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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ____________________ TO ____________________
Commission file number: 0-23374
MFB CORP.
(Exact name of registrant as specified in its charter)
Indiana 35-1907258
------- ----------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
121 South Church Street
P.O. Box 528
Mishawaka, Indiana 46546
(Address of principal executive offices,
including Zip Code)
(574) 255-3146
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No
----- -----
(2) Yes X No
----- -----
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act)
Yes ___ No X
-------
The number of shares of the registrant's common stock, without par value,
outstanding as of January 31, 2003 was 1,282,610.
MFB CORP. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
December 31, 2002 (Unaudited) and September 30, 2002 3
Consolidated Statements of Income (Unaudited)
Three months ended December 31, 2002 and 2001 4
Condensed Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
Three months ended December 31, 2002 and 2001 5
Consolidated Statements of Cash Flows (Unaudited)
Three months ended December 31, 2002 and 2001 6
Notes to (Unaudited) Consolidated Financial Statements
December 31, 2002 7
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 13
Results of Operations 14
Balance Sheet Composition 14
Liquidity and Capital Resources 15
Critical Accounting Policies 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 19
Part II. Other Information
Items 1-6. 20
Signatures 21
Certifications 22
MFB CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and September 30, 2002
(In thousands, except share information)
(Unaudited)
December 31 September 30
2002 2002
ASSETS
Cash and due from financial institutions $ 15,082 $ 13,647
Interest - bearing deposits in other financial institutions - short term 9,768 13,935
----------------- ---------------
Total cash and cash equivalents 24,850 27,582
Securities available for sale 52,963 53,585
Interest-bearing time deposits in other financial institutions 500 500
Federal Home Loan Bank (FHLB) stock, at cost 6,308 6,308
Investment in limited partnership 2,678 2,713
Loans held for sale 17,426 6,404
Loans receivable 298,025 316,391
Less: allowance for loan losses (5,582) (5,143)
----------------- ---------------
Loan receivable, net 292,443 311,248
Accrued interest receivable 1,679 1,766
Premises and equipment, net 5,046 5,054
Mortgage servicing rights, net of accumulated amortization of
$889 - 12/31/02 and $605 - 09/30/02 1,761 1,617
Cash surrender value of life insurance 5,000 -
Other assets 3,181 4,423
----------------- ---------------
Total assets $ 413,835 $ 421,200
================= ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand deposits $ 20,362 $ 20,270
Savings, NOW and MMDA deposits 88,497 86,559
Time deposits 150,351 157,548
----------------- ---------------
Total deposits 259,210 264,377
FHLB advances
118,915 119,215
Advances from borrowers for taxes and insurance 670 1,414
Accrued expenses and other liabilities 1,537 2,242
----------------- ---------------
Total liabilities 380,332 387,248
Shareholders' equity
Common stock, no par value, 5,000,000 shares authorized;
shares issued: 1,689,417-12/31/02 and 09/30/02
shares outstanding: 1,284,749-12/31/02 and 1,330,049-09/30/02 12,846 12,880
Retained earnings - substantially restricted 29,804 29,183
Accumulated other comprehensive income (loss),
net of tax of $40 -12/31/02 and $57 - 09/30/02 (222) (194)
Treasury stock, 404,668 common shares - 12/31/02
359,368 common shares - 09/30/02, at cost (8,925) (7,917)
----------------- ---------------
Total shareholders' equity 33,503 33,952
----------------- ---------------
Total Liabilities and Shareholders' equity $ 413,835 $ 421,200
================= ===============
MFB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended December 31, 2002 and 2001
(in thousands except per share information)
Three Months Ended
December 31,
2002 2001
-------------- -------------
Interest income
Loans receivable, including fees
Mortgage loans $ 2,583 $ 3,056
Consumer and other loans 501 554
Commercial loans 2,286 2,236
Securities - taxable 589 736
Other interest-bearing assets 80 158
-------------- -------------
Total interest income 6,039 6,740
Interest expense
Deposits 1,556 1,955
FHLB advances 1,703 1,709
Securities sold under agreements to repurchase - 53
-------------- -------------
Total interest expense 3,259 3,717
-------------- -------------
Net interest income 2,780 3,023
Provision for loan losses 450 232
-------------- -------------
Net interest income after provision for loan losses 2,330 2,791
Noninterest income
Service charges on deposit accounts 296 260
Trust fee income 103 58
Insurance commissions 41 38
Net realized gains from sales of loans 974 580
Loan servicing fees, net (193) (58)
Gain on sale of securities 40 -
Other income 61 45
-------------- -------------
-------------- -------------
Total noninterest income 1,322 923
Noninterest expense
Salaries and employee benefits 1,608 1,398
Occupancy and equipment 340 361
Data processing expense 170 159
Other expense 465 390
-------------- -------------
Total noninterest expense 2,583 2,308
Income before income taxes 1,069 1,406
Income tax expense 308 507
-------------- -------------
Net income $ 761 $ 899
============== =============
Basic earnings per common share $ 0.58 $ 0.67
Diluted earnings per common share $ 0.56 $ 0.66
See accompanying notes to (unaudited) consolidated financial statements
MFB CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY (UNAUDITED)
Three months ended December 31, 2002 and 2001
(In thousands)
Three Months Ended
December 31,
2002 2001
---- ----
Balance at beginning of period $ 33,952 $ 34,380
Purchase of treasury stock (1,071) (117)
Stock option exercise 29 115
Cash dividends declared (140) (134)
Comprehensive income (loss):
Net income (loss) 761 899
Net change in net unrealized gains and losses on
securities available for sale, net (28) (130)
of tax effects
------------ -------------
Total comprehensive income (loss) (449) 769
Balance at end of period $ 33,503 $ 35,013
============ =============
See accompanying notes to (unaudited) consolidated financial statements.
