ITEM 1. BUSINESS
Headquartered in Durham, North Carolina ("NC"), the Company is a bank holding company incorporated under the laws of NC in 1999, and is registered with the Board of Governors of the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company's primary function is to serve as the holding company for its wholly-owned subsidiary, Bank, a NC chartered commercial bank that was organized in 1907 and began operations in 1908.
As of December 31, 2014, the Company had assets of approximately $298.4 million, with gross loans of approximately $175.1 million and deposits of approximately $255.9 million. The Company's corporate office is located at 2634 Durham Chapel Hill Boulevard, Durham, NC, 27707, and its telephone number is 919-687-7800.
The Company's principal source of income is from dividends declared and paid by the Bank on its issued and outstanding capital stock. The Company uses such income to pay dividends to stockholders and fund its expenses. The majority of the Company's operations occur at the Bank level. Throughout this Annual Report on Form 10-K, results of operations will be discussed by referring to the Bank's operations, unless a specific reference is made to the Company and its operating results apart from those of the Bank.
The Bank is a community bank engaged in the general banking business in Wake, Durham, Guilford, Forsyth, and Mecklenburg Counties and the surrounding areas. Both the Company and the Bank are designated by the United States Department of the Treasury (the “Treasury”) as a Community Development Financial Institution (“CDFI”). As defined by the Treasury, a CDFI is a community-based organization that provides credit, financial services, and other related services in low-income urban and rural communities across America. These organizations have a common mission of working toward revitalizing economically depressed communities or communities underserved by mainstream financial institutions and improving the quality of life of those who live and work in these communities. CDFIs provide financing to residents who want to buy their first home, individuals who may want to start their own business and owners of existing businesses who would like to expand their businesses (helping to create new jobs). In addition, CDFIs offer financial literacy services to individuals on topics such as improving their credit ratings or creating monthly budgets.
The Bank offers a full range of banking services, including the following: checking accounts, savings accounts, Negotiable Order of Withdrawal ("NOW") accounts, money market accounts, certificates of deposit, individual retirement accounts, equity lines of credit, credit lines, consumer loans, credit cards, safe deposit boxes, internet banking, mobile banking, electronic funds transfer services including wire transfers, traveler's checks, notary services, and loans for real estate, construction, businesses, personal use, home improvement and automobiles. In addition, the Bank provides automated teller machine (“ATM”) access to its customers for cash withdrawals through nationwide ATM networks. At present, the Bank does not provide the services of a trust department.
GENERAL DESCRIPTION OF MARKET AREAS
The Bank has two branch offices in Durham, NC, two offices in Raleigh, NC, one office in Charlotte, NC, one office in Winston-Salem, NC, and one office in Greensboro, NC. All offices are located in metropolitan areas with employment spread primarily among service, health care, education, manufacturing and governmental activities. All offices are located in areas of high competition among financial service providers.
COMPETITION
Commercial banking in NC is extremely competitive. The Bank competes in its market areas with some of the largest banking organizations in the state and the country, other community financial institutions, such as federally and state-chartered banks or savings and loan institutions, credit unions, consumer finance companies, mortgage companies and other lenders engaged in the business of extending credit. Many of the Bank's competitors have broader geographic markets, easier access to capital, lower cost of funding, and higher lending limits than the Bank, and are able to provide more services, and make greater use of media advertising.
Despite strong competition in its market areas, the Bank believes that it has certain competitive advantages that distinguish it from its competition. The Bank believes that its primary competitive advantages are its 107-year legacy, strong local identity, affiliation with the communities it serves, and its emphasis on providing specialized services to small- and medium-sized business and special purpose enterprises, faith-based non-profit organizations and individuals. The Bank offers customers modern, high-tech banking without compromising community values such as prompt, personal service and friendliness. The Bank offers personalized services and attracts customers by being responsive and sensitive to their individual needs. The Bank relies on goodwill and referrals from stockholders, board members, employees, and satisfied customers, as well as traditional methods to attract new customers. To enhance a positive image in the communities in which it has branches, the Bank supports and participates in select local events and many of its officers and directors serve on boards of local civic and charitable organizations.
The ability of the Bank to attract and retain deposits generally depends on its ability to provide a rate of return, liquidity and risk comparable to that offered by competing investment opportunities. As of June 30, 2014, based on the Federal Deposit Insurance Corporation (the “FDIC”) Summary of Deposits Report, the Bank's market share of the total deposits in Durham, NC was 1.77%, and less than one percent in each of Raleigh, Charlotte, Greensboro and Winston-Salem, NC. Management believes that the Bank is not dependent upon any single customer, or a few customers, the loss of which would have a material adverse effect on the Bank’s operations. However, the Bank does serve a specialized niche market (faith-based non-profit organizations), the loss of which could have a material adverse effect on the Company's operations.
EMPLOYEES
As of December 31, 2014, the Company and the Bank had 70 employees, including 66 full-time employees. None of our employees are covered by a collective bargaining agreement. Management considers relations with employees to be good.
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AVAILABLE INFORMATION
The Company makes its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports, available free of charge on its internet website www.mfbonline.com, as soon as reasonably practicable after the reports are electronically filed with the Securities and Exchange Commission (“SEC”). Any materials that the Company files with the SEC may be read and/or copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. These filings are accessible on the SEC's website at www.sec.gov.
The Company's corporate governance policies, including its Codes of Ethics and the charters of the Audit, Compensation, and Corporate Governance and Nominating Committees, may be found under the “Investor Relations” section of the Company's website. The Company elects to disclose any amendments to or waivers of any provisions of its Code of Ethics applicable to its principal executive officers and senior financial officers on its website. A written copy of the foregoing corporate governance policies is available upon written request to the Company.
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 certain statutes and regulations that apply to the Company and Bank. This summary is qualified in its entirety by reference to the particular statute and regulatory provisions cited below and are not intended to be an exhaustive description of the statutes or regulations applicable to the business of the Company and the Bank. Supervision, regulation and examination of the Company and the Bank by the regulatory agencies are intended primarily for the protection of depositors rather than stockholders of the Company.
Statutes and regulations, which contain wide-ranging proposals for altering the structures, regulations, and competitive relationship of financial institutions, are introduced regularly. The Company cannot predict whether or in what form any proposed statute or regulation may be adopted or the extent to which the business of the Company and the Bank may be affected by such statute or regulation.
In certain circumstances, the FDIC can require a holding company to guarantee the compliance of its subsidiary insured depository institution with any capital restoration plan. 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.
Monetary Policy and Economic Controls
The Company and the Bank are directly affected by governmental policies and regulatory measures affecting the banking industry in general. Of primary importance is the Federal Reserve, whose actions directly affect the money supply, which, in turn, affects banks' lending abilities by increasing or decreasing the cost and availability of funds to banks. The Federal Reserve regulates the availability of bank credit in order to combat recession and curb inflationary pressures in the economy by open market operations in United States government securities, changes in the discount rate on bank borrowings, changes in reserve requirements against bank deposits, and limitations on interest rates that banks may pay on time and savings deposits.
Deregulation of interest rates paid by banks on deposits and the types of deposits that may be offered by banks has eliminated minimum balance requirements and rate ceilings on various types of time deposit accounts. The effect of these specific actions and, in general, the deregulation of deposit interest rates has generally increased banks' cost of funds and made them more sensitive to fluctuations in money market rates. In view of the changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand, or the business and earnings of the Bank or the Company. As a result, banks, including the Bank, face a significant challenge to maintain acceptable net interest margins.
Company Regulation
General. The Company is a bank holding company registered with the Federal Reserve under the BHCA. As such, the Company is subject to the supervision, examination and reporting requirements contained in the BHCA and the regulation of the Federal Reserve. The Federal Reserve has the power to order a bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary, when it believes that continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company.
Dodd-Frank Wall Street Reform and Consumer Protection Act. In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. This law has significantly changed the current bank regulatory structure and is affecting the lending, deposit, investment, trading, and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies have significant discretion in drafting rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many years. The Dodd-Frank Act included, among other things:
• the creation of a Financial Stability Oversight Council to identify emerging systemic risks posed by financial firms, activities and practices, and to improve cooperation between federal agencies;
• the creation of a Bureau of Consumer Financial Protection (the “CFPB”) authorized to promulgate and enforce consumer protection regulations relating to financial products, which would affect both banks and non-bank financial companies;
• the establishment of strengthened capital and prudential standards for banks and bank holding companies;
• enhanced regulation of financial markets, including derivatives and securitization markets;
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• the elimination of certain trading activities by banks;
• a permanent increase of FDIC deposit insurance to $250,000 per deposit category and an increase in the minimum deposit insurance fund reserve requirement from 1.15% to 1.35%, with assessments to be based on assets as opposed to deposits;
• amendments to the Truth in Lending Act aimed at improving consumer protections with respect to mortgage originations, including originator compensation, minimum repayment standards, and prepayment considerations; and
• new disclosure and other requirements relating to executive compensation and corporate governance.
A number of other provisions of the Dodd-Frank Act remain to be implemented through the rulemaking process at various regulatory agencies. We are unable to predict the extent to which the Dodd-Frank Act or the forthcoming rules and regulations will impact our business. However, we believe that certain aspects of the legislation, including, without limitation, the additional cost of higher deposit insurance coverage and the costs of compliance with disclosure and reporting requirements and examinations could have a significant impact on our business, financial condition, and results of operations. Additionally, we cannot predict whether there will be additional proposed laws or reforms that would affect the U.S. financial system or financial institutions, whether or when such changes may be adopted, how such changes may be interpreted and enforced, or how such changes may affect us.
Federal Securities Law. The Company's common stock is registered with the SEC pursuant to Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”). As a result, 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. The regulatory compliance burden of being a publicly traded company has increased significantly.
The Gramm-Leach-Bliley Act. The federal Gramm-Leach-Bliley Act (the "GLB Act") dramatically changed various federal laws governing the banking, securities and insurance industries. The GLB Act 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 presents the Company with 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 has had a significant economic impact on the banking industry and on competitive conditions in the financial services industry generally.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act was signed into law in 2002 (“Sarbanes-Oxley”) and became some of the most sweeping federal legislation addressing accounting, corporate governance and disclosure issues. The impact of Sarbanes-Oxley has been wide-ranging as it applies to all public companies and imposes significant requirements for public company governance and disclosure.
In general, Sarbanes-Oxley mandated important corporate governance and financial reporting requirements intended to enhance the accuracy and transparency of public companies' reported financial results. It established responsibilities for corporate chief executive officers, chief financial officers and audit committees in the financial reporting process and created a regulatory body to oversee auditors of public companies. It backed these requirements with SEC enforcement tools, increased criminal penalties for federal mail, wire and securities fraud, and created criminal penalties for document and record destruction in connection with federal investigations. It also increased the opportunity for more private litigation by lengthening the statute of limitations for securities fraud claims and providing federal corporate whistleblower protection.
The economic and operational effects of this 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 its requirements. Because Sarbanes-Oxley, for the most part, applies equally to larger and smaller public companies, the Company has additional challenges as a smaller financial institution seeking to compete with larger financial institutions in its market. In accordance with the requirements of Section 404(a), management's report on internal control is included herein as Item 9A. The Dodd-Frank Act permanently exempted smaller companies, such as the Company, from the requirements under Section 404(b) for auditor attestation on internal controls.
Prohibited and Permissible Activities of Bank Holding Companies. The BHCA generally prohibits a bank holding company, with certain exceptions, from engaging in activities other than banking, or managing or controlling banks or other permissible subsidiaries, and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those activities determined by the Federal Reserve to be closely related to banking. In determining whether a particular activity is permissible, the Federal Reserve must consider whether the performance of such an activity may be reasonably expected to produce benefits to the public, such as greater convenience, increased competition or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices.
Pursuant to delegated authority, the Federal Reserve Bank of Richmond (the “FRB”) has authority to approve certain activities of holding companies within its district, including the Company, provided the nature of the activity has been approved by the Federal Reserve.
Additional Restrictions and Oversight. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve on any extensions of credit to the bank holding Company or any of its subsidiaries, investments in the stock or securities thereof and the acceptance of such stock or securities as collateral for loans to any borrower. A bank holding company and its subsidiaries are prevented from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. An example of a prohibited tie -in would be any arrangement that would condition the provision or cost of services on a customer obtaining additional services from the bank holding Company or any of its other subsidiaries.
The Federal Reserve may issue cease and desist orders (often referred to as "consent orders") against bank holding companies and non-bank subsidiaries to stop actions believed to present a serious threat to a subsidiary bank. The Federal Reserve regulates certain debt obligations, changes in control of bank holding companies and capital requirements.
As a result of the Company's ownership of the Bank, the Company is registered under the bank holding company laws of NC. Accordingly, the Company is also subject to supervision and regulation by the NC Commissioner of Banks (the “NCCOB”).
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Capital Requirements. The Federal Reserve has established risk-based capital guidelines for bank holding companies and banks that are members of the Federal Reserve System. The minimum standard for the ratio of capital to risk-weighted assets (including certain off-balance-sheet obligations, such as standby letters of credit) is eight percent. At least half of this capital must consist of common equity, retained earnings, and a limited amount of perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less certain goodwill items and other adjustments (“Tier 1 capital”). The remainder (“Tier 2 capital”) may consist of mandatorily redeemable debt securities, a limited amount of other preferred stock, subordinated debt and loan loss reserves.
In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets less certain amounts equal to three percent for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies will generally be required to maintain a Leverage Ratio of between four and five percent.
The guidelines provide that bank holding companies experiencing significant growth, whether through internal expansion or acquisitions, are expected to maintain strong capital ratios well above the minimum supervisory levels without significant reliance on intangible assets. The same heightened requirements apply to bank holding companies with supervisory, financial, operational or managerial weaknesses, as well as to other banking institutions if warranted by particular circumstances or the institution's risk profile. Furthermore, the guidelines indicate that the Federal Reserve will continue to consider a “tangible Tier 1 Leverage Ratio” (deducting all intangibles) in evaluating proposals for expansion or new activity. The Federal Reserve has not advised the Company that it is required to satisfy any heightened capital requirements.
As of December 31, 2014, the Company had Tier 1 risk-adjusted, total regulatory capital and leverage ratios of approximately 17.78%, 19.03% and 11.90%, respectively, all in excess of the minimum requirements. Those same ratios as of December 31, 2013 were 16.17%, 17.42% and 11.87%, respectively. As of December 31, 2014, the Bank had a leverage ratio of 11.54%, a Tier 1 capital ratio of 17.24%, and a total risk-based capital ratio of 18.50%. Those same ratios as of December 31, 2013 were 10.69%, 15.51% and 16.77%, respectively.
In July 2013, the Federal Reserve approved a new rule that implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. The final rule includes new risk-based capital and leverage ratios, which became effective on January 1, 2015, and revise the definition of what constitutes “capital” for purposes of calculating those ratios. See “-Capital Requirements for the Bank”, below.
Emergency Economic Stabilization Act of 2008. Under the Emergency Economic Stabilization Act of 2008 (the “EESA”), as amended, the Treasury implemented the Troubled Asset Relief Program (“TARP”), of which the Capital Purchase Program (the “CPP”) is a part. Under the CPP, certain U.S. qualifying financial institutions sold senior preferred stock and warrants to the Treasury. Eligible institutions generally applied to issue preferred stock to the Treasury in aggregate amounts between 1% and 3% of the institution's risk-weighted assets. Smaller community banks and bank holding companies, such as the Company, were later allowed to issue preferred stock up to 5% of the institution's risk weighted assets.
The Treasury was given discretion to exempt certain financial institutions from having to issue warrants. The Treasury elected to exercise its discretion in favor of those financial institutions that are certified as CDFIs, and for whom the CPP investment was $50 million or less. Accordingly, the Company was exempted from issuing warrants. On June 26, 2009, the Company completed the issuance of 11,735 shares of $1,000 value Series A Fixed Rate Cumulative Perpetual Preferred Stock ("Series A Preferred Stock") under the CPP. On August 20, 2010, the Company exchanged the Series A Preferred Stock for an equal number of shares of $1,000 liquidation value, Series B Fixed Rate Cumulative Perpetual Preferred Stock (“Series B Preferred Stock”), under the Community Development Capital Initiative (“CDCI”), also part of the TARP.
Executive Compensation. The EESA, as amended by the American Recovery and Reinvestment Act (“ARRA”), which was signed into law on February 17, 2009, introduced extensive restrictions on executive compensation arrangements of financial institutions participating in TARP programs, including the CPP and the CDCI. On June 15, 2009, the Treasury published the Interim Final Rules in the Federal Register, which further supplement these executive compensation restrictions.
Dividend and Repurchase Limitations. Under a Memorandum of Understanding ("MOU") with the FRB executed in August 2010, the Company agreed to obtain FRB approval prior to repurchasing or redeeming any shares of its stock, declaring or paying any dividends or taking dividends or any other form of payment representing a reduction in capital from the Bank.
Federal banking regulations applicable to all bank holding companies separately restrict the Company from repurchasing its common stock for consideration in excess of 10% of its net worth during any 12-month period unless the Company (i) both before and after the redemption satisfies capital requirements for "well capitalized" state bank holding companies; (ii) received a “one” or “two” rating in its last examination; and (iii) is not the subject of any unresolved supervisory issues. In addition, as a bank holding company, the Company is required to adhere to the Federal Reserve's Policy Statement on Payment of Cash Dividends, which generally requires bank holding companies to act as a source of strength and not place undue burden on subsidiary banks.
Under NC corporation laws, the Company may not pay a dividend or distribution, if after giving its effect, the Company would not be able to pay its debts as they become due in the usual course of business or the Company's total assets would be less than its liabilities. In general, the Company's ability to pay cash dividends is dependent upon the amount of dividends paid to the Company by the Bank. NC commercial banks, such as the Bank, are subject to legal limitations on the amounts of dividends they are permitted to pay. For instance, NC commercial banks are prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the bank would become "undercapitalized" (as such term is defined in the applicable law and regulations). Further, under the terms of the Bank MOU entered into with the FDIC and the NCCOB on June 24, 2013, the Bank may not declare dividends to the Company without prior approval from the FDIC and NCCOB.
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Participation in the CDCI places restrictions on the Company's ability to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, shares of its capital stock, including restrictions against the Company (i) increasing dividends payable on its common stock from the last quarterly cash dividend per share declared on the common stock prior to November 17, 2008; (ii) increasing its aggregate per share dividends and distributions above the aggregate dividends and distributions paid for the immediately prior fiscal year; and (iii) declaring or paying dividends or distributions on, or repurchasing, redeeming or otherwise acquiring for consideration, shares of its capital stock in the event that the Company fails to declare and pay full dividends (or declare and set aside a sum sufficient for payment thereof) on the Series B Preferred Stock. These restrictions will continue until all of the Series B Preferred Stock has been redeemed in full.
Bank Regulation
The Bank is subject to numerous state and federal statutes and regulations that affect its business, activities, and operations, and is supervised and examined by the NCCOB and the FDIC. The FDIC and the NCCOB regularly examine the operations of banks over which they exercise jurisdiction. They have the authority to approve or disapprove the establishment or closing of branches, mergers, consolidations and other similar corporate actions. They have authority to prevent the continuance or development of unsafe or unsound banking practices and other violations of law. The FDIC and the NCCOB regulate and monitor all areas of the operations of banks and their subsidiaries, including loans, mortgages, capital adequacy, loss reserves and compliance with the Community Reinvestment Act (“CRA”) as well as other laws and regulations. Interest and certain other charges collected and contracted for by banks are subject to state usury laws and certain federal laws concerning interest rates.
Federal Deposit Insurance. The Deposit Insurance Fund ("DIF") of the FDIC insures deposit accounts in the Bank up to a maximum amount per separately insured depositor. Under the Dodd-Frank Act, the maximum amount of federal deposit insurance coverage permanently increased to $250,000 per depositor, per institution.
Insured depository institutions are required to pay deposit insurance premiums based on the risk an institution poses to the DIF. In order to restore reserves and ensure that the DIF will adequately cover losses from future bank failures, the FDIC approved new deposit insurance rules in November 2009. These new rules required insured depository institutions to prepay their estimated quarterly risk-based assessments for all of 2010, 2011, and 2012. The Bank requested and received an exemption from the prepayment of assessments.
