UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
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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
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MFB CORP.
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(Exact name of registrant as specified in its charter)
Indiana 35-1907258
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
121 South Church Street
P.O. Box 528
Mishawaka, Indiana 46546
(Address of principal executive offices,
including Zip Code)
(219) 255-3146
(Registrant's telephone number, including area code)
None
----
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No
----- -----
(2) Yes X No
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The number of shares of the registrant's common stock, without par value,
outstanding as of April 30, 2002 was 1,336,839.
MFB CORP. AND SUBSIDIARY FORM
10-Q
INDEX
Page No.
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2002 (Unaudited) and September 30, 2001 3
Consolidated Statements of Income (Unaudited)
Three and six months ended March 31, 2002 and 2001 4
Condensed Consolidated Statements of Changes in Shareholders'
Equity (Unaudited)
Three and six months ended March 31, 2002 and 2001 5
Consolidated Statements of Cash Flows (Unaudited)
Six months ended March 31, 2002 and 2001 6
Notes to (Unaudited) Consolidated Financial Statements
March 31, 2002 8
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
Results of Operations 13
Balance Sheet Composition 14
Asset/Liability Management 15
Liquidity and Capital Resources 17
Part II. Other Information
Items 1-6. 19
Signatures 20
MFB CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, 2002 and September 30, 2001
(In thousands, except share information)
(Unaudited)
March 31, September 30,
2002 2001
---- ----
ASSETS
Cash and due from financial institutions $ 11,458 $ 7,229
Interest-bearing deposits in other financial
institutions - short-term 20,853 26,994
--------- ---------
Total cash and cash equivalents 32,311 34,223
--------- ---------
Interest-bearing time deposits in other financial institutions 1,000 1,500
Securities available for sale (amortized cost of $61,933 - 3/31/02
and $47,732 - 9/30/01) 61,041 47,860
Federal Home Loan Bank (FHLB) stock, at cost 6,308 6,308
Loans held for sale 1,236 3,074
Loans receivable 309,571 311,613
Less: allowance for loan losses (3,388) (4,632)
--------- ---------
Loans receivable, net 306,183 306,981
--------- ---------
Accrued interest receivable 1,803 1,774
Premises and equipment, net 4,948 5,100
Mortgage servicing rights, net of accumulated amortization of
$420 - 3/31/02 and $239 - 9/30/01 1,396 1,069
Investment in limited partnership 2,785 2,877
Other assets 2,583 2,318
--------- ---------
Total assets $ 421,594 $ 413,084
========= =========
LIABIILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing demand deposits $ 15,395 $ 13,895
Savings, NOW and MMDA deposits 81,025 73,082
Other time deposits 157,109 158,202
--------- ---------
Total deposits 253,529 245,179
--------- ---------
Securities sold under agreements to repurchase 11,363 11,022
FHLB advances 119,335 119,685
Advances from borrowers for taxes and insurance 1,592 1,599
Accrued expenses and other liabilities 1,157 1,219
--------- ---------
Total liabilities 386,976 378,704
Shareholders' equity
Common stock, no par value, 5,000,000 shares authorized;
shares issued:1,689,417-3/31/02 and 9/30/01
shares outstanding: 1,336,839-3/31/02 and 1,336,539-9/30/01 12,940 13,023
Retained earnings - substantially restricted 30,084 29,089
Accumulated other comprehensive income (loss),
net of tax of $(246) - 3/31/02 and $83 - 9/30/01 (646) 45
Treasury stock, 352,578 common shares - 3/31/02
352,878 common shares - 9/30/01, at cost (7,760) (7,777)
--------- ---------
Total shareholders' equity 34,618 34,380
--------- ---------
Total liabilities and shareholders' equity $ 421,594 $ 413,084
========= =========
See accompanying notes to (unaudited) consolidated financial statements.
