24
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 March 31, 2003
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 April 30, 2003 was 1,266,610.
MFB CORP. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
March 31 2003 (Unaudited) and September 30, 2002 3
Consolidated Statements of Income (Unaudited)
Three and six months ended March 31, 2003 and 2002 4
Condensed Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
Three and six months ended March 31, 2003 and 2002 5
Consolidated Statements of Cash Flows (Unaudited)
Six months ended March 31, 2003 and 2002 6
Notes to (Unaudited) Consolidated Financial Statements March 31, 2003 7
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 13
Results of Operations 13
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
March 31, 2003 and September 30, 2002
(In thousands, except share information) (Unaudited)
March 31 September 30
2003 2002
ASSETS
Cash and due from financial institutions $ 12,040 $ 13,647
Interest - bearing deposits in other financial institutions - short term 43,337 13,935
----------------- ---------------
Total cash and cash equivalents 55,377 27,582
Securities available for sale 47,659 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 2,642 2,713
Loans held for sale 3,171 6,404
Loans receivable 307,771 316,391
Less: allowance for loan losses (5,603) (5,143)
----------------- ---------------
Loan receivable, net 302,168 311,248
Accrued interest receivable 1,635 1,766
Premises and equipment, net 5,211 5,054
Mortgage servicing rights, net of accumulated amortization of
$1,179 - 03/31/03 and $605 - 09/30/02 1,753 1,617
Cash surrender value of life insurance 5,082 -
Other assets 3,707 4,423
----------------- ---------------
Total assets $ 435,213 $ 421,200
================= ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand deposits $ 21,624 $ 20,270
Savings, NOW and MMDA deposits 98,786 86,559
Time deposits 158,954 157,548
----------------- ---------------
Total deposits 279,364 264,377
FHLB advances
118,915 119,215
Loans from Correspondent Banks 300 -
Advances from borrowers for taxes and insurance 1,264 1,414
Accrued expenses and other liabilities 2,231 2,242
----------------- ---------------
Total liabilities 402,074 387,248
Shareholders' equity
Common stock, no par value, 5,000,000 shares authorized;
shares issued: 1,689,417-03/31/03 and 09/30/02
shares outstanding: 1,266,610-03/31/03 and 1,330,049-09/30/02 12,778 12,880
Retained earnings - substantially restricted 30,133 29,183
Accumulated other comprehensive income (loss),
net of tax of $(9) -03/31/03 and $57 - 09/30/02 (438) (194)
Treasury stock, 422,807 common shares - 03/31/03
359,368 common shares - 09/30/02, at cost (9,334) (7,917)
----------------- ---------------
Total shareholders' equity 33,139 33,952
----------------- ---------------
Total Liabilities and Shareholders' equity $ 435,213 $ 421,200
================= ===============
MFB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three and six months ended March 31, 2003 and 2002
(in thousands except per share information)
Three Months Ended Six Months Ended
March 31 March 31
2003 2002 2003 2002
Interest income
Loans receivable, including fees
Mortgage loans $ 2,251 $ 2,850 $ 4,834 $ 5,906
Consumer and other loans 448 479 949 1,030
Commercial loans 2,248 2,120 4,534 4,360
Securities - taxable 550 738 1,139 1,474
Other interest-bearing assets 71 132 151 289
------------ ------------- ------------- ------------
Total interest income 5,568 6,319 11,607 13,059
Interest expense
Deposits 1,447 1,731 3,003 3,686
FHLB advances 1,666 1,671 3,369 3,380
Securities sold under agreements to repurchase - 40 - 92
------------ ------------- ------------- ------------
Total interest expense 3,113 3,442 6,372 7,158
------------ ------------- ------------- ------------
Net interest income 2,455 2,877 5,235 5,901
Provision for loan losses 450 452 900 685
------------ ------------- ------------- ------------
Net interest income after provision for loan losses 2,005 2,425 4,335 5,216
Noninterest income
Service charges on deposit accounts 305 236 601 497
Trust fee income 124 58 227 115
Insurance commissions 44 30 85 69
Net realized gains from sales of loans 934 341 1,908 921
Loan servicing fees, net (184) 9 (377) (50)
Gain on sale of securities 0 - 40 -
Other income 211 22 272 67
------------ ------------- ------------- ------------
------------ ------------- ------------- ------------
Total noninterest income 1,434 696 2,756 1,619
Noninterest expense
Salaries and employee benefits 1,699 1,521 3,307 2,919
