##### Table of Contents







UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K





ANNUAL REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended
December 31, 2010

Commission file number 027307





LOGO

(Exact name of registrant as specified in charter)







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

(919)
687-7800

(Registrants Telephone Number, Including Area Code)





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

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, no par value

(Title of class)





Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes   ̈    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ̈    No  x

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K.  x

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



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

Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ̈    No  x

The
aggregate market value of the registrants common stock as of June 30, 2010, held by those persons deemed by the registrant to be non-affiliates was approximately $4,118,580. For purposes of the foregoing calculation only, all directors,
executive officers, and 5% stockholders of the registrant have been deemed affiliates.

As of March 25, 2011, there were 2,031,337 shares
outstanding of the registrants common stock.





DOCUMENTS
INCORPORATED BY REFERENCE



|                                                                                                               |  |         
|-------------------------------------------------------------------------------------------------------------- |  | --------
|Document Incorporated                                                                                          |  | Where   
|Portions of the registrants Proxy Statement for the Annual Meeting of Stockholders to be held on June 7, 2011 |  | Part III









---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



Annual Report on Form 10-K for the Year Ended December 31, 2010

INDEX



|                                                                                                         |  |  |    | 
|-------------------------------------------------------------------------------------------------------- |  |  | -- | 
|PART I                                                                                                   |  |  | 3  | 
|ITEM 1. BUSINESS                                                                                         |  |  | 3  | 
|ITEM 1A. RISK FACTORS                                                                                    |  |  | 11 | 
|ITEM 2. PROPERTIES                                                                                       |  |  | 19 | 
|ITEM 3. LEGAL PROCEEDINGS                                                                                |  |  | 19 | 
|ITEM 4. N/A                                                                                              |  |  | 19 | 
|PART II                                                                                                  |  |  | 19 | 
|ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES |  |  | 19 | 
|ITEM 6. SELECTED FINANCIAL DATA                                                                          |  |  | 21 | 
|ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS            |  |  | 22 | 
|ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                      |  |  | 41 | 
|ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                      |  |  | 43 | 
|ITEM 9A. CONTROLS AND PROCEDURES                                                                         |  |  | 82 | 
|ITEM 9B. OTHER INFORMATION                                                                               |  |  | 83 | 
|PART III                                                                                                 |  |  | 84 | 
|ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                          |  |  | 84 | 
|ITEM 11. EXECUTIVE COMPENSATION                                                                          |  |  | 84 | 
|ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS  |  |  | 84 | 
|ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                       |  |  | 84 | 
|ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES                                                          |  |  | 84 | 
|PART IV                                                                                                  |  |  | 85 | 
|ITEM 15. EXHIBITS                                                                                        |  |  | 85 | 



1



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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



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



| |  |  | The Banks failure to satisfy the requirements of the Memorandum of Understanding with the Commissioner of Banking of North Carolina and the
Regional Director of the Federal Deposit Insurance Corporations (FDIC) Atlanta Regional Office (the Bank MOU);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Companys failure to satisfy the requirements of the Memorandum of Understanding (The Company MOU) with the Federal Reserve Bank
of Richmond (FRB);
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | Revenues are lower than expected;
| | - |  | ---------------------------------



| |  |  | Credit quality deterioration which could cause an increase in the provision for credit losses;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | Competitive pressure among depository institutions increases significantly;
| | - |  | ---------------------------------------------------------------------------



| |  |  | Changes in consumer spending, borrowings and savings habits;
| | - |  | ------------------------------------------------------------



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



| |  |  | Technological changes and security and operations risks associated with the use of technology;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | The cost of additional capital is more than expected;
| | - |  | -----------------------------------------------------



| |  |  | A change in the interest rate environment reduces interest margins;
| | - |  | -------------------------------------------------------------------



| |  |  | Asset/liability repricing risks, ineffective hedging and liquidity risks;
| | - |  | -------------------------------------------------------------------------



| |  |  | Counterparty risk;
| | - |  | ------------------



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



| |  |  | The effects of the FDIC deposit insurance premiums and assessments;
| | - |  | -------------------------------------------------------------------



| |  |  | The effects of and changes in monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Volatility in the credit or equity markets and its effect on the general economy;
| | - |  | ---------------------------------------------------------------------------------



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



| |  |  | The costs and effects of legal, accounting and regulatory developments and compliance; and
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Regulatory approvals for acquisitions cannot be obtained on the terms expected or on the anticipated schedule.
| | - |  | --------------------------------------------------------------------------------------------------------------

The Company cautions that the foregoing list of important factors is not exhaustive. See also Risk Factors which begins on page 13. The
Company undertakes no obligation to update any forward-looking statement, whether written or oral, that may be made from time to time, by or on behalf of the Company.



2



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



PART I

ITEM 1. BUSINESS

GENERAL

Headquartered in Durham, North Carolina (NC), M&F Bancorp, Inc. (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 System (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, Mechanics and Farmers Bank (the Bank), a NC-chartered commercial bank that was organized in 1907 and began operations in 1908.

As of December 31, 2010, the Company had assets of approximately $312.3 million, with gross loans of approximately $201.8 million and deposits of
approximately $269.7 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. In addition to its corporate office, the Company has seven branch offices
in NC: two in Durham, two in Raleigh, one in Charlotte, one in Winston-Salem, and one in Greensboro.

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 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 operate in communities for the benefit of people who live in them. In
turn, 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 work with individuals on improving their credit ratings or helping them to create monthly budgets.

The Bank offers a full range of
banking services, including the following: checking accounts; savings accounts; NOW accounts; money market accounts; certificates of deposit; individual retirement accounts; loans for real estate, construction, businesses, personal use, home
improvement and automobiles; equity lines of credit; credit lines; consumer loans; credit cards; safe deposit boxes; bank money orders; internet banking; electronic funds transfer services including wire transfers; travelers checks; and notary
services. 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 North Carolina 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 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 the 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 104-year legacy, strong local identity and affiliation with the communities it
serves, and its emphasis on providing specialized services to small- and medium-sized business and special purpose enterprises, and individuals. The Bank offers customers modern, high-tech banking without compromising community values



3



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



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, 2010, 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 approximately 2.62%, and less than one percent in each of Raleigh, Charlotte, Greensboro and
Winston-Salem, NC. Management believes that the Company is not dependent upon any single customer, or a few customers, the loss of which would have a material adverse effect on the Companys operations. However, the Company does serve a
specialized niche market (faith-based organizations and not-for-profits), the loss of which could have a material adverse effect on the Companys operations.

EMPLOYEES

As of December 31, 2010, the Company and the Bank had 81 employees,
including 71 full-time equivalent employees. No employees are represented by a collective bargaining unit or agreement. Management considers relations with employees to be good.

EXECUTIVE OFFICERS



|                |  |     |  |                                                                          
|--------------- |  | --- |  | -------------------------------------------------------------------------
|Name            |  | Age |  | Position with Company                                                    
|Kim D. Saunders |  | 50  |  | President/Chief Executive Officer                                        
|                |  |    
|Lyn Hittle      |  | 57  |  | Senior Vice President/Chief Financial Officer/Director of Human Resources

Kim D. Saunders serves as President and
Chief Executive Officer for the Company and the Bank, overseeing the day-to-day operations of the Bank. Ms. Saunders joined the Company in 2007. She previously served as President and Chief Executive Officer of Consolidated Bank and Trust
Company from 2003 to 2007. Lyn Hittle serves as Senior Vice President, Chief Financial Officer and Director of Human Resources (HR) for the Company and the Bank, overseeing the financial operations and HR function of the Company and the
Bank. Ms. Hittle joined the Company in 2008, before which she was the Chief Accounting Officer of Capital Bank in Raleigh, NC from 2007 to 2008, Vice President Finance/Controller for Eos Airlines from 2006 to 2007, and Chief Financial Officer
for Harrington Bank in Chapel Hill, NC from 2001 to 2005.

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.



4



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



Insured depository institutions under common control are required to reimburse the FDIC for any loss
suffered by its deposit insurance fund because of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The
FDIC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. Despite prior approval, 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.

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 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 over the last several years.

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 new challenges, as its larger competitors are able to expand their services and products into areas that are not feasible for smaller, community-oriented financial institutions. The GLB Act 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 new requirements for public Company governance and disclosure requirements. Some of the provisions of Sarbanes-Oxley became effective immediately while other provisions have subsequently been
implemented or will be implemented in the future.

In general, Sarbanes-Oxley mandated important new corporate governance and financial
reporting requirements intended to enhance the accuracy and transparency of public companies reported financial results. It established new responsibilities for corporate chief executive officers, chief financial officers and audit committees
in the financial reporting process and created a new regulatory body to oversee auditors of public companies. It backed these requirements with new SEC enforcement tools, increased criminal penalties for federal mail, wire and securities fraud, and
created new 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 new federal corporate whistleblower protection.



5



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



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
will be presented with 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.

Banking, operating a thrift institution, extending credit or servicing loans, leasing real or personal property, providing
securities brokerage services, providing certain data processing services, acting as agent or broker in selling credit life insurance and certain other types of insurance underwriting activities have been determined by regulations of the Federal
Reserve to be permissible activities.

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 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).

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 (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 of any
specific minimum Leverage Ratio or tangible Tier 1 Leverage Ratio applicable to it.

As of December 31, 2010, the Company had Tier 1
risk-adjusted, total regulatory capital and leverage capital of approximately 16.93%, 18.19% and 11.77%, respectively, all in excess of the minimum requirements. Those same ratios as of December 31, 2009 were 14.33%, 15.58% and 13.00%,
respectively. As of December 31, 2010, the Bank had a leverage ratio of 10.42%, a Tier 1 capital ratio of 15.59%, and a total risk-based capital ratio of 16.84%. Those same ratios as of December 31, 2009 were 11.30%, 12.86% and 14.11%,
respectively.



6



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



In December 2009, the Basel Committee on Banking Supervision (the BCBS) released a
comprehensive list of proposals for changes to capital, leverage, and liquidity requirements for banks (commonly referred to as Basel III). In December 2010, the oversight body of the Basel Committee published the final Basel III rules
on capital, leverage, and liquidity.

Dividend and Repurchase Limitations. Under a Memorandum of Understanding (MOU) with
the FRB executed in August 2010, the Company must 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 may only pay dividends from undivided profits, which are determined by
deducting and charging certain items against actual profits, including any contributions to surplus required by NC law. In addition, an insured depository institution, such as the Bank, is prohibited from making capital distributions, including the
payment of dividends, if, after making such distribution, the institution would become undercapitalized (as such term is defined in the applicable law and regulations). Further, under the terms of the MOU entered into by the FDIC, and
the NCCOB in April 2010, the Bank may not declare dividends to the Company without prior approval from the FDIC and NCCOB.

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. 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.

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 ($0.05) 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.



7



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



Federal Deposit Insurance. The Deposit Insurance Fund (DIF) of the Federal Deposit
Insurance Corporation (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 from
$100,000 to $250,000 per depositor, per institution. On November 9, 2010, the FDIC issued a final rule to implement a provision of the Dodd-Frank Act that provides temporary unlimited deposit insurance coverage for noninterest-bearing
transaction accounts at all FDIC-insured depository institutions. Institutions cannot opt out of this coverage, nor will the FDIC charge a separate assessment for the insurance. On December 29, 2010, President Obama signed into law an amendment
to the Federal Deposit Insurance Act to include Interest on Lawyers Trust Accounts (IOLTA) within the definition of noninterest-bearing transaction accounts. This amendment will provide IOLTAs with the same temporary, unlimited insurance
coverage afforded to noninterest-bearing transaction accounts under the Dodd-Frank Act. This unlimited coverage for noninterest-bearing transaction accounts became effective on December 31, 2010 and terminates on December 31, 2012.

The FDIC did not extend its Transaction Account Guarantee Program beyond its sunset date of December 31, 2010, which provided a full
guarantee of certain Negotiable Order of Withdrawal accounts (NOW accounts). The FDIC insures NOW accounts up to the standard maximum deposit insurance amount as noted above.

FDIC-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.

As required by the Dodd-Frank Act, on February 7,
2011, the FDIC finalized new rules, which would redefine the assessment base as average consolidated total assets minus average tangible equity. The new rate schedule and other revisions to the assessment rules will become effective
April 1, 2011, and used to calculate the June 2011 assessments, which will be due in September 2011. Institutions, such as the Bank, with less than $1 billion in average total assets will share a more proportionate FDIC assessment under the new
rules. We continue to assess the impact that these changes will have on our deposit insurance premiums in future periods.

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%, a Total Capital Ratio of at least 10%, a Tier 1 Leverage Ratio of at least 5%, and not be
subject to a capital directive order. As of December 31, 2010, the Bank was classified as well capitalized. 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.

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 Community Reinvestment Act (the CRA). In addition, federal banking regulators, pursuant to the Gramm-Leach-Bliley 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 a new Bureau of Consumer Financial Protection (the CFPB) that will take over responsibility for the federal consumer financial protection laws. The CFPB is an independent bureau within the FRB that will have 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 also 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.



8



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



Amendments to Regulation E, which implement the Electronic Fund Transfer Act (the
EFTA), involve changes to the way banks with assets in excess of $10 billion may charge overdraft fees by limiting their ability to charge an overdraft fee for ATM and one-time debit card transactions that overdraw a consumers
account, unless the consumer affirmatively consents to payment of overdraft fees for those transactions. Additional amendments to the EFTA include the Durbin Act, which mandates limiting debit card interchange fees that larger banks may
charge merchants. Notwithstanding that these new laws do not apply directly to the Bank, it is anticipated that smaller financial institutions, such as the Bank, will come under competitive pressure to reduce their fees accordingly.

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. The Bank, as a NC commercial bank, is required to maintain a surplus account
equal to 50% or more of its paid-in capital stock. As a NC chartered, FDIC-insured commercial bank, which is not a member of the Federal Reserve System, the Bank is also subject to capital requirements imposed by the FDIC. Under the FDICs
regulations, state nonmember banks that (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,
2010.

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 0.15% (or 15 basis points) 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 new activity-based stock ownership requirement. On December 31, 2010, 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.



9



---

##### Table of Contents

M&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.

Emergency Economic
Stabilization Act of 2008.Under the EESA, the Treasury implemented the TARP, of which 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. At the 2009 annual meeting of the stockholders, the Companys stockholders approved an amendment to the Companys articles of incorporation
authorizing the issuance of shares of preferred stock, and so enabling the Company to participate in the CPP.

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, because the Bank is a CDFI, the Company was exempted from issuing warrants.

On June 26, 2009, the Company
completed the issuance of 11,735 shares of Series A Preferred Stock under the CPP as a part of the TARP.

On February 3, 2010, the Obama
Administration announced final terms for a new TARP program designed for CDFIs. Under the CDCI, eligible CDFIs currently participating in the CPP would be permitted to exchange the preferred stock issued under the CPP for preferred stock to be
issued under the CDCI. Under the CDCI program, an initial dividend rate of 2% would apply for a period of eight years, as opposed to the original CPP terms of 5% for five years, thereafter moving to 9%.

On August 20, 2010, the Company completed an exchange of the Series A Preferred Stock for an equal amount of Series B Preferred Stock, under the
CDCI.

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.

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 Act requires mortgage loan originators employed by federally 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.



10



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



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.

Under Chapter 53 of the NC General Statutes,
if the capital stock of a NC commercial bank is impaired by losses or otherwise, the NCCOB is authorized to require payment of the deficiency by assessment upon the banks stockholders.

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 current conditions in the financial markets and economic conditions generally.The global, U.S. and North Carolina
economies are continuing to experience significantly reduced business activity and consumer spending as a result of, among other factors, disruptions in the capital and credit markets that first occurred during 2008. Since 2008, 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Until conditions improve, we expect our business, financial condition and results of operations to continue to be adversely affected.

Financial reform legislation recently enacted by Congress will result in new laws and regulations that are expected to increase our costs of
operations. Congress recently enacted the Dodd-Frank Act. This new law will significantly change the current bank regulatory structure and affect 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, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

Certain provisions of the Dodd-Frank Act are expected to have a near term effect on us. For example, effective one year after the date of enactment, is a provision that eliminates the federal prohibitions
on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse effect on our interest expense.



11



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Assessments will now be based
on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per
depositor, retroactive to January 1, 2008, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012.

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 Securities
and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a companys proxy materials. The legislation also directs the Federal Reserve 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 creates
a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau 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. The Consumer Financial Protection Bureau 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 predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on community banks. However, it is expected that 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.

The soundness of other financial institutions could adversely affect us.Since mid-2007, the financial services industry as a whole,
as well as the securities markets generally, have been materially and adversely affected by significant declines in the values of nearly all asset classes and by a serious lack of liquidity. Financial institutions in particular have been subject to
increased volatility and an overall loss in investor confidence. The Companys ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial
services companies are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial
services industry, including brokers and dealers, commercial banks, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally,
have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk
may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan due us. There is no assurance that any such losses would not materially and adversely affect our
businesses, financial condition or results of operations.

Increases in FDIC insurance premiums may adversely affect the Companys net
income and profitability.Since 2008, higher levels of bank failures have dramatically increased resolution costs of the FDIC and depleted the DIF. Deposit accounts are permanently insured up to $250,000 per customer and noninterest-bearing
transactional accounts are currently fully insured (unlimited coverage). These programs have placed additional stress on the deposit insurance fund. In order to maintain a strong funding position and restore reserve ratios of the DIF, the FDIC has
increased assessment rates of insured institutions. The Company is generally unable to control the amount of premiums that the Bank is required to pay for FDIC insurance. If there are additional bank or financial institution failures, or the cost of
resolving prior failures exceeds expectations, the Bank may be required to pay even higher FDIC premiums than the recently increased levels. These announced increases and any future increases or required prepayments of FDIC insurance premiums may
adversely impact the Companys earnings and financial condition.



12



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



On November 9, 2010, the FDIC published a rulemaking proposal under the Dodd-Frank Act that would
alter the way an institutions assessment base is calculated. Under the proposal, an institutions assessment base will be its average consolidated total assets less its average tangible equity. In addition, certain current rate
adjustments will be modified or eliminated, and a new rate adjustment will be established. The proposal will not become effective before the second quarter of 2011.

Additional requirements under our regulatory framework, especially those imposed under Dodd-Frank, ARRA, EESA or other legislation or regulations intended to strengthen the U.S. financial system, could
adversely affect us.Recent government efforts to strengthen the U.S. financial system, including the passage of the Dodd-Frank Act, implementation of ARRA, EESA, the TLGP and special assessments imposed by the FDIC, subject participants to
additional regulatory fees and requirements, including corporate governance requirements, executive compensation restrictions, restrictions on declaring or paying dividends, restrictions on share repurchases, limits on executive compensation tax
deductions and prohibitions against golden parachute payments. These requirements, and any other requirements that may be subsequently imposed, may have a material and adverse affect on 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. On August 20, 2010, the Company issued 11,735 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 ($0.05) 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 also 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.

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 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. Given the recent disruption in the financial markets and regulatory initiatives that have been proposed by the Obama administration and Congress, new regulations and laws that may affect us are increasingly likely. Compliance with such
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:



| |  |  | 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.
| | - |  | --------------------------------------



13



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



Our regulatory position is discussed in greater detail under Item 1.
BusinessSupervision and Regulation of this Annual Report on Form 10-K. In addition, the Company will be required to pay significantly higher FDIC premiums because market developments have significantly depleted the insurance fund
of the FDIC and reduced the ratio of reserves to insured deposits.

We may need to raise additional capital in the future and such capital
may not be available when needed or at all.We may need additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs. Our ability to raise additional capital, if
needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial performance. The ongoing liquidity crisis and the loss of confidence in financial institutions may
increase our cost of funding and limit our access to some of our customary sources of capital, including, but not limited to, inter-bank borrowings, repurchase agreements and borrowings from the discount window of the Federal Reserve. 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, such as a decline in the confidence of debt purchasers, depositors of the Bank or counterparties
participating in 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.

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. Current the regulators have restricted the Bank from up-streaming dividends to the Company without prior approval by the FDIC, NCCOB and the FRB, which is discussed in greater detail under Item 1.
BusinessSupervision and Regulation of this Annual Report on Form 10-K. Absent 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, 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 allowance 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 allowance for loan losses 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 allowance for loan losses. Repayment of commercial loans is generally considered more subject to market risk than residential mortgage loans. Bank regulatory agencies periodically review the Banks allowance for loan losses 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 allowance for loan losses, the Bank
will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses 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 allowance for loan losses.

Our commercial real estate lending may expose
us to a greater risk of loss and hurt our earnings and profitability.Our business strategy involves making loans secured by commercial 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, 2010, our real estate secured commercial and faith based loans totaled $137.0 million, which represented 67.99% 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 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 these 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. In addition, many economists believe that deterioration in income producing commercial real estate
is likely to worsen as vacancy rates continue to rise and absorption rates of existing square footage continue to decline. In our niche market, faith-based and non-profit, payments on loans are dependent on voluntary contributions, which may be
adversely affected during high unemployment periods, such as the economic conditions since late 2008. Because of the current general economic slowdown, these loans represent 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. For the year ended December 31, 2010, we had net charge-offs of $0.2 million, a decrease
of $1.1 million when compared to the $1.3 million net charge-offs for the year ended December 31, 2009. 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.



14



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



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, were foreclosure or sale necessary to enable
principal and interest repayment. The Company has experienced recent deterioration in the credit quality of many of the loans in this niche market, and while we seek to minimize these risks in a variety of ways, there may be no assurance that these
measures will protect against loan losses. At December 31, 2010, our loans secured by faith-based and non-profit entities totaled $91.4 million, which totaled 45.33% of total loans as compared to $82.0 million, which totaled 39.02% of total
loans at December 31, 2009. Such loans increase our credit risk profile relative to other financial institutions that have higher concentrations of one to four family residential loans.

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, 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 also 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 and, 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 our investment in the common stock of the FHLB of Atlanta is classified as other-than-temporarily impaired or as permanently impaired, our earnings
and stockholders equity could decrease. We own common stock of the FHLB of Atlanta. We hold this stock to qualify for membership in the FHLB System and to be eligible to borrow funds under the FHLB of Atlantas advance program. The
aggregate cost and fair value of our FHLB of Atlanta common stock as of December 31, 2010 was $0.9 million based on its par value. There is no market for our FHLB of Atlanta common stock.

Published reports indicate that certain member banks of the FHLB System may be subject to accounting rules and asset quality risks that could result in
materially lower regulatory capital levels. In an extreme situation, it is possible that the capital of an FHLB, including the FHLB of Atlanta, could be substantially diminished or reduced to zero. Consequently, we believe that there is a risk that
our investment in FHLB of Atlanta common stock could be impaired at some time in the future, and if this occurs, it would cause our earnings and stockholders equity to decrease by the after-tax amount of the impairment charge.

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 its 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.



15



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



The Companys operating results and financial condition would likely suffer if there is
continued deterioration in the general economic condition of the areas in which the Bank 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 will be 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 Companys financial condition and results of operations. A significant further 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 affect on the Companys financial condition and results of operations.

The Company is subject to security and operational risks related to the technology the Company uses that could result in a loss of
customers, increased costs and other damages which could be material.The Company depends on data processing, software, and communication and information exchange on a variety of platforms, networks and over the internet. Despite safeguards, the
Company 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 servicing or loan 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 the Companys 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 nonbank 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 have begun to enter or have announced plans to enter the market areas in which the Bank currently operates. Nonbank 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 as well as 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 Company and 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
terms of their loans. The Bank has underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for loan losses, 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
Company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 the Companys financial condition and results of operations.

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, and disclosure, sharing or inadequate protection of customer information, and from actions taken by government regulators and
community organizations in response to that conduct.



16



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



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 also 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.

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, FHLB advances, and 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 the continued 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 Company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 Companys future success will depend, in part, on our ability to address the needs of the Banks 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



17



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



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 its operations or the ability or
willingness of its 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 its 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 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.

The Company has issued preferred stock, which ranks senior to our common stock.The Company has issued 11,735 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.

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.

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 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.
As of December 31, 2010, the Bank has deposits with one correspondent institution that exceed the federally insured limit by $0.6 million.

Consumer protection initiatives related to the foreclosure process could affect our remedies as a creditor.Consumer protection initiatives
proposed 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 1B. UNRESOLVED STAFF COMMENTS

None



18



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



|ITEM 2. | PROPERTIES
|------- | ----------

At December 31, 2010,
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, 2010. Rent expense incurred by the Bank under ongoing leases totaled approximately $46
thousand for the year ended December 31, 2009. Total rent expense for the year ended December 31, 2010 totaled $47 thousand, which included an off-site ATM.



|                             |  |                   |  |       |  |       
|---------------------------- |  | ----------------- |  | ----- |  | ------
|Address                      |  | Services          |  | Owned |  | Leased
|2634 Durham Chapel Hill Blvd |  | Corporate Offices |  | ü     |  |       
|Durham, NC                   |  |                   |  |       |  |       
|116 West Parrish Street      |  | Branch/ ATM       |  |       |  | ü     
|Durham, NC                   |  |                   |  |       |  |       
|2705 Durham Chapel Hill Blvd |  | Branch/ ATM       |  | ü     |  |       
|Durham, NC                   |  |                   |  |       |  |       
|13 East Hargett Street       |  | Branch            |  | ü     |  |       
|Raleigh, NC                  |  |                   |  |       |  |       
|1824 Rock Quarry Road        |  | Branch/ ATM       |  |       |  | ü     
|Raleigh, NC                  |  |                   |  |       |  |       
|101 Beatties Ford Road       |  | Branch/ ATM       |  | ü     |  |       
|Charlotte, NC                |  |                   |  |       |  |       
|770 Martin Luther King Drive |  | Branch/ ATM       |  | ü     |  |       
|Winston Salem, NC            |  |                   |  |       |  |       
|100 South Murrow Blvd        |  | Branch/ ATM       |  | ü     |  |       
|Greensboro, NC               |  |                   |  |       |  |       

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, included in Item 8 herein.

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, 2010.

ITEM 4. N/A

PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF
EQUITY SECURITIES

The Companys common stock is quoted on the OTC Bulletin Board under the symbol MFBP.

As of March 15, 2011, 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 paid per share for 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.



19



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



|                                  |  |           |        |  |           |   |       |           |  |   |           |  |  |   |        | 
|--------------------------------- |  | --------- | ------ |  | --------- | - | ----- | --------- |  | - | --------- |  |  | - | ------ | 
|2010 Price Range                  |  | Quarter 1 |        |  | Quarter 2 |   |       | Quarter 3 |  |   | Quarter 4 | 
|High                              |  | $         | 2.30   |  |           | $ | 4.25  |           |  | $ | 3.26      |  |  | $ | 3.30   | 
|Low                               |  |           | 1.50   |  |           |   | 2.30  |           |  |   | 2.70      |  |  |   | 2.10   | 
|Cash dividends declared per share |  |           | 0.0175 |  |           |   |      |           |  |   |          |  |  |   | 0.0825 | 
|                                  |  |           |        | 
|2009 Price Range                  |  |           |        |  |           |   |       |           |  |   |           | 
|High                              |  | $         | 5.20   |  |           | $ | 3.50  |           |  | $ | 2.84      |  |  | $ | 2.75   | 
|Low                               |  |           | 1.75   |  |           |   | 1.50  |           |  |   | 2.22      |  |  |   | 1.55   | 
|Cash dividends declared per share |  |           | 0.025  |  |           |   | 0.025 |           |  |   | 0.025     |  |  |   | 0.025  | 

Dividends.See Item 1.
Description of Business  Supervision and Regulation  Dividend and Repurchase Limitations above for regulatory and TARP restrictions, which limit the ability of the Company to pay dividends.

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 fiscal year 2010, the Company declared and paid to its stockholders dividends totaling $0.10 per share (see chart above for declared quarterly dividends). Subject to the regulatory and TARP restrictions discussed in
Item 1 Dividend and Repurchase Limitations, the Company may continue to pay stockholders in the form of annual cash dividends, if doing so is considered to be in the best interest of the Company and consistent with maintaining the
Companys status as a well capitalized institution under applicable banking laws and regulations, and the regulators are in agreement thereof. In 2010, the dividends awarded to stockholders accounted for 83.0% of fully diluted
earnings per share available to common shareholders.

Recent Sales of Unregistered Securities. Except for the sale of preferred stock
to the Treasury in 2009 and the exchange thereof in 2010, the Company did not sell any securities within the last three fiscal years that were not registered under the Securities Act.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers.The Company did not repurchase any shares of its common stock in 2010.

Equity Compensation Plan.The Companys stock option plan, and all options granted thereunder, expired as of or before December 31,
2009.