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three and six months ended March 31, 2002 and 2001
(in thousands except per share information)
Three Months Ended Six Months Ended
March 31, March 31,
2002 2001 2002 2001
---- ---- ---- ----
Interest income
Loans receivable, including fees
Mortgage loans $ 2,844 $ 3,524 $ 5,894 $ 7,072
Consumer and other loans 478 614 1,025 1,219
Commercial loans 2,113 2,304 4,347 4,805
Securities - taxable 738 894 1,474 1,802
Other interest-bearing assets 131 280 289 460
-------- -------- -------- --------
Total interest income 6,304 7,616 13,029 15,358
Interest expense
Deposits 1,731 2,921 3,686 5,852
Securities sold under agreements
to repurchase 40 73 92 166
FHLB advances 1,671 1,628 3,380 3,241
-------- -------- -------- --------
Total interest expense 3,442 4,622 7,158 9,259
-------- -------- -------- --------
Net interest income 2,862 2,994 5,871 6,099
Provision for loan losses 452 150 685 2,107
-------- -------- -------- --------
Net interest income after
provision for loan losses 2,410 2,844 5,186 3,992
Noninterest income
Service charges on deposit accounts 236 206 497 431
Trust fee income 58 55 115 101
Insurance commissions 30 25 69 60
Net realized gains from sales of loans 341 186 921 372
Loan servicing fees, net 9 18 (50) 44
Other income 88 115 190 260
-------- -------- --------
Total noninterest income 762 605 1,742 1,268
Noninterest expense
Salaries and employee benefits 1,521 1,215 2,919 2,374
Occupancy and equipment 374 349 735 645
Data processing expense 169 120 328 236
Other expense 602 547 1,034 1,024
-------- -------- -------- --------
Total noninterest expense 2,666 2,231 5,016 4,279
-------- -------- -------- --------
Income before income taxes 506 1,218 1,912 981
Income tax expense 135 409 642 307
-------- -------- --------
Net income $ 371 $ 809 $ 1,270 $ 674
======== ======== ======== ========
Basic earnings per common share $ 0.28 $ 0.60 $ .95 $ .50
Diluted earnings per common share $ 0.26 $ 0.59 $ .92 $ .49
See accompanying notes to (unaudited) consolidated financial statements.
MFB CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY (UNAUDITED)
Three and six months ended March 31, 2002 and 2001
(In thousands)
Three Months Ended Six Months Ended
March 31, March 31,
2002 2001 2002 2001
---- ---- ---- ----
Balance at beginning of period $ 35,013 $ 32,422 $ 34,380 $ 32,514
Purchase of treasury stock (64) (107) (181) (325)
Stock option exercise - 153 115 161
Cash dividends declared (141) (134) (275) (262)
Comprehensive income (loss):
Net income 371 809 1,270 674
Net change in net unrealized gains and losses on
securities available for sale, net of tax effects (561) 228 (691) 609
-------- -------- -------- --------
Total comprehensive income (190) 1,037 579 1283
-------- -------- -------- --------
Balance at end of period $ 34,618 $ 33,371 $ 34,618 $ 33,371
======== ======== ======== ========
See accompanying notes to (unaudited) consolidated financial statements.
