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, 2007
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, a non-accelerated filer, or a smaller reporting company. See
definition of " large accelerated filer", "accelerated filer", and
"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer __ Accelerated filer __
Non-accelerated filer __ Smaller reporting company 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 February 5, 2008 was 1,387,171.
<page>
MFB CORP. AND SUBSIDIARIES
FORM 10-Q
INDEX
<table>
<caption>
<s> <c>
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
December 31, 2007 (Unaudited) and September 30, 2007 3
Consolidated Statements of Income (Unaudited)
Three Months Ended December 31, 2007 and 2006 4
Condensed Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
Three Months Ended December 31, 2007 and 2006 5
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended December 31, 2007 and 2006 6
Notes to (Unaudited) Consolidated Financial Statements December 31, 2007 7
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
General 13
Results of Operations 13
Balance Sheet Composition 14
Liquidity and Capital Resources 14
Item 4T. Controls and Procedures 16
Part II. Other Information
Items 1-6 17
Signatures 19
Certifications 20
</table>
MFB CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2007 (UNAUDITED) and September 30, 2007
(Dollars in thousands except share information)
<table>
<caption>
<s> <c> <c>
December 31, September 30,
2007 2007
----------------- ------------------
Assets
Cash and due from financial institutions $ 7,075 $ 7,546
Interest-earning deposits in other financial institutions - short term 24,352 15,924
Total cash and cash equivalents 31,427 23,470
Securities available for sale 31,188 33,409
FHLB Stock and other investments 9,155 9,718
Loans held for sale - 612
Mortgage loans 198,484 201,233
Commercial loans 152,912 153,945
Consumer loans 53,490 52,578
Loans receivable 404,886 407,756
Less: allowance for loan losses (4,919) (5,298)
Loans receivable, net 399,967 402,458
Premises and equipment, net 19,131 18,506
Mortgage servicing rights, net 2,194 2,253
Cash surrender value of life insurance 10,662 10,565
Goodwill 1,970 1,970
Other intangible assets 1,823 1,922
Other assets 6,275 5,565
Total assets $ 513,792 $ 510,448
Liabilities and Shareholders' Equity
Liabilities
Deposits
Noninterest-bearing demand deposits $ 38,670 $ 39,043
Savings, NOW and MMDA deposits 121,913 123,718
Time deposits 175,548 171,042
Total deposits 336,131 333,803
Securities sold under agreements to repurchase 577 540
Federal Home Loan Bank advances 127,052 124,258
Subordinated debentures 5,000 5,000
Accrued expenses and other liabilities 3,553 5,790
Total liabilities 472,313 469,391
Shareholders' equity
Common stock, 5,000,000 shares authorized; 12,533 12,500
shares issued: 1,689,417 - 12/31/07 and 9/30/07;
shares outstanding: 1,333,671 - 12/31/07 and 1,313,671 - 9/30/07
Retained earnings - substantially restricted 37,934 37,841
Accumulated other comprehensive income (loss),
net of tax of ($239) - 12/31/07 and ($159) - 9/30/07 (464) (308)
Treasury stock: 355,746 common shares - 12/31/07 and
375,746 common shares - 9/30/07, at cost (8,524) (8,976)
Total shareholders' equity 41,479 41,057
Total liabilities and shareholders' equity $ 513,792 $ 510,448
See accompanying notes to (unaudited) consolidated financial statements
</table>
<page>
MFB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended December 31, 2007 and 2006
(Dollars in thousands except per share information and cash dividends)
<table>
<caption>
<s> <c> <c>
Three Months Ended
December 31,
2007 2006
Interest income
Loans receivable, including fees $ 6,772 $ 6,307
Securities - taxable 491 740
Other interest-earning assets 123 65