MFB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended December 31, 2002 and 2001 Three Months Ended
(In Thousands) December 31,
2002 2001
---- ----
Cash flows from operating activities
Net income $ 761 $ 899
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization, net of accretion 332 195
Provision for loan losses 450 232
Net gains from sales of securities available for sale (40) -
Net realized gains from sales of loans (974) (580)
Amortization of mortgage servicing rights 284 120
Origination of loans held for sale (34,681) (25,584)
Proceeds from sales of loans held for sale 34,663 24,287
Equity in loss of investment in limited partnership 35 42
Net change in:
Accrued interest receivable 87 123
Other assets 1,258 600
Accrued expenses and other liabilities (705) (257)
----------- -------------
Net cash from operating activities 1,470 77
Cash flows from investing activities
Net change in loans receivable 7,898 7,595
Proceeds from:
Principal payments of mortgage-backed and related securities 6,914 4,961
Maturities and calls of securities available for sale 1,000 9,145
Sales of securities available for sale 160 -
Purchase of:
Securities available for sale (7,660) (24,630)
Life insurance (5,000) -
Premises and equipment, net (121) (67)
----------- -------------
Net cash from investing activities 3,191 (2,996)
Cash flows from financing activities
Purchase of MFB Corp common stock (1,071) (117)
Net change in deposits (5,167) 1,582
Net change in securities sold under agreement to repurchase - (979)
Repayment of FHLB borrowings (300) (350)
Proceeds from exercise of stock options 29 90
Net change in advances from borrowers for taxes and insurance (744) (849)
Cash dividends paid (140) (134)
----------- -------------
Net cash used in financing activities (7,393) (757)
Net change in cash and cash equivalents (2,732) (3,676)
Cash and cash equivalents at beginning of period 27,582 34,223
----------- -------------
Cash and cash equivalents at end of period 24,850 $ 30,547
=========== =============
Supplemental disclosures of cash flow information Cash paid during the period
for:
Interest $2,877 $ 3,734
Income taxes - 100
Supplemental schedule of noncash investing activities:
Transfer from:
Loans receivable to loans held for sale $10,457 $ -
MFB CORP. AND SUBSIDIARIES
NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
NOTE 1 - BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Nature of Operations: MFB Corp. is an Indiana unitary savings and loan holding
company organized in 1993, and parent company of its wholly owned federal
savings bank subsidiary, MFB Financial (the "Bank"). MFB Corp. and the Bank
(collectively referred to as the "Company") conduct business from their main
office in Mishawaka, Indiana, and six branch locations in St. Joseph and Elkhart
Counties of Indiana. The Bank offers a variety of lending, deposit, trust and
other financial services to its retail and commercial customers. The Bank's
wholly-owned subsidiary, Mishawaka Financial Services, Inc., offers general
property, casualty and life insurance to customers in the Bank's market area.
The Bank's wholly-owned subsidiaries, MFB Investments I,Inc., MFB Investments
II, Inc. and MFB Investments, LP are Nevada corporations and a Nevada limited
partnership that manage a portion of the Bank's investment portfolio.
Basis of Presentation: The accompanying unaudited consolidated financial
statements were prepared in accordance with instructions for Form 10-Q and,
therefore, do not include all disclosures required by accounting principles
generally accepted in the United States of America for a complete presentation
of the financial statements. In the opinion of management, the consolidated
financial statements contain all normal recurring adjustments necessary to
present fairly the consolidated balance sheets of MFB Corp. and its subsidiary
MFB Financial as of December 31, 2002 and September 30, 2002, and the
consolidated statements of income, the condensed consolidated statements of
changes in shareholders' equity and the consolidated statements of cash flows
for the three months ended December 31, 2002 and 2001. All significant
intercompany transactions and balances are eliminated in consolidation.
Reclassifications: Some items in the prior consolidated financial statements
have been reclassified to conform with the current presentation.