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended March 31, 2002 and 2001
(In thousands)
Six Months Ended
March 31,
2002 2001
---- ----
Cash flows from operating activities
Net income (loss) $ 1,270 $ 674
Adjustments to reconcile net income (loss) to net
cash from operating activities
Depreciation and amortization, net of accretion 540 188
Provision for loan losses 685 2,107
Net realized gains from sales of loans (921) (372)
Amortization of mortgage servicing rights 181 36
Origination of loans held for sale (39,018) (16,113)
Proceeds from sales of loans held for sale 41,269 20,997
Equity in loss of investment in limited partnership 92 33
Net change in:
Accrued interest receivable (29) 42
Other assets 90 (1,079)
Accrued expenses and other liabilities (62) 333
-------- --------
Net cash from operating activities 4,097 6,846
Cash flows from investing activities
Net Change in interest-bearing time deposits in other financial institutions 500 (2,500)
Net change in loans receivable 113 3,677
Proceeds from:
Principal payments of mortgage-backed
and related securities 13,433 944
Maturities and calls of securities available for sale 14,445 23,999
Purchase of:
Securities available for sale (42,321) (32,078)
Premises and equipment, net (147) (636)
-------- --------
Net cash from investing activities (13,977) (6,594)
(Continued)
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended March 31, 2002 and 2001
(In thousands)
Six Months Ended
March 31,
2002 2001
---- ----
Cash flows from financing activities
Purchase of MFB Corp. common stock $ (181) $ (325)
Net change in deposits 8,350 14,197
Net change in securities sold under agreements to repurchase 341 (1,899)
Proceeds from FHLB borrowings - 15,000
Repayment of FHLB borrowings (350) (12,350)
Proceeds from exercise of stock options 90 116
Net change in advances from borrowers for taxes and insurance (7) (127)
Cash dividends paid (275) (262)
-------- --------
Net cash from financing activities 7,968 14,350
-------- --------
Net change in cash and cash equivalents (1,912) 14,602
Cash and cash equivalents at beginning of period 34,223 14,544
-------- --------
Cash and cash equivalents at end of period $ 32,311 $ 29,146
======== ========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 7,198 $ 9,268
Income taxes 715 150
See accompanying notes to (unaudited) consolidated financial statements.
MFB CORP. AND SUBSIDIARY
NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
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 bank
subsidiary, MFB Financial (the "Bank"). MFB Corp. and the Bank (collectively
referred to as the "Company") conduct business from their main office in
Mishawaka, Indiana, and six branch locations in St. Joseph and Elkhart Counties
of Indiana. The Bank offers a variety of lending, deposit, trust and other
financial services to its retail and commercial customers. The Bank's
wholly-owned subsidiary, Mishawaka Financial Services, Inc., offers general
property, casualty and life insurance to customers in the Bank's market area.
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 complete presentation of
financial statements. In the opinion of management, the consolidated financial
statements contain all normal recurring adjustments necessary to present fairly
the consolidated balance sheets of MFB Corp. and its subsidiary MFB Financial as
of March 31, 2002 and September 30, 2001, the consolidated statements of income
and the condensed consolidated statements of changes in shareholders' equity for
the three and six months ended March 31, 2002, and the consolidated statements
of cash flows for the six months ended March 31, 2002 and 2001. All significant
intercompany transactions and balances are eliminated in consolidation.
Reclassifications: Some items in the prior consolidated financial statements
have been reclassified to conform with the current presentation.
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.
A reconciliation of the numerators and denominators used in the computation of
the basic earnings per common share and diluted earnings per common share is
presented below:
(Continued)
NOTE 2 - EARNINGS PER COMMON SHARE (Continued)
The computations of basic earnings per common share and diluted earnings per
common share for the periods ended March 31, 2002 and 2001 are presented below.
Three Months Ended Six Months Ended
March 31, March 31,
2002 2001 2002 2001
----- ---- ---- ----
(in thousands except per share information)
Basic Earnings Per Common Share
Numerator
Net income $ 371 809 1,270 $ 674
====== ====== ====== ======
Denominator
Weighted average common shares outstanding
for basic earnings per common share 1,339 1,347 1,339 1,351
====== ====== ====== ======
Basic Earnings Per Common Share $ .28 $ .60 $ .95 $ .50
====== ====== ====== ======
Diluted Earnings Per Common Share
Numerator
Net income $ 371 $ 809 $1,270 $ 674
====== ====== ====== ======
Denominator
Weighted average common shares outstanding
for basic earnings per common share 1,339 1,347 1,339 1,351
Add: Dilutive effects of assumed exercises of
stock options 37 33 35 31
------ ------ ------ ------
Weighted average common and dilutive
potential common shares outstanding 1,376 1,380 1,374 1,382
====== ====== ====== ======
Diluted Earnings Per Common Share $ .26 $ .59 $ .92 $ .49
====== ====== ====== ======
Stock options for 75,750 common shares for the three and six months ended March
31, 2002 and 78,250 common shares for the three and six months ended March 31,
2001 were not considered in computing diluted earnings per common share because
they were antidilutive.
