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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ____________________ TO ____________________
COMMISSION FILE NUMBER: 0-23374
MFB CORP.
(Exact name of registrant as specified in its charter)
INDIANA 35-1907258
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
121 SOUTH CHURCH STREET
P.O. BOX 528
MISHAWAKA, INDIANA 46546
(Address of principal executive offices,
including Zip Code)
(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
The number of shares of the registrant's common stock, without par value,
outstanding as of December 31, 1999 was 1,412,549.
MFB CORP. AND SUBSIDIARY
FORM 10-Q
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Consolidated Balance Sheets, (Unaudited)
December 31, 1999 and September 30, 1999 3
Consolidated Statements of Income, (Unaudited)
Three months ended December 31, 1999 and 1998 4
Consolidated Statements of Changes in Shareholders' Equity,
(Unaudited) Three months ended December 31, 1999 and 1998 5
Consolidated Statements of Cash Flows, (Unaudited)
Three months ended December 31, 1999 and 1998 6
Notes to Unaudited Consolidated Financial Statements
December 31, 1999 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
Item 4. Year 2000 Readiness 17
PART II. OTHER INFORMATION 19
Items 1-6. 19
Signatures 20
2
MFB CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
December 31, 1999 and September 30, 1999
(In thousands)
December 31, September 30,
1999 1999
ASSETS
Cash and due from financial institutions $ 8,989 $ 6,316
Interest-bearing deposits in other financial
institutions - short-term 5,631 5,746
Total cash and cash equivalents $ 14,620 $12,062
Securities available for sale 34,455 38,170
Securities held to maturity 3,968 3,984
Interest-bearing time deposits in other financial
institutions 1,100 1,000
Federal Home Loan Bank (FHLB) stock, at cost 5,711 5,511
Loans held for sale, net of unrealized losses
of $310,834 at 12/31/99 and $489,152 at 9/30/99 5,805 8,062
Loans receivable, net of allowance for loan losses
of $707,000 at 12/31/99 and $638,465 at 9/30/99 282,757 269,464
Accrued interest receivable 1,482 1,364
Premises and equipment, net 4,533 4,414
Mortgage Servicing Rights, net of accumulated
amortization of $65,059 at 12/31/99 and
$56,571 at 9/30/99 435 412
Investment in limited partnership 1,208 1,213
Other Assets 511 798
Total assets $ 356,585 $ 346,454
LIABIILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing demand deposits $ 7,867 $ 7,358
Savings, NOW and MMDA deposits 53,984 52,409
Other time deposits 141.383 141,640
Total deposits 203,234 201,407
Securities sold under agreements to repurchase 8,944 6,566
FHLB advances 111,226 104,226
Advances from borrowers for taxes and insurance 1,087 2,111
Accrued expenses and other liabilities 677 962
Total liabilities 325,168 315,272
Shareholders' equity
Common stock, 5,000,000 shares authorized;
shares issued:1,689,417-12/31/99 and 9/30/99
shares outstanding: 1,412,549-12/31/99,
1,420,049-9/30/99 $ 13,047 $ 13,016
Retained earnings - substantially restricted 25,981 25,420
Accumulated other comprehensive income (loss) ( 978) (718)
Unearned Employee Stock Ownership Plan (ESOP) Shares (173) (223)
Treasury Stock, 276,868 common shares - 12/31/99
269,368 common shares - 9/30/99 (6,460) (6,313)
Total shareholders' equity 31,417 31,182
Total liabilities and shareholders' equity $ 356,585 $ 346,454
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended December 31, 1999 and 1998
(in thousands)
Three Months Ended
December 31,
1999 1998
INTEREST INCOME
Loans receivable
Mortgage loans $ 3,798 $ 3,886
Consumer and other loans 420 274
Financing leases and Commercial loans 1,448 818
Securities - taxable 796 835
Other interest-bearing assets 58 147
6,520 5,960
INTEREST EXPENSE
Deposits 2,165 2,162
Securities sold under agreements
to repurchase 75 21
FHLB advances 1,445 1,443
3,685 3,626
NET INTEREST INCOME 2,835 2,334
PROVISION FOR LOAN LOSSES 75 45
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,760 2,289
NONINTEREST INCOME
Insurance commissions 41 39
Brokerage Commissions 5 8
Net realized gains from sales of loans 57 120
Loan servicing fees, net of amortization 17 7
Other 238 133
Total noninterest income 358 304
NONINTEREST EXPENSE
Salaries and employee benefits 1,138 838
Occupancy and equipment 242 185
SAIF deposit insurance premium 29 26
Provision to adjust loans held for sale
to lower of cost or market 112 -
Other 489 418
Total noninterest expense 2,010 1,467
INCOME BEFORE INCOME TAXES 1,108 1,126
Income tax expense 419 463
NET INCOME $ 689 $ 663
Basic earnings per common share $ .49 $ .46
Diluted earnings per common share $ .48 $ .45
See accompanying notes to (unaudited) consolidated financial statements.
