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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, 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 January 31, 2004 was 1,303,810.
MFB CORP. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
December 31, 2003 (Unaudited) and September 30, 2003 3
Consolidated Statements of Income (Unaudited)
Three months ended December 31, 2003 and 2002 4
Condensed Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
Three months ended December 31, 2003 and 2002 5
Consolidated Statements of Cash Flows (Unaudited)
Three months ended December 31, 2003 and 2002 6
Notes to (Unaudited) Consolidated Financial Statements December 31, 2003 7
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
General 13
Results of Operations 13
Balance Sheet Composition 15
Liquidity and Capital Resources 16
Critical Accounting Policies 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 20
Part II. Other Information
Items 1-6. 21
Signatures 22
Certifications 23
MFB CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and September 30, 2003
(In thousands, except share information) (Unaudited)
December 31, September 30,
2003 2003
ASSETS
Cash and due from financial institutions $ 22,269 $ 13,881
Interest - bearing deposits in other financial institutions - short term 5,645 26,476
----------------- -----------------
Total cash and cash equivalents 27,914 40,357
Securities available for sale 38,806 40,029
Interest-bearing time deposits in other financial institutions 2,001 1,001
Federal Home Loan Bank (FHLB) stock, at cost 6,552 6,471
Investment in limited partnership 2,480 2,548
Loans held for sale 2,553 6,625
Loans receivable 327,208 318,154
Less: allowance for loan losses (5,373) (5,198)
----------------- -----------------
Loan receivable, net 321,835 312,956
Accrued interest receivable 1,519 1,522
Premises and equipment, net 13,250 6,090
Mortgage servicing rights 1,613 1,373
Cash surrender value of life insurance 5,287 5,217
Other assets 5,749 4,434
----------------- -----------------
Total assets $ 429,559 $ 428,623
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand deposits $ 27,135 $ 26,481
Savings, NOW and MMDA deposits 111,803 107,341
Time deposits 155,425 158,284
----------------- -----------------
Total deposits 294,363 292,106
FHLB advances 97,990 98,790
Loans from correspondent banks 300 300
Advances from borrowers for taxes and insurance 165 1,153
Accrued expenses and other liabilities 1,977 2,023
----------------- -----------------
Total liabilities 394,795 394,372
Shareholders' equity
Common stock, no par value, 5,000,000 shares authorized;
shares issued: 1,689,417-12/31/03 and 9/30/03;
shares outstanding: 1,303,810-12/31/03 and 1,287,710-9/30/03 12,549 12,560
Retained earnings - substantially restricted 31,503 31,022
Accumulated other comprehensive income (loss),
net of tax of $(36) -12/31/03 and $(36) - 9/30/03 (768) (466)
Treasury stock, 385,607 common shares - 12/31/03;
401,707 common shares - 9/30/03, at cost (8,520) (8,865)
----------------- -----------------
Total shareholders' equity 34,764 34,251
----------------- -----------------
Total Liabilities and Shareholders' equity $ 429,559 $ 428,623
================= =================
See accompanying notes to (unaudited) consolidated financial statements
MFB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended December 31, 2003 and 2002
(in thousands except per share information)
Three Months Ended
December 31
2003 2002
Interest income
Loans receivable, including fees
Mortgage loans $ 2,237 $ 2,583
Consumer and other loans 456 501
Commercial loans 2,372 2,286
Securities - taxable 410 589
Other interest-bearing assets 52 80
------------ -------------
------------ -------------
Total interest income 5,527 6,039
Interest expense
Deposits 1,347 1,556
FHLB advances 1,372 1,703
------------ -------------
Total interest expense 2,719 3,259
------------ -------------
------------ -------------
Net interest income 2,808 2,780
Provision for loan losses 300 450
------------ -------------
------------ -------------
Net interest income after provision for loan losses 2,508 2,330
Noninterest income
Service charges on deposit accounts 689 296
Trust fee income 126 103
Insurance commissions 50 41
Net realized gains from sales of loans 310 974
Loan servicing fees, net of amortization (19) (193)
Mortgage servicing impairment recovery 168 -
Gain on securities - 40
Other income 150 61