Occupancy and equipment 392 374 732 735
Data processing expense 191 169 361 328
Other expense 596 551 1,061 941
------------ ------------- ------------- ------------
------------ -------------
Total noninterest expense 2,878 2,615 5,461 4,923
Income before income taxes 561 506 1,630 1,912
Income tax expense 91 135 399 642
------------ -------------
------------ ------------- ------------- ------------
Net income $ 470 $ 371 $ 1,231 $ 1,270
============ ============= ============= ============
============ =============
Basic earnings per common share $ 0.37 $ 0.28 $ 0.95 $ 0.95
Diluted earnings per common share $ 0.36 $ 0.26 $ 0.92 $ 0.92
See accompanying notes to (unaudited) consolidated financial statements
MFB CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY (UNAUDITED)
Three and six months ended March 31, 2003 and 2002
(In thousands)
Three Months Ended Six Months Ended
March 31, March 31,
2003 2002 2003 2002
---- ---- ---- ----
Balance at beginning of period $ 33,503 $ 35,013 $ 33,952 $ 34,380
Purchase of treasury stock (605) (64) (1,676) (181)
Stock option exercise 128 - 157 115
Cash dividends declared (141) (141) (281) (275)
Comprehensive income (loss):
Net income (loss) 470 371 1,231 1,270
Net change in net unrealized gains and losses
on securities available for sale, net of tax (216) (561) (244) (691)
effects
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Total comprehensive income (loss) 254 (190) 987 579
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Balance at end of period $ 33,139 $ 34,618 $ 33,139 $ 34,618
=========== =========== =========== ===========
See accompanying notes to (unaudited) consolidated financial statement
MFB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended March 31, 2003 and 2002
(In Thousands)
Six Months Ended
March 31,
2003 2002
---- ----
Cash flows from operating activities
Net income $ 1,231 $ 1,270
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization, net of accretion 618 540
Provision for loan losses 900 685
Net gains from sales of securities available for sale (40) -
Net realized gains from sales of loans (1,908) (921)
Amortization of mortgage servicing rights 574 181
Origination of loans held for sale (50,729) (39,018)
Proceeds from sales of loans held for sale 64,816 41,269
Equity in loss of investment in limited partnership 92
71
Appreciation in cash surrender value of life insurance (82) -
Net change in:
Accrued interest receivable 131 (29)
Other assets 811 90
Accrued expenses and other liabilities (10) (62)
----------- -------------
Net cash from operating activities 16,383 4,097
Cash flows from investing activities
Net change in interest-bearing time deposits in other financial institutions - 500
Net change in loans receivable (1,476) 113
Proceeds from:
Principal payments of mortgage-backed and related securities 13,916 13,433
Sales, Maturities and calls of securities available for sale 3,160 14,445
Purchase of:
Securities available for sale (11,816) (42,321)
Life insurance (5,000) -
Premises and equipment, net (379) (147)
----------- -------------
Net cash from investing activities (1,595) (13,977)
Cash flows from financing activities
Purchase of MFB Corp common stock (1,676) (181)
Net change in deposits 14,987 8,350
Net change in securities sold under agreement to repurchase - 341
Repayment of FHLB borrowings (300) (350)
Proceeds from other borrowings 300 -
Proceeds from exercise of stock options 127 90
Net change in advances from borrowers for taxes and insurance (150) (7)
Cash dividends paid (281) (275)
----------- -------------
Net cash used in financing activities 13,007 7,968
Net change in cash and cash equivalents 27,795 (1,912)
Cash and cash equivalents at beginning of period 27,582 34,223
----------- -------------
Cash and cash equivalents at end of period 55,377 $ 32,311
=========== =============
Supplemental disclosures of cash flow information Cash paid during the period
for:
Interest $6,063 $ 7,198
Income taxes - 715
Supplemental schedule of noncash investing activities:
Transfer from Loans receivable to loans held for sale $9,657 $ -
MFB CORP. AND SUBSIDIARIES
NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
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 March 31, 2003 and September 30, 2002, the consolidated
statements of income and the condensed
consolidated statements of changes in shareholders' equity for the three and six
months ended March 31, 2003 and 2002 and the consolidated statements of cash
flows for the six months ended March 31, 2003 and 2002. 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.
