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, 2000
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 March 31, 2000 was 1,380,449.
MFB CORP. AND SUBSIDIARY
FORM 10-Q
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Consolidated Balance Sheets (Unaudited)
March 31, 2000 and September 30, 1999 3
Consolidated Statements of Income (Unaudited)
Three and six months ended March 31, 2000 and 1999 4
Consolidated Statements of Changes in Shareholders' Equity,
(Unaudited) Three and six months ended March 31, 2000 and 1999 5
Consolidated Statements of Cash Flows, (Unaudited)
Six months ended March 31, 2000 and 1999 6
Notes to Unaudited Consolidated Financial Statements
March 31, 2000 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
PART II. OTHER INFORMATION 18
Items 1-6. 18
Signatures 19
Exhibit 27, Financial Data Schedule 20
2
MFB CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, 2000 and September 30, 1999
(In thousands except share information)
March 31, September 30,
2000 1999
ASSETS
Cash and due from financial institutions $ 7,996 $ 6,316
Interest-bearing deposits in other financial
institutions - short-term 1,029 5,746
Total cash and cash equivalents 9,025 12,062
Interest-bearing time deposits in other
financial institutions - 1,000
Securities available for sale (amortized cost of
$33,960 in 2000 and $39,359 in 1999) 32,347 38,170
Securities held to maturity
(fair value of $18,301 in 2000 and $3,709 in 1999) 18,738 3,984
Federal Home Loan Bank (FHLB) stock, at cost 5,711 5,511
Loans held for sale, net of unrealized losses
$236 in 2000 and $489 in 1999 4,180 8,062
Loans receivable, net of allowance for loan losses
$787 in 2000 and $638 in 1999 303,614 269,464
Accrued interest receivable 1,617 1,364
Premises and equipment, net 4,653 4,414
Mortgage servicing rights, net of accumulated
amortization of $78 in 2000 and $57 in 1999 446 412
Investment in limited partnership 1,168 1,213
Other assets 1,116 798
Total assets $ 382,615 $ 346,454
LIABIILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand deposits $ 10,653 $ 7,358
Savings, NOW and MMDA deposits 59,383 52,409
Other time deposits 164,721 141,640
Total deposits 234,757 201,407
Securities sold under agreements to repurchase 7,958 6,566
FHLB advances 104,726 104,226
Advances from borrowers for taxes and insurance 2,340 2,111
Accrued expenses and other liabilities 1,303 962
Total liabilities 351,084 315,272
Shareholders' equity
Common stock, 5,000,000 shares authorized;
shares issued:1,689,417-3/31/00 and 9/30/99;
shares outstanding: 1,380,449-3/31/00,
1,420,049-9/30/99 13,070 13,016
Retained earnings - substantially restricted 26,571 25,420
Accumulated other comprehensive income (loss),
net of tax of($639) in 2000 and ($471) in 1999 ( 974) (718)
Unearned Employee Stock Ownership Plan
(ESOP) Shares (123) (223)
Treasury stock, 308,968 common shares - 3/31/00,
269,368 common shares - 9/30/99 (7,013) (6,313)
Total shareholders' equity 31,531 31,182
Total liabilities and shareholders' equity $ 382,615 $ 346,454
See accompanying notes to (unaudited) consolidated financial statements.