In 2011, the FDIC finalized new rules, which redefined the assessment base as "average consolidated total assets minus average tangible equity." The revised rate schedule and other revisions to the assessment rules became effective April 1, 2011, and were used to calculate the quarterly assessments beginning with the June 2011 assessment. Institutions, such as the Bank, with less than $1 billion in average total assets share a more proportionate FDIC assessment under these new rules.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") the federal banking agencies possess broad powers to take prompt corrective action to resolve problems of insured depository institutions. FDICIA identifies five capital categories for insured depository institutions: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." Under regulations established by the federal banking agencies, a "well capitalized" institution must have a Tier 1 Capital Ratio of at least 6.0%, a Total Capital Ratio of at least 10.0%, a Tier 1 Leverage Ratio of at least 5.0% and not be subject to a capital directive order. The Bank MOU requires the Bank to maintain a Tier 1 Capital Ratio of not less than 8.0% and a Total Risk Based Capital Ratio of not less than 10.0%. As of December 31, 2013, the Bank was classified as "well capitalized" and satisfied the heightened capital requirements of the Bank MOU. The classification of a depository institution under FDICIA is primarily for the purpose of applying the federal banking agencies' prompt corrective action provisions, and is not intended to be, nor should it be interpreted as, a representation of the overall financial condition or the prospects of any financial institution.
The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an insured institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Management of the Bank is not aware of any practice, condition or violation that might lead to termination of its FDIC deposit insurance.
Community Reinvestment and Consumer Protection Laws. In connection with its lending activities, the Bank is subject to a number of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. These include the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, and the CRA. In addition, federal banking regulators, pursuant to the GLB Act, have enacted regulations limiting the ability of banks and other financial institutions to disclose nonpublic consumer information to non-affiliated third parties. The regulations require disclosure of privacy policies and allow consumers to prevent certain personal information from being shared with non-affiliated third parties.
The CRA requires the appropriate federal banking agency, in connection with its examination of a bank, to assess the bank's record in meeting the credit needs of the communities served by the bank, including low and moderate-income neighborhoods. Under the CRA, institutions are assigned a rating of "outstanding," "satisfactory," "needs to improve," or "substantial non-compliance." The Bank received an "outstanding" rating in its most recent CRA evaluation.
The Dodd-Frank Act created the CFPB to take over responsibility for the federal consumer financial protection laws. The CFPB is an independent bureau within the Federal Reserve that has broad rule making, supervisory and examination authority to set and enforce rules in the consumer protection area over financial institutions that have assets of $10 billion or more. The Dodd-Frank Act gives the CFPB expanded data-collecting powers for fair lending purposes for both small business and mortgage loans, as well as expanded authority to prevent unfair, deceptive and abusive practices. It is anticipated that certain of the CFPB's rules will be indirectly applied to the Bank, through their adoption by the Bank's regulators as “best practices.”
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Bank Secrecy Act / Anti-Money Laundering Laws. The Bank is subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the USA PATRIOT Act of 2001. The USA PATRIOT Act substantially broadened the scope of U.S. anti-money laundering laws and regulations by creating new laws, regulations, and penalties, imposing significant new compliance and due diligence obligations, and expanding the extra-territorial jurisdiction of the U.S. These laws and regulations require the Bank to implement policies, procedures, and controls to detect, prevent, and report potential money laundering and terrorist financing and to verify the identity of their customers. Violations of these requirements can result in substantial civil and criminal sanctions. In addition, provisions of the USA PATRIOT Act require the federal banking agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions.
Other Safety and Soundness Regulations. As required by FDICIA, the federal banking agencies' prompt corrective action powers impose progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. These actions can include: requiring an insured depository institution to adopt a capital restoration plan guaranteed by the institution's parent company; placing limits on asset growth and restrictions on activities, including restrictions on transactions with affiliates; restricting the interest rates the institution may pay on deposits; prohibiting the payment of principal or interest on subordinated debt; prohibiting the holding company from making capital distributions without prior regulatory approval; and, ultimately, appointing a receiver for the institution.
The federal banking agencies also have adopted guidelines prescribing safety and soundness standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation and benefits. The federal regulatory agencies may take action against a financial institution that does not meet such standards.
Capital Requirements for the Bank. As an NC-chartered, 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 (i) receive the highest rating during the examination process and (ii) 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, 2014.
In July 2013, the Federal Reserve and the FDIC approved revisions to their capital adequacy guidelines and prompt corrective action rules that implement the revised standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.
The rules include new risk-based capital and leverage ratios, which became effective on January 1, 2015, and revise the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Company and the Bank are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6.0% (increased from 4.0%); (iii) a total capital ratio of 8.0% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4.0% for all institutions. The rules eliminate the inclusion of certain instruments, such as trust preferred securities, from Tier 1 capital. Instruments issued prior to May 19, 2010 will be grandfathered for companies with consolidated assets of $15 billion or less. The rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase by that amount each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that may be utilized for such actions.
Federal Home Loan Bank System. The Federal Home Loan Bank system provides a central credit facility for member institutions. As a member of the Federal Home Loan Bank of Atlanta ("FHLB"), the Bank is required to own capital stock in the FHLB in an amount at least equal to 0.09% (or 9 basis points) during 2014 and 0.15% (or 15 basis points) during 2013 of the Bank's total assets at the end of each calendar year, plus 4.5% of its outstanding advances (borrowings) from the FHLB under the activity-based stock ownership requirement. On December 31, 2014, the Bank was in compliance with this requirement.
Restrictions on Transactions with Affiliates. The Bank is subject to the provisions of Sections 23A and 23B of the Federal Reserve Act and Regulation W. 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;
•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 meet specified collateral requirements. The Bank must comply with other provisions designed to avoid the transfer of low-quality assets from an affiliate.
The Bank 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.
IndexM&F BANCORP, INC., AND SUBSIDIARY
Under Section 22(h), loans to directors, executive officers and stockholders who own more than 10% of a depository institution (18% in the case of institutions located in an area with less than 30,000 in population), and certain affiliated entities of any of the foregoing, may not exceed, together with all other outstanding loans to such person and affiliated entities, the institution's loans-to-one-borrower limit (as discussed below). Section 22 (h) prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers and stockholders who own more than 10% of an institution, and their respective affiliates, unless such loans are approved in advance by a majority of the board of directors of the institution. Any "interested" director may not participate in the voting. The FDIC has prescribed the loan amount (which includes all other outstanding loans to such person), as to which such prior board of directors approval is required, as being the greater of $25,000 or 5% of capital and surplus (up to $500,000). Further, pursuant to Section 22(h), the Federal Reserve requires that loans to directors, executive officers, and principal stockholders be made on terms substantially the same as offered in comparable transactions with non-executive employees of the Bank. The FDIC has imposed additional limits on the amount a bank can loan to an executive officer.
Limits on Rates Paid on Deposits and Brokered Deposits. FDIC regulations limit the ability of insured depository institutions to accept, renew or roll-over deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in such depository institution's normal market area. Under these regulations, “well capitalized” depository institutions may accept, renew or roll-over such deposits without restriction, “adequately capitalized” depository institutions may accept, renew or roll-over such deposits with a waiver from the FDIC (subject to certain restrictions on payments of rates) and “undercapitalized” depository institutions may not accept, renew, or roll-over such deposits. Definitions of “well capitalized,” “adequately capitalized” and “undercapitalized” are the same as the definitions adopted by the FDIC to implement the prompt corrective action provisions discussed above.
The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (“SAFE Act”). The SAFE Act was enacted to enhance consumer protection and reduce fraud by setting minimum standards for the licensing and registration of mortgage loan originators. The SAFE Act requires mortgage loan originators employed by insured depository institutions or their subsidiaries to register with the Nationwide Mortgage Licensing System and Registry and to maintain current registration in that system. Financial institutions are required by the SAFE Act to maintain adequate policies and practices, which will ensure that all employees acting in the capacity of mortgage loan originators register in the Nationwide Mortgage Licensing System and update their registration annually during the annual renewal period in November and December of each year.
Other. Additional regulations require annual examinations of all insured depository institutions by the appropriate federal banking agency, with some exceptions for small, well-capitalized institutions and state chartered institutions examined by state regulators. Additional regulations establish operational and managerial, asset quality, earnings and stock valuation standards for insured depository institutions, as well as compensation standards.
In addition, the Bank is subject to various other state and federal laws and regulations, including state usury laws, laws relating to fiduciaries, consumer credit and equal credit, fair credit reporting laws and laws relating to branch banking. The Bank, as an insured NC commercial bank, is prohibited from engaging as a principal in activities that are not permitted for national banks, unless (i) the FDIC determines that the activity would pose no significant risk to the appropriate deposit insurance fund and (ii) the Bank is, and continues to be, in compliance with all applicable capital standards.
ITEM 1A.
ITEM 1A. RISK FACTORS
An investment in the Company's common stock is subject to risks inherent in the Company's business. The material risks and uncertainties that management believes affect the Company are described below. Before making an investment decision, you should carefully consider these risks and uncertainties, together with all of the other information included or incorporated by reference in this Annual Report on Form 10-K. These risks and uncertainties are not the only ones facing the Company. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company's business operations. This report is qualified in its entirety by these risk factors.
If any of the following risks actually occur, the Company's financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the Company's common stock could decline significantly, and you could lose all or part of your investment.
The Company’s business has been and may continue to be adversely affected by the prolonged effects of the recession. The U.S. and N.C. economies have yet to fully recover from the recession that began in 2007. Following the onset of the recession, dramatic declines in the housing market, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. A sustained weakness or weakening in business and economic conditions generally or specifically in the principal markets in which we do business could have one or more of the following adverse effects on our business:
•a decrease in the demand for loans or other products and services offered by us;
•a decrease in the value of our loans or other assets secured by consumer or commercial real estate;
•a decrease in deposit balances due to overall reductions in the accounts of customers;
•an impairment of certain intangible assets or investment securities;
•a decreased ability to raise additional capital on terms acceptable to us or at all; or
•an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to us. An increase in the number of delinquencies, bankruptcies or defaults could result in a higher level of nonperforming assets, net charge-offs and provision for loan losses, which would reduce our earnings.
While conditions in our principal markets appear to be gradually improving, we expect our business, financial condition and results of operations to continue to be adversely affected in the near term, and until such time as our customers have experiences of full recovery from the effects of the recent recession.
IndexM&F BANCORP, INC., AND SUBSIDIARY
The Company and the Bank may be subject to additional, heightened enforcement actions if we do not comply with the MOUs. The Bank MOU requires the Bank to take certain actions to enhance its management of adversely classified assets, remain well-capitalized and maintain adequate liquidity. It also restricts the payment of dividends to the holding company without prior approval and requires reporting of progress of implementing additional management improvement plans. The Company MOU requires the Company to first obtain approval before it pays any dividends, repurchases stock, or receives any dividends from the Bank. In the event we do not comply with these MOUs, the banking regulators may impose additional, heightened enforcement actions against us and/or keep the MOUs in place longer than they may otherwise have been. Additional, heightened enforcement action, including any further restrictions on our lending and deposit gathering activities, could negatively impact our interest income, interest expense, and liquidity, and have a material and adverse effect on our business, financial condition and results of operation.
Financial reform legislation enacted by Congress and resulting regulations have increased, and are expected to continue to increase our costs of operations. Congress enacted the Dodd-Frank Act in 2010. This law has significantly changed the structure of the bank regulatory system and affects the lending, deposit, investment, trading, and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations. Although some of the regulations have been promulgated, many additional regulations are expected to be issued in 2015 and thereafter. Consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.
The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizes the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company's proxy materials. The legislation also directs the FRB to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.
The Dodd-Frank Act created the CFPB with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. It also has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets will be examined by their applicable bank regulators. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.
It is difficult to quantify what specific impact the Dodd-Frank Act and related regulations have had on the Company to date and what impact yet to be written regulations will have on us in the future. However, it is expected at a minimum, they will increase our operating and compliance costs and could increase our interest expense.
Market developments may adversely affect our industry, business and results of operations. Significant declines in the housing market, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by many financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative securities, caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. The Company has experienced significant challenges, its credit quality has deteriorated and its net income and results of operations have been adversely impacted. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced, and in some cases, ceased to provide funding to borrowers including other financial institutions. Although to date the Company and the Bank remain “well capitalized,” and have performed better than many of their peers, we are part of the financial system and a systemic lack of available credit, a lack of confidence in the financial sector, increased volatility in the financial markets and/or reduced business activity could materially adversely affect our business, financial condition and results of operations.
Our participation in the CDCI imposes restrictions and obligations on us that limit our ability to increase dividends, repurchase shares of our common stock and access the capital markets. In 2010, the Company issued 11.7 million shares of Series B Preferred Stock pursuant to the CDCI, a TARP program. Participation in the CDCI places restrictions on the Company's ability to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, shares of its capital stock, including restrictions against the Company (i) increasing dividends payable on its common stock from the last quarterly cash dividend per share declared on the common stock prior to November 17, 2008; (ii) increasing its aggregate per share dividends and distributions above the aggregate dividends and distributions paid for the immediately prior fiscal year; and (iii) declaring or paying dividends or distributions on, or repurchasing, redeeming or otherwise acquiring for consideration, shares of its capital stock in the event that the Company fails to declare and pay full dividends (or declare and set aside a sum sufficient for payment thereof) on the Series B Preferred Stock. The holders of these shares of Series B Preferred Stock have certain registration rights, which in certain circumstances impose lock-up periods during which we would be unable to issue equity securities. These restrictions will continue until all of the Series B Preferred Stock has been redeemed in full. In addition, unless we are able to redeem the Series B Preferred Stock during the first eight years, the dividends on this capital will increase substantially at that point, from 2% to 9%, and no further common stock dividends will be allowed until the preferred stock has been fully redeemed. Depending on market conditions at the time, this increase in preferred stock dividends could significantly impact our liquidity.
The limitations on incentive compensation contained in the ARRA and subsequent regulations may adversely affect our ability to retain our highest performing employees. In the case of a company such as the Company that received TARP funds, the ARRA, and subsequent regulations issued by Treasury, contain restrictions on bonus and other incentive compensation payable to the company's senior executive officers. As a consequence, we may be unable to create a compensation structure that permits us to retain our highest performing employees and attract new employees of a high caliber. If this were to occur, our businesses and results of operations could be adversely affected.
IndexM&F BANCORP, INC., AND SUBSIDIARY
The Company is subject to extensive governmental regulation, which could have an adverse impact on our operations. The banking industry is extensively regulated and supervised under both federal and state law. Current and future legislation and the policies established by federal and state regulatory authorities will affect the Company's operations. The Company is subject to supervision and periodic examination by the Federal Reserve and the NCCOB. The Bank, as a state chartered non-member commercial bank, receives regulatory scrutiny from the FDIC and the NCCOB. Banking regulations, designed primarily for the protection of depositors, may limit our growth and the return to you as an investor in the Company, by restricting the Company’s activities, such as:
•The payment of dividends to shareholders;
•Possible transactions with or acquisitions by other institutions;
•Desired investments;
•Loans and interest rates;
•The level of its allowance for loan losses;
•Higher capital requirements;
•Interest rates paid on deposits;
•The possible expansion of branch offices; and
•The ability to provide other services.
The Company cannot predict what changes, if any, will be made to existing federal and state legislation and regulations or the effect that such changes may have on its business. Compliance with such legislation and regulation may increase our costs and limit our ability to pursue business opportunities. In addition, participation in additional programs may subject us to additional restrictions. We cannot assure you that such modifications or new laws will not adversely affect our business and results of operations.
Our regulatory position is discussed in greater detail under Item 1. “Business-Supervision and Regulation” of this Annual Report on Form 10-K.
We will need to raise additional capital in the future and such capital may not be available when needed or at all. We will need additional capital in the future to replace the TARP funds, and to provide us with sufficient capital resources and liquidity to meet our commitments and business needs. Our ability to raise additional capital will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial performance. We cannot assure you that such capital will be available to us on acceptable terms or at all. Any occurrence that may limit our access to the capital markets may adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity. An inability to raise additional capital on acceptable terms when needed could have a materially adverse effect on our businesses, financial condition and results of operations.
We will become subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or constrain us from paying dividends or repurchasing shares. In July 2013, the Federal Reserve and the FDIC approved new rules that will substantially amend the regulatory risk-based capital rules applicable to the Bank. The final rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.
The final rule includes new minimum risk-based capital and leverage ratios, which became effective for the Bank and he Company on January 1, 2015, and revises the definition of what constitutes “capital” for purposes of calculating those ratios. These rules also establish a “capital conservation buffer” of 2.5%, and will result in the following minimum ratios: (i) a common equity tier 1 capital ratio of 7.0%, (ii) a tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount.
The application of more stringent capital requirements for the Bank could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions constraining us from paying dividends or repurchasing shares if we were unable to comply with such requirements.
The Company relies on dividends from the Bank for most of its revenue. The Company is a separate and distinct legal entity from the Bank. It receives substantially all of its revenue from dividends received from the Bank. These dividends are the principal source of funds to pay dividends on the Company's common and preferred stock. Currently the regulators have restricted the Bank from paying dividends to the Company without prior approval by the FDIC, NCCOB and the FRB, as is discussed in greater detail under Item 1. “Business-Supervision and Regulation” of this Annual Report on Form 10-K. Notwithstanding the current MOUs, various federal and/or state laws, regulations, and agreements, limit the amount of dividends that the Bank may pay to the Company. In the event the Bank is unable to pay dividends to the Company, the Company may not be able to service debt, pay obligations, or pay dividends on the Company's common and preferred stock. The inability to receive dividends from the Bank could have a material adverse effect on the Company's business, financial condition and results of operations. See Item 1 “Business - Supervision and Regulation.”
The Bank may have higher loan losses than the Bank's allowance for loan losses. The Bank maintains an allowance for loan losses ("ALLL"), which is a reserve established through a provision for loan losses charged to expense that represents management's best estimate of inherent risks of loss, as well as probable losses that will be incurred within the existing portfolio of loans. The level of the ALLL reflects management's continuing evaluation of industry concentrations; specific loan risks; credit loss experience; current loan portfolio quality; present economic, political and regulatory conditions; and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the ALLL inherently involves a high degree of subjectivity and requires management to make significant estimates of current loan risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of the Bank's control, may require an increase in the ALLL. Repayment of commercial loans is generally considered more subject to market risk than residential mortgage loans. Bank regulatory agencies periodically review the Bank's ALLL and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the ALLL, the Bank will need additional provisions to increase the ALLL. Any increases in the ALLL will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on the Company's financial condition and results of operations. See "Provision and Allowance for Loan Losses" in the accompanying Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion related to the Bank's process for determining the appropriate level of the ALLL.
IndexM&F BANCORP, INC., AND SUBSIDIARY
Our commercial real estate and faith-based non-profit lending may expose us to a greater risk of loss and hurt our earnings and profitability. Our business strategy includes making loans secured by commercial and faith-based non-profit real estate. These types of loans generally have higher risk-adjusted returns and shorter maturities than traditional one-to-four family residential mortgage loans. At December 31, 2014, our commercial real estate loans totaled $40.1 million, which represented 22.88% of total loans, and our faith-based non-profit real estate totaled $95.4 million, which represented 54.47% of total loans. These two categories of loans may increase our credit risk profile relative to other financial institutions that have higher concentrations of one-to-four family residential mortgage loans. Further, loans secured by commercial real estate properties are generally for larger amounts and involve a greater degree of risk than one-to-four family residential mortgage loans. Payments on loans secured by commercial real estate properties are often dependent on the income produced by the underlying properties, which in turn, depends on the successful operation and management of the properties. Accordingly, repayment of these loans is subject to adverse conditions in the real estate market or the local economy. For faith-based and non-profit institutions, payments on loans are largely dependent on voluntary contributions, which may be adversely affected during high unemployment periods, such as the economic conditions that followed late 2008. During an economic slowdown, these loans could present higher risk, could result in an increase in our total net charge-offs and could require us to increase our allowance for loan losses, which could have a material adverse effect on our financial condition or results of operations.
Our faith-based and non-profit lending may expose us to a greater risk of loss and adversely impact our earnings and profitability. Our niche market is faith-based and non-profit lending. This specialization has historically experienced minimal losses, however, when unemployment is high, individuals may be unable to donate to support the missions of these organizations. In addition, many of the real estate secured properties are deemed to be special purpose structures that may not be conducive to other types of commercial activities in the event of foreclosure or sale. At December 31, 2014, our loans to faith-based and non-profit entities totaled $95.4 million, which totaled 54.47% of total loans. Such loans increase our credit risk profile relative to other financial institutions that have higher concentrations of one-to-four family residential loans.