4
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Three months ended December 31, 1999 and 1998
(In thousands)
UNEARNED Accumulated Total
Common Retained ESOP RRP Comprehensive Treasury Shareholders'
STOCK EARNINGS SHARES SHARES INCOME STOCK EQUITY
THREE MONTHS ENDED DECEMBER 31, 1998
Balance-October 1, 1998 $ 12,847 $ 23,730 $( 445) $ ( 38) $ (45) $ (5,163) $ 30,886
Effect of contribution to fund ESOP - - 46 - - - 46
Market adjustment of 18,513 ESOP shares
committed to be released 47 - - - - - 47
Amortization of RRP contribution - - - 19 - - 19
Purchase of 10,300 shares of treasury stock - - - - - (215) (215)
Cash dividends declared -$.085/share - (125) 4 - - - (121)
Comprehensive Income:
Net income for the three months ended
December 31, 1998 - 663 - - - - 663
Net change in net unrealized gains and losses
on securities available for sale during the
period - - - - (47) - (47)
Total Comprehensive income - - - - - - 616
Balance at December 31, 1998 $ 12,894 $ 24,268 $ (395) $ (19) $ (92) $ (5,378) $31,278
THREE MONTHS ENDED DECEMBER 31, 1999
Balance-October 1, 1999 $ 13,016 $ 25,420 $( 223) $ - $ (718) $ (6,314) $31,181
Effect of contribution to fund ESOP - - 48 - - - 48
Market adjustment of 17,456 ESOP shares committED
to be released 31 - - - - - 31
Purchase of 7,500 shares of treasury stock - - - - - (146) (146)
Cash dividends declared -$.09/share - (128) 2 - - - (126)
Comprehensive Income:
Net income for the three months
ended December 31, 1999 - 689 - - - - 689
Net change in net unrealized gains and losses
on securities available for sale during
the period - - - - (260) - (260)
Total comprehensive income - - - - - - (429)
Balance at December 31, 1999 $ 13,047 $ 25,981 $ (173) $ - $ (978) $(6,460) $ 31,417
5
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended December 31, 1999 and 1998
(In thousands)
Three Months Ended
December 31
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 689 $ 663
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization, net of accretion 133 (69)
Amortization of RRP contribution - 19
Provision for loan losses 75 45
Market adjustment of ESOP shares committed
to be released 31 47
ESOP expense 50 50
Net realized gains from sales of securities
available for sale - -
Net realized gains from sales of loans (57) (120)
Loss on investment in limited partnership 5 7
Amortization of mortgage servicing rights 8 11
Provision to adjust loans held for sale
to lower of cost or market 112 -
Origination of loans held for sale (3,198) (14,751)
Proceeds from sales of loans held for sale 2,963 6,678
Net change in:
Accrued interest receivable (118) (93)
Other assets 456 47
Accrued expenses and other liabilities (284) 352
Net cash from operating activities 865 (7,114)
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing time deposits
in other financial institutions (100) -
Net change in loans receivable (10,963) (644)
Purchase of:
Securities available-for-sale - (29,819)
Securities held to maturity (484) -
FHLB stock (200) (875)
Premises and equipment, net (233) (402)
Proceeds from:
Maturities of securities available for sale 500 15,617
Maturities of securities held to maturity 500 -
Principal payments of mortgage-backed
and related securities 2,766 5,916
Sales of securities available for sale - -
Net cash from investing activities (8,214) (10,207)
(CONTINUED)
6
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended December 31, 1999 and 1998
(In thousands)
Three Months Ended
December 31,
1999 1998
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 1,827 8,204