NOTE 3 - SECURITIES
The amortized cost and fair value of securities available for sale are as
follows:
...........................March 31, 2002............................
--------------
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Debt securities
U.S. Government
and federal agencies $ 12,067 $ 54 $ (86) $ 12,035
Municipal bonds 350 - (6) 344
Mortgage-backed 27,074 145 (98) 27,121
Commercial Paper 1,999 - - 1,999
Corporate notes 16,206 116 (746) 15,576
---------------- ------------ -------------- ------
57,696 315 (936) 57,075
Marketable equity securities 4,237 1 (272) 3,966
---------------- ------------ -------------- ---------------
$ 61,933 $ 316 $ (1,208) $ 61,041
================ ============ ============== ===============
..........................September 30, 2001.........................
------------------
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Debt securities
U.S. Government
and federal agencies $ 2,920 $ 102 $ - $ 3,022
Municipal bonds 145 - - 145
Mortgage-backed 20,091 244 (15) 20,320
Commercial paper 4,995 - - 4,995
Corporate notes 15,329 403 (525) 15,207
---------------- ------------ ------------- ---------------
43,480 749 (540) 43,689
Marketable equity securities 4,252 - (81) 4,171
---------------- ------------ ------------- ---------------
$ 47,732 $ 749 $ (621) $ 47,860
================ ============ ============= ===============
NOTE 4 - LOANS RECEIVABLE, NET
Loans receivable at March 31, 2002 and September 30, 2001 are summarized as
follows:
March 31, September 30,
2002 2001
---- ----
(in thousands)
First mortgage loans (principally conventional)
Principal balances
Secured by one-to-four family residences $ 152,544 $ 157,187
Construction loans 13,701 18,658
Other 7,340 4,331
--------- ---------
173,585 180,176
Less undisbursed portion of construction and
other mortgage loans (684) (143)
--------- ---------
Total first mortgage loans 172,901 180,033
Commercial and consumer loans:
Principal balances
Home equity and second mortgage $ 18,629 $ 20,275
Commercial 112,772 105,556
Municipal 19 19
Other 6,014 6,537
--------- ---------
Total commercial and consumer loans 137,434 132,387
Net deferred loan origination fees (764) (807)
--------- ---------
$ 309,571 $ 311,613
========= =========
Activity in the allowance for loan losses is summarized as follows for the six
months ended March 31, 2002 and for the year ended September 30, 2001.
March 31, September 30,
2002 2001
---- ---
(in thousands)
Balance at beginning of year $ 4,632 $ 1,672
Provision for loan losses 685 3,097
Charge-offs (1,934) (141)
Recoveries 5 4
------- -------
Balance at end of year $ 3,388 $ 4,632
======= =======
NOTE 4 - LOANS RECEIVABLE, NET (continued)
Impaired loans were as follows:
Quarter Ended Year Ended
March 31, September 30,
2002 2001
---- ----
Quarter-end and year-end balances with no allocated
allowance for loan losses $ 1,355,000 $ 1,290,000
Quarter-end and year-end loans with allocated allowance
for loan losses 5,839,000 7,641,000
------------- --------------
Total $ 7,194,000 $ 8,931,000
============= ==============
Amount of the allowance for loan losses allocated $ 1,250,000 $ 2,700,000
Average of impaired loans $ 9,187,000 $ 2,274,000
Interest income recognized during impairment $ 50,000 $ -
Cash-basis interest income recognized during impairment $ 54,000 $ -
Nonperforming loans were as follows at March 31, 2002 and September 30, 2001:
March 31, September 30,
2002 2001
---- ----
Loans past due over 90 days still on accrual status $ - $ 152,000
Nonaccrual loans 4,029,000 2,632,000
----------- ------------
Total Nonperforming loans $ 4,029,000 $ 2,784,000
=========== ============
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
The principal business of MFB Financial has historically consisted of attracting
deposits from the general public and the small business community and making
loans secured by various types of collateral, including real estate and general
business assets. The Bank is significantly affected by prevailing economic
conditions, as well as government policies and regulations concerning, among
other things, monetary and fiscal affairs, housing and financial institutions.