Charge-offs may increase in all categories of lending, which may increase our earnings and profitability. Charge-offs reduce the ALLL and impact the quantitative factors in the estimated losses inherent in the loan portfolio. An additional provision for loan losses may be required because of any charge-offs. For the year ended December 31, 2014, we had net charge-offs of $103 thousand. While we seek to minimize loan loss risks in a variety of ways, there can be no assurance that these measures will protect against credit-related losses.
The Company's growth strategy may not be successful. As a strategy, the Company seeks to increase the size of its franchise by pursuing business development opportunities, which include expanding deposit relationships, lending activity, and possible strategic expansion and/or acquisitions in new or existing markets. The Company can provide no assurance that it will be successful in increasing the volume of the Company's loans and deposits at acceptable risk levels and upon acceptable terms, or in expanding its asset base while managing the costs and implementation risks associated with this growth strategy. There can be no assurance that any expansion will be profitable or that the Company will be able to sustain its growth, either through internal growth or through successful expansions of its banking markets, that regulatory approval would be forthcoming for such growth, or that the Company will be able to maintain capital sufficient to support its continued growth.
The Bank is subject to interest rate risk. The Bank's earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and investment securities, and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Bank's control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Bank receives on loans and investment securities and the amount of interest it pays on deposits and borrowings, but such changes could affect (i) the Bank's ability to originate loans and obtain deposits, (ii) the fair value of the Bank's financial assets and liabilities, and (iii) the average duration of certain of the Bank's interest-rate sensitive assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Bank's net interest income and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. In addition, there are costs associated with the Bank's risk management techniques, and these costs could be material. Fluctuations in interest rates are not predictable or controllable by management; therefore, there can be no assurances of the Bank's ability to continue to maintain a consistent, positive spread between the interest earned on the Bank's earning assets and the interest paid on the Bank's interest-bearing liabilities. See "Asset/Liability Management” in the accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations located elsewhere in this report for further discussion related to the Company's management of interest rate risk.
If the Bank loses key employees with significant business contacts in its market areas, its business may suffer. The Bank's success is largely dependent on the personal contacts of our officers and employees in our market areas. If the Bank loses key employees temporarily or permanently, this could have a material adverse effect on the business. The Bank could be particularly hurt if its key employees go to work for competitors. The Bank's future success depends on the continued contributions of its existing senior management personnel, many of whom have significant local experience and contacts in its market areas.
The Bank's operating results and financial condition would likely suffer if there is a deterioration in the general economic condition of the areas in which the it does business. Unlike larger national or other regional banks that are more geographically diversified, the Bank primarily provides services to customers located in the Raleigh, Durham, Winston-Salem, Greensboro, and Charlotte areas of NC. Because the Bank's lending and deposit-gathering activities are concentrated in these markets, the Bank is affected by the business activity, population, income levels, deposits and real estate activity in these markets. Adverse developments in local industries have had and could continue to have a negative effect on the Bank's financial condition and results of operations. Even though the Bank's customers' business and financial interests may extend well beyond these market areas, adverse economic conditions that affect these market areas could reduce the Bank's growth rate, affect the ability of the Bank's customers to repay their loans and generally affect the Bank's financial condition and results of operations. A decline in general economic conditions in the Bank's market areas, or the entire country, caused by inflation, recession, unemployment or other factors which are beyond the Bank's control, would also impact these local economic conditions and could have an adverse effect on its financial condition and results of operations.
IndexM&F BANCORP, INC., AND SUBSIDIARY
The Bank is subject to security and operational risks related to the technology it uses that could result in a loss of customers, increased costs and other damages, which could be material. The Bank depends on data processing, software, and communication and information exchange on a variety of platforms, networks and over the internet. Despite safeguards, the Bank cannot be certain that all of its systems are entirely free from vulnerability to attack or other technological difficulties or failures. Any failure, interruptions, or breach of security of these systems could result in failures or disruptions in its customer relationships, general ledger, deposits and loan servicing or origination systems. The occurrence of any such failures or difficulties could result in a loss of customer business, damage the Bank's reputation, subject the Bank to additional regulatory scrutiny, or expose the Bank to civil litigation and possible financial liability, any of which could have a material adverse effect on its results of operations and financial condition.
The Bank faces strong competition in our market areas, which may limit our asset growth and profitability. The banking business in the Bank's market areas is very competitive, and the level of competition facing the Bank may increase further, which may limit the Bank's asset growth and/or profitability. The Bank experiences competition in both lending and attracting deposits from other banks and non-bank financial institutions located within its market areas, some of which are significantly larger institutions and may have more financial resources than the Bank. Such competitors primarily include national, regional and local financial institutions within the Bank's market areas. Additionally, various out-of-state banks may enter the market areas in which the Bank currently operates. Non-bank competitors for deposits and deposit-type accounts include savings associations, credit unions, savings banks, securities firms, money market funds, life insurance companies and the mutual funds industry. For loans, the Bank encounters competition from other banks, savings associations, finance companies, mortgage bankers and brokers, insurance companies, small loan and credit card companies, credit unions, pension trusts, securities firms and major retail stores that offer competing financial services. Many of these competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services and better pricing for those products and services than the Bank can offer.
The Bank is exposed to risks in connection with the loans it makes. A significant source of risk for the Bank arises from the possibility that losses will be sustained by the Bank because borrowers, guarantors and related parties may fail to perform in accordance with the contractual terms of their loans. The Bank has underwriting and credit monitoring procedures and credit policies, including the establishment and review of the ALLL, that it believes are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying its loan portfolio. Such policies and procedures, however, may not prevent unexpected losses that could adversely affect the Bank's results of operations.
The Bank is subject to environmental liability risk associated with lending activities. A significant portion of the Bank’s loan portfolio is secured by real property. During the ordinary course of business, the Bank may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Bank may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Bank to incur substantial expenses and may materially reduce the affected property's value or limit the Bank's ability to use or sell the affected property. In addition, future laws or more stringent interpretations of enforcement policies with respect to existing laws may increase the Bank's exposure to environmental liability. Although the Bank has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on its financial condition and results of operations.
The Company has issued preferred stock, which ranks senior to our common stock. The Company has issued 11.7 million shares of Series B Preferred Stock. This Series B Preferred Stock ranks senior to shares of our common stock. As a result, the Company must make dividend payments on the preferred stock before any dividends may be paid on the common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the preferred stock must be satisfied before any distributions can be made on the common stock. If the Company does not remain current in the payment of dividends on the Series B Preferred Stock, no dividends may be paid on the common stock.
Our preferred stock reduces net income available to holders of our common stock and earnings per common share. The dividends declared on our preferred stock reduce any net income available to holders of common stock and our earnings per common share. The preferred stock will receive preferential treatment in the event of sale, merger, liquidation, dissolution or winding up of our company.
Negative publicity could damage our reputation. Reputation risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business. Negative public opinion could adversely affect our ability to keep and attract customers, and expose us to adverse legal and regulatory consequences. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending practices; corporate governance; regulatory compliance; mergers and acquisitions; disclosure, sharing or inadequate protection of customer information; and from actions taken by government regulators and community organizations in response to that conduct.
Financial services companies depend on the accuracy and completeness of information about customers and counterparties. In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports, and other financial information. We may rely on representations of those customers, counterparties, or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports, or other financial information could cause us to enter into unfavorable transactions, which could have a material adverse effect on our financial condition and results of operations.
IndexM&F BANCORP, INC., AND SUBSIDIARY
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition, results of operations and cash flows. Liquidity is essential to our business. Our ability to implement our business strategy will depend on our ability to obtain funding for loan originations, working capital and other general corporate purposes. An inability to raise funds through deposits, borrowings, securities sold under repurchase agreements, the sale of loans and other sources could have a substantial negative effect on our liquidity. We do not anticipate that our retail and commercial deposits will be sufficient to meet our funding needs in the foreseeable future. We therefore rely on Certificate of Deposit Account Registry Service ("CDARS") reciprocal deposits, or may use other sources such as FHLB advances or other wholesale funding sources to obtain the funds necessary to implement our growth strategy.
Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable to us could be impaired by factors that affect us, specifically, the financial services industry, or the economy in general, including a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated or adverse regulatory action against us. Our ability to borrow could be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and a deterioration in credit markets. To the extent we are not successful in obtaining such funding, we will be unable to implement our strategy as planned which could have a material adverse effect on our financial condition, results of operations and cash flows.
Changes in our accounting policies or in accounting standards could materially affect how we report our financial results and condition. Our accounting policies are fundamental to understanding our financial results and condition. Some of these policies require use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Some of our accounting policies are critical because they require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain, and because it is likely that materially different amounts would be reported under different conditions or using different assumptions.
From time to time the Financial Accounting Standards Board (the “FASB”) and the SEC change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our external financial statements. These changes are beyond our control, can be hard to predict and could materially impact how we report our results of operations and financial condition. We could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements in material amounts.
Technological advances impact the Bank’s business. The banking industry continues to undergo technological changes with frequent introductions of new technology-driven products and services. In addition to improving customer services, the effective use of technology increases efficiency and enables financial institutions to reduce costs. The Bank’s future success will depend, in part, on our ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in operations. Many competitors have substantially greater resources to invest in technological improvements. The Bank may not be able to effectively implement new technology-driven products and services or successfully market such products and services to its customers.
Our stock price can be volatile. Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:
•Actual or anticipated variations in quarterly results of operations;
•Operating results and stock price performance of other companies that investors deem comparable to us;
•News reports relating to trends, concerns, and other issues in the financial services industry;
•Perceptions in the marketplace regarding us and/or our competitors;
•New technology used or services offered by competitors;
•Significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or involving us or our competitors;
•Changes in government regulations; and
•General market fluctuations, industry factors, and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes, or credit loss trends, could cause our stock price to decrease regardless of operating results.
Unpredictable catastrophic events could have a material adverse effect on the Company. The occurrence of catastrophic events such as hurricanes, tropical storms, earthquakes, pandemic disease, windstorms, floods, severe winter weather (including snow, freezing water, ice storms and blizzards), fires, and other catastrophes could adversely affect the Company's consolidated financial condition or results of operations. Unpredictable natural and other disasters could have an adverse effect on the Bank in that such events could materially disrupt our operations or the ability or willingness of our customers to access the financial services offered by the Bank. The incidence and severity of catastrophes are inherently unpredictable. Although the Bank carries insurance to mitigate its exposure to certain catastrophic events, these events could nevertheless reduce the Company's earnings, cause volatility in our financial results for any fiscal quarter or year, and have a material adverse effect on the Company's financial condition and/or results of operations.
The Company's trading volume is low compared with larger national and regional banks. The Company's common stock is quoted on the Over The Counter Bulletin Board. The trading volume of the Company's common stock is very low when compared with more seasoned companies listed on the NASDAQ, the NYSE, other consolidated reporting systems, or stock exchanges. Thus, the market in the Company's common stock is limited in scope relative to other larger companies. In addition, the Company cannot say with any certainty that a more active and liquid trading market for its common stock will develop.
There may be future sales of additional common stock or preferred stock or other dilution of our equity, which may adversely affect the market price of our common stock. We are not restricted from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. The market value of our common stock could decline as a result of sales by us of a large number of shares of common stock or preferred stock or similar securities in the market or the perception that such sales could occur.
IndexM&F BANCORP, INC., AND SUBSIDIARY
The Company's common stock is not FDIC insured. The Company's common stock is not a savings or deposit account or other obligation of any bank, is not insured by the FDIC or any other governmental agency, and is subject to investment risk, including the possible loss of principal. Investment in the Company's common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any other company. As a result, holders of the Company's common stock may lose some or all of their investment.
The Bank has credit risks with some of its deposits. The Bank holds deposits that may exceed the FDIC federally insured balance at certain financial institutions. The Bank may lose all uninsured balances if one of the correspondent banks fails without warning.
Consumer protection initiatives related to the foreclosure process could affect our remedies as a creditor. Consumer protection initiatives related to the foreclosure process, including voluntary and/or mandatory programs intended to permit or require lenders to consider loan modifications or other alternatives to foreclosure, could increase our loan losses or increase our expense in pursuing our remedies as a creditor.
ITEM 2.
ITEM 2. PROPERTIES
The Company conducted its business from its corporate office in Durham, NC, and its seven branch offices in Durham, Raleigh, Charlotte, Greensboro and Winston-Salem, NC.
The following table sets forth certain information regarding the Bank's properties as of December 31, 2014. Rent expense incurred by the Bank under ongoing leases totaled approximately $50 thousand and $47 thousand for the years ended December 31, 2014 and 2013, respectively.
Management considers all of these properties to be in good condition and adequately covered by insurance. Additional information about the Company's property is set forth in Notes 7 and 9 to the Consolidated Financial Statements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of operations, the Company and the Bank are often involved in legal proceedings. In the opinion of management, neither the Company nor the Bank is a party to, nor is their property the subject of, any material pending legal proceedings, other than ordinary routine litigation incidental to their business, nor has any such proceeding been terminated during the fourth quarter of the Company's fiscal year ended December 31, 2014.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
The Company's common stock is quoted on the OTC Bulletin Board under the symbol "MFBP".
As of March 18, 2015, there were 2,031,337 shares of the Company's common stock outstanding, held by approximately 990 stockholders of record (not including persons or entities whose stock is held in nominee or 'street' name through various brokerage firms or banks). The following table shows the high and low sale price of the Company's common stock for the previous eight quarters, as well as the per share amount of cash dividends declared during the same periods. These quotations reflect inter-dealer prices, without retail mark up, mark down or commission and may not represent actual transactions. No stock dividend was declared or paid during any of the fiscal quarters listed.
IndexM&F BANCORP, INC., AND SUBSIDIARY
Dividends. See "Item 1. Business - Supervision and Regulation - Dividend and Repurchase Limitations" above for regulatory and TARP restrictions, which limit the ability of the Company to pay dividends. During 2014 and 2013, the Company paid its stockholders annual dividends totaling $0.063 per share and $0.125 per share, respectively.
Rights Agreement. On September 23, 2014, the Board of Directors declared a dividend of one preferred share purchase right for each outstanding share of the Company’s common stock, to purchase from the Company one one-hundredth of a share of Series C Junior Participating Preferred Stock, par value $0.01 per share, of the Company at a price of $10.00 per one one-hundredth of a share of preferred stock, subject to adjustment as provided in the associated rights agreement. The description and terms of the preferred share purchase rights are set forth in a rights agreement, dated as of September 23, 2014, between the Company and American Stock Transfer & Trust Company, LLC, as rights agent.
Dividend Policy. The Company's stockholders are entitled to receive such dividends or distributions as declared from time to time by the Board of Directors. During 2014, the Company declared and paid to its stockholders dividends totaling $0.063 per share. Subject to the regulatory and TARP restrictions discussed in “Item 1 Dividend and Repurchase Limitations”, the Company may continue to pay annual cash dividends to stockholders, if doing so is considered to be in the best interest of the Company and consistent with maintaining the Bank’s status as a “well capitalized” institution under applicable banking laws and regulations.
Recent Sales of Unregistered Securities. The Company did not sell any securities within the last three fiscal years that were not registered under the Securities Act of 1933, as amended.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers. The Company did not repurchase any shares of its common stock in 2014.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable to smaller reporting companies.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and analysis is intended to aid the reader in understanding and evaluating the Company’s consolidated results of operations and financial condition. This discussion is designed to provide more comprehensive information about the major components of the Company’s results of operations, financial condition, liquidity, and capital resources than may be obtained from reading the financial statements alone. This discussion should be read in conjunction with, and is qualified in its entirety by reference to, the Company’s Consolidated Financial Statements, including the related notes thereto presented under Item I in this Annual Report on Form 10-K. This discussion contains certain forward-looking statements about the Company's financial condition and results of operations, which are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. See also "Cautionary Statement Regarding Forward-Looking Statements" and "Risk Factors" which begin on pages 1 and 10, respectively. All information presented is consolidated data unless otherwise specified.
OVERVIEW
The Bank is a full-service NC state-chartered bank conducting business in the five largest urban areas of NC: Raleigh, the State's capitol, Durham, Winston-Salem, Greensboro, and Charlotte. In 2007, the Bank celebrated the 100th anniversary of its founding in 1907, and the opening of its first branch in 1908 on Parrish Street in Durham, where the Bank continues to operate a branch. In 1999, the Company was created as a bank holding company. As of December 31, 2014, the Company conducted no business other than providing services and assistance to the Bank, its wholly owned subsidiary.
The Bank's business consists principally of attracting deposits from the general public and investing these funds in loans secured by commercial and faith-based non-profit real estate, secured and unsecured commercial, faith-based non-profit, and consumer loans, single-family residential mortgage loans, and home equity lines. As a community bank, the Bank's profitability depends primarily upon its levels of net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. When earnings from interest-earning assets approximate or exceed expenses for interest-bearing liabilities, any positive interest rate spread will generate net interest income. The Bank's profitability is affected by its provision for loan losses, noninterest income, and other operating expenses. Noninterest income primarily consists of service charges, ATM fees, rental income, and the increase in cash surrender value of bank-owned life insurance. Operating expenses primarily consist of compensation and benefits, occupancy related expenses, marketing, data processing, professional fees, telecommunication, FDIC insurance expense, expenses related to foreclosed properties from defaulted loans, and other non-interest expenses.
IndexM&F BANCORP, INC., AND SUBSIDIARY
The Bank's operations are influenced significantly by local economic conditions and by policies of bank regulatory authorities. The Bank's costs of funds are influenced by interest rates on deposits and borrowing rates offered by competing financial institutions in our market area, as well as general market interest rates. Lending activities are affected by the demand for financing, which in turn is affected by the prevailing interest rates, as well as the borrower's credit and risk profiles established under the Bank's lending policies.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following discussion and analysis of the Company’s financial condition and results of operations are based on the Company’s Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires the Company to make estimates and judgments regarding uncertainties that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to the allowance for loan losses, investment values, income taxes, contingencies, and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. However, because future events and their effects cannot be determined with certainty, actual results may differ from these estimates under different assumptions or conditions, and the Company may be exposed to gains or losses that could be material.
The Company's significant accounting policies are discussed below and in Item 8. Financial Statements and Supplementary Data--Notes to Consolidated Financial Statements--Note 1. Significant Accounting Policies. Management believes that the following accounting policies are the most critical to aid in fully understanding and evaluating the Company's reported financial reported financial results, and these policies require management's most difficult, subjective, or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting policies and related disclosures with the Audit Committee of the Board of Directors.
•Allowance for Loan Losses - The Company records an estimated allowance for loan losses ("ALLL") based on known problem loans and estimated risks inherent within the existing loan portfolio. The allowance calculation takes into account historical loss trends, and current market and economic conditions. If economic conditions were to decline significantly or the financial condition of the Company’s customers were to deteriorate further, resulting in an impairment of their ability to make payments, additional increases to the allowance may be required.
•Non-Accrual Interest - When a loan or lease is placed on non-accrual status, regardless of class, the accrued and unpaid interest receivable is reversed and the loan or lease is accounted for on the cash or cost recovery method until qualifying for return to accrual status. All payments received on non-accrual loans and leases are applied against the principal balance of the loan or lease. Loans may be returned to accrual status when all principal and interest amounts contractually due (including any arrearages) are reasonably assured of repayment within a reasonable period, the borrower has demonstrated payment performance for a minimum of six months in accordance with the original or revised contractual terms of the loan, and when doubt about repayment is resolved.
•Loans Modified in a Troubled Debt Restructuring ("TDR") - Loans are considered to have been modified as a TDR when the Company makes certain concessions to a borrower experiencing financial difficulty. Concessions to the borrower at modification may include interest rate reductions, principal or interest forgiveness, forbearance (from further collection actions such as initiating foreclosure), and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a non-accrual loan that has been modified in a TDR remains on non-accrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. In response to the extended economic downturn, management has elected to offer concessions to certain borrowers with identified financial weaknesses, even if the borrowers have continued making scheduled payments, working with the borrowers to enable them to continue meeting their obligations to repay the debt to the Company.
•Investments - The Company records an investment impairment charge when it believes an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions and associated market values of investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.
