2004



ANNUAL

REPORT



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M&F BANCORP, INC. AND
SUBSIDIARY

CONSOLIDATED FINANCIAL HIGHLIGHTS



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



|(1) |  Includes Federal Home Loan Bank Stock.
|--- | ----------------------------------------



|(2) | All share and per share gives retroactive effect to the 100% stock dividend declared in November 2004.
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Annual Meeting:The Annual Meeting of Shareholders of M&F Bancorp, Inc., a North Carolina Corporation, will be held in the
auditorium of the M&F Corporate Center, 2634 Durham-Chapel Hill Blvd., Durham, NC on Tuesday, May 10, 2005 at 10:00 a.m. All shareholders are cordially invited to attend.



Transfer Agent: American Stock Transfer & Trust Company, 6201 15thAvenue, 3rdFloor,
Brooklyn, NY 11219, Telephone 1-877-777-0800.



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



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



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



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TABLE OF CONTENTS



|                                     |  | 
|------------------------------------ |  | 
|Messages To Our Shareholders         |  | 
|                                     | 
|Managements Discussion and Analysis |  | 
|                                     | 
|Report of Deloitte & Touche LLP      |  | 
|                                     | 
|Financial Statements                 |  | 
|                                     | 
|Board of Directors and Management    |  | 



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Message from the Chairman



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



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



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



|                     
|---------------------
|Sincerely,           
|                     
|/s/ Maceo K. Sloan   
|Maceo K. Sloan,      
|Chairman of the Board



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Message from the President



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



Financial Results



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



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



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



Moving Forward at Mechanics and Farmers Bank



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



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



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



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



Outlook for Your Company



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



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



|                                     
|-------------------------------------
|Sincerely,                           
|                                     
|/s/ Lee Johnson, Jr.                 
|Lee Johnson, Jr.                     
|President and Chief Executive Officer



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MANAGEMENTS DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



DESCRIPTION OF BUSINESS



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



|              |  |                  
|------------- |  | -----------------
|Market        |  | Number ofBranches
|Durham        |  | 3                
|Raleigh       |  | 2                
|Charlotte     |  | 3                
|Winston-Salem |  | 1                



SUMMARY



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



FORWARD-LOOKING STATEMENTS



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



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



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ASSET LIABILITY MANAGEMENT



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



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



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



LIQUIDITY



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



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



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



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



CRITICAL ACCOUNTING POLICIES



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



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



Allowance for Possible Loan Losses



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



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



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



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



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



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



Pension Plans



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



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



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



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



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



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



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



Executive Overview



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



| |  |  | Total assets growth in excess of 4.00%
| | - |  | --------------------------------------



| |  |  | Gross loan growth of 12.00% net of a $3,300,000 loan sale
| | - |  | ---------------------------------------------------------



| |  |  | Increase in market value of common stock shares in excess of 26.00%
| | - |  | -------------------------------------------------------------------



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



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



| |  |  | Improving operating efficiency
| | - |  | ------------------------------



| |  |  | Intense competition
| | - |  | -------------------



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



| |  |  | Economic environment of local markets.
| | - |  | --------------------------------------



