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, 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.
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 January 16, 2007 was 1,323,771.
MFB CORP. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)
December 31, 2006 and September 30, 2006 3
Consolidated Statements of Income (Unaudited)
Three Months Ended December 31, 2006 and 2005 4
Condensed Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
Three Months Ended December 31, 2006 and 2005 5
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended December 31, 2006 and 2005 6
Notes to (Unaudited) Consolidated Financial Statements December 31, 2006 7
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
General 12
Results of Operations
12
Balance Sheet Composition 13
Liquidity and Capital Resources 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4. Controls and Procedures 17
Part II. Other Information
Items 1-6 18
Signatures 19
Certifications 20
MFB CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
December 31, 2006 and September 30, 2006
(in thousands except share information)
December 31, September 30,
2006 2006
----------------- ------------------
----------------- ------------------
Assets
Cash and due from financial institutions $ 11,669 $ 13,318
Interest-bearing deposits in other financial institutions - short term 10,030 2,971
----------------- ------------------
Total cash and cash equivalents 21,699 16,289
Securities available for sale 52,958 58,383
FHLB Stock and other investments 10,415 10,939
Loans held for sale 675 -
Mortgage loans 200,122 199,194
Commercial loans 134,946 134,414
Consumer loans 48,214 45,614
----------------- ------------------
----------------- ------------------
Loans receivable 383,282 379,222
Less: allowance for loan losses (5,663) (7,230)
----------------- ------------------
Loans receivable, net 377,619 371,992
Premises and equipment, net 19,347 19,477
Mortgage servicing rights 2,241 2,366
Cash surrender value of life insurance 6,296 6,237
Goodwill 1,970 1,970
Other intangible assets 1,602 1,699
Other assets 7,114 6,720
----------------- ------------------
Total Assets $ 501,946 $ 496,072
================= ==================
Liabilities and Shareholders' Equity
Liabilities
Deposits
Noninterest-bearing demand deposits $ 33,222 $ 30,031
Savings, NOW and MMDA deposits 127,296 129,233
Time deposits 190,213 186,979
----------------- ------------------
Total deposits 350,731 346,243
FHLB advances 97,970 97,053
Loans from correspondent banks 4,500 4,500
Subordinated debentures 5,000 5,000
Accrued expenses and other liabilities 3,650 4,337
----------------- ------------------
Total liabilities 461,851 457,133
Shareholders' equity
Common stock, no par value: 5,000,000 shares authorized;
shares issued: 1,689,417 - 12/31/06 and 09/30/06;
shares outstanding: 1,323,771 - 12/31/06 and 1,320,844 - 09/30/06 12,466 12,421
Retained earnings - substantially restricted 36,413 35,479
Accumulated other comprehensive income (loss),
net of tax of ($96) - 12/31/06 and ($176) - 09/30/06 (186) (341)
Treasury stock: 365,646 common shares - 12/31/06 and (8,598) (8,620)
368,573 common shares - 09/30/06, at cost
----------------- ------------------
Total shareholders' equity 40,095 38,939
----------------- ------------------
Total Liabilities and Shareholders' equity $ 501,946 $ 496,072
================= ==================
See accompanying notes to (unaudited) consolidated financial statements
MFB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended December 31, 2006 and 2005
(in thousands except per share information)
Three Months Ended
December 31,
2006 2005
------------------ -----------------
------------------ -----------------
Interest income
Loans receivable, including fees $ 6,307 $ 6,042
Securities - taxable 740 773
Other interest-bearing assets 65 350
------------------ -----------------
------------------ -----------------
Total interest income 7,112 7,165
Interest expense
Deposits 2,581 2,064
FHLB advances and other borrowings 1,471 1,644
------------------ -----------------
Total interest expense 4,052 3,708
------------------ -----------------
------------------ -----------------
Net interest income 3,060 3,457
Provision for (recovery of) loan losses (1,128) 2,055
------------------ -----------------