•Deferred Taxes - The Company assesses the need to record a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. The Company considers anticipated future taxable income and ongoing prudent and feasible tax planning strategies in determining the need for the valuation allowance which, at this time, it deems not to be necessary. In the event the Company were to determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.
•Foreclosed Assets - Foreclosed assets represent properties acquired through foreclosure or physical possession. Write-downs to fair value of foreclosed assets at the time of transfer are charged to allowance for loan losses. Subsequent to foreclosure, the Company periodically evaluates the value of foreclosed assets held for sale and records an impairment charge for any subsequent declines in fair value less selling costs. Subsequent declines in value are charged to operations. Fair value is based on an assessment of information available at the end of a reporting period and depends upon a number of factors, including historical experience, economic conditions, and issues specific to individual properties. The evaluation of these factors involves subjective estimates and judgments that may change.
IndexM&F BANCORP, INC., AND SUBSIDIARY
•Fair Value Estimates - Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market inputs. For financial instruments, that are traded actively and have quoted market prices or observable market inputs, there is minimal subjectivity involved in measuring fair value. However, when quoted market prices or observable market inputs are not fully available, significant management judgment may be necessary to estimate fair value. In developing our fair value measurements, we maximize the use of observable inputs and minimize the use of unobservable inputs.
•Fair Value Hierarchy - The fair value hierarchy defines Level 1 and 2 valuations as those that are based on quoted prices for identical instruments traded in active markets and quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 3 valuations a based on model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates or assumptions that we believe market participants would use in pricing the asset or liability. Financial assets that are recorded at fair value on a recurring basis include available-for-sale investment securities, mortgage servicing rights, and investments related to deferred compensation arrangements.
RESULTS OF OPERATIONS
Year ended December 31, 2014 compared with year ended December 31, 2013
General. We had net income of $1.0 million and $0.4 million for the years ended December 31, 2014 and 2013, respectively. Net income available to common stockholders was $0.8 million, or $0.40 per diluted share, for 2014 compared to $0.1 million, or $0.06 per diluted share, for 2013. Net income available to common stockholders represents net income less preferred stock dividends and related discount accretion. The increase in net income in 2014 was primarily due to a $0.3 million reduction in provision for loan losses, a $0.5 million realized gain on sales of repossessed assets compared to none during the prior year, and a $0.2 decrease in noninterest expenses. Net interest income, the difference between interest earned on interest-earning assets and interest incurred on interest-bearing liabilities, was $10.6 million in 2014 and $10.4 million in 2013, an increase of 1.45%. Noninterest income, principally service charges and fees, increase in cash value of bank-owned life insurance, plus gains on sales of securities amounted to $2.5 million in 2014 and $2.0 million in 2013. During 2014 and 2013, the Bank received a Bank Enterprise Award (“BEA”) of $0.4 million and $0.3 million, respectively, which is included in noninterest income. The BEA reflects the Bank’s dedication to financing and supporting community and economic development activities in economically distressed areas. Our provision for loan losses was $0.1 million and $0.3 million in 2014 and 2013, respectively. The decrease in provision was partially attributable to a $14.4 million decrease in loans outstanding. We incurred noninterest expense of $11.4 million in 2014 and $11.6 million in 2013. The decrease in non-interest expense of $0.2 million, or 1.66%, was primarily attributable to decreased salaries and benefits of $0.3 million, decreased director fees of $0.1 million and decreased professional fees of $0.1 million, partially offset by an increase in other expenses of $0.2 million.
Net Interest Income. Net interest income, the difference between total interest income from loans and investments, and total interest expenses from deposits and borrowings, is the Company’s principal source of earnings. The amount of net interest income is determined by the volume of interest- earning assets, the level of rates earned on those assets, and the volume and cost of underlying funding from deposits and borrowings. Net interest income before the provision for loan losses increased $0.2 million, or 1.45%, from $10.4 million for the year ended December 31, 2013 to $10.6 million for the year ended December 31, 2014. Net interest margin represents net interest income divided by average earning assets. Average earning assets for the year ended December 31, 2014 were $282.6 million compared to $271.7 million for the year ended December 31, 2013. On a fully tax-equivalent basis, net interest margin was 3.75% and 3.85% for the years ended December 31, 2014 and 2013, respectively. The yield on interest-earning assets was 3.99% and 4.13% for the years ended December 31, 2014 and 2013, respectively, reflecting a decrease of 14 basis points (“bps”). The interest rate on average interest-bearing liabilities for those same periods was 0.33% and 0.38%, respectively, reflecting a decrease of 5 bps due to the ongoing low interest rate environment. Net interest spread is the difference between rates earned on interest-earning assets and the interest paid on deposits and borrowed funds. The net interest spread decreased 9 bps from 3.75% for the year ended December 31, 2013 to 3.66% for the year ended December 31, 2014. The decrease was primarily attributable to the 14 bps reduction in yield on earning assets.
Interest income increased 0.74% for the year ended December 31, 2014 to $11.3 million from $11.2 million for the year ended December 31, 2013. The average balance of outstanding loans, which yielded 5.35% for the year ended December 31, 2014 and 5.72% for the year ended December 31, 2013, increased from $179.7 million for the year ended December 31, 2013 to $185.2 million for the year ended December 31, 2014. The average balance of investment securities increased $9.5 million from $59.2 million for the year ended December 31, 2013 to $68.7 million for the year ended December 31, 2014. The tax-equivalent yield on investment securities increased from 1.46% for the year ended December 31, 2013 to 1.90% for the year ended December 31, 2014. During 2014, fewer higher yielding investment securities were called and replaced with lower yielding investment securities than was experienced during 2013, which contributed to higher yields during 2014. The average balances of federal funds and other short-term investments decreased by $4.0 million from $32.8 million to $28.8 million at December 31, 2014 as management sought to invest excess funds in its investment and loan portfolios. The average yield in this category increased 2 bps from 0.26% for the year ended December 31, 2013 to 0.28% for the year ended December 31, 2014. The average yield on earning assets dropped from 4.13% during 2013 to 3.99% during 2014. The decrease in higher yielding loans due to loan runoff and issuance of new loans at lower market rates accounted for the largest impact of the 14 bps decrease in yield on earning assets.
Interest expense decreased $0.1 million for the year ended December 31, 2014 to $0.7 million, compared to $0.8 million for the year ended December 31, 2013. Average total interest-bearing deposits, including savings, interest-bearing demand deposits and time deposits, increased from $201.4 million at December 31, 2013 to $211.2 million at December 31, 2014. The average rate paid on interest-bearing deposits decreased from 38 bps for the year ended December 31, 2013 to 33 bps for the year ended December 31, 2014, primarily due to lower interest rates paid on time deposits.
The average rate on borrowings increased from 0.50% for the year ended December 31, 2013 to 0.65% or the year ended December 31, 2014. The average borrowings outstanding decreased by $0.5 million from $1.4 million for the year ended December 31, 2013 to $0.9 million for the year ended December 31, 2014. The interest expense on borrowed funds decreased to $6 thousand in 2014 primarily because of the net reduction in outstanding borrowings.
IndexM&F BANCORP, INC., AND SUBSIDIARY
The following table, Average Balances, Interest Earned or Paid, and Interest Yields/Rates reflects the Company’s effective yield on earning assets and cost of funds. Yields and costs are computed by dividing income or expense for the year by the respective daily average asset or liability balance. Changes in net interest income from year to year can be explained in terms of fluctuations in volume and rate. In the table, the amount earned on nontaxable securities is reflected as actual, whereas the rate on nontaxable securities is stated at the tax equivalent rate.
(1) Loans receivable include nonaccrual loans for which accrual of interest income has not been recorded.
(2) The tax equivalent rate is computed using a blended federal and state tax rate of 37.96% for 2014 and 38.55% for 2013.
(3) The tax equivalent adjustment is computed using a blended tax rate of 37.96% for 2014 and 38.55% for 2013.
(4) Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average interest-earning assets.
IndexM&F BANCORP, INC., AND SUBSIDIARY
(1) Loans receivable include nonaccrual loans for which accrual of interest income has not been recorded.
(2) The tax equivalent rate is computed using a blended federal and state tax rate of 38.55%
(3) The tax equivalent adjustment is computed using a blended tax rate of 38.55%.
(4) Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average interest-earning assets.
IndexM&F BANCORP, INC., AND SUBSIDIARY
The following table, Rate and Volume Variance Analysis, presents further information on those changes. For each category of interest-earning asset and interest-bearing liability, we have provided information on changes attributable to:
•Changes in rates, which are changes in the average rate multiplied by the average volume for the previous period;
•Changes in volume, which are changes in average volume multiplied by the average rate for the previous period; and
•Total change, which is the sum of the previous columns.
(1) The changes in rates and volumes account for the total changes in interest income and interest expense.
(2) The interest income that would have been reflected on non-accruing loans is excluded from this analysis.
Noninterest Income. Noninterest income increased by $0.5 million in the year ended December 31, 2014 over the same period in 2013, primarily due to realized gains on the sales of repossessed assets of $0.5 million compared to none during the prior year. While gains and/or losses on the disposal of repossessed assets are not uncommon, we do not anticipate gains of this magnitude in the future. The Company earned $44 thousand less in service charge revenue, which is primarily activity-based, and $0.1 million less in rental income, which is occupancy-based, during 2014 compared to 2013. Other noninterest income increased by $0.1 million primarily due to a $55 thousand benefit on a life insurance policy and a $32 thousand increase in BEA amount received in 2014. The BEA is awarded by the U.S. Treasury Department, and reflects the Company’s support of economically distressed areas. During 2014, the Company received a BEA of $0.4 million compared to $0.3 million during 2013.
Noninterest Expense. Noninterest expense represents the cost of operating the Company and the Bank. Management regularly monitors all categories of noninterest expense with the goal of improving productivity and operating performance. Noninterest expense decreased from $11.6 million for the year ended December 31, 2013 to $11.4 million for the year ended December 31, 2014. The largest reductions in noninterest expense were a $0.3 million decrease in salaries and employee benefits, decreased director fees of $0.1 million and decreased professional fees of $0.1 million, partially offset with increased other expenses of $0.2 million.
Occupancy expense decreased from $1.5 million for the year ended December 31, 2013 to $1.4 million for the year ended December 31, 2014, primarily due to reduced security guard expenses.
Directors’ fees decreased from $0.3 million for the year ended December 31, 2013 to $0.2 million for the year-ended December 31, 2014. The decrease was attributable to a reduced number of meetings.
Professional fees decreased $0.1 million to $0.8 million during the year ended December 31, 2014 compared to the year ended December 31, 2013, primarily as a result of decreased legal and audit expenses.
Information technology expense increased by $0.1 million or 7.31% during the year ended December 31, 2014 from $0.8 million to $0.9 million, primarily due to a core systems conversion during the third quarter of 2014. The new system is intended to provide the Bank with advanced technology in order to improve operational performance and expanded service capabilities for customers.
FDIC deposit insurance increased from $0.5 million for the year ended December 31, 2013 to $0.6 million for the year ended December 31, 2014. The increase reflects the overall increase in average assets upon which the premiums are calculated.
Other real estate owned (“OREO”) expenses totaled $0.3 million for the years ended December 31, 2014 and 2013.
Other expenses increased $0.2 million primarily related to a $0.1 increase off-balance sheet provision for unfunded line and letters of credit and $0.1 million increase in costs associated with impaired mortgage loans.
Provision for Income Taxes. The Company recorded income tax expense of $0.6 million and $0.2 million for the years ended December 31, 2014 and 2013, respectively. The overall effective rate increased from 29.38% for the year ended December 31, 2013 to 34.52% in the year ended December 31, 2014 due to a decrease in tax-exempt interest income and permanent tax to book differences decreasing.
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ASSET QUALITY
Allowances for Loan Losses ("ALLL") - The ALLL is management's estimate of losses inherent in the loan portfolio. The provision for loan losses is the amount charged against earnings to establish an adequate ALLL. Loan losses and recoveries are charged to or credited to the ALLL, rather than reported as a direct expense or recovery. The loan portfolio is segmented into three parts for the ALLL calculation: impaired commercial loans, smaller balance homogenous loans in the process of foreclosure, and TDRs (collectively referred to as "impaired loans"), and all other loans.
For all classes of commercial loans, a quarterly evaluation of individual borrowers is performed to identify impaired loans. The identification of specific borrowers for review is based on a review of non-accrual loans as well as those loans specifically identified by management as exhibiting above average levels of risk through the loan classification process. The ALLL attributed to impaired loans and TDRs considers all available evidence based on significant conditions or circumstances related to the specific credits. The specific allowance amounts are determined by a method prescribed by Accounting Standards Codification ("ASC") 310. The loans identified as impaired and TDRs are accounted for in accordance with one of three valuations: (i) the present value of future cash flows discounted at the loan’s effective interest rate; (ii) the loan’s observable market price, or (iii) the fair value of the collateral, if the loan is collateral dependent, less estimated liquidation costs. Factors considered by management in determining impairment include payment status, collateral value, alternate use of special purpose real estate which could adversely impact resale, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The significance of payment delays and payment shortfalls are considered on a loan-by-loan basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Interest payments made on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest income may be accrued or recognized on a cash basis.
Most consumer loans are evaluated for impairment on a collective basis, because these loans are for smaller balances and are homogeneous. Any loans, including commercial loans, not specifically identified as impaired or TDRs, are collectively evaluated by loan type, applying two factors: the quantitative loss history by loan type for the relevant look back period compared to average loans outstanding for the same period (the "quantitative factor"), and a qualitative factor that is comprised of quantitatively-driven calculations based on historical data, and subjective factors (the "qualitative factors"). The quantitative portion of the ALLL is adjusted for qualitative factors to account for model imprecision and to incorporate the range of probable outcome inherent in the estimates used for the allowance.
The quantitative factor by loan type is applied against the unimpaired loan balances and smaller-balance homogenous impaired loans not in the process of foreclosure for which there is no specific reserve to determine the quantitative reserve. The qualitative factors, including (i) policy underwriting, charge-off and collection, (ii) national and local economic conditions, (iii) nature and volume of the portfolio, (iv) experience, ability, and depth of lending team, (v) trends of past due, classified loans, and restructurings, (vi) quality of loan review and board oversight, (vii) existence, levels, and effect of loan concentrations and (viii) effects of external factors such as competition and regulatory oversight, are adjusted quarterly based on historical information for any quantifiable factors and qualitative judgments for subjective factors (those considered subjective are policy, underwriting, experience, ability and depth of lending team, quality of loan review and board oversight, and effects of external factors), and applied in total to each loan balance by loan type. The Company continues to enhance its modeling of the portfolio and underlying risk factors through quarterly analytical reviews with the goal of ensuring it captures all pertinent factors contributing to risk of loss inherent in the loan portfolio. Under ASC 310, the non-homogenous impaired loans, homogenous small balance real estate secured loans in process of foreclosure for which the value is less than the loan principal balance, and TDRs, are reviewed individually for impairment.
The process of assessing the adequacy of the ALLL is inherently subjective. Further, and particularly in terms of economic downturns, it is reasonably possible that future credit losses may exceed historical loss levels and may also exceed management’s current estimates of incurred credit losses inherent within the loan portfolio. As such, there can be no assurance that future loan charge-offs will not exceed management’s current estimate of what constitutes a reasonable allowance for loan losses.
The Company and the Bank are subject to periodic examination by their federal and state banking regulators, and may be required by their regulators to recognize additions to the allowance for loan losses based on their assessment of credit information available to them at the time of their examinations.
As of December 31, 2014 and December 31, 2013, the ALLL was $3.4 million and $3.5 million, respectively, which represented approximately 1.96% and 1.84%, respectively, net of unearned income and deferred costs ("net loans outstanding"), on those respective dates. During the fourth quarter of 2014, management switched from an eight-quarter look back period for measuring losses to a four-year look back period. The change in look back periods resulted in a $375 thousand increase in ALLL. We believe that having a longer look back period is a more conservative approach to estimating risks within the portfolio as it captures periods of increased economic uncertainty as compared to the past two years. Nonperforming assets, defined as non-accruing loans, OREO and other repossessed assets, at December 31, 2014 were 3.01% of total assets compared to 3.43% at December 31, 2013. Nonperforming assets as a percentage of total loans as of December 31, 2014 were 5.13% compared to 5.46% at December 31, 2013. For the years ended December 31, 2014 and December 31, 2013, the provision for loan losses was $50 thousand and $329 thousand, respectively.
Of non-accruing loans totaling $5.9 million at December 31, 2014, all of the outstanding balances were secured by real estate, which management believes mitigates the risk of loss. TDRs in compliance with modified terms totaled $20.9 million or 83.02% of total TDRs at December 31, 2014. GAAP does not provide specific guidance on when a loan may be returned to accrual status. Federal banking regulators have provided guidance that interest on impaired loans, including TDRs, should only be recorded when there has been a sustained period of repayment performance, the loan is well secured, and the collection under any revised terms is assessed as probable. The Company evaluates impaired loans and TDR performance under the applicable regulatory guidelines and returns loans to accruing after a sustained period of repayment performance.
Loans are generally placed on non-accrual status when the scheduled payments reach 90 days past due. Loans are charged-off, with Board of Director approval, when the Chief Credit Officer and his staff determine that all reasonable means of collection of the outstanding balances, except foreclosure, have been exhausted. The Company continues its collection efforts subsequent to charge-off, which historically has resulted in some recoveries each year.
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Loans outstanding as of the dates indicated were as follows:
The following table shows the summary activity in the ALLL for the years indicated:
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Activity in the ALLL for the years indicated was as follows:
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The following tables present the ALLL and the reported investment in loans by portfolio segment and based on impairment method as of the dates indicated:
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Impaired loans at the dates indicated were as follows:
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Impaired loans not included in the above tables are the recorded investments of $1.9 million in homogeneous first mortgage residential real estate loans, which are collectively measured for impairment. The total recorded investment in impaired loans was $24.1 million at December 31, 2012.
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IndexM&F BANCORP, INC., AND SUBSIDIARY
The total recorded investment in impaired loans as of December 31, 2014 decreased $0.4 million from December 31, 2013. Changes during the year were primarily due to the addition of 10 new loans totaling $3.0 million, primarily residential real estate - first mortgage and commercial real estate - other, less 10 paid off loans totaling $0.8 million, primarily residential real estate - construction and commercial real estate - other, 11 loans transferred to OREO totaling $0.9 million, primarily residential real estate - other and commercial real estate - other, two loans no longer considered impaired totaling $1.3 million, primarily faith-based non-profit - owner occupied, and three charged-off loans totaling $0.1 million, primarily residential real estate - first mortgage.
The recorded investment in TDRs, which are included in total impaired loans, was $25.1 million, $26.4 million, $20.2 million, $18.7 million and $9.4 million at December 31, 2014, 2013, 2012, 2011 and 2010, respectively.
Loans for which principal or interest is in default for 90 days or more are classified as nonaccrual unless they are well secured and in process of collection. Loans over 90 days still accruing were matured loans that were well secured and in process of collection. Borrowers have continued to make payments on these loans while administrative and legal processes are proceeding, which will enable the Bank to extend or modify maturity dates. Approximately $3.5 million and $1.0 million of past due loans represented loans that had matured and were in the process of being renewed at December 31, 2014 and 2013, respectively.
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The following tables present the recorded investment by loan class and the number of non-accrual and loans past due over 90 days still on accrual as of the dates indicated:
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The following table presents the recorded investment by loan class and the number of non-accrual and loans past due over 90 days still on accrual as of December 31, 2010:
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The following tables present the aging of the recorded investment in loans as of December 31, 2014 and 2013 by class of loans:
The Company has allocated $17 thousand and $934 thousand of specific reserves to customers, whose loan terms had been modified in TDRs as of December 31, 2014 and December 31, 2013, respectively. The Company has not committed to lend additional amounts as of December 31, 2014 and December 31, 2013 to customers with outstanding loans that are classified as TDRs.
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payments experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans for impairment by the loan’s classification to credit risk. The analysis includes non-homogeneous loans, such as commercial, commercial real estate and faith-based non-profit entities, and mortgage loans in process of foreclosure for which the loan to value does not support repayment in full. This analysis is performed on at least a quarterly basis. The Company uses the following terms for risk ratings:
•Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Management believes that there is a moderate likelihood of some loss related to those loans and leases that are considered special mention.