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



2004 Compared with 2003



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



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



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



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



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



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



2003
Compared With 2002



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



12



---

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



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



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



13



---

Five-Year Summary



Financial Condition Data at December 31,



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



Operating Data for the Years Ended
December 31,



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



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



14



---

TABLE 1. RATE SENSITIVITY ANALYSIS



AT DECEMBER 31, 2004



|                                                                                                   |  |                 |         |   |               |   |         |                                 |  |   |               |    |  |       |         |   |  |   |         |  
|-------------------------------------------------------------------------------------------------- |  | --------------- | ------- | - | ------------- | - | ------- | ------------------------------- |  | - | ------------- | -- |  | ----- | ------- | - |  | - | ------- | -
|(Dollars In Thousands)                                                                             |  | 3 Monthsor Less |         |   | 4 to 12Months |   |         | MaturitiesTotal Within12 Months |  |   | Over 12Months |    |  | Total |        
|Interest Earning Assets                                                                            |  |                 |         |   |               |   |         |                                 |  |   |               |    |  |       |         |   |  |   |         |  
|Loans                                                                                              |  | $               | 9,455   |   |               | $ | 24,886  |                                 |  | $ | 34,341        |    |  | $     | 134,953 |   |  | $ | 169,294 |  
|Investment Securities (1)                                                                          |  |                 | 4,457   |   |               |   | 1,891   |                                 |  |   | 6,348         |    |  |       | 21,922  |   |  |   | 28,270  |  
|Interest-Bearing Deposits                                                                          |  |                 | 15,236  |   |               |   |        |                                 |  |   | 15,236        |    |  |       |        |   |  |   | 15,236  |  
|                                                                                                   |  |                 |         |   |               |   |         |                                 |  |   |               |    |  |       |         |   |  |   |         |  
|Total Interest-Earning Assets                                                                      |  | $               | 29,148  |   |               | $ | 26,777  |                                 |  | $ | 55,925        |    |  | $     | 156,875 |   |  | $ | 212,800 |  
|                                                                                                   |  |                 |         |   |               |   |         |                                 |  |   |               |    |  |       |         |   |  |   |         |  
|Percent of Total Interest-Earning Assets                                                           |  |                 | 13.70   | % |               |   | 12.58   | %                               |  |   | 26.28         | %  |  |       | 73.72   | % |  |   | 100.00  | %
|Cumulative Percent of Total Interest-Earning Assets                                                |  |                 | 13.70   | % |               |   | 26.28   | %                               |  |   | 26.28         | %  |  |       | 100.00  | % |  |   |         |  
|                                                                                                   |  |                 |         |   |              
|Interest-Bearing Liabilities                                                                       |  |                 |         |   |               |   |         |                                 |  |   |               |    |  |       |         |   |  |   |         |  
|Time Deposits $100,000 or More                                                                     |  | $               | 6,472   |   |               | $ | 6,950   |                                 |  | $ | 13,422        |    |  | $     | 9,369   |   |  | $ | 22,791  |  
|Savings, Now and Money Market Deposits                                                             |  |                 | 93,891  |   |               |   |        |                                 |  |   | 93,891        |    |  |       |        |   |  |   | 93,891  |  
|Other Time Deposits                                                                                |  |                 | 11,705  |   |               |   | 15,275  |                                 |  |   | 26,980        |    |  |       | 13,748  |   |  |   | 40,728  |  
|Borrowed Funds                                                                                     |  |                 | 7       |   |               |   | 22      |                                 |  |   | 29            |    |  |       | 16,773  |   |  |   | 16,802  |  
|                                                                                                   |  |                 |         |   |               |   |         |                                 |  |   |               |    |  |       |         |   |  |   |         |  
|Total Interest-Bearing Liabilities                                                                 |  | $               | 112,075 |   |               | $ | 22,247  |                                 |  | $ | 134,322       |    |  | $     | 39,890  |   |  | $ | 174,212 |  
|                                                                                                   |  |                 |         |   |               |   |         |                                 |  |   |               |    |  |       |         |   |  |   |         |  
|Percent of Total Interest-Bearing Liabilities                                                      |  |                 | 64.33   | % |               |   | 12.77   | %                               |  |   | 77.10         | %  |  |       | 22.90   | % |  |   | 100.00  | %
|                                                                                                   |  |                 |         |   |              
|Cumulative Percent of Total Interest-Bearing Liabilities                                           |  |                 | 64.33   | % |               |   | 77.10   | %                               |  |   | 77.10         | %  |  |       | 100.00  | % |  |   |         |  
|Ratio of Interest-Earning Assets to Interest-Bearing Liabilities (Gap Ratio)                       |  |                 | 26.01   | % |               |   | 120.36  | %                               |  |   | 41.64         | %  |  |       | 393.27  | % |  |   |         |  
|                                                                                                   |  |                 |         |   |              
|Cumulative Ratio of Interest-Earning Assets to Interest-Bearing Liabilities (Cumulative Gap Ratio) |  |                 | 26.01   | % |               |   | 41.64   | %                               |  |   | 41.64         | %  |  |       | 122.15  | % |  |   |         |  
|                                                                                                   |  |                 |         |   |              
|Interest Sensitivity Gap                                                                           |  |                 | (82,927 | ) |               |   | 4,530   |                                 |  |   | (78,397       | )  |  |       | 116,985 |   |  |   | 38,588  |  
|                                                                                                   |  |                 |         |   |              
|Cumulative Interest Sensitivity Gap                                                                |  |                 | (82,927 | ) |               |   | (78,397 | )                               |  |   | (78,397       | )  |  |       | 38,588  |   |  |   |         |  
|                                                                                                   |  |                 |         |   |              
|Cumulative Interest Sensitivity Gap as a Percent of Total Interest-Earning Assets                  |  |                 |         |   |               |   | (-25.19 | %)                              |  |   | (-25.19       | %) |  |       | 18.13   | % |  |   |         |  



|(1) | Includes Federal Home Loan Bank stock
|--- | -------------------------------------