------------ -------------
------------ -------------
Total noninterest income 1,474 1,322
Noninterest expense
Salaries and employee benefits 1,732 1,608
Occupancy and equipment 532 340
Data processing expense 121 170
Other expense 870 465
------------ -------------
------------ -------------
Total noninterest expense 3,255 2,583
Income before income taxes 727 1,069
Income tax expense 108 308
------------ -------------
------------ -------------
Net income $ 619 $ 761
============ =============
============ =============
Basic earnings per common share $ 0.48 $ 0.58
Diluted earnings per common share $ 0.45 $ 0.56
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, 2003 and 2002
(In thousands)
Three Months Ended
December 31,
2003 2002
---- ----
Balance at beginning of period $ 34,251 $ 33,952
Purchase of treasury stock - (1,071)
Stock option exercise 338 29
Cash dividends declared (142) (140)
Comprehensive income:
Net income 619 761
Net change in net unrealized gains and losses
on securities available for sale, net of tax (302) (28)
effects
----------- -----------
----------- -----------
Total comprehensive income 321 733
----------- -----------
----------- -----------
Balance at end of period $ 34,764 $ 33,503
=========== ===========
See accompanying notes to (unaudited) consolidated financial statement
MFB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended December 31, 2003 and 2002 Three Months Ended
(In Thousands) December 31,
2003 2002
---- ----
Cash flows from operating activities
Net income $ 619 $ 761
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization, net of accretion 284 332
Provision for loan losses 300 450
Net gains from sales or valuation of securities available for sale - (40)
Net realized gains from sales of loans (310) (974)
Amortization of mortgage servicing rights 113 284
Recovery of mortgage servicing rights (168) -
Origination of loans held for sale (10,644) (34,681)
Proceeds from sales of loans held for sale 14,843 34,663
Equity in loss of investment in limited partnership 68 35
Appreciation in cash surrender value of life insurance (70) -
Net change in:
Accrued interest receivable 3 87
Other assets (1,217) 1,258
Accrued expenses and other liabilities (46) (705)
----------- -------------
Net cash from operating activities 3,775 1,470
Cash flows from investing activities
Net change in interest-bearing time deposits in other financial institutions (1,000) -
Net change in loans receivable (9,179) 7,898
Proceeds from:
Principal payments of mortgage-backed and related securities 2,320 6,914
Sales of securities available for sale - 160
Maturities and calls of securities available for sale 500 1,000
Purchase of:
Securities available for sale (1,997) (7,660)
Life insurance - (5,000)
FHLB stock (81) -
Premises and equipment, net (7,347) (121)
----------- -------------
Net cash from investing activities (16,784) 3,191
Cash flows from financing activities
Purchase of MFB Corp common stock - (1,071)
Net change in deposits 2,257 (5,167)
Repayment of FHLB borrowings (800) (300)
Proceeds from exercise of stock options 239 29
Net change in advances from borrowers for taxes and insurance (988) (744)
Cash dividends paid (142) (140)
----------- -------------
----------- -------------
Net cash from financing activities 566 (7,393)
----------- -------------
----------- -------------
Net change in cash and cash equivalents (12,443) (2,732)
Cash and cash equivalents at beginning of period 40,357 27,582
----------- -------------
Cash and cash equivalents at end of period $ 27,914 $ 24,850
=========== =============
Supplemental disclosures of cash flow information Cash paid during the period
for:
Interest $2,650 $ 2,877
Income taxes 90 -
Supplemental schedule of noncash investing activities:
Transfer from:
Loans receivable to other real estate owned $1,200 -
MFB CORP. AND SUBSIDIARIES
NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
December 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 eight branch locations in St. Joseph and
Elkhart Counties of Indiana. A new branch facility was opened in South Bend,
Indiana on January 20, 2004. 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 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, 2003 and September 30, 2003, 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, 2003 and 2002. All significant intercompany
transactions and balances are eliminated in consolidation.