------------------ -----------------
Net interest income after provision for 4,188 1,402
(recovery of) loan losses
Noninterest income
Service charges on deposit accounts 851 865
Trust fee income 111 100
Insurance commissions 8 48
Net realized gains from sales of loans 51 85
Mortgage servicing asset recovery (impairment) (49) 167
Net gain (loss) on securities available for sale 361 -
Other income 288 290
------------------ -----------------
------------------ -----------------
Total noninterest income 1,621 1,555
Noninterest expense
Salaries and employee benefits 2,112 1,962
Occupancy and equipment expenses 801 796
Professional and consulting fees 218 162
Data processing expense 207 214
Other expense 878 777
------------------ -----------------
------------------ -----------------
Total noninterest expense 4,216 3,911
Income (loss) before income taxes 1,593 (954)
Income tax expense (benefit) 442 (557)
------------------ -----------------
------------------ -----------------
Net income (loss) $ 1,151 $ (397)
================== =================
================== =================
Basic earnings (loss) per common share $ 0.87 $ (0.29)
Diluted earnings (loss) per common share $ 0.84 $ (0.29)
Cash dividends declared $ 0.165 $ 0.135
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, 2006 and 2005
(in thousands)
Three Months Ended
December 31,
2006 2005
---- ----
Balance at beginning of period $ 38,939 $ 38,673
Stock based compensation expense 14 14
Purchase of 4,073 shares of treasury stock (132) -
Stock option exercise - issuance of 7,000 shares of treasury stock 148 -
Tax benefit related to employee stock plan 37 -
Cash dividends declared (217) (169)
Comprehensive income (loss):
Net income (loss) 1,151 (397)
Other comprehensive income (loss), net of tax 155 (310)
------------------ ----------------
------------------ ----------------
Total comprehensive income (loss) 1,306 (707)
------------------ ----------------
------------------ ----------------
Balance at end of period $ 40,095 $ 37,811
================== ================
See accompanying notes to (unaudited) consolidated financial statement
MFB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended December 31, 2006 and 2005
(in thousands)
Three Months Ended
December 31,
2006 2005
------------- --------------
------------- --------------
Cash flows from operating activities
Net income (loss) $ 1,151 $ (397)
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization, net of accretion 355 457
Provision for (recovery of) loan losses (1,128) 2,055
Net realized gains from sales of loans (51) (85)
Amortization of mortgage servicing rights 93 84
Amortization/(accretion) of intangible assets and purchase adjustments 136 (36)
Origination of loans held for sale (2,106) (5,627)
Sale of other real estate owned property 1,113 -
Impairment (recovery) of mortgage servicing rights 49 (167)
Proceeds from sales of loans held for sale 2,130 4,035
Net (gain) loss on sales of premises and equipment (5) -
Equity in loss of investment in limited partnership 78 42
Stock-based compensation 14 14
Appreciation in cash surrender value of life insurance (59) (54)
Net change in:
Accrued interest receivable 170 12
Other assets (1,691) (758)
Accrued expenses and other liabilities (101) (95)
------------- --------------
Net cash provided (used) in operating activities 148 (520)
Cash flows from investing activities
Net change in loans receivable (5,358) 9,908
FHLB stock redemption 446 -
Proceeds from:
Principal payments of mortgage-backed and related securities 2,369 3,824
Maturities and calls of securities available for sale 3,275 1,500
Purchase of:
Securities available for sale - (5,557)
Premises and equipment (208) (278)
------------- --------------
------------- --------------
Net cash provided in investing activities 524 9,397
Cash flows from financing activities
Purchase of treasury stock (132) -
Net change in deposits 4,488 (7,583)
Proceeds from FHLB advances 27,215 -
Repayment of FHLB advances (26,215) (15,500)
Proceeds from exercise of stock options 148 -
Tax benefit from exercise of stock options 37 -
Net change in advances from borrowers for taxes and insurance (586) (530)
Cash dividends paid (217) (169)
------------- --------------
------------- --------------
Net cash provided (used) in financing activities 4,738 (23,782)