NOTE 2 - EARNINGS PER COMMON SHARE
Basic earnings per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per common share shows the dilutive effect of additional potential
common shares issuable under stock options.
(Continued)
NOTE 2 - EARNINGS PER COMMON SHARE (Continued)
The computations of basic earnings per common share and diluted earnings per
common share for the periods ended December 31, 2002 and 2001 are presented
below.
Three Months Ended
December 31,
2002 2001
---- ----
(in thousands except per share information)
Basic Earnings Per Common Share
Net income $ 761 $ 899
=========== ===========
Weighted average common shares outstanding for
basic earnings per common share 1,316 1,339
=========== ===========
Basic Earnings Per Common Share $ .58 $ .67
=========== ===========
Diluted Earnings Per Common Share
Net income $ 761 $ 899
=========== ===========
Weighted average common shares outstanding
for basic earnings per common share 1,316 1,339
Add: Dilutive effects of assumed exercises
of stock options 38 34
----------- -----------
Weighed average common and
dilutive potential common shares 1,354 1,373
outstanding
=========== ===========
Diluted Earnings Per Common Share $ .56 $ .66
=========== ===========
Stock options for 51,750 common shares for the three months ended December 31,
2002 and 75,750 common shares for the three months ended December 30, 2001 were
not considered in computing diluted earnings per common share because they were
antidilutive.
NOTE 3 - SECURITIES
The amortized cost and fair value of securities available for sale are as
follows:
..........................December 31, 2002..........................
-----------------
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities
U.S. Government and federal agencies $ 11,442 $ 325 $ - $ 11,767
Municipal bonds 348 20 - 368
Mortgage-backed 27,356 234 (29) 27,561
Corporate notes 9,762 152 (604) 9,310
------------ -------------- ------------- --------------
48,908 731 (633) 49,006
Marketable equity securities 4,237 - (280) 3,957
------------ -------------- ------------- --------------
$ 53,145 $ 731 $ (913) $ 52,963
============ ============== ============= ==============
..........................September 30, 2002.........................
------------------
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities
U.S. Government and federal agencies $ 12,485 $ 329 $ - $ 12,814
Municipal bonds 349 19 - 368
Mortgage-backed 26,771 272 (6) 27,037
Commercial paper - - - -
Corporate notes 9,880 138 (609) 9,409
------------ -------------- ------------- --------------
49,485 758 (615) 49,628
Marketable equity securities 4,237 - (280) 3,957
------------ -------------- ------------- --------------
$ 53,722 $ 758 $ (895) $ 53,585
============ ============== ============= ==============
NOTE 4 - LOANS RECEIVABLE, NET
Loans receivable at December 31, 2002 and September 30, 2002 are summarized as
follows:
December 31, September 30,
2002 2002
----------------- ----------------
First mortgage loans (principally conventional) (in thousands)
Principal balances
Secured by one to four family residences $ 126,683 $ 146,942
Construction loans 12,135 15,863
Others 5,896 6,027
----------------- ----------------
144,714 168,832
Less undisbursed portion of construction and other mortgage loans (116) (103)
----------------- ----------------
Total first mortgage loans 144,598 168,729
Commercial loans:
Principal balances
Commercial $ 49,304 $ 48,438
Commercial real estate 77,467 72,703
----------------- ----------------
----------------- ----------------
Total commercial loans 126,771 121,141
Consumer loans:
Home equity and second mortgage $ 21,548 $ 21,150
Other 5,852 6,165
----------------- ----------------
Total consumer loans 27,400 27,315
Net deferred loan origination fees (744) (794)
----------------- ----------------
Total loans receivable $ 298,025 $ 316,391
================= ================
Activity in the allowance for loan losses is summarized as follows for the three
months ended December 31, 2002 and for the year ended September 30, 2002.
December 31, September 30,
2002 2002
---------------- -----------------
(in thousands)
Balance at beginning of year $ 5,143 $ 4,632
Provision for loan losses 450 3,370
Charge-offs (11) (2,873)
Recoveries - 14
---------------- -----------------
Balance at end of year $ 5,582 $ 5,143
================ =================
NOTE 4 - LOANS RECEIVABLE, NET (continued)
Quarter Ended Year Ended
December 31, September 30,
Impaired loans were as follows: 2002 2002
------------------ ------------------
(in thousands)
Quarter-ended and year-end balances with no allocated allowance for loan losses $ - $ -
Quarter-ended and year-end loans with allocated allowances for loan losses 5,881 6,567
------------------ ------------------
Total $ 5,881 $ 6,567
================== ==================
Amount of the allowance for loan losses allocated $ 1,848 $ 1,773
Average of impaired loans 5,938 8,070
Interest income recognized during impairment 25 227
Cash-basis interest income recognized during impairment 25 226
Nonperforming loans were as follows at December 31, 2002 and September 30, 2002:
December 31, September 30,
2002 2002
------------------ ------------------
(in thousands)
Loans past due over 90 days still on accrual status $ - $ -
Nonaccrual loans 4,822 5,464
------------------ ------------------
Total Nonperforming loans $ 4,822 $ 5,464
NOTE 5 - STOCK OPTIONS
The Board of Directors of the Company has adopted the MFB Corp. Stock Option
Plans (the "Option Plans"). The number of options authorized under the Option
Plans totals 450,000 shares of common stock. Officers, employees and outside
directors of the Company and its subsidiary are eligible to participate in the
Option Plans. The option exercise price must be no less than 85% of the fair
market value of common stock on the date of the grant, and the option term
cannot exceed ten years and one day from the date of the grant. As of December
31, 2002, all options granted have an exercise price of at least 100% of the
market value of the common stock on the date of grant and no compensation
expense was recognized for stock options for the quarters ended December 31,
2002 and 2001.