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•Substandard. Loans classified as substandard are inadequately protected by the current sound financial repayment capacity and debt service coverage of the obligor or of the collateral pledge, if any. Loans so classified have a well-defined weakness or weaknesses that may jeopardize the liquidation of our repayment according to the original terms of the debt. In addition to commercial and faith-based non-profit loans with identified weaknesses, substandard loans include loans within the mortgage and consumer portfolio segments that are past due 90 days or more as to principal or interest if the loan to value does not support full repayment. Substandard loans are evaluated for impairment on an individual loan basis unless the substandard loan is a smaller homogeneous loan that is not a TDR and is not in the process of foreclosure. These loans exhibit a distinct possibility that the Company will sustain some loss if the deficiencies related to the los are not corrected in a timely manner.
•Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
• Pass. Loans not identified as special mention, substandard or doubtful are classified as pass.
As of December 31, 2014, and based on the most recent analysis performed, the risk category of loans by class of loans was as follows:
Our ability to manage credit risk depends in large part on our ability to properly identify and manage problem loans. To do so, we operate a credit risk rating system under which our credit management personnel assign a numeric credit risk rating to each loan at the time of origination and review loans on a regular basis.
Each loan officer is responsible for monitoring his or her loan portfolio, recommending a credit risk rating for each loan in his or her portfolio and ensuring the credit risk ratings are appropriate. These credit risk ratings are then ratified by our Chief Credit Officer or the Directors’ Loan Committee. Credit risk ratings are determined by evaluating a number of factors including a borrower’s financial strength, cash flow coverage, collateral protection and guarantees. The credit risk ratings and methodology applied are reviewed annually by management and the Board of Directors.
FINANCIAL CONDITION
Financial Condition at December 31, 2014 and December 31,
The Company’s financial condition is measured in terms of its asset and liability composition, asset quality, capital resources and liquidity. Gross loans and total deposits decreased for the year ended December 31, 2014 as compared with the year ended December 31, 2013.
Total assets decreased from $301.5 million as of December 31, 2013 to $298.4 million as of December 31, 2014, which was caused by a decrease in deposit base. Gross loans decreased by $14.4 million primarily due to loan pay downs, loan run-off and loan transfers to OREO. Investment securities available for sale increased $3.8 million to $69.7 million from December 31, 2013 to December 31, 2014. The increase in investment securities available for sale was driven by the management decision to move low yielding cash into higher yielding low risk bonds. Cash and cash equivalents increased $7.0 million to $35.6 million at December 31, 2014. OREO increased $0.1 million in 2014 to $3.1 million. Total liabilities decreased from $265.4 million as of December 31, 2013 to $261.8 million as of December 31, 2014, led by a decrease in total deposits of $4.1 million, partially offset with a decrease in other liabilities of $0.6 million.
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Total consolidated stockholders’ equity increased $0.5 million to $36.6 million as of December 31, 2014 compared to $36.1 million at December 31, 2013. For the year ended December 31, 2014, the net increase in retained earnings was comprised of $1.0 million of net income, offset by dividends declared to preferred stockholders of $0.2 million and common stockholders of $0.1 million. Accumulated other comprehensive loss represents the unrealized loss on available for sale securities and the unrealized loss related to the deferred pension liability, net of deferred taxes. Accumulated other comprehensive loss totaled $1.7 million and $1.4 million at December 31, 2014 and 2013, respectively.
ASSETS
Cash and Cash Equivalents. Cash and cash equivalents, including noninterest-bearing and interest-bearing cash, fed funds sold and short-term investments, increased $7.0 million from $28.6 million at December 31, 2013 to $35.6 million at December 31, 2014. The increase in cash and cash equivalents was the primary result of net loan payoffs and proceeds from called securities, which were not reinvested prior to year-end.
Loan Portfolio. Gross loans totaled $175.1 million and $189.5 million as of December 31, 2014 and 2013, respectively. The commercial loan portfolio is comprised mainly of loans to small- and mid-sized business and faith-based non-profit organizations. A significant portion of the loan portfolio is collateralized by owner-occupied real estate. An adverse change in the economy affecting real estate values in general or in our primary markets in particular, could impair the value of the underlying collateral and/or our ability to sell such collateral.
The Bank has a concentration of loans to faith-based non-profit organizations, in which the Bank has specialized lending experience. As of December 31, 2014, the percentage of loans in this niche, which included construction, real estate, and lines of credit, totaled approximately 54.47% of the total loan portfolio, and the reserve for these loans was 35.87% of the total allowance. Historically, the Bank has experienced low levels of loan losses in this specialty; however, repayment of loans is primarily dependent on voluntary contributions, which appear to have been adversely affected by the economic downturn. Management monitors the loan portfolio for changes in trends of past dues and concentration.
Traditionally, the Bank has not issued high-risk mortgage products such as Adjustable Rate Mortgages (“ARM”), interest only residential mortgages and other sub-prime mortgages. While the Bank does not engage in sub-prime lending, a small balance of loans may be deemed sub-prime based on borrowers’ credit scores. Historically, the Bank has made very few acquisition and development loans or construction development loans with interest reserves built into the loans.
The OREO portfolio increased a net $0.1 million from $3.0 million at December 31, 2013 to $3.1 million at December 31, 2014. During 2014 there was $0.9 million in additions to OREO through foreclosure or deed in lieu of foreclosure (“at foreclosure”), $0.7 million in sales of OREO, and $0.2 million in OREO write-downs during the year.
The Bank’s market areas are the Research Triangle (Raleigh and Durham, NC), the Piedmont Triad (Greensboro and Winston-Salem, NC) and Charlotte, NC. The economic trends of the areas in NC served by the Bank are influenced by the significant industries within these regions. The ultimate collectability of the Bank’s loan portfolio is susceptible to changes in the market condition of these geographic regions.
The table below shows the loans outstanding by type and maturity as of December 31, 2014:
Investment Securities. The main objectives of our investment strategy are to provide a source of liquidity while managing our interest rate risk, and to generate an adequate level of interest income without taking undue risks. Our investment policy permits investments in various types of securities, certificates of deposit and federal funds sold in compliance with various restrictions in the policy. As of December 31, 2014 and 2013, all investment securities were classified as available for sale.
Our investment portfolio consists of the following securities:
• U.S. Government agency securities ("U.S. Agencies")
• U.S. Government sponsored residential mortgage backed securities ("MBS"), and
• North Carolina municipal securities ("Municipals")
All securities owned as of December 31, 2014 and are investment grade. The Company evaluates securities for other-than- temporary impairment, at least on a quarterly basis. Consideration is given to the financial condition and near-term prospects of the issuer, the length of time and extent to which the fair value has been less than cost, and our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. As of December 31, 2014 and December 31, 2013, the Company held 59 and 68 investment positions, respectively, with unrealized losses of $345 thousand and $791 thousand, respectively. These investments were generally in U.S. Agencies, MBS and Municipals. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. Management has determined that all declines in the market value of available for sale securities are not other-than- temporary, and will not be likely required to sell.
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The Company owns stock in the FHLB, classified on the Consolidated Balance Sheets as Other invested assets, which is evaluated on a quarterly basis for other-than-temporary impairment. The FHLB has been issuing dividends and repurchasing excess stock on a pro-rata basis for several quarters. The Company believes that the investment in FHLB is not other-than-temporarily-impaired.
Our available for sale securities totaled $69.7 million and $65.9 million as of December 31, 2014 and 2013, respectively. Securities with a fair value of $1.0 million were pledged to the FRB, and an additional $3.8 million and $18.1 million of securities were pledged to public housing authorities in NC and the NC Department of State Treasurer, respectively, as collateral for public deposits at December 31, 2014. Securities with a fair value of $1.0 million were pledged to the FRB and an additional $3.5 million and $15.4 million of securities were pledged to public housing authorities in North Carolina and the NC Department of State Treasurer as collateral for public deposits at December 31, 2013.
The following table displays the amortized cost and fair value for the Company's investment portfolio for the periods ended December 31, 2014, 2013 and 2012:
The following table presents contractual maturities of debt securities with the exception of MBS, which reflects projected cash flow streams, and weighted average yields at December 31, 2014. Actual maturities may differ, because borrowers may have the right to call or prepay MBS, collateralized mortgage obligations, agency securities, and municipal bonds with or without call or prepayment penalties. Certain mortgage-backed securities have adjustable interest rates and will reprice within the various maturity ranges. These repricing schedules are not reflected in the table below. Weighted average yield calculations on investments available for sale do not give effect to changes in the fair value that are reflected as a component of equity.
Government National Mortgage Association with a fair value of $28.5 million and an amortized cost of $28.7 million, Federal Home Loan Mortgage Corporation with a fair value of $23.0 million and an amortized cost of $22.8 million, Fannie Mae with a fair value of $10.2 million and an amortized cost of $10.2 million and Federal Home Loan Bank with a fair value of $6.0 million and an amortized cost of $6.0 million are issuers that exceeds 10% of stockholders’ equity as of December 31, 2014. The U.S. Government guarantees all of our MBS.
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Liquidity and Capital Resources
Liquidity, Interest Rate Sensitivity and Market Risks
The objectives of the Company’s liquidity management policy include providing adequate funds to meet the needs of depositors and borrowers at all times, providing funds to meet the basic needs for on-going operations of the Company, and to meet regulatory requirements. The 31.44% liquidity ratio is the sum of cash, overnight funds, and unpledged, marketable securities divided by the sum of deposits and short-term borrowings (less the full amount of pledged deposits). Management believes that core deposit activity, $6.6 million in available borrowing capacity from the FHLB at December 31, 2014, and Federal Funds Lines of Credit ("Fed Funds lines") of $10.0 million will be adequate to meet the short-term and long-term liquidity needs of the Company. The Company had $0.7 million outstanding from the FHLB as of December 31, 2014. The maximum outstanding balance from the FHLB during the fourth quarter of 2014 was $0.7 million. The Company periodically draws on its Fed Funds lines to test the lines availability.
The Company participates in the CDARS program, which enables depositors to receive FDIC insurance coverage for deposits otherwise exceeding the maximum insurable amount. Through the CDARS program, deposits in excess of the maximum insurable amount are placed with multiple participating financial institutions. All of the Bank’s CDARS deposits are reciprocal, relationship-based deposits. There are several large depositors in the CDARS program, and the largest continuing depositor has annually renewed $20.0 million in deposits for several years, and during 2013 increased its balance to $25.0 million. There is no guarantee, however that this trend will continue. In management’s opinion, the large depositors have stable and long-term relationships with the Bank.
Capital Resources
The Company and the Bank are subject to various regulatory capital requirements administered by their federal and state banking regulators. Failure to satisfy minimum capital requirements may result in certain mandatory and additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s Consolidated Financial Statements. The Board and management have determined that maintaining strong on-Balance Sheet liquidity is prudent in the current weak economy. The Bank is required to obtain the non-objection of its regulators before engaging in any transactions that would materially change the composition of the Bank’s balance sheet. In addition, the Bank MOU requires the Bank maintain a Tier 1 leverage capital ratio of not less than 8.00%, and a total risk based capital ratio of not less than 10.00%.
At December 31, 2014 and 2013 regulatory capital levels of the Company and Bank compared to regulatory standards were:
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DEPOSITS AND DEBT
Deposits. Total deposits decreased from $259.9 million as of December 31, 2013 to $255.9 million as of December 31, 2014. Of these amounts, $48.0 million and $41.8 million were noninterest-bearing and $211.9 million and $214.1 million were interest-bearing deposits at December 31, 2013 and December 31, 2014, respectively. Time deposits of $250,000 and greater, including fully insured CDARS reciprocal deposits, were $14.3 million and $14.7 million as of December 31, 2014 and December 31, 2013, respectively. Time deposits of less than $250,000 were $122.2 million and $129.1 million as of December 31, 2014 and December 31, 2013, respectively.
The following table reflects deposits by type:
The following table reflects the maturities of time deposits of $250,000 or greater as of December 31, 2014, 2013 and 2012:
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Debt. Borrowings as of December 31, 2014 consisted of an FHLB borrowing of $0.7 million with an interest rate of 50 bps that matures in 2020 and capital leases of $0.1 million with a blended interest rate of 1.60%. Please see Note 9 for details of the capital leases. Interest expense on advances from FHLB for the years ended December 31, 2014, 2013 and 2012 was $3 thousand, $4 thousand and $4 thousand, respectively. The maximum FHLB advances outstanding for the years ended December 31, 2014, 2013 and 2012 was $0.7 million. As of December 31, 2014, 2013 and 2012, the Bank had $0.7 million of outstanding advances with the FHLB, and had the availability of borrowing an additional $6.6 million from the FHLB at December 31, 2014. Pursuant to collateral agreements with the FHLB, advances are secured by FHLB stock, and qualifying loans totaling $7.3 million, $8.0 million and $10.2 million as of December 31, 2014, 2013 and 2012, respectively.
OTHER
Capital Resources. Total stockholders' equity as of December 31, 2014 and 2013, including unrealized gains and/or losses net of taxes on available- for-sale securities and deferred pension liability, was $36.6 million and $36.1 million, respectively. The Company declared cash dividends on its common stock of $0.063 per share and $0.125 per share, totaling $0.1 million and $0.3 million for the years ended December 31, 2014 and 2013, respectively. The Company paid preferred stock dividends of $0.2 million in each of the years ended December 31, 2014 and 2013.
Asset/Liability Management. Asset/liability management functions to maximize profitability within established guidelines for interest rate risk, liquidity and capital adequacy. Measurement and monitoring of liquidity, interest rate risk and capital adequacy are performed centrally through the Bank Board's Asset/Liability Committee, and reported under guidelines established by management, the Bank's Board of Directors and regulators (see Item 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank strives to reach its strategic financial objectives through the effective management of market risk. Like many financial institutions, the Bank's most significant market risk exposure is interest rate risk. The Bank's primary goal in managing interest rate risk is to minimize the effect that changes in interest rates have on interest income and expense. This is accomplished through the active management of asset and liability portfolios, which includes the strategic pricing of assets and liabilities to maintain a balanced maturity mix of assets and liabilities. The goal of these activities is the development of maturity and re-pricing opportunities in the Bank's portfolios of assets and liabilities that will produce consistent net interest income during periods of changing interest rates. The Bank's Asset/Liability Committee (“ALCO”), made up of members of management and the Bank Board, monitors loan, investment, and liability portfolios to ensure comprehensive management of interest rate risk. These portfolios are analyzed to monitor fixed- and variable-rate mixes under several interest rate shock scenarios.
The asset/liability management process is intended to accomplish relatively stable net interest margins and liquidity by coordinating the amounts, maturities, or re-pricing opportunities of earning assets, deposits and borrowed funds. The ALCO has the responsibility to determine and achieve appropriate volumes and combinations of earning assets and interest-bearing liabilities, and ensure an adequate level of liquidity and capital, within the context of corporate performance objectives. The ALCO sets policy guidelines and establishes long-term strategies with respect to interest rate risk exposure and liquidity. The ALCO meets regularly to review the Bank's interest rate risk and liquidity positions in relation to present and prospective market and business conditions, and adopts balance sheet management strategies intended to ensure that the potential impact of earnings and liquidity as a result of fluctuations in interest rates is within acceptable guidelines.
As a financial institution, most of the Bank's assets and liabilities are monetary in nature. This differs greatly from most commercial and industrial companies’ balance sheets, which are comprised primarily of fixed assets or inventories. Movements in interest rates and actions the Federal Reserve takes to regulate the availability and cost of credit have a greater effect on a financial institution's profitability than do the effects of higher costs for goods and services. Through its balance sheet management function, which is monitored by the ALCO, the Bank believes it is positioned to respond to changing needs for liquidity, changes in interest rates and inflationary or deflationary trends.
The Bank engages an asset/liability management modeling firm to provide management with additional tools to evaluate interest rate risk and develop asset/liability management strategies. One tool used is a computer simulation model, which projects the Bank's performance under different interest rate scenarios. Analyses are prepared quarterly, which evaluate the Bank's performance in a base strategy that reflects the Bank's current year operating plan. Three interest rate scenarios (flat, rising and declining) are applied to the base strategy to determine the effect of changing interest rates on net interest income. The December 31, 2014 analysis indicates that interest rate risk exposure over a twelve-month time horizon is within the guidelines established by the Bank's Board of Directors.
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The table below measures the impact on net interest income of an immediate 200 bps change in interest rates over the 12 months following the interest rate change. The results indicate an adverse impact on earnings in the event that interest rates decrease 200 bps. However, with interest rates at historic lows, this scenario is considered by management to be improbable. Actual results could differ from these estimates.
The table below presents the Bank's ratio of cumulative rate sensitive assets to rate sensitive liabilities (Gap Ratio) as of December 31, 2014. This ratio measures an entity's balance sheet sensitivity to re-pricing assets and liabilities. A ratio over 1.0 indicates that an entity may be somewhat asset sensitive, and a ratio under 1.0 indicates that an entity may be somewhat liability sensitive.
IndexM&F BANCORP, INC., AND SUBSIDIARY
Item 8.
Item 8. Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
M&F Bancorp, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of M&F Bancorp, Inc. and Subsidiary (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 their internal control over financial reporting. Our audits 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of M&F Bancorp, Inc. and Subsidiary as of December 31, 2014 and 2013, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/Elliott Davis Decosimo, PLLC
Charlotte, North Carolina
March 18, 2015
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See notes to consolidated financial statements.
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See notes to consolidated financial statements.
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See notes to consolidated financial statements
IndexM&F BANCORP, INC., AND SUBSIDIARY
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See notes to consolidated financial statements.
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See notes to consolidated financial statements.
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Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - M&F Bancorp, Inc. (the “Company”) is a bank holding company, and the parent company of Mechanics and Farmers Bank (the “Bank”), a state chartered commercial bank incorporated in North Carolina (“NC”) in 1907, which began operations in 1908. The Bank has seven branches in NC: two in Durham, two in Raleigh, and one each in Charlotte, Greensboro and Winston-Salem. The Company, headquartered in Durham, operates as a single business segment and offers a wide variety of consumer and commercial banking services and products almost exclusively in NC.
Basis of Presentation - The Consolidated Financial Statements include the accounts and transactions of the Company and the Bank, the wholly owned subsidiary. All significant inter-company accounts and transactions have been eliminated in consolidation.
Segment Reporting - Based on an analysis performed by the Company, management has determined that the Company only has one operating segment, which is commercial banking. The chief operating decision-maker uses consolidated results to make operating and strategic decisions, and therefore, the Company is not required to disclose any additional segment information.
Cash and Cash Equivalents - The cash and cash equivalents are comprised of highly liquid short-term investments that are carried at cost, which approximates market value, and cash held at the Federal Reserve Bank of Richmond ("FRB"). The Board of Governors of the Federal Reserve (the “Federal Reserve”) and banking laws in NC require banks to maintain average balances in relation to specific percentages of their customers' deposits as a reserve. As of December 31, 2014 and 2013, the Bank, held deposits as shown:
As of December 31, 2014 and 2013, the Bank held deposits of $0.1 million and $0.4 million, respectively at other financial institutions in excess of the federally insured balances.
Investment Securities - Debt securities that the Company has the positive intent and ability to hold to maturity are classified as “held to maturity securities” and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling in the near term are classified as “trading securities” and reported at fair value, with unrealized gains and losses included in consolidated earnings. Debt securities not classified as either held to maturity securities or trading securities, and equity securities not classified as trading securities, are classified as “available for sale securities” and reported at fair value, with unrealized gains and losses excluded from consolidated earnings and reported as a separate component of consolidated stockholders' equity and as an item of other comprehensive income. The unrealized gain or loss of a security is identified and removed from other comprehensive income when a security is sold, matured, or called. The initial classification of securities is determined at the date of purchase. Gains and losses on sales of investment securities, computed based on specific identification of the adjusted cost of each security, are included in noninterest income at the time of sale. Premiums and discounts on debt securities are recognized in interest income using the interest method over the period to maturity, or when the debt securities are called.
Declines in the fair value of individual held to maturity and available for sale securities below their costs that are other-than-temporary result in write-downs of the individual securities to their respective fair value. There were no credit write-downs in consolidated earnings as realized losses. Transfers of securities between classifications, of which there were none in 2014 or 2013, are accounted for at fair value. No securities were classified as trading or held to maturity as of December 31, 2014 and 2013.
Other Invested Assets - Other invested assets are investments in Federal Home Loan Bank of Atlanta (the “FHLB”) stock carried at historical cost, as adjusted for any other-than-temporary impairment loss. As of December 31, 2014 and 2013, the Company's investments in FHLB stock were $0.3 million and $0.4 million, respectively.