20



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial information for the Company, including balance sheets and operational data as of and for the years ended
December 31, 2010, 2009, and 2008, portions of which have been derived from, and are qualified by reference to, and should be read in conjunction with, the Consolidated Financial Statements and notes thereto included elsewhere in this report.
The comparability of financial data for these periods has been impacted by the acquisition of Mutual Community Savings Bank, Inc., SSB (MCSB) in March, 2008.



|                                                       |  |                                            |           |   |      |   |           |      |  |   |           |   
|------------------------------------------------------ |  | ------------------------------------------ | --------- | - | ---- | - | --------- | ---- |  | - | --------- | --
|                                                       |  | As of and for the Years Ended December 31, |          
|(Dollars in thousands)                                 |  | 2010                                       |           |   | 2009 |   |           | 2008 | 
|Selected Balance Sheet Data                            |  |                                            |           |   |      |   |           |      |  |   |           |   
|Cash and due from banks                                |  | $                                          | 74,575    |   |      | $ | 30,313    |      |  | $ | 13,776    |   
|Securities                                             |  |                                            | 20,627    |   |      |   | 17,699    |      |  |   | 32,503    |   
|Gross loans                                            |  |                                            | 201,771   |   |      |   | 210,111   |      |  |   | 208,411   |   
|Allowance for loan losses                              |  |                                            | (3,851    | ) |      |   | (3,564    | )    |  |   | (2,962    | ) 
|Total Assets                                           |  |                                            | 312,345   |   |      |   | 274,381   |      |  |   | 271,618   |   
|Deposits                                               |  |                                            | 269,684   |   |      |   | 224,807   |      |  |   | 216,567   |   
|Borrowings                                             |  |                                            | 745       |   |      |   | 7,766     |      |  |   | 25,046    |   
|Stockholders equity                                   |  |                                            | 36,410    |   |      |   | 36,555    |      |  |   | 24,319    |   
|                                                       |  |                                            |          
|(Dollars in thousands)                                 |  |                                            |           |   |      |   |           |      |  |   |           |   
|Summary of Operations                                  |  |                                            |           |   |      |   |           |      |  |   |           |   
|Interest income                                        |  | $                                          | 13,108    |   |      | $ | 14,164    |      |  | $ | 14,651    |   
|Interest expense                                       |  |                                            | 2,063     |   |      |   | 2,924     |      |  |   | 4,503     |   
|Net interest income                                    |  |                                            | 11,045    |   |      |   | 11,240    |      |  |   | 10,148    |   
|Provision for loan losses                              |  |                                            | 520       |   |      |   | 1,853     |      |  |   | 823       |   
|Net interest income after provision for loan losses    |  |                                            | 10,525    |   |      |   | 9,387     |      |  |   | 9,325     |   
|Other operating income                                 |  |                                            | 2,222     |   |      |   | 2,620     |      |  |   | 2,366     |   
|Other operating expense                                |  |                                            | 11,844    |   |      |   | 11,250    |      |  |   | 13,327    |   
|Pre-tax net income (loss) before extraordinary gain    |  |                                            | 903       |   |      |   | 757       |      |  |   | (1,636    | ) 
|Income tax expense (benefit) before extraordinary gain |  |                                            | 89        |   |      |   | 97        |      |  |   | (825      | ) 
|Extraordinary gain                                     |  |                                            |          |   |      |   |          |      |  |   | 1,712     |   
|Net income                                             |  |                                            | 814       |   |      |   | 660       |      |  |   | 901       |   
|Preferred dividends                                    |  |                                            | 475       |   |      |   | 302       |      |  |   |          |   
|Net income available to common stockholders            |  | $                                          | 339       |   |      | $ | 358       |      |  | $ | 901       |   
|                                                       |  |                                            |          
|Per Share Data (1)                                     |  |                                            |           |   |      |   |           |      |  |   |           |   
|Before extraordinary gain:                             |  |                                            |           |   |      |   |           |      |  |   |           |   
|Net income (loss)-basic and diluted                    |  | $                                          | 0.17      |   |      | $ | 0.18      |      |  | $ | (0.42     | ) 
|After extraordinary gain:                              |  |                                            |           |   |      |   |           |      |  |   |           |   
|Net income-basic and diluted                           |  | $                                          | 0.17      |   |      | $ | 0.18      |      |  | $ | 0.46      |   
|Dividends                                              |  |                                            | 0.10      |   |      |   | 0.10      |      |  |   | 0.20      |   
|Book value per share of common stock (2)               |  |                                            | 12.15     |   |      |   | 12.22     |      |  |   | 11.97     |   
|Average common shares outstanding                      |  |                                            | 2,031,337 |   |      |   | 2,031,337 |      |  |   | 1,948,220 |   
|                                                       |  |                                            |          
|Selected Ratios                                        |  |                                            |           |   |      |   |           |      |  |   |           |   
|Before extraordinary gain:                             |  |                                            |           |   |      |   |           |      |  |   |           |   
|Return (loss) on average assets                        |  |                                            | 0.28      | % |      |   | 0.25      | %    |  |   | (0.32     | )%
|Return (loss) on average stockholders equity          |  |                                            | 2.21      |   |      |   | 2.13      |      |  |   | (3.24     | ) 
|After extraordinary gain:                              |  |                                            |           |   |      |   |           |      |  |   |           |   
|Return on average assets                               |  |                                            | 0.28      | % |      |   | 0.25      | %    |  |   | 0.35      | % 
|Return on average stockholders equity                 |  |                                            | 2.21      |   |      |   | 2.13      |      |  |   | 3.59      |   
|                                                       |  |                                            |          
|Dividend payout ratio                                  |  |                                            | 58.82     | % |      |   | 55.56     | %    |  |   | 43.48     | % 
|Average stockholders equity to average total assets   |  |                                            | 12.63     |   |      |   | 11.71     |      |  |   | 9.77      |   
|Net interest margin (3)                                |  |                                            | 4.09      |   |      |   | 4.61      |      |  |   | 4.44      |   



|(1) | available to common stockholders
|--- | --------------------------------

|(2) | stockholders equity reduced for aggregate liquididation preference of preferred stock
|--- | -------------------------------------------------------------------------------------

|(3) | on a tax equivalent basis (TE)
|--- | --------------------------------



21



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



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 elsewhere in this report. This discussion may
contain forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in forward-looking statements as a result of various factors. See Item 1A Risk Factors and
the cautionary statement on page 2 of this Annual Report on Form 10-K, entitled Forward-looking Statements.

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. Beginning in 2007, the Bank celebrated the
100thanniversary 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, 2010, the Company conducted no business other than providing
services and assistance to the Bank, its wholly owned subsidiary.

On March 28, 2008, the Company completed the acquisition of MCSB,
which had opened its original operation in a teller window of the Bank 84 years previously.

The Banks business consists principally of
attracting deposits from the general public and investing these funds in loans secured by commercial real estate, secured and unsecured commercial 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.

The Banks operations are influenced significantly by local economic conditions and by policies of financial institution 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.

EXECUTIVE SUMMARY

Impact of Recent Developments on the Banking Industry

Congress enacted the Dodd-Frank Act on July 21, 2010. This new law will significantly change the current bank regulatory
structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act is a significant piece of legislation that will have major effects on the financial
services industry, including the Company, and the financial condition and operations of banks and bank holding companies, including the Bank. Management is currently evaluating the impact of the Dodd-Frank Act; however, uncertainty remains as to its
operational impact, which could have a material adverse impact on the Companys and the Banks business, results of operations and financial condition. Many of the provisions of the Dodd-Frank Act are focused on financial institutions that
are significantly larger than the Company and the Bank. As rules and regulations are promulgated by the agencies responsible for implementing and enforcing the Dodd-Frank Act, the Company and the Bank will have to address each to ensure compliance
with applicable provisions of the Act and compliance costs are expected to increase.

It is difficult to predict at this time what specific
impact the Dodd-Frank Act and the yet to be written rules and regulations will have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest
expense.



22



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



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

As discussed in more detail below, the following is a brief
summary of the Companys significant results for the year ended December 31, 2010.



| |  |  | Net income before preferred stock dividends was $0.8 million for the year ended December 31, 2010 and $0.7 million for the year ended
December 31, 2009. For the year ended December 31, 2010, net income available to common stockholders was $0.3 million, or $0.17 per common share. For the year ended December 31, 2009, net income available to common stockholders was
$0.4 million, or $0.18 per common share. The difference in earnings per share of common stock is attributable to a full year of Preferred Stock dividends in 2010, versus one-half year of Preferred Stock dividends in 2009, partially offset by the
decrease in the Preferred Stock dividend rate from 5% to 2% effective with the exchange of the Series A Preferred for the Series B Preferred on August 20, 2010.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest income on loans decreased by $0.8 million or 6.05% while interest income on investments and cash decreased $0.3 million resulting in total
interest income being $1.1 million less in the year ended December 31, 2010 compared to the year ended December 31, 2009. Average loans outstanding for the year ended December 31, 2010 decreased $4.0 million from the 2009 level, and
the rate for average loan interest earned decreased 21 basis points (bp) during 2010 compared to 2009.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest expense on deposits decreased $0.8 million and interest expense on borrowings decreased 0.1 million, resulting in total interest expense
being $0.9 million less in the year ended December 31, 2010 compared to the year ended December 31, 2009. Average interest-bearing deposits outstanding in 2010 increased $22.8 million during 2010 from the level in 2009; however, the
average cost of those deposits decreased 57 bp in 2010 compared to the 2009 level. Average borrowings in 2010 decreased $7.5 million in 2010 compared to the 2009 level, and the cost of those borrowings decreased 45 bp during the comparable periods.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net interest income, due to the above factors, decreased $0.2 million in the year ended December 31, 2010 compared to the year ended
December 31, 2009. The net interest margin, on a tax equivalent basis for the year ended December 31, 2010 was 4.09% compared to 4.66%, a decrease of 57 bp.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As economic conditions began to improve, and unemployment moderated, fewer of the Companys borrowers have failed to meet their obligations
repayment, and average loans outstanding decreased. The ending balance of the Allowance for Loan Losses increased in 2010 to 1.91% of loans outstanding as of December 31, 2010 compared to 1.70% of total loans outstanding as of December 31,
2009. While the coverage increased during 2010, the decrease in average loans outstanding and lower incurred losses for business borrowers, have resulted in managements estimate of a lower provision expense required to cover the estimated
inherent losses in the loan portfolio. As a direct result, the provision for loan losses has decreased by $1.3 million to $0.5 million for the year ended December 31, 2010, compared to $1.9 million for the year ended December 31, 2009.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Noninterest income decreased $0.4 million in 2010 over 2009, mainly due to the sale in 2009 of a closed branch and land owned by the Bank.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Noninterest expenses increased $0.6 million in 2010 over 2009 largely driven by a decrease in Other Real Estate Owned (OREO) property
values in 2010, an increase in FDIC insurance expense of $0.2 million, and an increase in miscellaneous expense of $0.2 million, and information technology expense of $0.1 million, partially offset by decreases in employee compensation and
benefits of $0.4 million, occupancy expense of $0.2 million, and delivery expense of $0.1 million.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Preferred stock dividends in 2010 were $0.5 million, compared to $0.3 million in 2009.
| | - |  | --------------------------------------------------------------------------------------

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.



23



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



The Bank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 results, and they require managements most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently
uncertain. Management has reviewed these critical accounting policies and related disclosures with the Audit Committee of the Board of Directors.



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



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



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



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



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

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



24



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



RESULTS OF OPERATIONS

Year Ended December 31, 2010 Compared with Year Ended December 31, 2009



| |  |  | Net income before preferred stock dividends was $0.8 million and $0.7 million for the years ended December 31, 2010 and 2009, respectively. Net
income available to common stockholders for the year ended December 31, 2010 was $0.3 million or $0.17 per share. Net income available to common stockholders for the year ended December 31, 2009 was $0.4 million or $0.18 per share.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net operating income before income taxes for the years ended December 31, 2010 and 2009 were $0.9 million and $0.8 million respectively.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net interest margin decreased from 4.66% for the year ended December 31, 2009 to 4.09% for the year ended December 31, 2010 due to:
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Average loans outstanding decreased $4.0 million in 2010 over 2009, resulting in $0.2 million less interest income combined with the decrease of $0.6
million attributable to the average rate decrease from 6.21% in 2009 to 5.94% in 2010.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Average interest bearing deposits outstanding increased $22.8 million in 2010 over 2009, resulting in $0.2 million in additional interest expense,
partially offset by the $1.0 million decrease in expense due to the decrease in the average rate paid for deposits from 1.59% in 2009 to 1.02% in 2010.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Average borrowings outstanding in 2010 decreased $7.5 million from the 2010 average balance, and the average rate paid on borrowings decreased from
0.81% in 2009 to 0.34% in 2010, reducing net interest margin $0.1 million in 2010 compared to 2009.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Noninterest income declined $0.4 million in 2010 from the level in 2009, predominantly due to the sale of bank owned property including a branch closed
in 2009 and land adjacent to another branch.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Noninterest expense increased in 2010 by $0.6 million. A decrease in OREO appraisal values led to $0.5 million of the increase, increased FDIC
insurance expense was $0.2 million, and information technology costs increased $0.1 million in 2010 compared to 2009. These increased expenses were partially offset by salaries and employee benefits which decreased $0.3 million in 2010 from 2009,
mainly attributable to the reduction in headcount in 2009 when the Bank undertook closing two branches and a corresponding reduction in branch, operations, and administrative staff. Occupancy expense decreased $0.2 million in 2010 due to the branch
closures, and delivery expense decreased $0.1 million due to the Bank changing courier services in 2010 when compared to 2009.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The above reductions in income were offset by a large decline in loan provision from $1.9 million to $0.5 million for the years ended December 31,
2009 and 2010, respectively.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Net Interest Income. Net interest income, the difference between total interest income
from loans and investments, and total interest expenses from deposits and borrowings, is the Companys principal source of earnings. The amount of net interest income is determined by the volume of interest-earning assets, the level of rates
earned on those assets, and the volume and cost of underlying funding from deposits and borrowings. Net interest income before the provision for loan losses decreased $0.2 million, or 1.73%, from $11.2 million for the year ended December 31,
2009, to $11.0 million for the year ended December 31, 2010. Net interest spread is the difference between rates earned on interest-earning assets and the interest paid on deposits and borrowed funds. Net interest margin is the total of net
interest income divided by average earning assets. Average earning assets for the year ended December 31, 2010 were $274.3 million, up 11.06% compared to $247.0 million for the year ended December 31, 2009. On a fully TE basis, net
interest margin was 4.09% and 4.66% for the years ended December 31, 2010 and 2009, respectively. The net interest spread decreased 42 bps to 3.82% for the year ended December 31, 2010, from 4.24% for the year ended December 31, 2009.
The yield on average interest-earning assets was 4.84% and 5.80% for the years ended December 31, 2010 and 2009, respectively, a decrease of 96 bps, while the interest rate on average interest-bearing liabilities for those periods was 1.02% and
1.56%, respectively, a decrease of 54 bps due to the ongoing low interest rate environment.

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

Interest income decreased 7.46% for the year ended December 31, 2010 to $13.1 million, from $14.2 million for the year ended December 31, 2009.
The average balances of loans, which had overall yields of 5.94% for the year ended December 31, 2010 and 6.21% for the year ended December 31, 2009, respectively, decreased from $211.0 million for the year ended December 31, 2009 to
$207.0 million for the year ended December 31, 2010. The average balance of investment securities decreased $5.4 million from $23.4 million for the year ended December 31, 2009 to $18.0 million for the year ended December 31, 2010.
The TE yield on investment securities decreased from 5.55% for the year ended December 31, 2009 to 4.95% for the year ended December 31, 2010. The rate decreases have been driven by the economy and market conditions. The average balances
of federal funds and other short-term investments increased from $12.6 million for the year ended December 31, 2009 to $49.3 million for the year ended December 31, 2010, and the average yield in this category decreased 4 bps from 0.24% to
0.20% over the same time period resulting from the decrease in short-term interest rates. The increase in federal funds sold and other short-term investments has resulted from the decrease in loans and the increase in deposits during 2010.



25



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



Interest expense decreased 29.45% for the year ended December 31, 2010, to $2.1 million, from $2.9
million for the year ended December 31, 2009. Average total interest-bearing deposits, including savings, interest-bearing demand deposits and time deposits increased from $179.2 million for the year ended December 31, 2009, to $202.0
million for the year ended December 31, 2010. The average rate paid on interest-bearing deposits decreased 57 bps from 1.59% for the year ended December 31, 2009 to 1.02% for the year ended December 31, 2010, primarily in response to
the decreases in rates paid on time deposits.

The average rate on borrowings decreased from 0.81% for the year ended December 31, 2009
to 0.34% for the year ended December 31, 2010. The average borrowings outstanding decreased from $8.6 million for the year ended December 31, 2009 to $1.1 million for the year ended December 31, 2010. The interest expense on
borrowed funds decreased by $66 thousand in 2010 from $70 thousand in 2009 to $4 thousand, reflecting lower rates and lower average balances. In early 2010, the Company repaid a short-term borrowing at the FHLB, and took advantage of the opportunity
to pay off another long term borrowing without a prepayment penalty. Other than periodic testing of the Banks federal funds lines with correspondent banks, there was only one long term, small balance loan outstanding for the balance of 2010.

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 tables, the amount earned on nontaxable securities is reflected as actual, whereas the rate on nontaxable securities is stated at the TE rate.



26



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



Average Balances, Interest Earned or Paid, and Interest Yields/Rates

For the Years Ended December 31, 2010 and 2009



|                                                                |  |                |         |   |                   |   |        |             |  |  |                |   |  |                   |         |   |             |   |        |   |  |  |      |  
|--------------------------------------------------------------- |  | -------------- | ------- | - | ----------------- | - | ------ | ----------- |  |  | -------------- | - |  | ----------------- | ------- | - | ----------- | - | ------ | - |  |  | ---- | -
|(Dollars in thousands)                                          |  | 2010           |         |   | 2009              |  
|                                                                |  | AverageBalance |         |   | AmountEarned/Paid |   |        | AverageRate |  |  | AverageBalance |   |  | AmountEarned/Paid |         |   | AverageRate |  
|Assets                                                          |  |                |         |   |                   |   |        |             |  |  |                |   |  |                   |         |   |             |   |        |   |  |  |      |  
|Loans receivable (1):                                           |  | $              | 207,011 |   |                   | $ | 12,304 |             |  |  | 5.94           | % |  | $                 | 211,046 |   |             | $ | 12,983 |   |  |  | 6.15 | %
|Taxable securities                                              |  |                | 10,837  |   |                   |   | 415    |             |  |  | 3.83           |   |  |                   | 13,387  |   |             |   | 623    |   |  |  | 4.65 |  
|Nontaxable securities(2)                                        |  |                | 7,142   |   |                   |   | 292    |             |  |  | 6.65           |   |  |                   | 9,996   |   |             |   | 415    |   |  |  | 6.76 |  
|Federal funds sold and other interest on short-term investments |  |                | 49,323  |   |                   |   | 97     |             |  |  | 0.20           |   |  |                   | 12,570  |   |             |   | 30     |   |  |  | 0.24 |  
|                                                                |  |                |         |   |                   |   |        |             |  |  |                |   |  |                   |         |   |             |   |        |   |  |  |      |  
|Total interest earning assets                                   |  |                | 274,313 |   |                   |   | 13,108 |             |  |  | 4.84           | % |  |                   | 246,999 |   |             |   | 14,051 |   |  |  | 5.75 | %
|Cash and due from banks                                         |  |                | 2,046   |   |                   |   |        |             |  |  |                |   |  |                   | 2,115   |   |             |   |        |   |  |  |      |  
|Other assets                                                    |  |                | 19,015  |   |                   |   |        |             |  |  |                |   |  |                   | 18,621  |   |             |   |        |   |  |  |      |  
|Allowance for loan losses                                       |  |                | (3,762  | ) |                   |   |        |             |  |  |                |   |  |                   | (3,188  | ) |             |   |        |   |  |  |      |  
|                                                                |  |                |         |   |                   |   |        |             |  |  |                |   |  |                   |         |   |             |   |        |   |  |  |      |  
|Total assets                                                    |  | $              | 291,612 |   |                   |   |        |             |  |  |                |   |  | $                 | 264,547 |   |             |   |        |   |  |  |      |  
|                                                                |  |                |         |   |                   |   |        |             |  |  |                |   |  |                   |         |   |             |   |        |   |  |  |      |  
|                                                                |  |                |         |   |                   |  
|Liabilities and Equity                                          |  |                |         |   |                   |   |        |             |  |  |                |   |  |                   |         |   |             |   |        |   |  |  |      |  
|Savings deposits                                                |  | $              | 50,494  |   |                   | $ | 178    |             |  |  | 0.35           | % |  | $                 | 29,467  |   |             | $ | 59     |   |  |  | 0.20 | %
|Interest-bearing demand deposits                                |  |                | 27,805  |   |                   |   | 97     |             |  |  | 0.35           |   |  |                   | 46,682  |   |             |   | 345    |   |  |  | 0.74 |  
|Time deposits                                                   |  |                | 123,677 |   |                   |   | 1,784  |             |  |  | 1.44           |   |  |                   | 103,032 |   |             |   | 2,450  |   |  |  | 2.38 |  
|                                                                |  |                |         |   |                   |   |        |             |  |  |                |   |  |                   |         |   |             |   |        |   |  |  |      |  
|Total interest-bearing deposits                                 |  |                | 201,976 |   |                   |   | 2,059  |             |  |  | 1.02           |   |  |                   | 179,181 |   |             |   | 2,854  |   |  |  | 1.59 |  
|Borrowed funds                                                  |  |                | 1,099   |   |                   |   | 4      |             |  |  | 0.36           |   |  |                   | 8,602   |   |             |   | 70     |   |  |  | 0.81 |  
|                                                                |  |                |         |   |                   |   |        |             |  |  |                |   |  |                   |         |   |             |   |        |   |  |  |      |  
|Total interest-bearing liabilities                              |  |                | 203,075 |   |                   |   | 2,063  |             |  |  | 1.02           | % |  |                   | 187,783 |   |             |   | 2,924  |   |  |  | 1.56 | %
|Non-interest-bearing deposits                                   |  |                | 46,304  |   |                   |   |        |             |  |  |                |   |  |                   | 39,811  |   |             |   |        |   |  |  |      |  
|Other liabilities                                               |  |                | 5,397   |   |                   |   |        |             |  |  |                |   |  |                   | 5,964   |   |             |   |        |   |  |  |      |  
|                                                                |  |                |         |   |                   |   |        |             |  |  |                |   |  |                   |         |   |             |   |        |   |  |  |      |  
|Total liabilities                                               |  |                | 254,776 |   |                   |   |        |             |  |  |                |   |  |                   | 233,558 |   |             |   |        |   |  |  |      |  
|Stockholders equity                                            |  |                | 36,836  |   |                   |   |        |             |  |  |                |   |  |                   | 30,989  |   |             |   |        |   |  |  |      |  
|                                                                |  |                |         |   |                   |   |        |             |  |  |                |   |  |                   |         |   |             |   |        |   |  |  |      |  
|Total liabilities and stockholders equity                      |  | $              | 291,612 |   |                   |   |        |             |  |  |                |   |  | $                 | 264,547 |   |             |   |        |   |  |  |      |  
|                                                                |  |                |         |   |                   |   |        |             |  |  |                |   |  |                   |         |   |             |   |        |   |  |  |      |  
|                                                                |  |                |         |   |                   |   |        |             |  |  |                |   |  |                   |         |   |             |   |        |   |  |  |      |  
|Net interest income                                             |  |                |         |   |                   | $ | 11,045 |             |  |  |                |   |  |                   |         |   |             | $ | 11,127 |   |  |  |      |  
|                                                                |  |                |         |   |                   |   |        |             |  |  |                |   |  |                   |         |   |             |   |        |   |  |  |      |  
|                                                                |  |                |         |   |                   |  
|Non-taxable securities                                          |  |                |         |   |                   |   | 292    |             |  |  |                |   |  |                   |         |   |             |   | 415    |   |  |  |      |  
|Tax equivalent adjustment (3)                                   |  |                |         |   |                   |   | 183    |             |  |  |                |   |  |                   |         |   |             |   | 260    |   |  |  |      |  
|                                                                |  |                |         |   |                   |   |        |             |  |  |                |   |  |                   |         |   |             |   |        |   |  |  |      |  
|Tax equivalent net interest income                              |  |                |         |   |                   | $ | 11,228 |             |  |  |                |   |  |                   |         |   |             | $ | 11,387 |   |  |  |      |  
|                                                                |  |                |         |   |                   |   |        |             |  |  |                |   |  |                   |         |   |             |   |        |   |  |  |      |  
|Net interest spread (4)                                         |  |                |         |   |                   |   |        |             |  |  | 3.82           | % |  |                   |         |   |             |   |        |   |  |  | 4.19 | %
|Net interest margin (5)                                         |  |                |         |   |                   |   | 4.09   | %           |  |  |                |   |  |                   |         |   |             |   | 4.61   | % |  |  |      |  
|                                                                |  |                |         |   |                   |   |        |             |  |  |                |   |  |                   |         |   |             |   |        |   |  |  |      |  



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

|(2) | The tax equivalent rate (TE) is computed using a blended federal and state tax rate of 38.55%
|--- | -----------------------------------------------------------------------------------------------

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

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

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

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 rate, 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.
| | - |  | -------------------------------------------------------



27



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



Rate and Volume Variance Analysis

|                          |  |                                               |        |   |        |   |      |           |  |   |      |  
|------------------------- |  | --------------------------------------------- | ------ | - | ------ | - | ---- | --------- |  | - | ---- | -
|                          | 
|                          |  | For the Years EndedDecember 31, 2010 vs.
2009 |       
|(Dollars in thousands)    |  | Rate                                          |        |   | Volume |   |      | Total (1) | 
|Interest income:          |  |                                               |        |   |        |   |      |           |  |   |      |  
|Loans receivable (2) (3)  |  | $                                             | (439   | ) |        | $ | (240 | )         |  | $ | (679 | )
|Taxable securities        |  |                                               | (110   | ) |        |   | (98  | )         |  |   | (208 | )
|Nontaxable securities     |  |                                               | (6     | ) |        |   | (117 | )         |  |   | (123 | )
|Federal funds sold        |  |                                               | (5     | ) |        |   | 72   |           |  |   | 67   |  
|                          |  |                                               |        |   |        |   |      |           |  |   |      |  
|Total interest income     |  |                                               | (560   | ) |        |   | (383 | )         |  |   | (943 | )
|Interest expense:         |  |                                               |        |   |        |   |      |           |  |   |      |  
|Interest-bearing deposits |  |                                               | (1,027 | ) |        |   | 232  |           |  |   | (795 | )
|Borrowed funds            |  |                                               | (39    | ) |        |   | (27  | )         |  |   | (66  | )
|                          |  |                                               |        |   |        |   |      |           |  |   |      |  
|Total interest expense    |  |                                               | (1,066 | ) |        |   | 205  |           |  |   | (861 | )
|                          |  |                                               |        |   |        |   |      |           |  |   |      |  
|Net interest income       |  | $                                             | 506    |   |        | $ | (588 | )         |  | $ | (82  | )
|                          |  |                                               |        |   |        |   |      |           |  |   |      |  



|(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.
|--- | --------------------------------------------------------------------------------------------------------

|(3) | Loan fees included in interest income earned on loans was $0.3 million for 2010 and 2009
|--- | ----------------------------------------------------------------------------------------

Noninterest Income. Noninterest income decreased 15.19% to $2.2 million from $2.6 million for years ended December 31, 2010 and 2009, respectively. In the year ended December 31, 2009,
the Bank sold two bank-owned facilities, a closed branch in Durham, NC and a parcel of land that was originally acquired with another branch, for a net gain on sale of $0.3 million, which accounted for the majority of the decrease in noninterest
income in 2010. In 2009, the Bank realized an additional $0.1 million in gain on sale of securities and disposal of assets. The additional $0.2 million in realized gains improved other noninterest income in 2009.

Noninterest Expense. Noninterest expense represents the costs of operating the Company and the Bank. Management regularly monitors all categories
of noninterest expense with the goal of improving productivity and operating performance. Noninterest expense increased 5.28% to $11.8 million for the year ended December 31, 2010 from $11.3 million for the year ended December 31, 2009.
The largest impacts to noninterest expense were increases in OREO expense, FDIC insurance expense, and information technology expense.

Salary
and employee benefits expenses for the years ended December 31, 2010 and 2009 were $5.2 million and $5.5 million, respectively. The full time equivalent employees increased from 74 as of December 31, 2009 to 77 as of December 31,
2010. The increase in staff during 2010 occurred in the second half of the year, mitigating the effect on overall salaries and wages expenses for 2010. Benefits decreased $0.1 million in 2010 compared to 2009, primarily due to decreased retirement
benefit costs associated with the Companys 401k and pension plans. The Company incurred $0.1 million in severance expenses in 2009 related to the reductions in workforce of the Banks employees associated with branch closures and
corporate office staff reductions.

Occupancy expense decreased $0.2 million in the year ended December 31, 2010 from the same period in
2009. Depreciation and amortization expenses decreased $0.1 million to $0.4 million for the year ended December 31, 2010 from $0.5 million for the year ended December 31, 2009, primarily due to assets fully depreciating in 2009 and not
being replaced. Building repairs and maintenance expense declined $0.1 million, following the 2009 branch closures. Real estate taxes, utilities, and other equipment expense decreased a combined total of $43 thousand in 2010.

Data processing and communications costs increased from $0.7 million in 2009 to $0.8 million in 2010, mainly due to increased core processing charges of
$0.1 million associated with the increase in total assets.

Directors and advisory board fees were basically flat at $0.3 million for 2009 and
2010. Professional fees increased $38 thousand in 2010 above 2009. Consultant costs increased $0.1 million, temporary help decreased $35 thousand, legal fees remained flat, and audit costs decreased $0.1 million in 2010 from 2009 levels as the
result of cost containment measures.

In 2010, FDIC insurance premiums increased $0.2 million due to an increase in our insurance rate and
overall deposits.



28



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



Other expenses increased $0.2 million for the year ended December 31, 2010 from the year ended
December 31, 2009. Increases in contributions, franchise tax, and appraisal fees led to the majority of the $0.2 million increase over prior year.

Provision for Income Taxes. The Company recorded an income tax expense of $0.1 million for the years ended December 31, 2010 and December 31, 2009. The overall effective
rate decreased from a tax expense of 12.81% in 2009 to a tax expense of 9.86% in 2010.

ASSET QUALITY

Provision and Allowance for Loan Losses. The provision for loan losses is the amount charged against earnings, to establish an adequate allowance
for loan losses. Loan losses and recoveries are charged to or credited to this allowance, rather than reported as a direct expense or recovery. As of December 31, 2010, the allowance for loan losses was $3.9 million compared to $3.6 million for
the year ended December 31, 2009, an increase of $0.3 million, which represented approximately 1.91% and 1.70% of total loans outstanding on those respective dates. Nonperforming assets, defined as non-accruing loans plus foreclosed properties,
at December 31, 2010 were 4.07% of total assets compared to 2.13% at December 31, 2009. Nonperforming loans as percentage of total loans at the end of 2010 was 6.23% compared to 5.32% at December 31, 2009.

Of the non-accruing loans totaling $12.6 million at December 31, 2010, 90.6% of the outstanding balance is secured by real estate, which management
believes mitigates the risk of loss. Troubled debt restructurings (TDRs) in compliance with the modified terms totaled $3.19 million or 37.7% of total TDRs at December 31, 2010. GAAP does not provide specific guidance on when a loan
may be returned to accrual status. Federal banking regulators have provided guidance that interest on impaired loans, including TDRs, should only be recorded when there has been a sustained period of repayment performance, the loan is well secured,
and collection under any revised terms is assessed as probable. The Company currently uses this Federal banking regulators guidance.

