses are attributable to changes in interest rates on investment grade securities. The Company believes that all of the unrealized losses are temporary in nature.

For the year ended December 31, 2004 the Bank had a $1,266 gross realized gain, and for the years ended December 31, 2003 and 2002 gross realized losses of $54 and $6,433 respectively, on sales of securities available for sale.

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The scheduled maturities of securities to be held to maturity and securities available for sale at December 31, 2004 are as follows:

	Securities to Be Held to Maturity				Securities Available for Sale
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	194,926	$	195,682	$	2,393,464	$	2,374,987
Due from one to five years		189,794		192,077		18,517,101		18,612,064
Due from five to ten years		—		—		2,208,371		2,241,874
Due after ten years		—		—		2,343,643		2,326,063
No stated maturity		—		—		12,042		1,135,859
Total	$	384,720	$	387,759	$	25,474,621	$	26,690,847

For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, are grouped based upon the final payment date. The mortgage-backed securities may mature earlier because of principal prepayments.

Investment securities having an aggregate par value of $16,055,730 and $28,272,933 at December 31, 2004 and 2003, respectively, were pledged as collateral to secure public funds on deposit and for other purposes as required by law.

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4. LOANS

Loans at December 31, are summarized as follows:

	2004		2003
Commercial, financial and agricultural	$	108,310,046	$	94,977,613
Real estate construction		14,936,829		7,429,538
Real estate mortgage		37,743,677		40,526,327
Installment loans to individuals		8,303,450		7,931,715
Total	$	169,294,002	$	150,865,193

At December 31, 2004 and 2003, the Bank had loans totaling approximately $3,635,000 and $1,734,000, respectively, that were contractually delinquent for 90 days or more, in a nonaccrual status or in process of foreclosure. Restructured loans at December 31, 2004 and 2003 totaled approximately $52,000 and $500,000, respectively. If interest income on nonaccrual loans had been accrued, such income would have been approximately $70,000, $38,000 and $40,000 for 2004, 2003 and 2002, respectively. These amounts are not included in income. Interest paid on nonaccrual loans and included in income was approximately $34,000, $42,000 and $21,000 for 2004, 2003 and 2002, respectively.

In 2004 and 2003, the Bank sold residential real estate mortgage loans of $3,285,886 and $8,313,665, respectively. The Bank realized gains on the loan sales of $112,774 in 2004 and $82,296 in 2003. Realized gains on the sale of mortgage loans are included in Other Income in the Company’s Consolidated Statements of Income for 2004 and 2003. The Bank utilizes an outside investment service to evaluate, price, and pool groups of loans available for possible sale.

Qualifying first mortgage loans collateralize Federal Home Loan Bank (“FHLB”) advances. (See Note 11.)

Loans to related parties are disclosed in Note 12.

The Bank’s retail, commercial and real estate loans in North Carolina create a significant geographic concentration.

5. ALLOWANCE FOR POSSIBLE LOAN LOSSES

Allowance for possible loan losses for the years ended December 31, are summarized as follows:

	2004			2003			2002
Balance at beginning of year	$	2,275,886		$	2,022,360		$	1,505,404
Provision for possible loan losses		464,684			499,608			737,856
Loans charged off		(346,695	)		(278,620	)		(282,997	)
Recoveries		118,098			32,538			62,097
Balance at end of year	$	2,511,973		$	2,275,886		$	2,022,360

At December 31, 2004 and 2003, the Bank had impaired loans totaling approximately $3,687,000 and $2,234,000, with related reserves of $351,000 and $189,000, respectively. At December 31,

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2004 and 2003, no additional funds were committed to be advanced on impaired loans. Impaired loans of $3,621,000 and $2,234,000 for 2004 and 2003 were collateralized with real estate.

6. PREMISES, EQUIPMENT AND LEASES

Major classifications of premises and equipment at December 31 are summarized as follows:

	2004			2003
Land	$	286,349		$	692,838
Premises		6,845,319			6,628,030
Furniture, equipment and leasehold improvements		4,715,187			4,193,831
Construction in progress		—			163,061
Total		11,846,855			11,677,760
Less accumulated depreciation		(5,651,301	)		(5,357,505	)
Premises and equipment—net	$	6,195,554		$	6,320,255

The Bank leases premises and equipment under various operating lease agreements that provide for the payment of property taxes, insurance and maintenance costs. Generally, operating leases provide for one or more renewal options on the same basis as current rental terms. However, certain leases require increased rentals under cost-of-living escalation clauses. Certain of the leases also provide purchase options.

The Bank owns a parcel of land in Raleigh, North Carolina that was purchased with the intent of constructing a banking facility. This parcel was classified as land and grouped with premises and equipment in 2003. In 2004, the Bank has classified this parcel of land to assets held for sale at a carrying value of $590,478.