Deposit flows are influenced by a number of factors, including interest rates
paid on competing investments, account maturities, fee structures, and level of
personal income and savings. Lending activities are influenced by the demand for
funds, the number and quality of lenders, and regional economic cycles. Sources
of funds for lending activities of the Bank include deposits, borrowings,
payments on loans and income provided from operations.
The Company's earnings are primarily dependent upon the Bank's net interest
income, the difference between interest income and interest expense. Interest
income is a function of the balances of loans and investments outstanding during
a given period and the yield earned on such loans and investments. Interest
expense is a function of the amount of deposits and borrowings outstanding
during the same period and interest rates paid on such deposits and borrowings.
The Company's earnings are also affected by the Bank's provisions for loan
losses, service charges, fee income, gains from sales of loans, retained
mortgage loan servicing fees, income from subsidiary activities, operating
expenses and income taxes.
COMPARISON OF THREE AND SIX MONTHS ENDED MARCH 31, 2002 AND 2001
Results Of Operation
The Company's consolidated net income for the three months ended March 31, 2002
was $371,000, or $0.26 diluted earnings per common share, compared to net income
of $809,000 or $0.59 diluted earnings per share, for the three months ended
March 31, 2001. The Company's consolidated net income for the six months ended
March 31, 2002 was $1,270,000, or $0.92 diluted earnings per share, compared to
net income of $674,000, or $0.49 diluted earnings per share, for the same period
last year. The decline in net income for the second quarter from last year was
primarily attributable to increases in the loan loss provision and noninterest
expense offset by increased noninterest income and a reduction in income tax
expense. The increase in net income for the six months ended March 31, 2002 over
the same period last year was due to increased noninterest income this year and
an additional $1.80 million provision to the loan loss reserve ($1.10 million
after tax) during the first quarter of last year due to a Chapter 11 bankruptcy
filing by a commercial customer. These were partially offset by an increase in
noninterest expense this year over last year.
Net interest income before provision for loan losses for the three month period
ended March 31, 2002 totaled $2.9 million compared to $3.0 million for the same
period one year ago. Total interest income for the second quarter decreased $1.3
million and total interest expense decreased $1.2 million from the second
quarter last year as a result of the overall decline in interest rates. For the
six months ended March 31, 2002 net interest income declined from $6.1 million
last year to $5.9 million this year. The provision for loan losses for the
second quarter ended March 31, 2002 was $452,000 compared to $150,000 for the
second quarter last year. The provision for loan losses for the six months ended
March 31, 2002 was $685,000 compared to $2.11 million for the same period last
year. Excluding the specific $1.80 million loan loss provision previously
discussed, management has increased the provision this year for both the second
quarter and year to date based on their analysis of the commercial loan
portfolio and economic conditions.
Noninterest income increased 26.0% from $605,000 for the three months ended
March 31, 2001 to $762,000 for the most recent three month period. For the six
months ended March 31, 2002 noninterest income increased 37.4%, from $1.27
million to $1.74 million. Significant growth occurred in deposit fees and gains
on sales of mortgage loans for both the three and six month periods. Noninterest
expenses increased 19.5% from $2.23 million for the second quarter ended March
31, 2001 to $2.67 million this current quarter. For the six months ended March
31, 2002 noninterest expense increased 17.2% from $4.3 million last year to $5.0
million this year. The increases were primarily due to increases in salaries and
employee benefits, occupancy and equipment and data processing expense for both
the three and six month periods. Both noninterest income and noninterest expense
have been impacted this year by the increased volume in real estate lending due
to the low rate environment.