In
analyzing its allowance for loan losses, the Company tracks its net loan loss history by loan type. The quantitative net loss history utilizes the prior two year period by loan type for the reserve. The quantitative loss experience by loan type is
then applied against the unimpaired loan balances and homogenous impaired balances to determine the quantitative reserve. Under Accounting Standards Codification (ASC) Section 310 Receivables(ASC 310), the
non-homogenous impaired loans, homogenous small balance real estate secured loans in process of foreclosure, and TDRs, are reviewed individually for impairment. The second piece of the calculation is based on qualitative factors, including
(i) policy, underwriting, charge-off and collection (ii) national and local economic conditions, (iii) nature and volume of the portfolio, (iv) experience, ability, and depth of lending team, (v) trends of past due,
classified loans, and restructurings, (vi) quality of loan review and board oversight, (vii) existence, levels, and effect of loan concentrations and (viii) effects of external factors such as competition and regulatory oversight, are
adjusted quarterly based on historical information for any quantifiable factors, and applied in total to each loan balance by loan type. The Company continues to enhance its modeling of the portfolio and underlying risk factors through quarterly
analytical reviews with the goal of ensuring it captures all pertinent factors contributing to risk of loss inherent in the loan portfolio. The Company applies additional qualitative factors for classified loans including special mention,
substandard, and doubtful loans not identified as impaired, when the loan has a loan to value exceeding 50% of the outstanding balance and is not current in its payments.

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

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

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. The allowance for loan and lease losses attributed to impaired loans considers all available evidence, including as
appropriate, the probability that a specific loan will default, the expected exposure of a loan in default, an estimate of loss given default, the present value of expected future cash flows discounted using the loans contractual effective
rate, the secondary market value of the loan and the fair value of collateral.



29



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



When a loan has been identified as being impaired, the allowance attributed considers all available
evidence as appropriate, the probability that a specific loan will default, the expected exposure of a loan in default, an estimate of loss given default, the present value of expected future cash flows discounted using the loans contractual
effective rate, the secondary market value of the loan and the fair value of collateral. 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), an 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 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 maybe accrued or recognized on a cash basis.

In 2010 the provision for loan losses decreased to $0.5 million from the 2009 level of $1.9 million. In 2009, two TDR loans to one borrower were determined to be permanently impaired for $0.8 million, and
the carrying values of the loans were decreased accordingly. In addition, the carrying values of loans to two other borrowers whose loans were not TDRs, were decreased a total of $0.4 million in 2009. These TDR and non-TDR principal write-downs
contributed to the larger provision in 2009 versus that of 2010.

Loans net of deferred fees and costs at year end were as follows:



|                                   |  |                    |         |   |      |   |         |  
|---------------------------------- |  | ------------------ | ------- | - | ---- | - | ------- | -
|                                   |  | As of December 31, |        
|(Dollars in thousands)             |  | 2010               |         |   | 2009 |  
|Commercial                         |  | $                  | 9,148   |   |      | $ | 8,006   |  
|Commercial real estate:            |  |                    |         |   |      |   |         |  
|Construction                       |  |                    | 1,187   |   |      |   | 1,162   |  
|Owner occupied                     |  |                    | 22,395  |   |      |   | 33,147  |  
|Other                              |  |                    | 24,265  |   |      |   | 27,029  |  
|Faith-based and non-profit         |  |                    |         |   |      |   |         |  
|Construction                       |  |                    | 9,840   |   |      |   | 13,773  |  
|Owner occupied                     |  |                    | 79,490  |   |      |   | 65,566  |  
|Other                              |  |                    | 2,127   |   |      |   | 2,652   |  
|Residential real estate:           |  |                    |         |   |      |   |         |  
|First mortgage                     |  |                    | 32,284  |   |      |   | 35,639  |  
|Multifamily                        |  |                    | 7,892   |   |      |   | 8,982   |  
|Home equity                        |  |                    | 5,123   |   |      |   | 5,539   |  
|Construction                       |  |                    | 2,243   |   |      |   | 2,052   |  
|Consumer                           |  |                    | 2,218   |   |      |   | 2,303   |  
|Other loans                        |  |                    | 3,559   |   |      |   | 4,261   |  
|                                   |  |                    |         |   |      |   |         |  
|Loans, net of deferred fees        |  |                    | 201,771 |   |      |   | 210,111 |  
|Allowance for loan losses          |  |                    | (3,851  | ) |      |   | (3,564  | )
|                                   |  |                    |         |   |      |   |         |  
|Loans, net of allowance for losses |  | $                  | 197,920 |   |      | $ | 206,547 |  
|                                   |  |                    |         |   |      |   |         |  

Activity in the allowance for loan losses was as follows:



|                          |  |                    |       |   |      |   |        |  
|------------------------- |  | ------------------ | ----- | - | ---- | - | ------ | -
|                          |  | As of December 31, |      
|(Dollars in thousands)    |  | 2010               |       |   | 2009 |  
|Beginning balance         |  | $                  | 3,564 |   |      | $ | 2,962  |  
|Provision for loan losses |  |                    | 520   |   |      |   | 1,853  |  
|Loans charged-off         |  |                    | (309  | ) |      |   | (1,290 | )
|Recoveries                |  |                    | 76    |   |      |   | 39     |  
|                          |  |                    |       |   |      |   |        |  
|Ending balance            |  | $                  | 3,851 |   |      | $ | 3,564  |  
|                          |  |                    |       |   |      |   |        |  



30



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



In 2010, management changed its loan-related disclosure classifications in its financial reports to
present portfolio segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for loan losses. The following table presents the allowance for loan losses and the
reported investment in loans net of deferred fees and costs by portfolio segment and based on impairment method as of December 31, 2010:



|                                                |  |                   |       |  |            |   |        |            |  |   |             |  |  |          |        |  |       |   |       |       |  |   |       |  |  |   |         | 
|----------------------------------------------- |  | ----------------- | ----- |  | ---------- | - | ------ | ---------- |  | - | ----------- |  |  | -------- | ------ |  | ----- | - | ----- | ----- |  | - | ----- |  |  | - | ------- | 
|                                                |  | December 31, 2010 |      
|                                                |  |                   |       |  | Commercial |   |        | Faith-     |  |   | Residential |  |  |          |        |  |       |   |       |       | 
|                                                |  |                   |       |  | Real       |   |        | Based and  |  |   | Real        |  |  |          |        |  | Other |   |       |       | 
|(Dollars in thousands)                          |  | Commercial        |       |  | Estate     |   |        | Non-Profit |  |   | Estate      |  |  | Consumer |        |  | Loans |   |       | Total | 
|Allowance for loan losses:                      |  |                   |       |  |            |   |        |            |  |   |             |  |  |          |        |  |       |   |       |       |  |   |       |  |  |   |         | 
|Ending allowance balance attributable to loans: |  |                   |       |  |            |   |        |            |  |   |             |  |  |          |        |  |       |   |       |       |  |   |       |  |  |   |         | 
|Individually evaluated for impairment           |  | $                 |      |  |            | $ |       |            |  | $ |            |  |  | $        | 118    |  |       | $ |      |       |  | $ |      |  |  | $ | 118     | 
|Collectively evaluated for impairment           |  |                   | 651   |  |            |   | 651    |            |  |   | 1,289       |  |  |          | 927    |  |       |   | 105   |       |  |   | 107   |  |  |   | 3,730   | 
|                                                |  |                   |       |  |            |   |        |            |  |   |             |  |  |          |        |  |       |   |       |       |  |   |       |  |  |   |         | 
|Total ending allowance balance                  |  | $                 | 651   |  |            | $ | 651    |            |  | $ | 1,289       |  |  | $        | 1,045  |  |       | $ | 105   |       |  | $ | 107   |  |  | $ | 3,848   | 
|                                                |  |                   |       |  |            |   |        |            |  |   |             |  |  |          |        |  |       |   |       |       |  |   |       |  |  |   |         | 
|                                                |  |                   |       |  |            |   |       
|Loans:                                          |  |                   |       |  |            |   |        |            |  |   |             |  |  |          |        |  |       |   |       |       |  |   |       |  |  |   |         | 
|Loans individually evaluated for impairment     |  | $                 | 1,180 |  |            | $ | 5,730  |            |  | $ | 7,270       |  |  | $        | 1,272  |  |       | $ |      |       |  | $ |      |  |  | $ | 15,452  | 
|Loans collectively evaluated for impairment     |  |                   | 7,968 |  |            |   | 42,117 |            |  |   | 84,187      |  |  |          | 46,270 |  |       |   | 2,218 |       |  |   | 3,559 |  |  |   | 186,319 | 
|                                                |  |                   |       |  |            |   |        |            |  |   |             |  |  |          |        |  |       |   |       |       |  |   |       |  |  |   |         | 
|Total ending loans balance                      |  | $                 | 9,148 |  |            | $ | 47,847 |            |  | $ | 91,457      |  |  | $        | 47,542 |  |       | $ | 2,218 |       |  | $ | 3,559 |  |  | $ | 201,771 | 
|                                                |  |                   |       |  |            |   |        |            |  |   |             |  |  |          |        |  |       |   |       |       |  |   |       |  |  |   |         | 

The Company experienced $0.2 million in net loans charged-off for the year ended December 31, 2010 compared to $1.3
million in net loan charge-offs for the year ended December 31, 2009. Net loan charge-offs as a percent of average loan balances outstanding decreased from 0.59% for the year ended December 31, 2009 to 0.11% for the year ended
December 31, 2010.

The unpaid principal balance for impaired loans, excluding troubled debt restructures were as follows:



|                                                           |  |              |       |  |      |   |       | 
|---------------------------------------------------------- |  | ------------ | ----- |  | ---- | - | ----- | 
|                                                           |  | December 31, |      
|(Dollars in thousands)                                     |  | 2010         |       |  | 2009 |  
|Year-end loans with no allocated allowance for loan losses |  | $            | 6,437 |  |      | $ | 1,605 | 
|Year-end loans with allocated allowance for loan losses    |  |              | 565   |  |      |   | 1,607 | 
|                                                           |  |              |       |  |      |   |       | 
|Total                                                      |  | $            | 7,002 |  |      | $ | 3,212 | 
|                                                           |  |              |       |  |      |   |       | 
|Amount of the allowance for loan losses allocated          |  | $            | 109   |  |      | $ | 35    | 



|                                                   |  |              |       |  |      |  |       | 
|-------------------------------------------------- |  | ------------ | ----- |  | ---- |  | ----- | 
|                                                   |  | December 31, |      
|(Dollars in thousands)                             |  | 2010         |       |  | 2009 | 
|Average of individually impaired loans during year |  |              | 5,337 |  |      |  | 2,621 | 

There was no interest income
recognized while the loans were impaired.



31



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



The following table presents loans individually evaluated for impairment, excluding TDRs by class of
loans as of December 31, 2010:



|                                    |  |                        |       |  |                    |   |       |                                   |  |   |     | 
|----------------------------------- |  | ---------------------- | ----- |  | ------------------ | - | ----- | --------------------------------- |  | - | --- | 
|                                    |  | UnpaidPrincipalBalance |       |  | RecordedInvestment |   |       | Allowance forLoan LossesAllocated | 
|(Dollars in thousands)              |  |                        |       |  |                    |   |       |                                   | 
|With no related allowance recorded: |  |                        |       |  |                    |   |       |                                   |  |   |     | 
|Commercial real estate:             |  |                        |       |  |                    |   |       |                                   |  |   |     | 
|Owner occupied                      |  | $                      | 1,358 |  |                    | $ | 1,355 |                                   |  | $ |    | 
|Other                               |  |                        | 65    |  |                    |   | 65    |                                   |  |   |    | 
|Faith-based and non-profit:         |  |                        |       |  |                    |   |       |                                   |  |   |     | 
|Owner occupied                      |  |                        | 4,474 |  |                    |   | 4,466 |                                   |  |   |    | 
|Residential real estate:            |  |                        |       |  |                    |   |       |                                   |  |   |     | 
|First mortgage                      |  |                        | 207   |  |                    |   | 207   |                                   |  |   |    | 
|Multifamily                         |  |                        | 322   |  |                    |   | 322   |                                   |  |   |    | 
|Home Equtiy                         |  |                        | 11    |  |                    |   | 11    |                                   |  |   |    | 
|                                    |  |                        |      
|With an allowance recorded:         |  |                        |       |  |                    |   |       |                                   |  |   |     | 
|Residential real estate:            |  |                        |       |  |                    |   |       |                                   |  |   |     | 
|First mortgage                      |  |                        | 324   |  |                    |   | 323   |                                   |  |   | 8   | 
|Multifamily                         |  |                        | 143   |  |                    |   | 143   |                                   |  |   | 61  | 
|Home equity                         |  |                        | 98    |  |                    |   | 98    |                                   |  |   | 40  | 
|                                    |  |                        |       |  |                    |   |       |                                   |  |   |     | 
|Total                               |  | $                      | 7,002 |  |                    | $ | 6,990 |                                   |  | $ | 109 | 
|                                    |  |                        |       |  |                    |   |       |                                   |  |   |     | 

The recorded investment in impaired loans is net of deferred fees and costs.

The amount and number of nonaccrual loans and loans past due 90 days still on accrual were as follows:



|                                             |  |              |        |  |        |  |    |        |  |   |        |  |  |  |    | 
|-------------------------------------------- |  | ------------ | ------ |  | ------ |  | -- | ------ |  | - | ------ |  |  |  | -- | 
|                                             |  | December 31, |       
|                                             |  | 2010         |        |  | 2009   | 
|(Dollars in thousands)                       |  | Amount       |        |  | Number |  |    | Amount |  |   | Number | 
|Loans past due over 90 days still on accrual |  | $            | 3,743  |  |        |  | 5  |        |  | $ |       |  |  |  |   | 
|Nonaccrual loans                             |  | $            | 12,572 |  |        |  | 53 |        |  | $ | 8,999  |  |  |  | 57 | 

Nonaccrual loans and loans past due
90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. The majority of the increase was due to one large loan put on non-accrual during the
fourth quarter of 2010 for $3 million.



32



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



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



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

The following table presents the aging of the recorded investment in loans as of December 31, 2010 by class of loans:



|                            |  |                     |       |  |                     |   |       |                             |  |   |               |  |  |         |        |  |       |   |         |  |  |   |         | 
|--------------------------- |  | ------------------- | ----- |  | ------------------- | - | ----- | --------------------------- |  | - | ------------- |  |  | ------- | ------ |  | ----- | - | ------- |  |  | - | ------- | 
|(Dollars in thousands)      |  | 30 - 59DaysPast Due |       |  | 60 - 89DaysPast Due |   |       | Greater than90 DaysPast
Due |  |   | TotalPast Due |  |  | Current |        |  | Total |  
|Commercial                  |  | $                   | 3     |  |                     | $ | 17    |                             |  | $ | 1,180         |  |  | $       | 1,200  |  |       | $ | 7,948   |  |  | $ | 9,148   | 
|Commercial real estate:     |  |                     |       |  |                     |   |       |                             |  |   |               |  |  |         |        |  |       |   |         |  |  |   |         | 
|Construction                |  |                     |      |  |                     |   |      |                             |  |   | 650           |  |  |         | 650    |  |       |   | 537     |  |  |   | 1,187   | 
|Owner occupied              |  |                     | 54    |  |                     |   | 70    |                             |  |   | 1,640         |  |  |         | 1,764  |  |       |   | 20,631  |  |  |   | 22,395  | 
|Other                       |  |                     | 92    |  |                     |   |      |                             |  |   | 3,100         |  |  |         | 3,192  |  |       |   | 21,073  |  |  |   | 24,265  | 
|Faith-based and non-profit: |  |                     |       |  |                     |   |       |                             |  |   |               |  |  |         |        |  |       |   |         |  |  |   |         | 
|Construction                |  |                     |      |  |                     |   |      |                             |  |   |              |  |  |         |       |  |       |   | 9,840   |  |  |   | 9,840   | 
|Owner occupied              |  |                     | 703   |  |                     |   | 721   |                             |  |   | 6,557         |  |  |         | 7,981  |  |       |   | 71,509  |  |  |   | 79,490  | 
|Other                       |  |                     |      |  |                     |   |      |                             |  |   |              |  |  |         |       |  |       |   | 2,127   |  |  |   | 2,127   | 
|Residential real estate:    |  |                     |       |  |                     |   |       |                             |  |   |               |  |  |         |        |  |       |   |         |  |  |   |         | 
|First mortgage              |  |                     | 1,172 |  |                     |   | 226   |                             |  |   | 2,226         |  |  |         | 3,624  |  |       |   | 28,660  |  |  |   | 32,284  | 
|Multifamily                 |  |                     |      |  |                     |   |      |                             |  |   | 465           |  |  |         | 465    |  |       |   | 7,427   |  |  |   | 7,892   | 
|Home equity                 |  |                     | 625   |  |                     |   |      |                             |  |   | 109           |  |  |         | 734    |  |       |   | 4,389   |  |  |   | 5,123   | 
|Construction                |  |                     |      |  |                     |   |      |                             |  |   |              |  |  |         |       |  |       |   | 2,243   |  |  |   | 2,243   | 
|Consumer                    |  |                     | 18    |  |                     |   | 2     |                             |  |   |              |  |  |         | 20     |  |       |   | 2,198   |  |  |   | 2,218   | 
|Other loans                 |  |                     |      |  |                     |   |      |                             |  |   |              |  |  |         |       |  |       |   | 3,559   |  |  |   | 3,559   | 
|                            |  |                     |       |  |                     |   |       |                             |  |   |               |  |  |         |        |  |       |   |         |  |  |   |         | 
|Total                       |  | $                   | 2,667 |  |                     | $ | 1,036 |                             |  | $ | 15,927        |  |  | $       | 19,630 |  |       | $ | 182,141 |  |  | $ | 201,771 | 
|                            |  |                     |       |  |                     |   |       |                             |  |   |               |  |  |         |        |  |       |   |         |  |  |   |         | 

Troubled Debt Restructuring balances at 2010 and 2009:

The Company has allocated $9 thousand and $201 thousand of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2010 and 2009,
respectively. The Company has not committed to lend additional amounts as of December 31, 2010 and 2009 to customers with outstanding loans that are classified as troubled debt restructurings.



33



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



Then unpaid principal balance of troubled debt restructures (TDRs) were as follows:



|                                                           |  |              |       |  |      |   |       | 
|---------------------------------------------------------- |  | ------------ | ----- |  | ---- | - | ----- | 
|                                                           |  | December 31, |      
|(Dollars in thousands)                                     |  | 2010         |       |  | 2009 |  
|Year-end loans with no allocated allowance for loan losses |  | $            | 8,333 |  |      | $ | 6,205 | 
|Year-end loans with allocated allowance for loan losses    |  |              | 49    |  |      |   | 773   | 
|                                                           |  |              |       |  |      |   |       | 
|Total                                                      |  | $            | 8,464 |  |      | $ | 6,978 | 
|                                                           |  |              |       |  |      |   |       | 
|                                                           |  |             
|Amount of the allowance for loan losses allocated          |  | $            | 9     |  |      | $ | 201   | 
|                                                           | 
|                                                           |  | December 31, |      
|(Dollars in thousands)                                     |  | 2010         |       |  | 2009 |  
|Average of TDR loans during year                           |  |              | 7,335 |  |      |   | 6,770 | 

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



|                                    |  |                 |       |  |                  |   |      |               |  |   |                    |  |  |                                   |       |  |  |   |   | 
|----------------------------------- |  | --------------- | ----- |  | ---------------- | - | ---- | ------------- |  | - | ------------------ |  |  | --------------------------------- | ----- |  |  | - | - | 
|(Dollars in thousands)              |  | ImpairedBalance |       |  | LiquidCollateral |   |      | TotalExposure |  |   | RecordedInvestment |  |  | Allowance forLoan LossesAllocated |      
|With no related allowance recorded: |  |                 |       |  |                  |   |      |               |  |   |                    |  |  |                                   |       |  |  |   |   | 
|Commercial                          |  | $               | 1,180 |  |                  | $ |     |               |  | $ | 1,180              |  |  | $                                 | 1,180 |  |  | $ |  | 
|Commercial real estate:             |  |                 |       |  |                  |   |      |               |  |   |                    |  |  |                                   |       |  |  |   |   | 
|Construction                        |  |                 | 1,038 |  |                  |   |     |               |  |   | 1,038              |  |  |                                   | 1,038 |  |  |   |  | 
|Owner occupied                      |  |                 | 744   |  |                  |   |     |               |  |   | 744                |  |  |                                   | 744   |  |  |   |  | 
|Other                               |  |                 | 3,034 |  |                  |   |     |               |  |   | 3,034              |  |  |                                   | 3,034 |  |  |   |  | 
|Faith-based and non-profit:         |  |                 |       |  |                  |   |      |               |  |   |                    |  |  |                                   |       |  |  |   |   | 
|Owner occupied                      |  |                 | 2,301 |  |                  |   | (103 | )             |  |   | 2,198              |  |  |                                   | 2,299 |  |  |   |  | 
|Residential real estate:            |  |                 |       |  |                  |   |      |               |  |   |                    |  |  |                                   |       |  |  |   |   | 
|First mortgage                      |  |                 | 118   |  |                  |   | (6   | )             |  |   | 112                |  |  |                                   | 118   |  |  |   |   | 
|                                    |  |                 |       |  |                 
|With an allowance recorded:         |  |                 |       |  |                  |   |      |               |  |   |                    |  |  |                                   |       |  |  |   |   | 
|Residential real estate:            |  |                 |       |  |                  |   |      |               |  |   |                    |  |  |                                   |       |  |  |   |   | 
|First mortgage                      |  |                 | 49    |  |                  |   |     |               |  |   | 49                 |  |  |                                   | 49    |  |  |   | 9 | 
|                                    |  |                 |       |  |                  |   |      |               |  |   |                    |  |  |                                   |       |  |  |   |   | 
|Total                               |  | $               | 8,464 |  |                  | $ | (109 | )             |  | $ | 8,355              |  |  | $                                 | 8,462 |  |  | $ | 9 | 
|                                    |  |                 |       |  |                  |   |      |               |  |   |                    |  |  |                                   |       |  |  |   |   | 

The recorded investment in TDR loans is net of deferred fees and costs.

Credit Quality Indicators:

The Company
categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current
economic trends, among other factors. The Company analyzes loans for impairment by the loans classification as to credit risk. This analysis includes non-homogenous loans, such as commercial, commercial real estate and faith-based
nonprofit entities. This analysis is performed at least on 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.

Substandard. Loans
classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of
or repayment according to the original terms of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.



34



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



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.

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass-rated loans. As of
December 31, 2010, and based on the most recent analysis performed, the risk category by class of loans is as follows:



|                            |  |      |         |  |                |   |       |             |  |   |          |  |  |   |   | 
|--------------------------- |  | ---- | ------- |  | -------------- | - | ----- | ----------- |  | - | -------- |  |  | - | - | 
|(Dollars in thousands)      |  | Pass |         |  | SpecialMention |   |       | Substandard |  |   | Doubtful | 
|Commercial                  |  | $    | 7,495   |  |                | $ | 234   |             |  | $ | 1,419    |  |  | $ |  | 
|Commercial real estate:     |  |      |         |  |                |   |       |             |  |   |          |  |  |   |   | 
|Construction                |  |      | 115     |  |                |   | 34    |             |  |   | 1,038    |  |  |   |  | 
|Owner occupied              |  |      | 17,312  |  |                |   | 1,759 |             |  |   | 3,324    |  |  |   |  | 
|Other                       |  |      | 16,637  |  |                |   | 1,529 |             |  |   | 6,099    |  |  |   |  | 
|Faith-based and non-profit: |  |      |         |  |                |   |       |             |  |   |          |  |  |   |   | 
|Construction                |  |      | 9,560   |  |                |   |      |             |  |   | 280      |  |  |   |  | 
|Owner occupied              |  |      | 59,893  |  |                |   | 2,940 |             |  |   | 16,657   |  |  |   |  | 
|Other                       |  |      | 2,057   |  |                |   | 22    |             |  |   | 48       |  |  |   |  | 
|Residential real estate:    |  |      |         |  |                |   |       |             |  |   |          |  |  |   |   | 
|First mortgage              |  |      | 26,951  |  |                |   | 1,362 |             |  |   | 3,971    |  |  |   |  | 
|Multifamily                 |  |      | 7,293   |  |                |   | 67    |             |  |   | 532      |  |  |   |  | 
|Home equity                 |  |      | 4,544   |  |                |   | 73    |             |  |   | 506      |  |  |   |  | 
|Construction                |  |      | 2,243   |  |                |   |      |             |  |   |         |  |  |   |  | 
|Consumer                    |  |      | 2,158   |  |                |   |      |             |  |   | 60       |  |  |   |  | 
|Other loans                 |  |      | 437     |  |                |   |      |             |  |   | 3,122    |  |  |   |  | 
|                            |  |      |         |  |                |   |       |             |  |   |          |  |  |   |   | 
|Total                       |  | $    | 156,695 |  |                | $ | 8,020 |             |  | $ | 37,056   |  |  | $ |  | 
|                            |  |      |         |  |                |   |       |             |  |   |          |  |  |   |   | 



35



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



The provision for loan losses assigned to these ratings by portfolio class as of December 31, 2010
is as follows:



|                            |  |      |       |  |                |   |     |             |  |   |          |  |  |   |   | 
|--------------------------- |  | ---- | ----- |  | -------------- | - | --- | ----------- |  | - | -------- |  |  | - | - | 
|(Dollars in thousands)      |  | Pass |       |  | SpecialMention |   |     | Substandard |  |   | Doubtful | 
|Commercial                  |  | $    | 629   |  |                | $ | 19  |             |  | $ | 3        |  |  | $ |  | 
|Commercial real estate:     |  |      |       |  |                |   |     |             |  |   |          |  |  |   |   | 
|Construction                |  |      | 2     |  |                |   |     |             |  |   |         |  |  |   |  | 
|Owner occupied              |  |      | 312   |  |                |   | 23  |             |  |   | 33       |  |  |   |  | 
|Other                       |  |      | 217   |  |                |   | 20  |             |  |   | 44       |  |  |   |  | 
|Faith-based and non-profit: |  |      |       |  |                |   |     |             |  |   |          |  |  |   |   | 
|Construction                |  |      | 125   |  |                |   |    |             |  |   | 4        |  |  |   |  | 
|Owner occupied              |  |      | 933   |  |                |   | 40  |             |  |   | 157      |  |  |   |  | 
|Other                       |  |      | 27    |  |                |   | 1   |             |  |   | 2        |  |  |   |  | 
|Residential real estate:    |  |      |       |  |                |   |     |             |  |   |          |  |  |   |   | 
|First mortgage              |  |      | 515   |  |                |   | 19  |             |  |   | 68       |  |  |   |  | 
|Multifamily                 |  |      | 179   |  |                |   | 3   |             |  |   | 63       |  |  |   |  | 
|Home equity                 |  |      | 120   |  |                |   | 2   |             |  |   | 46       |  |  |   |  | 
|Construction                |  |      | 30    |  |                |   |    |             |  |   |         |  |  |   |  | 
|Consumer                    |  |      | 103   |  |                |   |    |             |  |   | 2        |  |  |   |  | 
|Other loans                 |  |      | 66    |  |                |   |    |             |  |   | 41       |  |  |   |  | 
|                            |  |      |       |  |                |   |     |             |  |   |          |  |  |   |   | 
|Total                       |  | $    | 3,258 |  |                | $ | 127 |             |  | $ | 463      |  |  | $ |  | 
|                            |  |      |       |  |                |   |     |             |  |   |          |  |  |   |   | 

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 the banks chief credit officer or the directors loan committee. Credit risk ratings are determined by evaluating a number of factors
including, a borrowers financial strength, cash flow coverage, collateral protection and guarantees. The credit risk ratings and methodology applied are reviewed annually by management and the board of directors.

FINANCIAL CONDITION

The
Companys financial condition is measured in terms of its asset and liability composition, asset quality, capital resources and liquidity. The growth and composition of the Companys liabilities during 2010 and 2009 reflect organic growth
resulting from internal business development activities. While gross loans decreased in 2010, versus 2009, the Bank continues to develop relationships and business in the commercial, faith-based and non-profit organizations in its footprint.

Total assets increased from $274.4 million as of December 31, 2009 to $312.3 million as of December 31, 2010. The largest component
of asset growth was in cash and cash equivalents, which increased $44.3 million from December 31, 2009 to December 31, 2010. The increase in cash was funded by the increase of $44.9 million in total deposits. Gross loans decreased $8.3
million and OREO decreased $0.3 million in 2010. Total liabilities increased from $237.8 million as of December 31, 2009 to $275.9 million as of December 31, 2010, with deposit growth of $44.9 million. The increase in deposits was offset
by the decrease in borrowings from December 31, 2009 of $7.8 million to $0.7 million as of December 31, 2010. The Company focused on increasing deposits while decreasing its dependence on borrowed funds during 2010.

Total consolidated stockholders equity decreased from $36.5 million as of December 31, 2009 to $36.4 million as of December 31, 2010. In
June 2009, pursuant to its participation in the CPP, the Company sold 11,735 shares of Series A Preferred Stock to the Treasury for $11.7 million. In August 2010, pursuant to its participation in the CDCI, the Company exchanged the Series A
Preferred Stock for an equal number of shares of Series B Preferred Stock. For the year ended December 31, 2010, the net decrease in retained earnings was comprised of $0.8 million of net income, offset by dividends declared to preferred
stockholders of $0.5 million and dividends declared to common stockholders of $0.2 million. Accumulated other comprehensive loss represents the unrealized gain or loss on available for sale securities and the unrealized gain or loss related to the
deferred pension liability, net of deferred taxes. Accumulated other comprehensive loss was in a net unrealized loss position of $1.3 million at December 31, 2010, an increase of $0.3 million from the net unrealized loss of $1.0 million as of
December 31, 2009.



36



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



ASSETS

Cash and Cash Equivalents. Cash and cash equivalents, including noninterest-bearing and interest-bearing cash, Fed Funds sold and short-term investments, increased $44.3 million from $30.3 million
as of December 31, 2009 to $74.6 million as of December 31, 2010. The increase in cash was funded by the increase of $44.9 million in total deposits, and $8.3 million decrease in gross loans, and offset by the $7.0 million decrease in
borrowings. Throughout the fourth quarter of 2009 and the year ended December 31, 2010, management successfully focused on improving on-balance sheet liquidity through organic deposit growth.

Loan Portfolio. Gross loans were $201.8 million and $210.1 million as of December 31, 2010 and 2009, respectively. This decrease reflects an
active decision by management to increase on-balance sheet liquidity. The commercial loan portfolio is comprised mainly of loans to small- and mid-sized businesses. A significant portion of the loan portfolio is collateralized by owner-occupied real
estate. An adverse change in the economy affecting real estate values generally, or in our primary markets in particular, could impair the value of underlying collateral and/or our ability to sell such collateral (see Part I  Item 1A.
Risk Factors for more information on the risks inherent in a loan portfolio that is dependent on real estate.) The Bank has implemented policies and procedures to help manage this concentration risk and track the performance of the loans.