Future minimum lease commitments for noncancelable operating leases with initial or remaining terms of one year or more consist of the following:

Year Ending December 31
2005	$	94,965
2006		91,054
2007		70,083
2008		34,063
2009		24,246
Thereafter		259,864
Total minimum payments	$	574,275

Rent expense for all operating leases amounted to approximately $124,000 in 2004, $137,000 in 2003, and $166,000 in 2002.

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7. DEPOSITS

Included in deposits are certificates of deposit of $100,000 or more aggregating approximately $22,800,000 and $17,400,000 at December 31, 2004 and 2003, respectively. For the years ended December 31, 2004, 2003 and 2002, interest expense on certificates of deposit of $100,000 or more totaled approximately $462,000, $462,000, and $485,000, respectively.

For the years ended December 31, 2004 and 2003, $7,284 and $8,205, respectively, of demand deposit overdrafts were reclassified as loan balances.

At December 31, 2004, the scheduled maturities of certificates of deposit are as follows:

2005	$	40,401,722
2006		19,558,663
2007		3,143,165
2008		111,608
2009		304,072
Thereafter		—
Total Certificates	$	63,519,230

8. COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Bank has various commitments to extend credit which are not reflected in the financial statements. At December 31, 2004 and 2003, the Bank had outstanding loan commitments of approximately $41,063,000 and $29,975,000, respectively. Included in these loan commitments are approximately $10,750,000 committed through minority bank loan programs that the Company never expects to fund. Commitments under standby letters of credit amounted to approximately $3,600,100 and $1,090,300 at December 31, 2004 and 2003, respectively. These letters of credit represent agreements, whereby the Bank guarantees to lend funds to customers up to a predetermined maximum amount.

The Bank approves lines of credit to customers through home equity and overdraft protection loans. At December 31, 2004 and 2003, in addition to actual advances made on such loans, the Bank’s customers have available additional lines of credit on home equity and consumer overdraft protection loans. Available lines on home equity loans at December 31, 2004 and 2003 were $1,376,000 and $1,268,000, respectively. Consumer overdraft protection loans had available lines of credit of $882,000 and $858,000 as of December 31, 2004 and 2003, respectively.

The nature of the business of the Company ordinarily results in a certain amount of litigation. The Company is involved in various legal claims which are considered incidental to the normal course of business. Management believes that the liabilities, if any, arising from these claims will not have a material effect on the Company’s consolidated financial statements.

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9. INCOME TAXES

The components of income tax expense for the years ended December 31 are summarized as follows:

	2004			2003		2002
Current tax provision	$	776,925		$	463,508	$	628,000
Deferred tax (benefit) provision		(174,795	)		9,492		(167,000	)
Income tax expense	$	602,130		$	473,000	$	461,000

Changes in deferred taxes of $42,249, $104,138 and $94,900 related to unrealized gains and losses on securities available for sale during 2004, 2003 and 2002, respectively, were allocated to comprehensive income.

Changes in deferred taxes of $(93,656), $40,067 and $349,180 related to an additional minimum pension liability during 2004, 2003 and 2002, respectively, were allocated to comprehensive income.

The approximate tax effect of each type of temporary difference at December 31, is summarized as follows:

	2004			2003
Deferred tax assets:
Accrued pension expense	$	362,499		$	281,603
Additional minimum pension liability		260,738			354,395
Bad debt reserve		725,068			631,512
Deferred loan fees		210,266			210,925
Interest on non-accrual loans		35,384			40,434
Deferred gain on foreclosed real estate		29,206			30,318
Other		4,151			3,919
Total	$	1,627,312		$	1,553,106
Deferred tax liabilities:
Depreciation	$	(312,286	)	$	(319,390	)
Unrealized gain on securities available for sale—net		(413,517	)		(455,766	)
Prepaid expenses		(2,197	)		(2,205	)
Other		(442	)		(442	)
Total		(728,442	)		(777,803	)
Net deferred tax assets	$	898,870		$	775,303

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A reconciliation of income taxes computed for the years ended December 31 at the statutory federal income tax rate to the provision for income tax follows:

	2004			2003			2002
Income tax at statutory federal rate	$	591,854		$	598,597		$	508,895
Effect of tax-exempt interest income		(127,545	)		(138,529	)		(132,982	)
State taxes—net of federal benefit		90,992			46,860			70,620
Cash Surrender Value of Life Insurance		(108,075	)		(84,915	)		7,218
Other—net		154,904			50,987			7,249
Total	$	602,130		$	473,000		$	461,000

The Bank made income tax payments of approximately $795,000 and $1,038,000 in 2004 and 2003, respectively.