------------- --------------
------------- --------------
Net change in cash and cash equivalents 5,410 (14,905)
Cash and cash equivalents at beginning of period 16,289 54,209
------------- --------------
------------- --------------
Cash and cash equivalents at end of period $ 21,699 $ 39,304
------------- --------------
------------- --------------
Supplemental disclosures of cash flow information Cash paid during the period
for:
Interest $ 4,120 $ 3,453
Income taxes 440 386
Supplemental schedule of noncash investing activities:
Transfer from:
Loans receivable to loans held for sale $ 531 $ -
Loans receivable to other real estate owned 65 -
MFB CORP. AND SUBSIDIARIES
NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
December 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 and ten 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 and other financial services to its retail and business
customers. The Wealth Management Group of the Bank attracts high net worth
clients and offers trust, investment, insurance, broker advisory, retirement
plan and private banking services. The Bank's wholly-owned subsidiary, Mishawaka
Financial Services, Inc., offers a variety of life and health insurance products
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, 2006 and September 30, 2006, 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, 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.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
In March 2006, the Financial Accounting Standards Board (FASB) issued Statement
No. 156, Accounting for Servicing of Financial Assets-an amendment of FASB
Statement No. 140. This Statement provides the following: 1) revised guidance on
when a servicing asset and servicing liability should be recognized; 2) requires
all separately recognized servicing assets and servicing liabilities to be
initially measured at fair value, if practicable; 3) permits an entity to elect
to measure servicing assets and servicing liabilities at fair value each
reporting date and report changes in fair value in earnings in the period in
which the changes occur; 4) upon initial adoption, permits a onetime
reclassification of available-for-sale securities to trading securities for
securities which are identified as offsetting the entity's exposure to changes
in the fair value of servicing assets or liabilities that a servicer elects to
subsequently measure at fair value; and 5) requires separate presentation of
servicing assets and servicing liabilities subsequently measured at fair value
in the statement of financial position and additional footnote disclosures. The
Company adopted this standard on October 1, 2006. The Company does not intend to
carry servicing rights at fair value and therefore the adoption of this
statement did not have a material impact on our consolidated financial position
or results of operations.
NOTE 3 - EARNINGS PER COMMON SHARE
Basic earnings per common share is computed by dividing net income (loss) 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 month periods ended December 31, 2006 and 2005 are
presented below.
Three Months Ended
December 31,
(in thousands except per share information)
2006 2005
--------------- ---------------
--------------- ---------------
Basic earnings (loss) per common share
Numerator
Net income (loss) $ 1,151 $ (397)
=============== ===============
Denominator
Weighted average common shares outstanding for basic earnings
(loss) per common share 1,317 1,356
=============== ===============
Basic earnings (loss) per common share $ 0.87 $ (0.29)
=============== ===============
Diluted earnings (loss) per common share
Numerator
Net income (loss) $ 1,151 $ (397)
=============== ===============
Denominator
Weighted average common shares outstanding for basic earnings
(loss) per common share 1,317 1,356
Add: Dilutive effects of assumed exercises of stock options 53 -
--------------- ---------------
Weighed average common and dilutive potential common shares outstanding
1,370 1,356
=============== ===============
Diluted earnings (loss) per common share $ 0.84 $ (0.29)
=============== ===============
Stock options for 17,000 common shares for the three months ended December 31,
2006 were not considered in computing diluted earnings per share because they
were antidilutive.