Total interest income 7,386 7,112
Interest expense
Deposits 2,530 2,581
Securities sold under agreements to repurchase 5 -
FHLB advances and other borrowings 1,653 1,471
Total interest expense 4,188 4,052
Net interest income 3,198 3,060
Provision for loan losses (94) (1,128)
Net interest income after provision for loan losses 3,292 4,188
Noninterest income
Service charges on deposit accounts 819 851
Trust and brokerage fee income 449 111
Insurance commissions 11 8
Net realized gains from sales of loans 101 51
Mortgage servicing asset (impairment) (58) (49)
Net gain (loss) on securities available for sale (282) 361
Earnings on life insurance 102 62
Other income 222 226
Total noninterest income 1,364 1,621
Noninterest expense
Salaries and employee benefits 2,409 2,112
Occupancy and equipment expenses 805 801
Professional and consulting fees 217 218
Data processing expense 174 207
Business development and marketing 91 191
Supplies and communications 143 151
Amortization of intangibles 99 97
Other expense 360 439
Total noninterest expense 4,298 4,216
Income before income taxes 358 1,593
Income tax expense 16 442
Net income $ 342 $ 1,151
Basic earnings per common share $ 0.26 $ 0.87
Diluted earnings per common share $ 0.26 $ 0.84
Cash dividends declared $ 0.190 $ 0.165
- -----------------------------------------------------------------------------------------------------------------------------------
</table>
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, 2007 and 2006
(Dollars in thousands except share information)
<table>
<caption>
Three Months Ended
December 31,
<s> <c> <c>
2007 2006
-------- ------
Balance at beginning of period $ 41,057 $ 38,939
Stock based compensation expense 8 14
Purchase of -0- and 4,073 shares of treasury stock - (132)
Stock option exercise - issuance of 20,000 and 7,000 shares of treasury stock 426 148
Tax benefit related to employee stock plan 51 37
Cash dividends declared (249) (217)
Comprehensive income:
Net income 342 1,151
Other comprehensive income (loss), net of tax (156) 155
Total comprehensive income 186 1,306
Balance at end of period $ 41,479 $ 40,095
</table>
See accompanying notes to (unaudited) consolidated financial statements
<page>
MFB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended December 31, 2007 and 2006
(Dollars in thousands)
<table>
<caption>
Three Months Ended
December 31,
<s> <c> <c>
2007 2006
Cash flows from operating activities
Net income $ 342 $ 1,151
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization, net of accretion 331 355
Provision for loan losses (94) (1,128)
Net realized gains from sales of loans (101) (51)
Other-than-temporary impairments on available for sale securities 350 -
Amortization of mortgage servicing rights 60 93
Amortization of intangible assets and purchase adjustments 143 136
Origination of loans held for sale (4,535) (2,106)
Sale of other real estate owned property - 1,113
Expense of mortgage servicing rights 58 49
Proceeds from sales of loans held for sale 5,506 2,130
(Gain) on sales of premises and equipment - (5)
Equity in loss of investment in limited partnership 63 78
Stock-based compensation 8 14
Appreciation in cash surrender value of life insurance (97) (59)
Net change in:
Accrued interest receivable (75) 170
Other assets (409) (1,691)
Accrued expenses and other liabilities (808) (101)
Net cash provided (used) in operating activities 742 148
Cash flows from investing activities
Net change in loans receivable 2,009 (5,358)
Stock repurchase by FHLB - 446
Proceeds from:
Principal payments of mortgage-backed and related securities 1,127 2,369
Maturities and calls of securities available for sale and other investments 1,000 3,275
Purchase of premises and equipment, net (951) (208)