10. RETIREMENT AND STOCK COMPENSATION PLANS

The Bank sponsors a noncontributory defined-benefit cash balance pension plan (the “Plan”), covering all employees who qualify under length of service and other requirements. Under the Plan, retirement benefits are based on years of service and average earnings.

The Bank’s funding policy is to contribute amounts to the Plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as the Bank may determine to be appropriate.

The Plan’s assets are invested in Scudder Flag Investor Mutual Funds by Intercarolina Financial Services. The objective of the Plan’s investment strategy is to receive a return consistent with market performance of other comparable plans. The M&F Bancorp, Inc., Cash Balance Plan is invested in a balanced mutual fund that has a “flexible value” investment strategy with investments primarily in common stocks and bonds. The stock/ bond target allocation for this fund under normal market conditions is approximately two thirds in stocks and one third in bonds. The expected return of 8.00% is based on a twenty year historical range of data from Frontier Analytics

The following sets forth the Plan’s funded status and amounts recognized in the balance sheets at December 31, 2004 and 2003.

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Retirement Plan

Change in benefit obligation:
Benefit obligation at beginning of year	$	(3,783,766	)	$	(3,474,771	)
Service cost		(95,518	)		(74,486	)
Interest cost		(221,866	)		(215,326	)
Amendments		20,078			—
Actuarial loss		(178,770	)		(142,714	)
Benefits and expenses paid		108,204			123,531
Benefit obligation at end of year	$	(4,151,638	)	$	(3,783,766	)
Change in plan assets:
Fair value of plan assets at beginning of year	$	3,372,308		$	2,461,711
Actual return on plan assets		296,768			779,316
Employer contribution		108,204			254,812
Benefits and expenses paid		(108,204	)		(123,531	)
Fair value of plan assets at end of year		3,669,076			3,372,308
Funded status		(482,562	)		(411,458	)
Unrecognized net actuarial loss		661,590			575,565
Unrecognized prior service cost		(79,915	)		(130,443	)
Accrued liability	$	99,113		$	33,664
Amounts recognized in the consolidated balance sheet consist of:
Accrued benefit liability	$	(400,124	)	$	(352,023	)
Accumulated other comprehensive income		499,237			385,687
Net amounts recognized	$	99,113		$	33,664
Weighted-average assumptions as of December 31:
Discount rate		5.75	%		6.00	%
Expected return on plan assets		8.00	%		8.00	%
Rate of compensation increase		6.00	%		6.00	%

The expected payments for this plan for each of the next five years and combined for years six through ten are as follows:

Estimated Benefit Payments for the Year Ending December 31, 2005	$	447,000
Estimated Benefit Payments for the Year Ending December 31, 2006	$	438,000
Estimated Benefit Payments for the Year Ending December 31, 2007	$	276,000
Estimated Benefit Payments for the Year Ending December 31, 2008	$	374,000
Estimated Benefit Payments for the Year Ending December 31, 2009	$	336,000
Estimated Benefit Payments for the Years Ending December 31, 2010-2014	$	1,612,000

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Net periodic pension cost for the Plan for the years ended December 31, 2004, 2003 and 2002 includes the following:

	2004			2003			2002
Service cost	$	95,518		$	74,486		$	61,381
Interest cost		221,866			215,326			208,595
Expected return on plan assets		(266,187	)		(195,496	)		(209,687	)
Amortization of prior service cost		(8,442	)		32,443			(32,275	)
Net periodic pension cost	$	42,755		$	126,759		$	28,014

Executive Retirement Plan

The Bank sponsors a nonqualified Supplemental Executive Retirement Plan (“SERP”). The SERP, which is unfunded, provides certain individuals pension benefits, outside the Bank’s noncontributory defined-benefit cash balance pension plan, based on average earnings, years of service and age at retirement. The Bank has purchased bank owned life insurance (BOLI) in the aggregate amount of approximately $13,000,000 face value and $4,900,000 cash value as of December 31, 2004, covering all the participants in the SERP, with the Bank and each participant as 50% beneficiary. The Bank intends to keep this life insurance in force indefinitely. The insurance proceeds may be used, at the bank’s sole discretion, to fund the benefits payable under the SERP.

During 2004, 2003, and 2002 the cash value of Bank owned life insurance increased $209,817, $249,013 and $4,156,000 respectively. The cash value of these policies at December 31, 2004, 2003 and 2002 was $4,924,027, $4,714,210 and $4,465,199 respectively.