Corresponding to the reported income before taxes, income tax expense declined
from the second quarter ended March 31, 2001 to the second quarter ended March
31, 2002, and increased for the six months ended March 31, 2002 over the same
period last year.
COMPARISON OF MARCH 31, 2002 TO SEPTEMBER 30, 2001
Balance Sheet Composition
Total assets increased $8.5 million from $413.1 million as of September 30, 2001
to $421.6 million as of March 31, 2002.
Cash and cash equivalents decreased $1.9 million from $34.2 million at September
30, 2001 to $32.3 million at March 31, 2002. Net cash used in investing
activities amounted to $14.0 million and net cash from financing activities
totaled $8.0 million during the six months ended March 31, 2002.
As of March 31, 2002, the total securities portfolio amounted to $61.0 million,
an increase of $13.1 million from $47.9 million at September 30, 2001. The
securities portfolio activity during that period included security purchases of
$42.3 million, security maturities of $14.4 million, and principal payments on
mortgage-backed and related securities of $13.4 million.
As of March 31, 2002, loans receivable were $309.6 million, a decrease of $2.0
million from $311.6 million at September 30, 2001. Commercial loans outstanding
increased by $7.2 million from $105.6 million at September 30, 2001 to $112.8
million at March 31, 2002. Due to increased volume of mortgage loan sales into
the secondary market, mortgage loans declined $7.1 million from $180.0 million
at September 30, 2001 to $172.9 million at March 31, 2002. Consumer loans,
including home equity and second mortgages, also decreased $2.1 million during
the six month period. Loans held for sale at March 31, 2002 declined to $1.2
million from $3.1 million at September 30, 2001. Diversification of the asset
mix in the balance sheet continued to be a focus to improve profit margins,
control margin volatility and to appeal to a broader range of customers and
potential customers.
During the second quarter ended March 31, 2002, the Company completed secondary
market mortgage loans sales totaling $17.0 million and the net gains realized on
these loan sales were $341,000, including $208,000 related to recording mortgage
loans servicing rights. During the first quarter ended December 31, 2001 sales
of $24.3 million yielded net gains on loan sales of $580,000, including $300,000
related to recording mortgage loan servicing rights. The loans sold this year
were 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 decreased from $4.6 million, or 1.49% of loans, at
September 30, 2001 to $3.4 million or 1.09% of loans at March 31, 2002. The
allowance is maintained through the provision for loan losses, which is charged
to earnings. The provision for loan losses is determined in conjunction with
management's review and evaluation of current economic conditions, changes in
the character and size of the loan portfolio, loan delinquencies (current status
as well as past and anticipated trends) and adequacy of collateral securing loan
delinquencies, historical and estimated net charge-offs, and other pertinent
information derived from a review of the loan portfolio. During this six month
period, $685,000 was added to the loan loss reserve, while $1.93 million of net
charge offs were recorded reducing the loan loss reserve. Included in those
charge offs was $1.40 million on the commercial customer who filed Chapter 11
bankruptcy during the first quarter ending December 31, 2000. A $1.80 million
provision to the loan loss reserve was recorded at that time as previously
mentioned. The Company also recorded a $500,000 charge off on a deteriorating
substandard commercial credit in the furniture manufacturing industry.
The Company's non-performing assets have increased from $2.78 million at
September 30,2001 to $4.03 million at March 31, 2002. A total of $2.42 million
of the non-performing assets at March 31. 2002 are non-accrual loans of the
aforemention commercial furniture manufacturer. Impaired loans have decreased
from $8.93 million at September 30, 2001 to $7.19 million at March 31, 2002. The
reduction in impaired loans in largely attributable to the charge offs
previously discussed. In management's opinion, the allowance for loan losses is
adequate to cover losses that are currently anticipated at March 31, 2002.