Net cash provided (used) in investing activities 3,185 524
Cash flows from financing activities
Purchase of treasury stock - (132)
Net change in deposits 2,328 4,488
Net change in securities sold under agreements to repurchase 37 -
Proceeds from FHLB borrowings 26,501 27,215
Repayment of FHLB borrowings (23,635) (26,215)
Proceeds from exercise of stock options, including tax benefit 477 185
Net change in advances from borrowers for taxes and insurance (1,429) (586)
Cash dividends paid (249) (217)
Net cash provided (used) in financing activities 4,030 4,738
Net change in cash and cash equivalents 7,957 5,410
Cash and cash equivalents at beginning of period 23,470 16,289
Cash and cash equivalents at end of period $ 31,427 $ 21,699
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 4,219 $ 4,120
Income taxes - 440
Supplemental schedule of noncash investing activities:
Transfer from:
Loans receivable to loans held for sale $ - $ 531
Loans receivable to other real estate owned 146 65
</table>
See accompanying notes to (unaudited) consolidated financial statements
<page>
MFB CORP. AND SUBSIDIARIES
NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
NOTE 1 - BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Nature of Operations: MFB Corp. is an Indiana unitary savings and loan holding
company organized in 1993, and parent company of its wholly owned federal
savings bank subsidiary, MFB Financial (the "Bank"). MFB Corp. and the Bank
(collectively referred to as the "Company") conduct business from their
corporate office and main office located in Mishawaka, Indiana and the Bank's
eleven financial centers in St. Joseph, Elkhart, and Hamilton Counties of
Indiana, and also has a mortgage loan office located in New Buffalo in Berrien
County, Michigan. The Bank offers a variety of lending, deposit, trust,
investment, broker advisory, private banking, retirement plan and other
financial services to its retail and business customers. The Bank's wholly-owned
subsidiary, Mishawaka Financial Services, Inc., is engaged in the sale of life
and health 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. The Bank's wholly-owned subsidiary,
Community Wealth Management Group, Inc., is based out of Hamilton and Montgomery
counties in Indiana, and attracts high net worth clients and offers trust,
investment, insurance, broker advisory, retirement plan and private banking
services in the Bank's market area. MFBC Statutory Trust I is MFB Corp's
wholly-owned trust preferred security subsidiary.
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, 2007 and September 30, 2007, 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, 2007 and 2006. 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.
<page>
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 month periods ended December 31, 2007 and 2006 are
presented below.
<table>
<caption>
<s> <c> <c>
Three Months Ended
December 31,
(In thousands except per share information)
2007 2006
Basic earnings per common share
Numerator
Net income $ 342 $ 1,151
Denominator
Weighted average common shares outstanding for basic
earnings per common share 1,316 1,317
------ ------
Basic earnings per common share $ 0.26 $ 0.87
Diluted earnings per common share
Numerator
Net income $ 342 $ 1,151
Denominator
Weighted average common shares outstanding for basic
earnings per common share 1,316 1,317
Add: Dilutive effects of assumed exercises of stock options 19 53
Weighted average common and dilutive potential common shares
outstanding 1,335 1,370
Diluted earnings per common share $ 0.26 $ 0.84
</table>
Stock options for 63,500 and 17,000 shares of common stock were not considered
in computing diluted earnings per common share for the three months ended
December 31, 2007 and 2006 because they were antidilutive.