	2004			2003
Change in benefit obligation:
Benefit obligation at beginning of year	$	(1,798,232	)	$	(915,803	)
Service cost		(63,229	)		(50,376	)
Interest cost		(123,077	)		(100,564	)
Amendments		—			(696,804	)
Actuarial loss		(345,398	)		(66,078	)
Benefits and expenses paid		31,393			31,393
Benefit obligation at end of year		(2,298,543	)		(1,798,232	)
Change in plan assets:
Fair value of plan assets at beginning of year		—			—
Employer contribution		31,393			31,393
Benefits and expenses paid		(31,393	)		(31,393	)
Fair value of plan assets at end of year		—			—
Funded status		(2,298,543	)		(1,798,232	)
Unrecognized net actuarial loss		591,646			277,841
Unrecognized prior service cost		541,614			619,209
Accrued liability	$	(1,165,283	)	$	(901,182	)

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	2004			2003
Amounts recognized in the consolidated balance sheets consist of:
Accrued benefit liability	$	(1,974,541	)	$	(1,562,380	)
Intangible asset		541,614			619,209
Accumulated other comprehensive income		267,644			41,989
Net amounts recognized	$	(1,165,283	)	$	(901,182	)
Weighted-average assumptions as of December 31:
Discount rate		5.75	%		6.00	%
Expected return on plan assets		N/A			N/A
Rate of compensation increase		6.00	%		6.00	%

The expected payments for this plan for each of the next five years and combined for years six through ten are as follows:

Estimated Benefit Payments for the Year Ending December 31, 2005	$	82,000
Estimated Benefit Payments for the Year Ending December 31, 2006	$	126,000
Estimated Benefit Payments for the Year Ending December 31, 2007	$	139,000
Estimated Benefit Payments for the Year Ending December 31, 2008	$	146,000
Estimated Benefit Payments for the Year Ending December 31, 2009	$	153,000
Estimated Benefit Payments for the Years Ending December 31, 2010-2014	$	796,000

Net periodic pension cost for the SERP for the years ended December 31, 2004, 2003 and 2002 includes the following:

	2004		2003		2002
Service cost	$	63,229	$	50,376	$	11,034
Interest cost		123,077		100,564		57,267
Amortization of prior service cost		109,188		95,445		92,120
Net periodic pension cost	$	295,494	$	246,385	$	160,421

401(k) Plan—The Bank sponsors a 401(k) plan. Participation in the 401(k) plan is voluntary and employees become eligible after completing 90 days of service and attaining age 21. Employees may elect to contribute up to 12% of their compensation to the 401(k) plan. The Bank matches 100% of employee contributions up to 6% of each employee’s compensation. The 401(k) plan investments are managed by Intercarolina Financial Services. The Bank’s contributions to the 401(k) plan were $180,196, $164,712 and $151,172 for 2004, 2003 and 2002, respectively.

Deferred Compensation Plan—The Bank sponsors a nonqualified deferred compensation plan. The plan, which is unfunded, provides for certain management employees to defer compensation in order

55

to provide retirement and death benefits on behalf of such employees. The plan allows certain management employees to receive the balance of the 6% Bank match on the 401(k) plan that would otherwise be forfeited to comply with the Internal Revenue Code. At December 31, 2004 and 2003, the amount of the liability was $502,000 and $349,000, respectively.

Stock Option Plan—The Company has a stock option plan (the “Option Plan”) under which the Company may grant options to selected officers of the Company for up to 171,000 shares of common stock. Under the plan, the exercise price of each option equals the market price of the Company’s stock on the date of grant, and an option’s maximum term is 10 years. Options vest over 5 years based on years of service and become 100% vested at either age 55, with 30 years of service, or at age 65 (Note 1).

Post Retirement Benefits—The Company provides certain post retirement benefits to specified executive officers. At December 31, 2004 the amount of the liability for these benefits was approximately $91,100.

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A summary of the status of the Option Plan as of December 31, 2004, 2003, and 2002 and the changes during the years ending on those dates is presented below:

	2004			2003			2002
Fixed Options (Note 1)	Shares	Weighted- Average Exercise Price		Shares	Weighted- Average Exercise Price		Shares	Weighted- Average Exercise Price
Outstanding at beginning of year	110,400	$	7.84	110,400	$	7.84	118,800	$	7.84
				—			8,400
Outstanding at end of year	110,400	$	7.84	110,400	$	7.84	110,400	$	7.84
Options exercisable at end of year	110,400			95,040			79,680

No options were granted in 2004, 2003 or 2002.

At December 31, 2004, 2003 and 2002, options outstanding under the Option Plan had a weighted-average remaining contractual life of 4.99 years, 5.99 years, and 6.99 years, respectively.