The Bank has a concentration of loans to faith-based and non-profit organizations, in which the Bank has specialized lending experience. As
of December 31, 2010, the percentage of loans in this niche, which included construction, real estate secured, and lines of credit, totaled approximately 45.33% of the total loan portfolio and the reserve for these loans is 33.50% of the total
allowance. Historically the Bank has experienced low levels of loan losses in this specialty; however, repayment of loans is dependent on voluntary contributions, which appears to have been adversely affected by the current economic downturn.
Management monitors the loan portfolio for changes in trends of past due loans and has seen a recent increase in the past due status of some loans in this concentration.

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

Of the loan balances outstanding at December 31, 2010, 91.55% or $1884.7 million is secured by real estate, and 1.24% or $2.5 million, is secured by cash deposits. Junior liens at December 31,
2010, constituted $1.0 million, or 0.48% of the loan balances outstanding. Real estate secured owner occupied faith based and non-profit and commercial loans totaled $137.2 million, or 67.99% of the outstanding loan balances as of December 31,
2010

The following table reflects the maturities of the loan portfolio by segment, and the mix of loans that mature greater than one year in
the loan portfolio between fixed rate and adjustable rate notes as of December 31, 2010.



|                               |  |                   |       |  |            |   |        |            |  |   |             |  |  |          |        |  |       |   |       |       |  |   |       |  |  |   |         | 
|------------------------------ |  | ----------------- | ----- |  | ---------- | - | ------ | ---------- |  | - | ----------- |  |  | -------- | ------ |  | ----- | - | ----- | ----- |  | - | ----- |  |  | - | ------- | 
|                               |  | December 31, 2010 |      
|                               |  |                   |       |  | Commercial |   |        | Faith-     |  |   | Residential |  |  |          |        |  |       |   |       |       | 
|                               |  |                   |       |  | Real       |   |        | Based and  |  |   | Real        |  |  |          |        |  | Other |   |       |       | 
|(Dollars in thousands)         |  | Commercial        |       |  | Estate     |   |        | Non-Profit |  |   | Estate      |  |  | Consumer |        |  | Loans |   |       | Total | 
|Maturity dates:                |  |                   |       |  |            |   |        |            |  |   |             |  |  |          |        |  |       |   |       |       |  |   |       |  |  |   |         | 
|Due within one year            |  | $                 | 4,838 |  |            | $ | 16,271 |            |  | $ | 35,765      |  |  | $        | 31,050 |  |       | $ | 1,496 |       |  | $ | 35    |  |  | $ | 89,455  | 
|Due on through five years      |  | $                 | 2,676 |  |            | $ | 27,951 |            |  | $ | 47,286      |  |  | $        | 11,904 |  |       | $ | 451   |       |  | $ | 3,122 |  |  | $ | 93,390  | 
|Due after five years           |  |                   | 1,634 |  |            |   | 3,625  |            |  |   | 8,406       |  |  |          | 4,588  |  |       |   | 271   |       |  |   | 402   |  |  |   | 18,926  | 
|                               |  |                   |       |  |            |   |        |            |  |   |             |  |  |          |        |  |       |   |       |       |  |   |       |  |  |   |         | 
|Total ending allowance balance |  | $                 | 9,148 |  |            | $ | 47,847 |            |  | $ | 91,457      |  |  | $        | 47,542 |  |       | $ | 2,218 |       |  | $ | 3,559 |  |  | $ | 201,771 | 
|                               |  |                   |       |  |            |   |        |            |  |   |             |  |  |          |        |  |       |   |       |       |  |   |       |  |  |   |         | 
|                               |  |                   |       |  |            |   |       
|Loans due after one year:      |  |                   |       |  |            |   |        |            |  |   |             |  |  |          |        |  |       |   |       |       |  |   |       |  |  |   |         | 
|Fixed rate                     |  | $                 | 1,185 |  |            | $ | 23,465 |            |  | $ | 47,197      |  |  | $        | 10,699 |  |       | $ | 627   |       |  | $ | 402   |  |  | $ | 83,575  | 
|Variable rate                  |  |                   | 3,125 |  |            |   | 8,111  |            |  |   | 8,495       |  |  |          | 5,793  |  |       |   | 95    |       |  |   | 3,122 |  |  |   | 28,741  | 
|                               |  |                   |       |  |            |   |        |            |  |   |             |  |  |          |        |  |       |   |       |       |  |   |       |  |  |   |         | 
|Total ending loans balance     |  | $                 | 4,310 |  |            | $ | 31,576 |            |  | $ | 55,692      |  |  | $        | 16,492 |  |       | $ | 722   |       |  | $ | 3,524 |  |  | $ | 112,316 | 
|                               |  |                   |       |  |            |   |        |            |  |   |             |  |  |          |        |  |       |   |       |       |  |   |       |  |  |   |         | 

The Banks market areas are the Research Triangle (Raleigh and Durham), the Piedmont Triad (Greensboro and
Winston-Salem) 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 conditions of these geographic regions (see Part I  Item 1A. Risk Factors for more information on the risks inherent in dependence on the economic conditions of certain market areas.)



37



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



Investment Securities. Investment securities represent the third largest component of earning
assets. The Companys securities portfolio consists primarily of the following types of debt securities:



| |  |  | Government sponsored mortgage backed securities (MBS):
| | - |  | --------------------------------------------------------



| |  |  | Non-Government sponsored MBS: and
| | - |  | ---------------------------------



| |  |  | Municipal securities
| | - |  | --------------------



| |  |  | North Carolina
| | - |  | --------------



| |  |  | Out of state.
| | - |  | -------------

The
available-for-sale classification allows flexibility in the management of interest rate risk, liquidity, and loan portfolio growth. The Company carries securities available for sale at their fair value, and the mark-to-market adjustment was $0.1
million in net unrealized gains for the year ended December 31, 2010. After considering applicable tax benefits, the mark-to-market adjustment increased total stockholders equity by $0.1 million. Future fluctuations in stockholders
equity will occur due to changes in the fair values of available-for-sale securities.

On December 31, 2010 and 2009, the recorded value
of investments totaled $20.6 million and $17.7 million, respectively. Factors affecting the increase of the investment securities portfolio include the decrease in total loans, deposit growth, the interest rates available for reinvesting maturing
securities and changes in the interest rate yield curve. Certain depositors require banks to provide collateral for their deposits in excess of FDIC insurance coverage. For the period ending December 31, 2010, the Bank had $2.8 million in
pledged securities for these depositors.

Other investments comprised of FHLB stock with a carrying value of $0.9 million and $1.1 million as
of December 31, 2010 and 2009, respectively.

The Company has reviewed the investment portfolio as of December 31, 2010 and does not
believe any of the declines in fair value are other-than-temporary. The Company anticipates that substantially all of the book value of the investments will be recovered over the life of any securities whose market value is below amortized cost.

The following table reflects the carrying value of the Companys investment securities portfolio at the dates indicated.



|                             |  |                   |        |  |                   |   |        | 
|---------------------------- |  | ----------------- | ------ |  | ----------------- | - | ------ | 
|                             |  | December 31, 2010 |        |  | December 31, 2009 |  
|(Dollars in thousands)       |  | Fair Value        |        |  | Fair Value        |  
|Government sponsored MBS     |  |                   |        |  |                   |   |        | 
|Residential                  |  | $                 | 13,712 |  |                   | $ | 9,244  | 
|Non-Government sponsored MBS |  |                   |        |  |                   |   |        | 
|Residential                  |  |                   | 205    |  |                   |   | 307    | 
|Municipal securities         |  |                   |        |  |                   |   |        | 
|North Carolina               |  |                   | 3,186  |  |                   |   | 4,517  | 
|Out of state                 |  |                   | 3,524  |  |                   |   | 3,631  | 
|                             |  |                   |        |  |                   |   |        | 
|                             |  | $                 | 20,627 |  |                   | $ | 17,699 | 
|                             |  |                   |        |  |                   |   |        | 



38



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



The following table reflects the debt securities by contractual maturities as of December 31,
2010. Expected maturities will differ from contractual maturities 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.



|                                       |  |                         |        |  |               |  |      |  
|-------------------------------------- |  | ----------------------- | ------ |  | ------------- |  | ---- | -
|(Dollars in thousands)                 |  | As of December 31, 2010 |       
|                                       |  | Fair Value              |        |  | Average Yield | 
|Government sponsored MBS               |  |                         |        |  |               |  |      |  
|Residential                            |  |                         |        |  |               |  |      |  
|Due after one year through five years  |  | $                       | 9      |  |               |  | 4.35 | %
|Due after five years through ten years |  |                         | 492    |  |               |  | 5.27 |  
|Due after ten years                    |  |                         | 13,211 |  |               |  | 4.17 |  
|                                       |  |                         |        |  |               |  |      |  
|Total Government sponsored MBS         |  | $                       | 13,712 |  |               |  | 4.21 | %
|                                       |  |                         |        |  |               |  |      |  
|                                       |  |                        
|Non-Government sponsored MBS           |  |                         |        |  |               |  |      |  
|Residential                            |  |                         |        |  |               |  |      |  
|Due after ten years                    |  | $                       | 205    |  |               |  | 4.17 | %
|                                       |  |                        
|Municipal securities                   |  |                         |        |  |               |  |      |  
|North Carolina                         |  |                         |        |  |               |  |      |  
|Due within one year                    |  | $                       | 511    |  |               |  | 4.38 | %
|Due after one year through five years  |  |                         | 988    |  |               |  | 3.58 |  
|Due after five years through ten years |  |                         | 1,687  |  |               |  | 3.74 |  
|                                       |  |                         |        |  |               |  |      |  
|Total North Carolina municipal bonds   |  | $                       | 3,186  |  |               |  | 3.79 | %
|                                       |  |                         |        |  |               |  |      |  
|                                       |  |                        
|Out of state                           |  |                         |        |  |               |  |      |  
|Due within one year                    |  | $                       | 256    |  |               |  | 4.86 | %
|Due after one year through five years  |  |                         | 1,900  |  |               |  | 1.86 |  
|Due after five years through ten years |  |                         | 1,368  |  |               |  | 3.74 |  
|                                       |  |                         |        |  |               |  |      |  
|Total out of state municipal bonds     |  | $                       | 3,524  |  |               |  | 2.81 | %
|                                       |  |                         |        |  |               |  |      |  

Government National Mortgage Association, with a fair value of $9.3 million and an amortized cost of $9.4 million, is the
only lone bond issuer that exceeds 10% of stockholders equity as of December 31, 2010. However, the US government guarantees all but one of our MBS. The only non-government sponsored MBS is at an unrealized gain position of $0.2 million.

DEPOSITS AND DEBT

Deposits. Total deposits increased from $224.8 million as of December 31, 2009 to $269.7 million as of December 31, 2010. Of these
amounts, $44.6 million and $38.0 million, respectively, were noninterest-bearing deposits and $225.1 million and $186.8 million, respectively, were interest-bearing deposits. Time deposits of $100,000 and greater, including fully insured CDARS®
reciprocal deposits, were $118.1 million and $88.6 million as of December 31, 2010 and 2009, respectively. Time deposits of $100,000 or less, excluding CDARS® reciprocal deposits, were $21.8 million and $24.0 million as of December 31,
2010 and December 31, 2009, respectively.

The following table reflects the maturities of time deposits of $100,000 or greater as of
December 31, 2010:



|                                 |  |        |         |  |              |  |      |  
|-------------------------------- |  | ------ | ------- |  | ------------ |  | ---- | -
|(Dollars in thousands)           |  | Amount |         |  | Average Rate | 
|Three months or less             |  | $      | 52,018  |  |              |  | 0.55 | %
|Over three months to six months  |  |        | 15,210  |  |              |  | 1.08 |  
|Over six months to twelve months |  |        | 47,498  |  |              |  | 1.03 |  
|Over one year to five years      |  |        | 3,356   |  |              |  | 1.32 |  
|                                 |  |        |         |  |              |  |      |  
|                                 |  | $      | 118,082 |  |              |  | 0.83 | %
|                                 |  |        |         |  |              |  |      |  

Debt. As of December 31, 2010 and 2009, the Banks outstanding advances with the FHLB were $0.7 million and
$7.8 million, respectively. During the year ended December 31, 2010, the maximum outstanding advances were $7.8 million. The Bank had average outstanding borrowings of $1.1 million and $8.6 million with effective costs of borrowing of 0.34% and
0.81% for the years ending December 31, 2010 and 2009, respectively. The $0.7 million FHLB advances outstanding as of December 31, 2010 consisted of one fixed rate, fixed term advance.



39



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



OTHER

Capital Resources. Total stockholders equity as of December 31, 2010 and 2009, including unrealized gains and/or losses net of taxes on available-for-sale securities and deferred pension
liability, was $36.4 million and $36.6 million, respectively. The Company rewarded its common stockholders with cash dividends of $0.10 per share, totaling $0.2 million, for each of the years ended December 31, 2010 and 2009. The preferred
stock dividends under the TARP were $0.5 million in 2010 and $0.3 million in 2009.

As of December 31, 2010, the Company had a leverage
ratio of 11.77%, a Tier 1 capital ratio of 16.93%, and a total risk-based capital ratio of 18.19%. As of December 31, 2010, the Bank had a leverage ratio of 10.42%, a Tier 1 capital ratio of 15.59%, and a total risk-based capital ratio of
16.84%. These ratios exceeded the federal regulatory minimum requirements for a well capitalized bank holding company and bank, respectively (see Item 8. Financial Statements and Supplementary Data, Notes to Consolidated
Financial Statements  Note 16. Regulatory Matters and Restrictions for additional information on regulatory capital requirements).

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. Quantitative and Qualitative Disclosures about Market Risk for information about interest rate risk).

Liquidity.Liquidity management involves the ability to meet the cash flow requirements of depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be
available to meet their credit needs. To ensure the Company is positioned to meet immediate and future cash demands, management relies on internal analysis of its liquidity, knowledge of current economic and market trends and forecasts of future
conditions. Regulatory agencies set certain minimum liquidity standards, including the setting of a reserve requirement by the Federal Reserve. The Company must submit quarterly reports to the Federal Reserve, which monitors the Companys
compliance. As of December 31, 2010, the Company met all of its liquidity and reporting requirements.

The Company had $74.6 million and
$30.3 million in cash and cash equivalents as of December 31, 2010 and 2009, respectively. The Companys principal sources of funds are deposits, short-term borrowings and capital. Core deposits (total deposits less certificates of
deposits in the amount of $100,000 or more), one of the most stable sources of liquidity, together with equity capital funded $188.0 million, or 60.20%, of total assets as of December 31, 2010. As of December 31, 2009, core deposits and
equity capital totaled $178.7 million, or 65.12%, of total assets.

The Companys liquidity can be demonstrated best by an analysis of
its cash flows. Operating activities provided $2.9 million of liquidity for the year ended December 31, 2010, compared to $1.6 million for the year ended December 31, 2009. The principal elements of operating activities are net income,
increased by significant noncash expenses including the provision for loan losses, depreciation and amortization. In 2010, the Company used a net decrease in loans of $7.4 million plus a net increase in total deposits of $44.9 to fund an investment
growth of $3.0 million, $44.3 million growth in cash and cash equivalents, and a $7.0 million net decrease in borrowings.

A secondary source
of liquidity for the Company comes from investing activities, principally the sales of, maturities of, and cash flows from, investment securities. As of December 31, 2010, the Company had $0.8 million of investment securities that mature within
the next 12 months. During 2010, the Company purchased $9.3 million in investment securities, received $4.1 million in principal collections, and had $2.0 million in calls and maturities.

Additional sources of liquidity are available to the Bank through the Federal Reserve and through membership in the FHLB System, and other correspondent banks. As of December 31, 2010, the Bank had a
maximum borrowing capacity, based on pledged collateral, of $10.9 million through the FHLB of Atlanta. These funds are available with various maturities and interest rate structures. Borrowings may not exceed 12% of total assets.

As of December 31, 2010, the Bank owned $0.9 million worth of FHLB stock or 127.25% percent of its outstanding advances of $0.7 million. Borrowings
and letters of credit are collateralized by a blanket lien by the FHLB on the Banks qualifying assets. During 2009, the FHLB changed its process for repurchasing stock when a borrowing bank made principal reductions. Rather than repurchasing
stock upon the paydown of principal, FHLB will determine quarterly whether it will repurchase any stock.

Off-Balance Sheet Arrangements.The Company has liquidity from other sources such as federal funds lines and brokered certificate of deposits. These liquidity sources may require collateral but are generally unsecured or easily utilized by the Company. In addition, during
2008, the Company secured a letter of credit in the amount of $2.0 million from the FHLB, which provides collateral for public deposits. The letter of credit is an off-balance sheet source funding, collateralized by assets pledged to the FHLB,
unless drawn. Federal funds lines totaled $12.6 million at December 31, 2010, none of which was drawn as of that date. The Company periodically tests its Federal Funds lines to ensure accessibility and availability if needed. During 2010, other
than testing the lines, no drawdowns were made on these lines.



40



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



In addition to the sources of liquidity discussed above, the Company has off-balance sheet contingent
funding commitments with various probabilities of being drawn by borrowers. The following table shows the commercial off-balance sheet contingencies:



|                       |  |                             |     |  |                                  |   |        |                  |  |   |        | 
|---------------------- |  | --------------------------- | --- |  | -------------------------------- | - | ------ | ---------------- |  | - | ------ | 
|(Dollars in thousands) |  | Commercial lettersof credit |     |  | Other commercialloan commitments |   |        | Totalcommitments | 
|Less than one year     |  | $                           | 10  |  |                                  | $ | 12,887 |                  |  | $ | 12,897 | 
|One to three years     |  |                             | 100 |  |                                  |   | 1,996  |                  |  |   | 2,096  | 
|Three to five years    |  |                             |    |  |                                  |   | 4,684  |                  |  |   | 4,684  | 
|More than five years   |  |                             |    |  |                                  |   | 2,238  |                  |  |   | 2,238  | 
|                       |  |                             |     |  |                                  |   |        |                  |  |   |        | 
|                       |  | $                           | 110 |  |                                  | $ | 21,805 |                  |  | $ | 21,915 | 
|                       |  |                             |     |  |                                  |   |        |                  |  |   |        | 

Effects of Inflation. The Companys financial statements have been prepared in accordance with GAAP, which
requires the measurement of financial position and operating results in terms of historic dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The rate of inflation has been relatively
moderate over the past few years; however, the effect of inflation on interest rates can materially impact Bank operations, which rely on the spread between the yield on earning assets and rates paid on deposits and borrowings as the major source of
earnings. Operating costs, such as salaries and wages, occupancy and equipment costs, can also be negatively impacted by inflation.

Recent
Accounting Developments. Please refer to Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements  Note 1. Summary of Significant Accounting Policies for a discussion of recent accounting
developments.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company strives to reach its strategic financial objectives through the effective management of market risk. Like many financial institutions, the
Companys most significant market risk exposure is interest rate risk. The Company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 Company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 both 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 Company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 Company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 Company believes it is positioned to respond to changing needs for liquidity, changes in interest rates and
inflationary or deflationary trends.

The Company 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 Companys performance under different interest rate scenarios. Analyses are prepared
quarterly, which evaluate the Companys performance in a base strategy that reflects the Company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, 2010, 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.



41



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



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 most unlikely. Actual results could differ from these estimates.



|                        |  |                     |       |   |                          |  |       |  
|----------------------- |  | ------------------- | ----- | - | ------------------------ |  | ----- | -
|As of December 31,
2010 | 
|Basis point change:     |  | Net Interest Margin |       |   | Economic Value of Equity | 
|-200                    |  |                     | -6.15 | % |                          |  | 13.87 | %
|+200                    |  |                     | 10.49 | % |                          |  | 13.79 | %
|No rate change:         |  |                     | 3.77  | % |                          |  | 12.38 | %

The table below presents the
Companys ratio of cumulative rate sensitive assets to rate sensitive liabilities (Gap Ratio) as of December 31, 2010. This ratio measures an entitys balance sheet sensitivity to repricing 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.



|              |  |                     
|------------- |  | --------------------
|Time Period   |  | Cumulative Gap Ratio
|< 1 year      |  | 1.45                
|1-3 years     |  | 1.13                
|3-5 years     |  | 1.19                
|5-15 years    |  | 1.29                
|Over 15 years |  | 1.31                



42



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA



|                                                                                                 |  |  |    | 
|------------------------------------------------------------------------------------------------ |  |  | -- | 
|                                                                                                 | 
|Index to Consolidated Financial Statements and Supplementary Financial Data                      |  |  |    | 
|                                                                                                 | 
|Reports of Independent Registered Public Accounting Firms                                        |  |  | 44 | 
|                                                                                                 | 
|Financial Statements:                                                                            |  |  |    | 
|                                                                                                 | 
|Consolidated Balance Sheets                                                                      |  |  | 45 | 
|                                                                                                 | 
|Consolidated Statements of Income                                                                |  |  | 46 | 
|                                                                                                 | 
|Consolidated Statements of Changes in Stockholders Equity and Other Comprehensive Income
(Loss) |  |  | 47 | 
|                                                                                                 | 
|Consolidated Statements of Cash Flows                                                            |  |  | 48 | 
|                                                                                                 | 
|Notes to Consolidated Financial Statements                                                       |  |  | 49 | 



43



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



Report of Independent Registered Public Accounting Firm

Shareholders and Directors of

M&F Bancorp, Inc.

We have audited the accompanying consolidated balance sheets of
M&F Bancorp, Inc. (a North Carolina corporation) and subsidiary as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in stockholders equity and other comprehensive income, and cash flows for
each of the two years in the period ended December 31, 2010. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control
over financial reporting. Our 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 consolidated financial position of
M&F Bancorp, Inc. and subsidiary as of December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2010, in conformity with accounting
principles generally accepted in the United States of America.

/s/ GRANT THORNTON LLP

Charlotte, North Carolina

March 29, 2011



44



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



CONSOLIDATED BALANCE SHEETS



AS OF DECEMBER 31,



|                                                                                                                                                                                              |  |      |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|(Dollars in thousands except per share data)                                                                                                                                                  |  | 2010 |         |   | 2009 |  
|ASSETS                                                                                                                                                                                        |  |      |         |   |      |   |         |  
|Cash and cash equivalents                                                                                                                                                                     |  | $    | 74,575  |   |      | $ | 30,313  |  
|Investment securities available for sale, at fair value                                                                                                                                       |  |      | 20,627  |   |      |   | 17,699  |  
|Other invested asset                                                                                                                                                                          |  |      | 948     |   |      |   | 1,061   |  
|Loans, net of unearned income and deferred fees                                                                                                                                               |  |      | 201,771 |   |      |   | 210,111 |  
|Allowances for loan losses                                                                                                                                                                    |  |      | (3,851  | ) |      |   | (3,564  | )
|                                                                                                                                                                                              |  |      |         |   |      |   |         |  
|Loans, net                                                                                                                                                                                    |  |      | 197,920 |   |      |   | 206,547 |  
|                                                                                                                                                                                              |  |      |         |   |      |   |         |  
|Interest receivable                                                                                                                                                                           |  |      | 627     |   |      |   | 935     |  
|Bank premises and equipment, net                                                                                                                                                              |  |      | 4,585   |   |      |   | 4,852   |  
|Cash surrender value of bank-owned life insurance                                                                                                                                             |  |      | 5,564   |   |      |   | 5,499   |  
|Other real estate owned                                                                                                                                                                       |  |      | 1,915   |   |      |   | 2,176   |  
|Deferred tax assets and taxes receivable, net                                                                                                                                                 |  |      | 4,434   |   |      |   | 4,402   |  
|Other assets                                                                                                                                                                                  |  |      | 1,150   |   |      |   | 898     |  
|                                                                                                                                                                                              |  |      |         |   |      |   |         |  
|TOTAL ASSETS                                                                                                                                                                                  |  | $    | 312,345 |   |      | $ | 274,382 |  
|                                                                                                                                                                                              |  |      |         |   |      |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                          |  |      |         |   |      |   |         |  
|Deposits                                                                                                                                                                                      |  |      |         |   |      |   |         |  
|Interest-bearing deposits                                                                                                                                                                     |  | $    | 225,119 |   |      | $ | 186,792 |  
|Noninterest-bearing deposits                                                                                                                                                                  |  |      | 44,565  |   |      |   | 38,016  |  
|                                                                                                                                                                                              |  |      |         |   |      |   |         |  
|Total deposits                                                                                                                                                                                |  |      | 269,684 |   |      |   | 224,808 |  
|Other borrowings                                                                                                                                                                              |  |      | 745     |   |      |   | 7,766   |  
|Other liabilities                                                                                                                                                                             |  |      | 5,506   |   |      |   | 5,253   |  
|                                                                                                                                                                                              |  |      |         |   |      |   |         |  
|Total liabilities                                                                                                                                                                             |  |      | 275,935 |   |      |   | 237,827 |  
|                                                                                                                                                                                              |  |      |         |   |      |   |         |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                 |  |      |         |   |      |   |         |  
|                                                                                                                                                                                              |  |     
|Stockholders equity:                                                                                                                                                                         |  |      |         |   |      |   |         |  
|Series A Preferred Stock- $1,000 liquidation value per share, 11,735 shares issued and outstanding as of December 31,
2009                                                                    |  |      |        |   |      |   | 11,719  |  
|Series B Preferred Stock- $1,000 liquidation value per share, 11,735 shares issued and outstanding as of December 31,
2010                                                                    |  |      | 11,722  |   |      |   |        |  
|Common stock, no par value, 10,000,000 shares authorized as of December 31, 2010 and December 31, 2009; 2,031,337
shares issued and outstanding as of December 31, 2010 and December 31, 2009 |  |      | 8,732   |   |      |   | 8,732   |  
|Retained earnings                                                                                                                                                                             |  |      | 17,264  |   |      |   | 17,128  |  
|Accumulated other comprehensive loss                                                                                                                                                          |  |      | (1,308  | ) |      |   | (1,024  | )
|                                                                                                                                                                                              |  |      |         |   |      |   |         |  
|Total stockholders equity                                                                                                                                                                    |  |      | 36,410  |   |      |   | 36,555  |  
|                                                                                                                                                                                              |  |      |         |   |      |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                    |  | $    | 312,345 |   |      | $ | 274,382 |  
|                                                                                                                                                                                              |  |      |         |   |      |   |         |  

See notes to consolidated financial statements.



45



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF INCOME



YEARS ENDED DECEMBER 31,



|                                                      |  |      |           |   |      |   |           |  
|----------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|(Dollars in thousands except per share data)          |  | 2010 |           |   | 2009 |  
|Interest income:                                      |  |      |           |   |      |   |           |  
|Loans, including fees                                 |  | $    | 12,304    |   |      | $ | 12,983    |  
|Investment securities, including dividends            |  |      |           |   |      |   |           |  
|Taxable                                               |  |      | 415       |   |      |   | 623       |  
|Tax-exempt                                            |  |      | 292       |   |      |   | 415       |  
|Other                                                 |  |      | 97        |   |      |   | 30        |  
|                                                      |  |      |           |   |      |   |           |  
|Total interest income                                 |  |      | 13,108    |   |      |   | 14,051    |  
|                                                      |  |      |           |   |      |   |           |  
|Interest expense:                                     |  |      |           |   |      |   |           |  
|Deposits                                              |  |      | 2,059     |   |      |   | 2,854     |  
|Borrowings                                            |  |      | 4         |   |      |   | 70        |  
|                                                      |  |      |           |   |      |   |           |  
|Total interest expense                                |  |      | 2,063     |   |      |   | 2,924     |  
|                                                      |  |      |           |   |      |   |           |  
|Net interest income                                   |  |      | 11,045    |   |      |   | 11,127    |  
|Less provision for loan losses                        |  |      | 520       |   |      |   | 1,853     |  
|                                                      |  |      |           |   |      |   |           |  
|Net interest income after provision for loan losses   |  |      | 10,525    |   |      |   | 9,274     |  
|                                                      |  |      |           |   |      |   |           |  
|                                                      |  |     
|Noninterest income:                                   |  |      |           |   |      |   |           |  
|Service charges                                       |  |      | 1,649     |   |      |   | 1,825     |  
|Rental income                                         |  |      | 303       |   |      |   | 272       |  
|Cash surrender value of life insurance                |  |      | 201       |   |      |   | 200       |  
|Realized gain on sale of loan                         |  |      |          |   |      |   | 14        |  
|Realized gain on sale of securities                   |  |      | 26        |   |      |   | 142       |  
|Realized gain on sale of other real estate owned      |  |      | 40        |   |      |   | 277       |  
|Realized (loss) gain on disposal of assets            |  |      | (3        | ) |      |   | 97        |  
|Impairment of other assets                            |  |      |          |   |      |   | (88       | )
|Other income (loss)                                   |  |      | 6         |   |      |   | (7        | )
|                                                      |  |      |           |   |      |   |           |  
|Total noninterest income                              |  |      | 2,222     |   |      |   | 2,732     |  
|                                                      |  |      |           |   |      |   |           |  
|                                                      |  |     
|Noninterest expense:                                  |  |      |           |   |      |   |           |  
|Salaries and employee benefits                        |  |      | 5,243     |   |      |   | 5,532     |  
|Occupancy and equipment                               |  |      | 1,535     |   |      |   | 1,721     |  
|Directors fees                                        |  |      | 315       |   |      |   | 317       |  
|Marketing                                             |  |      | 226       |   |      |   | 206       |  
|Professional fees                                     |  |      | 901       |   |      |   | 863       |  
|Information technology                                |  |      | 852       |   |      |   | 705       |  
|Delivery                                              |  |      | 222       |   |      |   | 335       |  
|FDIC deposit insurance                                |  |      | 847       |   |      |   | 632       |  
|OREO expense, net                                     |  |      | 614       |   |      |   | 68        |  
|Other                                                 |  |      | 1,089     |   |      |   | 870       |  
|                                                      |  |      |           |   |      |   |           |  
|Total noninterest expense                             |  |      | 11,844    |   |      |   | 11,249    |  
|                                                      |  |      |           |   |      |   |           |  
|Income before income taxes                            |  |      | 903       |   |      |   | 757       |  
|Income tax expense                                    |  |      | 89        |   |      |   | 97        |  
|                                                      |  |      |           |   |      |   |           |  
|Net income                                            |  |      | 814       |   |      |   | 660       |  
|                                                      |  |     
|Less preferred stock dividends and accretion          |  |      | (475      | ) |      |   | (302      | )
|                                                      |  |      |           |   |      |   |           |  
|Net income available to common stockholders           |  | $    | 339       |   |      | $ | 358       |  
|                                                      |  |      |           |   |      |   |           |  
|                                                      |  |     
|Basic and diluted earnings per share of common stock: |  | $    | 0.17      |   |      | $ | 0.18      |  
|Weighted average shares of common stock outstanding:  |  |      |           |   |      |   |           |  
|Basic and diluted                                     |  |      | 2,031,337 |   |      |   | 2,031,337 |  
|Dividends per share of common stock                   |  | $    | 0.10      |   |      | $ | 0.10      |  

See notes to
consolidated financial statements.