Net change in securities sold under
agreements to repurchase 2,378 (687)
Net change in advances from borrowers
for taxes and insurance (1,024) (1,072)
Purchase of MFB Corp. common stock (146) (215)
Proceeds from other borrowings 40,500 20,000
Repayment of other borrowings (33,500) (7,431)
Cash dividends paid (128) (124)
Net cash from financing activities 9,907 18,675
Net change in cash and cash equivalents 2,558 1,354
Cash and cash equivalents at
beginning of period 12,062 17,904
CASH AND CASH EQUIVALENTS AT END OF PERIOD $14,620 $19,258
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest on deposits $ 3,242 $ 3,687
Income taxes 120 90
Supplemental schedule of noncash
investing activities
Transfer from:
Loans held for sale to loans receivable $ 2,405 -
The accompanying notes are an integral part of these (unaudited) consolidated
financial statements
7
MFB CORP. AND SUBSIDIARY
NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
NOTE 1 - BASIS OF PRESENTATION AND ACCOUNTING POLICIES
NATURE OF OPERATIONS: MFB Corp. is an Indiana corporation organized in
December, 1993, to become a unitary savings and loan holding company. MFB
Corp. became a unitary savings and loan holding company upon the conversion of
Mishawaka Federal Savings (the "Bank") from a federal mutual savings and loan
association to a federal stock savings bank in March, 1994. MFB Corp. is the
sole shareholder of the Bank. MFB Corp. and the Bank (collectively referred
to as the "Company") conduct business from their main office in Mishawaka,
Indiana, and five 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., is engaged in the sales
of credit life, general fire and accident, car, home, and life insurance as
agent for the Bank's customers and the general public.
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 generally accepted
accounting principles for complete presentation of financial statements. In
the opinion of management, the consolidated financial statements contain all
adjustments necessary to present fairly the consolidated balance sheets of MFB
Corp. and its subsidiary MFB Financial as of December 31, 1999 and September
30, 1999, and the consolidated statements of income for the three months
ended December 31, 1999 and 1998, and the consolidated statements of changes
in shareholders' equity and the consolidated statements of cash flows for the
three months ended December 31, 1999 and 1998. All significant intercompany
transactions and balances are eliminated in consolidation. The income
reported for the three months ended December 31, 1999 is not necessarily
indicative of the results that may be expected for the full year.
NOTE 2 - EARNINGS PER COMMON SHARE
Basic earnings per common share is based on the net income divided by the
weighted average number of common shares outstanding during the period. ESOP
shares are considered outstanding for earnings per common share calculations as
they are committed to be released; unearned shares are not considered
outstanding. Recognition and retention plan ("RRP") shares are considered
outstanding for earnings per common share calculations as they become vested.
Diluted earnings per common share shows the dilutive effect of additional
potential common shares issuable under stock options and nonvested shares
issued under the RRP. At December 31, 1999 and 1998, the Company had average
year-to-date unallocated ESOP shares of 18,675 and 39,028, and average year-to-
date nonvested RRP shares of -0- and 2,888, respectively, which are excluded
from the weighted average number of shares outstanding.
