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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 March 31, 2006
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)
4100 Edison Lakes Parkway Suite 300
P.O. Box 528
Mishawaka, Indiana 46546
(Address of principal executive offices,
including Zip Code)
(574) 277-4200
(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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (check one)
Large accelerated filer Accelerated filer Non-accelerated filer X
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- -----
The number of shares of the registrant's common stock, without par value,
outstanding as of April 30, 2006 was 1,344,060.
MFB CORP. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)
March 31, 2006 and September 30, 2005 3
Consolidated Statements of Income (Unaudited)
Three and Six Months Ended March 31, 2006 and 2005 4
Condensed Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
Three and Six Months Ended March 31, 2006 and 2005 5
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended March 31, 2006 and 2005 6
Notes to (Unaudited) Consolidated Financial Statements March 31, 2006 7
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
General 14
Results of Operations
15
Balance Sheet Composition 16
Liquidity and Capital Resources 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
23
Certifications 24
MFB CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, 2006 and September 30, 2005
(in thousands except share information)
March 31, September 30,
2006 2005
----------------- -----------------
----------------- -----------------
Assets
Cash and due from financial institutions $ 8,217 $ 7,613
Interest-bearing deposits in other financial institutions - short term 30,056 46,596
----------------- -----------------
Total cash and cash equivalents 38,273 54,209
Securities available for sale 64,669 63,575
Other investments 12,422 12,514
Loans held for sale 411 407
Mortgage loans 191,613 191,970
Commercial loans 142,556 157,804
Consumer loans 42,831 40,921
----------------- -----------------
----------------- -----------------
Loans receivable 377,000 390,695
Less: allowance for loan losses (8,188) (6,388)
----------------- -----------------
Loan receivable, net 368,812 384,307
Premises and equipment, net 20,132 20,336
Mortgage servicing rights 2,456 2,341
Cash surrender value of life insurance 6,071 5,964
Goodwill 1,970 2,423
Other intangible assets 1,916 2,134
Other assets 8,184 6,667
----------------- -----------------
Total Assets $ 525,316 554,877
================= =================
Liabilities and Shareholders' Equity
Liabilities
Deposits
Noninterest-bearing demand deposits $ 35,836 $ 36,876
Savings, NOW and MMDA deposits 136,245 153,864
Time deposits 189,358 183,624
----------------- -----------------
Total deposits 361,439 374,364
FHLB advances 109,628 125,854
Loans from correspondent banks 6,500 6,500
Trust preferred securities 5,000 5,000
Accrued expenses and other liabilities 4,446 4,486
----------------- -----------------
Total liabilities 487,013 516,204
Shareholders' equity
Common stock, no par value: 5,000,000 shares authorized;
shares issued: 1,689,417 - 03/31/06 and 09/30/05;
shares outstanding: 1,344,060 - 03/31/06 and 1,355,860 - 09/30/05 12,376 12,376
Additional paid-in capital 29 -
Retained earnings - substantially restricted 34,093 34,027
Accumulated other comprehensive income (loss),
net of tax of ($381) - 03/31/06 and ($175) - 09/30/05 (412) (310)
Treasury stock: 345,357 common shares - 03/31/06 and (7,783) (7,420)
333,557 common shares - 09/30/05, at cost
----------------- -----------------
Total shareholders' equity 38,303 38,673
----------------- -----------------
Total Liabilities and Shareholders' equity $ 525,316 $ 554,877
================= =================
See accompanying notes to (unaudited) consolidated financial statements
MFB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three and Six Months Ended March 31, 2006 and 2005
(in thousands except per share information)
Three Months Ended Six Months Ended
March 31, March 31,
2006 2005 2006 2005
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
Interest income
Loans receivable, including fees $ 6,027 $ 6,022 $ 12,069 $ 12,112
Securities - taxable 805 641 1,578 1,327
Other interest-bearing assets 282 37 632 92
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
Total interest income 7,114 6,700 14,279 13,531
Interest expense
Deposits 2,221 1,524 4,285 3,070
FHLB advances and other borrowings 1,479 1,689 3,123 3,411
-------------- --------------
-------------- ------------- -------------- --------------
Total interest expense 3,700 3,213 7,408 6,481
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
Net interest income 3,414 3,487 6,871 7,050
Provision for (recovery of) loan losses (154) (29) 1,901 271
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
Net interest income after provision for 3,568 (3,516) (4,970) (6,779)
(recovery of) loan losses
Noninterest income
Service charges on deposit accounts 779 757 1,628 1,586
Trust fee income 126 101 226 200
Insurance commissions 43 50 91 100
Net realized gains from sales of loans 86 179 171 401
Mortgage servicing asset recovery (impairment) (1) 163 165 25
Net gain (loss) on securities available for sale - - - (948)
Other income 428 201 796 461
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
Total noninterest income 1,461 1,451 3,077 1,826
Noninterest expense
Salaries and employee benefits 1,909 1,808 3,871 3,663