Loans - Loans are stated at the amount of unpaid principal, net of deferred loan origination fees and costs. Loans (net) are reduced by the ALLL. Nonrefundable loan fees, net of direct costs, associated with the origination or acquisition of loans are deferred and recognized as an adjustment of the loan yield over the life of the loan using the effective interest method. Interest on loans is accrued on the daily balances of unpaid principal outstanding. Interest income is accrued and credited to income only if deemed collectible. Other loan fees and charges, representing service costs for the prepayment of loans, for delinquent payments, or for miscellaneous loan services, are recorded in income when collected.
Non-Performing Loans and Leases - Generally, all classes of loans and leases are placed on non-accrual status upon becoming contractually past due 90 days or more as to principal or interest (unless loans are adequately secured by collateral, are in the process of collection, and are reasonably expected to result in repayment), or where substantial doubt about full repayment of principal or interest is evident.
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
When a loan or lease is placed on non-accrual status, regardless of class, the accrued and unpaid interest receivable is reversed and the loan or lease is accounted for on the cash or cost recovery method until qualifying for return to accrual status. All payments received on non-accrual loans and leases are applied against the principal balance of the loan or lease. Loans may be returned to accrual status when all principal and interest amounts contractually due (including any arrearages) are reasonably assured of repayment within a reasonable period, the borrower has demonstrated payment performance for a minimum of six months in accordance with the original or revised contractual terms of the loan, and when doubt about repayment is resolved.
Generally, for all classes of loans and leases, a charge-off is recorded when it is probable that a loss has been incurred and when it is possible to determine a reasonable estimate of the loss. For all classes of commercial loans and leases, a charge-off is determined on a judgmental basis after due consideration of the debtor's prospects for repayment and the fair value of collateral. For closed-end consumer loans, the entire outstanding balance of the loan is charged-off during the month that the loan becomes 120 days past due as to principal or interest. Consumer loans with non- real estate collateral are written down to the value of the collateral, less estimated costs to sell, if repossession of collateral is assured and in process. For residential mortgage and home equity loan classes, a partial charge-off is recorded at 120 days past due as to principal or interest for the amount that the loan balance exceeds the fair value of the collateral less estimated costs to sell.
Impaired Loans - A loan is considered impaired when, based on current information and events, it is probable that the Company will not be able to collect all amounts due from the borrower in accordance with the original contractual terms of the loan, including scheduled interest payments. Impaired loans include all classes of commercial non-accruing loans and Troubled Debt Restructurings ("TDRs").
For all classes of commercial loans, a quarterly evaluation of specific individual commercial borrowers with identified weaknesses is performed to identify impaired loans. The identification of specific borrowers for review is based on a review of non-accrual loans as well as those loans specifically identified by management as exhibiting above average levels of risk.
When a loan has been identified as being impaired, the amount of impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral-dependent. If the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest, net of deferred loan fees or costs and unamortized premiums or discounts), impairment is recognized by creating or adjusting an existing allocation of the Allowance, or by recording a partial charge-off of the loan to its estimated fair value. Interest payments made on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest income may be accrued or recognized on a cash basis.
Loans Modified as a TDR - Loans are considered to have been modified as a TDR when the Company makes certain concessions to a borrower experiencing financial difficulty. Concessions to the borrower at modification may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a non-accrual loan that has been modified in a TDR remains on non-accrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. Since the economic crisis began in 2008, management has elected to offer concessions to borrowers with identified financial weaknesses, even if the borrowers have continued making scheduled payments, working with the borrowers to enable them to continue meeting their obligations to repay the debt to the Company.
Income Recognition on Impaired and Nonaccrual Loans - Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity, or payment of principal or interest for a period of more than 90 days, unless such loans are well secured and in the process of collection. If a loan or a portion of a loan is classified as doubtful or is partially charged off, the loan is generally classified as nonaccrual. Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual if full repayment of principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within a reasonable period of time, and the borrower has demonstrated payment performance for a minimum of six months in accordance with the contractual terms involving payments of cash or cash equivalents.
In the case where a nonaccrual loan had been partially charged-off, recognition of interest on a cash basis is limited to that which would have been recognized on the remaining loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charged off balances have been fully recovered.
Reserve for Credit Losses - The Company's reserve for credit losses is comprised of two components, the allowance for loan losses and the reserve for unfunded commitments (the "Unfunded Reserve").
Allowances for Loan Losses - The ALLL is a valuation allowance, which is established through a provision for loan losses charged to expense. When management believes that the collectability of the principal is unlikely, loans are charged against the ALLL. Subsequent recoveries, if any, are credited to the ALLL.
The ALLL is management's estimate of probable losses that are inherent in the loan portfolio. The ALLL is based on regular quarterly assessments. The methodologies for measuring the appropriate level of the ALLL include the combination of a quantitative historical loss history by loan type and a qualitative analysis for loans not classified as impaired or TDRs, and a specific allowance method for impaired and TDR loans. The qualitative analysis is patterned after the guidelines provided under the Securities Exchange Commission (“SEC”) Staff Accounting Bulletin 102 and the Federal Financial Institutions Examination Council (“FFIEC”) Interagency Policy Statement on the Allowance for Loan and Lease Losses and include the following:
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
•Changes in lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices;
•Changes in national economic and business conditions and developments and the effect of unemployment on African Americans, who are the majority of our customers;
•Changes in the nature and volume of the loan portfolio;
•Changes in the experience, ability, and depth of lending management and staff;
•Changes in trends of the volume and severity of past due and classified loans; and changes in trends in the volume of non-accrual loans, troubled debt restructurings and classified loans;
•Changes in the quality of the loan review system and the degree of oversight by the Bank's Board of Directors;
•The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
•The effect of external factors such as competition and legal and regulatory requirements.
Management has developed, from historical loan and economic information, quantitative drivers for certain qualitative factors. Management has identified which factors, by nature, are subjective, such as lending policies, competition, and regulatory requirements. The quantitative drivers, to which different weights are assigned based on management's judgment, are reviewed and updated quarterly. The quantitative loss history was based on a four 1-year rolling look back at December 31, 2014, and previously on eight-quarter look back, history of losses incurred by different loan types within the loan portfolio. The change in methodology resulted in a $375 thousand increase in the ALLL at December 31, 2014.
A specific ALLL is established for loans identified as impaired or TDRs, based on significant conditions or circumstances related to the specific credits. The specific allowance amounts are determined by a method prescribed by Accounting Standards Codification (“ASC”) 310, Receivables. Loans identified as impaired are accounted for in accordance with one of three valuations: (i) the present value of future cash flows discounted at the loan's effective interest rate; (ii) the loan's observable market price, or (iii) the fair value of the collateral, if the loan is collateral dependent, less estimated liquidation costs. A loan is considered impaired when it is probable that not all amounts due (principal and interest) will be collectible according to the original 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. The significance of payment delays and payment shortfalls are considered on a loan-by-loan basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
For commercial business, faith-based non-profit, real estate and certain consumer loans, the measurement of loan impairment is based on the present value of the expected future cash flows, discounted at the loan's effective interest rate, or on the fair value of the loan's collateral if the loan is collateral dependent. Most consumer loans are smaller balance and homogeneous, and are evaluated for impairment on a collective basis, applying the quantitative loss history and the qualitative factors. Impairment losses are included in the ALLL through a charge to the provision for loan losses.
The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company's risk rating system was developed to aid in the risk management process by grouping credits with similar risk profiles into pass, internal watch, special mention, or criticized categories. Credit risk ratings are applied individually to all classes of loans and leases. Internal credit reviews and external contracted credit review examinations are used to determine and validate loan risk grades. The credit review system takes into consideration factors such as: borrower's background and experience; historical and current financial condition; credit history and payment performance; economic conditions and their impact on various industries; type, market value and volatility of the market value of collateral; lien position; and the financial strength of guarantors.
The process of assessing the adequacy of the ALLL is necessarily subjective. Further, and particularly in periods of economic downturns, it is reasonably possible that future credit losses may exceed historical loss levels and may also exceed management's current estimates of incurred credit losses inherent within the loan portfolio. As such, there can be no assurance that future loan charge-offs will not exceed management's current estimate of what constitutes a reasonable ALLL.
The Company and the Bank are subject to periodic examination by their federal and state regulators, and may be required by such regulators to recognize additions to the allowance for loan losses based on their assessment of credit information available to them at the time of their examinations.
Reserve for Unfunded Commitments - The Unfunded Reserve is a component of other liabilities and represents the estimate for probable credit losses inherent in unfunded commitments to extend credit. Unfunded commitments to extend credit include unfunded loans with available balances, new commitments to lend that are not yet funded, and standby and commercial letters of credit. The process used to determine the Unfunded Reserve is consistent with the process for determining the ALLL, as adjusted for estimated funding probabilities and historical four 1-year rolling look back quantitative loan loss factor for 2014 and an eight-quarter rolling look-back quantitative loan loss factor for 2013. The look back period was extended during the fourth quarter of 2014 to capture a period of increased losses. The level of the Unfunded Reserve is adjusted by recording an expense or recovery in other noninterest expense. The balances of $34 thousand and $13 thousand for December 31, 2014 and 2013, respectively, were reflected in other liabilities on the Consolidated Balance Sheet.
Bank Premises and Equipment, Net - 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 30-50 years for premises; generally 6-10 years for furniture and equipment, and 3-5 years for information technology equipment and software. 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 as incurred. The Bank 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. Upon disposition, the asset and related accumulated depreciation and/or amortization are relieved, and any gains or losses are reflected in operations.
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
Cash Surrender Value of Life Insurance - The Bank maintains life insurance on certain current and former officers and directors, of which the Bank is owner and beneficiary. The cash surrender value of the policies at December 31, 2014 and 2013 was $7.7 million and $6.2 million, respectively. Income from the policies and changes in the net cash surrender value, excluding additional purchases or withdrawals, are recorded in noninterest income.
OREO - OREO, which represents real estate acquired through foreclosure, or the transfer of the deed in lieu of foreclosure, in satisfaction of commercial and consumer real estate collateralized loans, is initially recorded at fair value less estimated holding and selling costs of the real estate. Loan balances in excess of the fair value of the real estate acquired at the date of the foreclosure are charged to the ALLL. Any subsequent operating expenses or income, reduction in estimated fair values, and gains or losses on disposition of such properties are charged or credited to non-interest income or non-interest expense. Valuations are periodically performed by management, and any subsequent write-downs due to the carrying value of a property exceeding its estimated fair value less estimated costs to sell are charged against other non-interest expense. As of December 31, 2014 and 2013, there was $3.1 million and $3.0 million, respectively, of foreclosed properties included in OREO on the Consolidated Balance Sheets. OREO excludes bank-owned property held for sale at December 31, 2014 and 2013.
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 earnings per share and the weighted average number of shares of common stock outstanding plus dilutive common stock equivalents, such as stock options, for the purpose of computing diluted earnings per share. As of December 31, 2014 and 2013, there were no stock options outstanding.
Advertising Costs - Advertising is expensed as incurred.
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 tax asset and liability balances reflect temporary differences at the tax rate expected to be in effect when taxes will become payable or receivable. Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the Consolidated Financial Statements that will result in taxable or deductible amounts in future years. The effect of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded for deferred tax assets if the Company determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company regularly reviews its deferred tax assets for recoverability considering historical profitability, projected future taxable income, and the expected timing of the reversals of existing temporary differences and tax planning strategies.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that ultimately would be sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more- likely-than not that the position will be sustained upon examination, including the resolution of appeals or litigation process, if any. The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions. Tax positions that meet the more-likely-than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying Consolidated Balance Sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits are recognized in income tax expense on the income statement. It is the Company's policy to recognize interest and penalties related to unrecognized tax liabilities within income tax expense in the statements of income. The Company does not have an accrual for uncertain tax positions as of December 31, 2014 and 2013, as deductions taken and benefits accrued are based on widely understood administrative practices and procedures and are based on tax law. The Company's federal and state income tax returns are subject to review and examination by government authorities.
Comprehensive Income (Loss) - Comprehensive income (loss) is the change in the Company's equity during the period from transactions and other events and circumstances from non-owner sources. Total comprehensive income (loss) consists of net income and other comprehensive (loss) income. The Company's other comprehensive (loss) income and accumulated other comprehensive loss are comprised of net unrealized gains and losses on certain investments in debt securities and post-retirement plans. Information concerning the Company’s other comprehensive (loss) income and accumulated comprehensive loss as of and for the years ended December 31, 2014 and 2013 are presented in the Consolidated Statements of Comprehensive Income.
Fair Values of Financial Instruments - Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 17. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Generally accepted accounting principles (“GAAP”) establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets (observable inputs) and the lowest priority to the Company's assumptions (unobservable inputs). GAAP requires fair value measurements to be separately disclosed by level within the fair value hierarchy. For assets and liabilities recorded at fair value, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements.
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available-for-sale investment securities are recorded at fair value on a recurring basis. Additionally, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets.
Under GAAP, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The Company did not have any changes in leveling inputs in 2013.
These levels are:
Level 1 - Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange.
Level 2 - Valuations are obtained from readily available pricing sources via independent providers for market transactions involving similar assets or liabilities. The Company’s principal market for these securities is the secondary institutional markets and valuations are based on observable market data in those markets. Level 2 securities include U. S. Government agency securities (“U.S. Agencies”), U.S. Government sponsored residential mortgage backed securities (“MBS”) and State and Municipal Bonds (“Municipals”).
Level 3 - Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets.
Use of Estimates - The preparation of financial statements in conformity with GAAP 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 susceptible to change in the near term relate to the determination of the ALLL and the provision for loan losses, the evaluation of other-than-temporary impairment of investment securities, accounting for deferred tax assets and related valuation allowances, the determination of the fair values of investment securities and other accounting for incentive compensation, and post-retirement benefits. Actual results could differ from those estimates.
Significant Group Concentrations - Most of the Bank's activities are with customers located within the state of NC. The Bank does have concentrations with respect to loans to and deposits from faith-based non-profit organizations as outlined in Notes 6 and 8 to the Consolidated Financial Statements.
Mortgage Servicing Rights - Mortgage servicing rights are recognized as assets when mortgage loans are sold and the rights to service those loans are retained. Mortgage servicing rights are initially recorded at fair value by using a discounted cash flow model to calculate the present value of estimated future net servicing income.
The Company's mortgage servicing rights accounted for under the amortization method are initially recorded at fair value. The Company obtains an annual appraisal of its mortgage servicing rights and adjusts the carrying value accordingly. During the year, the carrying value is amortized based on the year-end appraisal to total serviced mortgage balances outstanding as of quarter end.
New Accounting Pronouncements -
In January 2014, the FASB amended the “Receivables-Troubled Debt Restructurings by Creditors” subtopic of the Codification to address the reclassification of consumer mortgage loans collateralized by residential real estate upon foreclosure. The amendments clarify the criteria for determining that an in substance repossession or foreclosure has occurred, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The amendments also outline interim and annual disclosure requirements. The amendments are effective for the Company for interim and annual reporting periods beginning after December 15, 2014. Companies are allowed to use either a modified retrospective transition method or a prospective transition method when adopting this update. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2016. The Company will apply the guidance using a modified retrospective approach. The Company does not expect this guidance to have a material effect on its financial statements.
In August 2014, the FASB issued guidance that is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. In connection with preparing financial statements, management will need to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the organization’s ability to continue as a going concern within one year after the date that the financial statements are issued. The amendments will be effective for the Company for annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company does not expect these amendments to have a material effect on its financial statements.
In January 2015, the FASB issued guidance that eliminated the concept of extraordinary items from U.S. GAAP. Existing U.S. GAAP required that an entity separately classify, present, and disclose extraordinary events and transactions. The amendments will eliminate the requirements for reporting entities to consider whether an underlying event or transaction is extraordinary, however, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The amendments may be applied either prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect these amendments to have a material effect on its financial statements.
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
2. INVESTMENT SECURITIES
The main objectives of our investment strategy are to provide a source of liquidity while managing our interest rate risk, and to generate an adequate level of interest income without taking undue risks. Our investment policy permits investments in various types of securities, certificates of deposit and federal funds sold in compliance with various restrictions in the policy. As of December 31, 2014 and 2013 all investment securities were classified as available for sale.
Our available-for-sale securities totaled $69.7 million and $65.9 million as of December 31, 2014 and 2013, respectively. In the normal course of business, the Company pledges securities to the FRB and to public housing authorities in NC and the NC Department of State Treasurer (“State Treasurer”) as collateral for public deposits. The following table shows the amounts pledged as well as a letter of credit with the FHLB utilized in lieu of pledged investments for the public housing authorities and State Treasurer:
Our investment portfolio consists of the following securities:
•U.S. Agencies
•MBS, and
•Municipals
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
The amortized cost, gross unrealized gains and losses and fair values of investment securities at December 31, 2014 and 2013 were:
Sales and calls of securities available for sale for the year ended December 31, 2014 and December 31, 2013 resulted in aggregate gross realized gains of $14 thousand and none, respectively, and no realized losses during either period.
The amortized cost and estimated market values of securities as of December 31, 2014 and 2013 by contractual maturities with the exception of MBS, which reflects projected cash flow streams, are shown below. Actual maturities may differ, because borrowers may have the right to call or prepay MBS, collateralized mortgage obligations, agency securities, and municipal bonds with or without call or prepayment penalties. Certain mortgage-backed securities have adjustable interest rates and will reprice within the various maturity ranges. These repricing schedules are not reflected in the table below.
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
As of December 31, 2014 and December 31, 2013, the fair value of securities with gross unrealized losses by length of time that the individual securities have been in an unrealized loss position is as follows:
All securities owned as of December 31, 2013 and December 31, 2012 were investment grade. The Company evaluates securities for other-than- temporary impairment, at least on a quarterly basis. Consideration is given to the financial condition and near-term prospects of the issuer, the length of time and extent to which the fair value has been less than cost, and our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. As of December 31, 2014 and 2013, the Company held 59 and 68 investment positions, respectively, with unrealized losses of $345 thousand and $791 thousand, respectively. These investments were in U.S. agencies, MBS and municipals. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. Management has determined that all declines in the market value of available for sale securities are not other-than-temporary, and will not be likely required to sell.
3. FHLB STOCK
To be a member of the FHLB System, the Bank is required to maintain an investment in capital stock of the FHLB in an amount equal to 0.09% during 2014 and 0.12% during 2013 of its total assets as of December 31 of the prior year (up to a maximum of $15.0 million and $20.0 million, respectively), plus 4.5% of its outstanding FHLB advances. The carrying value of FHLB stock, which is included in other invested assets, as of December 31, 2014 and 2013 was $0.3 million and $0.4 million, respectively. No ready market exists for the FHLB stock, and it has no quoted market value, however, management believes that the cost approximates the market value as of December 31, 2014 and 2013. Management has reviewed its investment in FHLB stock for impairment and does not believe it is impaired as of December 31, 2014 or 2013. The FHLB of Atlanta in which the Company owns stock has been profitable in each of the years ended December 31, 2014 and 2013.
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
4. RECONCILIATIONS OF BASIC AND DILUTED EARNINGS PER SHARE ("EPS")
Basic EPS is computed by dividing net income after preferred stock dividends by the weighted average number shares of common stock outstanding for the period. Basic EPS excludes the dilutive effect that could occur if any options or warrants to purchase shares of common stock were exercised. Diluted EPS is computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding for the period plus the number of additional shares of common stock that would have been outstanding if the potentially dilutive common shares had been issued. There are no stock options or warrants outstanding for any of the periods being reported.
5. ACCUMULATED OTHER COMPREHENSIVE INCOME
Comprehensive income includes net income and all other changes to the Company's equity, with the exception of transactions with stockholders. The Company's other comprehensive income and accumulated other comprehensive income are comprised of unrealized gains and losses on certain investments in debt securities and defined benefit plan adjustments.
CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT
For The Years Ended December 31, 2014 and 2013
(Dollars in thousands)
All amounts are net of tax.
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
RECLASSIFICATION ADJUSTMENTS FROM ACCUMULATED OTHER COMPREHENSIVE LOSS
6. LOANS AND ALLL
The ALLL is management's estimate of losses inherent in the loan portfolio. The provision for loan losses is the amount charged against earnings to establish an adequate ALLL. Loan losses and recoveries are charged to or credited to the ALLL, rather than reported as a direct expense or recovery. The loan portfolio is segmented into three parts for the ALLL calculation: impaired commercial loans and smaller balance homogenous loans in the process of foreclosure, TDRs (collectively referred to as "impaired loans"), and all other loans.