11. BORROWED FUNDS

Borrowed funds at December 31 are summarized as follows:

	2004		2003
Fixed-rate advances from the FHLB:
Advance maturing, October 8, 2008, 4.64%	$	10,000,000	$	10,000,000
Advance maturing, July 16, 2018, 7.26%		1,802,466		1,829,040
Advances maturing, December 8, 2009, 4.02%		3,000,000
Advances maturing, December 10, 2007, 3.59%		2,000,000
	$	16,802,466	$	11,829,040

The contractual maturities of borrowed funds are as follows:

2005	$	29,212
2006		32,111
2007		2,035,298
2008		10,038,801
2009		3,042,652
Thereafter		1,624,392
Total	$	16,802,466

The advance maturing July 16, 2018 requires quarterly principal repayments.

Pursuant to collateral agreements with the FHLB, advances are secured by all stock in the FHLB and qualifying first mortgage loans. The Bank also periodically borrows funds on an overnight basis via advances from the Federal Reserve and the purchase of federal funds.

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The Bank has the availability of additional borrowings of approximately $10,300,000 from the FHLB, as of December 31, 2004. The Bank also has available on a line of credit approximately $3,700,000 established at the Federal Reserve.

12. RELATED-PARTY TRANSACTIONS

The Bank has, and expects to have in the future, banking transactions in the ordinary course of business with several of its directors, officers and their associates on the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with others in the normal course of business. Those transactions do not involve more than the normal risk of collectibility nor do they present any unfavorable features. The aggregate amount of loans to such related parties at December 31, 2004 and 2003 was approximately $4,086,000 and $4,345,000, respectively. During 2004, new loans to such related parties totaled approximately $573,000 exclusive of advances on existing lines of credit and payments were approximately $830,000 exclusive of payments on existing lines of credit.

13. FAIR VALUES OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate that value:

Cash and Cash Equivalents—Carrying amount is a reasonable estimate of fair value.

Securities—Fair value for securities, excluding Federal Home Loan Bank (“FHLB”) stock, are based on quoted market prices. The carrying value of FHLB stock approximates fair value based on commitments on hand from investors or prevailing market prices.

Loans—Fair value of variable-rate mortgage loans is estimated using quoted market prices. For non-mortgage variable-rate loans, the carrying amount is considered a reasonable estimate of fair value. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers.

Deposits—The fair value of demand and passbook savings accounts is the amount payable on demand. The fair value of fixed-maturity certificate accounts is estimated using the present value of the projected cash flows using rates currently offered for similar deposits with similar maturities.

Borrowed Funds—The fair value of borrowed funds due within one year is the amount payable at the reporting date. The fair value of long-term borrowed funds is estimated by discounting the future cash flows using the current rates at which similar loans could be obtained with similar credit ratings and for the same remaining maturities.

Commitments to Extend Credit—The actual committed amount for mortgage loan originations and for unused lines of credit is considered a reasonable estimate of fair value.

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	December 31, 2004				December 31, 2003
(In thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	19,668	$	19,668	$	25,859	$	25,859
Securities*		28,271		28,274		32,092		32,102
Loans—net		166,164		169,467		147,969		152,381
Financial liabilities:
Deposits		189,059		189,449		185,898		186,662
Long-term debt		16,802		17,274		11,829		12,604
Unrecognized financial instruments:
Commitments to extend credit				41,063				29,975
Standby letters of credit				3,600				1,091

* Includes Federal Home Loan Bank stock

14. REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2004 and 2003, that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2004, the most recent notification received from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Company’s category.

The Bank’s actual capital amounts and ratios are also presented in the table below.

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	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars In Thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2004:
Total capital (to risk-weighted assets)	$	22,543	12.00	%	$	15,032	8.00	%	$	18,790	10.00	%
Tier 1 capital (to risk-weighted assets)		19,686	10.48	%		7,516	4.00	%		11,274	6.00	%
Tier 1 capital (to average assets)		19,686	8.54	%		9,226	4.00	%		11,532	5.00	%
As of December 31, 2003:
Total capital (to risk-weighted assets)	$	20,647	12.82	%	$	12,889	8.00	%	$	16,111	10.00	%
Tier 1 capital (to risk-weighted assets)		18,098	11.23	%		6,444	4.00	%		9,666	6.00	%
Tier 1 capital (to average assets)		18,098	8.65	%		8,374	4.00	%		10,467	5.00	%

The Bank is also subject to limits on dividend payments. The Bank may pay dividends only out of undivided profits. The Bank is prohibited from paying a dividend if i) surplus is less than 50% of its paid-in capital stock, ii) or is insolvent when payment of a dividend would render it insolvent or iii) if payment would. be contrary to its Articles of Incorporation. Additionally, there are statutory provisions regarding the ascertainment of undivided profits from which dividends may be paid; and banking regulators may restrict or prohibit the payment of dividends by banks which have been found to have inadequate capital.

Payment of dividends by the Bank to the Company is subject to various restrictions. Under applicable banking regulations, the Bank may not declare a cash dividend if the effect thereof would be to reduce its net worth to an amount less than the minimum required by federal and state banking regulations.