46



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY AND OTHER
COMPREHENSIVE INCOME (LOSS)



YEARS ENDED DECEMBER 31, 2010 and 2009



|                                                            |  |                 |           |  |             |   |       |                |  |   |                  |   |  |                                   |        |   |       |   |        |   |  |   |         |  
|----------------------------------------------------------- |  | --------------- | --------- |  | ----------- | - | ----- | -------------- |  | - | ---------------- | - |  | --------------------------------- | ------ | - | ----- | - | ------ | - |  | - | ------- | -
|(Dollars in thousands)                                      |  | Number ofShares |           |  | CommonStock |   |       | PreferredStock |  |   | RetainedEarnings |   |  | AccumulatedOtherComprehensiveLoss |        |   | Total |  
|Balances as of December 31, 2008                            |  |                 | 2,031,337 |  |             | $ | 8,732 |                |  | $ |                 |   |  | $                                 | 16,972 |   |       | $ | (1,385 | ) |  | $ | 24,319  |  
|Issuance of Series A Preferred Stock, net of issuance costs |  |                 |           |  |             |   |       |                |  |   | 11,717           |   |  |                                   |        |   |       |   |        |   |  |   | 11,717  |  
|Accretion of Series A Preferred Stock issuance costs        |  |                 |           |  |             |   |       |                |  |   | 2                |   |  |                                   |        |   |       |   |        |   |  |   | 2       |  
|Comprehensive income:                                       |  |                 |           |  |             |   |       |                |  |   |                  |   |  |                                   |        |   |       |   |        |   |  |   |         |  
|Net income                                                  |  |                 |           |  |             |   |       |                |  |   |                  |   |  |                                   | 660    |   |       |   |        |   |  |   | 660     |  
|Other comprehensive income, net of tax                      |  |                 |           |  |             |   |       |                |  |   |                  |   |  |                                   |        |   |       |   | 361    |   |  |   | 361     |  
|                                                            |  |                 |           |  |             |   |       |                |  |   |                  |   |  |                                   |        |   |       |   |        |   |  |   |         |  
|Total comprehensive income, net of tax                      |  |                 |           |  |             |   |       |                |  |   |                  |   |  |                                   |        |   |       |   |        |   |  |   | 1,021   |  
|Dividends declared on preferred stock                       |  |                 |           |  |             |   |       |                |  |   |                  |   |  |                                   | (302   | ) |       |   |        |   |  |   | (302    | )
|Dividends declared on common stock ($0.10 per share)        |  |                 |           |  |             |   |       |                |  |   |                  |   |  |                                   | (202   | ) |       |   |        |   |  |   | (202    | )
|                                                            |  |                 |           |  |             |   |       |                |  |   |                  |   |  |                                   |        |   |       |   |        |   |  |   |         |  
|                                                            |  |                 |           |  |             |  
|Balances as of December 31, 2009                            |  |                 | 2,031,337 |  |             | $ | 8,732 |                |  | $ | 11,719           |   |  | $                                 | 17,128 |   |       | $ | (1,024 | ) |  | $ | 36,555  |  
|                                                            |  |                 |           |  |             |   |       |                |  |   |                  |   |  |                                   |        |   |       |   |        |   |  |   |         |  
|Accretion of Series A Preferred Stock issuance costs        |  |                 |           |  |             |   |       |                |  |   | 16               |   |  |                                   | (16    | ) |       |   |        |   |  |   |        |  
|Redemption of Series A Preferred Stock                      |  |                 |           |  |             |   |       |                |  |   | (11,735          | ) |  |                                   |        |   |       |   |        |   |  |   | (11,735 | )
|Issuance of Series B Preferred Stock, net of issuance costs |  |                 |           |  |             |   |       |                |  |   | 11,721           |   |  |                                   |        |   |       |   |        |   |  |   | 11,721  |  
|Accretion of Series B Preferred Stock issuance costs        |  |                 |           |  |             |   |       |                |  |   | 1                |   |  |                                   | (1     | ) |       |   |        |   |  |   |        |  
|Comprehensive income:                                       |  |                 |           |  |             |   |       |                |  |   |                  |   |  |                                   |        |   |       |   |        |   |  |   |         |  
|Net income                                                  |  |                 |           |  |             |   |       |                |  |   |                  |   |  |                                   | 814    |   |       |   |        |   |  |   | 814     |  
|Other comprehensive loss, net of tax                        |  |                 |           |  |             |   |       |                |  |   |                  |   |  |                                   |        |   |       |   | (284   | ) |  |   | (284    | )
|                                                            |  |                 |           |  |             |   |       |                |  |   |                  |   |  |                                   |        |   |       |   |        |   |  |   |         |  
|Total comprehensive income, net of tax                      |  |                 |           |  |             |   |       |                |  |   |                  |   |  |                                   |        |   |       |   |        |   |  |   | 530     |  
|Dividends declared on preferred stock                       |  |                 |           |  |             |   |       |                |  |   |                  |   |  |                                   | (458   | ) |       |   |        |   |  |   | (458    | )
|Dividends declared on common stock ($0.10 per share)        |  |                 |           |  |             |   |       |                |  |   |                  |   |  |                                   | (203   | ) |       |   |        |   |  |   | (203    | )
|                                                            |  |                 |           |  |             |   |       |                |  |   |                  |   |  |                                   |        |   |       |   |        |   |  |   |         |  
|Balances as of December 31, 2010                            |  |                 | 2,031,337 |  |             | $ | 8,732 |                |  | $ | 11,722           |   |  | $                                 | 17,264 |   |       | $ | (1,308 | ) |  | $ | 36,410  |  
|                                                            |  |                 |           |  |             |   |       |                |  |   |                  |   |  |                                   |        |   |       |   |        |   |  |   |         |  

See notes to consolidated financial statements



47



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF CASH FLOWS



YEARS ENDED DECEMBER 31, 2010 and 2009



|                                                                                  |  |      |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|(Dollars in thousands)                                                            |  | 2010 |         |   | 2009 |  
|Cash flows from operating activities:                                             |  |      |         |   |      |   |         |  
|Net income                                                                        |  | $    | 814     |   |      | $ | 660     |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |         |   |      |   |         |  
|Provision for loan losses                                                         |  |      | 520     |   |      |   | 1,853   |  
|Depreciation and amortization                                                     |  |      | 410     |   |      |   | 506     |  
|Loss (gain) on disposal of assets                                                 |  |      | 3       |   |      |   | (97     | )
|(Accretion) amortization of discounts/premiums on investments, net                |  |      | (7      | ) |      |   | 17      |  
|Loan purchase accounting amortization, net                                        |  |      | 174     |   |      |   | 174     |  
|Deferred income tax benefit                                                       |  |      | (229    | ) |      |   | (236    | )
|Deferred loan origination fees and costs, net                                     |  |      | 140     |   |      |   | 186     |  
|Impairment on other assets                                                        |  |      |        |   |      |   | 88      |  
|Realized gain on sale of securities                                               |  |      | (26     | ) |      |   | (142    | )
|Increase in cash surrender value of bank owned life insurance                     |  |      | (195    | ) |      |   | (195    | )
|Gain on sale of loans                                                             |  |      |        |   |      |   | (14     | )
|Gain on sale of other real estate owned                                           |  |      | (40     | ) |      |   | (277    | )
|Changes in:                                                                       |  |      |         |   |      |   |         |  
|Accrued interest receivable and other assets                                      |  |      | 941     |   |      |   | (566    | )
|Other liabilities                                                                 |  |      | 351     |   |      |   | (351    | )
|                                                                                  |  |      |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  |      | 2,856   |   |      |   | 1,606   |  
|                                                                                  |  |     
|Cash flows from investing activities:                                             |  |      |         |   |      |   |         |  
|Activity in available-for-sale securities:                                        |  |      |         |   |      |   |         |  
|Sales                                                                             |  |      |        |   |      |   | 6,559   |  
|Maturities, prepayments and calls                                                 |  |      | 2,005   |   |      |   | 6,833   |  
|Principal collections                                                             |  |      | 4,100   |   |      |   | 5,570   |  
|Purchases                                                                         |  |      | (9,277  | ) |      |   | (3,084  | )
|Premiums paid on bank owned life insurance                                        |  |      | (6      | ) |      |   | (6      | )
|Net decrease (increase) in loans                                                  |  |      | 7,357   |   |      |   | (6,473  | )
|Proceeds from sale of loans                                                       |  |      |        |   |      |   | 3,340   |  
|Purchases of bank premises and equipment                                          |  |      | (146    | ) |      |   | (385    | )
|Proceeds from sale of bank-owned life insurance policies                          |  |      | 136     |   |      |   |        |  
|Proceeds from sale of other assets                                                |  |      |        |   |      |   | 28      |  
|Proceeds from sale of real estate owned                                           |  |      | 139     |   |      |   | 277     |  
|                                                                                  |  |      |         |   |      |   |         |  
|Net cash provided by investing activities                                         |  |      | 4,308   |   |      |   | 12,659  |  
|                                                                                  |  |     
|Cash flows from financing activities:                                             |  |      |         |   |      |   |         |  
|Net increase in deposits                                                          |  |      | 44,877  |   |      |   | 8,240   |  
|Proceeds from other borrowings                                                    |  |      |        |   |      |   | 41,964  |  
|Repayments of other borrowings                                                    |  |      | (7,021  | ) |      |   | (59,147 | )
|Issuance of Series A Preferred Stock, net of issuance costs                       |  |      |        |   |      |   | 11,719  |  
|Cash dividends                                                                    |  |      | (758    | ) |      |   | (504    | )
|                                                                                  |  |      |         |   |      |   |         |  
|Net cash provided by financing activities                                         |  |      | 37,098  |   |      |   | 2,272   |  
|                                                                                  |  |      |         |   |      |   |         |  
|Net increase in cash and cash equivalents                                         |  |      | 44,262  |   |      |   | 16,537  |  
|                                                                                  |  |     
|Cash and cash equivalents as of the beginning of the period                       |  |      | 30,313  |   |      |   | 13,776  |  
|                                                                                  |  |      |         |   |      |   |         |  
|Cash and cash equivalents as of the end of the period                             |  | $    | 74,575  |   |      | $ | 30,313  |  
|                                                                                  |  |      |         |   |      |   |         |  
|                                                                                  |  |     
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                |  |      |         |   |      |   |         |  
|Cash paid during period for:                                                      |  |      |         |   |      |   |         |  
|Interest                                                                          |  | $    | 2,086   |   |      | $ | 4,604   |  
|Income taxes                                                                      |  |      | 168     |   |      |   | 312     |  
|Non-cash financing activities:                                                    |  |      |         |   |      |   |         |  
|Redemption of Series A Preferred Stock                                            |  |      | (11,735 | ) |      |   |        |  
|Issuance of Series B Preferred Stock                                              |  |      | 11,735  |   |      |   |        |  

See notes to
consolidated financial statements.



48



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements

1. 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 offices 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. 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, 2010 and 2009, the Bank, held deposits as shown:



|                       |  |                  |       |  |                     |   |        |                    |  |   |               |  |  |       |       |  |  |   |        | 
|---------------------- |  | ---------------- | ----- |  | ------------------- | - | ------ | ------------------ |  | - | ------------- |  |  | ----- | ----- |  |  | - | ------ | 
|                       |  | Federal Reserve  |       |  | Correspondent Banks |   |        |                    | 
|(Dollars in thousands) |  | Required Average |       |  | Excess              |   |        | Federal Funds Sold |  |   | Core Deposits |  |  | Total |      
|December 31, 2010      |  | $                | 2,800 |  |                     | $ | 68,503 |                    |  | $ | 700           |  |  | $     | 2,572 |  |  | $ | 74,575 | 
|December 31, 2009      |  | $                | 2,700 |  |                     | $ |       |                    |  | $ | 23,551        |  |  | $     | 4,062 |  |  | $ | 30,313 | 

As of December 31, 2010 and 2009
the Bank held deposits of $0.7 million and $7.6 million 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. The related credit write-downs are included in
consolidated earnings as realized losses. Transfers of securities between classifications, of which there were none in 2010 or 2009, are accounted for at fair value. No securities were classified as trading or held to maturity as of
December 31, 2010 and 2009.

Other Invested Assets Other invested asset is an investment 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, 2010 and 2009, the Companys investments in FHLB stock were $0.9 million and $1.1 million,
respectively.

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



49



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



Non-Performing Loans and Leases Generally, all classes of commercial loans
and leases are placed on non-accrual status upon becoming contractually past due 90 days or more as to principal or interest (unless loans and leases are adequately secured by collateral, are in the process of collection, and are reasonably
expected to result in repayment), when terms are renegotiated below market levels, or where substantial doubt about full repayment of principal or interest is evident. For residential mortgage and home equity loan classes, loans are placed on
non-accrual status at the earlier of the loan becoming contractually past due 120 days or more as to principal or interest or upon taking of a partial charge-off on the loan. For automobile and other consumer loan classes, the entire
outstanding balance on the loan is charged-off when the loan becomes 120 days past due as to principal or interest.

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

Generally, for all classes of loans and leases, a
charge-off is recorded when it is probable that a loss has been incurred and when it is possible to determine a reasonable estimate of the loss. For all classes of commercial loans and leases, a charge-off is determined on a judgmental basis after
due consideration of the debtors prospects for repayment and the fair value of collateral. For the pooled segment of the Companys commercial and industrial loan class, which consists of small business loans, the entire outstanding
balance on the loan is charged-off during the month that the loan becomes 120 days past due as to principal or interest. 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 selling costs. In the event that loans or lines in the home equity loan class is behind another financial institutions first mortgage,
the entire outstanding balance on the loan is charged-off when the loan becomes 120 days past due as to principal or interest.

Impaired Loans A loan is considered impaired when, based on current information and events, it is probable that the Company will not
be able to collect all amounts due from the borrower in accordance with the contractual terms of the loan, including scheduled interest payments. Impaired loans include all classes of commercial non-accruing loans. Impaired loans exclude smaller
balance homogeneous loans (consumer and small business non-accruing loans) not in the process of foreclosure that are collectively evaluated for impairment. All classes of loans may be returned to accrual status when all delinquent interest and
principal become current in accordance with the terms of the loan or lease agreement and when doubt about repayment is resolved.

For all
classes of commercial loans, a quarterly evaluation of specific individual commercial borrowers is performed to identify impaired loans. The identification of specific borrowers for review is based on a review of new 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 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 in a Troubled Debt Restructuring (TDR) Loans are considered to have been modified in a TDR when, due to a borrowers financial difficulties, the
Company makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to
avoid foreclosure or repossession of collateral. Generally, a non-accrual loan that has been modified in a TDR 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. If the borrowers ability to meet the revised payment schedule is in question the loan is charged off or foreclosed.

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.



50



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



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

In the case where a 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 and
lease losses and the reserve for unfunded commitments (the Unfunded Reserve).

Allowances for Loan Losses The
allowance for loan losses is a valuation allowance which is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal
is unlikely. Subsequent recoveries, if any, are credited to the allowance.

The Bank maintains an allowance for loan losses to provide for
estimated probable losses that are inherent in the loan portfolio. The allowance is based on regular quarterly assessments. The methodologies for measuring the appropriate level of the allowance include the combination of a quantitative historical
loss history by loan type, a qualitative analysis, and a specific allowance method for impaired loans. The qualitative analyses are 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:



| |  |  | 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.
| | - |  | -----------------------------------------------------------------------------------------

A specific loss allowance is established for loans 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.The loans identified as impaired are accounted for in accordance with one of three valuations: (i) the
present value of future cash flows discounted at the loans effective interest rate; (ii) the loans observable market price, or (iii) the fair value of the collateral, if the loan is collateral dependent, less estimated
liquidation costs. A loan is considered impaired when it is probable that not all amounts due (principal and interest) will be collectible within the contractual terms of the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. 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 and 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 evaluated for impairment on a collective basis, because these loans are smaller balance and homogeneous. Impairment losses are included in the allowance
for loan losses through a charge to the provision for loan losses.



51



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The
Companys primary credit quality indicators are to use an internal credit risk rating system that categorizes loans and leases into pass, special mention, or classified categories. Credit risk ratings are applied individually to those classes
of loans and leases that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans and leases to businesses or individuals in the classes which comprise the commercial and faith-based
and non-profit segments. 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. Groups of loans and leases that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk rated
and monitored collectively. These are typically loans and leases to individuals in the classes that comprise the consumer portfolio segment.

The process of assessing the adequacy of the allowance for loan losses is necessarily 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 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 Allowance, as adjusted for estimated funding probabilities or loan and lease equivalency factors. The level of the Unfunded Reserve is adjusted by
recording an expense or recovery in other noninterest expense. The balances of $34.5 thousand and $45.7 thousand for December 31, 2010 and 2009, respectively, were reflected in other liabilities on the Consolidated Balance Sheets.

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 to 50 years for premises and generally 6-10 years
for furniture and equipment. Leasehold improvements are amortized over the terms of the respective leases or the useful lives of the improvements, whichever is shorter. Maintenance and repairs are charged to operations 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.

Cash Surrender Value of Life Insurance The Bank maintains life insurance on certain current and former officers and
directors, with the Company and the Bank as owner and beneficiary. The cash surrender value of the policies at December 31, 2010 and 2009 was $5.6 million and $5.5 million, respectively. Income from the policies and changes in the net cash
surrender value are recorded in noninterest income.

Other Real Estate Owned Other real estate owned, which represents
real estate acquired through 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 allowance for loan losses. 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, 2010 and 2009, there was $1.9 million and $2.2 million, respectively, of foreclosed properties included in other real estate owned on the Consolidated
Balance Sheets. Foreclosed properties exclude bank-owned property held for sale at December 31, 2010 and 2009.

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, 2010 and 2009, there were no stock options outstanding.



52



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



Advertising Costs Adverting is expensed as incurred.

Stock-Based Compensation The Company accounts for its stock based compensation plan under the current accounting provisions of which
requires recognizing expense for options granted equal to the grant-date fair value over their vesting period. The excess tax benefits arising from increases in the value of equity instruments issued under stock-based payment arrangements to be
treated as cash inflows from financing activities. A Black-Scholes model is utilized to estimate the fair value of stock options. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards
with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. No stock-based compensation has been granted during the years ending December 31, 2010 and 2009. All
outstanding stock options previously granted expired on or before December 31, 2009. The stock option plan expired during the year ended December 31, 2009.

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, 2010 or 2009, 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 is the change in the
Companys equity during the period from transactions and other events and circumstances from non-owner sources. Total comprehensive 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



53



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



concerning the Companys other comprehensive (loss) income and accumulated comprehensive loss as of and for the years ended December 31, 2010 and 2009 is as follows:



|                                                                                                              |  |              |        |   |      |   |        |  
|------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|(Dollars in thousands)                                                                                        |  | December 31, |       
|                                                                                                              |  | 2010         |        |   | 2009 |  
|Net income                                                                                                    |  | $            | 814    |   |      | $ | 660    |  
|                                                                                                              |  |              |        |   |      |   |        |  
|Items of other comprehensive income, before tax:                                                              |  |              |        |   |      |   |        |  
|Unrealized gains on securities available for sale, net of taxes                                               |  |              | (363   | ) |      |   | 539    |  
|Reclassification adjustments for gains included in income before income tax expense                           |  |              | (26    | ) |      |   | (142   | )
|Adjustments relating to defined benefit plans                                                                 |  |              | (75    | ) |      |   | 190    |  
|                                                                                                              |  |              |        |   |      |   |        |  
|Other comprehensive (loss) income before tax expense                                                          |  |              | (464   | ) |      |   | 587    |  
|Less: Changes in deferred income taxes related to change in unrealized gains on securities available for sale |  |              | (150   | ) |      |   | 153    |  
|                                                                                                              |  |              |        |   |      |   |        |  
|Less: Changes in deferred income taxes related to change in adjustments relating to defined benefit plans     |  |              | (30    | ) |      |   | 73     |  
|                                                                                                              |  |              |        |   |      |   |        |  
|                                                                                                              |  |             
|Other comprehensive (loss) income, net of taxes                                                               |  |              | (284   | ) |      |   | 361    |  
|                                                                                                              |  |              |        |   |      |   |        |  
|                                                                                                              |  |             
|Total comprehensive income                                                                                    |  | $            | 530    |   |      | $ | 1,021  |  
|                                                                                                              |  |              |        |   |      |   |        |  
|                                                                                                              |  |             
|(Dollars in thousands)                                                                                        |  | 2010         |        |   | 2009 |  
|Unrealized gains on securities available for sale                                                             |  | $            | 143    |   |      | $ | 534    |  
|Related income taxes                                                                                          |  |              | (54    | ) |      |   | (206   | )
|                                                                                                              |  |              |        |   |      |   |        |  
|Net unrealized gains on available for sale securities                                                         |  |              | 89     |   |      |   | 328    |  
|                                                                                                              |  |              |        |   |      |   |        |  
|                                                                                                              |  |             
|Unrecognized net actuarial loss and prior service cost of defined benefit plans                               |  |              | (2,274 | ) |      |   | (2,200 | )
|Related income taxes                                                                                          |  |              | 877    |   |      |   | 848    |  
|                                                                                                              |  |              |        |   |      |   |        |  
|Net unrecognized actuarial loss and prior service cost of defined benefit plans                               |  |              | (1,397 | ) |      |   | (1,352 | )
|                                                                                                              |  |              |        |   |      |   |        |  
|                                                                                                              |  |             
|Accumulated other comprehensive loss                                                                          |  | $            | (1,308 | ) |      | $ | (1,024 | )
|                                                                                                              |  |              |        |   |      |   |        |  

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 19. 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 require 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.

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. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of
individual 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 2010.



54



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



These levels are:



| |  |  | Level 1  Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the
measurement date. This category generally includes securities that are traded on an active exchange, such as the New York Stock Exchange, and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2  Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 2 securities include U. S. Government agency obligations, state and municipal bonds and mortgage-backed securities.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3  Significant unobservable inputs that reflect a reporting entitys own assumptions about the assumptions that market participants
would use in pricing an asset or liability. Level 3 generally includes other real estate owned (OREO) and impaired loans when there is no observable market price or if it is impaired.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 allowance and 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, profit sharing 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 and non-profit organizations as outlined in Notes 5 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 is 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 mortgage balances outstanding as of quarter end.

New Accounting Pronouncements 



| |  |  | Fair Value Measurements and Disclosures: In January 2010, the FASB issued guidance that requires new disclosures, and clarifies existing
disclosure requirements, about fair value measurements. The clarifications and the requirement to separately disclose transfers of instruments between Level 1 and Level 2 of the fair value hierarchy are effective for interim reporting periods
beginning after December 15, 2009; however, the requirement to provide purchases, sales, issuances and settlements in the Level 3 roll-forward on a gross basis is effective for fiscal years beginning after December 15, 2010. Early adoption
of the guidance is permitted. The Company intends to adopt this guidance on the effective date.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses: The ASU requires expanded disclosure about
the credit quality of the loan portfolio in the notes to financial statements, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. The disclosures related to
period-end balances are effective for annual or interim reporting periods ending after December 15, 2010 and the disclosures of activity that occurs during the reporting period are effective for annual or interim reporting periods beginning
after December 15, 2010. The FASB has elected to defer the disclosures related to TDRs included within this standard. The required disclosures were adopted as of December 31, 2010 and are included in notes 5 and 6 of these
financial statements.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Accounting for Transfers of Financial Assets: Accounting for Transfers of Financial Assets amends prior accounting guidance to
enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. The new authoritative accounting guidance eliminates the concept of
a qualifying special-purpose entity and changes the requirements for derecognizing financial assets. The new guidance also
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



55



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



| | requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The
Company adopted this new authoritative accounting guidance effective January 1, 2010. It did not have a significant impact on the Companys consolidated financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2. PREFERRED STOCK  U.S. TREASURY DEPARTMENTS CAPITAL PURCHASE PROGRAM

On June 26, 2009, the Company completed the issuance of 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) under the Capital Purchase Program (CPP) as a part of the Troubled Asset Relief Program (TARP). The Series A Preferred Stock was issued without warrants, an exception made for Community Development
Financial Institutions (CDFI) for which serving the underserved is a mandate and business practice.

On August 20, 2010, the
Company completed an exchange of the Series A Preferred Stock for an equal number of shares, Series B Fixed Rate Cumulative Perpetual Preferred Stock having a liquidation preference of $1,000 per share (Series B Preferred Stock), under
the Community Development Capital Initiative (CDCI), also part of TARP. Neither the Series A nor Series B Preferred Stock has any mandatory redemption and/or conversion features.

Under the CPP terms, the Series A Preferred Stock carried a dividend rate of 5% for the first five years after issuance, payable quarterly, after which the dividend rate increased to 9% until the Series A
Preferred Stock is repurchased at its liquidation value. Under the CDCI program, the Series B Preferred Stock carries a dividend rate of 2% for eight years, after which the dividend rate increases to 9% until the Series B Preferred Stock is
repurchased at its liquidation value. The Company paid dividends on the Series A Preferred Stock up to the date of closing of the CDCI exchange on August 20, 2010.

3. INVESTMENT SECURITIES

The main objectives of our investment strategy are to provide a
source of liquidity while managing our interest rate risk, and to generate an adequate level of interest income without taking undue risks. Our investment policy permits investments in various types of securities, certificates of deposits and
federal funds sold in compliance with various restrictions in the policy. As of December 31, 2010 and 2009, all investment securities are classified as available for sale.

Our available for sale securities totaled $20.6 million and $17.7 million as of December 31, 2010 and 2009, respectively. Securities with a fair value of $0.6 million and $1.1 million,
respectively, were pledged to the Federal Reserve and an additional $2.2 million and $10.1 million, respectively, in investments are pledged to public housing authorities in NC and the state treasurer as collateral for public deposits at
December 31, 2010 and 2009. Our investment portfolio consists of the following securities:



| |  |  | Government sponsored residential mortgage backed securities (MBS),
| | - |  | --------------------------------------------------------------------



| |  |  | Non-Government sponsored residential MBS, and
| | - |  | ---------------------------------------------



| |  |  | Municipal securities
| | - |  | --------------------



| |  |  | North Carolina
| | - |  | --------------



| |  |  | Out of state
| | - |  | ------------



56



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



The amortized cost, gross unrealized gains and losses and fair values of investment securities at
December 31, 2010 and 2009 are as follows:



|                             |  |               |        |  |                      |   |     |                       |  |   |            |   |  |   |        | 
|---------------------------- |  | ------------- | ------ |  | -------------------- | - | --- | --------------------- |  | - | ---------- | - |  | - | ------ | 
|(Dollars in thousands)       |  | AmortizedCost |        |  | GrossUnrealizedGains |   |     | GrossUnrealizedLosses |  |   | Fair Value |  
|December 31, 2010            |  |               |        |  |                      |   |     |                       |  |   |            |   |  |   |        | 
|Government sponsored MBS     |  |               |        |  |                      |   |     |                       |  |   |            |   |  |   |        | 
|Residential                  |  | $             | 13,554 |  |                      | $ | 326 |                       |  | $ | (168       | ) |  | $ | 13,712 | 
|Non-Government sponsored MBS |  |               |        |  |                      |   |     |                       |  |   |            |   |  |   |        | 
|Residential                  |  |               | 201    |  |                      |   | 4   |                       |  |   |           |   |  |   | 205    | 
|Municipal securities         |  |               |        |  |                      |   |     |                       |  |   |            |   |  |   |        | 
|North Carolina               |  |               | 3,164  |  |                      |   | 65  |                       |  |   | (43        | ) |  |   | 3,186  | 
|Out of state                 |  |               | 3,565  |  |                      |   | 26  |                       |  |   | (67        | ) |  |   | 3,524  | 
|                             |  |               |        |  |                      |   |     |                       |  |   |            |   |  |   |        | 
|Total at December 31, 2010   |  | $             | 20,484 |  |                      | $ | 421 |                       |  | $ | (278       | ) |  | $ | 20,627 | 
|                             |  |               |        |  |                      |   |     |                       |  |   |            |   |  |   |        | 
|                             |  |               |        | 
|December 31, 2009            |  |               |        |  |                      |   |     |                       |  |   |            |   |  |   |        | 
|US government agencies       |  |               |        |  |                      |   |     |                       |  |   |            |   |  |   |        | 
|Government sponsored MBS     |  |               |        |  |                      |   |     |                       |  |   |            |   |  |   |        | 
|Residential                  |  | $             | 8,887  |  |                      | $ | 357 |                       |  | $ |           |   |  | $ | 9,244  | 
|Non-Government sponsored MBS |  |               |        |  |                      |   |     |                       |  |   |            |   |  |   |        | 
|Residential                  |  |               | 310    |  |                      |   |    |                       |  |   | (3         | ) |  |   | 307    | 
|Municipal securities         |  |               |        |  |                      |   |     |                       |  |   |            |   |  |   |        | 
|North Carolina               |  |               | 4,402  |  |                      |   | 115 |                       |  |   |           |   |  |   | 4,517  | 
|Out of state                 |  |               | 3,566  |  |                      |   | 71  |                       |  |   | (6         | ) |  |   | 3,631  | 
|                             |  |               |        |  |                      |   |     |                       |  |   |            |   |  |   |        | 
|Total at December 31, 2009   |  | $             | 17,165 |  |                      | $ | 543 |                       |  | $ | (9         | ) |  | $ | 17,699 | 
|                             |  |               |        |  |                      |   |     |                       |  |   |            |   |  |   |        | 

Sales and calls of securities available for sale for the year ended December 31, 2010 and 2009 resulted in aggregate
net realized gains of $26 thousand and $142 thousand, respectively.

The amortized cost and estimated market values of securities as of
December 31, 2010 by contractual maturities are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

MBS, which are not due at a single maturity date, are grouped based upon the final payment date. MBS may mature earlier because of principal
prepayments.