The following proforma information presents net income and basic and diluted
earning per share had the fair value method been used to measure compensation
for stock options granted. The exercise price of options granted is equivalent
to the market price of the underlying stock at the grant date; therefore, no
compensation expense has been recorded for stock options granted.
December 31,
2002 2001
---- ----
(in thousands except per share data)
Net income as reported $ 761 $ 899
Proforma net income 724 870
Reported earnings per common share
Basic 0.58 0.67
Diluted 0.56 0.66
Proforma earnings per common share
Basic 0.55 0.65
Diluted 0.53 0.63
The weighted average fair value of stock options granted during the three months
ended December 31, 2002 and 2001 were $5.82 and $4.07. The fair value of options
granted during the three months ended December 31, 2002 and 2001 were estimated
using an option pricing model with the following weighted average information as
of the grant dates: December 31,
2002 2001
---- ----
Risk free rate of interest 3.72% 4.57%
Expected option life 8 years 8 years
Expected dividend yield 1.82% 2.05%
Expected volatility 23.23% 14.55%
In future years, as additional options are granted, the proforma effect on net
income and earnings per share may increase. Stock options are used to reward
directors and certain executive officers and provide them with an additional
equity interest. Options are issued for ten year periods and have varying
vesting schedules. Information about options available for grant and options
granted follows:
Weighted-
Average
Available Options Exercise
For Grant Outstanding Price
Balance at September 30, 2002 153,500 185,950 $ 17.53
Options exercised - (2,900) 10.00
Options issued (59,000) 59,000 21.30
------------- ------------ ----------
Balance at December 31, 2002 94,500 242,050 18.54
============ ============ ==========
At December 31, 2002, options outstanding had a weighted
average remaining life of approximately 5.4 years. There
were 162,015 options exercisable December 31, 2002 with
a weighted-average exercise price of $16.58.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
GENERAL
MFB Corp. is an Indiana unitary savings and loan holding company organized in
1993, and parent company of its wholly owned savings bank subsidiary, MFB
Financial (the "Bank"). MFB Corp. and the Bank (collectively referred to as the
"Company") conduct business from their main office in Mishawaka, Indiana and six
branch locations in St. Joseph and Elkhart Counties of Indiana. The Bank offers
a variety of lending, deposit, trust and other financial services to its retail
and commercial customers. The Bank's wholly-owned subsidiary, Mishawaka
Financial Services, Inc., offers general property, casualty and life insurance
to customers in the Bank's market area. The Bank's wholly-owned subsidiaries,
MFB Investments I, Inc., MFB Investments II, Inc. and MFB Investments, LP are
Nevada corporations and a Nevada limited partnership that manage a portion of
the Bank's investment portfolio.
The principal business of the Bank has historically consisted of attracting
deposits from the general public and the business community and making loans
secured by various types of collateral, including real estate and general
business assets. The Bank is significantly affected by prevailing economic
conditions as well as government policies and regulations concerning, among
other things, monetary and fiscal affairs, housing and financial institutions.
Deposit flows are influenced by a number of factors including interest rates
paid on competing investments, account maturities, fee structures and level of
personal income and savings. Lending activities are influenced by the demand for
funds, the number and quality of lenders, and regional economic cycles. Sources
of funds for lending activities of the Bank include deposits, borrowings,
payments on loans and income provided from operations. The Company's earnings
are primarily dependent upon the Bank's net interest income, the difference
between interest income and interest expense.
RESULTS OF OPERATION
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
The Company's consolidated net income for the three months ended December 31,
2002 was $761,000 or $0.56 diluted earnings (losses) per common share, compared
to net income of $899,000 or $0.66 diluted earnings (losses) per share, for the
three months ended December 31, 2001. MFB Corp's reduction of net income from
the prior year was attributable to a reduction in the Bank's net interest
income, an increase in provision for loan losses, and an increase in noninterest
expense; partially offset by an increase in noninterest income.