The Bank paid cash dividends of $715,122, $549,068, and $956,197 to the Company during 2004, 2003 and 2002, respectively.

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15. PARENT COMPANY CONDENSED FINANCIAL INFORMATION

Condensed financial information pertaining only to the Company at December 31, 2004 and 2003 and for the three years ended December 31, 2004, is as follows:

	2004		2003
Assets:
Cash	$	699,642	$	915,291
Investment in subsidiary		19,523,971		18,460,178
Other assets		197,697		117,645
Total assets	$	20,421,310	$	19,493,114
Liabilities and shareholders’ equity:
Accrued expenses and other liabilities	$	81,543	$	76,062
Shareholders’ equity		20,339,767		19,417,052
Total liabilities and shareholders’ equity	$	20,421,310	$	19,493,114

	2004			2003			2002
Condensed statement of income:
Equity in earnings of Bank (distributed)	$	715,122		$	549,068		$	956,197
Other income		10,916			13,721			9,346
Total income		726,038			562,789			965,543
Other expenses		529,986			299,586			196,680
Income before income taxes and equity in undistributed net income of subsidiary		196,052			263,203			768,863
Equity in undistributed earnings of Bank subsidiary		1,625,045			1,672,380			915,218
Income tax expense		(682,479	)		(660,136	)		(648,331	)
Net income	$	1,138,618		$	1,275,447		$	1,035,750

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Condensed Statements of Cash Flows	2004			2003			2002
Operating activities:
Net income	$	1,138,618		$	1,275,447		$	1,035,750
Deferred income tax expense		682,479			660,224			648,412
Undistributed earnings in subsidiary		(1,625,045	)		(1,672,380	)		(915,218	)
Adjustments to reconcile net cash provided by operations:
Decrease in other assets		(80,052	)		69,516			4,248
(Decrease) increase in other liabilities		(2,949	)		8,433			(20,877	)
Net cash provided by operating activities		113,051			341,240			752,315
Financing activities:
Dividends		(328,700	)		(303,416	)		(272,673	)
Repurchase and retirement of common stock		—			—			(106,294	)
Cash used in financing activities		(328,700	)		(303,416	)		(378,967	)
Increase (Decrease) in cash		(215,649	)		37,824			373,348
Cash:
Beginning of year		915,291			877,467			504,119
End of year	$	699,642		$	915,291		$	877,467

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16. QUARTERLY FINANCIAL DATA (UNAUDITED)

Non-interest income		531		554		1,104		570
Non-interest expense		2,118		2,404		2,424		3,045
Income before taxes		514		316		888		23
Income tax expense		138		77		261		126
Net income	$	376	$	239	$	627	$	(103	)
Net earnings per share-basic (Note 1)	$	0.23	$	0.14	$	0.37	$	(0.06	)
Net earnings per share-diluted (Note 1)	$	0.22	$	0.14	$	0.36	$	(0.06	)
Weighted average shares outstanding-basic (Note 1)		1,646		1,646		1,646		1,646
Weighted average shares outstanding-diluted (Note 1)		1,712		1,730		1,730		1,736
Year ended December 31, 2003
(In thousands, except share data)	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Total interest and dividend income	$	2,954	$	3,079	$	2,960	$	3,013
Total interest expense		844		867		840		811
Net interest income		2,110		2,212		2,120		2,202
Provision for loans		125		125		125		125
Net interest income after provision for loan losses		1,985		2,087		1,995		2,077
Non-interest income		454		577		502		875
Non-interest expense		2,026		2,134		1,987		2,657
Income before taxes		413		530		510		295
Income tax expense		103		248		110		12
Net income	$	310	$	282	$	400	$	283
Net earnings per share—basic and diluted (Note 1)	$	0.19	$	0.17	$	0.24	$	0.17
Weighted average shares outstanding (Note 1)		1,646		1,646		1,646		1,646

17. SUBSEQUENT EVENTS

In November 2004, the Board of Directors approved a ten cent ($.10) per share quarterly dividend. Each shareholder of record at the close of business on December 15, 2004 is entitled to receive $.10 for each share of stock on the record date. The payment date was January 7, 2005.

* * * * * *

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M&F BANCORP, INC.