NOTE 4 - SECURITIES
The amortized cost and fair value of securities available for sale are as
follows:
December 31, 2006
-----------------
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities
U.S. Government and federal agencies $ 12,394 $ 3 $ (45) $ 12,352
Municipal bonds 337 - - 337
Mortgage-backed 31,486 32 (486) 31,032
Corporate notes 5,971 - (134) 5,837
----------------- ---------------- --------------- ---------------
50,188 35 (665) 49,558
Marketable equity securities 3,052 348 0 3,400
----------------- ---------------- --------------- ---------------
$ 53,240 $ 383 $ (665) $ 52,958
================= ================ =============== ===============
September 30, 2006
------------------
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities
U.S. Government and federal agencies $ 14,392 $ $ (72) $ 14,322
2
Municipal bonds 337 1 - 338
Mortgage-backed 33,839 18 (662) 33,195
Corporate notes 7,246 2 (133) 7,115
----------------- ---------------- --------------- ---------------
55,814 23 (867) 54,970
Marketable equity securities 3,085 328 - 3,413
----------------- ---------------- --------------- ---------------
$ 58,899 $ 351 $ (867) $ 58,383
================= ================ =============== ===============
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.
The values of mortgage-backed securities increased since September 30, 2006,
resulting in an unrealized loss of $486,000 at December 31, 2006 compared to an
unrealized loss of $662,000 at September 30, 2006. Credit issues are not
considered to be a significant factor relative to the current unrealized losses.
Included in marketable equity securities are government sponsored agency
preferred stocks of $3.1 million at both December 31, 2006 and September 30,
2006. The Company recorded a non-cash impairment charge of $948,000 ($626,000
net of tax) during the year ended September 30, 2005 for the decline in the
value determined to be other-than temporary. The value of these securities
subsequently improved resulting in an unrealized gain of $348,000 at December
31, 2006.
During the fiscal year ended September 30, 2002, a write down was recorded of
$895,000 on a $1.0 million WorldCom, Inc. corporate debt security. This security
was sold in October 2002 for $160,000. During the quarter ended December 31,
2006, a payment of $16,000 was received for the initial distribution of funds
recovered by the U.S. Securities and Exchange Commission in its action against
WorldCom, Inc. Another payment was received of $361,000 representing an initial
distribution of funds recovered in the federal securities class action law suit
brought on behalf of purchasers of WorldCom, Inc. securities. These amounts were
recorded as a recovery of loss on securities during the quarter ended December
31, 2006. An additional distribution may occur depending upon the resolution of
disputed claims, appeals from court determinations and additional administrative
expenses, interest and taxes incurred by the settlement funds.
NOTE 5 - LOANS RECEIVABLE
Loans receivable at December 31, 2006 and September 30, 2006 are summarized as
follows:
December 31, September 30,
2006 2006
--------------------- ---------------------
(in thousands)
Residential mortgage loans
Secured by one to four family residences $ 179,097 $ 174,397
Construction loans 18,314 22,232
Other 3,042 3,090
--------------------- ---------------------
200,453 199,719
Net deferred loan fees (493) (498)
Construction and other mortgage loans in process (undisbursed) 162 (27)
--------------------- ---------------------
Total residential mortgage loans 200,122 199,194
Commercial loans
Commercial real estate $ 85,057 $ 84,653
Commercial 49,183 49,958
--------------------- ---------------------
--------------------- ---------------------
134,240 134,611
Net deferred loan fees (194) (209)
Commercial and real estate loans in process 900 12
--------------------- ---------------------
Total commercial loans 134,946 134,414
Consumer loans
Home equity and second mortgage $ 39,850 $ 37,779
Other 8,263 7,776
--------------------- ---------------------
48,113 45,555
Home equity and other loans in process 101 59
--------------------- ---------------------
Total consumer loans 48,214 45,614
--------------------- ---------------------
Total loans receivable $ 383,282 $ 379,222
===================== =====================
Activity in the allowance for loan losses is summarized as follows for the three
months ended December 31, 2006 and 2005.
