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 JUNE 30, 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)
INDIANA35-1907258
State or other jurisdiction of(I.R.S. Employer
incorporation or organizationIdentification 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 June 30, 2000 was 1,370,449.
MFB CORP. AND SUBSIDIARY
FORM 10-Q
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Consolidated Balance Sheets
June 30, 2000 (Unaudited) and September 30, 1999 3
Consolidated Statements of Income (Unaudited)
Three and nine months ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Changes in Shareholders'
Equity,(Unaudited) Three and nine months ended June 30, 2000
and 1999 5
Consolidated Statements of Cash Flows, (Unaudited)
Nine months ended June 30, 2000 and 1999 6
Notes to (Unaudited) Consolidated Financial Statements
June 30, 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
June 30, 2000 and September 30, 1999
(In thousands except share information)
(Unaudited)
June 30, September 30,
2000 1999
ASSETS
Cash and due from financial institutions $ 9,951 $ 6,316
Interest-bearing deposits in other financial
institutions - short-term 2,175 5,746
Total cash and cash equivalents 12,126 12,062
Interest-bearing time deposits in other financial
institutions - 1,000
Securities available for sale (amortized cost of
$26,405 in 2000 and $39,359 in 1999) 24,807 38,170
Securities held to maturity (fair value of $18,327
in 2000 and $3,709 in 1999) 18,750 3,984
Federal Home Loan Bank (FHLB) stock, at cost 6,308 5,511
Loans held for sale, net of unrealized losses of
$0 in 2000 and $489 in 1999 - 8,062
Loans receivable, net of allowance for loan losses of
$977 in 2000 and $638 in 1999 316,965 269,464
Accrued interest receivable 2,065 1,364
Premises and equipment, net 4,617 4,414
Mortgage servicing rights, net of accumulated
amortization of $85 in 2000 and $57 in 1999 529 412
Investment in limited partnerships 2,974 1,213
Other assets 1,071 798
Total assets $ 390,212 $ 346,454
LIABIILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing demand deposits $ 12,179 $ 7,358
Savings, NOW and MMDA deposits 58,048 52,409
Other time deposits 160,552 141,640
Total deposits 230,779 201,407
Securities sold under agreements to repurchase 6,803 6,566
FHLB advances 118,151 104,226
Advances from borrowers for taxes and insurance 1,218 2,111
Accrued expenses and other liabilities 1,105 962
Total liabilities 358,056 315,272
Shareholders' equity
Common stock, no par value, 5,000,000 shares
authorized; shares issued: 1,689,417-6/30/00 and
9/30/99 shares outstanding: 1,370,449-6/30/00 and
1,420,049-9/30/99 13,093 13,016
Retained earnings - substantially restricted 27,284 25,420
Accumulated other comprehensive income (loss),
net of tax of $(633) in 2000 and $(471) in 1999 ( 965) (718)
Unearned Employee Stock Ownership Plan (ESOP) shares (73) (223)
Treasury stock, 318,968 common shares - 6/30/00
269,368 common shares - 9/30/99, at cost (7,183) (6,313)
Total shareholders' equity 32,156 31,182
Total liabilities and shareholders' equity $ 390,212 $ 346,454
See accompanying notes to (unaudited) consolidated financial statements.