Total liabilities increased from $378.7 million at September 30, 2001 to $387.0
million at March 31, 2002. Total deposits increased $8.3 million from $245.2
million at September 30, 2001 to $253.5 million at March 31, 2002, primarily due
to a $7.9 million increase in savings, NOW and MMDA deposits and a $1.5 million
increase in noninterest-bearing demand deposits exceeding the $1.1 million
decrease in time certificates of deposits.
FHLB advances decreased from $119.7 million at September 30, 2001 to $119.3
million at March 31, 2002 and securities sold under agreements to repurchase
increased $341,000 during the same six month period. The $119.3 million of
Federal Home Loan Bank advances have a weighted average interest rate of 5.60%
and mature in ten years or less. The one-day retail repurchase agreements with a
weighted average interest rate of 1.52% are secured by investment securities.
Total shareholders' equity increased $238,000 from $34.4 million as of September
30, 2001 to $34.6 million as of March 31, 2002 mainly from net income of
$1,270,000 offset by a reduction in the market value of available for sale
securities of $691,000, net of tax, cash dividend payments of $275,000 and the
repurchase of 8,700 shares of outstanding common stock during this period at a
cost of $181,000. MFB Corp's equity to assets ratio was 8.21% at March 31, 2002
compared to 8.32% at September 30, 2001. The book value of MFB Corp. stock
increased from $25.72 at September 30, 2001 to $25.90 at March 31, 2002.
ASSET/LIABILITY MANAGEMENT
The Company is subject to interest rate risk to the degree that its
interest-bearing liabilities, primarily deposits and Federal Home Loan Bank
(FHLB) advances with short and medium-term maturities, reprice more rapidly, or
at different rates than its interest-earning assets.
A key element of the Company's asset/liability plan is to protect net earnings
by managing the maturity or repricing mismatch between its interest-earning
assets and rate-sensitive liabilities. The Company has sought to reduce exposure
to its earnings 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. The difference as a percentage of
the value of assets is the NPV ratio which was 8.17% as of December 31, 2001
(the most recently available data). Management and the Board of Directors review
the OTS measurements on a quarterly basis to determine whether the Company's
interest rate exposure is within the limits established by the Board of
Directors in the Company's interest rate risk policy.
The Company's asset/liability management strategy dictates acceptable limits on
the amounts of change in NPV given certain changes in interest rates. The table
presented here, as of December 31, 2001, 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 and down
200 basis points. Due to the abnormally low interest rate environment prevailing
at December 31, 2001, meaningful data was not available from the OTS model for
the (-200) basis point scenario and therefore is not included in the table
below.
Interest Rate NPV as % of Portfolio
Changes in Basis Net Portfolio Value Value of Assets
Points ------------------------------------------ -----------------------
NPV
(Rate Shock)(1) $ Amount $ Change % Change Ratio Change (1)
- ------------------------ -------- -------- ----- ----------
(Dollars in Thousands)
+200 27,727 (6,651) ( 19) 6.82 (135)
+100 31,719 (2,658) (8) 7.66 (51)
0 34,377 - - 8.17 -
- 100 34,551 174 1 8.11 (6)
(1) Expressed in basis points
As illustrated in the December 31, 2001 table, the Company's interest rate risk
has similar sensitivity to rising rates as declining rates. When rates rise, the
decline in market value of fixed-rate loans due to the rate increases and
slowing prepayments exceeds the decline in market value of fixed rate deposits
and borrowings. However, when rates decline, the NPV also decreases in the model
because the corresponding increase in market value of fixed rate loans is
partially mitigated by increased borrower prepayments.