Net interest income before provision for loan losses for the three month period
ended December 31, 2002 totaled $2.8 million compared to $3.0 million for the
same period one year ago. Total interest income for the first quarter decreased
$701,000 and total interest expense decreased $458,000 from the first quarter
last year as a result of the overall decline in interest rates.
The provision for loan losses for the first quarter ended December 31, 2002 was
$450,000 compared to $232,000 for the first quarter last year. The increase over
last year is based on the evaluation of many factors including current economic
conditions, changes in the character, mix and size of the loan portfolio,
current and past delinquency trends, adequacy of collateral on loans and
historical and estimated net charge-offs. The Company's commercial loan
portfolio has continued to grow as a percentage of total loans.
Noninterest income increased from $923,000 for the three months ended December
31, 2001 to $1.32 million for the most recent three month period due to an
increase in net gains on loan sales, trust fees, deposit fees and gain on sale
of securities, offset by a reduction in net loan servicing fees. Net gains on
loan sales totaling $974,000 for the first quarter ended December 31, 2002 were
up 67.9% over the same period last year. An increase in fixed rate mortgage
origination volume and improved secondary market pricing contributed to the
increase over last year. Noninterest expenses increased 11.9% from $2.3 million
for the first quarter ended December 31, 2001 to $2.6 million this current
quarter. The increases for the three month period was primarily due to increases
in salaries and employee benefits and other expense. The significant growth in
salaries and benefits is the result of staffing several key positions in the
organization designed to position the bank for growth in the coming years.
Corresponding to the decline in income before taxes and increased low income
housing tax credits, income tax expense decreased from the first quarter ended
December 31, 2001 to the first quarter ended December 31, 2002.
BALANCE SHEET COMPOSITION
COMPARISON OF DECEMBER 31, 2002 TO SEPTEMBER 30, 2002
The Company's total assets decreased $7.4 million from $421.2 million as of
September 30, 2002 to $413.8 million as of December 31, 2002.
Cash and cash equivalents decreased $2.7 million from $27.6 million at September
30, 2002 to $24.9 million at
December 31, 2002. Net cash from investing activities amounted to $3.2 million
and net cash used in financing activities totaled ($7.4) million during the
three months ended December 31, 2002.
As of December 31, 2002, the total securities available for sale portfolio
amounted to $53.0 million, a decrease of $600,000 from $53.6 million at
September 30, 2002. The securities portfolio activity during that period
included security purchases of $7.7 million, security maturities and sales of
$1.2 million, and principal payments on mortgage-backed and related securities
of $6.9 million.
As of December 31, 2002, loans receivable were $298.0 million, a decrease of
$18.4 million from $316.4 million at September 30, 2002. Commercial loans
outstanding increased by $5.7 million from $121.1 million at September 30, 2002
to $126.8 million at December 31, 2002. Due to increased volume of mortgage
loans sold into the secondary market, mortgage loans declined $24.1 million from
$168.7 million at September 30, 2002 to $144.6 million at December 31, 2002.
Consumer loans, including home equity and second mortgages, increased $85,000
during the three month period. Loans held for sale at December 31, 2002
increased to $17.4 million from $6.4 million at September 30, 2002. This
increase is due to a specific mortgage loan sale to two secondary market
investors totaling approximately $10.2 million in loans that settled in January,
2003. Diversification of the asset mix in the balance sheet continued to be a
focus to improve profit margins, control margin volatility and to appeal to a
broader range of customers and potential customers.
During the first quarter ended December 31, 2002, the Company completed
secondary market mortgage loans sales totaling $34.2 million and the net gains
realized on these loan sales were $974,000 including $428,000 related to
recording mortgage loans servicing rights. During the first quarter ended
December 31, 2001 sales of $24.3 million yielded net gains on loan sales of
$580,000, including $300,000 related to recording mortgage loan servicing
rights. The loans sold this year were fixed rate mortgage loans with maturities
of fifteen years or longer. The sale of loan production serves as a source of
additional liquidity and management anticipates that the Company will continue
to deliver fixed rate loans to the secondary market to meet consumer demand,
manage interest rate risk, and diversify the asset mix of the Company. On a
non-recurring basis, to meet liquidity needs that arise, the Company may sell
certain adjustable rate loans from its portfolio.
The allowance for loan losses increased from $5.1 million, or 1.63% of loans, at
September 30, 2002 to $5.6 million or 1.87% of loans at December 31, 2002. The
allowance is maintained through the provision for loan losses, which is charged
to earnings. During this three month period, $450,000 was added to the loan loss
reserve due to the current state of the local, regional and national economy and
due to the increasing percentage of commercial loans in the Company's loan
portfolio. A total of $11,000 of net charge offs were recorded during the same
period reducing the loan loss reserve.
The Company's non-performing assets have decreased from $5.9 million at
September 30, 2002 to $4.8 million at December 31, 2002. The decrease was
attributable to partial liquidations on non-accrual loans and sales of other
real estate and nonperforming securities. Impaired loans have decreased from
$6.6 million at September 30, 2002 to $5.9 million at December 31, 2002. In
management's opinion, the allowance for loan losses is adequate to cover
probable incurred losses at December 31, 2002.