For all classes of commercial loans, a quarterly evaluation of specific individual borrowers is performed to identify impaired loans. The identification of specific borrowers for review is based on a review of non-accrual loans as well as those loans specifically identified by management as exhibiting above average levels of risk through the loan classification process. The ALLL attributed to impaired loans and TDRs considers all available evidence based on significant conditions or circumstances related to the specific credits. The specific allowance amounts are determined by a method prescribed by ASC 310. The loans identified as impaired and TDRs are accounted for in accordance with one of three valuations: (i) the present value of future cash flows discounted at the loan’s effective interest rate; (ii) the loan’s observable market price, or (iii) the fair value of the collateral, if the loan is collateral dependent, less estimated liquidation costs. Factors considered by management in determining impairment include payment status, collateral value, alternate use of special purpose real estate which could adversely impact resale, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The significance of payment delays and payment shortfalls are considered on a loan-by-loan basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Interest payments made on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest income may be accrued or recognized on a cash basis.
Most consumer loans are evaluated for impairment on a collective basis, because these loans are for smaller balances and are homogeneous. Any loans, including commercial loans, not specifically identified as impaired or TDRs, are collectively evaluated and segmented by loan type, applying two factors: the quantitative loss history by loan type for the previous 4 1-year periods at December 31, 2014, previously eight quarters, compared to average loans outstanding for the same period (the "quantitative factor"), and a qualitative factor that is comprised of quantitatively-driven calculations based on historical data, and subjective factors (the "qualitative factors"). The change in methodology resulted in a $375 thousand increase in the ALLL at December 31, 2014. The quantitative portion of the ALLL is adjusted for qualitative factors to account for model imprecision and to incorporate the range of probable outcomes inherent in the estimates used for the allowance.
The quantitative factor by loan type is applied against the unimpaired loan balances and smaller-balance homogenous impaired loans not in the process of foreclosure for which there is no specific reserve to determine the quantitative reserve. The qualitative factors, including (i) policy underwriting, charge-off and collection, (ii) national and local economic conditions, (iii) nature and volume of the portfolio, (iv) experience, ability, and depth of lending team, (v) trends of past due, classified loans, and restructurings, (vi) quality of loan review and board oversight, (vii) existence, levels, and effect of loan concentrations and (viii) effects of external factors such as competition and regulatory oversight, are adjusted quarterly based on historical information for any quantifiable factors and qualitative judgments for subjective factors (those considered subjective are policy, underwriting, experience, ability and depth of lending team, quality of loan review and board oversight, and effects of external factors), and applied in total to each loan balance by loan type. The Company continues to enhance its modeling of the portfolio and underlying risk factors through quarterly analytical reviews with the goal of ensuring it captures all pertinent factors contributing to risk of loss inherent in the loan portfolio. Under ASC 310, the non-homogenous impaired loans, homogenous small balance real estate secured loans in process of foreclosure for which the value is less than the loan principal balance, and TDRs, are reviewed individually for impairment.
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
The process of assessing the adequacy of the ALLL is inherently subjective. Further, and particularly in terms of economic downturns, it is reasonably possible that future credit losses may exceed historical loss levels and may also exceed management’s current estimates of incurred credit losses inherent within the loan portfolio. As such, there can be no assurance that future loan charge-offs will not exceed management’s current estimate of what constitutes a reasonable allowance for loan losses.
The Company and the Bank are subject to periodic examination by their federal and state banking regulators, and may be required by their regulators to recognize additions to the allowance for loan losses based on their assessment of credit information available to them at the time of their examinations.
As of December 31, 2014 and December 31, 2013, the ALLL was $3.4 million $3.5 million, which represented approximately 1.96% and 1.84% of loans outstanding, net of unearned income and deferred costs ("net loans outstanding"), on those respective dates. Loans decreased $14.4 million from December 31, 2013 to December 31, 2014, impaired loans decreased $343 thousand over the same period, and the reserve allocated for impaired loans individually evaluated decreased by $730 thousand over the same period. The large decrease in reserve for impaired loans was primarily attributable to one real estate secured loan. As of December 31, 2014, the total loans collectively evaluated totaled $144.8 million compared to $158.8 million at December 31, 2013. The corresponding allowance for loans collectively reviewed for impairment totaled $3.2 million and $2.5 million at December 31, 2014 and December 31, 2013, respectively. Net charge-offs totaled $103 thousand and $335 thousand for the years ended December 31, 2013 and December 31, 2012, respectively.
Of the non-accruing loans totaling $5.9 million at December 31, 2014, 2.25% are secured by faith-based non-profit real estate, 97.75% are secured by real estate excluding faith-based non-profit. Management believes loans secured by real estate lessen the risk of loss. TDRs in compliance with the modified terms totaled $20.9 million or 83.02% at December 31, 2014. GAAP does not provide specific guidance on when a loan may be returned to accrual status. Federal banking regulators have provided guidance that interest on impaired loans, including TDRs, should only be recorded when there has been a sustained period of repayment performance, the loan is well secured, and collection under any revised term is assessed as probable. The Company evaluates impaired and TDR performance under the banking guidelines and returns loans to accruing after a sustained period of repayment performance.
Loans are generally placed on non-accrual status when the scheduled payments reach 90 days past due. Loans are charged-off, with Board approval, when the Chief Credit Officer and his staff determine that all reasonable means of collection of the outstanding balances, except foreclosure, have been exhausted. The Company continues its collection efforts subsequent to charge-off, which historically has resulted in some recoveries each year.
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
The composition of the loan portfolio, net of deferred fees and costs, by loan classification as of December 31, 2014 and 2013:
The Bank has a concentration of loans to faith-based non-profit organizations, in which the Bank has specialized lending experience. At December 31, 2014, the percentage of loans in this segment, which included construction, owner occupied real estate secured, and other loans, comprised 54.47% of the total loan portfolio. The reserve allocated for these loans is 35.87% of the total ALLL. Historically the Bank has experienced low levels of loan losses in this segment; however, repayment of these loans is generally dependent on voluntary contributions, some of which have been adversely affected by the economic downturn.
Management has identified its loan-related disclosure classifications in its financial reports to present portfolio segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its ALLL. The following tables present the reported investment in loans, net of deferred fees and costs, by portfolio segment and based on impairment method as of December 31, 2014 and December 31, 2013, respectively:
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
The following table presents the ALLL by loan type and as a percentage of loans outstanding:
The following table presents loans by impairment analysis and related ALLL:
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
The following tables show impaired loans with and without valuation allowances as of December 31, 2014 and 2013:
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
The recorded investment in loan balance is net of deferred fees and costs, and partial charge-offs, where applicable.
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Bank modifies certain loans and provides a concession such as a reduced rate, extended terms, or reduction of principal and/or interest, in a TDR where the borrowers are experiencing financial difficulties. These concessions typically result from loss mitigation recommendations developed by the Bank's problem loan team. Concessions could include reductions in below market interest rates, payment extensions, forbearance or other actions. TDRs are generally classified as nonperforming at the time of restructuring and may only be returned to performing status after considering the borrower's sustained repayment performance for a reasonable period, generally six months.
When loans are modified as TDRs, the Bank evaluates each loan for any possible impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the repayment source is expected to be the liquidation of underlying collateral, in which cases the Bank uses the fair value of the collateral, less selling costs, instead of discounted cash flows. If the Bank determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance allocation or a charge-off to the allowance.
There were no new TDR modifications during 2014. The Bank completed four TDR modifications within the year ended December 31, 2013. All of the TDRs were secured by real estate. Of the four loans restructured during the year ended December 31, 2013, one loan totaling $2.6 million was not in compliance with the restructured terms. Based upon financial analysis and the fair value of collateral, the Bank allocated $0.9 million of specific reserves for TDRs.
The followings tables present details of TDR loans that were restructured during the year ended December 31, 2013:
The following table presents loans modified as TDRs with a payment default occurring within 12 months of the restructure date, during the year ended December 31, 2013:
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
The following tables present the recorded investment in non-accrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2014 and 2013:
Non-accrual loans and loans past due over 90 days still on accrual include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified impaired loans. Loans from which principal or interest is in default for 90 days or more are classified as a non-accrual unless they are well secured and in process of collection. Loans past due over 90 days still accruing were matured loans that were well secured and in process of collection. Borrowers have continued to make payments on these loans while administrative and legal due processes are proceeding which will enable the bank to extend or modify maturity dates.
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
Unrecognized income on non-accrual loans as of December 31, 2014 and December 31, 2013 was $0.3 million and $0.5 million, respectively, representing a decrease of $0.2 million in the most recent year.
The following tables present loans not past due, and the aging of past due loans as of December 31, 2014 and 2013 by class of loans:
Non-accrual loans decreased $0.8 million as of December 31, 2014 compared to December 31, 2013, while total loans past due increased by $1.9 million over the same period. Not reflected in the table above are non-accrual loans past due less than 30 days. As shown in the following table at December 31, 2014, the Company had $0.7 million in non-accrual loans that are less than 30 days past due.
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
The following table displays all non-accrual loans and loans 90 or more days past due and still on accrual for the period ended December 31, 2014.
The following table displays all non-accrual loans and loans 90 or more days past due and still on accrual for the period ended December 31, 2013.
The Company experienced $0.1 million in net loan charge-offs for the year ended December 31, 2014 compared to $0.3 million in net charge-offs for the year ended December 31, 2013. Net charge-offs totaled 0.06% and 0.19% of average loans outstanding for the years ended December 31, 2014 and 2013, respectively.
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans for reserves according to the loan's classification as to credit risk. This analysis includes homogenous loans, such as commercial, commercial real estate and faith based non-profit entities, and mortgage loans in process of foreclosure for which the loan to value does not support repayment in full. This analysis is performed on at least a quarterly basis. The Company uses the following definitions for risk ratings:
•Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. These loans exhibit a moderate likelihood of some loss related to those loans and leases that are considered special mention.
•Substandard. Loans classified as substandard are inadequately protected by the current sound financial repayment capacity and service coverage of the debtor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that may jeopardize the liquidation of or repayment according to the original terms of the debt. In addition to commercial and faith-based non-profit loans with identified weaknesses, substandard loans include loans within the mortgage and consumer portfolio segments that are past due 90 days or more as to principal or interest if the loan to value does not support full repayment. Substandard loans are evaluated for impairment on an individual loan basis unless the substandard loan is a smaller balance homogenous loan that is not a TDR and is not in the process of foreclosure. These loan exhibits a distinct possibility that the company will sustain some loss if the deficiencies related to the loans is not corrected in a timely manner.
•Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added character that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
•Pass. Loans are classified as pass in all classes within the commercial, faith-based non-profit, mortgage, consumer, and other portfolio segments that are not identified as special mention, substandard, or doubtful, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. These loans exhibit a low likelihood of loss related to loans that are considered pass.
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
As of December 31, 2014, and based on the most recent analysis performed, the risk category of loans by class of loans was as follows:
As of December 31, 2013, the risk category of loans by class of loans was as follows:
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
7. BANK PREMISES AND EQUIPMENT
The following is a summary of bank premises and equipment, net as of December 31, 2014 and 2013:
Total depreciation expense was $0.4 and $0.3 million for the years ended December 31, 2014 and 2013, respectively.
8. DEPOSITS
Deposits are the Bank’s primary source of funds for making loans and purchasing investments. The Bank offers a variety of deposit account products to commercial and consumer customers. The total deposits that were re-classified to loans due to overdrafts were $46 thousand and $204 thousand at December 31, 2014 and 2013, respectively.
The following shows the maturity schedule of all time deposits:
Principal maturities of time deposits of $250,000 or more as of December 31, 2014 were as follows:
For the years ended December 31, 2014 and 2013, the Bank had $65 thousand and $69 thousand, respectively, in interest expense for time deposits greater than $250,000.
In the normal course of business, certain directors and executives of the Company and the Bank, including their immediate families and companies in which they have an interest, are deposit customers. These relationships had aggregate deposits of $1.2 million and $1.4 million as of December 31, 2014 and 2013, respectively. The Bank had three deposit relationships for the year ended December 31, 2014 and 2013 with individual balances in excess of five percent of total deposits totaling $55.0 million.
9. LEASES
The Bank leases premises and equipment under various operating lease agreements that provide for the payment of property taxes, insurance and maintenance costs. The following are future minimum capital lease payments as required under the agreements as of December 31, 2014:
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
The capital leases had an average interest rate of 1.60% and an expense of $2 thousand for the year ended December 31, 2014.
The following are future minimum operating lease payments as required under the agreements:
Rent expense for all operating leases amounted to approximately $0.1 million in 2014 and 2013.
The Bank leases out office space in some of its vacant office space in its headquarters and branches. The following are the minimum rentals to be received under related lease agreements:
Rental income for the years ended December 31, 2014 and 2013 was $0.2 and $0.3 million, respectively.
10. BORROWINGS
Borrowings as of December 31, 2014 consisted of an FHLB borrowing of $0.7 million with an interest rate of 0.50% that matures in 2020 and capital leases of $0.1 million with an average interest rate of 1.60%. Please see Note 9 for details on leases. Interest expense on advances from FHLB for the years ended December 31, 2014 and December 31, 2013 was $3 thousand and $4 thousand, respectively. The maximum FHLB advances outstanding for the year ended December 31, 2014 were $0.7 million. As of December 31, 2014, the Bank had $0.7 million of outstanding advances with the FHLB, and had the borrowing availability of an additional $6.6 million from the FHLB. Pursuant to collateral agreements with the FHLB, advances are secured by FHLB stock, and qualifying loans totaling $7.3 million and $8.0 million as of December 31, 2014 and 2013, respectively.
The Company has federal funds lines of credit with three correspondent banks totaling $10.0 million. The Company periodically tests its federal funds lines of credit with its correspondent banks. These lines were tested quarterly during the year ended December 31, 2014.
The following is the outstanding principal maturities and interest rate of the Company’s FHLB advances as of December 31, 2014:
11. INCOME TAXES
The components of the income tax expense (benefit) for the years ended December 31, 2014 and 2013 were as follows:
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
A reconciliation of reported income tax expense for the years ended December 31, 2014 and 2013 to the amount of tax expense computed by multiplying income before income taxes by the statutory federal income tax rate follows:
The tax effect of the cumulative temporary differences and carry forwards that gave rise to the deferred tax assets and liabilities as of December 31, 2014 and December 31, 2013 within the Consolidated Balance Sheets were as follows:
The Company has federal net operating loss carry-forwards of approximately $0.4 million at December 31, 2014, which can be used to offset future taxable income, subject to certain Section 382 limitations. The federal loss carry-forwards start to expire in 2027. The Company’s state net operating losses contain amounts, which the Company determined do not meet the “more likely than not” threshold for recognition. Accordingly, a valuation allowance has been established for the state loss carry-forward amounts. The last tax year audited by the Internal Revenue Service was 2006; tax years 2011 - 2013 are open for audit under the statute of limitations.
12. EMPLOYEE BENEFIT PLANS
The Bank sponsors a noncontributory defined benefit cash balance pension plan (the “Cash Balance Plan”), covering all employees who qualify under length of service and other requirements. Under the Cash Balance Plan, retirement benefits are based on years of service and average earnings. The Bank’s funding policy is to contribute amounts to the Cash Balance Plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), plus such additional amounts as the Bank may determine to be appropriate. The contributions to the Cash Balance Plan paid during the years ended December 31, 2014 and 2013 totaled $0.4 million and $0.3 million, respectively. The Cash Balance Plan was not fully funded as of December 31, 2014 and December 31, 2013. The measurement date for the Cash Balance Plan is December 31 and prior service costs and benefits are amortized on a straight-line basis over the average remaining service period of active participants.
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
It is expected that the Company will contribute $0.4 million to the Cash Balance Plan during 2015.
The following table shows the type of assets held in the Cash Balance Plan:
The Bank sponsors a nonqualified Supplemental Executive Retirement Plan (“SERP”). The SERP, which is unfunded, provides certain individuals with pension benefits, outside the Bank’s noncontributory defined-benefit Cash Balance Plan, based on average earnings, years of service and age at retirement. Participation in the SERP is at the discretion of the Bank’s Board of Directors. The Company and Bank purchased bank owned life insurance (“BOLI”) in 2002 in the aggregate amount of approximately $12.9 million face value covering all the participants in the SERP. Increases in the cash surrender value of BOLI policies totaled $1.5 million for the year ended December 31, 2014, which was primarily attributable to an additional $1.5 million investment in BOLI for certain executive officers, and $0.2 million for 2013. The cash surrender value of the BOLI owned by the Bank was $7.7 million and $6.2 million as of December 31, 2014 and 2013, respectively. The Bank has the ability and the intent to keep this life insurance in force indefinitely. The insurance proceeds may be used, at the sole discretion of the Bank, to fund the benefits payable under the SERP. During 2014, the Company collected $201 thousand on a BOLI death benefit claim.
Since there are not assets in the plan, contributions are equal to the benefits paid. It is expected that $0.2 million will be paid in benefits during 2015.
The SERP and the Cash Balance Plan components of the net periodic benefit cost reflected in salaries and employee benefits expense for the years ended December 31, 2014 and December 31, 2013 were:
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
The following table shows the change in the projected benefit obligations and plan assets for the years ended December 31, 2014 and 2013:
The Bank had a liability for the Cash Balance Plan of $0.9 million and $0.4 million for the periods ended December 31, 2014 and 2013, respectively. The liability is included in Other Liabilities within the Consolidated Balance Sheets. The accrued liability and accumulated benefits obligations for the SERP was $2.1 million and $2.0 million for the periods ended December 31, 2014 and 2013, respectively. The balance is included in Other Liabilities within the Consolidated Balance Sheets.
The amounts in accumulated other comprehensive loss that have not been recognized as components of net periodic pension cost were:
Amounts in accumulated other comprehensive loss expected to be recognized in net periodic costs in 2015:
The estimated expected benefits payments for the Cash Balance Plan and SERP are:
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
Retirement Plan Assets- In general, the Cash Balance Plan’s investment management organizations make reasonable efforts to control market fluctuations through appropriate techniques including, but not limited to, adequate diversification. The specific investment strategy adopted by the plan referred to as the Long Term Growth of Capital Strategy, attempts to achieve long-term growth of capital with little concern for current income. 	Typical investors in this portfolio have a relatively aggressive investment philosophy, seeking long-term growth, and are not looking for current dividend income.
Prohibited investments include commodities and futures contracts, private placements, options, transactions which would result in unrelated business taxable income, and other investments prohibited by Employee Retirement Income Security Act.
The target range of allocation percentages for each major category of plan assets was:
Equity investments must be listed on the New York, American, World, or other similar stock exchanges traded in the over-the-counter market with the requirement that such stocks have adequate liquidity relative to the size of the investment.
Fixed income investments must have a credit rating of B or better from Standard and Poor’s or Moody’s. The fixed income portfolio should be constructed so as to have an average maturity not exceeding 10 years. No more than 5% of the fixed income portfolio should be invested in any one issuer. U.S. Treasury and Agency securities are exempt from this restriction.
Cash and equivalent instruments that are acceptable are repurchase agreements, bankers’ acceptances, U.S. treasury bills, money market funds, and certificates of deposit.
The portfolio shall be structured to meet financial objectives over a period of 11 or more years. Over that time horizon, the total rate of return should equal at least 103% of the applicable blended benchmark returns and place in the top half of group performance. Benchmarks which may be used for portfolio performance comparison are as follows:
•U.S. Large Cap Equities: S&P 500, Russell 1000, Russell 1000 Value, and Russell 1000 Growth
•U.S. Mid Cap Equities: S&P 400 Mid Cap, Russell Mid Cap Value, and Russell Mid Cap Growth
•U.S. Small Cap Equities: S&P 600 Small Cap, Russell 2000 Value, and Russell 2000 Growth
•Non-U.S. Equities: MSCI EAFE IL
•Fixed Income: Lehman Brothers Intermediate Government/Corporate
•Cash: U.S. 3-Month Treasury Bill
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels were:
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
401(k) Plan -The Bank sponsors a 401(k) plan. Participation in the 401(k) plan is voluntary. Employees become eligible after completing 90 days service and attaining age 21. Employees may elect to contribute up to 12% of their compensation to the 401(k) plan. The Bank matches 100% of each employee’s contribution, up to a maximum of 6% of compensation. The Bank’s contribution to the 401(k) plan was $0.2 million in each of the years ended December 31, 2014 and 2013.