8
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:
THREE MONTHS ENDED
DECEMBER 31,
1999 1998
BASIC EARNINGS PER SHARE
Numerator
Net income available to common shareholders $ 688,826 $ 662,703
Denominator
Weighted average common shares outstanding 1,420,049 1,467,164
Less: Average unallocated ESOP shares 18,675 39,028
Less: Average nonvested RRP shares - 2,888
Weighted average common shares outstanding
for basic earnings per common share 1,401,374 1,425,248
BASIC EARNINGS PER COMMON SHARE $ .49 $ .46
Earnings Per Share Assuming Dilution
Numerator
Net income $ 688,826 $ 662,703
Denominator
Weighted average common shares outstanding
for basic earnings per common share 1,401,374 1,425,248
Add: dilutive effects of assumed exercises
of stock options 36,187 44,167
Add: dilutive effects of average nonvested
RRP share - 1,027
Weighted average common shares and dilutive
potential common shares outstanding 1,437,561 1,470,442
DILUTED EARNINGS PER COMMON SHARE $ .48 $ .45
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The principal business of MFB Financial (the "Bank") 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 and real estate losses, service charges, retained
mortgage loan servicing fees, income from subsidiary activities, operating
expenses and income taxes.
LIQUIDITY
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 $50.2 million as of December
31, 1999 compared to $51.2 million as of September 30, 1999. This $1.0 million
decrease was primarily due to a $3.7 million decrease in securities available
for sale offset by a $2.5 million increase in cash and cash equivalents.
Management believes the liquidity level of $50.2 million as of December 31,
1999 is sufficient to meet anticipated liquidity needs.
A standard measure of liquidity for savings associations is the ratio of cash
and eligible investments to a certain percentage of net withdrawable savings
and borrowings due within one year. The minimum required ratio is currently set
by Office of Thrift Supervision regulation at 4%. At December 31, 1999, the
Bank's liquidity ratio was 15.07%. Therefore, the Bank's liquidity is well
above the minimum regulatory requirements.
Short-term borrowings or long-term debt may be used to compensate for reduction
in other sources of funds such as deposits and to assist in asset/liability
management. During the year ended September 30, 1996 the Bank instituted a
capital leveraging strategy that involved the purchase of earning assets funded
primarily with FHLB advances. As of December 31, 1999, total FHLB borrowings
amounted to $111.2 million , $19.9 million of which were used as part of this
strategy. The remaining $91.3 million was used primarily to fund loan portfolio
growth. The Bank had commitments to fund loan originations with borrowers
totaling $72.1 million at December 31, 1999, including $53.8 million in
available consumer and commercial lines of credit. In the opinion of
management, the Company has sufficient cash flow and other cash resources to
meet current and anticipated loan funding commitments, deposit customer
withdrawal requirements and operating expenses. At September 30, 1999, total
FHLB borrowings totaled $104.2 million, $20.8 million of which were used as
part of the capital leveraging strategy, with the remaining $83.4 million used
to fund loan growth.
10
The cash flow statements provide an indication of the Company's sources and
uses of cash as well as an indication of the ability of the Company to maintain
an adequate level of liquidity. A discussion of the changes in the cash flow
statements for the three months ended December 31, 1999 and 1998 follows.
During the three months ended December 31, 1999, net cash and cash equivalents
increased $2.5 million from $12.1 million at September 30, 1999 to $14.6
million at December 31, 1999.
The Company experienced an $865,000 net increase in cash from operating
activities for the three months ended December 31, 1999, compared to a $7.1
million net decrease for the three months ended December 31, 1998. The increase
in the most recent period was primarily attributable to $3.0 million in
proceeds realized from the sale of mortgage loans and net income of $689,000
offset by the origination of $3.2 million of loans held for sale. The decrease
of $7.1 million for the period ended December 31, 1998 was primarily
attributable to the origination of $14.8 million of loans held for sale offset
by $6.7 million in proceeds realized from the sale of mortgage loans and net
income of $663,000. In the quarter ended September 30, 1999, the Bank adopted a
strategy of originating, selling and delivering all fixed rate, owner-occupied
residential mortgage loans on a "Best Efforts" basis. This program allows the
Bank to commit loans for delivery to investors at prices that are determined
prior to loan approval. In the event that loans are not closed and therefore
not delivered, the Bank incurs no penalty. The strategy is expected to reduce
the interest rate risk exposure of the Bank by minimizing the volume of loans
closed and carried in the held for sale portfolio.