(Continued)
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.
The computations of basic earnings per common share and diluted earnings per
common share for the periods ended March 31, 2003 and 2002 are presented below.
Three Months Ended Six Months Ended
March 31, March 31,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands except per share information)
Basic Earnings Per Common Share
Numerator
Net income $ 470 $ 371 $ 1,231 $ 1,270
=========== =========== ========== ============
Denominator
Weighted average common shares outstanding for
basic earnings per common share 1,280 1,339 1,298 1,339
=========== =========== ========== ============
Basic Earnings Per Common Share $ 0.37 $ 0.28 $ 0.95 $ 0.95
=========== =========== ========== ============
Diluted Earnings Per Common Share
Numerator
Net income $ 470 $ 371 $ 1,231 $ 1,270
=========== =========== ========== ============
Denominator
Weighted average common shares outstanding
for basic earnings per common share 1,280 1,339 1,298 1,339
Add: Dilutive effects of assumed exercises
of stock options 38 37 37 35
----------- ----------- ---------- ------------
Weighed average common and
dilutive potential common shares 1,318 1,376 1,335 1,374
outstanding
=========== =========== ========== ============
Diluted Earnings Per Common Share $ 0.36 $ 0.26 $ 0.92 $ 0.92
=========== =========== ========== ============
Stock options for 42,500 and 51,750 common shares for the three and six months
ended, respectively, March 31, 2003 and 75,750 common shares for the three and
six months ended March 31, 2002 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:
...........................March 31, 2003............................
--------------
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities
U.S. Government and federal agencies $ 9,406 $ 279 $ - $ 9,685
Municipal bonds 348 20 - 368
Mortgage-backed 24,350 146 (62) 24,434
Corporate notes 9,765 185 (590) 9,360
------------ -------------- ------------- --------------
43,869 630 (652) 43,847
Marketable equity securities 4,237 - (425) 3,812
------------ -------------- ------------- --------------
$ 48,106 $ 630 $ (1,077) $ 47,659
============ ============== ============= ==============
..........................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 March 31, 2003 and September 30, 2002 are summarized as
follows:
March 31, September 30,
2003 2002
----------------- ----------------
First mortgage loans (principally conventional) (in thousands)
Principal balances
Secured by one to four family residences $ 129,711 $ 146,942
Construction loans 16,631 15,863
Others 5,827 6,027
----------------- ----------------
152,169 168,832
Less undisbursed portion of construction and other mortgage loans (229) (103)
----------------- ----------------
Total first mortgage loans 151,940 168,729
Commercial loans:
Principal balances
Commercial $ 51,088 $ 48,438
Commercial real estate 79,437 72,703
----------------- ----------------
----------------- ----------------
Total commercial loans 130,525 121,141
Consumer loans:
Home equity and second mortgage $ 20,339 $ 21,150
Other 5,701 6,165
----------------- ----------------
Total consumer loans 26,040 27,315
Net deferred loan origination fees (734) (794)
----------------- ----------------
Total loans receivable $ 307,771 $ 316,391
================= ================
Activity in the allowance for loan losses is summarized as follows for the six
months ended March 31, 2003 and for the year ended September 30, 2002.
March 31, September 30,
2003 2002
---------------- -----------------
(in thousands)
Balance at beginning of period $ 5,143 $ 4,632
Provision for loan losses 900 3,370
Charge-offs (440) (2,873)
Recoveries - 14
---------------- -----------------
Balance at end of period $ 5,603 $ 5,143
================ =================
NOTE 4 - LOANS RECEIVABLE, NET (continued)
Quarter Ended Year Ended
March 31, September 30,
Impaired loans were as follows: 2003 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 4,503 6,567
------------------ ------------------
Total $ 4,503 $ 6,567
================== ==================
Amount of the allowance for loan losses allocated $ 1,873 $ 1,773
Average of impaired loans 5,207 8,070
Interest income recognized during impairment 28 227
Cash-basis interest income recognized during impairment 23 226
Nonperforming loans were as follows:
March 31, September 30,
2003 2002
------------------ ------------------
(in thousands)
Loans past due over 90 days still on accrual status $ - $ -
Nonaccrual loans 3,456 5,464
------------------ ------------------
Total Nonperforming loans $ 3,456 $ 5,464
================== ==================
NOTE 5 - STOCK BASED COMPENSATION
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 March 31,
2003, 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 six months ended March 31, 2003 and 2002.