Total liabilities decreased from $387.2 million at September 30, 2002 to $380.3
million at December 31, 2002. Total deposits decreased $5.2 million from $264.4
million at September 30, 2002 to $259.2 million at December 31, 2002, primarily
due to a $7.2 million decrease in time certificates of deposits, offset by 2.0
million increase in DDA, Savings, NOW and MMDA deposits.
FHLB advances decreased from $119.2 million at September 30, 2002 to $118.9
million at December 31, 2002. The $118.9 million of Federal Home Loan Bank
advances have a weighted average interest rate of 5.60% and mature over the next
nine years. A total of $20.8 million of these advances mature in the next twelve
months.
Total shareholders' equity decreased from $34.0 million as of September 30, 2002
to $33.5 million as of December 31, 2002. Net income of $761,000 was offset by a
reduction in the market value of available for sale securities of $28,000 net of
tax, cash dividend payments of $140,000 and the repurchase of 48,200 shares of
outstanding common stock during this period at a cost of $1.1 million. MFB
Corp's equity to assets ratio was 8.10% at December 31, 2002 compared to 8.06%
at September 30, 2002. The book value of MFB Corp. stock increased from $25.53
at September 30, 2002 to $26.08 at December 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity relates primarily to the Company's ability to fund loan demand, meet
deposit customers' withdrawal requirements and provide for operating expenses.
Assets used to satisfy these needs consist of cash, deposits with other
financial institutions, overnight interest-bearing deposits in other financial
institutions and securities available for sale. These assets are commonly
referred to as liquid assets.
Liquid assets were $78.3 million as of December 31, 2002 compared to $81.7
million as of September 30, 2002. This $3.4 decrease was primarily due to a
decrease in short-term deposits with other financial institutions. The sale of
fixed rate loan production has provided a source of additional liquidity.
Management believes the liquidity level as of December 31, 2002 is sufficient to
meet anticipated cash needs.
Short-term borrowings or long-term debt, such as Federal Home Loan Bank
advances, are used to compensate for reduction in other sources of funds such as
deposits and to assist in asset/liability management. As of December 31, 2002,
total FHLB borrowings amounted to $118.9 million and were used primarily to fund
loan portfolio growth. The Bank had commitments to fund loan originations with
borrowers totaling $91.6 million at December 31, 2002, including $67.2 million
in available consumer and commercial lines and letters of credit. Certificates
of deposits scheduled to mature in one year or less totaled $59.8 million. Based
on historical experience, management believes that a significant portion of
maturing deposits will remain with the Bank. The Bank anticipates that it will
continue to have sufficient cash flow and other cash resources to meet current
and anticipated loan funding commitments, deposit customer withdrawal
requirements and operating expenses.
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings, and other factors,
and the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If only adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
The Bank's actual capital and required capital amounts and ratios at
December 31, 2002 and September 30, 2002 are presented below:
Requirement to be
Well Capitalized Under
Requirement for Capital Prompt Corrective
Actual Adequacy Purposes Actual Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2002
Total capital
(to risk weighted $ 36,630 12.88% $ 22,743 8.00% $ 28,428 10.00%
assets)
Tier 1 (core) capital
(to risk weighted 33,076 11.63 11,491 4.00 17,057 6.00
assets)
Tier 1 (core) capital
(to adjusted total 33,076 8.00 16,541 4.00 20,676 5.00
assets)
As of September 30, 2002
Total capital
(to risk weighted $ 36,167 12.83% $ 22,553 8.00% $ 28,191 10.00%
assets)
Tier 1 (core) capital
(to risk weighted 32,948 11.69 11,276 4.00 16,914 6.00
assets)
Tier 1 (core) capital
(to adjusted total 32,948 7.83 16,824 4.00 21,032 5.00
assets)
As of December 31, 2002, management is not aware of any current recommendations
by regulatory authorities which, if they were to be implemented, would have, or
are reasonably likely to have, a material adverse effect on the Company's
liquidity, capital resources or operations.
The forgoing discussion contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, which involve a number
of risks and uncertainties. A number of factors could cause results to differ
materially from the objectives and estimates expressed in such forward-looking
statements. These factors include, but are not limited to, changes in the
financial condition of issuers of the Company's investments and borrowers,
changes in economic conditions in the Company's market area, changes in policies
by regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area, changes in the position of banking regulators on the
adequacy of our allowance for loan losses and competition, all or some of which
could cause actual results to differ materially from historical earnings and
those presently anticipated or projected. These factors should be considered in
evaluating any forward-looking statements, and undue reliance should not be
placed on such statements. The Corporation does not undertake and specifically
disclaims any obligation to update any forward-looking statements to reflect
occurrence of anticipated or unanticipated events or circumstances after the
date of such statements.