December 31, December 31,
2006 2005
--------------------- ---------------------
(in thousands)
Balance at beginning of period $ 7,230 $ 6,388
Provision for (recovery of) loan losses (1,128) 2,055
Charge-offs (450) (8)
Recoveries 11 1
--------------------- ---------------------
Balance at end of period $ 5,663 $ 8,436
===================== =====================
NOTE 5 - LOANS RECEIVABLE (continued)
Quarter Ended Year Ended
December 31, September 30,
Impaired loans were as follows: 2006 2006
--------------------- ----------------------
(in thousands)
Period end loans with no allocated allowance for loan losses $ 840 $ 873
Period end loans with allocated allowances for loan losses 3,714 6,052
--------------------- ----------------------
Total impaired loans $ 4,554 $ 6,925
===================== ======================
Amount of the allowance for loan losses allocated $ 2,828 $ 4,337
Average of impaired loans 6,508 8,270
Interest income recognized during impairment 7 165
Cash-basis interest income recognized during impairment 7 159
Impaired loans decreased during the quarter ended December 31, 2006 primarily
due to the activity of two commercial loan customers. A payoff was received from
an impaired loan with a balance of approximately $1.4 million at September 30,
2006 and an allowance for loan losses allocation of $611,000. The resolution of
this problem loan resulted in a provision recovery of $160,000 of the $611,000
allowance for loan losses allocation and a charge-off of $451,000 during the
quarter ended December 31, 2006. The second commercial loan and the largest loan
relationship included in impaired loans paid approximately $898,000 during the
quarter ended December 31, 2006. The loan balance was $3.1 million at September
30, 2006 and $2.2 million at December 31, 2006 with an equivalent amount of
allowance for loan losses allocation. As of December 31, 2006, the Bank and the
commercial loan customer were negotiating a forbearance agreement to provide for
full payment of the outstanding debt. However, the Bank maintained the $2.2
million allowance for the loan losses allocation based upon the history of
unreliable and inconsistent financial reporting and cash flows of the customer's
business. The actual loss on this loan relationship may vary significantly from
the current estimate contingent upon the borrower's compliance with the terms of
the forbearance agreement.
Non-performing loans were as follows:
December 31, September 30,
2006 2006
---------------------- ---------------------
(in thousands)
Loans past due over 90 days still on accrual status $ - $ 619
Non-accrual loans 6,718 6,390
---------------------- ---------------------
---------------------- ---------------------
Total non-performing loans $ 6,718 $ 7,009
====================== =====================
NOTE 6 - FORECLOSED REAL ESTATE
During the quarter ended December 31, 2006, the company sold a building that was
included as foreclosed real estate in other assets on the consolidated balance
sheet. The carrying value of the foreclosed real estate was $1.1 million at
December 31, 2006. The cash proceeds and a loan financed by the Bank resulted in
a loss after sales costs of $9,700.
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 Wealth Management Group of MFB attracts high net worth
clients and offers trust, investment, insurance, broker advisory, retirement
plan and private banking services. 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 MONTHS ENDED DECEMBER 31, 2006 AND 2005
The Company's consolidated net income for the three months ended December 31,
2006 was $1.2 million or $0.84 diluted earnings per common share, compared to
net loss of $397,000 or $0.29 diluted loss per share, for the three months ended
December 31, 2005. MFB Corp.'s increase in earnings for the first fiscal quarter
from the prior comparable period was primarily attributable to a recovery of
loan losses partially offset by an increase in noninterest expense.
MFB Corp's net interest income before provision for loan losses for the three
month period ended December 31, 2006 was $3.1 million compared to $3.5 million
for the same period last year. The decrease was primarily due to an increase in
interest expense on deposits partially offset by a reduction of FHLB advances
and other borrowings interest expense. Interest expense on deposits increased to
$2.6 million for the quarter ended December 2006 compared to $2.1 million for
the quarter ended December 2005, while expense for borrowings declined to $1.5
million from $1.6 million for the comparable periods. Total interest income
earned was $7.1 million for the quarter ended December 2006 and $7.2 million for
the same quarter in 2005.
The recovery of loan losses was $1.1 million for the quarter ended December 31,
2006 compared to a provision of $2.1 for the same period last year. The recovery
during the quarter ended December 31, 2006 was predominantly related to the
repayment of two commercial loans which previously had a significant allowance
for loan losses allocations - discussed in Note 5. The provision during the
first quarter ended December 31, 2005 was primarily related to management's
assessment of a commercial loan (which is the larger of the two loans discussed
in Note 5) 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.