3
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three and six months ended March 31, 2000 and 1999
(in thousands except per share information)
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
INTEREST INCOME
Loans receivable, including fees
Mortgage loans $ 3,780 $ 3,732 $ 7,578 $ 7,618
Consumer and other loans 459 283 878 557
Financing leases and
commercial loans 1,644 936 3,092 1,754
Securities - taxable 937 783 1,733 1,618
Other interest-bearing assets 74 223 132 370
Total interest income 6,894 5,957 13,413 11,917
INTEREST EXPENSE
Deposits 2,480 2,128 4,644 4,290
Securities sold under agreements
to repurchase 75 31 150 52
FHLB advances 1,417 1,430 2,862 2,873
Total interest expense 3,972 3,589 7,656 7,215
NET INTEREST INCOME 2,922 2,368 5,757 4,702
PROVISION FOR LOAN LOSSES 80 45 155 90
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,842 2,323 5,602 4,612
Noninterest income
Insurance commissions 32 28 72 64
Brokerage commissions 5 5 10 13
Net realized gains (losses) from sales
of securities available for sale (7) --- (7) ---
Net realized gains from sales of
loans 59 108 116 228
Loan servicing fees, net 15 10 33 17
Other income 191 135 429 268
Total noninterest income 295 286 653 590
NONINTEREST EXPENSE
Salaries and employee benefits 1,053 985 2,192 1,823
Occupancy and equipment expense 285 197 527 382
SAIF deposit insurance premium 11 28 40 53
Provision to adjust loans held
for sale to the lower of cost
or market 19 -- 131 --
Other expense 610 384 1,099 803
Total noninterest expense 1,978 1,594 3,989 3,061
INCOME BEFORE INCOME TAXES 1,159 1,015 2,266 2,141
Income tax expense 435 421 853 884
NET INCOME $ 724 $ 594 $ 1,413 $ 1,257
Basic earnings per common share $ 0.52 $ 0.42 $ 1.02 $ .88
Diluted earnings per common share $ 0.51 $ 0.41 $ .99 $ .86
See accompanying notes to (unaudited) consolidated financial statements.
4
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Three and six months ended March 31, 2000 and 1999
(In thousands)
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
Balance at beginning of period $31,418 $31,278 $31,182 $30,886
Effect of contribution to fund ESOP 50 51 98 97
Market adjustment of ESOP shares
committed to be released 23 52 54 99
Amortization of RRP contribution - 19 - 38
Purchase of treasury stock (554) (321) (700) (536) - -
Cash dividends declared (134) (132) (260) (253) - -
Comprehensive income:
Net income 724 594 1,413 1,257
Net change in net unrealized
gains and losses on securities
available for sale, net of
reclassification adjustments and
tax effects 4 22 (256) (25)
Total comprehensive income 728 616 1,157 1,232
Balance at end of period $31,531 $31,563 $31,531 $31,563
See accompanying notes to (unaudited) consolidated financial statements.
5
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended March 31, 2000 and 1999
(In thousands)
Six Months Ended
March 31,
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,413 $ 1,257
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization,
net of accretion 262 (11)
Amortization of RRP contribution - 38
Provision for loan losses 155 90
Market adjustment of ESOP shares
committed to be released 54 99
ESOP expense 98 97
Net realized losses from sales of
securities available for sale 7 -
Net realized gains from sales of loans (116) (228)
Equity in loss of investment in limited
partnership 45 9
Amortization of mortgage servicing rights 21 20
Provision to adjust loans held for sale
to lower of cost or market 131 -
Origination of loans held for sale (6,368) (21,367)
Proceeds from sales of loans held for
sale 6,160 15,343
Net change in:
Accrued interest receivable (253) (175)
Other assets (151) (151)
Accrued expenses and other
liabilities 341 (193)
Net cash from operating
activities 1,799 (5,172)
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing time
deposits in other financial
institutions 1,000 (1,000)
Net change in loans receivable (30,285) (1,418)
Purchase of:
Securities available-for-sale (3,000) (51,832)
Securities held to maturity (15,243) -
FHLB stock (200) (875)
Premises and equipment, net (472) (1,194)
Proceeds from:
Maturities of securities
available for sale 1,000 35,545
Maturities of securities
held to maturity 500 -
Principal payments of mortgage-
backed and related securities 4,670 10,848
Sales of securities available
for sale 2,683 -
Net cash from investing
activities (39,347) (9,926)
(CONTINUED)
6
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended March 31, 2000 and 1999
(In thousands)
Six Months Ended
March 31,
2000 1999
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits $ 33,350 $ 14,230
Net change in securities sold under agreements
to repurchase 1,392 1,142
Net change in advances from borrowers for taxes
and insurance 229 50
Purchase of MFB Corp. common stock (700) (536)
Proceeds from FHLB advances 49,000 20,000
Repayment of FHLB advances (48,500) (13,431)
Cash dividends paid (260) (253)
Net cash from financing activities 34,511 21,202
Net change in cash and cash equivalents (3,037) 6,104
Cash and cash equivalents at beginning of period 12,062 17,904
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,025 $ 24,008
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 7,900 $ 7,284
Income taxes 1,052 883
Supplemental schedule of noncash investing
activities
Transfer from:
Loans held for sale to loans receivable $ 4,020 -
See accompanying notes to (unaudited) consolidated financial statements.