Occupancy and equipment 869 866 1,726 1,654
Professional and consulting fees 110 133 201 371
Data processing expense 211 198 425 395
Other expense 857 928 1,705 1,841
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
Total noninterest expense 3,956 3,933 7,928 7,924
Income before income taxes 1,073 1,034 119 681
Income tax expense (benefit) 258 238 (299) (5)
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
Net income $ 815 $ 796 $ 418 $ 686
============== ============= ============== ==============
============== ============= ============== ==============
Basic earnings per common share $ 0.60 $ 0.59 $ 0.31 $ 0.51
Diluted earnings per common share $ 0.58 $ 0.58 $ 0.30 $ 0.50
Cash dividends declared $ 0.135 $ 0.125 $ 0.260 $ 0.245
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, 2006 and 2005
(in thousands)
Three Months EndedSix Months Ended
March 31, March 31, March 31, March 31,
2006 2005 2006 2005
Balance at beginning of period $ 37,811 $36,426 $ 38,673 $ 35,906
Stock option exercise 0 328 0 398
Treasury stock purchased (363) 0 (363) 0
Stock based compensation expense 15 0 29 0
Cash dividends declared (183) (169) (352) (326)
Comprehensive income (loss):
Net income 815 796 418 686
Net change in net unrealized gains and losses
on securities available for sale, net of
reclassification adjustments and tax effects 208 (276) (102) 441
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Total comprehensive income 1,023 520 316 1,127
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Balance at end of period $ 38,303 $ 37,105 $ 38,303 $ 37,105
=========== =========== ========== ==========
See accompanying notes to (unaudited) consolidated financial statement
MFB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended March 31, 2006 and 2005
(in thousands)
Six Months Ended
March 31,
2006 2005
------------- --------------
------------- --------------
Cash flows from operating activities
Net income $ 418 $ 686
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization, net of accretion 950 946
Provision for loan losses 1,901 271
Net loss on securities available for sale - 948
Net realized gains from sales of loans (171) (401)
Amortization of mortgage servicing rights 147 192
Accretion of intangible assets and purchase adjustments 45 (172)
Origination of loans held for sale (7,753) (10,535)
Impairment (recovery) of mortgage servicing rights (165) (25)
Proceeds from sales of loans held for sale 7,823 9,849
Equity in loss of investment in limited partnership 92 161
Appreciation in cash surrender value of life insurance (108) (101)
Stock dividend paid by FHLB - (185)
Net change in:
Accrued interest receivable (53) (41)
Other assets (1,227) (339)
Accrued expenses and other liabilities (322) (1,530)
------------- --------------
Net cash from operating activities 1,577 (276)
Cash flows from investing activities
Net change in loans receivable 13,379 (816)
Net cash received in settlement 453 Proceeds from:
Principal payments of mortgage-backed and related securities 6,476 6,410
Maturities and calls of securities available for sale 5,000 2,100
Purchase of: (12,970)
Securities available for sale -
Premises and equipment, net (660) (401)
------------- --------------
Net cash from investing activities 11,678 7,293
Cash flows from financing activities
Net change in deposits (12,808) (14,986)
Repayment of FHLB and other borrowings (15,950) (47,450)
Proceeds from FHLB and other borrowings - 43,800
Proceeds from exercise of stock options - 389
Purchase of treasury stock (363) -
Net change in advances from borrowers for taxes and insurance 282 (1,381)
Cash dividends paid (352) (326)
------------- --------------
------------- --------------
Net cash used in financing activities (29,191) (19,954)
------------- --------------
------------- --------------
Net change in cash and cash equivalents (15,936) (12,937)
Cash and cash equivalents at beginning of period 54,209 28,595
------------- --------------
Cash and cash equivalents at end of period $ 38,273 $ 15,658
============= ==============
Supplemental disclosures of cash flow information Cash paid during the period
for:
Interest $ $ 6,506
7,035
Income taxes 507 175
Supplemental schedule of noncash investing activities:
Transfer from:
Loans receivable to loans held for sale $ $ 785
-
Loans receivable to other real estate owned - -
MFB CORP. AND SUBSIDIARIES
NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
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 in Indiana from
their corporate office in Mishawaka, eleven banking centers in St. Joseph and
Elkhart Counties and provide private client services to the Indianapolis market
through the Bank's office in Hamilton County. The Bank offers a variety of
lending, deposit, trust and other financial services to its retail and business
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 March 31, 2006 and September 30, 2005, the consolidated
statements of income and the condensed consolidated statements of changes in
shareholders' equity for the three and six months ended March 31, 2006 and 2005
and the consolidated statements of cash flows for the six months ended March 31,
2006 and 2005. 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: Prior to October 1, 2005, the Company accounted for
its stock-based employee compensation under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. No stock-based employee compensation cost is reflected
in the income statements for periods ending September 30, 2005, or before.