57



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



|                                       |  |                         |        |  |                |   |        | 
|-------------------------------------- |  | ----------------------- | ------ |  | -------------- | - | ------ | 
|(Dollars in thousands)                 |  | As of December 31, 2010 |       
|                                       |  | Fair Value              |        |  | Amortized Cost |  
|Government sponsored MBS               |  |                         |        |  |                |   |        | 
|Residential                            |  |                         |        |  |                |   |        | 
|Due after one year through five years  |  | $                       | 9      |  |                | $ | 9      | 
|Due after five years through ten years |  |                         | 492    |  |                |   | 463    | 
|Due after ten years                    |  |                         | 13,211 |  |                |   | 13,082 | 
|                                       |  |                         |        |  |                |   |        | 
|Total Government sponsored MBS         |  | $                       | 13,712 |  |                | $ | 13,554 | 
|                                       |  |                         |        |  |                |   |        | 
|Non-Government sponsored MBS           |  |                         |        |  |                |   |        | 
|Residential                            |  |                         |        |  |                |   |        | 
|Due after ten years                    |  | $                       | 205    |  |                | $ | 201    | 
|                                       |  |                        
|Municipal securities                   |  |                         |        |  |                |   |        | 
|North Carolina                         |  |                         |        |  |                |   |        | 
|Due within one year                    |  | $                       | 511    |  |                | $ | 497    | 
|Due after one year through five years  |  |                         | 988    |  |                |   | 937    | 
|Due after five years through ten years |  |                         | 1,687  |  |                |   | 1,730  | 
|                                       |  |                         |        |  |                |   |        | 
|Total North Carolina municipal bonds   |  | $                       | 3,186  |  |                | $ | 3,164  | 
|                                       |  |                         |        |  |                |   |        | 
|Out of state                           |  |                         |        |  |                |   |        | 
|Due within one year                    |  | $                       | 256    |  |                | $ | 255    | 
|Due after one year through five years  |  |                         | 1,900  |  |                |   | 1,905  | 
|Due after five years through ten years |  |                         | 1,368  |  |                |   | 1,405  | 
|                                       |  |                         |        |  |                |   |        | 
|Total out of state municipal bonds     |  | $                       | 3,524  |  |                | $ | 3,565  | 
|                                       |  |                         |        |  |                |   |        | 

As of December 31, 2010 and December 31, 2009, 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:



|                             |  |                     |        |  |                      |   |      |            |  |   |                  |  |  |            |    |   |                  |   |        |  |  |   |      |  
|---------------------------- |  | ------------------- | ------ |  | -------------------- | - | ---- | ---------- |  | - | ---------------- |  |  | ---------- | -- | - | ---------------- | - | ------ |  |  | - | ---- | -
|                             |  | Fair Value          |        |  | Fair Value           |   |      | Fair Value | 
|                             |  | Gain                |        |  | (Loss)               |   |      | Gain       |  |   | (Loss)           |  |  | Gain       |    |   | (Loss)           |  
|(Dollars in thousands)       |  | Less Than 12 Months |        |  | 12 Months or Greater |   |      | Total      | 
|                             |  | Fair Value          |        |  | UnrealizedLosses     |   |      | Fair Value |  |   | UnrealizedLosses |  |  | Fair Value |    |   | UnrealizedLosses |  
|December 31, 2010            |  |                     |        |  |                      |   |      |            |  |   |                  |  |  |            |    |   |                  |   |        |  |  |   |      |  
|Government sponsored MBS     |  |                     |        |  |                      |   |      |            |  |   |                  |  |  |            |    |   |                  |   |        |  |  |   |      |  
|Residential                  |  | $                   | 7,725  |  |                      | $ | (168 | )          |  | $ |                 |  |  | $          |   |   |                  | $ | 7,725  |  |  |   | (168 | )
|Municipal securities         |  |                     |        |  |                      |   |      |            |  |   |                  |  |  |            |    |   |                  |   |        |  |  |   |      |  
|North Carolina               |  |                     | 1,687  |  |                      |   | (43  | )          |  |   |                 |  |  |            |   |   |                  |   | 1,687  |  |  |   | (43  | )
|Out of state                 |  |                     | 2,085  |  |                      |   | (67  | )          |  |   |                  |  |  |            |    |   |                  |   | 2,085  |  |  |   | (67  | )
|                             |  |                     |        |  |                      |   |      |            |  |   |                  |  |  |            |    |   |                  |   |        |  |  |   |      |  
|Total at December 31, 2010   |  | $                   | 11,497 |  |                      | $ | (278 | )          |  | $ |                 |  |  | $          |   |   |                  | $ | 11,497 |  |  | $ | (278 | )
|                             |  |                     |        |  |                      |   |      |            |  |   |                  |  |  |            |    |   |                  |   |        |  |  |   |      |  
|                             |  |                     |        |  |                      |  
|December 31, 2009            |  |                     |        |  |                      |   |      |            |  |   |                  |  |  |            |    |   |                  |   |        |  |  |   |      |  
|Government sponsored MBS     |  |                     |        |  |                      |   |      |            |  |   |                  |  |  |            |    |   |                  |   |        |  |  |   |      |  
|Residential                  |  | $                   |       |  |                      | $ |     |            |  | $ | 11               |  |  | $          |   |   |                  | $ | 11     |  |  | $ |     |  
|Non-Government sponsored MBS |  |                     |        |  |                      |   |      |            |  |   |                  |  |  |            |    |   |                  |   |        |  |  |   |      |  
|Residential                  |  |                     |       |  |                      |   |     |            |  |   | 307              |  |  |            | (3 | ) |                  |   | 307    |  |  |   | (3   | )
|Municipal securities         |  |                     |        |  |                      |   |      |            |  |   |                  |  |  |            |    |   |                  |   |        |  |  |   |      |  
|Out of state                 |  |                     | 244    |  |                      |   | (6   | )          |  |   |                  |  |  |            |    |   |                  |   | 244    |  |  |   | (6   | )
|                             |  |                     |        |  |                      |   |      |            |  |   |                  |  |  |            |    |   |                  |   |        |  |  |   |      |  
|Total at December 31, 2009   |  | $                   | 244    |  |                      | $ | (6   | )          |  | $ | 318              |  |  | $          | (3 | ) |                  | $ | 562    |  |  | $ | (9   | )
|                             |  |                     |        |  |                      |   |      |            |  |   |                  |  |  |            |    |   |                  |   |        |  |  |   |      |  

All securities owned as of December 31, 2010 and 2009 are investment grade. The unrealized losses are attributable to
changes in market interest rates. The Bank evaluates securities for other-than-temporary impairment on at least 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



58



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



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. The Bank believes that all
of the unrealized losses are temporary in nature. As of December 31, 2010 and 2009, the Bank held twenty and three investment positions, respectively, with unrealized losses of $278 thousand and $9 thousand, respectively. These investments were
in Municipal securities and MBS. In analyzing an issuers financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and
industry analysts reports. Management has determined that all declines in the market value of available for sale securities are not other-than-temporary.

4. 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 0.15% of its total assets as of December 31 of the prior year (up to a maximum of $26.0 million), 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, 2010 and 2009 was $0.9 million and $1.1 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, 2010 and 2009. The FHLB, of which the bank is a member, has been impacted by the Recession that began in late 2007. Management has reviewed its investment in FHLB stock for
impairment and does not believe it is impaired as of December 31, 2010 or 2009. The FHLB of Atlanta in which the Company owns stock has been profitable in each of the years ended December 31, 2010 and 2009.

5. LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of the loan portfolio, net of deferred fees and costs, by loan classification as of December 31, 2010 and 2009 is as follows:



|                                   |  |                    |         |   |      |   |         |  
|---------------------------------- |  | ------------------ | ------- | - | ---- | - | ------- | -
|                                   |  | As of December 31, |        
|(Dollars in thousands)             |  | 2010               |         |   | 2009 |  
|Commercial                         |  | $                  | 9,148   |   |      | $ | 8,006   |  
|Commercial real estate:            |  |                    |         |   |      |   |         |  
|Construction                       |  |                    | 1,187   |   |      |   | 1,162   |  
|Owner occupied                     |  |                    | 22,395  |   |      |   | 33,147  |  
|Other                              |  |                    | 24,265  |   |      |   | 27,029  |  
|Faith-based and non-profit         |  |                    |         |   |      |   |         |  
|Construction                       |  |                    | 9,840   |   |      |   | 13,773  |  
|Owner occupied                     |  |                    | 79,490  |   |      |   | 65,566  |  
|Other                              |  |                    | 2,127   |   |      |   | 2,652   |  
|Residential real estate:           |  |                    |         |   |      |   |         |  
|First mortgage                     |  |                    | 32,284  |   |      |   | 35,639  |  
|Multifamily                        |  |                    | 7,892   |   |      |   | 8,982   |  
|Home equity                        |  |                    | 5,123   |   |      |   | 5,539   |  
|Construction                       |  |                    | 2,243   |   |      |   | 2,052   |  
|Consumer                           |  |                    | 2,218   |   |      |   | 2,303   |  
|Other loans                        |  |                    | 3,559   |   |      |   | 4,261   |  
|                                   |  |                    |         |   |      |   |         |  
|Loans, net of deferred fees        |  |                    | 201,771 |   |      |   | 210,111 |  
|Allowance for loan losses          |  |                    | (3,851  | ) |      |   | (3,564  | )
|                                   |  |                    |         |   |      |   |         |  
|Loans, net of allowance for losses |  | $                  | 197,920 |   |      | $ | 206,547 |  
|                                   |  |                    |         |   |      |   |         |  

The Bank has a concentration of loans to faith-based and non-profit organizations, in which the Bank has specialized lending
experience. As of December 31, 2010, the percentage of loans in this niche, which included construction, real estate secured, and lines of credit, totaled approximately 45.33% of the total loan portfolio and the reserve for these loans is
33.50% of the total allowance. Historically the Bank has experienced low levels of loan losses in this specialty; however repayment of loans is dependent on voluntary contributions which could be adversely affected by the current economic downturn.



59



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



Activity in the allowance for loan losses was as follows:



|                          |  |                    |       |   |      |   |        |  
|------------------------- |  | ------------------ | ----- | - | ---- | - | ------ | -
|                          |  | As of December 31, |      
|(Dollars in thousands)    |  | 2010               |       |   | 2009 |  
|Beginning balance         |  | $                  | 3,564 |   |      | $ | 2,962  |  
|Provision for loan losses |  |                    | 520   |   |      |   | 1,853  |  
|Loans charged-off         |  |                    | (309  | ) |      |   | (1,290 | )
|Recoveries                |  |                    | 76    |   |      |   | 39     |  
|                          |  |                    |       |   |      |   |        |  
|Ending balance            |  | $                  | 3,851 |   |      | $ | 3,564  |  
|                          |  |                    |       |   |      |   |        |  

In 2010, management changed its loan-related disclosure classifications in its financial reports to present portfolio
segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for loan losses. The following table presents the allowance for loan losses and the reported
investment in loans, net of deferred fees and costs, by portfolio segment and based on impairment method as of December 31, 2010:



|                                                |  |                   |       |  |                      |   |        |                           |  |   |                       |  |  |          |        |  |            |   |       |       |  |   |       |  |  |   |         | 
|----------------------------------------------- |  | ----------------- | ----- |  | -------------------- | - | ------ | ------------------------- |  | - | --------------------- |  |  | -------- | ------ |  | ---------- | - | ----- | ----- |  | - | ----- |  |  | - | ------- | 
|                                                |  | December 31, 2010 |      
|(Dollars in thousands)                          |  | Commercial        |       |  | CommercialRealEstate |   |        | Faith-Based andNon-Profit |  |   | ResidentialRealEstate |  |  | Consumer |        |  | OtherLoans |   |       | Total | 
|Allowance for loan losses:                      |  |                   |       |  |                      |   |        |                           |  |   |                       |  |  |          |        |  |            |   |       |       |  |   |       |  |  |   |         | 
|Ending allowance balance attributable to loans: |  |                   |       |  |                      |   |        |                           |  |   |                       |  |  |          |        |  |            |   |       |       |  |   |       |  |  |   |         | 
|Individually evaluated for impairment           |  | $                 |      |  |                      | $ |       |                           |  | $ |                      |  |  | $        | 118    |  |            | $ |      |       |  | $ |      |  |  | $ | 118     | 
|Collectively evaluated for impairment           |  |                   | 651   |  |                      |   | 651    |                           |  |   | 1,289                 |  |  |          | 927    |  |            |   | 105   |       |  |   | 107   |  |  |   | 3,730   | 
|                                                |  |                   |       |  |                      |   |        |                           |  |   |                       |  |  |          |        |  |            |   |       |       |  |   |       |  |  |   |         | 
|Total ending allowance balance                  |  | $                 | 651   |  |                      | $ | 651    |                           |  | $ | 1,289                 |  |  | $        | 1,045  |  |            | $ | 105   |       |  | $ | 107   |  |  | $ | 3,848   | 
|                                                |  |                   |       |  |                      |   |        |                           |  |   |                       |  |  |          |        |  |            |   |       |       |  |   |       |  |  |   |         | 
|                                                |  |                   |       |  |                      |   |       
|Loans:                                          |  |                   |       |  |                      |   |        |                           |  |   |                       |  |  |          |        |  |            |   |       |       |  |   |       |  |  |   |         | 
|Loans individually evaluated for impairment     |  | $                 | 1,180 |  |                      | $ | 5,730  |                           |  | $ | 7,270                 |  |  | $        | 1,272  |  |            | $ |      |       |  | $ |      |  |  | $ | 15,452  | 
|Loans collectively evaluated for impairment     |  |                   | 7,968 |  |                      |   | 42,117 |                           |  |   | 84,187                |  |  |          | 46,270 |  |            |   | 2,218 |       |  |   | 3,559 |  |  |   | 186,319 | 
|                                                |  |                   |       |  |                      |   |        |                           |  |   |                       |  |  |          |        |  |            |   |       |       |  |   |       |  |  |   |         | 
|Total ending loans balance                      |  | $                 | 9,148 |  |                      | $ | 47,847 |                           |  | $ | 91,457                |  |  | $        | 47,542 |  |            | $ | 2,218 |       |  | $ | 3,559 |  |  | $ | 201,771 | 
|                                                |  |                   |       |  |                      |   |        |                           |  |   |                       |  |  |          |        |  |            |   |       |       |  |   |       |  |  |   |         | 

Total impaired loans including troubled debt restructures (TDRs) is $15.5 million as of December 31,
2010. A loan is considered impaired when, based on current information and events, it is probable that the Company will not be able to collect all amounts due from the borrower in accordance with the contractual terms of the loan, including
scheduled interest payments. Impaired loans include all classes of non-accruing loans. Impaired loans exclude smaller balance homogenous loans (consumer and small business non-accruing loans) not in the process of foreclosure that are collectively
evaluated for impairment and do not have specific reserves.



60



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



The following table shows impaired loans, excluding TDRs with and without valuation allowances as
of December 31, 2010 and 2009:

The unpaid principal balance for impaired loans, excluding troubled debt restructures were as follows:



|                                                           |  |              |       |  |      |   |       | 
|---------------------------------------------------------- |  | ------------ | ----- |  | ---- | - | ----- | 
|                                                           |  | December 31, |      
|(Dollars in thousands)                                     |  | 2010         |       |  | 2009 |  
|Year-end loans with no allocated allowance for loan losses |  | $            | 6,437 |  |      | $ | 1,605 | 
|Year-end loans with allocated allowance for loan losses    |  |              | 565   |  |      |   | 1,607 | 
|                                                           |  |              |       |  |      |   |       | 
|Total                                                      |  | $            | 7,002 |  |      | $ | 3,212 | 
|                                                           |  |              |       |  |      |   |       | 
|                                                           |  |             
|Amount of the allowance for loan losses allocated          |  | $            | 109   |  |      | $ | 35    | 
|                                                           | 
|                                                           |  | December 31, |      
|(Dollars in thousands)                                     |  | 2010         |       |  | 2009 |  
|Average of individually impaired loans during year         |  |              | 5,337 |  |      |   | 2,621 | 

The following table presets loans
individually evaluated for impairment, excluding troubled debt restructures, by class of loans as of December 31, 2010.



|                                    |  |                        |       |  |                    |   |       |                                   |  |   |     | 
|----------------------------------- |  | ---------------------- | ----- |  | ------------------ | - | ----- | --------------------------------- |  | - | --- | 
|(Dollars in thousands)              |  | UnpaidPrincipalBalance |       |  | RecordedInvestment |   |       | Allowance forLoan LossesAllocated | 
|With no related allowance recorded: |  |                        |       |  |                    |   |       |                                   |  |   |     | 
|Commercial real estate:             |  |                        |       |  |                    |   |       |                                   |  |   |     | 
|Owner occupied                      |  | $                      | 1,358 |  |                    | $ | 1,355 |                                   |  | $ |    | 
|Other                               |  |                        | 65    |  |                    |   | 65    |                                   |  |   |    | 
|Faith-based and non-profit:         |  |                        |       |  |                    |   |       |                                   |  |   |     | 
|Owner occupied                      |  |                        | 4,474 |  |                    |   | 4,466 |                                   |  |   |    | 
|Residential real estate:            |  |                        |       |  |                    |   |       |                                   |  |   |     | 
|First mortgage                      |  |                        | 207   |  |                    |   | 207   |                                   |  |   |    | 
|Multifamily                         |  |                        | 322   |  |                    |   | 322   |                                   |  |   |    | 
|Home Equtiy                         |  |                        | 11    |  |                    |   | 11    |                                   |  |   |    | 
|With an allowance recorded:         |  |                        |       |  |                    |   |       |                                   |  |   |     | 
|Residential real estate:            |  |                        |       |  |                    |   |       |                                   |  |   |     | 
|First mortgage                      |  |                        | 324   |  |                    |   | 323   |                                   |  |   | 8   | 
|Multifamily                         |  |                        | 143   |  |                    |   | 143   |                                   |  |   | 61  | 
|Home equity                         |  |                        | 98    |  |                    |   | 98    |                                   |  |   | 40  | 
|                                    |  |                        |       |  |                    |   |       |                                   |  |   |     | 
|Total                               |  | $                      | 7,002 |  |                    | $ | 6,990 |                                   |  | $ | 109 | 
|                                    |  |                        |       |  |                    |   |       |                                   |  |   |     | 

The recorded investment in loan balance is net of deferred fees and costs where applicable.



61



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



The following table shows troubled debt restructure (TDR) loans with and without valuation
allowances as of December 31, 2010 and 2009:

Then unpaid principal balance of troubled debt restructures (TDRs) were as
follows:



|                                                           |  |              |       |  |      |   |       | 
|---------------------------------------------------------- |  | ------------ | ----- |  | ---- | - | ----- | 
|                                                           |  | December 31, |      
|(Dollars in thousands)                                     |  | 2010         |       |  | 2009 |  
|Year-end loans with no allocated allowance for loan losses |  | $            | 8,333 |  |      | $ | 6,205 | 
|Year-end loans with allocated allowance for loan losses    |  |              | 49    |  |      |   | 773   | 
|                                                           |  |              |       |  |      |   |       | 
|Total                                                      |  | $            | 8,464 |  |      | $ | 6,978 | 
|                                                           |  |              |       |  |      |   |       | 
|                                                           |  |             
|Amount of the allowance for loan losses allocated          |  | $            | 9     |  |      | $ | 201   | 
|                                                           | 
|                                                           |  | December 31, |      
|(Dollars in thousands)                                     |  | 2010         |       |  | 2009 |  
|Average of TDR loans during year                           |  |              | 7,335 |  |      |   | 6,770 | 

There was no interest income
recognized on the TDRs for the years ended.

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



|                                    |  |                 |       |  |                  |   |      |               |  |   |                    |  |  |                                   |       |  |  |   |   | 
|----------------------------------- |  | --------------- | ----- |  | ---------------- | - | ---- | ------------- |  | - | ------------------ |  |  | --------------------------------- | ----- |  |  | - | - | 
|(Dollars in thousands)              |  | ImpairedBalance |       |  | LiquidCollateral |   |      | TotalExposure |  |   | RecordedInvestment |  |  | Allowance forLoan LossesAllocated |      
|With no related allowance recorded: |  |                 |       |  |                  |   |      |               |  |   |                    |  |  |                                   |       |  |  |   |   | 
|Commercial                          |  | $               | 1,180 |  |                  | $ |     |               |  | $ | 1,180              |  |  | $                                 | 1,180 |  |  | $ |  | 
|Commercial real estate:             |  |                 |       |  |                  |   |      |               |  |   |                    |  |  |                                   |       |  |  |   |   | 
|Construction                        |  |                 | 1,038 |  |                  |   |     |               |  |   | 1,038              |  |  |                                   | 1,038 |  |  |   |  | 
|Owner occupied                      |  |                 | 744   |  |                  |   |     |               |  |   | 744                |  |  |                                   | 744   |  |  |   |  | 
|Other                               |  |                 | 3,034 |  |                  |   |     |               |  |   | 3,034              |  |  |                                   | 3,034 |  |  |   |  | 
|Faith-based and non-profit:         |  |                 |       |  |                  |   |      |               |  |   |                    |  |  |                                   |       |  |  |   |   | 
|Owner occupied                      |  |                 | 2,301 |  |                  |   | (103 | )             |  |   | 2,198              |  |  |                                   | 2,299 |  |  |   |  | 
|Residential real estate:            |  |                 |       |  |                  |   |      |               |  |   |                    |  |  |                                   |       |  |  |   |   | 
|First mortgage                      |  |                 | 118   |  |                  |   | (6   | )             |  |   | 112                |  |  |                                   | 118   |  |  |   |   | 
|                                    |  |                 |       |  |                 
|With an allowance recorded:         |  |                 |       |  |                  |   |      |               |  |   |                    |  |  |                                   |       |  |  |   |   | 
|Residential real estate:            |  |                 |       |  |                  |   |      |               |  |   |                    |  |  |                                   |       |  |  |   |   | 
|First mortgage                      |  |                 | 49    |  |                  |   |     |               |  |   | 49                 |  |  |                                   | 49    |  |  |   | 9 | 
|                                    |  |                 |       |  |                  |   |      |               |  |   |                    |  |  |                                   |       |  |  |   |   | 
|Total                               |  | $               | 8,464 |  |                  | $ | (109 | )             |  | $ | 8,355              |  |  | $                                 | 8,462 |  |  | $ | 9 | 
|                                    |  |                 |       |  |                  |   |      |               |  |   |                    |  |  |                                   |       |  |  |   |   | 

The recorded investment in loan balance is net of deferred fees and costs where applicable.



62



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



Unrecognized income on impaired loans as of December 31, 2010 and 2009 was $1.2 million and $0.7
million, respectively. Disclosure of interest income recognized on a cash basis on impaired loans is not provided, as it was deemed to be immaterial by management.

The following table presents the recorded investment in non-accrual and loans past due over 90 days and still accruing by class of loans as of December 31, 2010 and 2009:



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

Those loans over 90 days still accruing were in the process of modification. The modifications had been approved, just not
recorded on the Banks systems as of December 31, 2010. In all cases, the borrowers are still making payments.



63



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



The following table presents the aging of the recorded investment in loans as of December 31, 2010
by class of loans:



|                            |  |                     |       |  |                     |   |       |                             |  |   |               |  |  |         |        |  |       |   |         |  |  |   |         | 
|--------------------------- |  | ------------------- | ----- |  | ------------------- | - | ----- | --------------------------- |  | - | ------------- |  |  | ------- | ------ |  | ----- | - | ------- |  |  | - | ------- | 
|                            |  | 30 - 59DaysPast Due |       |  | 60 - 89DaysPast Due |   |       | Greater than90 DaysPast Due |  |   | TotalPast Due |  |  | Current |        |  | Total |  
|(Dollars in thousands)      |  |                     |       |  |                     |   |       |                             |  |   |               |  |  |         |        |  |       |  
|Commercial                  |  | $                   | 3     |  |                     | $ | 17    |                             |  | $ | 1,180         |  |  | $       | 1,200  |  |       | $ | 7,948   |  |  | $ | 9,148   | 
|Commercial real estate:     |  |                     |       |  |                     |   |       |                             |  |   |               |  |  |         |        |  |       |   |         |  |  |   |         | 
|Construction                |  |                     |      |  |                     |   |      |                             |  |   | 650           |  |  |         | 650    |  |       |   | 537     |  |  |   | 1,187   | 
|Owner occupied              |  |                     | 54    |  |                     |   | 70    |                             |  |   | 1,640         |  |  |         | 1,764  |  |       |   | 20,631  |  |  |   | 22,395  | 
|Other                       |  |                     | 92    |  |                     |   |      |                             |  |   | 3,100         |  |  |         | 3,192  |  |       |   | 21,073  |  |  |   | 24,265  | 
|Faith-based and non-profit: |  |                     |       |  |                     |   |       |                             |  |   |               |  |  |         |        |  |       |   |         |  |  |   |         | 
|Construction                |  |                     |      |  |                     |   |      |                             |  |   |              |  |  |         |       |  |       |   | 9,840   |  |  |   | 9,840   | 
|Owner occupied              |  |                     | 703   |  |                     |   | 721   |                             |  |   | 6,557         |  |  |         | 7,981  |  |       |   | 71,509  |  |  |   | 79,490  | 
|Other                       |  |                     |      |  |                     |   |      |                             |  |   |              |  |  |         |       |  |       |   | 2,127   |  |  |   | 2,127   | 
|Residential real estate:    |  |                     |       |  |                     |   |       |                             |  |   |               |  |  |         |        |  |       |   |         |  |  |   |         | 
|First mortgage              |  |                     | 1,172 |  |                     |   | 226   |                             |  |   | 2,226         |  |  |         | 3,624  |  |       |   | 28,660  |  |  |   | 32,284  | 
|Multifamily                 |  |                     |      |  |                     |   |      |                             |  |   | 465           |  |  |         | 465    |  |       |   | 7,427   |  |  |   | 7,892   | 
|Home equity                 |  |                     | 625   |  |                     |   |      |                             |  |   | 109           |  |  |         | 734    |  |       |   | 4,389   |  |  |   | 5,123   | 
|Construction                |  |                     |      |  |                     |   |      |                             |  |   |              |  |  |         |       |  |       |   | 2,243   |  |  |   | 2,243   | 
|Consumer                    |  |                     | 18    |  |                     |   | 2     |                             |  |   |              |  |  |         | 20     |  |       |   | 2,198   |  |  |   | 2,218   | 
|Other loans                 |  |                     |      |  |                     |   |      |                             |  |   |              |  |  |         |       |  |       |   | 3,559   |  |  |   | 3,559   | 
|                            |  |                     |       |  |                     |   |       |                             |  |   |               |  |  |         |        |  |       |   |         |  |  |   |         | 
|Total                       |  | $                   | 2,667 |  |                     | $ | 1,036 |                             |  | $ | 15,927        |  |  | $       | 19,630 |  |       | $ | 182,141 |  |  | $ | 201,771 | 
|                            |  |                     |       |  |                     |   |       |                             |  |   |               |  |  |         |        |  |       |   |         |  |  |   |         | 

Nonaccrual loans that were current totaled $349 thousand. There was one non-accrual loan of $39 thousand that was past
due included in the 30-59 days past due amounts as of December 31, 2010.

6. ALLOWANCES FOR LOAN LOSSES

Changes in the allowances for loan losses as of and for the years ended December 31, 2010 and 2009 are as follows:



|                          |  |                    |       |   |      |   |        |  
|------------------------- |  | ------------------ | ----- | - | ---- | - | ------ | -
|                          |  | As of December 31, |      
|                          |  | 2010               |       |   | 2009 |  
|(Dollars in thousands)    |  |                    |       |   |      |  
|Beginning balance         |  | $                  | 3,564 |   |      | $ | 2,962  |  
|Provision for loan losses |  |                    | 520   |   |      |   | 1,853  |  
|Loans charged-off         |  |                    | (309  | ) |      |   | (1,290 | )
|Recoveries                |  |                    | 76    |   |      |   | 39     |  
|                          |  |                    |       |   |      |   |        |  
|Ending balance            |  | $                  | 3,851 |   |      | $ | 3,564  |  
|                          |  |                    |       |   |      |   |        |  

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



64



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



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



|                                                |  |                   |       |  |                      |   |        |                           |  |   |                       |  |  |          |        |  |            |   |       |       |  |   |       |  |  |   |         | 
|----------------------------------------------- |  | ----------------- | ----- |  | -------------------- | - | ------ | ------------------------- |  | - | --------------------- |  |  | -------- | ------ |  | ---------- | - | ----- | ----- |  | - | ----- |  |  | - | ------- | 
|                                                |  | December 31, 2010 |      
|(Dollars in thousands)                          |  | Commercial        |       |  | CommercialRealEstate |   |        | Faith-Based andNon-Profit |  |   | ResidentialRealEstate |  |  | Consumer |        |  | OtherLoans |   |       | Total | 
|Allowance for loan losses:                      |  |                   |       |  |                      |   |        |                           |  |   |                       |  |  |          |        |  |            |   |       |       |  |   |       |  |  |   |         | 
|Ending allowance balance attributable to loans: |  |                   |       |  |                      |   |        |                           |  |   |                       |  |  |          |        |  |            |   |       |       |  |   |       |  |  |   |         | 
|Individually evaluated for impairment           |  | $                 |      |  |                      | $ |       |                           |  | $ |                      |  |  | $        | 118    |  |            | $ |      |       |  | $ |      |  |  | $ | 118     | 
|Collectively evaluated for impairment           |  |                   | 651   |  |                      |   | 651    |                           |  |   | 1,289                 |  |  |          | 927    |  |            |   | 105   |       |  |   | 107   |  |  |   | 3,730   | 
|                                                |  |                   |       |  |                      |   |        |                           |  |   |                       |  |  |          |        |  |            |   |       |       |  |   |       |  |  |   |         | 
|Total ending allowance balance                  |  | $                 | 651   |  |                      | $ | 651    |                           |  | $ | 1,289                 |  |  | $        | 1,045  |  |            | $ | 105   |       |  | $ | 107   |  |  | $ | 3,848   | 
|                                                |  |                   |       |  |                      |   |        |                           |  |   |                       |  |  |          |        |  |            |   |       |       |  |   |       |  |  |   |         | 
|Loans:                                          |  |                   |       |  |                      |   |        |                           |  |   |                       |  |  |          |        |  |            |   |       |       |  |   |       |  |  |   |         | 
|Loans individually evaluated for impairment     |  | $                 | 1,180 |  |                      | $ | 5,730  |                           |  | $ | 7,270                 |  |  | $        | 1,272  |  |            | $ |      |       |  | $ |      |  |  | $ | 15,452  | 
|Loans collectively evaluated for impairment     |  |                   | 7,968 |  |                      |   | 42,117 |                           |  |   | 84,187                |  |  |          | 46,270 |  |            |   | 2,218 |       |  |   | 3,559 |  |  |   | 186,319 | 
|                                                |  |                   |       |  |                      |   |        |                           |  |   |                       |  |  |          |        |  |            |   |       |       |  |   |       |  |  |   |         | 
|Total ending loans balance                      |  | $                 | 9,148 |  |                      | $ | 47,847 |                           |  | $ | 91,457                |  |  | $        | 47,542 |  |            | $ | 2,218 |       |  | $ | 3,559 |  |  | $ | 201,771 | 
|                                                |  |                   |       |  |                      |   |        |                           |  |   |                       |  |  |          |        |  |            |   |       |       |  |   |       |  |  |   |         | 

The Company experienced $0.3 million in net loans charged-off for the year ended December 31, 2010 compared to $1.3
million in net loan charge-offs for the year ended December 31, 2009. Net loan charge-offs as a percent of average loan balances outstanding decreased from 0.59% for the year ended December 31, 2009 to 0.11% for the year ended
December 31, 2010.