NOTE 3 - SECURITIES
The fair value of securities available for sale and the related amortized cost
and gross unrealized gains and losses recognized in accumulated other
comprehensive income (loss) are as follows:
<table>
<caption>
December 31, 2007
(Dollars in thousands)
<s> <c> <c> <c> <c>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities
U.S. Government and federal agencies $ 1,500 $ 8 $ - $ 1,508
Mortgage-backed 23,716 87 (198) 23,605
Corporate notes 3,974 - (379) 3,595
29,190 95 (577) 28,708
Marketable equity securities 2,702 - (222) 2,480
$ 31,892 $ 95 $ (799) $ 31,188
September 30, 2007
(Dollars in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities
U.S. Government and federal agencies $ 1,500 $ 6 $ - $ 1,506
Mortgage-backed 25,350 59 (382) 25,027
Corporate notes 3,974 - (468) 3,506
30,824 65 (850) 30,039
Marketable equity securities 3,052 318 - 3,370
$ 33,876 $ 383 $ (850) $ 33,409
</table>
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 have increased since September 30,
2007, resulting in net unrealized losses of $111,000 at December 31, 2007
compared to net unrealized losses of $323,000 at September 30, 2007. 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 Federal National Mortgage Association ("Fannie Mae") and
Federal Home Loan Mortgage Corporation ("Freddie Mac") of $2.0 million each at
both December 31, 2007 and September 30, 2007. The Company recorded a non-cash
impairment charge of $948,000 during the year ended September 30, 2005 for the
decline in the value determined to be other-than-temporary. In addition, during
the quarter ended December 31, 2007, the Company recorded an additional non-cash
impairment charge of $350,000 for the decline in the value of the Fannie Mae
preferred stock determined to be other-than-temporary. Recent capital needs at
Fannie Mae and Freddie Mac resulted in new issuances of higher yielding
preferred stocks by these two companies, and coupled with continued turmoil in
the housing and credit markets, have resulted in significant swings in the
market value of these securities. The Fannie Mae security has consistently held
an unrealized loss position during the latter part of the quarter ending
December 31, 2007. Based upon the structure of the recently issued securities
and its impact on the Company's existing security, management determined the
impairment to be other-than-temporary. Due to the uncertainty of future market
conditions and how they might impact the financial performance of Fannie Mae,
management was unable to determine when or if this impairment will be reversed.
In contrast, the Freddie Mac security showed improvement during management's
review and the impairment was determined to be not other-than-temporary.
<page>
NOTE 4 - LOANS RECEIVABLE
Loans receivable at December 31, 2007 and September 30, 2007 are summarized as
follows:
<table>
<caption>
<s> <c> <c>
December 31, September 30,
2007 2007
(Dollars in thousands)
Residential mortgage loans
Secured by one-to-four family residences $ 177,122 $ 178,056
Construction loans 16,053 18,107
Other 5,774 5,588
198,949 201,751
Less:
Net deferred loan origination fees (448) (466)
Undisbursed portion of construction and other mortgage loans (17) (52)
Total residential mortgage loans 198,484 201,233
Commercial loans
Commercial real estate $ 94,661 $ 95,241
Commercial 58,416 58,890
153,077 154,131
Less: net deferred loan origination fees (165) (186)
Total commercial loans 152,912 153,945
Consumer loans
Home equity and second mortgage $ 43,380 $ 42,593
Other 10,110 9,985
Total consumer loans 53,490 52,578
Total loans receivable $ 404,886 $ 407,756
Activity in the allowance for loan losses is summarized as follows for the three
months ended December 31, 2007 and 2006:
December 31, December 31,
2007 2006
(Dollars in thousands)
Balance at beginning of period $ 5,298 $ 7,230
(Negative) Provision for loan losses (94) (1,128)
Charge-offs (287) (450)
Recoveries 2 11
Balance at end of period $ 4,919 $ 5,663
</table>
NOTE 4 - LOANS RECEIVABLE (continued)
<table>
<caption>
<s> <c> <c>
Quarter Ended Year Ended
December 31, September 30,
2007 2007
Impaired loans were as follows: (Dollars in thousands)
Period end loans with no allocated allowance for loan losses $ 731 $ 759
Period end loans with allocated allowances for loan losses 2,612 2,901
Total impaired loans $ 3,343 $ 3,660
Amount of the allowance for loan losses allocated $ 1,991 $ 2,433
Average of impaired loans 3,691 4,644
Interest income recognized during impairment - 9
Cash-basis interest income recognized during impairment - 7
</table>
Impaired loans decreased during the quarter ended December 31, 2007. The
decrease was primarily due to a charge off of an impaired loan of $281,000 that
had been fully reserved for, in addition to principal payments made of
approximately $186,000 on an impaired loan with a balance of approximately $1.5
million at September 30, 2007. The remaining balance was approximately $1.3
million at December 31, 2007 with an equivalent amount of allowance for loan
losses allocation. The Bank maintained the $1.3 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 ability to seek alternative financing or pay down
the loan. The decrease of impaired loans was partially offset by the addition of
an impaired loan of $177,000.