Effective October 1, 2005, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123(R), Share-based Payment, and has included the
stock-based employee compensation expense in its income statement for the three
and six months ended March 31, 2006. Refer to Note 5 for additional disclosures.
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 three and six month periods ended March 31, 2006 and 2005
are presented below.
Three Months Ended Six Months Ended
March 31, March 31,
(in thousands except per share information)
2006 2005 2006 2005
Basic Earnings Per Common Share
Numerator
Net income $ 815 $ 796 $ 418 $ 686
Denominator
Weighted average common shares outstanding for basic
earnings per common share 1,352 1,345 1,354 1,338
Basic Earnings Per Common Share $ 0.60 $ 0.59 $ 0.31 $ 0.51
Diluted Earnings Per Common Share
Numerator
Net income $ 815 $ 796 $ 418 $ 686
Denominator
Weighted average common shares outstanding for basic
earnings per common share 1,352 1,345 1,354 1,338
Add: Dilutive effects of assumed exercises of stock
options 47 33 41 38
Weighed average common and dilutive potential common
shares outstanding 1,399 1,378 1,395 1,376
Diluted Earnings Per Common Share $ 0.58 $ 0.58 $ 0.30 $ 0.50
Stock options for 24,000 common shares for the three and six months ended March
31, 2006 were not considered in computing diluted earnings per share because
they were antidilutive. Stock options for 26,500 common shares for the three and
six months ended March 31 2005 were not considered in computing diluted earnings
per share because they were antidilutive.
NOTE 3 - SECURITIES
The amortized cost and fair value of securities available for sale are as
follows:
March 31, 2006
--------------
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities
U.S. Government and federal agencies $ 15,380 $ - $ (115) $ 15,265
Municipal bonds 339 1 - 340
Mortgage-backed 39,411 16 (852) 38,575
Corporate notes 7,247 10 (181) 7,076
------------ -------------- ------------- --------------
62,377 27 (1,148) 61,256
Marketable equity securities 3,085 328 0 3,413
------------ -------------- ------------- --------------
$ 65,462 $ 355 $ (1,148) $ 64,669
============ ============== ============= ==============
September 30, 2005
------------------
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities
U.S. Government and federal agencies $ 11,220 $ 2 $ (43) $ 11,179
Municipal bonds 341 3 - 344
Mortgage-backed 40,575 52 (352) 40,275
Corporate notes 8,744 37 (212) 8,569
------------ -------------- ------------- --------------
60,880 94 (607) 60,367
Marketable equity securities 3,180 60 (32) 3,208
------------ -------------- ------------- --------------
$ 64,060 $ 154 $ (639) $ 63,575
============ ============== ============= ==============
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the Company
to retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value.
Due to rising interest rates, the values of mortgage-backed securities have
declined since September 30, 2005, resulting in an unrealized loss of $852,000
at March 31, 2006 compared to an unrealized loss of $352,000 at September 30,
2005. Credit issues are not considered to be a significant factor relative to
the current unrealized losses.
Of the $181,000 unrealized losses for debt securities classified as corporate
notes at March 31, 2006, $113,000 is attributable to a trust preferred bond
issued by a regional banking organization. This unrealized loss is primarily
attributable to the low interest rate environment, and the variable interest
rate structure of the bond. Such interest rate adjustments resulted in coupons
being set at a level lower than today's market. As interest rates rise and the
bonds coupon rate increases, management anticipates recovery of the unrealized
losses. Management has the ability to hold this bond to maturity, at which time
the face value of the bond would be realized.
Included in marketable equity securities are government sponsored agency
preferred stocks of $3.1 million at both March 31, 2006 and September 30, 2005.
During the year ending September 30, 2005, the Company recorded a non-cash
impairment charge of $948,000 ($626,000 net of tax) for the decline in the value
of agency preferred stocks determined to be other-than temporary. The value of
the agency preferred stocks have improved since September 30, 2005 resulting in
an unrealized gain of $328,000 at March 31, 2006.