Reclassifications: Items in the prior consolidated financial statements are
reclassified to conform with the current presentation.
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 December 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 during the three
months ended December 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
December 31,
2003 2002
Net income as reported $ 619 $ 761
Less: Stock-based compensation
expense determined under fair value
based method 49 37
----------- ----------
Pro forma net income $ 570 $ 724
Basic earnings per share as reported $ .48 $ .58
Pro forma basic earnings per share .44 .55
Diluted earnings per share as reported .45 .56
Pro forma diluted earnings per share .42 .53
The weighted average fair value of stock options granted during the three months
ended December 31, 2003 and 2002 were $9.59 and $5.82 The fair value of options
granted during the three months ended December 31, 2003 and 2002 were estimated
using an option pricing model with the following weighted average information as
of the grant dates:
December 31,
2003 2002
---- ----
Risk free rate of interest 4.21% 3.72%
Expected option life 8 years 8 years
Expected dividend yield 1.37% 1.82%
Expected volatility 23.91% 23.23%
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.
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 December 31, 2003 and 2002 are presented
below.
Three Months Ended
December 31,
2003 2002
---- ----
(in thousands except per share information)
Basic Earnings Per Common Share
Numerator
Net income $ 619 $ 761
=========== ===========
Denominator
Weighted average common shares outstanding for basic earnings per common share
1,295 1,316
=========== ===========
Basic Earnings Per Common Share $ 0.48 $0.58
=========== ===========
Diluted Earnings Per Common Share
Numerator
Net income $ 619 $ 761
=========== ===========
Denominator
Weighted average common shares outstanding for basic earnings per common share
1,295 1,316
Add: Dilutive effects of assumed exercises of stock options
69 38
----------- -----------
Weighed average common and dilutive potential common shares outstanding
1,364 1,354
=========== ===========
Diluted Earnings Per Common Share $ 0.45 $0.56
=========== ===========
Stock options for 51,750 common shares for the three months ended December 31,
2002 were not considered in computing diluted earnings per share because they
were antidilutive. There were no antidilutive stock options for the three months
ended December 31, 2003.
NOTE 3 - SECURITIES
The amortized cost and fair value of securities available for sale are as
follows:
..........................December 31, 2003..........................
-----------------
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities
U.S. Government and federal agencies $ 11,349 $ 132 (1) $ 11,480
Municipal bonds 345 19 - 364
Mortgage-backed 14,405 52 (134) 14,323
Corporate notes 9,273 208 (382) 9,099
------------ -------------- ------------- --------------
35,372 411 (517) 35,266
Marketable equity securities 4,237 - (697) 3,540
------------ -------------- ------------- --------------
$ 39,609 $ 411 $ (1,214) $ 38,806
============ ============== ============= ==============
..........................September 30, 2003.........................
------------------
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities
U.S. Government and federal agencies $ 9,369 $ 194 $ - 9,563
Municipal bonds 346 23 - 369
Mortgage-backed 16,808 68 (106) 16,770
Corporate notes 9,771 196 (481) 9,486
------------ -------------- ------------- --------------
36,294 481 (587) 36,188
Marketable equity securities 4,237 - (396) 3,841
------------ -------------- ------------- --------------
$ 40,531 $ 481 $ (983) $ 40,029
============ ============== ============= ==============
NOTE 4 - LOANS RECEIVABLE, NET
Loans receivable at December 31, 2003 and September 30, 2003 are summarized as
follows:
December 31, September 30,
2003 2003
----------------- ----------------
First mortgage loans (principally conventional) (in thousands)
Principal balances
Secured by one to four family residences $ 132,691 $ 129,472
Construction loans 17,832 22,066
Others 6,619 6,728
----------------- ----------------
157,142 158,266
Less undisbursed portion of construction and other mortgage loans (99) 62
----------------- ----------------
Total first mortgage loans 157,043 158,328
Commercial loans:
Principal balances
Commercial $ 55,929 $ 49,709
Commercial real estate 84,430 80,914
----------------- ----------------
----------------- ----------------
Total commercial loans 140,359 130,623
Consumer loans:
Home equity and second mortgage $ 25,471 $ 24,535
Other 5,158 5,489
----------------- ----------------
Total consumer loans 30,629 30,024
Net deferred loan origination fees (823) (821)
----------------- ----------------
Total loans receivable $ 327,208 $ 318,154
================= ================
Activity in the allowance for loan losses is summarized as follows for the three
months ended December 31, 2003 and for the year ended September 30, 2003.