Compensation expense under stock options is reported using the intrinsic value
method. No stock-based compensation cost is reflected in net income, as all
options granted had an exercise price equal to or greater than the market price
of the underlying common stock at date of grant. The following table illustrates
the effect on net income and earnings per share if expense was measured using
the fair value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation.
Three Months Ending Six Months Ended
March 31, March 31,
2003 2002 2003 2002
---- ---- ---- ----
Net income as reported $ 470 $ 371 $ 1,231 $ 1,270
Less: Stock-based compensation
expense determined under fair value
based method 67 70 106 99
------------ ------------ ------------- ---------------
Pro forma net income $ 403 $ 301 $ 1,125 $ 1,171
Basic earnings per share as reported $ .37 $ .28 $ .95 $ .95
Pro forma basic earnings per share .32 .23 .87 .87
Diluted earnings per share as reported .36 .26 .92 .92
Pro forma diluted earnings per share .31 .22 .84 .85
The weighted average fair value of stock options granted during the six months
ended March 31, 2003 and 2002 were $5.82 and $4.45. The fair value of options
granted during the six months ended March 31, 2003 and 2002 were estimated using
an option pricing model with the following weighted average information as of
the grant dates: March 31,
2003 2002
---- ----
Risk free rate of interest 3.72% 4.83%
Expected option life 8 years 8 years
Expected dividend yield 1.82% 2.17%
Expected volatility 23.23% 14.41%
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.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
The principal business of MFB Financial has historically consisted of attracting
deposits from the general public and the small 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 (losses) are primarily dependent upon the Bank's net
interest income, the difference between interest income and interest expense.
Interest income is a function of the balances of loans and investments
outstanding during a given period and the yield earned on such loans and
investments. Interest expense is a function of the amount of deposits and
borrowings outstanding during the same period and interest rates paid on such
deposits and borrowings. The Company's earnings (losses) are also affected by
the Bank's provisions for loan losses, service charges, fee income, gains from
sales of loans, retained mortgage loan servicing fees, income from subsidiaries
activities, operating expenses and income taxes.
RESULTS OF OPERATION
COMPARISON OF THREE AND SIX MONTHS ENDED MARCH 31, 2003 AND 2002
The Company's consolidated net income for the three months ended March 31, 2003
was $470,000 or $0.36 diluted earnings per common share, compared to net income
of $371,000 or $0.26 diluted earnings per share, for the three months ended
March 31, 2002. The Company's consolidated net income for the six months ended
March 31, 2003 was $1.23 million or $.92 diluted earnings per share, compared to
net income of $1.27 million, or $.92 diluted earnings per share, for the same
period last year. MFB Corp's increase in net income for the second fiscal
quarter from the prior comparable period was primarily attributable to an
increase in noninterest income, offset by a reduction in net interest income and
increase in noninterest expense. The decrease in net income for the six months
ended March 31, 2003 over the same period last year was due to the decrease in
net interest income and increase in noninterest expense, offset by the increase
in noninterest income.
Net interest income before provision for loan losses for the three month period
ended March 31, 2003 totaled $2.46 million compared to $2.88 million for the
same period one year ago. Total interest income for the second quarter decreased
$751,000 and total interest expense decreased $329,000 from the second quarter
last year as a result of the overall decline in interest rates. For the six
months ended March 31, 2003 net interest income declined from $5.90 million last
year to $5.24 million this year.
The provision for loan losses for the quarter ended March 31, 2003 was $450,000
compared to $452,000 for the same quarter last year. The provision for loan
losses for the six months ended March 31, 2003 was $900,000 compared to $685,000
for the same period last year. This 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 porfolio, current and past delinquency
trends, adequacy of collateral on loans, historical and estimated net
charge-offs and the current level of impaired loans and nonperforming loans
compared to peer banks. The Company's commercial loan portfolio has continued to
grow as a percentage of total loans.