The $8.2 million net decrease in cash from investing activities during the
three months ended December 31, 1999 is primarily attributable to the $11.0
million increase in loan originations exceeding principal payments offset by
$2.8 million of mortgage-backed security principal payments. For the three
months ended December 31, 1998, there was a $10.2 million net decrease in cash
from investing activities. This decrease was primarily attributable to the
purchases of securities and FHLB stock totaling $30.7 million exceeding $15.6
million of security maturities and $5.9 million of principal payments of
mortgage-backed and related securities.
Financing activities generated net cash of $9.9 million for the period ending
December 31, 1999. The net cash was provided primarily from $7.0 million in
net new FHLB advances, net deposit increases of $1.8 million and repurchase
agreement increases of $2.4 million, offset by net changes of $1.0 million in
property tax escrow funds held for borrowers, $146,000 to repurchase the
Company's stock and cash dividend payments of $128,000 during the quarter. Net
cash generated from financing activities was $18.7 million for the three months
ended December 31, 1998. The net cash was provided primarily from $12.6 million
in net new FHLB advances and net deposit increases of $8.2 million, offset by
net changes of $1.1 million in funds held for borrower's property tax
payments, $215,000 to repurchase the Company's stock and cash dividend payments
of $124,000 during the quarter.
CAPITAL RESOURCES
Total shareholders' equity increased from $31.2 million as of September 30,
1999 to $31.4 million as of December 31, 1999 mainly from net income of
$689,000 offset by the repurchase of 7,500 shares of outstanding common stock
during this period at a cost of $146,000, along with the payment of cash
dividends of $128,000.
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
11
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.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth below) of
Total capital to risk weighted assets, Tier I (core) capital to risk weighted
assets and Tier 1 (core) capital to adjusted total assets.
The Bank's actual capital and required capital amounts and ratios at December
31, 1999 and 1998 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 December 31, 1999
Total capital (to
risk weighted assets) $ 31,469 14.54% $ 17,311 8.00% $21,638 10.00%
Tier 1 (core) capital
(to risk weighted
assets) 30,762 14.22% $ 8,655 4.00 12,983 6.00
Tier 1 (core) capital
(to Adjusted total
assets 30,762 8.61% $ 14,293 4.00 17,866 5.00
As of December 31, 1998
Total capital (to
risk weighted assets) $ 29,330 14.65% $ 16,016 8.00% $ 20,020 10.00%
Tier 1 (core) capital
(to risk weighted
assets) 28,839 14.41% 8,008 4.00 12,012 6.00
Tier 1 (core) (to
Adjusted total assets 28,839 8.62% 13,378 4.00 16,722 5.00
AS OF DECEMBER 31, 1999, 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.
12
MATERIAL CHANGES IN FINANCIAL CONDITION
DECEMBER 31, 1999 COMPARED TO SEPTEMBER 30, 1999
Total assets increased $10.1 million from $346.5 million as of September 30,
1999 to $356.6 million as of December 31, 1999.
Net loans increased from $269.5 million to $282.8 million during the three
month period ended December 31, 1999, and increase of $10.9 million. Commercial
loans outstanding increased by $9.3 million from $47.4 million at September 30,
1999 to $56.7 million at December 31, 1999. Mortgage loans and home equity
loans outstanding increased by $3.7 million during the three months ended
December 31, 1999 net of secondary market sales totaling $2.9 million during
the first quarter. Consumer loans outstanding also increased by $313,000 from
$4.5 million at September 30, 1999 to $4.8 million at December 31, 1999. The
growth in all lending divisions, which has been funded primarily by the growth
in total savings deposits and additional borrowings through Federal Home Loan
Bank advances, is primarily attributable to the Company's reputation as a
quality local lender satisfying the market's desire for local service and local
decision making. Net loans held for sale decreased from $8.1 million at
September 30, 1999 to $5.8 million at December 31, 1999 primarily due to the
transfer of seasoned loans (i.e. loans over 12 months old) from the held for
sale classification to loans receivable. During the three month period ended
December 31, 1999, loan sales resulted in net realized gains of $57,000,
including the recording of mortgage servicing rights income. Securities
available for sale decreased $3.7 million from $38.3 million at September 30,
1999 to $34.5 million at December 31, 1999, while total cash and cash
equivalents increased $2.5 million during the same period.