CRITICAL ACCOUNTING POLICIES
Certain of the Company's accounting policies are important to the portrayal of
the Company's financial condition, since they require management to make
difficult, complex or subjective judgments, some of which may relate to matters
that are inherently uncertain. Estimates associated with these policies are
susceptible to material changes as a result of changes in facts and
circumstances. Fact and circumstances which could affect these judgments
include, but without limitation, changes in interest rates, in the performance
of the economy or in the financial condition of borrowers. Management believes
that its critical accounting policies include determining the allowance for loan
losses, determining the fair value of securities and other financial instruments
and the valuation of mortgage servicing rights. The Company's critical
accounting policies are discussed in detail in the Annual Report for the year
ended September 30, 2002 (incorporated by reference as part of the Company's 10K
filing) in Note 1 of the Notes to the Consolidated Financial Statements under
"Securities," "Mortgage Banking Activities," and "Loans Receivable".
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to interest rate risk to the degree that its
interest-bearing liabilities, primarily deposits and Federal Home Loan Bank
(FHLB) advances, reprice more rapidly, or at different rates than its
interest-earning assets.
A key element of the Company's asset/liability plan is to protect net earnings
by managing the maturity or repricing mismatch between its interest-earning
assets and rate-sensitive liabilities. The Company has sought to reduce exposure
to its earnings by holding adjustable rate loans and selling fixed rate loans
into the secondary market, and by extending funding maturities through the use
of FHLB advances and longer term certificates of deposit.
As part of its efforts to monitor and manage interest rate risk, the Company
uses the Net Portfolio Value ("NPV") methodology adopted by the Office of Thrift
Supervision (OTS) as part of its capital regulations. In essence, this approach
calculates the difference between the present value of expected cash flows from
assets and the present value of expected cash flows from liabilities, as well as
cash flows from off-balance-sheet contracts. The difference as a percentage of
the value of assets is the NPV ratio which was 5.82% as of September 30, 2002
(the most recently available data). Management and the Board of Directors review
the OTS measurements on a quarterly basis to determine whether the Company's
interest rate exposure is within the limits established by the Board of
Directors in the Company's interest rate risk policy. The Company's
interest-earning assets and interest-bearing liabilities have not changed
materially from September 30, 2002 to December 31, 2002.
The Company's asset/liability management strategy dictates acceptable limits on
the amounts of change in NPV given certain changes in interest rates. The table
presented here, as of September 30, 2002, is an analysis of the Company's
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts in the yield curve, in 100 basis point increments, up 300 basis
points and down 300 basis points. Due to the abnormally low interest rate
environment prevailing at September 30, 2002, meaningful data was not available
from the OTS model for the (-200) and (-300) basis point scenario and therefore
is not included in the table below.
(dollars are in thousands)
Interest Rate Net Portfolio Value NPV as % of Portfolio
Changes in Basis Value of Assets
Points NPV
(Rate Shock) (1) $ Amount $ Change % Change Ratio Change (1)
- ----------------------------- ----------------- ---------------- ------------- ------------- -----------------
+300 26,794 1,896 8% 6.50% 68
+200 28,363 3,465 14% 6.78% 95
+100 27,708 2,811 11% 6.54% 71
0 24,898 - - 5.82% -
-100 21,306 (3,591) (14%) 4.94% (88)
(1) Expressed in basis points
As illustrated in the September 30, 2002 table, the Company's NPV will decline
if rates fall, and the NPV would increase if rates were to rise. During the
quarter ended September 30, 2002, the Company experienced a decrease in
adjustable rate mortgages that reprice on a longer term basis and an increase in
three and five year maturity CDs, both of which had the effect of increasing NPV
in a rising rate scenario in the OTS model.
Specifically, the table indicates that at September 30, 2002, the Company's NPV
was $24.9 million or 5.82% of the market value of portfolio assets. Based upon
the assumptions utilized, an immediate 300 basis point increase in market
interest rates would result in a $1.9 million or 8% increase in the Company's
NPV and would result in a 68 basis point or 12% increase in the Company's NPV
ratio to 6.50%. Conversely, an immediate 100 basis point decrease in market
interest rates would result in a $3.6 million or 14% decrease in the Company's
NPV, and a 88 basis point or 17.8% decrease in the Company's NPV ratio to 4.94%.
In evaluating the Company's interest rate risk exposure to interest rate
movements, certain shortcomings inherent in the method of analysis presented in
the foregoing table must be considered. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in interest rates. Additionally, certain assets, such as
adjustable rate mortgages (ARM'S), have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Further, in
the event of a significant change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed above.
Finally, the ability of many borrowers to service their debt may decrease in the
event of an interest rate increase. The Company considers all of these factors
in monitoring its exposure to interest rate risk.