NOTE 4 - LOANS RECEIVABLE
Loans receivable at March 31, 2006 and September 30, 2005 are summarized as
follows:
March 31, September 30,
2006 2005
----------------- ----------------
(in thousands)
Residential mortgage loans
Secured by one to four family residences $ 167,185 $ 167,658
Construction loans 21,865 21,757
Other 3,169 3,249
----------------- ----------------
192,219 192,664
Net deferred loan fees (493) (509)
Undisbursed portion of construction and other mortgage loans (113) (185)
----------------- ----------------
Total residential mortgage loans 191,613 191,970
Commercial loans
Commercial real estate $ 87,345 $ 96,224
Commercial 55,426 61,847
----------------- ----------------
----------------- ----------------
142,771 158,071
Net deferred loan fees (215) (267)
----------------- ----------------
Total commercial loans 142,556 157,804
Consumer loans
Home equity and second mortgage $ 35,935 $ 33,901
Other 6,893 7,010
----------------- ----------------
42,828 40,911
Net deferred loan costs 3 10
----------------- ----------------
Total consumer loans 42,831 40,921
----------------- ----------------
Total loans receivable $ 377,000 $ 390,695
================= ================
Activity in the allowance for loan losses is summarized as follows for the six
months ended March 31, 2006 and 2005.
March 31, March 31,
2006 2005
---------------- -----------------
(in thousands)
Balance at beginning of period $ 6,388 $ 6,074
Provision for loan losses 1,901 271
Charge-offs (103) (195)
Recoveries 2 51
---------------- -----------------
Balance at end of period $ 8,188 $ 6,201
================ =================
NOTE 4 - LOANS RECEIVABLE (continued)
Quarter Ended Year Ended
March 31, September 30,
Impaired loans were as follows: 2006 2005
------------------ ------------------
(in thousands)
Period end loans with no allocated allowance for loan losses $ 553 $ 603
Period end loans with allocated allowances for loan losses 8,452 8,074
------------------ ------------------
Total impaired loans $ 9,005 $ 8,677
================== ==================
Amount of the allowance for loan losses allocated $ 5,249 $ 2,714
Average of impaired loans 9,773 2,505
Interest income recognized during impairment 51 92
Cash-basis interest income recognized during impairment 51 75
The largest loan relationship included in impaired loans as of March 31, 2006
and September 30, 2005 totaled approximately $3.6 million. At September 30,
2005, $1.4 million of the allowance for loan losses had been allocated to this
loan relationship and at March 31, 2006, $3.6 million had been allocated. The
allowance for loan losses allocation as of September 30, 2005 was based upon the
discounted fair value of the underlying collateral based upon the most recent
financial information provided to the Company by the borrower. After updating an
analysis of the value of this collateral during the six months ended March 31,
2006, completing an assessment of the reliability and adequacy of accounting
systems and evaluating the recent financial performance of the business, the
Bank determined that the allowance for loan losses allocation should be
increased to equal the unpaid balance of the loan, $3.6 million, as of March 31,
2006.
Non-performing loans were as follows:
March 31, September 30,
2006 2005
------------------ ------------------
(in thousands)
Loans past due over 90 days still on accrual status $ 1,132 $ 136
Non-accrual loans 7,297 1,284
------------------ ------------------
------------------ ------------------
Total non-performing loans $ 8,429 $ 1,420
================== ==================
NOTE 5 - STOCK OPTIONS
Stock Based Compensation: Effective October 1, 2005, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 123(R), Share-based
Payment, and has included the stock-based employee compensation cost in its
income statement for the three months and six months ended March 31, 2006. The
Board of Directors of the Company has adopted three 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 has always been the fair market value of common stock on
the date of the grant - 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, 2006, 13,000 options remain available for future grants.
Activity in the Option Plans is summarized as follows for the six months ending
March 31, 2006 and the three years prior ending September 30:
Weighted Weighted
Number of Average Average
Outstanding Exercise Exercise Fair Value
Options Price Price of Grants
Balance at September 30, 2002 $ 185,950 $10.00 - 26.75 $ 17.53
Granted 59,000 21.30 21.30 $ 5.82
Forfeited (500) 21.30 21.30
Exercised (33,000) 10.00 - 21.30 11.46
-----------
Balance at September 30, 2003 211,450 10.00 - 26.75 19.71
Granted 26,500 30.35 - 34.01 31.90 9.96
Forfeited - - -
Exercised (41,350) 10.00 - 26.75 13.30
-----------
Balance at September 30, 2005 196,600 15.00 - 34.01 22.69
Granted 68,000 25.50 25.50 8.20
Forfeited (12,500) 18.75 - 30.35 23.37
Exercised (26,800) 15.00 - 21.50 16.48
------------
Balance at September 30, 2005 225,300 15.25 - 34.01 24.24
===========
Granted -
Forfeited -
Exercised -
-----------
Balance at March 31, 2006 225,300 15.25 - 34.01 24.24
===========
26
Options exercisable at March 31, 2006 and for the three prior years ending
September 30, based on vesting schedules established at the date of grant, are
as follows:
Weighted
Number Average
of Options Exercise Price
September 30, 2003 139,994 $ 18.68
September 30, 2005 123,494 22.04
September 30, 2005 196,509 23.95
March 31, 2006 215,100 23.84
At March 31, 2006 options outstanding and options exercisable were as follows:
Outstanding Exercisable
Weighted Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Number Life in years Price Number Price
--------------- ------ ------------- ----- ------ -----
$15.25 - $18.75 14,000 1.60 $ 16.04 14,000 $ 16.04
$20.55 - $26.75 187,300 6.26 23.86 187,300 23.86
$30.35 - $34.01 24,000 7.91 31.94 13,800 31.45
---------- ----------
Outstanding /
Exercisable 225,300 6.15 years $ 24.24 215,100 $ 23.84
========== ==========
Aggregate
Intrinsic Value $ 1,345,000 $ 1,345,000
------------ -----------
No stock options were granted during the six months ending March 31, 2006 or
March 31, 2005. The fair value of options granted during the prior three years
ending September 30 were estimated using an option pricing model with the
following weighted average information as of the grant dates:
2005 2004 2003
---- ---- ----
Risk-free interest rate 4.23% 4.11% 3.72%
Expected dividend rate 1.96 1.44 1.82
Stock price volatility 28.77 24.53 23.23
Estimated Life 8 yrs 8 yrs 8 yrs
The following table illustrates the effect of 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, for the three prior
years ending September 30 and for the comparative six month period ending March
31, 2005.