3
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three and nine months ended June 30, 2000 and 1999
(in thousands except per share information)
Three Months Ended Nine Months Ended
June 30, June 30,
2000 1999 2000 1999
INTEREST INCOME
Loans receivable, including fees
Mortgage loans $ 3,750 $ 3,627 $ 11,328 $ 11,245
Consumer and other loans 515 333 1,393 890
Financing leases and commercial
loans 2,165 1,077 5,257 2,831
Securities - taxable 919 880 2,652 2,498
Other interest-bearing assets 56 158 188 528
Total interest income 7,405 6,075 20,818 17,992
INTEREST EXPENSE
Deposits 2,616 2,150 7,260 6,440
Securities sold under agreements
to repurchase 72 42 222 94
FHLB advances 1,591 1,416 4,453 4,289
Total interest expense 4,279 3,608 11,935 10,823
NET INTEREST INCOME 3,126 2,467 8,883 7,169
PROVISION FOR LOAN LOSSES 190 65 345 155
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,936 2,402 8,538 7,014
NONINTEREST INCOME
Service charges on deposit accounts 156 71 367 197
Trust fee income 75 8 102 8
Insurance commissions 37 48 109 112
Brokerage commissions 4 7 14 20
Net realized gains (losses) from sales
of securities available for sale (27) 4 (34) 4
Net realized gains from sales of loans 187 26 303 253
Loan servicing fees, net 23 20 56 37
Other income 114 74 305 217
Total noninterest income 569 258 1,222 848
NONINTEREST EXPENSE
Salaries and employee benefits 1,222 910 3,414 2,733
Occupancy and equipment 277 228 804 610
SAIF deposit insurance premium 10 28 50 81
Provision (recovery) to adjust loans
held for sale to lower of cost or
market (6) 443 125 443
Other expense 657 414 1,756 1,217
Total noninterest expense 2,160 2,023 6,149 5,084
INCOME BEFORE INCOME TAXES 1,345 637 3,611 2,778
Income tax expense 501 272 1,354 1,156
NET INCOME $ 844 $ 365 $ 2,257 $ 1,622
Basic earnings per common share $ 0.62 $ 0.26 $ 1.63 $ 1.14
Diluted earnings per common share $ 0.61 $ 0.25 $ 1.60 $ 1.12
See accompanying notes to (unaudited) consolidated financial statements.
4
MFB CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
Three and nine months ended June 30, 2000 and 1999
(In thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
2000 1999 2000 1999
Balance at beginning of period $ 31,531 $ 31,563 $ 31,182 $ 30,886
Effect of contribution to fund ESOP 50 49 148 148
Market adjustment of ESOP shares
committed to be released 22 49 76 148
Amortization of RRP contribution - - - 38
Purchase of treasury stock (169) (375) (869) (911)
Cash dividends declared (131) (130) (391) (383)
Comprehensive income:
Net income 844 365 2,257 1,622
Net change in net unrealized gains
and losses on securities available
for sale, net of reclassification
adjustments and tax effects 9 (301) (247) (328)
Total comprehensive income 853 64 2,010 1,294
Balance at end of period $ 32,156 $ 31,220 $ 32,156 $ 31,220
See accompanying notes to (unaudited) consolidated financial statements.
5
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended June 30, 2000 and 1999
(In thousands)
Nine Months Ended
June 30,
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,257 $ 1,622
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization, net of accretion 284 118
Amortization of RRP contribution - 38
Provision for loan losses 345 155
Market adjustment of ESOP shares committed to be
released 76 148
ESOP expense 148 148
Net realized (gains) losses from sales of securities
available for sale 34 (4)
Net realized gains from sales of loans (303) (253)
Equity in loss of investment in limited partnership 107 8
Amortization of mortgage servicing rights 28 29
Provision to adjust loans held for sale to lower of
cost or market 125 443
Origination of loans held for sale (10,846) (18,211)
Proceeds from sales of loans held for sale 14,921 17,377
Net change in:
Accrued interest receivable (701) (395)
Other assets (11) (381)
Accrued expenses and other liabilities 143 (37)
Net cash from operating activities 6,607 805
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 (43,826) (20,344)
Purchase of:
Securities available for sale (3,000) (62,776)
Securities held to maturity (15,243) (3,482)
FHLB stock (797) (875)
Premises and equipment, net (557) (1,704)
Investment in limited partnership (1,868) -
Proceeds from:
Maturities of securities available for sale 1,000 39,036
Maturities of securities held to maturity 500 -
Principal payments of mortgage-backed and related
securities 5,230 16,861
Sales of securities available for sale 9,637 1,990
Net cash from investing activities (47,924) (32,294)
(CONTINUED)
6
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended June 30, 2000 and 1999
(In thousands)
Nine Months Ended
June 30,
2000 1999
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits $ 29,372 $ 15,571
Net change in securities sold under agreements to
repurchase 237 2,726
Net change in advances from borrowers for taxes and
insurance (893) (1,199)
Purchase of MFB Corp. common stock (869) (911)
Proceeds from FHLB advances 91,000 20,000
Repayment of FHLB advances (77,075) (13,431)
Cash dividends paid (391) (383)
Net cash from financing activities 41,381 22,373
Net change in cash and cash equivalents 64 (9,116)
Cash and cash equivalents at beginning of period 12,062 17,904
CASH AND CASH EQUIVALENTS AT END OF PERIOD $12,126 $ 8,788
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $11,986 $10,871
Income taxes 1,536 1,332
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
June 30, 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 June 30,
2000 and September 30, 1999, the consolidated statements of income and the
condensed consolidated statements of changes in shareholders' equity for the
three and nine months ended June 30, 2000 and 1999, and the consolidated
statements of cash flows for the nine months ended June 30, 2000 and 1999. All
significant intercompany transactions and balances are eliminated in
consolidation. The income reported for the nine months ended June 30, 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 June 30, 2000 and 1999 are presented below.