7
MFB CORP. AND SUBSIDIARY
NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
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
MFB Financial, formerly known as 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 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., 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
normal recurring adjustments necessary to present fairly the consolidated
balance sheets of MFB Corp. and its subsidiary MFB Financial as of March 31,
2000 and September 30, 1999, and the consolidated statements of income and
changes in shareholders' equity for the three and six months ended March 31,
2000 and 1999, and the consolidated statements of changes in shareholders'
equity and the consolidated statements of cash flows for the six months ended
March 31, 2000 and 1999. All significant intercompany transactions and
balances are eliminated in consolidation. The income reported for the six
months ended March 31, 2000 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 computed by dividing net income 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.
(Continued)
8
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, 2000 and 1999 are presented below.
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
(in thousands, except per share information)
BASIC EARNINGS PER COMMON SHARE
Numerator
Net income $ 724 $ 594 $1,413 $1,257
Denominator
Weighted average common shares
outstanding 1,399 1,460 1,407 1,464
Less: Average unallocated ESOP shares (14) (34) (16) ( 37)
Less: Average nonvested RRP shares - (1) - (4)
Weighted average common shares
outstanding for basic earnings per
common share 1,385 1,425 1,391 1,423
BASIC EARNINGS PER COMMON SHARES $ .52 $ .42 $ 1.02 $ . 88
Diluted Earnings Per Common Share
Numerator
Net income $ 724 $ 594 $1,413 $1,257
Denominator
Weighted average common shares
outstanding for basic earnings per
common share 1,385 1,425 1,391 1,423
Add: Dilutive effects of assumed
exercises of:
Stock options 30 38 30 38
Average nonvested RRP shares - 1 - 1
Weighted average common and dilutive
potential common shares outstanding 1,415 1,464 1,421 1,462
DILUTED EARNINGS PER COMMON SHARE $ .51 $ .41 $ . 99 $ . 86
Stock options for 84,750 for the three and six months ended March 31, 2000 and
45,000 for the three and six months ended March 31, 1999 were not considered
in computing diluted earnings per common share because they were antidilutive.
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 $41.4 million as
of March 31, 2000 compared to $51.2 million as of September 30, 1999. This
$9.8 million decrease was due to a $5.8 million decrease in securities
available for sale, a $3.0 million decrease in cash and cash equivalents and
a $1.0 million decrease in interest-bearing time deposits in other financial
institutions. These funds were used for meeting the Bank's ongoing
commitments and expanding the loan portfolio. Management believes the
liquidity level of $41.4 million as of March 31, 2000 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 March 31, 2000, the
Bank's liquidity ratio was 9.62%, well above the minimum regulatory
requirements.
Short-term borrowings or long-term debt, such as Federal Home Loan Bank
advances, may be used to compensate for reduction in other sources of funds
such as deposits and to assist in asset/liability management. As of
March 31, 2000, total FHLB borrowings amounted to $104.7 million and were
used primarily to fund loan portfolio growth. The Bank had commitments to
fund loan originations with borrowers totaling $76.1 million at
March 31, 2000, including $57.8 million in available consumer and commercial
lines of credit. Certificates of deposits scheduled to mature in one year or
less totaled $90.5 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.
At September 30, 1999, total FHLB borrowings totaled $104.2 million, $20.8
million of which were used as part of a 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 six months ended March 31, 2000 and 1999 follows.
During the six months ended March 31, 2000, net cash and cash equivalents
decreased $3.0 million from $12.0 million at September 30, 1999 to $9.0
million at March 31, 2000.