Noninterest income increased from $696,000 for the three months ended March 31,
2002 to $1.43 million for the most recent three month period due to an increase
in net gains on loan sales, trust fees, deposit fees and other income. For the
six months ended March 31, 2003 noninterest income increased 70.1% from $1.62
million to $2.76 million. Net gains on loan sales totaling $934,000 for the
second quarter ended March 31, 2003 and $1.91 million for the sixth month period
this year were up significantly over the same periods 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 10.1%
from $2.62 million for the second quarter ended March 31, 2002 to $2.88 million
this current quarter. For the six months ended March 31, 2003 noninterest
expense increased 10.9% from $4.92 million last year to $5.46 million this year.
These increases were 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.
Primarily as a result of increased non-taxable income and increased low income
housing tax credits, income tax expense decreased from the three and six months
ended March 31, 2002 to the three and six months ended March 31, 2003.
BALANCE SHEET COMPOSITION
COMPARISON OF MARCH 31, 2003 TO SEPTEMBER 30, 2002
The Company's total assets increased $14.0 million from $421.2 million as of
September 30, 2002 to $435.2 million as of March 31, 2003.
Cash and cash equivalents increased from $27.6 million at September 30, 2002 to
$55.4 million at
March 31, 2003. Net cash from operating activities amounted to $16.4 million and
net cash from financing activities totaled $13.0 million during the six months
ended March 31, 2003.
As of March 31, 2003, the total securities available for sale portfolio amounted
to $47.7 million, a decrease of $5.9 million from $53.6 million at September 30,
2002. The securities portfolio activity during that period included security
purchases of $11.8 million, security maturities and sales of $3.2 million, and
principal payments on mortgage-backed and related securities of $13.9 million.
As of March 31, 2003, loans receivable were $307.8 million, a decrease of $8.6
million from $316.4 million at September 30, 2002. Commercial loans outstanding
increased by $9.4 million from $121.1 million at September 30, 2002 to $130.5
million at March 31, 2003. Due to increased volume of mortgage loans sold into
the secondary market, mortgage loans declined from $168.7 million at September
30, 2002 to $151.9 million at March 31, 2003. A sale of $9.7 million of specific
adjustable rate loans to two secondary market investors settled in January 2003.
Consumer loans, including home equity and second mortgages, decreased $1.3
during the six month period. Loans held for sale at March 31, 2003 decreased to
$3.2 million from $6.4 million at September 30, 2002. 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 second quarter ended March 31, 2003, the Company completed secondary
market mortgage loans sales totaling $29.6 million and the net gains realized on
these loan sales were $934,000 including $283,000 related to recording mortgage
loans servicing rights. During the second quarter ended March 31, 2002 mortgage
loan sales of $16.7 million yielded net gains on loan sales of $341,000,
including $208,000 related to recording mortgage loan servicing rights. The
loans sold this year were primarily 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 1.82% of loans at March 31, 2003. The
allowance is maintained through the provision for loan losses, which is charged
to earnings. During the six month period ended March 31, 2003, $900,000 was
added to the loan loss reserve through the loan loss provision and a total of
$440,000 of net charge offs were recorded during the same period.
The Company's non-performing assets have decreased from $5.95 million at
September 30, 2002 to $3.72 million at March 31, 2003. 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 $4.5 million at March 31, 2003. In
management's opinion, the allowance for loan losses is adequate to cover
probable incurred losses at March 31, 2003.
Total liabilities increased from $387.2 million at September 30, 2002 to $402.1
million at March 31, 2003. Total deposits increased $15.0 million from $264.4
million at September 30, 2002 to $279.4 million at March 31, 2003.The increase
consisted of a $12.2 million increase in Savings, Now and MMDA deposits, $1.4
million increase in noninterest bearing demand deposits and $1.4 million
increase in time deposits.
FHLB advances decreased from $119.2 million at September 30, 2002 to $118.9
million at March 31, 2003. 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 $33.1 million as of March 31, 2003. Net income of $1.23 million was offset by
a reduction in the market value of available for sale securities of $244,000 net
of tax, cash dividend payments of $281,000 and the repurchase of 75,339 shares
of outstanding common stock during this period at a cost of $1.68 million. MFB
Corp's equity to assets ratio was 7.61% at March 31, 2003 compared to 8.06% at
September 30, 2002. The book value of MFB Corp. stock increased from $25.53 at
September 30, 2002 to $26.16 at March 31, 2003.