Total liabilities increased $9.9 million from $315.3 at September 30, 1999 to
$325.2 million at December 31, 1999. Total deposits increased from $201.4
million at September 30 , 1999 to $203.2 million at December 31, 1999,
primarily due to a $1.6 million increase in Savings, NOW and MMDA deposits
during the period. Securities sold under agreements to repurchase also
increased from $6.6 million at September 30, 1999 to $8.9 million at December
31, 1999. Enhancement of our deposit based product offerings and emphasis on
core relationships and quality service has contributed to the deposit and
repurchase agreement increases. FHLB advances increased by $7.0 million during
the period to facilitate the loan growth during the period.
The $111.2 million of Federal Home Loan Bank advances have a weighted average
interest rate of 5.45% and mature in ten years or less. The one-day retail
repurchase agreements are secured by investment securities have a weighted
average interest rate of 3.58%.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 1998
The Company's consolidated net income for the three months ended December 31,
1999 was $689,000 or $.48 diluted earnings per share compared with $663,000 or
$.45 diluted earnings per share for the three months ended Decmeber 31, 1998,
representing a 6.67% increase in earnings per share for the Corporation.
Net interest income after provision for loan losses for the most recent three
month period totaled $2.8 million compared to $2.3 million for the same period
one year ago. During the three months ended December 31, 1999 total interest
income increased by $560,000 compared to the same period one year ago,
primarily as a result of the redeployment of assets from relatively lower
earnings investments into the Bank's loan portfolio. Commercial and consumer
loan receivables, including home equity and second mortgage loans, increased
$34.5 over the comparative three month periods. Total interest expense
increased $59,000 reflecting the growth in savings account deposits and
borrowed funds.
13
Noninterest income increased from $304,000 for the three months ended December
31, 1998 to $358,000 for the most recent three month period, while noninterest
expense increased from $1.5 million to $2.0 million for the comparable periods.
The $54,000 noninterest income increase is primarily related to fees generated
from the growing number of core deposit account relationships and income
generated from the Bank's trust department formed in 1999. The noninterest
expense increases are primarily attributable to staffing increases and
renovated facilities to support lending operations along with expenses incurred
in the offering of additional services to the Bank's customers.
SUPPLEMENTAL INFORMATION
The Company continues to maintain asset quality that compares favorably to its
industry peer group. The ratio of nonperforming assets to total assets as of
December 31, 1999 was .05% compared to .08% as of December 31, 1998.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to interest rate risk to the degree that its interest-
bearing liabilities, primarily deposits with short and medium-term maturities,
mature or reprice at different rates than its interest-earning assets.
Although having liabilities that mature or reprice less frequently on average
than assets will be beneficial in times of rising interest rates, such an
asset/liability structure will result in lower net income during periods of
declining interest rates, unless offset by other factors such as noninterest
income.
A key element of the Company's asset/liability plan is to protect net earnings
from changes in interest rates 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 on a "Best Efforts delivery program" 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 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 IS THE NPV. AS
OF SEPTEMBER 30, 1999, (THE MOST RECENTLY AVAILABLE DATA), AFTER A 200 BASIS
POINT RATE DECREASE, THE COMPANY'S NPV RATIO WAS 11.53%. IN THE EVENT OF A 200
BASIS POINT INCREASE IN RATES, THE COMPANY'S NPV RATIO WAS 8.70%. MANAGEMENT
AND THE BOARD OF DIRECTORS REVIEW THE OTS MEASUREMENTS ON A QUARTERLY BASIS TO
DETERMINE WHETHER THE COMPANY'S INTEREST RATE EXPOSURE IS WITHIN THE LIMITS
ESTABLISHED BY THE BOARD OF DIRECTORS IN THE COMPANY'S INTEREST RATE RISK
POLICY.
THE COMPANY'S ASSET/LIABILITY MANAGEMENT STRATEGY DICTATES ACCEPTABLE LIMITS ON
THE AMOUNTS OF CHANGE IN NPV GIVEN CERTAIN CHANGES IN INTEREST RATES. THE
TABLE PRESENTED HERE, AS OF SEPTEMBER 30, 1999, 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 300 BASIS POINTS.