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



15



---

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



TABLE 2. AVERAGE BALANCES AND

NET INTEREST INCOME ANALYSIS



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



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



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



16



---

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



TABLE 3. INTEREST RATE AND VOLUME VARIANCE ANALYSIS



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



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



INVESTMENT SECURITIES



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



17



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



TABLE 4.0 INVESTMENT PORTFOLIO MATURITY SCHEDULE 2004



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



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



|2 | Also includes items with no stated maturities.
|- | ----------------------------------------------



TABLE 4.1 INVESTMENT PORTFOLIO MATURITY SCHEDULE 2003



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



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



|2 | Also includes items with no stated maturities.
|- | ----------------------------------------------



18



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LOAN PORTFOLIO



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



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



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



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



19



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TABLE 5. LOAN PORTFOLIO COMPOSITION



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



20



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



TABLE 6. LOAN MATURITIES-FIXED RATES



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



TABLE 6.1 LOAN
MATURITIES-FLOATING RATES



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



NON-ACCRUAL, PAST DUE AND
RESTRUCTURED LOANS



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



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



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



21



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



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



PROVISION AND ALLOWANCE FOR LOAN LOSSES



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



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



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



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



22



---

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



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



TABLE 8. LOAN LOSS AND RECOVERY EXPERIENCE



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



23



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



TABLE 9. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES



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



24



---

DEPOSITS



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



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



TABLE 10. AVERAGE DEPOSITS



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



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



25



---

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



TABLE 11. TIME DEPOSIT MATURITY SCHEDULE



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



SHAREHOLDERS EQUITY AND
DIVIDENDS



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



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



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



26



---

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



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



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



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



DIVIDENDS DECLARED



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



27



---

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



TABLE 12. RETURN
ON ASSETS AND EQUITY



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



28



---

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



TABLE 13. DISTRIBUTION OF ASSETS &
LIABILITIES



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



|(1) | Includes Federal Home Loan Bank Stock
|--- | -------------------------------------



29



---

TABLE 14. COMMITMENTS AND CONTINGENCIES



|                                              |  |                        |  |                                            |  |          |  |          |  |            
|--------------------------------------------- |  | ---------------------- |  | ------------------------------------------ |  | -------- |  | -------- |  | -----------
|                                              |  |                        |  | Payments Due by Period                    
|(In thousands) Contractual
Obligations        |  | Total                  |  | Less than1 Year                            |  | 1-3years |  | 4-5years |  | Over5 years
|Deposits without a Stated Maturity            |  | 125,540                |  | 125,540                                    |  |         |  |         |  |           
|Term Deposits                                 |  | 63,519                 |  | 40,402                                     |  | 22,702   |  | 415      |  |           
|Long-Term Debt                                |  | 16,802                 |  | 29                                         |  | 2,067    |  | 13,082   |  | 1,624      
|Interest on Long-Term Debt                    |  | 3,978                  |  | 802                                        |  | 1,513    |  | 822      |  | 841        
|Operating Leases                              |  | 574                    |  | 95                                         |  | 161      |  | 58       |  | 260        
|Unfunded Pension and Post Retirement Benefits |  | 5,076                  |  | 538                                        |  | 1,057    |  | 1,027    |  | 2,454      
|                                              |  |                        |  |                                            |  |          |  |          |  |            
|                                              |  | 215,489                |  | 167,406                                    |  | 27,500   |  | 15,404   |  | 5,179      
|                                              |  |                        |  |                                            |  |          |  |          |  |            
|                                              |  |                       
|                                              |  |                        |  | Amount of Commitment Expiration per Period
|Other Commercial Commitments                  |  | Total AmountsCommitted |  | Less than1 Year                            |  | 1-3years |  | 4-5years |  | Over 5years
|Lending Commitments                           |  | 30,313                 |  | 25,237                                     |  | 5,027    |  | 38       |  | 11         
|Standby Letters of Credit                     |  | 3,600                  |  | 1,600                                      |  | 2,000    |  |         |  |           
|                                              |  |                        |  |                                            |  |          |  |          |  |            



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



30



---

MANAGEMENTS RESPONSIBILITY FOR FINANCIAL REPORTING



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



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



Our internal auditors constantly monitor internal
controls.