(in thousands)
March, 31 September, 30 September, 30 September, 30
2005 2005 2005 2003
Net income as reported $ 686 $ 2,496 $ 1,790 $ 2,400
Less: Stock-based compensation expense
determined under fair value based method 70 627 223 198
Pro forma net income $ 616 $ 1,869 $ 1,567 $ 2,202
Basic earnings per share as reported $ 0.51 $ 1.85 $ 1.36 $ 1.87
Pro forma basic earnings per share 0.46 1.39 1.19 1.71
Diluted earnings per share as reported $ 0.50 $ 1.81 $ 1.30 $ 1.80
Pro forma diluted earnings per share 0.45 1.36 1.14 1.65
For the three and six months ended March 31, 2006, stock option compensation
expense of $15,000 and $29,000 respectively was recognized in connection with
the option plans. There was no tax benefit recognized relative to stock options
during the six months ending March 31, 2006 and March 31, 2005. At March 31,
2006, compensation expense related to non vested stock option grants aggregated
to $105,000 and is expected to be recognized as follows:
Stock Option Compensation
Expense (in thousands)
Remainder of fiscal 2006: $ 29
For the fiscal years ending September 30: 2007 35
2008 31
2009 10
-------
Total $ 105
======
NOTE 6 - GOODWILL
Goodwill activity is summarized as follows for the six months ending March 31,
2006 (in thousands):
Balance at beginning of period $2,423
Decrease in goodwill 453
Balance at end of period $1,970
During the six months ended March 31, 2006, the company received $453,000 from
Sobieski Bancorp as a result of the successful voluntary mediation relating to a
disputed asset from the August 2004 closing of the acquisition of certain assets
and certain liabilities. The proceeds, net of legal fees, were recorded as a
reduction of goodwill when received.
NOTE 7 - CONTINGENCIES
The Company and the Bank are subject to certain claims and legal actions arising
in the ordinary course of business. A creditor of the $3.6 million impaired loan
relationship has filed a lawsuit against MFB seeking to recover $987,000 from
MFB. In that lawsuit, the claimant alleges that MFB Financial violated a
Subordination Agreement, and a related letter agreement between the claimant and
MFB pertaining to the obligations of MFB's commercial loan customer. The Company
believes it has valid defenses and will vigorously contest this lawsuit. Based
upon information currently available and consultation with legal counsel, the
Company believes the ultimate outcome of this lawsuit is difficult to predict;
therefore, no contingent liability has been recorded for this lawsuit at March
31, 2006. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of all other legal matters is not expected to have a
material adverse effect on the consolidated financial position or results of
operation of the Company.
NOTE 8 - SUBSEQUENT EVENT
During April, 2006, the Bank's wholly owned insurance subsidiary Mishawaka
Financial Services, Inc., sold the rights, title and interest in its property
and casualty insurance business for a purchase price of approximately $200,000.
Mishawaka Financial Services, Inc., will continue to operate as a wholly owned
subsidiary of the Bank and will offer insurance business that sells lines other
than property and casualty.
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 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 charge and 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 AND SIX MONTHS ENDED MARCH 31, 2006 AND 2005
The Company's consolidated net income for the three months ended March 31, 2006
was $815,000 or $0.59 diluted earnings per common share, compared to net income
of $796,000 or $0.58 diluted earnings per share, for the three months ended
March 31, 2005. The Company's consolidated net income for the six months ended
March 31, 2006 was $418,000 or $0.30 diluted earnings per share, compared to net
income of $686,000 or $0.50 diluted earnings per share, for the same period last
year. MFB Corp.'s increase in earnings for the second fiscal quarter from the
prior comparable period was primarily attributable to an increase in the
recovery for loan losses partially offset by a decrease in net interest income.