Non-performing loans were as follows:
<table>
<caption>
<s> <c> <c>
December 31, September 30,
2007 2007
(Dollars in thousands)
Loans past due over 90 days still on accrual status $ - $ 41
Non-accrual loans 4,847 4,693
Restructured loans 318 361
Total non-performing loans $ 5,165 $ 5,095
</table>
NOTE 5 - BUSINESS COMBINATION
On September 28, 2007, the Company acquired certain trust assets, personal
property and contracts (the "Trust Business") of Community Trust & Investment
Company, Inc., an Indiana trust company serving the greater Indianapolis area
and Crawfordsville, Indiana. The Trust Business provides a myriad of trust
services including trust account administration under agreement and wills;
agency accounts, guardianships, estate settlement; custodial and other standard
trust services. The business also offers administration of employee benefit and
employee welfare plans and administrative service through partnerships with
established investment advisors. The Company acquired approximately $275.0
million in trust assets and is operating from offices in Carmel and
Crawfordsville, Indiana. The acquisition included a group of trust professionals
that complement the Company's existing trust department.
The purchase price is based upon the fees earned and received on the trust
assets acquired during the three year period from the date of closing. The first
year's payment is 25%, the second year payment is 20%, and the third year
payment is 15% of the fees earned and received during those periods. At closing,
the estimated purchase price approximated $660,000 and resulted in a present
value intangible asset of $610,000. This intangible asset will be amortized on a
straight line basis over 10 years and will be adjusted, with offsetting impact
to the acquisition payable, as actual payments are determined.
NOTE 6 - SUBSEQUENT EVENTS
On January 8, 2008, MFB Corp. and MutualFirst Financial, Inc. ("MutualFirst")
jointly announced the signing of a definitive agreement (the "Agreement")
pursuant to which the Company will be merged with and into MutualFirst
Acquisition Corp., a wholly-owned subsidiary of MutualFirst (the "Merger"), and
MFB Corp.'s savings bank subsidiary, MFB Financial, will be merged into
MutualFirst's subsidiary, Mutual Federal Savings Bank. The Agreement provides
that upon the effective date of the Merger (the "Effective Time"), pursuant to
election procedures described in the Agreement, each share of common stock of
MFB Corp. will be converted into either an amount of cash equal to $41.00 per
share (the "Cash Consideration"), or 2.59 shares of common stock, $.01 par value
per share, of MutualFirst (the "Exchange Ratio").
Notwithstanding the foregoing, 80% of the total number of outstanding shares of
common stock of MFB Corp. must be converted into MutualFirst common stock. There
may be allocations of cash or stock made to MFB Corp.'s shareholders to ensure
that this requirement is satisfied.
At the effective time of the Merger, each option to purchase Company common
stock, vested or unvested, will be converted into the right to receive options
for a number of shares of MutualFirst common stock equal to 2.59 times the
number of shares of MFB Corp.'s common stock, subject to such options, for the
same aggregate option price as shall be in effect for MFB Corp.'s stock options
immediately prior to the effective date of the Merger.
The Company will have the right to terminate the Agreement if the average
closing price of MutualFirst common stock during a period of five business days
following receipt of all required regulatory and shareholder approvals is less
than $12.664 and MutualFirst common stock underperforms an index of financial
institutions by fifteen percent, unless MutualFirst were to elect to make a
compensating adjustment to the exchange ratio.
Based on the closing price of MutualFirst's common stock on January 7, 2008
($13.35), the transaction has an aggregate value of approximately $52.7 million.