INTEREST RATES NPV AS % OF PORTFOLIO
CHANGE IN BASIS NET PORTFOLIO VALUE VALUE OF ASSETS Points
NPV
(RATE SHOCK) (1) $ AMOUNT $ CHANGE % CHANGE RATIO CHANGE (1)
(Dollars in Thousands)
+300 23,484 ( 15,215) (39) 7.20 (383)
+200 29,118 (9,580) ( 25) 8.70 (233)
+100 34,380 ( 4,318) (11) 10.02 (101)
0 38,698 - - 11.03 -
- 100 41,173 2,475 6 11.54 51
- 200 41,624 2,926 8 11.53 50
- 300 42,152 3,454 9 11.54 51
(1)EXPRESSED IN BASIS POINTS
15
AS ILLUSTRATED IN THE TABLE, THE COMPANY'S INTEREST RATE RISK IS MORE
SENSITIVE TO RISING RATES THAN DECLINING RATES. THIS OCCURS PRIMARILY
BECAUSE AS RATES RISE, THE MARKET VALUE OF FIXED-RATE LOANS DECLINES DUE
TO BOTH THE RATE INCREASES AND SLOWING PREPAYMENTS. WHEN RATES DECLINE,
THE COMPANY DOES NOT EXPERIENCE A SIGNIFICANT RISE IN MARKET VALUE FOR
THESE LOANS BECAUSE BORROWER PREPAYMENTS INCREASE. SPECIFICALLY, THE
TABLE INDICATES THAT, AT SEPTEMBER 30, 1999, THE COMPANY'S NPV WAS $38.7
MILLION OR 11.03% 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 $9.6 MILLION OR 24.8% DECLINE IN THE
COMPANY'S NPV AND WOULD RESULT IN A 233 BASIS POINT OR 21.1% DECLINE IN
THE COMPANY'S NPV RATIO TO 8.70%. CONVERSELY, AN IMMEDIATE 200 BASIS
POINT DECREASE IN MARKET INTEREST RATES WOULD RESULT IN A $2.9 MILLION OR
7.6% INCREASE IN THE COMPANY'S NPV, AND A 50 BASIS POINT OR 4.5% INCREASE
IN THE COMPANY'S NPV RATIO TO 11.53%. THE PERCENTAGE CHANGE IN THE
COMPANY'S NPV AT SEPTEMBER 30, 1999 WERE WITHIN THE LIMIT IN THE
COMPANY'S BOARD-APPROVED GUIDELINES.
IN ADDITION TO MONITORING SELECTED MEASURES ON NPV, MANAGEMENT ALSO MONITORS
EFFECTS ON NET INTEREST INCOME RESULTING FROM INCREASES OR DECREASES IN RATES.
THIS MEASURE 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, DURING PERIODS
OF DECLINING OR STABLE INTEREST RATES, 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 method of analysis used in evaluating the Company's exposure to interest
rate risk requires the use of numerous assumptions. Therefore, the possibility
that the Company's assets and liabilities will react or perform differently must
be considered in evaluating interest rate risk. 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 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.
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. Although the Company has historically
originated mortgage loans for its own portfolio, sales of fixed rate first
mortgage loans with maturities of 15 years or greater are currently being
sold on a "Best Efforts" basis to minimize interest rate risk exposure. Loans
classified as held for sale, net of allowance for unrealized losses as of
December 31, 1999 are $5.8 million. The Company retains the servicing on the
majority of loans sold in the secondary market and, at December 31, 1999, $43.2
million in such loans were being serviced for others. The Company also
maintains capital well in excess of regulatory requirements.
16
The Company's investment strategy is to maintain a diversified portfolio of
high quality investments that minimize interest rate and credit risks while
maximizing 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
ITEM 4. YEAR 2000 READINESS
The Company is aware of the issues associated with programming code in existing
computer systems as the year 2000 approaches. The issue is whether computer
systems will properly recognize date sensitive information when the year
changes to 2000. Systems that do not properly recognize such information could
generate erroneous data or cause a system to fail. The Company is heavily
dependent on computer processing in its business activities and the year 2000
issue creates risk for the Company from unforseen problems in the Company's
computer system and from third parties whom the Company uses to process
information. Such failure of the Company's computer system and/or third
parties computer systems could have a material impact on the Company's ability
to conduct its business.