The decrease in net income for the six months ended March 31, 2006, over the
same period last year was primarily due to the increase in provision for loan
losses offset by the absence of the net losses on securities available for sale.
MFB Corp's net interest income before provision for loan losses for the three
month period ended March 31, 2006 was $3.4 million compared to $3.5 million for
the same period last year. For the six month periods ended March 31, 2006 and
2005 net interest income was $6.9 million and $7.1 million, respectively. The
decrease in net interest income was predominantly due to an increase in deposit
interest expense, offset by an increase in interest income and a decrease in
FHLB advance interest expense. Interest expense on deposits increased to $2.2
million for the March 2006 quarter compared to $1.5 million for the March 2005
quarter, and increased to $4.3 million from $3.1 million for the comparable six
month periods. Interest income was $7.1 million for the three months ended March
31, 2006 compared to $6.7 million for the three months ended March 31, 2005 and
for the six months ended March 31, 2006 and March 31, 2005 was $14.3 million and
$13.5 million respectively. Interest expense on FHLB advances and other
borrowings decreased to $1.5 million for the three months ended March 31, 2006
compared to $1.7 million for the same period in 2005 and also decreased for the
six month period ended March 31, 2006 to $3.1 million from $3.4 million for the
six months ended March 31, 2005.
The provision for (recovery of) loan losses was ($154,000) for the quarter ended
March 31, 2006 compared to ($29,000) for the same period last year. The recovery
during the quarter ended March 31, 2006 was predominantly related to commercial
loan watch list pay-downs. The provision for loan losses was $1,901,000 for the
six months ended March 31, 2006 compared to $271,000 for the same period last
year. The increase during the six months ended March 31, 2006 was primarily
related to management's first quarter assessment of a commercial loan to a
business experiencing difficulties with inventory management, trade accounts
receivable collections, financial reporting, and operating cash flow. This loan
is primarily secured by inventory and accounts receivable. After updating our
analysis of the value of this collateral, completing an assessment of the
reliability and adequacy of accounting systems and evaluating the recent
financial performance of the business, the Bank determined that an additional
charge to earnings in the amount of $2,324,000 ($1,411,000 net of tax) for this
loan was necessary during the first quarter ended December 31, 2005. The loan
has been placed on non-accrual status and is now fully reserved. No charge-off
has been recorded on this commercial loan because the Bank cannot reasonably
estimate at this time how much of the loan it will ultimately collect. The
percentage of non-performing loans to total loans increased from 0.65% at March
31, 2005 to 2.24% at March 31, 2006.
Noninterest income remained consistent for the quarters ended March 31, 2005 and
March 31, 2006 at $1.5 million. Year to date noninterest income increased from
$1.8 million for the six months ended March 31, 2005 to $3.1 million for the six
months ended March 31, 2006. The significant increase was primarily the result
of the first quarter non-cash impairment charge to earnings in December 2004 of
$948,000 ($626,000 net of tax) resulting from a decline in value of $2.0 million
of Fannie Mae ("FNMA") and $2.0 million of Freddie Mac ("FHLMC") floating rate
preferred stock securities MFB holds. The increase was also due to the increase
in rental income for leasing of the headquarters building located in Mishawaka,
Indiana.
Noninterest expense increased slightly to $4.0 million for the quarter ended
March 31, 2006 from $3.9 million for the quarter ended March 31, 2005.
Noninterest expense remained consistent at $7.9 million for the six month
periods ended March 31, 2006 and 2005. A reduction in professional and
consulting fees, was offset by increases in salaries and employee benefits, and
occupancy and equipment expense.
BALANCE SHEET COMPOSITION
COMPARISON OF MARCH 31, 2006 TO SEPTEMBER 30, 2005
The Company's total assets decreased from $554.9 million as of September 30,
2005 to $525.3 million as of March 31, 2006.
Cash and cash equivalents decreased from $54.2 million at September 30, 2005 to
$38.3 million at March 31, 2006. Net cash used in financing activities was $29.2
million offset by $11.7 million net cash received from investing activities and
$1.6 million from operating activities during the six month period ended March
31, 2006.
As of March 31, 2006 total securities available for sale were $64.7 million, an
increase of $1.1 million from $63.6 million at September 30, 2005. The
securities portfolio activity during the six-month period included principal
payments on mortgage-backed and related securities of $6.5 million, maturities
and calls of securities available for sale of $5.0 million, and purchases of
$13.0 million.
Loans receivable decreased from $390.7 million at September 30, 2005 to $377.0
million at March 31, 2006. Commercial loans outstanding decreased by $15.2
million from $157.8 million at September 30, 2005 to $142.6 million at March 31,
2006. Mortgage loans decreased slightly from $192.0 million at September 30,
2005 to $191.6 million at March 31, 2006. Consumer loans, including home equity
and second mortgages, increased slightly by $1.9 million during the six month
period. Loans held for sale at March 31, 2006 increased to $411,000 from
$407,000 at September 30, 2005. 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 existing and potential customers.