In addition to monitoring selected measures on NPV, management also monitors
effects on net interest income resulting from increases or decreases in rates.
This process is used in conjunction with NPV measures to identify excessive
interest rate risk. In managing its asset/liability mix, the Company, depending
on the relationship between long and short term interest rates, market
conditions and consumer preference, may place somewhat greater emphasis on
maximizing its net interest margin than on strictly matching the interest rate
sensitivity of its assets and liabilities. Management believes that the
increased net income which may result from an acceptable mismatch in the actual
maturity or repricing of its asset and liability portfolios can provide
sufficient returns to justify the increased exposure to sudden and unexpected
increases in interest rates which may result from such a mismatch. Management
believes that the Company's level of interest rate risk is acceptable under this
approach as well.
The Board of Directors and management of the Company believe that certain
factors afford the Company the ability to operate successfully despite its
exposure to interest rate risk. The Company manages its interest rate risk by
originating and selling the majority of its fixed rate one-to-four family real
estate loans. While the Company generally originates adjustable rate mortgage
loans for its own portfolio, fixed rate first mortgage loans may be retained in
the portfolio from time to time. Loans classified as held for sale as of
December 31, 2002 totaled $17.4 million compared to $6.4 million at September
30, 2002. The Company retains the servicing on the majority of loans sold in the
secondary market and, at December 31, 2002, $149 million in such loans were
being serviced for others.
The Company's investment strategy is to maintain a diversified portfolio of high
quality investments that minimize interest rate and credit risks while striving
to maximize investment return and to provide liquidity necessary to meet funding
needs. The Company's investment portfolio primarily consists of US government
and federal agency obligations, mortgage-backed securities and corporate note
obligations. The Company's policy dictates all securities must satisfy the
investment grade requirements of the Office of Thrift Supervision at the time of
purchase. Wholesale banking activities are conducted as a means to supplement
net income and to achieve desired growth targets. This strategy involves the
acquisition of assets funded through sources other than retail deposits, such as
FHLB advances. The goal is to create interest rate spreads between asset yields
and funding costs within acceptable risk parameters while improving return on
equity.
The Company's cost of funds responds to changes in interest rates due to the
relatively short-term nature of its deposit portfolio. The Company offers a
range of maturities on its deposit products at competitive rates and monitors
the maturities on an ongoing basis.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company's chief
executive officer and chief financial officer, after evaluating the
effectiveness of the Company's disclosure controls and procedures (as defined in
Sections 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934, as
amended), as of a date (the "Evaluation Date") within 90 days before the filing
date of this quarterly report, have concluded that as of the Evaluation Date,
the Company's disclosure controls and procedures were adequate and are designed
to ensure that material information relating to the Company would be made known
to such officers by others within the Company.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the Evaluation Date.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual
Meeting of Shareholders was held on January 21, 2003.
(b) Each of the persons named in the proxy statement as a nominee for director
was elected. (c) The following are the voting results on each matter submitted
to the shareholders:
For Against Abstain
1) Election of Directors
M. Gilbert Eberhart 950,135 83,308 -
Jonathan E. Kintner 950,135 83,308 -
2) Appointment of Crowe, Chizek 1,006,837 18,579 8,027
& Company as auditors for 2003
The text of the matters referred to under this Item 4 is set forth in the proxy
statement dated December 16, 2002 previously filed with the Securities and
Exchange Commission, and is incorporated herein by reference.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) MFB Corp. filed one Form 8-K report during the quarter ended
December 31, 2002. Date of report: October 18, 2002
Items reported: News release dated October 18,
2002 regarding the announcement of fourth
quarter earnings (losses) and announcement
of a cash dividend payable on November 12, 2002 to
holders of record on October 29, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MFB CORP.
Date: /s/ 02/12/03 By /s/ Charles J Viater
--------- --------------------------------------------
Charles J. Viater
President and Chief Executive Officer
Date :/s/ 02/12/03 By /s/ Thomas J Flournoy
-------- --------------------------------------------
Thomas J. Flournoy
Chief Financial Officer
CERTIFICATION
I, Charles J. Viater, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MFB Corp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date:_/s/ 02/12/03_____________ /s/ Charles J Viater
---------------------------------
Charles J. Viater
Chief Executive Officer
CERTIFICATION
I, Thomas J. Flournoy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MFB Corp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date ;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date:_/s/ 02/12/03_________ /s/ Thomas J Flournoy
-------------------------------
Thomas J. Flournoy
Chief Financial Officer
CERTIFICATION
By signing below, each of the undersigned officers hereby certifies
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to his or her knowledge, (i) this report fully
complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and (ii) the information contained in this report fairly
presents, in all material respects, the financial condition and results of
operations of MFB Corp.
Signed this 12th day of February, 2003.
Thomas J. Flournoy Charles J. Viater
Chief Financial Officer Chief Executive Officer
- ---------------------------------- ---------------------------
(Title) (Title)