December 31, September 30,
2003 2003
---------------- -----------------
(in thousands)
Balance at beginning of period $ 5,198 $ 5,143
Provision for loan losses 300 1,110
Charge-offs (132) (1,388)
Recoveries 7 333
---------------- -----------------
Balance at end of period $ 5,373 $ 5,198
================ =================
NOTE 4 - LOANS RECEIVABLE, NET (continued)
Quarter Ended Year Ended
December 31, September 30,
Impaired loans were as follows: 2003 2003
------------------ ------------------
(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 2,624 4,027
------------------ ------------------
Total $ 2,624 $ 4,027
================== ==================
Amount of the allowance for loan losses allocated $ 1,020 $ 1,370
Average of impaired loans 3,842 5,233
Interest income recognized during impairment 15 82
Cash-basis interest income recognized during impairment 12 66
Non-performing assets were as follows:
December 31, September 30,
2003 2003
------------------ ------------------
(in thousands)
Loans past due over 90 days still on accrual status $ - $ -
Non-accrual loans 1,893 3,844
------------------ ------------------
------------------ ------------------
Total non-performing loans 1,893 3,844
Other real estate 1,730 705
------------------ ------------------
------------------ ------------------
Total non-performing assets $ 3,623 $ 4,549
================== ==================
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, sales of 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. 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 are also affected by the Bank's provisions for loan
losses, service charges, fee income, gains from sales of loans, valuation and
fees related to mortgage loan servicing operations, income from subsidiaries
activities, operating expenses and income taxes.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
The Company's consolidated net income for the three months ended December 31,
2003 was $619,000 or $0.45 diluted earnings per common share, compared to net
income of $761,000 million or $0.56 diluted earnings per share, for the three
months ended December 31, 2002.
The decrease in net income over last year for the three months period ending
December 31, 2003 was primarily due to increased non-interest expense, offset by
increased non-interest income and a reduction in the loan loss provision.
MFB Corp.'s net interest income before provision for loan losses for the three
month period ending December 31, 2003 totaled $2.8 million comparable to the
$2.8 million for the same period last year. Interest income was $5.5 million for
the three months ended December 31, 2003 a decrease from the interest income of
$6.0 million for the three months ended December 31, 2002. This was offset by a
decrease in interest expense from $3.2 million for the three months ended
December 31, 2002 to $2.7 million for the three months ended December 31, 2003.
The decrease in interest income and interest expense was due to the overall
decline in the rate environment.
The provision for loan losses for the quarter ending December 31, 2003 was
$300,000 compared to $450,000 for the same quarter last year. The provision is
based on several factors including the current economic environment, current and
past delinquency trends, change in the character and mix of the loan portfolio,
adequacy of collateral on loans and historical and estimated loan charge offs.
The lower provision this year for the three months ending December 31, 2003,
compared to last year, was also attributable to a decline in nonperforming
assets from 1.62% of loans at December 31, 2002 to 1.11% of loans at December
31, 2003.