During the second quarter ended March 31, 2006, the Company completed secondary
market mortgage loan sales totaling $3.8 million and the net gains realized on
these loan sales were $86,000 including $47,000 related to recording mortgage
servicing rights. During the quarter ended September 30, 2005, the Company
completed secondary market mortgage loan sales totaling $9.6 million and the net
gains realized on these loan sales were $213,000 including $118,000 related to
recording mortgage 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.
The allowance for loan losses at March 31, 2006 was $8.2 million or 2.17% of
loans compared to $6.4 million or 1.63% of loans at September 30, 2005. The
significant increase for the quarter ended March 31, 2006 was discussed above in
the Results of Operations section. For the second quarter ended March 31, 2006,
net charge offs were $95,000 compared to $131,000 net charge off for the quarter
ended March 31, 2005. Year to date net charge offs were $101,000 for the six
months ended March 31, 2006 and $144,000 for the six months ended March 31,
2005. In management's opinion, the allowance for loan losses is adequate to
cover probable incurred losses at March 31, 2006.
Goodwill decreased from $2.4 million at September 30, 2005 to $2.0 million at
March 31, 2006 as discussed further in Note 6 of the consolidated financial
statements.
Total liabilities decreased $29.2 million during the six-month period, from
$516.2 million at September 30, 2005 to $487.0 million at March 31, 2006. The
decrease was predominantly due to a measured reduction in above-average cost
deposit products and the payment of Federal Home Loan Bank (FHLB) Advances.
Advances from the FHLB decreased $16.2 million, from $125.9 million at September
30, 2005 to $109.6 million at March 31, 2006. As of March 31, 2006 the advances
had a weighted average interest rate of 5.38% and mature over the next six
years. A total of $4 million of the advances having a weighted average interest
rate of 4.38% mature over the next twelve months. Total deposits decreased from
$374.4 million to $361.4 million during the six-month period; savings, NOW and
MMDA deposits decreased from $153.9 million to $136.2 million; noninterest
bearing deposits decreased from $36.9 million to $35.8 million from September to
March, and were offset by time deposits that increased from $183.6 million to
$189.4 million during the same period.
Total shareholders' equity declined by $370,000 to $38.3 million from September
30, 2005 to March 31, 2006 primarily due to purchases of treasury stock of
$363,000, dividend payouts of $352,000 and net unrealized losses on investments
of $102,000; offset in part by net earnings of $418,000. MFB Corp's equity to
assets ratio was 7.29% at March 31, compared to 6.97% at September 30. The book
value of MFB Corp. stock fell slightly from $28.52 at September 30, 2005 to
$28.50 at March 31, 2006.
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 $104.4 million as of March 31, 2006 compared to $119.3
million as of September 30, 2005. The decrease was primarily due to the use of
cash to pay off $15.9 million of FHLB advances. Management believes the
liquidity level as of March 31, 2006 is sufficient to meet anticipated cash
needs.
Short-term borrowings or long-term debt, such as Federal Home Loan Bank
advances, are used to supplement other sources of funds such as deposits and to
assist in asset/liability management. As of March 31, 2006, total FHLB
borrowings amounted to $109.6 million and were originally used primarily to fund
loan portfolio growth. The Bank had commitments to fund loan originations with
borrowers totaling $79.8 million at March 31, 2006, including $69.5 million in
available consumer and commercial lines and letters of credit. Certificates of
deposit scheduled to mature in one year or less totaled $103.4 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 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 March 31,
2006 and September 30, 2005 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, 2006
Total capital
(to risk weighted $ 41,110 11.97% $ 27,481 8.00% $ 34,352 10.00%
assets)
Tier 1 (core) capital
(to risk weighted 38,580 11.23 13,741 4.00 20,611 6.00
assets)
Tier 1 (core) capital
(to adjusted total 38,580 7.44 20,753 4.00 25,942
assets) 5.00
As of September 30, 2005
Total capital 11.11%
(to risk weighted $ 40,588 $ 29,222 8.00% $ 36,528 10.00%
assets)
Tier 1 (core) capital
(to risk weighted 38,015 10.23 14,611 4.00 21,917
assets) 6.00
Tier 1 (core) capital
(to adjusted total 38,015 6.93 22,180 4.00 27,422
assets) 5.00
As of March 31, 2006, 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 foregoing 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 securities available for sale, 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to interest rate risk to the extent 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. Historically, the Company has sought to
reduce exposure to its earnings through the use of adjustable rate loans and
through the sale of fixed rate loans in the secondary market, and by extending
funding maturities through the use of FHLB advances.