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to
service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans for impairment by the loans
classification as to credit risk. This analysis includes non-homogenous loans, such as commercial, commercial real estate and faith-based nonprofit entities. 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.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of
the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of or repayment according to the original terms of the debt. They are characterized by the distinct possibility that the
institution will sustain some loss if the deficiencies are not corrected.

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.

Managements definitions of risk characteristics were reviewed and updated where applicable during 2010.



65



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



Loans not meeting the criteria above that are analyzed individually as part of the above described
process are considered to be pass- rated loans. As of December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:



|                            |  |      |         |  |                |   |       |             |  |   |          |  |  |   |   | 
|--------------------------- |  | ---- | ------- |  | -------------- | - | ----- | ----------- |  | - | -------- |  |  | - | - | 
|(Dollars in thousands)      |  | Pass |         |  | SpecialMention |   |       | Substandard |  |   | Doubtful | 
|Commercial                  |  | $    | 7,495   |  |                | $ | 234   |             |  | $ | 1,419    |  |  | $ |  | 
|Commercial real estate:     |  |      |         |  |                |   |       |             |  |   |          |  |  |   |   | 
|Construction                |  |      | 115     |  |                |   | 34    |             |  |   | 1,038    |  |  |   |  | 
|Owner occupied              |  |      | 17,312  |  |                |   | 1,759 |             |  |   | 3,324    |  |  |   |  | 
|Other                       |  |      | 16,637  |  |                |   | 1,529 |             |  |   | 6,099    |  |  |   |  | 
|Faith-based and non-profit: |  |      |         |  |                |   |       |             |  |   |          |  |  |   |   | 
|Construction                |  |      | 9,560   |  |                |   |      |             |  |   | 280      |  |  |   |  | 
|Owner occupied              |  |      | 59,893  |  |                |   | 2,940 |             |  |   | 16,657   |  |  |   |  | 
|Other                       |  |      | 2,057   |  |                |   | 22    |             |  |   | 48       |  |  |   |  | 
|Residential real estate:    |  |      |         |  |                |   |       |             |  |   |          |  |  |   |   | 
|First mortgage              |  |      | 26,951  |  |                |   | 1,362 |             |  |   | 3,971    |  |  |   |  | 
|Multifamily                 |  |      | 7,293   |  |                |   | 67    |             |  |   | 532      |  |  |   |  | 
|Home equity                 |  |      | 4,544   |  |                |   | 73    |             |  |   | 506      |  |  |   |  | 
|Construction                |  |      | 2,243   |  |                |   |      |             |  |   |         |  |  |   |  | 
|Consumer                    |  |      | 2,158   |  |                |   |      |             |  |   | 60       |  |  |   |  | 
|Other loans                 |  |      | 437     |  |                |   |      |             |  |   | 3,122    |  |  |   |  | 
|                            |  |      |         |  |                |   |       |             |  |   |          |  |  |   |   | 
|Total                       |  | $    | 156,695 |  |                | $ | 8,020 |             |  | $ | 37,056   |  |  | $ |  | 
|                            |  |      |         |  |                |   |       |             |  |   |          |  |  |   |   | 



66



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



The allowance assigned to these ratings by portfolio class as of December 31, 2010 is as follows:



|                            |  |      |       |  |                |   |     |             |  |   |          |  |  |   |   | 
|--------------------------- |  | ---- | ----- |  | -------------- | - | --- | ----------- |  | - | -------- |  |  | - | - | 
|(Dollars in thousands)      |  | Pass |       |  | SpecialMention |   |     | Substandard |  |   | Doubtful | 
|Commercial                  |  | $    | 629   |  |                | $ | 19  |             |  | $ | 3        |  |  | $ |  | 
|Commercial real estate:     |  |      |       |  |                |   |     |             |  |   |          |  |  |   |   | 
|Construction                |  |      | 2     |  |                |   |     |             |  |   |         |  |  |   |  | 
|Owner occupied              |  |      | 312   |  |                |   | 23  |             |  |   | 33       |  |  |   |  | 
|Other                       |  |      | 217   |  |                |   | 20  |             |  |   | 44       |  |  |   |  | 
|Faith-based and non-profit: |  |      |       |  |                |   |     |             |  |   |          |  |  |   |   | 
|Construction                |  |      | 125   |  |                |   |    |             |  |   | 4        |  |  |   |  | 
|Owner occupied              |  |      | 933   |  |                |   | 40  |             |  |   | 157      |  |  |   |  | 
|Other                       |  |      | 27    |  |                |   | 1   |             |  |   | 2        |  |  |   |  | 
|Residential real estate:    |  |      |       |  |                |   |     |             |  |   |          |  |  |   |   | 
|First mortgage              |  |      | 515   |  |                |   | 19  |             |  |   | 68       |  |  |   |  | 
|Multifamily                 |  |      | 179   |  |                |   | 3   |             |  |   | 63       |  |  |   |  | 
|Home equity                 |  |      | 120   |  |                |   | 2   |             |  |   | 46       |  |  |   |  | 
|Construction                |  |      | 30    |  |                |   |    |             |  |   |         |  |  |   |  | 
|Consumer                    |  |      | 103   |  |                |   |    |             |  |   | 2        |  |  |   |  | 
|Other loans                 |  |      | 66    |  |                |   |    |             |  |   | 41       |  |  |   |  | 
|                            |  |      |       |  |                |   |     |             |  |   |          |  |  |   |   | 
|Total                       |  | $    | 3,258 |  |                | $ | 127 |             |  | $ | 463      |  |  | $ |  | 
|                            |  |      |       |  |                |   |     |             |  |   |          |  |  |   |   | 

7. BANK PREMISES AND EQUIPMENT

A summary of bank premises and equipment, net as of December 31, 2010 and 2009 is as follows:



|                                               |  |      |       |  |      |   |       | 
|---------------------------------------------- |  | ---- | ----- |  | ---- | - | ----- | 
|(Dollars in thousands)                         |  | 2010 |       |  | 2009 |  
|Land                                           |  | $    | 752   |  |      | $ | 752   | 
|Buildings and leasehold improvements           |  |      | 7,020 |  |      |   | 6,986 | 
|Furniture and equipment                        |  |      | 2,033 |  |      |   | 1,935 | 
|                                               |  |      |       |  |      |   |       | 
|                                               |  |      | 9,805 |  |      |   | 9,673 | 
|Less accumulated depreciation and amortization |  |      | 5,220 |  |      |   | 4,821 | 
|                                               |  |      |       |  |      |   |       | 
|                                               |  | $    | 4,585 |  |      | $ | 4,852 | 
|                                               |  |      |       |  |      |   |       | 

Total depreciation expense, was $0.4 million and $0.5 million for the years ended December 31, 2010 and 2009,
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 $35.0 and $30.9 thousand for 2010 and 2009, respectively.



67



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



The following shows the maturity schedule of all time deposits:



|                       |  |        |         | 
|---------------------- |  | ------ | ------- | 
|(Dollars in thousands) |  | Amount |        
|12/31/2011             |  | $      | 132,711 | 
|12/31/2012             |  |        | 4,831   | 
|12/31/2013             |  |        | 1,604   | 
|12/31/2014             |  |        | 246     | 
|Thereafter             |  |        | 456     | 
|                       |  |        |         | 
|                       |  | $      | 139,848 | 
|                       |  |        |         | 

Principal maturities of time deposits of $100,000 or more as of December 31, 2010 are as follows:



|                                 |  |        |         |  |              |  |      |  
|-------------------------------- |  | ------ | ------- |  | ------------ |  | ---- | -
|(Dollars in thousands)           |  | Amount |         |  | Average Rate | 
|Three months or less             |  | $      | 52,018  |  |              |  | 0.55 | %
|Over three months to six months  |  |        | 15,210  |  |              |  | 1.08 |  
|Over six months to twelve months |  |        | 47,498  |  |              |  | 1.03 |  
|Over one year to five years      |  |        | 3,356   |  |              |  | 1.32 |  
|                                 |  |        |         |  |              |  |      |  
|                                 |  | $      | 118,082 |  |              |  | 0.83 | %
|                                 |  |        |         |  |              |  |      |  

Principal maturities of time deposits of $100,000 or more as of December 31, 2009 are as follows:



|                                 |  |        |        |  |              |  |      |  
|-------------------------------- |  | ------ | ------ |  | ------------ |  | ---- | -
|(Dollars in thousands)           |  | Amount |        |  | Average Rate | 
|Three months or less             |  | $      | 25,851 |  |              |  | 1.20 | %
|Over three months to six months  |  |        | 9,797  |  |              |  | 1.35 |  
|Over six months to twelve months |  |        | 49,998 |  |              |  | 1.98 |  
|Over one year to five years      |  |        | 2,900  |  |              |  | 2.52 |  
|                                 |  |        |        |  |              |  |      |  
|                                 |  | $      | 88,546 |  |              |  | 1.70 | %
|                                 |  |        |        |  |              |  |      |  

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 $2.4 million and $20.0 million as of December 31, 2010 and 2009, respectively.The Bank had two deposit
relationships for the year ended December 31, 2010 and one for the year ended December 31, 2009, with individual balances in excess of five percent of total deposits totaling $46.7 million and $20.0 million, respectively.

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. Generally, operating leases provide for one or more renewal options on the same basis as current
rental terms. In 2009 the Bank disposed of the sole capital lease. The disposal resulted in a gain of $0.1 million.

The following are future
minimum lease payments as required under the agreements:



|                       |  |        |     | 
|---------------------- |  | ------ | --- | 
|(Dollars in thousands) |  | Amount |    
|12/31/2011             |  | $      | 125 | 
|12/31/2012             |  |        | 84  | 
|12/31/2013             |  |        | 84  | 
|12/31/2014             |  |        | 84  | 
|12/31/2015             |  |        | 19  | 
|thereafter             |  |        | 4   | 
|                       |  |        |     | 
|                       |  | $      | 400 | 
|                       |  |        |     | 

Rent expense for all operating leases amounted to approximately $0.1 million in 2010 and 2009.



68



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



The Bank leases out office space in some of its vacant office space in its headquarters building and
branches. The following are the minimum rentals to be received under the agreements:



|                       |  |        |     | 
|---------------------- |  | ------ | --- | 
|(Dollars in thousands) |  | Amount |    
|12/31/2011             |  | $      | 302 | 
|12/31/2012             |  |        | 292 | 
|12/31/2013             |  |        | 245 | 
|12/31/2014             |  |        | 81  | 
|                       |  |        |     | 
|                       |  | $      | 920 | 
|                       |  |        |     | 

Rent income for December 31, 2010 and 2009 was $0.3 million.

10. BORROWINGS

Borrowings as of December 31, 2010 consisted of an FHLB borrowing of
$0.7 million with an interest rate of 50 basis points (bps) and mature in 2020. Interest expense on advances from FHLB for the years ended December 31, 2010 and 2009 was $3.2 thousand and $67.9 thousand, respectively. The maximum
FHLB advances outstanding for the year ended December 31, 2010, was $7.8 million on January 5, 2010. As of December 31, 2010, the Bank had $0.7 million of outstanding advances with the FHLB, and had the availability of borrowing an
additional $10.2 million from the FHLB. Pursuant to collateral agreements with the FHLB, advances are secured by FHLB stock, and qualifying loans totaling $12.9 million and $15.6 million as of December 31, 2010 and 2009, respectively.

Scheduled maturities of borrowings as of December 31, 2010, were as follows:



|                       |  |        |     |  |      |  |      |  
|---------------------- |  | ------ | --- |  | ---- |  | ---- | -
|December 31,
2010      | 
|Maturity Date          |  | Amount |     |  | Rate | 
|(Dollars in thousands) |  |        |     |  |      | 
|2011                   |  | $      | 21  |  |      |  | 0.50 | %
|2012                   |  |        | 22  |  |      |  | 0.50 | %
|2013                   |  |        | 22  |  |      |  | 0.50 | %
|2014                   |  |        | 23  |  |      |  | 0.50 | %
|2015 & thereafter      |  |        | 657 |  |      |  | 0.50 | %
|                       |  |        |     |  |      |  |      |  
|                       |  | $      | 745 |  |      |  | 0.50 | %
|                       |  |        |     |  |      |  |      |  

In January 2010, the Company took advantage of an opportunity to repay a $5 million fixed rate note, with no
prepayment penalty, and the Company repaid the Daily Rate Credit that had a 2009 average balance of $5.3 million and average rate of 0.38%.

11. INCOME TAXES

The components of the
income tax expense (benefit) for the years ended December 31, 2010 and 2009, are as follows:



|                              |  |      |      |   |      |   |      |  
|----------------------------- |  | ---- | ---- | - | ---- | - | ---- | -
|(Dollars in thousands)        |  | 2010 |      |   | 2009 |  
|Income tax expense (benefit): |  |      |      |   |      |   |      |  
|Current                       |  | $    | 318  |   |      | $ | 333  |  
|Deferred                      |  |      | (229 | ) |      |   | (236 | )
|                              |  |      |      |   |      |   |      |  
|Total                         |  | $    | 89   |   |      | $ | 97   |  
|                              |  |      |      |   |      |   |      |  



69



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



A reconciliation of reported income tax expense for the years ended December 31, 2010 and 2009, to
the amount of tax expense computed by multiplying income before income taxes by the statutory federal income tax rate follows:



|                                                    |  |      |      |   |      |   |      |  
|--------------------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | -
|(Dollars in thousands)                              |  | 2010 |      |   | 2009 |  
|Statutory federal income tax rate                   |  |      | 34   | % |      |   | 34   | %
|                                                    |  |     
|Tax expense (benefit) at statutory rate             |  | $    | 307  |   |      | $ | 257  |  
|Increase (decrease) in income taxes resulting from: |  |      |      |   |      |   |      |  
|State income taxes net of federal tax benefit       |  |      | 41   |   |      |   | 27   |  
|Tax exempt interest income                          |  |      | (102 | ) |      |   | (149 | )
|Disallowed interest expense                         |  |      | 3    |   |      |   | 7    |  
|Cash surrender value of life insurance              |  |      | (68  | ) |      |   | (65  | )
|Other                                               |  |      | (92  | ) |      |   | 20   |  
|                                                    |  |      |      |   |      |   |      |  
|Total                                               |  | $    | 89   |   |      | $ | 97   |  
|                                                    |  |      |      |   |      |   |      |  

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, 2010 and 2009 within the Consolidated Balance Sheets are as follows:



|                                                       |  |              |       |   |      |   |       |  
|------------------------------------------------------ |  | ------------ | ----- | - | ---- | - | ----- | -
|                                                       |  | December 31, |      
|(Dollars in thousands)                                 |  | 2010         |       |   | 2009 |  
|Deferred tax assets:                                   |  |              |       |   |      |   |       |  
|Accrued pension expense                                |  | $            | 660   |   |      | $ | 652   |  
|Adjustments, defined benefits plans                    |  |              | 876   |   |      |   | 848   |  
|Deferred loan fees                                     |  |              | 58    |   |      |   | 74    |  
|Excess book over tax provision for loan losses expense |  |              | 1,498 |   |      |   | 1,387 |  
|Federal net operating loss carryforward                |  |              | 300   |   |      |   | 376   |  
|State net operating loss carryforward                  |  |              | 189   |   |      |   | 178   |  
|Impairment on investments                              |  |              | 77    |   |      |   | 43    |  
|OREO write-downs                                       |  |              | 189   |   |      |   |       |  
|Deferred gain on sale of other real estate owned       |  |              | 20    |   |      |   | 22    |  
|Premises and equipment                                 |  |              | 272   |   |      |   | 483   |  
|Alternative minimum tax                                |  |              | 242   |   |      |   | 28    |  
|Other, net                                             |  |              | 62    |   |      |   | 150   |  
|                                                       |  |              |       |   |      |   |       |  
|                                                       |  |              |       |   |      |   |       |  
|Total deferred tax assets                              |  |              | 4,443 |   |      |   | 4,241 |  
|Valuation allowance for deferred tax assets            |  |              | (189  | ) |      |   | (178  | )
|                                                       |  |              |       |   |      |   |       |  
|Net of valuation allowance deferred tax assets         |  |              | 4,254 |   |      |   | 4,063 |  
|                                                       |  |              |       |   |      |   |       |  
|Deferred tax liabilities:                              |  |              |       |   |      |   |       |  
|Mark to market adjustment- loans                       |  |              | (119  | ) |      |   | (186  | )
|Unrealized gains on securities available for sale      |  |              | (55   | ) |      |   | (206  | )
|                                                       |  |              |       |   |      |   |       |  
|Total deferred tax liabilities                         |  |              | (174  | ) |      |   | (392  | )
|                                                       |  |              |       |   |      |   |       |  
|Net deferred tax assets                                |  |              | 4,080 |   |      |   | 3,671 |  
|                                                       |  |              |       |   |      |   |       |  
|Taxes receivable, net                                  |  |              | 354   |   |      |   | 731   |  
|                                                       |  |              |       |   |      |   |       |  
|Deferred tax assets and taxes receivable, net          |  | $            | 4,434 |   |      | $ | 4,402 |  
|                                                       |  |              |       |   |      |   |       |  

The Company has federal net operating loss carry-forwards of approximately $0.9 million at December 31, 2010, which can
be used to offset future taxable income. The federal loss carry-forwards start to expire in 2027. The Companys state net operating losses



70



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



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. Currently, the Company has concluded any review of its taxes. The 2006 tax year was the last year reviewed.

12.
STOCK-BASED COMPENSATION

Stock Option PlanThe Company had a stock option plan, approved in 1999 (the Option
Plan), under which the Company could grant options to selected officers of the Company and the Bank for up to 171,000 shares of common stock. Under the Option Plan, the exercise price of each option could not be less than the fair market value
of the Companys stock on the date of grant, and the maximum term of each option was 10 years. Options vested over 5 years based on years of service and became 100% vested otherwise, at either age 55 with 30 years of service, or at age 65. The
Option Plan and all options outstanding expired in 2009.

No stock compensation expense was incurred during 2010 or 2009.

13. 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 year ended December 31, 2010 totaled $0.4 million. There were no contributions
paid in 2009. The Cash Balance Plan was not fully funded as of December 31, 2010 and 2009. The Bank expects to provide $0.2 million in funding to the Cash Balance Plan in 2011. The measurement date for the Cash Balance Plan is December 31
and prior service costs and benefits are amortized on a straight-line basis over the average remaining service period of active participants.

The following table shows the type of assets held in the Cash Balance Plan:



|                  |  |                    |       |   |      |  |       |  
|----------------- |  | ------------------ | ----- | - | ---- |  | ----- | -
|                  |  | Cash Balance Plan  |      
|                  |  | As of December 31, |      
|Asset Category    |  | 2010               |       |   | 2009 | 
|Equity securities |  |                    | 56.0  | % |      |  | 58.0  | %
|Debt securities   |  |                    | 32.7  | % |      |  | 37.0  | %
|All other assets  |  |                    | 11.3  | % |      |  | 5.0   | %
|                  |  |                    |       |   |      |  |       |  
|Total             |  |                    | 100.0 | % |      |  | 100.0 | %
|                  |  |                    |       |   |      |  |       |  

The Bank sponsors a nonqualified Supplemental Executive Retirement Plan (SERP). The SERP, which is unfunded,
provides certain individuals with pension benefits, outside the Banks noncontributory defined-benefit Cash Balance Plan, based on average earnings, years of service and age at retirement. Participation in the SERP is at the discretion of the
Banks Board of Directors. The Company and Bank purchased bank owned life insurance (BOLI) in 2002, in the aggregate amount of approximately $12.8 million face value covering all the participants in the SERP. Increases in the cash
value of the BOLI policies totaled $0.2 million for the years ended December 31, 2010 and 2009. The Company sold its policy to the issuer at the current cash surrender value in 2010 for $0.1 million. The Bank did not sell its BOLI policy. The
cash value of the BOLI owned by the Bank was $5.6 million and $5.5 million as of December 31, 2010 and 2009. The Bank has the ability and the intent to keep this life insurance in force indefinitely. The insurance proceeds may be used, at the
sole discretion of the Bank, to fund the benefits payable under the SERP. The Bank does not expect to contribute to the SERP in 2011.



71



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



The following tables show information for the Cash Balance Plan and SERP as of and for the years ended
December 31, 2010 and 2009:



|                                                                         |  |                   |        |   |      |   |        |       |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|------------------------------------------------------------------------ |  | ----------------- | ------ | - | ---- | - | ------ | ----- |  | - | ------ | - |  | ---- | ------ | - | ---- | - | ------ | - |  | - | ------ | -
|                                                                         |  | Cash Balance Plan |        |   | SERP |   |        | Total | 
|(Dollars in thousands)                                                   |  | 2010              |        |   | 2009 |   |        | 2010  |  |   | 2009   |   |  | 2010 |        |   | 2009 |  
|Service costs                                                            |  | $                 | 134    |   |      | $ | 114    |       |  | $ |       |   |  | $    |       |   |      | $ | 134    |   |  | $ | 114    |  
|Interest cost                                                            |  |                   | 253    |   |      |   | 253    |       |  |   | 111    |   |  |      | 114    |   |      |   | 364    |   |  |   | 367    |  
|Expected return on Plan assets                                           |  |                   | (212   | ) |      |   | (201   | )     |  |   |       |   |  |      |       |   |      |   | (212   | ) |  |   | (201   | )
|Amortization of prior service cost and recognized net actuarial earnings |  |                   | 154    |   |      |   | 182    |       |  |   | 5      |   |  |      | 5      |   |      |   | 159    |   |  |   | 187    |  
|                                                                         |  |                   |        |   |      |   |        |       |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|Net periodic pension cost                                                |  | $                 | 329    |   |      | $ | 348    |       |  | $ | 116    |   |  | $    | 119    |   |      | $ | 445    |   |  | $ | 467    |  
|                                                                         |  |                   |        |   |      |   |        |       |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|                                                                         |  |                   |       
|                                                                         |  | Cash Balance Plan |        |   | SERP |   |        | Total | 
|(Dollars in thousands)                                                   |  | 2010              |        |   | 2009 |   |        | 2010  |  |   | 2009   |   |  | 2010 |        |   | 2009 |  
|Change in projected benefit obligations:                                 |  |                   |        |   |      |   |        |       |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|Benefit obligation at beginning of year                                  |  | $                 | 4,729  |   |      | $ | 4,526  |       |  | $ | 2,011  |   |  | $    | 1,977  |   |      | $ | 6,740  |   |  | $ | 6,503  |  
|Service cost                                                             |  |                   | 134    |   |      |   | 114    |       |  |   |       |   |  |      |       |   |      |   | 134    |   |  |   | 114    |  
|Interest cost                                                            |  |                   | 253    |   |      |   | 253    |       |  |   | 111    |   |  |      | 114    |   |      |   | 364    |   |  |   | 367    |  
|Actuarial gain                                                           |  |                   | 251    |   |      |   | 155    |       |  |   | 135    |   |  |      | 74     |   |      |   | 386    |   |  |   | 229    |  
|Benefits and expenses paid                                               |  |                   | (224   | ) |      |   | (319   | )     |  |   | (154   | ) |  |      | (154   | ) |      |   | (378   | ) |  |   | (473   | )
|                                                                         |  |                   |        |   |      |   |        |       |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|Benefit obligation at end of year                                        |  |                   | 5,143  |   |      |   | 4,729  |       |  |   | 2,103  |   |  |      | 2,011  |   |      |   | 7,246  |   |  |   | 6,740  |  
|                                                                         |  |                   |        |   |      |   |        |       |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|                                                                         |  |                   |        |   |      |  
|Change in plan assets:                                                   |  |                   |        |   |      |   |        |       |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|Fair value of plan assets at beginning of year                           |  |                   | 3,194  |   |      |   | 3,078  |       |  |   |       |   |  |      |       |   |      |   | 3,194  |   |  |   | 3,078  |  
|Actual return on plan assets                                             |  |                   | 366    |   |      |   | 435    |       |  |   |       |   |  |      |       |   |      |   | 366    |   |  |   | 435    |  
|Employer contributions                                                   |  |                   | 411    |   |      |   |       |       |  |   | 154    |   |  |      | 154    |   |      |   | 565    |   |  |   | 154    |  
|Benefits and expenses paid                                               |  |                   | (224   | ) |      |   | (319   | )     |  |   | (154   | ) |  |      | (154   | ) |      |   | (378   | ) |  |   | (473   | )
|                                                                         |  |                   |        |   |      |   |        |       |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|Fair value of plan assets at year end                                    |  |                   | 3,747  |   |      |   | 3,194  |       |  |   |       |   |  |      |       |   |      |   | 3,747  |   |  |   | 3,194  |  
|                                                                         |  |                   |        |   |      |   |        |       |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|Funded status - (under funded)                                           |  | $                 | (1,396 | ) |      | $ | (1,535 | )     |  | $ | (2,103 | ) |  | $    | (2,011 | ) |      | $ | (3,499 | ) |  | $ | (3,546 | )
|                                                                         |  |                   |        |   |      |   |        |       |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  

The Bank had a liability for the Cash Balance Plan of $1.4 and $1.5 million for the periods ending December 31, 2010
and 2009, respectively. The liability is included in Other Liabilities within the Consolidated Balance Sheets. The accrued liability and accumulated benefit obligations for the SERP was $2.1 and $2.0 million as of December 31, 2010 and 2009,
respectively. The balance is included in Other Liabilities within the Consolidated Balance Sheets.



72



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



Amounts in accumulated other comprehensive loss that have not been recognized as components of net
periodic pension cost are as follows:



|                                                              |  |                   |       |   |      |   |       |       |  |   |      |   |  |      |      |   |      |   |       |  |  |   |       | 
|------------------------------------------------------------- |  | ----------------- | ----- | - | ---- | - | ----- | ----- |  | - | ---- | - |  | ---- | ---- | - | ---- | - | ----- |  |  | - | ----- | 
|                                                              |  | Cash Balance Plan |       |   | SERP |   |       | Total | 
|(Dollars in thousands)                                        |  | 2010              |       |   | 2009 |   |       | 2010  |  |   | 2009 |   |  | 2010 |      |   | 2009 |  
|Unrecognized net actuarial loss                               |  | $                 | 1,987 |   |      | $ | 2,042 |       |  | $ | 275  |   |  | $    | 139  |   |      | $ | 2,262 |  |  | $ | 2,181 | 
|Unrecognized prior service cost                               |  |                   | 7     |   |      |   | 10    |       |  |   | 5    |   |  |      | 9    |   |      |   | 12    |  |  |   | 19    | 
|                                                              |  |                   |       |   |      |   |       |       |  |   |      |   |  |      |      |   |      |   |       |  |  |   |       | 
|Total amount included in accumulated other comprehensive loss |  | $                 | 1,994 |   |      | $ | 2,052 |       |  | $ | 280  |   |  | $    | 148  |   |      | $ | 2,274 |  |  | $ | 2,200 | 
|                                                              |  |                   |       |   |      |   |       |       |  |   |      |   |  |      |      |   |      |   |       |  |  |   |       | 
|                                                              |  |                   |       |   |      |  
|Weighted average assumptions as of December 31:               |  |                   |       |   |      |   |       |       |  |   |      |   |  |      |      |   |      |   |       |  |  |   |       | 
|Discount rate                                                 |  |                   | 5.25  | % |      |   | 5.75  | %     |  |   | 5.25 | % |  |      | 5.75 | % |      |   |       |  |  |   |       | 
|Expected return on plan assets                                |  |                   | 7.00  | % |      |   | 7.00  | %     |  |   | n/a  |   |  |      | n/a  |   |      |   |       |  |  |   |       | 
|Rate of compensation increase                                 |  |                   | 3.00  | % |      |   | 3.00  | %     |  |   | 3.00 | % |  |      | 3.00 | % |      |   |       |  |  |   |       | 



|                                                                                                               |  |                   |     |  |      |   |   |       |  |   |     | 
|-------------------------------------------------------------------------------------------------------------- |  | ----------------- | --- |  | ---- | - | - | ----- |  | - | --- | 
|                                                                                                               |  | Cash Balance Plan |     |  | SERP |   |   | Total | 
|Amounts in accumulated other comprehensive loss expected to berecognized in net periodic pension cost in
2010: |  |                   |     |  |      |   |   |       |  |   |     | 
|Net actuarial loss                                                                                             |  | $                 | 152 |  |      | $ |  |       |  | $ | 152 | 
|Prior service cost                                                                                             |  |                   | 2   |  |      |   | 5 |       |  |   | 7   | 
|                                                                                                               |  |                   |     |  |      |   |   |       |  |   |     | 
|Total expected to be recognized                                                                                |  | $                 | 154 |  |      | $ | 5 |       |  | $ | 159 | 
|                                                                                                               |  |                   |     |  |      |   |   |       |  |   |     | 
|Assets expected to be returned to the Company in 2011                                                          |  | $                 |    |  |      | $ |  |       |  | $ |    | 
|                                                                                                               |  |                   |     |  |      |   |   |       |  |   |     | 

The estimated benefit payments for the Cash Balance Plan and SERP are shown below:



|                                  |  |                   |       |  |      |   |       |       |  |   |       | 
|--------------------------------- |  | ----------------- | ----- |  | ---- | - | ----- | ----- |  | - | ----- | 
|(Dollars in thousands)            |  |                   |       |  |      |   |       |       | 
|For the Years Ending December 31: |  | Cash Balance Plan |       |  | SERP |   |       | TOTAL | 
|2011                              |  | $                 | 724   |  |      | $ | 154   |       |  | $ | 878   | 
|2012                              |  |                   | 427   |  |      |   | 153   |       |  |   | 580   | 
|2013                              |  |                   | 348   |  |      |   | 151   |       |  |   | 499   | 
|2014                              |  |                   | 335   |  |      |   | 149   |       |  |   | 484   | 
|2015                              |  |                   | 365   |  |      |   | 148   |       |  |   | 513   | 
|2016-2020                         |  |                   | 1,933 |  |      |   | 707   |       |  |   | 2,640 | 
|                                  |  |                   |       |  |      |   |       |       |  |   |       | 
|                                  |  | $                 | 4,132 |  |      | $ | 1,462 |       |  | $ | 5,594 | 
|                                  |  |                   |       |  |      |   |       |       |  |   |       | 

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

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



73



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



The target range of allocation percentages for each major category of plan assets is as follows:



|               |  |               |    |   |                |  |    |                |  |  |    |  
|-------------- |  | ------------- | -- | - | -------------- |  | -- | -------------- |  |  | -- | -
|Asset Category |  | Target Weight |    |   | Minimum Weight |  |    | Maximum Weight | 
|Cash           |  |               | 0  | % |                |  | 0  | %              |  |  | 10 | %
|Equities:      |  |               |    |   |                |  |    |                |  |  |    |  
|US             |  |               | 66 | % |                |  | 56 | %              |  |  | 76 | %
|Non-US         |  |               | 7  | % |                |  | 0  | %              |  |  | 14 | %
|Fixed Income   |  |               | 27 | % |                |  | 20 | %              |  |  | 37 | %

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. (US treasury and agency securities are exempt from this restriction.)