Non-interest income for the first quarter this year was impacted by a $168,000
($100,000 net of tax) non-cash recovery of an impairment charge recorded during
the third quarter of the prior year. This recovery is related to the increase in
the market value of servicing rights associated with MFB Financial's $170
million mortgage loan servicing portfolio. Other non-interest income (excluding
investment securities gains and losses and the mortgage servicing impairment
recovery) stayed relatively the same between the first quarters of 2003 and
2002. Significant growth occurred in deposit fees, trust fees and loan servicing
fees (net of amortization), offset by a significant reduction in net gains from
loan sales. Mortgage loan sales into the secondary market decreased from $34.2
million during the first quarter of 2002 to $14.7 million during the first
quarter of 2003 due to the slow down in mortgage refinancings from last year.
Non-interest expense increased from $2.6 million for the first quarter last year
to $3.3 million for the first quarter this year. Increases for the quarter were
due to increases in salaries and employee benefits, occupancy and equipment, and
other expense partially offset by a reduction in data processing expense. The
occupancy and equipment increase was primarily due to the operating expenses of
the new corporate headquarters and additional furniture and equipment expenses.
The increase in other expense is primarily due to the increase in consulting,
advertising, and other real estate losses and expenses.
Income tax expense decreased from last year for the three month period ended
December 31, 2003 due to decreased net income before taxes and additional
non-taxable income
BALANCE SHEET COMPOSITION
COMPARISON OF DECEMBER 31, 2003 TO SEPTEMBER 30, 2003
The Company's total assets increased from $428.6 million as of September 30,
2003 to $429.6 million as of December 31, 2003.
Cash and cash equivalents decreased from $40.4 million at September 30, 2003 to
$27.9 million at
December 31, 2003. Net cash from operating activities amounted to $3.8 million,
net cash from financing activities totaled $566,000 and the net cash used in
investing activities amounted to $16.8 during the three months ended December
31, 2003.
As of December 31, 2003, the total securities available for sale portfolio
amounted to $38.8 million, a decrease of $1.2 million from $40.0 million at
September 30, 2003. The securities portfolio activity during that period
included security purchases of $2.0 million, security maturities and sales of
$500,000, principal payments on mortgage-backed and related securities of $2.3
million, and a decline in mark to market valuation of $400,000.
Premises and equipment increased from $ 6.1 million at September 30, 2003 to
$13.3 million at December 31, 2003 primarily due to MFB Financial's $7.3 million
acquisition of the former National Steel Corporation's headquarters building in
October, 2003. A portion of the facility is currently being leased and MFB
intends to relocate its administrative staff and operation personnel to another
portion of the building in the Spring 2004.
As of December 31, 2003, loans receivable were $327.2 million, an increase of
$9.1 million from $318.1 million at September 30, 2003. Commercial loans
outstanding increased by $9.8 million from $130.6 million at September 30, 2003
to $140.4 million at December 31, 2003. Mortgage loans declined from $158.3
million at September 30, 2003 to $157.0 million at December 31, 2003. Consumer
loans, including home equity and second mortgages, increased $605,000 during the
three month period. Loans held for sale at December 31, 2003 decreased to $2.6
million from $6.6 million at September 30, 2003. Diversification of the mix of
loans on the balance sheet continues 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, 2003, the Company completed
secondary market mortgage loan sales totaling $14.7 million and the net gains
realized on these loan sales were $310,000 including $184,000 related to
recording mortgage loans servicing rights. During the quarter ended September
30, 2003, the Company completed secondary market mortgage loan sales totaling
$26.9 million and the net gains realized on these loan sales were $750,000
including $336,000 related to recording mortgage loans servicing rights. This
reduction is due to the slow down in the refinance activities that have occurred
in the last few years. 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 $5.2 million, or 1.63% of loans, at
September 30, 2003 to $5.4 million or 1.64% of loans at December 31, 2003. The
increasing percentage of commercial loans in the portfolio has contributed to
the increase in the Company's allowance for loan losses. The allowance is
maintained through the provision for loan losses, which is charged to earnings.