A major third party vendor provides the Company's primary data processing.
This provider has advised the Company that is has completed the renovation of
its system to be year 2000 ready, and is currently in the process of providing
users of the system the opportunity to test the system for readiness. The
Company has completed testing of the data processing provider's current system
for year 2000 readiness. Any new software or systems that may be installed in
the future will also be tested prior to implementation.
The Company has negotiated a new contract with its current data processing
provider following an extensive search process.
The Company has performed an assessment of its computer hardware and software,
and has identified those systems that require upgrades to be year 2000 ready.
Such upgrades have been completed as of June 30, 1999. In addition, the
Company has reviewed other external third party vendors that provide services
to the Company (i.e., utility companies, electronic funds transfer providers,
and software companies) and has requested or already received certification
letters from these vendors that their systems will be year 2000 ready on a
timely basis. Testing will be performed with the service providers, if
possible, to determine their year 2000 readiness.
17
The Company could incur losses if loan payments are delayed due to year 2000
problems affecting significant borrowers. The Company is communicating with
such parties to assess their progress in evaluating and implementing any
corrective measures required by them to be year 2000 ready. To date, the
Company has not been advised by such parties that they do not have plans in
place to address and correct the issues associated with the year 2000 problem;
however, no assurance can be given as to the adequacy of such plans or to the
timeliness of their implementation. As part of the current credit approval
process, new and renewed loans are evaluated as to the borrower's year 2000
readiness.
Based on the Company's review of its computer systems, management believes the
cost of the remediation effort to make its systems year 2000 ready will not
have an adverse impact on the Company's financial condition, results of
operations or liquidity. The Company had already planned to replace many of
its computers and associated equipment. As part of a general upgrade to improve
system efficiency, costs directly related to year 2000 issues are not expected
to exceed $50,000. These cost and time estimates are based on management's
best estimates and could differ from those actually incurred.
The Company has developed a year 2000 contingency plan that addresses, among
other issues, critical operations and potential failures thereof, and
strategies for business continuation.
Although management believes the Company's computer systems and service
providers will be year 2000 ready, there can be no assurance that these
systems, or those systems of other companies on which the Company's systems
rely, will be fully functional in the year 2000. Such failure could have a
significant adverse impact on the financial condition and results of operations
of the Company.
As of the date of this filing, the company has experienced no Y2K related
problems or failures and all systems are fully operational.
18
MFB CORP. AND SUBSIDIARY
FORM 10-Q
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
(a) THE ANNUAL MEETING OF SHAREHOLDERS WAS HELD ON JANUARY 18, 2000.
(b) EACH OF THE PERSONS NAMED IN THE PROXY STATEMENT AS A NOMINEE FOR
DIRECTOR WAS ELECTED.
(c) THE FOLLOWING ARE THE VOTING RESULTS ON EACH MATTER WHICH WERE
SUBMITTED TO THE
SHAREHOLDERS:
FOR AGAINST ABSTAIN NON-VOTE
Election of Directors:
M. Gilbert Eberhart 1,023,032 52,550
Jonathan E. Kintner 1,042,082 33,500
Appointment of
Crowe, Chizek 1,047,757 25,900 1,925
& Company as
auditors for 2000
The test of the matters referred to under this Item 4 is set forth in the proxy
statement dated December 17, 1999
previously filed with the Securities and Exchange Commission, and is
incorporated herein as reference.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K
(a) MFB Corp. filed one Form 8-K reports during the quarter ended
December 31, 1999.
Date of report: October 27, 1999
Items reported: News release dated October 22, 1999 regarding
the announcement of fourth quarter earnings and the declaration of a $.09 per
share cash dividend payable on November 16, 1999 to holders of record on
November 2, 1999.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MFB CORP.
Date By
Charles J. Viater
President
Date By Timothy C. Boenne
Vice President
20