The Company experienced an $1.8 million net increase in cash from operating
activities for the six months ended March 31, 2000, compared to a $5.2 million
net decrease for the six months ended March 31, 1999. The increase in the most
recent period was primarily attributable to $6.2 million in proceeds realized
from the sale of mortgage loans and net income of $1.4 million offset by the
origination of $6.4 million of loans held for sale. The decrease of $5.2
million for the period ended March 31, 1999 was primarily attributable to the
origination of $21.4 million of loans held for sale and $228 thousand in net
gains from the sale of these loans, offset by $15.3 million in proceeds
realized from the sale of mortgage loans and net income of $1.3 million. 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" delivery program 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 $39.3 million net decrease in cash from investing activities during the
six months ended March 31, 2000 is primarily attributable to the $30.3 million
increase in loan originations exceeding principal payments and investment
security purchases of $18.2 million, offset by sales and maturities of
securities totaling $4.2 million and $4.7 million of mortgage-backed and
related securities principal payments. For the six months ended March 31,
1999, there was a $9.9 million net decrease in cash from investing
activities. This decrease was primarily attributable to the purchases of
securities, interest-bearing time deposits and premises and equipment
expenditures totaling $54.0 million along with the $1.4 million increase in
loan originations exceeding principal payments, offset by $35.5 million of
security maturities and $10.8 million of principal payments of
mortgage-backed and related securities.
Financing activities generated net cash of $34.5 million for the period
ending March 31, 2000. The net cash was provided primarily from net deposit
increases of $33.4 million and repurchase agreement increases of
$1.4 million, offset by $700 thousand to repurchase the Company's stock and
cash dividend payments of $260 thousand during the quarter. Net cash
generated from financing activities was $21.2 million for the six months
ended March 31, 1999. The net cash was provided primarily from $6.6 million
in net new FHLB advances and net deposit increases of $14.2 million and
repurchase agreement increases of $1.1 million, offset by $536 thousand to
repurchase the Company's stock and cash dividend payments of $253 thousand
during the quarter.
CAPITAL RESOURCES
Total shareholders' equity increased from $31.2 million as of September 30,
1999 to $31.5 million as of March 31, 2000 mainly from net income of $1.4
million offset by the repurchase of 39,600 shares of outstanding common stock
during this period at a cost of $700 thousand, cash dividend payments of $260
thousand and a $256 thousand adjustment to reflect the decrease in the market
value of securities available for sale, net of tax.
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
March 31, 2000 and 1999 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,
2000
Total capital
(to risk
weighted
assets) $ 32,213 13.46% $ 19,146 8.00% $ 23,933 10.00%
Tier 1 (core)
capital (to
risk weighted
assets) 31,433 13.13 9,573 4.00 14,360 6.00
Tier 1 (core)
capital (to
Adjusted total
assets) 31,433 8.23 15,284 4.00 19,105 5.00
As of March 31,
1999
Total capital
to risk weighted
assets) $ 29,984 15.90 $ 15,083 8.00% $ 18,854 10.00%
Tier 1 (core)
capital (to risk
weighted
assets) 29,440 15.61 7,542 4.00 11,313 6.00
Tier 1 (core)
(to Adjusted
total assets 29,440 8.73 13,489 4.00 16,862 5.00
As of March 31, 2000, 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
MARCH 31, 2000 COMPARED TO SEPTEMBER 30, 1999
Total assets increased $36.1 million from $346.5 million as of September 30,
1999 to $382.6 million as of March 31, 2000.
Net loans receivable increased from $269.5 million to $303.6 million during
the six month period ended March 31, 2000, an increase of $34.1 million.
Included in this increase was the transfer of $4.0 million of held for sale
loans with originations greater than 12 months to loans held in portfolio.