During the first quarter ended December 31, 2005, the Bank updated the analysis
of the value of this collateral, completed an assessment of the reliability and
adequacy of accounting systems and evaluated the most recent financial
performance of the business and determined that an additional charge to earnings
in the amount of $2.3 million ($1.4 million net of tax) for this loan was
necessary. The percentage of non-performing assets to total loans decreased from
2.18% at September 30, 2006 to 1.90% at December 31, 2006.
Noninterest income totaled $1.6 million for both quarters ending December 31,
2006 and 2005. In the quarter ended December 31, 2006, MFB recorded a gain on
securities of $361,000 as a partial settlement on a WorldCom class action suit;
an impairment of $49,000 was recorded for the valuation of mortgage servicing
assets in the current quarter while in the prior year period a recovery of
$167,000 was recorded for the valuation of mortgage servicing rights.
Noninterest expense increased to $4.2 million for the quarter ended December 31,
2006 from $3.9 million for the quarter ended December 31, 2005. The increase was
primarily from increased salaries and employee benefits as well as an increase
in marketing and business development expenses.
BALANCE SHEET COMPOSITION
COMPARISON OF DECEMBER 31, 2006 TO SEPTEMBER 30, 2006
The Company's total assets were $501.9 million as of December 31, 2006 compared
to $496.1 million as of September 30, 2006.
Cash and cash equivalents increased from $16.3 million at September 30, 2006 to
$21.7 million at December 31, 2006. Financing activities provided an increase of
$4.7 million in cash, largely from an increase in deposits; investing activities
and operating activities contributed $524,000 and $185,000 to cash,
respectively, during the three month period.
As of December 31, 2006 total securities available for sale were $53.0 million,
a decrease of $5.4 million from $58.4 million at September 30, 2006. The
securities portfolio activity during the quarter ended December 31, 2006
included principal payments on mortgage-backed and related securities of $2.4
million and maturities and calls of securities available for sale of $3.3
million. There were no purchases or sales of securities during the quarter ended
December 31, 2006.
Loans receivable increased from $379.2 million at September 30, 2006 to $383.3
million at December 31, 2006. Mortgage loans increased by $900,000 from $199.2
million at September 30, 2006 to $200.1 million at December 31, 2006. Commercial
loans outstanding increased slightly from $134.4 million at September 30, 2006
to $134.9 million at December 31, 2006. Consumer loans, including home equity
and second mortgages, increased by $2.6 million during the three month period.
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 first quarter ended December 31, 2006, the Company completed
secondary market mortgage loan sales totaling $2.1 million and the net gains
realized on these loan sales were $51,000 including $26,000 related to recording
mortgage servicing rights. During the quarter ended September 30, 2006, the
Company completed secondary market mortgage loan sales totaling $2.3 million and
the net gains realized on these loan sales were $49,000 including $29,000
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 December 31, 2006 was $5.7 million or 1.48% of
loans compared to $7.2 million or 1.91% of loans at September 30, 2006 with the
change due predominantly to the recovery of loan losses during the quarter. For
the first quarter ended December 31, 2006, net charge-offs were $439,000
compared to $37,000 net charge-offs for the quarter ended September 30, 2006. In
management's opinion, the allowance for loan losses is adequate to cover
probable incurred losses at December 31, 2006.
Total liabilities increased by $4.8 million, from $457.1 million at September
30, 2006 to $461.9 million at December 31, 2006. The bank's noninterest-bearing
demand deposits increased $3.2 million, and time deposits increased $3.2 million
and were offset in part by a decrease in savings and NOW deposits of $1.9
million. Advances from the FHLB increased slightly to $98.0 million at December
31, 2006, from $97.1 million at September 30, 2006. As of December 31, 2006, the
advances had a weighted average interest rate of 5.49% and mature over the next
six years. A total of $7.0 million of the advances with a weighted average
interest rate of 6.73% mature over the next twelve months.