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



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



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



*  *  *  *  *  *



31



---

M&F Bancorp, Inc. and Subsidiary



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



32



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Shareholders of

M&F Bancorp, Inc. and Subsidiary

Durham, North Carolina



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



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



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



DELOITTE & TOUCHE LLP



Raleigh, North Carolina

March 30, 2005



33



---

M&F BANCORP, INC. AND SUBSIDIARY



CONSOLIDATED BALANCE SHEETS

DECEMBER
31, 2004 AND 2003



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



34



---

M&F BANCORP, INC. AND SUBSIDIARY



CONSOLIDATED BALANCE SHEETS

DECEMBER
31, 2004 AND 2003



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



35



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M&F BANCORP, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002



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



36



---

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002



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



37



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M&F BANCORP, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002



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



38



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M&F BANCORP, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002



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



(Concluded)



See notes to consolidated financial statements.



39



---



M&F BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002



|1. | SIGNIFICANT ACCOUNTING POLICIES
|-- | -------------------------------



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



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



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



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



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



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



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



40



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



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



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



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



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



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



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



41



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



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



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



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



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



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



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



42



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



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



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



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



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



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



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



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



43



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



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



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



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



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



44



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



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



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



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



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



|2. | CASH AMOUNTS DUE FROM BANKS
|-- | ---------------------------



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



45



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|3. | INVESTMENT SECURITIES
|-- | ---------------------



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



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



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



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



46



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



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



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



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



47



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|4. | LOANS
|-- | -----



Loans at December 31, are summarized as follows:



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



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



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



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



Loans to related parties are disclosed in Note 12.



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



|5. | ALLOWANCE FOR POSSIBLE LOAN LOSSES
|-- | ----------------------------------



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



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



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



48



---

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



|6. | PREMISES, EQUIPMENT AND LEASES
|-- | ------------------------------



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



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



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



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



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



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



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



49



---

|7. | DEPOSITS
|-- | --------



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



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



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



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



|8. | COMMITMENTS AND CONTINGENCIES
|-- | -----------------------------



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



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



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



50



---

|9. | INCOME TAXES
|-- | ------------



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



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



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



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



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



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



51



---

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



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



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



|10. | RETIREMENT AND STOCK COMPENSATION PLANS
|--- | ---------------------------------------



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



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



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



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



52



---

Retirement Plan



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



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





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



53



---

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



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



Executive Retirement Plan



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



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



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



54



---

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



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



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



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



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



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



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



55



---

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



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



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



56



---

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



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



No options were
granted in 2004, 2003 or 2002.



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



|11. | BORROWED FUNDS
|--- | --------------



Borrowed funds at December 31 are summarized as follows:



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



The contractual
maturities of borrowed funds are as follows:



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



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



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



57



---

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



|12. | RELATED-PARTY TRANSACTIONS
|--- | --------------------------



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



|13. | FAIR VALUES OF FINANCIAL INSTRUMENTS
|--- | ------------------------------------



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



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



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



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



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



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



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



58



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



|* | Includes Federal Home Loan Bank stock
|- | -------------------------------------



|14. | REGULATORY MATTERS
|--- | ------------------



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



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



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



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



59



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



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



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



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



60



---

|15. | PARENT COMPANY CONDENSED FINANCIAL INFORMATION
|--- | ----------------------------------------------



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



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



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



61



---

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



62



---

|16. | QUARTERLY FINANCIAL DATA (UNAUDITED)
|--- | ------------------------------------



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



|17. | SUBSEQUENT EVENTS
|--- | -----------------



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



* * * * * *



63



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M&F BANCORP, INC.



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



64



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MECHANICS & FARMERS
BANK



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



65



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



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