Commercial loans outstanding increased by $25.6 million from $47.4 million at
September 30, 1999 to $73.0 million at March 31, 2000. Mortgage loans and
home equity loans outstanding increased by $7.8 million during the six months
ended March 31, 2000 net of secondary market sales totaling $6.2 million
during the first two quarters. Consumer loans outstanding also increased by
$813 thousand from $4.5 million at September 30, 1999 to $5.3 million at
March 31, 2000. The growth in all lending divisions, which has been funded
primarily by the growth in total deposits and securities sold under
agreements to repurchase, 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 $4.2 million at March 31, 2000
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
six month period ended March 31, 2000, loan sales resulted in net realized
gains of $116 thousand, including the recording of mortgage servicing rights
income. Securities held to maturity increased $14.8 million from September
30, 1999 to March 31, 2000, while securities available for sale decreased
$5.8 million and total cash and cash equivalents decreased $3.0 million
during the same period.
Total liabilities increased $35.8 million from $315.3 at September 30, 1999 to
$351.1 million at March 31, 2000. Total deposits increased from $201.4
million at September 30, 1999 to $234.8 million at March 31, 2000, primarily
due to a $23.1 million increase in time deposits, of which $20.8 million were
short term public funds with a 6.3% weighted average rate and a weighted
average remaining maturity of three months at March 31, 2000. Savings, NOW and
MMDA deposits increased $7.0 million and noninterest-bearing demand deposits
rose $3.3 million during the period. Securities sold under agreements to
repurchase increased from $6.6 million at September 30, 1999 to $8.0 million
at March 31, 2000. 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 also increased by
$500 thousand during the period to facilitate the loan growth.
The $104.7 million of Federal Home Loan Bank advances have a weighted
average interest rate of 5.50% and mature in ten years or less. The one-day
retail repurchase agreements are secured by investment securities that have a
weighted average interest rate of 4.05%.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Three and six months ended March 31, 2000 compared to three and six months
ended March 31, 1999
The Company's consolidated net income for the three months ended March 31,
2000 was $724 thousand or $.52 basic and $.51 diluted earnings per common
share compared to $594 thousand or $.42 basic and $.41 diluted earnings per
share for the three months ended March 31, 1999, representing a 24.4%
increase in diluted earnings per share for the Corporation. Net income for
the six months ended March 31, 2000 was $1,413 thousand or $1.02 basic and
$.99 diluted earnings per common share compared to $1,257 thousand or $.88
basic and $.86 diluted earnings per share for the six months ended
March 31, 1999, representing a 15.1% year to date diluted earnings per share
increase.
Net interest income after provision for loan losses for the most recent three
and six month periods totaled $2.8 million and $5.6 million compared to $2.3
million and $4.6 million for the same periods one year ago. During the three
months ended March 31, 2000 total interest income increased by $937 thousand
compared to the same period one year ago, primarily as a result of increased
volumes of loans receivable, particularly commercial and consumer loans.
13
Commercial and consumer loan receivables, including home equity and second
mortgage loans, increased $42.1 million and mortgage loan receivables
increased $28.0 million from March 31, 1999 to March 31, 2000. Total
interest expense for the three month period increased $383 thousand
reflecting the growth in savings account deposits. For the six months ended
March 31, 2000, total interest income increased $1.5 million while total
interest expense increased $441 thousand.
Noninterest income increased from $286 thousand and $590 thousand for the
three and six months ended March 31, 1999 to $295 thousand and $653 thousand
for the most recent three and six month periods. These increases are
primarily due to fees generated from the increasing number of core deposit
account relationships and income generated from the Bank's trust department
formed in 1999, offset by decreases in net realized gains from loan sales.
Noninterest expenses increased from $1.6 million during the three months
ended March 31, 1999 to $2.0 million during the three months ended March 31,
2000, and from $3.1 million to $4.0 million for the comparable six month
periods. The noninterest expense increases are primarily attributable to
staffing increases, renovated facilities to support lending operations,
expenses associated with the opening of a new full service office during the
first quarter of 2000, and 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
March 31, 2000 compared to March 31, 1999 remained steady at .05%.