Cash and equivalent instruments that are acceptable are repurchase agreements, bankers acceptances, US 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, Russell 1000 Growth
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | U.S. Mid Cap Equities: S&P 400 Mid Cap, Russell Mid Cap Value, Russell Mid Cap Growth
| | - |  | -------------------------------------------------------------------------------------



| |  |  | U.S. Small Cap Equities: S&P 600 Small Cap, Russell 2000 Value, Russell 2000 Growth
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Non-U.S. Equities: MSCI EAFE IL
| | - |  | -------------------------------



| |  |  | Fixed Income: Lehman Brothers Intermediate Govt./Corp.
| | - |  | ------------------------------------------------------



| |  |  | 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 are:



74



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



The fair values of the Retirement Plan assets as of December 31, 2010 and 2009 by asset category
were as follows:



|                         |  |                   |       |  |                                                           |   |       |                                          |  |   |                                      |  |  |   |    | 
|------------------------ |  | ----------------- | ----- |  | --------------------------------------------------------- | - | ----- | ---------------------------------------- |  | - | ------------------------------------ |  |  | - | -- | 
|Asset Category           |  | December 31, 2010 |       |  | Level 1Quoted Prices inActive Markets forIdentical Assets |   |       | Level 2Significant OtherObservableInputs |  |   | Level 3SignificantUnobservableInputs | 
|Cash                     |  | $                 | 401   |  |                                                           | $ | 401   |                                          |  | $ |                                     |  |  | $ |   | 
|Equity Security:         |  |                   |       |  |                                                           |   |       |                                          |  |   |                                      |  |  |   |    | 
|Large-Cap                |  |                   | 753   |  |                                                           |   | 753   |                                          |  |   |                                     |  |  |   |   | 
|Mid-Cap                  |  |                   | 341   |  |                                                           |   | 341   |                                          |  |   |                                     |  |  |   |   | 
|Small-Cap                |  |                   | 502   |  |                                                           |   | 502   |                                          |  |   |                                     |  |  |   |   | 
|Mixed-Cap                |  |                   |      |  |                                                           |   |      |                                          |  |   |                                     |  |  |   |   | 
|Global and International |  |                   | 427   |  |                                                           |   | 427   |                                          |  |   |                                     |  |  |   |   | 
|Emerging Market          |  |                   | 75    |  |                                                           |   | 75    |                                          |  |   |                                     |  |  |   |   | 
|Fixed Income  Bonds     |  |                   | 1,225 |  |                                                           |   |      |                                          |  |   | 1,225                                |  |  |   |   | 
|Other                    |  |                   | 22    |  |                                                           |   |      |                                          |  |   | 9                                    |  |  |   | 13 | 
|                         |  |                   |       |  |                                                           |   |       |                                          |  |   |                                      |  |  |   |    | 
|Total                    |  | $                 | 3,746 |  |                                                           | $ | 2,499 |                                          |  | $ | 1,234                                |  |  | $ | 13 | 
|                         |  |                   |       |  |                                                           |   |       |                                          |  |   |                                      |  |  |   |    | 

401(k) PlanThe Bank sponsors a 401(k) plan. Participation in the 401(k) plan is voluntary. Employees
become eligible after completing 90 days of service and attaining age 21. Employees may elect to contribute up to 12% of their compensation to the 401(k) plan. The Bank matches 100% of each employees contribution, up to a maximum of 6% of
compensation. The Banks contributions to the 401(k) plan were $0.1 and $0.2 million for 2010 and 2009, respectively.

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 December 31, 2010 and 2009, the amount of the non-qualified deferred
compensation plan liability was $0.3 million.

Postretirement BenefitsThe Bank provides certain postretirement benefits
to select executive officers. As of December 31, 2010 and 2009, 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, 2010 and 2009, $0.2 million was
recorded in other liabilities for the split dollar benefit.

14. RECONCILIATIONS OF BASIC AND DILUTED EARNINGS PER SHARE

Basic EPS are 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. All outstanding stock options previously granted expired on or
before December 31, 2009. The Companys stock option plan expired as of December 31, 2009. There was no dilutive effect from the outstanding stock options as of December 31, 2009.

15. 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 collectability nor do they present any unfavorable features. Total loans to such groups totaled $2.4 million as of December 31, 2010 and $2.6 million as of December 31, 2009. Unused lines available to be drawn were
$0.2 million as of December 31, 2010 and 2009. The following table shows the related party transactions during 2010 and 2009.



75



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



|                  |  |              |       |   |              |   |       |  
|----------------- |  | ------------ | ----- | - | ------------ | - | ----- | -
|                  |  | December 31, |       |   | December 31, |  
|                  |  | 2010         |       |   | 2009         |  
|Beginning Balance |  | $            | 2,617 |   |              | $ | 2,769 |  
|Draws             |  |              | 590   |   |              |   | 252   |  
|Repayments        |  |              | (833  | ) |              |   | (404  | )
|                  |  |              |       |   |              |   |       |  
|Ending Balance    |  | $            | 2,374 |   |              | $ | 2,617 |  
|                  |  |              |       |   |              |   |       |  

16. REGULATORY MATTERS AND RESTRICTIONS

On April 27, 2010, the Bank entered into a memorandum of understanding with the Federal Deposit Insurance Commission 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 maintain adequate liquidity. It also restricts dividends that cant 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.

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 ($0.05) 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, 2010 and 2009, 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 leverage ratios as set forth in the table.



76



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



The Companys and the Banks actual capital amounts and ratios as of December 31, 2010
and 2009 are presented in the following tables:



|                                        |  |                   |        |  |                             |  |       |                       |  |   |        |  |  |        |      |   |       |   |        |  |  |  |       |  
|--------------------------------------- |  | ----------------- | ------ |  | --------------------------- |  | ----- | --------------------- |  | - | ------ |  |  | ------ | ---- | - | ----- | - | ------ |  |  |  | ----- | -
|                                        |  | December 31, 2010 |       
|(Dollars in thousands)                  |  | Actual            |        |  | For CapitalAdequacyPurposes |  |       | To Be WellCapitalized | 
|                                        |  | Amount            |        |  | Ratio                       |  |       | Amount                |  |   | Ratio  |  |  | Amount |      |   | Ratio |  
|Total capital (to risk weighted assets) |  |                   |        |  |                             |  |       |                       |  |   |        |  |  |        |      |   |       |   |        |  |  |  |       |  
|The Company                             |  | $                 | 36,461 |  |                             |  | 18.19 | %                     |  | $ | 16,037 |  |  |        | 8.00 | % |       | $ | 20,046 |  |  |  | 10.00 | %
|The Bank                                |  |                   | 33,733 |  |                             |  | 16.84 |                       |  |   | 16,023 |  |  |        | 8.00 |   |       |   | 20,028 |  |  |  | 10.00 |  
|                                        |  |                   |        |  |                             | 
|Tier 1 (to risk weighted assets)        |  |                   |        |  |                             |  |       |                       |  |   |        |  |  |        |      |   |       |   |        |  |  |  |       |  
|The Company                             |  | $                 | 33,939 |  |                             |  | 16.93 | %                     |  | $ | 8,019  |  |  |        | 4.00 | % |       | $ | 12,028 |  |  |  | 6.00  | %
|The Bank                                |  |                   | 31,214 |  |                             |  | 15.59 |                       |  |   | 8,011  |  |  |        | 4.00 |   |       |   | 12,017 |  |  |  | 6.00  |  
|                                        |  |                   |        |  |                             | 
|Tier 1 (to Average total assets)        |  |                   |        |  |                             |  |       |                       |  |   |        |  |  |        |      |   |       |   |        |  |  |  |       |  
|The Company                             |  | $                 | 33,939 |  |                             |  | 11.77 | %                     |  | $ | 11,534 |  |  |        | 4.00 | % |       | $ | 14,418 |  |  |  | 5.00  | %
|The Bank                                |  |                   | 31,214 |  |                             |  | 10.42 |                       |  |   | 11,979 |  |  |        | 4.00 |   |       |   | 14,973 |  |  |  | 5.00  |  
|                                        | 
|                                        |  | December 31, 2009 |       
|(Dollars in thousands)                  |  | Actual            |        |  | For CapitalAdequacyPurposes |  |       | To Be WellCapitalized | 
|                                        |  | Amount            |        |  | Ratio                       |  |       | Amount                |  |   | Ratio  |  |  | Amount |      |   | Ratio |  
|Total capital (to risk weighted assets) |  |                   |        |  |                             |  |       |                       |  |   |        |  |  |        |      |   |       |   |        |  |  |  |       |  
|The Company                             |  | $                 | 36,871 |  |                             |  | 15.58 | %                     |  | $ | 18,934 |  |  |        | 8.00 | % |       | $ | 23,667 |  |  |  | 10.00 | %
|The Bank                                |  |                   | 33,257 |  |                             |  | 14.11 |                       |  |   | 18,854 |  |  |        | 8.00 |   |       |   | 23,568 |  |  |  | 10.00 |  
|                                        |  |                   |        |  |                             | 
|Tier 1 (to risk weighted assets)        |  |                   |        |  |                             |  |       |                       |  |   |        |  |  |        |      |   |       |   |        |  |  |  |       |  
|The Company                             |  | $                 | 33,908 |  |                             |  | 14.33 | %                     |  | $ | 9,467  |  |  |        | 4.00 | % |       | $ | 14,200 |  |  |  | 6.00  | %
|The Bank                                |  |                   | 30,306 |  |                             |  | 12.86 |                       |  |   | 9,427  |  |  |        | 4.00 |   |       |   | 14,141 |  |  |  | 6.00  |  
|                                        |  |                   |        |  |                             | 
|Tier 1 (to Average total assets)        |  |                   |        |  |                             |  |       |                       |  |   |        |  |  |        |      |   |       |   |        |  |  |  |       |  
|The Company                             |  | $                 | 33,908 |  |                             |  | 13.00 | %                     |  | $ | 10,435 |  |  |        | 4.00 | % |       | $ | 13,044 |  |  |  | 5.00  | %
|The Bank                                |  |                   | 30,306 |  |                             |  | 11.30 |                       |  |   | 10,727 |  |  |        | 4.00 |   |       |   | 13,409 |  |  |  | 5.00  |  



77



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



17. HOLDING COMPANY CONDENSED FINANCIAL INFORMATION

The condensed financial data for the Company (holding company only) is as follows:



|                                                                                            |  |                                  |        |   |      |   |        |  
|------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ---- | - | ------ | -
|Condensed Balance Sheets:                                                                   |  | As of December 31,               |       
|(Dollars in thousands)                                                                      |  | 2010                             |        |   | 2009 |  
|Assets:                                                                                     |  |                                  |        |   |      |   |        |  
|Cash and cash equivalents                                                                   |  | $                                | 2,586  |   |      | $ | 3,011  |  
|Investment in subsidiary Bank                                                               |  |                                  | 33,381 |   |      |   | 32,649 |  
|Other assets                                                                                |  |                                  | 514    |   |      |   | 1,039  |  
|                                                                                            |  |                                  |        |   |      |   |        |  
|Total Assets                                                                                |  | $                                | 36,481 |   |      | $ | 36,699 |  
|                                                                                            |  |                                  |        |   |      |   |        |  
|                                                                                            |  |                                 
|Liabilities and Stockholders Equity:                                                       |  |                                  |        |   |      |   |        |  
|Total liabilities                                                                           |  | $                                | 71     |   |      | $ | 144    |  
|Shareholders equity                                                                        |  |                                  | 36,410 |   |      |   | 36,555 |  
|                                                                                            |  |                                  |        |   |      |   |        |  
|Total Liabilities and Stockholders Equity                                                  |  | $                                | 36,481 |   |      | $ | 36,699 |  
|                                                                                            |  |                                  |        |   |      |   |        |  
|                                                                                            | 
|Condensed Statements of Operations:                                                         |  | For the Years Ended December 31, |       
|(Dollars in thousands)                                                                      |  | 2010                             |        |   | 2009 |  
|Undistributed net earnings of subsidiary bank                                               |  | $                                | 1,017  |   |      | $ | 858    |  
|Expenses, net                                                                               |  |                                  | (203   | ) |      |   | (198   | )
|                                                                                            |  |                                  |        |   |      |   |        |  
|Net income                                                                                  |  | $                                | 814    |   |      | $ | 660    |  
|                                                                                            |  |                                  |        |   |      |   |        |  
|                                                                                            | 
|Condensed Cash Flows:                                                                       |  | For the Years Ended December 31, |       
|(Dollars in thousands)                                                                      |  | 2010                             |        |   | 2009 |  
|Cash Flows from operating activities:                                                       |  |                                  |        |   |      |   |        |  
|Net income                                                                                  |  | $                                | 814    |   |      | $ | 660    |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                                  |        |   |      |   |        |  
|Undistributed net earnings of subsidiary                                                    |  |                                  | (1,017 | ) |      |   | (858   | )
|Decrease (increase) in other assets                                                         |  |                                  | 512    |   |      |   | (694   | )
|Decrease in other liabilities                                                               |  |                                  | (73    | ) |      |   | (626   | )
|                                                                                            |  |                                  |        |   |      |   |        |  
|Net cash provided by (used in) operating activities                                         |  |                                  | 236    |   |      |   | (1,518 | )
|                                                                                            |  |                                  |        |   |      |   |        |  
|Investing Activities:                                                                       |  |                                  |        |   |      |   |        |  
|Additional investments in subsidiary                                                        |  |                                  |       |   |      |   | (7,000 | )
|                                                                                            |  |                                  |        |   |      |   |        |  
|Net cash used in investing activities                                                       |  |                                  |       |   |      |   | (7,000 | )
|                                                                                            |  |                                  |        |   |      |   |        |  
|Financing activities:                                                                       |  |                                  |        |   |      |   |        |  
|Issuance of preferred stock, net of issuance costs                                          |  |                                  |       |   |      |   | 11,719 |  
|Dividends paid                                                                              |  |                                  | (661   | ) |      |   | (504   | )
|                                                                                            |  |                                  |        |   |      |   |        |  
|Net cash (used in) provided by financing activities                                         |  |                                  | (661   | ) |      |   | 11,215 |  
|Net (decrease) increase in cash and cash equivalents                                        |  |                                  | (425   | ) |      |   | 2,697  |  
|Cash and cash equivalents at beginning of year                                              |  |                                  | 3,011  |   |      |   | 314    |  
|                                                                                            |  |                                  |        |   |      |   |        |  
|Cash and cash equivalents at end of year                                                    |  | $                                | 2,586  |   |      | $ | 3,011  |  
|                                                                                            |  |                                  |        |   |      |   |        |  

18. 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.



78



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



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

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

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

Financial instruments whose contract amounts represent credit risk as of December 31, 2010 and
2009, respectively, are commitments to extend credit (including availability of lines of credit), and standby letters of credit. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.
The Bank evaluates each customers credit worthiness on a case-by-case basis. The amount of collateral deemed necessary by the Bank is based on managements credit evaluation and underwriting guidelines for the particular loan.

Commitments outstanding at December 31, 2010 are summarized in the following table:



|                       |  |                             |     |  |                                  |   |        |                  |  |   |        | 
|---------------------- |  | --------------------------- | --- |  | -------------------------------- | - | ------ | ---------------- |  | - | ------ | 
|(Dollars in thousands) |  | Commercial lettersof credit |     |  | Other commercialloan commitments |   |        | Totalcommitments | 
|Less than one year     |  | $                           | 10  |  |                                  | $ | 12,887 |                  |  | $ | 12,897 | 
|One to three years     |  |                             | 100 |  |                                  |   | 1,996  |                  |  |   | 2,096  | 
|Three to five years    |  |                             |    |  |                                  |   | 4,684  |                  |  |   | 4,684  | 
|More than five years   |  |                             |    |  |                                  |   | 2,238  |                  |  |   | 2,238  | 
|                       |  |                             |     |  |                                  |   |        |                  |  |   |        | 
|                       |  | $                           | 110 |  |                                  | $ | 21,805 |                  |  | $ | 21,915 | 
|                       |  |                             |     |  |                                  |   |        |                  |  |   |        | 

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



79



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



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. The Company has none of these instruments at December 31, 2010.

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 obligations, state and municipal bonds and mortgage-backed
securities. The Company has Level 2 securities at December 31, 2010.

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. The Company has Level 3 assets and liabilities at December 31, 2010.

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. Impaired loans are generally classified at a Level 3 in the fair value hierarchy. 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.

Other real estate owned:Foreclosed assets are adjusted to fair value, less estimated carry 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 the foreclosed asset as nonrecurring Level 3.

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value as of December 31, 2010 and 2009.



|                             |  |                   |        |  |                    |   |   |                   |  |   |              |  |  |   |        | 
|---------------------------- |  | ----------------- | ------ |  | ------------------ | - | - | ----------------- |  | - | ------------ |  |  | - | ------ | 
|(Dollars in thousands)       |  |                   |        |  | Quoted Prices in   |   |   | Significant Other |  |   | Significant  | 
|                             |  |                   |        |  | Active Markets for |   |   | Observable        |  |   | Unobservable | 
|                             |  |                   |        |  | Identical Assets   |   |   | Inputs            |  |   | Inputs       | 
|Description                  |  | December 31, 2010 |        |  | (Level 1)          |   |   | (Level 2)         |  |   | (Level 3)    | 
|Recurring:                   |  |                   |        |  |                    |   |   |                   |  |   |              |  |  |   |        | 
|Government sponsored MBS     |  |                   |        |  |                    |   |   |                   |  |   |              |  |  |   |        | 
|Residential                  |  | $                 | 13,712 |  |                    | $ |  |                   |  | $ | 13,712       |  |  | $ |       | 
|Non-Government sponsored MBS |  |                   |        |  |                    |   |   |                   |  |   |              |  |  |   |        | 
|Residential                  |  |                   | 205    |  |                    |   |  |                   |  |   | 205          |  |  |   |       | 
|Municipal securities         |  |                   |        |  |                    |   |   |                   |  |   |              |  |  |   |        | 
|North Carolina               |  |                   | 3,186  |  |                    |   |  |                   |  |   | 3,186        |  |  |   |       | 
|Out of state                 |  |                   | 3,524  |  |                    |   |  |                   |  |   | 3,524        |  |  |   |       | 
|Mortgage Servicing Rights    |  |                   | 66     |  |                    |   |  |                   |  |   |             |  |  |   | 66     | 
|                             |  |                   |        | 
|Nonrecurring:                |  |                   |        |  |                    |   |   |                   |  |   |              |  |  |   |        | 
|Other real estate owned      |  |                   | 1,915  |  |                    |   |  |                   |  |   |             |  |  |   | 1,915  | 
|Impaired and TDR loans       |  |                   | 15,466 |  |                    |   |  |                   |  |   |             |  |  |   | 15,466 | 
|                             |  |                   |        |  |                    |   |   |                   |  |   |              |  |  |   |        | 
|Total                        |  | $                 | 38,074 |  |                    | $ |  |                   |  | $ | 20,627       |  |  | $ | 17,447 | 
|                             |  |                   |        |  |                    |   |   |                   |  |   |              |  |  |   |        | 



80



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



|                             |  |                   |        |  |                    |   |   |                   |  |   |              |  |  |   |        | 
|---------------------------- |  | ----------------- | ------ |  | ------------------ | - | - | ----------------- |  | - | ------------ |  |  | - | ------ | 
|(Dollars in thousands)       |  |                   |        |  | Quoted Prices in   |   |   | Significant Other |  |   | Significant  | 
|                             |  |                   |        |  | Active Markets for |   |   | Observable        |  |   | Unobservable | 
|                             |  |                   |        |  | Identical Assets   |   |   | Inputs            |  |   | Inputs       | 
|Description                  |  | December 31, 2009 |        |  | (Level 1)          |   |   | (Level 2)         |  |   | (Level 3)    | 
|Recurring:                   |  |                   |        |  |                    |   |   |                   |  |   |              |  |  |   |        | 
|Government sponsored MBS     |  |                   |        |  |                    |   |   |                   |  |   |              |  |  |   |        | 
|Residential                  |  | $                 | 9,244  |  |                    | $ |  |                   |  | $ | 9,244        |  |  | $ |       | 
|Non-Government sponsored MBS |  |                   |        |  |                    |   |   |                   |  |   |              |  |  |   |        | 
|Residential                  |  |                   | 307    |  |                    |   |  |                   |  |   | 307          |  |  |   |       | 
|Municipal securities         |  |                   |        |  |                    |   |   |                   |  |   |              |  |  |   |        | 
|North Carolina               |  |                   | 4,517  |  |                    |   |  |                   |  |   | 4,517        |  |  |   |       | 
|Out of state                 |  |                   | 3,631  |  |                    |   |  |                   |  |   | 3,631        |  |  |   |       | 
|Mortgage Servicing Rights    |  |                   | 65     |  |                    |   |  |                   |  |   |             |  |  |   | 65     | 
|                             |  |                   |        | 
|Nonrecurring:                |  |                   |        |  |                    |   |   |                   |  |   |              |  |  |   |        | 
|Other real estate owned      |  |                   | 2,176  |  |                    |   |  |                   |  |   |             |  |  |   | 2,176  | 
|Impaired and TDR loans       |  |                   | 10,190 |  |                    |   |  |                   |  |   |             |  |  |   | 10,190 | 
|                             |  |                   |        |  |                    |   |   |                   |  |   |              |  |  |   |        | 
|Total                        |  | $                 | 30,130 |  |                    | $ |  |                   |  | $ | 17,699       |  |  | $ | 12,431 | 
|                             |  |                   |        |  |                    |   |   |                   |  |   |              |  |  |   |        | 

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.

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

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

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

The fair value of performing loans is typically calculated by discounting scheduled cash flows through their estimated maturity, using estimated market
discount rates that reflect the credit and interest rate risk inherent in each group of loans. The estimate of maturity is based on contractual maturities for loans within each group, or on the Companys historical experience with repayments
for each loan classification, modified as required by an estimate of the effect of current economic conditions. The Bank does not use an illiquidity discount when valuing the loan portfolio.

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

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

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

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

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



81



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



As of December 31, 2010 and 2009, the carrying amounts and associated estimated fair value of
financial assets and liabilities of the Company are as follows:



|                                         |  |                   |         |  |                     |   |         |                |  |   |                     |  |  |   |         | 
|---------------------------------------- |  | ----------------- | ------- |  | ------------------- | - | ------- | -------------- |  | - | ------------------- |  |  | - | ------- | 
|(Dollars in thousands)                   |  | December 31, 2010 |         |  | December 31, 2009   |  
|                                         |  | CarryingAmount    |         |  | EstimatedFair Value |   |         | CarryingAmount |  |   | EstimatedFair Value | 
|Assets:                                  |  |                   |         |  |                     |   |         |                |  |   |                     |  |  |   |         | 
|Cash and cash equivalents                |  | $                 | 74,575  |  |                     | $ | 74,575  |                |  | $ | 30,313              |  |  | $ | 30,313  | 
|Marketable securities                    |  |                   | 20,627  |  |                     |   | 20,627  |                |  |   | 17,699              |  |  |   | 17,699  | 
|Other invested assets                    |  |                   | 948     |  |                     |   | 948     |                |  |   | 1,061               |  |  |   | 1,061   | 
|Loans, net of allowances for loan losses |  |                   | 197,920 |  |                     |   | 202,826 |                |  |   | 206,547             |  |  |   | 212,158 | 
|Accrued interest receivable              |  |                   | 627     |  |                     |   | 627     |                |  |   | 935                 |  |  |   | 935     | 
|                                         |  |                   |         | 
|Liabilities:                             |  |                   |         |  |                     |   |         |                |  |   |                     |  |  |   |         | 
|Deposits                                 |  | $                 | 269,684 |  |                     | $ | 269,596 |                |  | $ | 224,807             |  |  | $ | 228,506 | 
|Other borrowings                         |  |                   | 745     |  |                     |   | 780     |                |  |   | 7,766               |  |  |   | 6,951   | 
|Accrued interest payable                 |  |                   | 306     |  |                     |   | 306     |                |  |   | 188                 |  |  |   | 188     | 

The fair value option provides an
option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments not previously carried at fair value. The Company elected not to implement the
fair value option.



|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------

Not applicable.



|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, 2010. Management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control Integrated Framework,to make its assessment.Based on the evaluation, management determined that there were no material weaknesses in internal control and concluded that
internal control over financial reporting for the Company as of December 31, 2010, 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



82



---

##### Table of Contents

M&F BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)



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 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 2010, that
has materially affected or is reasonably likely to materially affect, the Companys internal control over financial reporting.



|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------

Not applicable.



83



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



PART III



|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 2011, 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|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. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 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. | 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. | PRINCIPAL ACCOUNTANT 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 in the Proxy Statement, which sections are incorporated herein by reference.



84



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



PART IV



|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(ii)     |  | Restated Bylaws of the Company, incorporated by reference to Exhibit 99.1 to the Form 8K filed with the SEC on April 6, 2009.                                                                                                                                                                                                                       
|                  | 
|Exhibit 4(i)      |  | Specimen Stock Certificate, incorporated by reference to Exhibit 4 to the Form 10-KSB for the year ended December 31, 2000, filed with the SEC on April 2, 2001.                                                                                                                                                                                    
|                  | 
|Exhibit 4(ii)     |  | Form of Certificate for the Fixed Rate Cumulative Perpetual Preferred Stock, Series B, incorporated by reference to Exhibit 4.2 to the Form 8-K filed with the SEC on
August 23, 2010.                                                                                                                                                              
|                  | 
|Exhibit 10(i) *   |  | Employment Agreement dated January 12, 2007 by and among Kim D. Saunders, the Company and the Bank, incorporated by reference to Exhibit 99.1 to the Form 8-K filed with the SEC on
January 18, 2007.                                                                                                                                               
|                  | 
|Exhibit 10(ii)    |  | Letter Agreement and certain side letters, all dated August 20, 2010, between the Company and the United States Department of the Treasury, with respect to the issuance and sale of
the Fixed Rate Cumulative Perpetual Preferred Stock, Series B, incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on August 23, 2010.
|                  | 
|Exhibit 10(iii) * |  | Employment Agreement Amendment, dated June 26, 2009, among the Company, the Bank and Kim D. Saunders, incorporated by reference to Exhibit 10.2 to the Form 8-K filed with the
SEC on June 26, 2009.                                                                                                                                                
|                  | 
|Exhibit 16        |  | Letter from McGladrey & Pullen, LLP, regarding change in certifying accountant, dated April 8, 2009, incorporated herein by reference to Exhibit 16.1 of the Current Report on
Form 8-K, filed with the SEC on April 8, 2009.                                                                                                                       
|                  | 
|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.                                                                                                                                                                                                                      



85



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



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



|* | management contracts and compensatory arrangements
|- | --------------------------------------------------

SIGNATURES

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



|                     |  |  |  |                   |  |                                                
|-------------------- |  |  |  | ----------------- |  | -----------------------------------------------
|                     |  |  |  | M&F Bancorp, Inc.
|                     |  |  | 
|Date: March 29, 2011 |  |  |  | By:               |  | /s/ Kim D. Saunders                            
|                     |  |  |  |                   |  | Kim D. Saunders                                
|                     |  |  |  |                   |  | President, Chief Executive Officer and Director

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/ Kim D. Saunders      |  | President, Chief Executive Officer and Director                |  | March 29, 2011
|Kim D. Saunders          |  | (Principal Executive Officer)                                  |  |               
|                         |  |                                                               
|/s/ Lyn Hittle           |  | Chief Financial Officer                                        |  | March 29, 2011
|Lyn Hittle               |  | (Principal Financial Officer and Principal Accounting Officer) |  |               
|                         |  |                                                               
|/s/ James A. Stewart     |  | Chairman of the Board                                          |  | March 29, 2011
|James A. Stewart         |  |                                                                |  |               
|                         |  |                                                               
|/s/ Willie T. Closs, Jr. |  | Director                                                       |  | March 29, 2011
|Willie T. Closs, Jr.     |  |                                                                |  |               
|                         |  |                                                               
|/s/ Michael L. Lawrence  |  | Director                                                       |  | March 29, 2011
|Michael L. Lawrence      |  |                                                                |  |               
|                         |  |                                                               
|/s/ Joseph M. Sansom     |  | Director                                                       |  | March 29, 2011
|Joseph M. Sansom         |  |                                                                |  |               
|                         |  |                                                               
|/s/ Aaron L. Spaulding   |  | Director                                                       |  | March 29, 2011
|Aaron L. Spaulding       |  |                                                                |  |               
|                         |  |                                                               
|/s/ James H. Speed, Jr.  |  | Director                                                       |  | March 29, 2011
|James H. Speed, Jr.      |  |                                                                |  |               
|                         |  |                                                               
|/s/ Connie J. White      |  | Director                                                       |  | March 29, 2011
|Connie J. White          |  |                                                                |  |               



86



---

##### Table of Contents

M&F BANCORP, INC. AND SUBSIDIARY



INDEX TO EXHIBITS



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



87