BOARD OF DIRECTORS Maceo K. Sloan Chairman, M&F Bancorp, Inc. Chairman, President and CEO NCM Capital Durham, NC Joseph M. Sansom Vice Chairman M&F Bancorp, Inc. Managing Partner Sansom Associates, LLC Raleigh, NC Willie T. Closs, Jr. Executive Vice President NC Mutual Life Insurance Company Durham, NC Genevia Gee Fulbright Vice President Fulbright & Fulbright, CPA, PA Durham, NC Lee Johnson, Jr. President and CEO M&F Bancorp, Inc. Durham, NC Aaron L. Spaulding Founder, President and CEO Prestige Travel Durham, NC OFFICERS Lee Johnson, Jr. President and CEO M&F Bancorp, Inc. Durham, NC E. Elaine Small Vice President Assistant Corporate Secretary M&F Bancorp, Inc. Durham, NC Fohliette W. Becote Secretary/Treasurer, Corporate Secretary M&F Bancorp, Inc. Durham, NC Valerie M. Quiett, Esquire Assistant Corporate Secretary/ Compliance Officer M&F Bancorp, Inc. Durham, NC COMMITTEES Audit Committee Genevia Gee Fulbright, Chairman Maceo K. Sloan, Secretary Willie T. Closs, Jr. Aaron L. Spaulding Strategic Issues and Planning Committee Maceo K. Sloan, Chairman Aaron L. Spaulding, Vice Chairman Willie T. Closs, Jr. Genevia Gee Fulbright Joseph M. Sansom Compensation Committee Willie T. Closs, Jr. Aaron L. Spaulding Corporate Governance and Nominating Committee Aaron L. Spaulding, Chairman Willie T. Closs, Jr. Genevia Gee Fulbright Maceo K. Sloan GENERAL COUNSEL William A. Marsh, Jr. SPECIAL COUNSEL Brooks, Pierce, McLendon, Humphrey & Leonard, LLP Womble, Carlyle, Sandridge & Rice, LLP

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MECHANICS & FARMERS BANK

BOARD OF DIRECTORS Aaron L. Spaulding* Chairman, Board of Directors Mechanics and Farmers Bank Founder, President and CEO Prestige Travel Durham, NC James A. Stewart* Vice Chairman, Board of Directors Mechanics and Farmers Bank Broker/Consultant Anthony Allenton Commercial Real Estate Durham, NC Lee Johnson, Jr.* President and CEO Mechanics and Farmers Bank Durham, NC Cedric L. Russell Funeral Director and General Manager Russell Funeral Home Winston-Salem, NC Joseph M. Sansom* Managing Partner Sansom Associates, LLC Raleigh, NC John C. Scarborough III President and CEO Scarborough and Hargett Funeral Home Durham, NC Connie J. White Management Consultant Durham, NC *  Executive Committee DIRECTORS EMERITI William J. Kennedy III Lem Long, Jr. Walter S. Tucker CORPORATE OFFICERS Lee Johnson, Jr. President and CEO E. Elaine Small Executive Vice President/Operations Group Executive Fohliette W. Becote Senior Vice President/Chief Financial Officer/Financial Group Executive/ Corporate Secretary Wesley A. Christopher Senior Vice President Banking Group Executive W. Donald Harrington Senior Vice President/Credit Administration William J. Pickens Senior Vice President/Business Development Officer Durham Harold G. Sellars Senior Vice President/Quality Assurance/Lending Administrator/ Security Officer Evelyn Acree Senior Vice President/City Executive, Winston-Salem Stanley Green, Jr. Senior Vice President/City Executive, Raleigh Jacque Johnson, Jr. Senior Vice President/City Executive, Charlotte Kevin J. Price Vice President/Business Development Officer, Charlotte Queron U. Smith Vice President/City Executive, Durham Julia V. Banks Vice President/Branch Operations Support Allan E. Sturges Vice President/Comptroller Samuel T. Gibson III Vice President/Business Development and Customer Relations Officer Brendalyn Alexander Assistant Vice President Loan Review Officer/Assistant Corporate Secretary Anne DeLoatch Assistant Vice President/Senior Banking Center Service Manager/Assistant Security Officer/Assistant Corporate Secretary, Durham BANKING OFFICERS Tanya Dial-Bethune Sales Executive, Customer Relations Manager/Assistant Corporate Secretary, Charlotte Julie Farrington Sales Executive, Customer Relations Manager, Durham-Chapel Hill Boulevard Branch, Durham John Jackson Sales Executive, Customer Relations Manager/Assistant Corporate Secretary, Winston-Salem Lucera B. Parker Marketing Director Sheila Winston-Graves Senior Banking Center Service Manager, Raleigh/Assistant Security Officer/ Assistant Corporate Secretary OTHER OFFICERS Valerie M. Quiett, Esquire Compliance Officer/Assistant Corporate Secretary Saundra H. Quick Executive Secretary/Assistant Corporate Secretary