During the three month period ended December 31, 2003, $300,000 was added to the
loan loss reserve through the loan loss provision and a total of $125,000 of net
charge offs were recorded during the same period.
The Company's non-performing assets have decreased from $4.5 million at
September 30, 2003 to $3.6 million at December 31, 2003. The decrease was
primarily attributable to restructure of one non-accrual loan and the sale of
other real estate owned. Impaired loans have decreased from $4.0 million at
September 30, 2003 to $2.6 million at December 31, 2003 due to acquiring title
of real estate collateral on one commercial loan and transferring that
collateral to other real estate owned. In management's opinion, the allowance
for loan losses is adequate to cover probable incurred losses at December 31,
2003.
Total liabilities slightly increased from $394.4 million at September 30, 2003
to $394.8 million at December 31, 2003. Total deposits increased $2.3 million
from $292.1 million at September 30, 2003 to $294.4 million at December 31,
2003. The increase consisted of a $4.5 million increase in Savings, Now and MMDA
deposits, $654,000 increase in non-interest bearing demand deposits and offset
by a $2.9 million decrease in time deposits.
FHLB advances decreased from $98.8 million at September 30, 2003 to $98.0
million at December 31, 2003. The $98.0 million of Federal Home Loan Bank
advances have a weighted average interest rate of 5.48% and mature over the next
nine years. A total of $200,000 of the remaining advances matures in the next
twelve months.
Total shareholders' equity increased from $34.3 million as of September 30, 2003
to $34.8 million as of December 31, 2003 primarily attributed to the net income
of $619,000. MFB Corp's equity to assets ratio was 8.09% at December 31, 2003
compared to 7.99% at September 30, 2003. The book value of MFB Corp. stock
increased from $26.60 at September 30, 2003 to $26.66 at December 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 $68.7 million as of December 31, 2003 compared to $81.4
million as of September 30, 2003. This decrease was partially due to the
purchase of a new corporate headquarters building for $7.3 million. The sale of
fixed rate loan production has also significantly slowed down, as previously
mentioned, which has contributed to the decline in liquid assets. Management
believes the liquidity level as of December 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 December 31, 2003,
total FHLB borrowings amounted to $98.0 million and were originally used
primarily to fund loan portfolio growth. The Bank had commitments to fund loan
originations with borrowers totaling $118.0 million at December 31, 2003,
including $83.2 million in available consumer and commercial lines and letters
of credit. Certificates of deposit scheduled to mature in one year or less
totaled $59.5 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 not "well 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, 2003 and September 30, 2003 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 December 31, 2003
Total capital
(to risk weighted $ 37,094 12.00% $ 24,736 8.00% $ 30,920 10.00%
assets)
Tier 1 (core) capital
(to risk weighted 33,491 10.83 12,368 4.00 18,552 6.00
assets)
Tier 1 (core) capital
(to adjusted total 33,491 7.81 17,159 4.00 21,449 5.00
assets)
As of September 30, 2003
Total capital
(to risk weighted $ 36,346 12.41% $ 23,435 8.00% $ 29,294 10.00%
assets)
Tier 1 (core) capital
(to risk weighted 33,268 11.36 11,718 4.00 17,576 6.00
assets)
Tier 1 (core) capital
(to adjusted total 33,268 7.77 17,116 4.00 21,395 5.00
assets)
As of December 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 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, changes in the value of the Company's mortgage
servicing rights, 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. MFB Corp. 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, 2003 (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 mortgage loans and selling fixed rate
mortgage 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 9.05% as of September 30, 2003
(the most recently available data), an increase from the 8.21% NPV at June 30,
2003. 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 September 30, 2003 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, 2003 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 37,705 (2,940) (7%) 8.74% (31)
+200 39,819 (826) (2%) 9.09% 4
+100 40,966 321 1% 9.23% 18
0 40,645 - - 9.05% -
-100 38,193 (2,452) (6%) 8.43% (62)
(1) Expressed in basis points
As illustrated in the September 30, 2003 table, the Company's interest rate risk
is more sensitive to a 100 basis point decline in rates than a 100 basis point
increase. This is due to the decrease in value of adjustable rate loans that
would occur with a rate reduction. The value of interest bearing deposits in
this scenario would change minimally since they are currently at record low
levels. Specifically, the table indicates that at September 30, 2003, the
Company's NPV was $40.6 million or 9.05% 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 $321,000 or 1% increase in
the Company's NPV and would result in an 18 basis point increase in the
Company's NPV ratio to 9.23%. Conversely, an immediate 100 basis point decrease
in market interest rates would result in a $2.5 million or 6% decrease in the
Company's NPV, and a 62 basis point decrease in the Company's NPV ratio to
8.43%. Additionally, as indicated in the table, the Company's interest rate risk
is sensitive to a significant rise in interest rates (i.e. 300 basis point rate
shock). This is due to a higher relative volume of assets with fixed rate
characteristics per the OTS model than liabilities with fixed rate
characteristics as of September 30, 2003.