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. 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. In Management's
opinion, there have been no significant shifts in position since December 31,
2005.
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, 2005, 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 200 basis points (due to the low interest rate environment at
December 31, 2005, data was not available from the OTS for the shift downward in
rates 300 basis points).
As illustrated in the December 31, 2005 table below, the Company's interest rate
risk is sensitive to both rising and declining rates. The decline in NPV with a
rate reduction is due to the change in value of fixed rate Federal Home Loan
Bank borrowings that would occur. The decline in NPV with a rate increase is due
to the relative volume of mortgage assets with fixed rate characteristics over
the volume of liabilities with fixed rate characteristics.
December 31, 2005
Change in
Interest Rates NPV as % of Portfolio
In Basis Net Portfolio Value Value of Assets
Points NPV
(Rate Shock) (1) $ Amount $ Change % Change Ratio Change (1)
- ----------- --- -------- -------- -------- ----- ---------
(Dollars in Thousands)
+300 $ 44,165 $ (14,430) (25)% 8.50% (227) bp
+200 49,887 (8,707) (15) 9.45 (133) bp
+100 54,992 (3,603) (6) 10.25 (52) bp
0 58,595 - - 10.77 -
(100) 59,084 489 1 10.76 (1) bp
(200) 56,940 (1,655) (3) 10.32 (46) bp
(1) Expressed in basis points
Specifically, the December 31, 2005 table indicates that the Company's NPV was
$58.6 million or 10.77% of the market value of portfolio assets. Based upon the
assumptions utilized, an immediate 200 basis point increase in market interest
rates would result in an $8.7 million or 15% decrease in the Company's NPV and
would result in a 133 basis point decrease in the Company's NPV ratio to 9.45%.
Also, an immediate 200 basis point decrease in market interest rates would
result in a $1.7 million or 3% decrease in the Company's NPV, and a 46 basis
point decrease in the Company's NPV ratio to 10.32%.
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, 2006 totaled $411,000 million compared to $407,000 at September 30, 2005.
The Company retains the servicing on the majority of loans sold in the secondary
market and, at March 31, 2006, $204.1 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 (the "Exchange act")), 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 are effective in ensuring that information required to
be disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms
and are designed to ensure that information required to be disclosed in those
reports is accumulated and communicated to management as appropriate to allow
timely decisions regarding required disclosure.
(b) Changes in internal controls. There were no 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 have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company and the Bank are subject to certain claims and legal actions arising
in the ordinary course of business. A creditor of the $3.6 million impaired loan
relationship has filed a lawsuit against MFB seeking to recover $987,000 from
MFB. In that lawsuit, the claimant alleges that MFB Financial violated a
Subordination Agreement, and a related letter agreement between the claimant and
MFB pertaining to the obligations of MFB's commercial loan customer. The Company
believes it has valid defenses and will vigorously contest this lawsuit. Based
upon information currently available and consultation with legal counsel, the
Company believes the ultimate outcome of this lawsuit is difficult to predict;
therefore, no contingent liability has been recorded for this lawsuit at March
31, 2006. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of all other legal matters is not expected to have a
material adverse effect on the consolidated financial position or results of
operation of the Company.
Item 1A. Risk Factors
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides information about purchases by the company pursuant
to a previously announced buyback program with respect to its Common Stock
during the three months ended March 31, 2006:
Total Total Number of Approximate Number
Number Shares Purchased of Shares that May
of Shares Average as part of Publicly Yet be Purchased
Period Purchased Price Paid Announced Program (1) Under the Program
------ --------- ---------- --------------------- -----------------
January 1, 2006 through 0 0 0 0
January 31, 2006
February 1, 2006 through 6,800 $30.40 6,800 60,200
February 28, 2006
March 1, 2006 through March 5,000 $31.25 5,000 55,200
31, 2006
Total 11,800 11,800 55,200
(1) On February 2, 2006, we announced in a press release that our board of
directors had authorized a stock repurchase program to purchase up to 5%, or
approximately 67,000 shares of outstanding stock.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information.
None
Item 6. 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. 140.13a-14(a).
32 Certification pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2005.
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: 05/3/06 By /s/ Charles J. Viater
Charles J. Viater
President and Chief Executive Officer
Date: 05/3/06 By /s/ Terry L Clark
Terry L. Clark
Vice President and Controller
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: 05/3/06 /s/ Charles J. Viater
Charles J. Viater
Chief Executive Officer
Exhibit 31
CERTIFICATION
I, Terry L. Clark, 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: 05/3/06 /s/ Terry L. Clark
Terry L. Clark
Controller
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 2005, 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 3rd day of May, 2006.
/s/ Terry L. Clark /s/ Charles J. Viater
Terry L. Clark Charles J. Viater
Controller 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.