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INTERNAL AUDIT Anthony C. Powell Audit and Risk Manager Peggy Gill Audit Risk Consultant COMMITTEES Asset Liability Committee Aaron L. Spaulding, Chairman Fohliette W. Becote, Secretary Wesley A. Christopher W. Donald Harrington Lee Johnson, Jr. E. Elaine Small James A. Stewart Allan E. Sturges Connie J. White Audit Committee** Genevia Gee Fulbright, Chairman Maceo K. Sloan, Secretary Willie T. Closs, Jr. Aaron L. Spaulding Compensation Committee ________________________ Joseph M. Sansom, Secretary James A. Stewart EDP and Technology Committee Joseph M. Sansom, Chairman E. Elaine Small, Secretary Julia V. Banks Fohliette W. Becote Wesley A. Christopher Joseph Ellerbee W. Donald Harrington Lee Johnson, Jr. Alice Lyon Anthony C. Powell James A. Stewart Connie J. White Loan Review Committee W. Donald Harrington, Chairman Harold Sellars, Vice Chairman Brendalyn Alexander, Secretary Evelyn Acree Wesley A. Christopher Stanley Green, Jr. Jacque Johnson, Jr. Lee Johnson, Jr. Queron U. Smith William J. Pickens* *       Alternate **     M&F Bancorp, Inc. Marketing & Advertising Committee ______________________ Lucera B. Parker, Secretary Fohliette W. Becote Wesley A. Christopher Lee Johnson, Jr. Lem Long, Jr., Ex officio Cedric L. Russell E. Elaine Small Aaron L. Spaulding Personnel Committee James A. Stewart, Chairman Fohliette W. Becote, Secretary Wesley A. Christopher Lee Johnson, Jr. J. C. Scarborough III E. Elaine Small Aaron L. Spaulding CITY ADVISORY BOARDS Durham James A. Stewart, Chairman Queron U. Smith, Secretary Jesse T. Callis Wesley A. Christopher Julio Cordoba Deryle Daniels Fredrick A. Davis L. Lois Deloatch Whitney Rich Lee Johnson, Jr., Ex officio Charlotte Lem Long, Jr., Chairman Jacque Johnson, Jr., Secretary Wesley A. Christopher Terrence A. Hawkins Anthony V. Hunt Marie P. Tann Walter S. Tucker Jewett L. Walker Lee Johnson, Jr., Ex officio Raleigh Joseph M. Sansom, Chairman Stanley Green, Jr., Secretary Wesley A. Christopher Charles A. Cook Hortense A. Francis Dumas A. Harshaw, Jr. Lorraine G. Stephens Jocelyn D. Williams Lee Johnson, Jr., Ex officio Winston-Salem Benjamin S. Ruffin, Chairman Evelyn Acree, Secretary Harvey Allen, Jr. John M. Berry Wesley A. Christopher Serenus T. Churn, Sr. Renita Linville Cedric L. Russell Tanya Wiley Lee Johnson, Jr., Ex officio GENERAL COUNSEL William A. Marsh, Jr. SPECIAL COUNSEL Brooks, Pierce, McLendon, Humphrey & Leonard, LLP Womble, Carlyle, Sandridge & Rice, LLP

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EX-21

Exhibit 21

SUBSIDIARIES OF M&F BANCORP, INC.

M&F Bancorp, Inc. has one subsidiary, Mechanics and Farmers Bank, a commercial bank organized under the laws of North Carolina.

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EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statement No. 333-95973 of M & F Bancorp, Inc. on Form S-8 of our report dated March 30, 2005, relating to the financial statements and financial statement schedules of M&F Bancorp, Inc, appearing in and incorporated by reference in the Annual Report on Form 10-KSB of M&F Bancorp, Inc. for the year ended December 31, 2004.

/s/ DELOITTE & TOUCHE LLP

Raleigh, North Carolina

March 30, 2005

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EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Lee Johnson, Jr. certify that:

1. I have reviewed this annual report on Form 10-KSB of M & F Bancorp, Inc.;

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

3. Based on my knowledge, the financial statements, and other financial information included in this 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 annual report;

4. The small business issuer’s other certifying officers 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.

Date: March 30, 2005	/s/ Lee Johnson, Jr.
	Lee Johnson, Jr.
	President and Chief Executive Officer

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EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Allan E. Sturges, certify that:

1. I have reviewed this annual report on Form 10-KSB of M & F Bancorp, Inc.;

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

3. Based on my knowledge, the financial statements, and other financial information included in this 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 annual report;

4. The small business issuer’s other certifying officers 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.

Date: March 30, 2005	/s/ Allan E. Sturges
	Allan E. Sturges
	Acting Chief Financial Officer

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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 Annual Report on Form 10-KSB of the Company for the fiscal year ended December 31, 2004 fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and information contained in that Form 10-KSB fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 30, 2005	/s/ Lee Johnson, Jr.
	Lee Johnson, Jr.
	Chief Executive Officer
Dated: March 30, 2005	/s/ Allan E. Sturges
	Allan E. Sturges
	Acting 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.

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