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 December 31, 1999 (the most recently available
data), after a 200 basis point rate decrease, the Company's NPV ratio was
11.26%. In the event of a 200 basis point increase in rates, the Company's
NPV ratio was 8.02%. 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, 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 NPV
(RATE SHOCK)(1) $ AMOUNT $ CHANGE % CHANGE RATIO CHANGE (1)
(Dollars in Thousands)
+300 21,832 ( 15,798) (42) 6.54 (393)
+200 27,456 (10,174) (27) 8.02 (245)
+100 32,879 ( 4,751) (13) 9.36 (111)
0 37,630 - - 10.47 -
-100 40,835 3,205 9 11.16 69
-200 41,708 4,078 11 11.26 79
-300 41,735 4,105 11 11.15 68
(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 December 31, 1999, the Company's NPV was $37.6 million or
10.47% of the market value of portfolio assets. Based upon the assumptions
utilized, an immediate 200 basis point increase in market interest rates
would result in a $10.2 million or 27% decline in the Company's NPV and would
result in a 245 basis point or 23.4% decline in the Company's NPV ratio to
8.02%. Conversely, an immediate 200 basis point decrease in market interest
rates would result in a $4.1 million or 11% increase in the Company's NPV,
and a 79 basis point or 7.5% increase in the Company's NPV ratio to 11.26%.
The percentage change in the Company's NPV at December 31, 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 interest rate risk
exposure 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" delivery program basis to minimize interest rate risk
exposure. Loans classified as held for sale, net of allowance for unrealized
losses as of March 31, 2000 are $4.2 million. The Company retains the
servicing on the majority of loans sold in the secondary market and, at March
31, 2000, $43.9 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
striving to maximize investment return and to provide liquidity necessary to
meet funding needs.
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 has a
substantial amount of passbook savings, demand deposit and money market
accounts which may be less sensitive to changes in interest rate than
certificate accounts. At March 31, 2000, the Bank had $70.0 million of these
types of accounts. The Company offers a range of maturities on its deposit
products at competitive rates and monitors the maturities on an ongoing basis.
17
MFB CORP. AND SUBSIDIARY
FORM 10-Q
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. Exhibits and Reports on Form 8-K.
(a) EXHIBITS
SEE EXHIBIT 27, FINANCIAL DATA SCHEDULE ON PAGE 20.
(B) MFB CORP. FILED ONE FORM 8-K REPORT DURING THE QUARTER ENDED
MARCH 31, 2000.
DATE OF REPORT: FEBRUARY 2, 2000
ITEMS REPORTED: NEWS RELEASE DATED JANUARY 14, 2000 REGARDING
THE ANNOUNCEMENT OF FIRST QUARTER EARNINGS.
NEWS RELEASE DATED JANUARY 19, 2000 REGARDING THE
ANNOUNCEMENT OF A CASH DIVIDEND AND A STOCK REPURCHASE
PROGRAM.
18
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
19
EXHIBIT 27-Financial Data Schedule
March 31, 2000
(IN THOUSANDS)
Period Type 6 mos
Fiscal year end September 30, 1999
Period start October 1, 1999
Period end March 31, 2000
Exchange rate 1.000
Cash 7,996
In-bearing deposits 1,029
Fed-funds sold 0
Trading assets 0
Investments HFS 32,347
Investments carrying 18,738
Investments-Market 18,301
Loans 308,581
Allowance 787
Total assets 382,615
Deposits 234,757
Short term 16,808
Liabilities-other 3,643
Long-term 95,876
Common 13,070
Preferred-mandatory 0
Preferred 0
Other-SE 18,461
Total liabilities and equity 382,615
Interest-loan 11.548
Interest-invest 1,733
Interest-other 132
Interest-total 13,413
Interest-deposit 4,644
Interest-expense 7,656
Interest-income-net 5,757
Loan losses 155
Securities-gains (7)
Expense -other 3989
Income-pretax 2,266
Income-pre-extraordinary 1,413
Extraordinary 0
Changes 0
Net income 1,413
EPS-Primary 1.02
EPS-Diluted .99
Yield-actual 3.32
Loans-non 0
Loans-past 178
Loans-troubled 0
Loans-problem 0
Allowance-open 638
Charge-offs 6
Recoveries 0
Allowance-close 787
Allowance-domestic 787
Allowance-foreign 0
Allowance unallocated 0
20