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 $103.5 million as of March 31, 2003 compared to $81.7 million
as of September 30, 2002. This $21.8 increase was primarily due to an increase
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 March 31, 2003 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 March 31, 2003,
total FHLB borrowings amounted to $118.9 million and were originally used
primarily to fund loan portfolio growth. The Bank had commitments to fund loan
originations with borrowers totaling $117.3 million at March 31, 2003, including
$68.4 million in available consumer and commercial lines and letters of credit.
Certificates of deposits scheduled to mature in one year or less totaled $54.4
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 March 31,
2003 and September 30, 2002 are presented below:
Actual Requirement for Capital Requirement to be
Well Capitalized Under
Prompt Corrective
Adequacy Purposes Actual Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of March 31, 2003
Total capital
(to risk weighted $ 35,667 12.33% $ 23,149 8.00% $ 28,937 10.00%
assets)
Tier 1 (core) capital
(to risk weighted 32,289 11.16 11,575 4.00 17,362 6.00
assets)
Tier 1 (core) capital
(to adjusted total 32,289 7.44 17,399 4.00 21,748 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 March 31, 2003, 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. Facts 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". If
Management were to underestimate the allowance for loan losses, earnings could
be reduced in the future as a result of greater than expected net loan losses.
Overestimations of the required allowance could result in future increases in
income, as loan loss recoveries increase or provisions for loan losses decrease.
Fluctuations in the fair value of securities will affect the level of capital in
the case of securities held for sale or earnings directly in the case of other
securities. Fluctuations in the valuation of mortgage servicing rights as a
result of market conditions or the level of interest rates will affect the
carrying value of that asset on the balance sheet as well as the income recorded
from loan servicing in the income statement.
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 5.30% as of December 31, 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 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 December 31, 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 December 31, 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 21,443 (686) (3%) 5.35% 5
+200 23,189 1,061 5% 5.69% 39
+100 23,648 1,520 7% 5.72% 42
0 22,128 - - 5.30% -
-100 19,228 (2,900) (13%) 4.56% (74)
(1) Expressed in basis points
As illustrated in the December 31, 2002 table, the Company's NPV will decline if
rates fall, and the NPV would generally increase if rates were to rise.
Specifically, the table indicates that at December 30, 2002, the Company's NPV
was $22.1 million or 5.30% of the market value of portfolio assets. Based upon
the assumptions utilized, an immediate 100 basis point increase in market
interest rates would result in a $1.5 million or 7% increase in the Company's
NPV and would result in a 42 basis point or 8% increase in the Company's NPV
ratio to 5.72%. Conversely, an immediate 100 basis point decrease in market
interest rates would result in a $2.9 million or 13% decrease in the Company's
NPV, and a 74 basis point or 14% decrease in the Company's NPV ratio to 4.56%.
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 March
31, 2003 totaled $3.2 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 March 31, 2003, $160 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.
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 on a timely basis.
(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
The results of the January 21, 2003 Annual Meeting of Shareholders
were reported in MFB Corp's Form 10Q for the quarter ended December
31, 2002.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
99.1 Certification pursuant to 18 U.S.C.ss.1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) MFB Corp. filed one Form 8-K report during the quarter ended
March 31, 2003. Date of report: January 23, 2003
Items reported: News release dated January 23,
2003 regarding the announcement of first
quarter earnings and announcement of a
cash dividend payable on
February 18, 2003 to
holders of record on February 4, 2003.
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/ 05/08/03 By /s/ Charles J Viater
--------- --------------------------------------------
Charles J. Viater
President and Chief Executive Officer
Date /s/ 05/08/03 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/ 05/08/03 /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/ 05/08/03________ /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 __8th__ day of _May___________, 2003.
/s/Thomas J Flournoy /s/ Charles J Viater
Thomas J. Flournoy Charles J. Viater
Chief Financial Officer Chief Executive Officer
(Title) (Title)
A signed original of this written statement required by Section 906 has been
proved to MFB Corp. and will be retained by MFB Corp. and forwarded to the
Securities and Exchange Commission or its staff upon request.