The Merger will be accounted for as a purchase and is expected to close during
the Company's fourth quarter of the fiscal year ending September 30, 2008. The
Agreement has been approved by the boards of directors of MFB Corp. and
MutualFirst. However, the closing of the Merger is subject to certain other
conditions, including the approval of the Merger by the shareholders of MFB
Corp. and approval of the issuance of shares by shareholders of MutualFirst and
the approval of regulatory authorities.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
The principal business of the Bank has historically consisted of attracting
deposits from the general public and the business community and making loans
secured by various types of collateral, including real estate and general
business assets. The Bank's Wealth Management Group 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, mortgage servicing rights valuation adjustments,
service charges, fee income, gains from sales of loans, mortgage loan servicing
fees, income from subsidiary activities, operating expenses and income taxes.
The Company's operations are managed and financial performance is evaluated on a
company-wide basis and, accordingly, considered a single operating segment.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006
Consolidated net income for the Company for the three months ended December 31,
2007 was $342,000 or $0.26 diluted earnings per common share, compared to net
income of $1.2 million or $0.84 diluted earnings per share, for the three months
ended December 31, 2006. MFB Corp.'s decrease in earnings for the first fiscal
quarter from the prior comparable period was primarily attributable to a
significantly smaller negative provision for loan loss and a $350,000
other-than-temporary impairment charge related to an investment in preferred
stock issued by Fannie Mae.
Net interest income before provision for loan losses increased to $3.2 million
for the three month period ending December 31, 2007 compared to $3.1 million for
the same period last year. The gain was due largely to increased income from the
Bank's loan portfolio, which totaled $6.8 million for the quarter ended
December, 31 2007 compared to $6.3 million for the quarter ended December, 31
2006. This was partially offset by interest paid on FHLB borrowings, which
increased to $1.7 million compared to $1.5 million for the respective comparable
periods. Income from investments and interest expense on deposits declined in
the comparable periods.
The negative provision for loan losses was $94,000 for the quarter ended
December 31, 2007 compared to a negative provision for loan losses of $1.1
million for the respective three months ended December 31, 2006. The negative
provision for loan losses during the three months ended December 31, 2007 was
primarily related to the repayment of a commercial loan which had previously
been fully reserved and was offset slightly by provision increases for
nonaccrual loans. The negative provision during the three months ended December
31, 2006 was predominantly related to the repayment of two commercial loans
which previously had a significant allowance for loan losses allocations. The
percentage of non-performing assets to total loans at December 31, 2007 was
1.35%, an increase from 1.29% at September 30, 2007.
Noninterest income totaled $1.4 million for the quarter ended December 31, 2007
compared to $1.6 million for the same period last year. This decrease in
noninterest income was primarily due to a $350,000 other-than-temporary
impairment charge related to an investment in preferred stock issued by Fannie
Mae. The decrease was partially offset by an increase in trust and brokerage fee
income in the amount of $338,000 as a result of the Company's new wealth
management and private banking subsidiary, Community Wealth Management Group,
Inc. In addition, during the quarter ending December 31, 2007, the Bank recorded
a gain on securities of $68,000 from the proceeds of its conversion and sale of
Class B Common Shares of MasterCard stock, compared to a gain of $361,000 as a
partial settlement on a WorldCom class action suit during the quarter ending
December 31, 2006.
Noninterest expense increased to $4.3 million for the quarter ended December 31,
2007 from $4.2 million for the quarter ended December 31, 2006. The increase was
primarily due to an increase in salaries and employee benefits, which was offset
by a decrease in business development and marketing expense.
<page>
Income tax expense for the three months ended December 31, 2007 was
approximately $16,000 compared to approximately $442,000 for the same period
last year due to the change in income before income taxes.
BALANCE SHEET COMPOSITION
COMPARISON OF DECEMBER 31, 2007 TO SEPTEMBER 30, 2007
The Company's total assets were $513.8 million as of December 31, 2007 compared
to $510.4 million as of September 30, 2007.
Cash and cash equivalents increased from $23.5 million at September 30, 2007 to
$31.4 million at December 31, 2007. The increase was derived from a number of
sources including borrowings from the FHLB of $2.8 million, an increase in
deposits of $2.3 million, and proceeds from payments and maturities of
investments of $2.1 million. Payments of property taxes out of borrowers'
escrows resulted in a cash outflow of $1.4 million during the quarter.