Specifically, the table indicates that at December 31, 2001, the Company's NPV
was $34.4 million or 8.17% 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 $6.7 million or 19.0% decline in the Company's
NPV and would result in a 135 basis point or 11% decline in the Company's NPV
ratio to 6.82%. Conversely, an immediate 100 basis point decrease in market
interest rates would result in a $174,000 or 1% increase in the Company's NPV,
and a 6 basis point or 0.7% decrease in the Company's NPV ratio to 8.11%. The
resulting NPV ratios for the above scenarios at December 31, 2001 were within
the limits in the Company's Board-approved guidelines.
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 adjustable rate loans and by selling a portion of its fixed rate
one-to-four family real estate loans. While the Company generally originates
mortgage loans for its own portfolio, sales of fixed rate first mortgage loans
with maturities of 15 years or greater are currently undertaken to manage
interest rate risk. Loans classified as held for sale as of March 31, 2002
totaled $1.24 million compared to $4.65 million at December 31, 2001. The
Company retains the servicing on the majority of loans sold in the secondary
market and, at March 31, 2002, $116 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. Wholesale banking activities are conducted as a means to supplement net
income and to achieve desired growth targets. This strategy involves the
acquisition of assets funded through sources other than retail deposits, such as
FHLB advances. The goal is to create interest rate spreads between asset yields
and funding costs within acceptable risk parameters while improving return on
equity.
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.
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 $94.4 million as of March 31, 2002 compared to $83.6 million
as of September 30, 2001. This $10.8 million increase was primarily due to a
increase in securities available for sale. The sale of fixed rate loan
production along with the growth in deposits has provided the source of
additional liquidity. Management believes the liquidity level as of March 31,
2002 is sufficient to meet anticipated cash needs.
Short-term borrowings or long-term debt, such as Federal Home Loan Bank
advances, are used to compensate for reduction in other sources of funds such as
deposits and to assist in asset/liability management. As of March 31, 2002,
total FHLB borrowings amounted to $119.3 million and were used primarily to fund
loan portfolio growth. The Bank had commitments to fund loan originations with
borrowers totaling $101.0 million at March 31, 2002, including $60.3 million in
available consumer and commercial lines and letters of credit. Certificates of
deposits scheduled to mature in one year or less totaled $103.2 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
judgements by regulators about components, risk weightings, and other factors,
and the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If only adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
The Bank's actual capital and required capital amounts and ratios at March 31,
2002 and September 30, 2001 are presented below:
Requirement to be
Well Capitalized Under
Requirement for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
As of March 31, 2002
Total capital (to risk
weighted assets) $35,915 13.22% $21,728 8.00% $27,160 10.00%
Tier 1 (core) capital
(to risk weighted assets) 33,777 12.44 10,864 4.00 16,296 6.00
Tier 1 (core) capital (to
adjusted total assets 33,777 8.02 16,851 4.00 21,063 5.00
As of September 30, 2001
Total capital (to risk
weighted assets) $35,454 13.11% $21,627 8.00% $27,033 10.00%
Tier 1 (core) capital
(to risk weighted assets) 33,522 12.40 10,813 4.00 16,220 6.00
Tier 1 (core) (to
adjusted total assets 33,522 8.12 16,509 4.00 20,636 5.00
As of March 31, 2002, 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information.
None
Item 6. Reports on Form 8-K.
(a) MFB Corp. filed one Form 8-K report during the quarter ended
March 31, 2002.
Date of report: January 16, 2002
Items reported: News release dated January 16, 2002
regarding the announcement of first quarter
earnings and announcement of a cash dividend
payable on February 12, 2002 to holders of
record on January 29, 2002.
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 May 10, 2002 By /s/ Charles J. Viater
------------------ ---------------------------
Charles J. Viater
President
Date May 10, 2002 By /s/ Thomas J. Flournoy
------------------ ---------------------------
Thomas J. Flournoy
Chief Financial Officer