Total shareholders' equity increased by $1.2 million to $40.1 million at
December 31, 2006 compared to $38.9 million at September 30, 2006. The increase
was from net income of $1.2 million, a reduction in the unrealized investment
losses of $155,000, offset by dividend payout of $217,000 and treasury stock
purchases of $132,000. MFB Corp's equity to assets ratio was 8.01% at December
31, 2006 compared to 7.85% at September 30, 2006. The book value of MFB Corp.
stock also increased, from $29.48 at September 30, 2006 to $30.29 at December
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 $75.7 million as of December 31, 2006 was relatively
unchanged from September 30, 2006. Cash and cash equivalents increased $5.4
million in the most recent quarter, while securities available for sale declined
by the same amount. Management believes the liquidity level as of December 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 December 31, 2006, 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 $88.4 million at December 31, 2006, including $74.0 million
in available consumer and commercial lines and letters of credit. Certificates
of deposit scheduled to mature in one year or less totaled $141.7 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, 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 December 31, 2006
Total capital
(to risk weighted assets) $ 44,273 13.07% $ 27,091 8.00% $ 33,864 10.00%
Tier 1 (core) capital
(to risk weighted assets) 41,795 12.20 13,546 4.00 20,318 6.00
Tier 1 (core) capital
(to adjusted total assets) 41,795 8.44 19,819 4.00 24,774 5.00
As of September 30, 2006
Total capital
(to risk weighted assets) $ 43,221 12.96% $ 26,688 8.00% $ 33,360 10.00%
Tier 1 (core) capital
(to risk weighted assets) 40,859 12.10 13,344 4.00 20,016 6.00
Tier 1 (core) capital
(to adjusted total assets) 40,859 8.34 19,604 4.00 24,506 5.00
As of December 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 September 30,
2006.
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, 2006, 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
September 30, 2006, data was not available from the OTS for the shift downward
in rates 300 basis points).
As illustrated in the September 30, 2006 table below, the Company's interest
rate risk is sensitive to rising rates and positively impacted by declining
rates. 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.
September 30, 2006
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 $ 39,710 $ (16,488) (29)% 8.24% (291) bp
+200 45,865 (10,333) (18) 9.36 (178) bp
+100 51,391 (4,807) (9) 10.33 (81) bp
0 56,198 - - 11.14 -
(100) 58,682 2,484 4 11.51 37 bp
(200) 59,723 3,524 6 11.62 48 bp
(1) Expressed in basis points
Specifically, the September 30, 2006 table indicates that the Company's NPV was
$56.2 million or 11.14% 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 a $10.3 million or 18% decrease in the Company's NPV and
would result in a 178 basis point decrease in the Company's NPV ratio to 9.36%.
Also, an immediate 200 basis point decrease in market interest rates would
result in a $3.5 million increase in the Company's NPV, and a 48 basis point
increase in the Company's NPV ratio to 11.62%.
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 were $675,000
at December 31, 2006 and there were no loans classified as held for sale at
September 30, 2006. The Company retains the servicing on the majority of loans
sold in the secondary market and, at December 31, 2006, $191.7 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
None
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 December 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
October 1-31, 2006 3,574 $32.15 3,574 15,220
November 1-30, 2006 399 $34.04 399 14,821
December 1-31, 2006 100 $36.04 100 14,721
Total 4,073 4,073
(1) On February 2, 2006, the Company announced in a press release that the 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.
3 (2) Code of By-Laws of MFB Corp. are incorporated by reference to Exhibit 3.1
to the Company's Form 8-K filed December 12, 2006
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: By /s/ Charles J. Viater
---------------------------------
Charles J. Viater
President and Chief Executive Officer
Date: By /s/ Terry L Clark
-----------------------------------
Terry L. Clark
Executive Vice President and 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: 1/19/07 /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: 1/19/07 /s/ Terry L. Clark
--------------------------------------
Terry L. Clark
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 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 19 day of January, 2007.
/s/Terry L Clark /s/ Charles J. Viater
Terry L. Clark 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.