As of December 31, 2007 total securities available for sale were $31.2 million,
a decline of $2.2 million from a balance of $33.4 million at September 30, 2007.
Securities portfolio activity during the three month period included principal
payments on mortgage-backed and related securities of $1.1 million and
maturities and calls of securities available for sale and other investments of
$1.0 million. The Company did not purchase or sell securities during the three
month period.
Loans receivable decreased from $407.8 million at September 30, 2007 to $404.9
million at December 31, 2007. Mortgage loans decreased from $201.2 million at
September 30, 2007 to $198.5 million at December 31, 2007. Commercial loans
outstanding decreased from $153.9 million at September 30, 2007 to $152.9
million at December 31, 2007. Consumer loans, including home equity and second
mortgages, increased by $912,000 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.
The balance of mortgage servicing rights at December 31, 2007 was $2.2 million
compared to $2.3 million at September 30, 2007. For the three months ending
December 31, 2007, the Company completed secondary market mortgage loan sales of
$5.5 million and the net gains realized on these loan sales were $101,000,
including $60,000 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 balance of allowance for loan losses at December 31, 2007 was $4.9 million,
or 1.21% of loans, compared to $5.3 million, or 1.30% of loans, at September 30,
2007. The change is due primarily to the negative provision for loan losses and
the increased amount of net charge-offs for the three months ended December 31,
2007. For the first quarter ended December 31, 2007, net charge-offs were
$285,000 compared to $40,000 net charge-offs for the quarter ended September 30,
2007. In management's opinion, the allowance for loan losses is adequate to
cover probable incurred losses at December 31, 2007.
Total liabilities increased $2.9 million, from $469.4 million at September 30,
2007 to $472.3 million at December 31, 2007. The Bank's total deposits grew $2.3
million, which was primarily related to an increase in time deposits of $4.5
million offset by a decrease in savings and NOW deposits of $1.8 million and a
decrease in noninterest-bearing demand deposits of $373,000. Accrued expenses
and other liabilities decreased by $2.1 million, largely due to payments of
property taxes. Advances owing to the FHLB increased by $2.8 million. As of
December 31, 2007, the advances had a weighted average interest rate of 5.16%
and mature over the next five years. A total of $73.5 million of the advances
with a weighted average interest rate of 5.33% mature over the next twelve
months.
Total shareholders' equity increased approximately $400,000 to $41.5 million at
December 31, 2007 compared to $41.1 million at September 30, 2007. The increase
was derived from net income of $342,000 and transactions relating to the
exercise of stock options of $426,000, which were partially offset by an
increase in accumulated other comprehensive (loss) net of tax of $156,000 and a
dividend payout of $249,000. MFB Corp's equity to assets ratio was 8.07% at
December 31, 2007 compared to 8.04% at September 30, 2007. The book value of MFB
Corp. stock decreased from $31.25 at September 30, 2007 to $31.10 at December
31, 2007.
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, over night interest-earning deposits in other financial
institutions, and securities available for sale. These assets are commonly
referred to as liquid assets.
<page>
Liquid assets were $62.6 million as of December 31, 2007, up from $57.4 million
at September 30, 2007. Cash and cash equivalents increased $8.0 million during
the three month period, while securities available for sale and other liquid
investments declined by $2.8 million. Management believes the liquidity level as
of December 31, 2007 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, 2007, total FHLB
borrowings amounted to $127.1 million and were originally used primarily to fund
loan portfolio growth. The Bank had commitments to fund loan originations with
borrowers totaling $88.6 million at December 31, 2007, including $83.0 million
in available consumer and commercial lines and letters of credit. Certificates
of deposit scheduled to mature in one year or less totaled $110.2 million. Based
on historical experience, management believes that a significant portion of
maturing deposits will remain with the Bank. The Bank anticipates that it will
continue to have sufficient cash flow and other cash resources to meet current
and anticipated loan funding commitments, deposit customer withdrawal
requirements and operating expenses.