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, 2003 totaled $2.6 million compared to $6.6 million at September 30,
2003. The Company retains the servicing on the majority of loans sold in the
secondary market and, at December 31, 2003, $170.0 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-15(e) and 15d-15(e) of regulations promulgated under the Securities
Exchange Act of 1934, as amended), as of the end of the most recent fiscal
quarter covered by this quarterly report (the "Evaluation Date"), 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 control over financial reporting identified in connection
with the Company's evaluation of controls that occurred during the Company's
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities, Use of Proceeds and Issuer purchases of Equity
securities.
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 20, 2004.
(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 which were
submitted to the shareholders:
For Against Abstain
1) Election of Directors
Christine A. Lauber 1,032,237 101,269 -
Reginald H. Wagle 1,041,166 92,340 -
2) Appointment of Crowe Chizek 1,127,500 5,606 400
and Company, LLC as auditors for 2004
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
31(1) Certification required by 17 C.F.R. ss. 240.13a-14(a). 31(2)
Certification required by 17 C.F.R. ss. 240.13a-14(a).
32 Certification pursuant to 18 U.S.C.ss.1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2003.
(b) MFB Corp. filed one Form 8-K report during the quarter ended
December 31, 2003. Date of report: October 23,2003
Items reported: News release dated October 23,
2003 regarding the announcement of fourth
quarter earnings and announcement of a
cash dividend payable on
November 18, 2003 to
holders of record on November 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/ 02/09/04 By /s/ Charles J. Viater
--------- --------------------------------------------
Charles J. Viater
President and Chief Executive Officer
Date /s/ 02/09/04 By /s/ Thomas J. Flournoy
-------- -------------------------------------------
Thomas J. Flournoy
Chief Financial Officer
Exhibit 31
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 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 report;
3. Based on my knowledge, the financial statements, and other
financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures or caused
such disclosure controls and procedures to be designed under
our supervision, 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 and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date:__/s/ 02/09/04______________ /s/ Charles J Viater
----------------------------------
Charles J. Viater
Chief Executive Officer
Exhibit 31
CERTIFICATION
I, Thomas J. Flournoy, certify that:
6. I have reviewed this quarterly report on Form 10-Q of MFB
Corp;
7. Based on my knowledge, this 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 report;
8. Based on my knowledge, the financial statements, and other
financial information included in this 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 report.
9. 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-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures or caused
such disclosure controls and procedures to be designed under
our supervision, 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 and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
10. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date:__/s/ 02/09/04___________ /s/ Thomas J. Flournoy
------------------------------------
Thomas J. Flournoy
Chief Financial Officer
Exhibit 32
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 2003, that, to his 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 9th day of February, 2004.
/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, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
required by Section 906, has been provided to MFB Corp. and will be retained by
MFB Corp. and furnished to the Securities and Exchange Commission or its staff
upon request.