Deferred Compensation Plan -The Bank sponsors a nonqualified deferred compensation plan. The plan, which is unfunded, permits certain management employees to defer compensation in order to provide retirement and death benefits. The plan allows participants to receive the balance of the 6% Bank matching contribution on the 401(k) plan that would otherwise be forfeited to comply with the Internal Revenue Code. At both December 31, 2014 and 2013, the amount of the non-qualified deferred compensation plan liability was $0.2 million.
Post-retirement Benefits -The Bank provides certain post-retirement benefits to select former executive officers. As of December 31, 2014 and 2013, the amount of the liability for these benefits was approximately $0.2 million.
Split Dollar Benefits -In 2002, upon investing in BOLI policies, the Company granted certain executives a split dollar life benefit by which the beneficiaries of the executive would receive a portion of the non-cash surrender value death benefit of the BOLI upon the executive’s demise. Thereafter, amounts are accrued by a charge to employee benefits. As of December 31, 2014 and 2013, $0.2 million was recorded in other liabilities for the split dollar benefit.
13. RELATED PARTY TRANSACTIONS
In the ordinary course of business, certain of the Company’s and Bank’s directors and executive officers, including immediate family members and companies in which they have an interest, are loan customers. Those transactions do not involve more than the normal risk of collection nor do they present any unfavorable features. Total loans to such groups totaled $1.9 million and $2.0 million as of December 31, 2014 and 2013, respectively. Unused lines available to be drawn were $0.3 million and $0.4 million as of as of December 31, 2014 and December 31, 2013, respectively.
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
14. REGULATORY MATTERS AND RESTRICTIONS
On June 24, 2013, the Bank entered into a memorandum of understanding with the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The informal agreement requires the Bank take certain actions to enhance its management of adversely classified assets, remain well-capitalized and improve earnings. It also restricts dividends that cannot be paid to the holding company without prior approval and requires reporting of progress of implementing additional management improvement plans. On August 19, 2010, the Company entered into a memorandum of understanding with the Federal Reserve Bank of Richmond. The informal agreement requires the Company to receive prior approval for payment of any dividends, to repurchase stock, or to receive any dividends from the Bank.
On August 20, 2010, the Company issued 11,735 shares of $1,000 liquidation value, Series B Fixed Rate Cumulative Perpetual Preferred Stock, (“Series B Preferred Stock”), under the Community Development Capital Initiative (“CDCI”), part of the United States Department of the Treasury (the “Treasury”) Troubled Asset Relief Program (“TARP”). Participation in the Community Development Capital Initiative ("CDCI") places restrictions on the Company’s ability to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, shares of its capital stock, including restrictions against the Company (i) increasing dividends payable on its common stock from the last quarterly cash dividend per share declared on the common stock prior to November 17, 2008; (ii) increasing its aggregate per share dividends and distributions above the aggregate dividends and distributions paid for the immediately prior fiscal year; and (iii) declaring or paying dividends or distributions on, or repurchasing, redeeming or otherwise acquiring for consideration, shares of its capital stock in the event that the Company fails to declare and pay full dividends (or declare and set aside a sum sufficient for payment thereof) on the Series B Preferred Stock. These restrictions will continue until all of the Series B Preferred Stock has been redeemed in full.
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements may initiate certain mandatory and the possibility of 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 subject to qualitative judgments by the regulators about components, risk weightings and other factors. 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, 2014 and December 31, 2013, that the Company and the Bank met all capital adequacy requirements to which they are subject. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leveraged ratios as set forth in the table below. In addition, the Bank MOU requires the Bank to maintain a Tier 1 Capital Ratio of not less than 8.0%, which is higher than general well-capitalized standards.
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
15. HOLDING COMPANY CONDENSED FINANCIAL INFORMATION
The condensed financial data for the Company (holding company only) was:
16. COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized on the Consolidated Balance Sheets. The contractual amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.
The Bank’s exposure to credit losses in the event of non -performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank utilizes the same credit policies in making commitments and conditional obligations as it does for balance sheet instruments.
IndexM&F BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
Commitments to extend credit are agreements to lend to a customer as long as there is not a violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, upon extension of credit is based on management’s credit evaluation of the counter parties. Collateral varies and may include real estate, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. To the extent deemed necessary, collateral of varying types and amounts is held to secure customer performance under certain of those letters of credit outstanding.
Financial instruments whose contract amounts represent credit risk as of December 31, 2014 and December 31, 2013, respectively, are commitments to extend credit (including availability of lines of credit), and standby letters of credit. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral deemed necessary by the Bank is based on management’s credit evaluation and underwriting guidelines for the particular loan.
The Bank records a reserve for credit commitments that is adjusted through Other liabilities and Other expense in the Consolidated Balance Sheets and Consolidated Statements of Income based on (i) the expected probability of funding and (ii) the loss history by loan type as determined in calculating the ALLL. The reserves included in Other liabilities as of December 31, 2014 and December 31, 2013 were $34 thousand and $12 thousand, respectively.
Commitments outstanding at December 31, 2014 are summarized in the following table:
17. FAIR VALUE MEASUREMENT
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. Fair value measurements are required to be separately disclosed by level within the fair value hierarchy. The Company bases fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
For assets and liabilities recorded at fair value, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy.
Fair value measurements for assets and liabilities where there exists limited or no observable market data and, therefore, are based primarily upon estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors.
Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment, OREO, and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assts.
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1 - Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange.
Level 2 - Valuations are obtained from readily available pricing sources via independent providers for market transactions involving similar assets or liabilities. The Company’s principal market for these securities is the secondary institutional markets and valuations are based on observable market data in those markets. Level 2 securities include U. S. Agencies, state and municipal bonds and MBS.
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Notes to Consolidated Financial Statements
Level 3 - Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets.
Assets and Liabilities Measured on a Recurring Basis:
Available For Sale ("AFS") Investment Securities: Investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Level 1 securities include those traded on nationally recognized securities exchanges, U.S. Treasury securities, and money market funds. Level 2 securities include U.S. Agencies, MBS issued by government sponsored entities, state and municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets. The Company did not hold any Level 1 or Level 3 AFS Investment Securities as of December 31, 2014 and December 31, 2013.
Mortgage Serving Rights: Mortgage servicing rights do not trade in an active market with readily observable market data. As a result, the Company estimates the fair value of mortgage servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income. The Company stratifies its mortgage servicing portfolio on the basis of loan type. The assumptions used in the discounted cash flow model are those that we believe market participants would use in estimating future net servicing income, including estimates of loan prepayment rates, servicing costs, ancillary income, impound account balances, and discount rates. Significant assumptions in the valuation of mortgage servicing rights include changes in interest rates, estimated loan repayment rates, and the timing of cash flows, among other factors. Mortgage servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.
Assets measured at fair value on a recurring basis as of December 31, 2014 were as follows:
Assets measured at fair value on a recurring basis as of December 31, 2013 were as follows:
The table below displays the change in all recurring Level 3 Assets from December 31, 2013 to December 31, 2014.
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Notes to Consolidated Financial Statements
Assets and Liabilities Measured on a Nonrecurring Basis:
Impaired loans: Impaired loans are evaluated and valued at the time the loan is identified as impaired, and are carried at the lower of cost or market value. Market value is measured based on the value of the collateral securing these loans or net present value of expected future cash flows discounted at the loan’s effective interest rate. Collateral may be real estate and/or business assets including equipment, inventory, and/or accounts receivable. The value of business equipment, inventory, and accounts receivable collateral is based on net book value on the business’ financial statements and, if necessary, discounted based on management’s review and analysis. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and the client’s selling costs and other expenses. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. The Company records impaired loans as nonrecurring Level 3, because Management believes the underlying collateral is less than the appraised value.
OREO: Foreclosed assets are adjusted to fair value, less estimated carrying costs and costs to sell, upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of the carrying value or the fair value, less estimated carry costs and costs to sell. Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. The Company records foreclosed assets as nonrecurring Level 3.
Repossessed Collateral: Repossessed collateral is adjusted to fair value, less estimated carrying costs and costs to sell, upon transfer of the loans to repossessions. Subsequently, repossessions assets are carried at the lower of the carrying value or the fair value, less estimated carry costs and costs to sell. Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. The Company records repossessions as nonrecurring Level 3.
Assets measured at fair value on a nonrecurring basis as of December 31, 2014 and December 31, 2013 were:
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Notes to Consolidated Financial Statements
Quantitative Information about Level 3 Fair Value Measurements
The Company discloses estimated fair values for its significant financial instruments. The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The methodologies for other financial assets and liabilities are discussed below.
The Company had no transfers between any of the three levels in 2014 or 2013.
Cash and Cash Equivalents: The carrying amount of cash, due from bank, and federal funds sold approximates fair value, and is therefore considered Level 1 input.
Loans (other than impaired), net of allowances for loan losses: Fair values are estimated for portfolios of loans with similar financial characteristics. The majority of the Company’s loans and lending-related commitments are not carried at fair value on a recurring basis on the Consolidated Balance Sheets, nor are they actively traded.
The fair value of performing loans is calculated by discounting scheduled cash flows through their individual contractual maturity, using discount rates that reflect the credit risk, overhead expenses, interest rate earned and again, contractual maturity of each loan less credit component. The maturity is based on contractual maturities for each loan, modified as required by an estimate of the effect of historical prepayments and current economic conditions.
For all loans, assumptions regarding the characteristics and segregation of loans, maturities, credit risk, cash flows, and discount rates are judgmentally determined using specific borrower and other available information, and are therefore considered a Level 3 input.
Accrued Interest Receivable and Payable: The fair value of interest receivable and payable is estimated to approximate the carrying amounts and are therefore considered Level 1 input.
Deposits: The fair value of deposits with no stated maturity, such as demand deposits, checking accounts, savings and money market accounts, is equal to the carrying amount. The fair value of certificates of deposit is based on the discounted value of contractual cash flows, where the discount rate is estimated using the market rates currently offered for deposits of similar remaining maturities and are therefore considered Level 2 input.
Borrowings: The fair value of borrowings is based on the discounted value of estimated cash flows. The discounted rate is estimated using market rates currently offered for similar advances or borrowings and are therefore considered Level 3 input.
Off-Balance Sheet Instruments: Since the majority of the Company’s off-balance sheet instruments consist of non-fee producing variable rate commitments, the Company has determined they do not have a distinguishable fair value.
As of December 31, 2014 and December 31, 2013, the carrying amounts and associated estimated fair value of financial assets and liabilities of the company are as follows:
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Notes to Consolidated Financial Statements
18. PREFERRED STOCK - U.S. TREASURY DEPARTMENT'S CAPITAL PURCHASE PROGRAM and CDCI
On June 26, 2009, the Company issued 11,735 shares of Series A Fixed Rate Cumulative Perpetual Preferred Stock, having a liquidation preference of $1,000 per share ("Series A Preferred Stock") to the Treasury under the Treasury’s Capital Purchase Program for a purchase price of $11,735,000 in cash. On August 20, 2010, the Company completed an exchange of the Series A Preferred Stock for an equal number of shares of Series B Fixed Rate Cumulative Perpetual Preferred Stock, also having a liquidation preference of $1,000 per share, under the Treasury’s CDCI. Neither the Series A nor Series B Preferred Stock has any mandatory redemption and/or conversion features.
Under the CPP, the Series A Preferred Stock carried a dividend rate of 5% for the first five years after issuance, after which the dividend rate increased to 9% until such time as the Series A Preferred Stock is repurchased or redeemed. Under the CDCI, the Series B Preferred Stock carries a dividend rate of 2% for eight years, after which time the dividend rate increases to 9% until the Series B Preferred Stock is repurchased or redeemed. The Company paid all of the dividends due on the Series A Preferred Stock up to the date of closing of the CDCI exchange on August 20, 2010, and is current in its payment of dividends on the Series B Preferred Stock.
On September 23, 2014, the Board of Directors declared a dividend of one preferred share purchase right for each outstanding share of the Company’s common stock, to purchase from the Company one one-hundredth of a share of Series C Junior Participating Preferred Stock, par value $0.01 per share, of the Company at a price of $10.00 per one one-hundredth of a share of preferred stock, subject to adjustment as provided in the associated rights agreement.
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ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure 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 (as defined in Rule 13a-15(e) of the Exchange Act) are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms.
Management's Report on Internal Control Over Financial Reporting.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company's internal control over financial reporting is a process designed under the supervision of the Company's Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. Management has made a comprehensive review, evaluation and assessment of the Company's internal control over financial reporting as of December 31, 2014. Management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013), to make its assessment. Based on the evaluation, management determined that there were no material weaknesses in internal control and concluded internal control over financial reporting for the Company as of December 31, 2014 is effective.
In accordance with Section 404 of the Sarbanes-Oxley Act of 2002, management makes the following assertions:
·Management has implemented a process to monitor and assess both the design and operating effectiveness of internal control over financial reporting.
·Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
This Annual Report on Form 10-K does not include an attestation report of the Company's registered public accounting Company regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting Company pursuant to rules of the Securities and Exchange Commission ("SEC") that permit the Company to provide only management's report in this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting.
There was no change in the Company's internal control over financial reporting that occurred during the fourth quarter of 2014, that has materially affected or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
a.Directors and Executive Officers - The information required by this Item regarding the Company's directors, executive officers and all persons nominated or chosen to become such is set forth under the sections captioned “Proposal I-Election of Directors” and “Executive and Director Compensation”, in the Company's Proxy Statement, to be filed with the SEC with respect to the Annual Meeting of Stockholders to be held during June 2015, which sections are incorporated herein by reference.
b. Section 16(a) Compliance - The information required by this Item regarding compliance with Section 16(a) of the Exchange Act is set forth under the Proxy Statement under the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance, ” which section is incorporated herein by reference.
c.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 (called the “Code of Ethics for Principal Executive and Senior Financial Professionals”) adopted by the Board of Directors is available on the “Investor Information” page of the Company's website at www.mfbonline.com. In addition, the Bank has a separate Code of Ethics applicable to all of its officers and employees.
d. 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.
e.Audit Committee - The information required by the Item regarding the Company's Audit Committee, including the Audit Committee Financial Expert is set forth under the Proxy Statement section captioned “Report of the Audit Committee,” which section is incorporated by reference.
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ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the section captioned “Executive and Director Compensation” in the Proxy Statement, which section is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item is set forth under the section captioned “Stock Ownership” in the Proxy Statement, which section is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is set forth under the sections captioned “Executive and Director Compensation - Indebtedness and Transactions with Related Persons”, “Director Independence”, “Nominating and Corporate Governance Committee”, “Compensation Committee” and “Audit Committee”, in the Proxy Statement, which sections are incorporated herein by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is set forth under the sections captioned “Audit Fees Paid to Independent Auditors”, and “Pre-Approval of Audit and Permissible Non-Audit Services” and “Proposal 2 - Ratification of Appointment of Independent Registered Public Accounting Firm” in the Proxy Statement, which sections are incorporated herein by reference.
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PART IV
Item 15.
Item 15. Exhibits
Exhibits and Index of Exhibits
The following exhibits are filed with or incorporated by reference into this report.
Exhibit No. Exhibit Description
Exhibit 3(i)(a) Amended and Restated Articles of Incorporation of the Company, incorporated by reference to Exhibit 3(i) to the Form 10-QSB for the quarter ended September 30, 1999, filed with the SEC on November 12, 1999.
Exhibit 3(i)(b) Articles of Amendment, adopted by the Shareholders of the Company on May 3, 2000, filed with the North Carolina Department of the Secretary of State on July 12, 2000, and incorporated by reference to Exhibit 3(v) to the Form 10-KSB for the year ended December 31, 2005, filed with the SEC on March 31, 2006.
Exhibit 3(i)(c) Articles of Amendment, adopted by the Shareholders of the Company on June 9, 2009, filed with the North Carolina Department of the Secretary of State on June 11, 2009, and incorporated by reference to Exhibit 4.1 to the Form 8-K filed with the SEC on June 26, 2009.
Exhibit 3(i)(d) Articles of Amendment, adopted by the Board of Directors of the Company on June 10, 2009, filed with the North Carolina Department of the Secretary of State on June 25, 2009, and incorporated by reference to Exhibit 4.2 to the Form 8-K filed with the SEC on June 26, 2009.
Exhibit 3(i)(e) Articles of Amendment, adopted by the Board of Directors of the Company on July 27, 2010, filed with the North Carolina Department of the Secretary of State on August 20, 2010, and incorporated by reference to Exhibit 4.1 to the Form 8-K filed with the SEC on August 23, 2010.
Exhibit 3(i)(f) Articles of Amendment, adopted by the Board of Directors of the Company and filed with the North Carolina Department of the Secretary of State on September 23, 2014, incorporated by reference to Exhibit 3.1 to the Form 8-K filed with the SEC on September 23, 2014.
Exhibit 3(ii) Amended and Restated Bylaws of the Company, dated November 12, 2014, incorporated by reference to Exhibit 3(ii) to the Form 10-Q for the quarter ended September 30, 2014, filed with the SEC on November 12, 2014.
Exhibit 4(i) Specimen Stock Certificate, incorporated by reference to Exhibit 4 to the Form 10-KSB for the year ended December 31, 2000, filed with the SEC on April 2, 2001.
Exhibit 4(ii) Form of Certificate for the Fixed Rate Cumulative Perpetual Preferred Stock, Series B, incorporated by reference to Exhibit 4.2 to the From 8-K filed with the SEC on August 23, 2010.
Exhibit 4(iii) Rights Agreement, dated as of September 23, 2014, between the Company and American Stock Transfer & Trust Company, LLC, as Rights Agent, incorporated by reference to Exhibit 4.1 to the Form 8-K filed with the SEC on September 23, 2014.
Exhibit 10(i) Letter Agreement and certain side letters, all dated August 20, 2010, between the Company and the United States Department of the Treasury, with respect to the issuance and sale of the Fixed Rate Cumulative Perpetual Preferred Stock, Series B, incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on August 23, 2010.
Exhibit 10(ii) * Employment Agreement, dated August 11, 2014, among the Company, the Bank and James H. Sills, III, incorporated by reference to Exhibit 99.1 to the Form 8-K filed with the SEC on August 14, 2014.
Exhibit 21 Subsidiaries of the Company, incorporated by reference to Exhibit 21 to the Form 10-KSB filed with the SEC on March 31, 2006.
Exhibit 31 (i) Certification of James H. Sills, III.
Exhibit 31 (ii) Certification of Randall C. Hall.
Exhibit 32 Certification pursuant to 18 U.S.C. Section 1350.
Exhibit 99 Certification pursuant to the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009.
Exhibit 99 (ii) Certification pursuant to the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009.
Exhibit 101 Financial Statements submitted in XBRL format
* Management contracts and compensatory arrangements.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
M&F Bancorp, Inc.
March 18, 2015 By: /s/ James H. Sills, III
James H. Sills, III
President and Chief Executive Officer
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In accordance with the Securities 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/ James. H. Sills, III President, Chief Executive Officer and Director March 18, 2015
James H. Sills, III (Principal Executive Officer)
/s/ Randall C. Hall Chief Financial Officer March 18, 2015
Randall C. Hall (Principal Financial Officer and Principal Accounting Officer)
/s/ James A. Stewart Chairman of the Board March 18, 2015
James A. Stewart
/s/ Willie T. Closs, Jr. Director March 18, 2015
Willie T. Closs, Jr.
/s/ Michael L. Lawrence Director March 18, 2015
Michael L. Lawrence
/s/ Raymond C. Pierce Director March 18, 2015
Raymond C. Pierce
/s/ James H. Speed, Jr. Director March 18, 2015
James H. Speed, Jr.
/s/ Connie J. White Director March 18, 2015
Connie J. White
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INDEX TO EXHIBITS
Exhibit 31(i) Certification of James H. Sills, III.
Exhibit 31(ii) Certification of Randall C. Hall.
Exhibit 32 Certification pursuant to 18 U.S.C. Section 1350.
Exhibit 99(i) Certification Pursuant to the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009.
Exhibit 99(ii) Certification Pursuant to the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009.
Exhibit 101 Financial Statements submitted in XBRL format