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings, and other factors,
and the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If only adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
The Bank's actual capital and required capital amounts and ratios at December
31, 2007 and September 30, 2007 are presented below:
<table>
<caption>
<s> <c> <c> <c> <c> <c> <c>
Minimum
Requirement to be
Minimum Well Capitalized Under
Requirement for Capital Prompt Corrective
Actual Adequacy Purposes Actual Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
As of December 31, 2007
Total capital
(to risk weighted assets) $ 40,904 10.66 % $ 30,710 8.00 % $ 38,388 10.00 %
Tier 1 (core) capital
(to risk weighted assets) 38,476 9.91 15,355 4.00 23,033 6.00
Tier 1 (core) capital
(to adjusted total assets) 38,476 7.59 20,287 4.00 25,359 5.00
As of September 30, 2007
Total capital
(to risk weighted assets) $ 41,220 10.79 % $ 30,550 8.00 % $ 38,188 10.00 %
Tier 1 (core) capital
(to risk weighted assets) 38,582 9.99 15,275 4.00 22,913 6.00
Tier 1 (core) capital
(to adjusted total assets) 38,582 7.65 20,182 4.00 25,228 5.00
</table>
As of December 31, 2007, 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.
<page>
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 4T. 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 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 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 significant changes in the
Company's internal control over financial reporting identified in connection
with the Company's evaluation of controls that occurred during the Company's
last fiscal quarter that 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, 2007:
<table>
<caption>
<s> <c> <c> <c> <c>
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 Under the Program
- ---------------------------- ---------------- --------------- ------------------------ --------------------------
(1), (2) (1), (2)
October 1-31, 2007 $ - $ - $ - 67,721
November 1-30, 2007 - - - 67,721
December 1-31, 2007 - - - 67,721
Total $ - $ -
</table>
(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. There are 1,721 shares remaining to be purchased under that
program.
(2) On February 23, 2007, the Company announced in a press release that
the board of directors had authorized a new stock repurchase program
to purchase up to 5%, or approximately 66,000 shares of outstanding
stock, but no shares were repurchased under this new program during
the quarter ended December 31, 2007.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders
(a)The Annual Meeting of Shareholders was held on January 15, 2008.
(b)Each of the persons named in the proxy statement as a nominee for
director was elected.
(c)The MFB Corp 2008 Stock Option and Incentive Plan was approved
and ratified.
(d)The following are the voting results on each matter which were
submitted to the shareholders:
<table>
<caption>
<s> <c> <c>
1) Election of Directors For Against
Robert C. Beutter 1,066,017 110,683
Michael J. Marien 1,067,017 109,683
Charles J. Viater 1,067,667 109,033
MFB Corp 2008 Stock Option 528,564 326,761
and Incentive Plan
</table>
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.
<page>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant had duly caused this report to be signed
on behalf of the undersigned, thereto duly authorized.
MFB CORP.
Date: February 8, 2008 By:
-----------------------------------------------------
Charles J. Viater
President and Chief Executive Officer
Date: February 8, 2008 By:
-----------------------------------------------------
Terry L. Clark
Executive Vice President and Chief Financial Officer
EXHIBIT 31.1
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;
and
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.
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.
Dated: February 8, 2008
---------------------------------------
Charles J. Viater, President and Chief
Executive Officer
EXHIBIT 31.2
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;
and
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.
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.
Dated: February 8, 2008
--------------------------------------------
Terry L. Clark, Executive Vice President and
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 8th day of February, 2008.
/s/ Terry L. Clark /s/ Charles J. Viater
(Signature of Authorized Officer) (Signature of Authorized Officer)
Terry L. Clark Charles J. Viater
- --------------------------------- -------------------------------------
(Typed Name) (Typed Name)
Executive Vice President and CFO President and Chief Executive Officer
- --------------------------------- -------------------------------------
(Title) (Title)
A signed original 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.