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
(in thousands except per share information)
BASIC EARNINGS PER COMMON SHARE
Numerator
Net income $ 844 $ 365 $2,257 $1,622
Denominator
Weighted average common shares
outstanding 1,376 1,440 1,397 1,456
Less: Average unallocated ESOP
shares (10) (30) (14) (34)
Weighted average common shares
outstanding for basic earnings
per common share 1,366 1,410 1,383 1,422
BASIC EARNINGS PER COMMON SHARES $ .62 $ .26 $ 1. 63 $ 1.14
DILUTED EARNINGS PER COMMON SHARE
Numerator
Net income $ 844 $ 365 $2,257 $1,622
Denominator
Weighted average common shares
outstanding for basic earnings
per common share 1,366 1,410 1,383 1,422
Add: Dilutive effects of assumed
exercises of stock options 29 46 29 31
Weighted average common and dilutive
potential common shares outstanding 1,395 1,456 1,412 1,453
DILUTED EARNINGS PER COMMON SHARE $ .61 $ .25 $ 1.60 $ 1.12
Stock options for 85,500 for the three and nine months ended June 30, 2000 and
69,000 for the three and nine months ended June 30, 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 $36.9 million as of June 30,
2000 compared to $51.2 million as of September 30, 1999. This $14.3 million
decrease was due to a $13.4 million decrease in securities available for sale
and a $1.0 million decrease in interest-bearing time deposits in other
financial institutions. These funds were used to help fund the purchase of
$15.2 million of securities held to maturity since September 30, 1999.
Management believes the liquidity level of $36.9 million as of June 30, 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 June 30, 2000, the
Bank's liquidity ratio was 8.42%, 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 June 30,
2000, total FHLB borrowings amounted to $118.2 million and were used primarily
to fund loan portfolio growth. The Bank had commitments to fund loan
originations with borrowers totaling $73.4 million at June 30, 2000, including
$52.2 million in available consumer and commercial lines of credit.
Certificates of deposits scheduled to mature in one year or less totaled $111.7
million. Based on historical experience, management believes that a significant
portion of maturing deposits will remain with the Bank. The Bank anticipates
that it will continue to have sufficient cash flow and other cash resources to
meet current and anticipated loan funding commitments, deposit customer
withdrawal requirements and operating expenses. 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 using securities, 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 nine months ended June 30, 2000 and 1999 follows.
During the nine months ended June 30, 2000, net cash and cash equivalents
increased $64,000 from September 30, 1999 to June 30, 2000.
The Company experienced a $6.6 million net increase in cash from operating
activities for the nine months ended June 30, 2000, compared to an $805
thousand net increase for the nine months ended June 30, 1999. The increase in
the most recent period was primarily attributable to $14.9 million in proceeds
realized from the sale of mortgage loans and net income of $2.3 million offset
by the origination of $10.8 million of loans held for sale. The increase of
$805 thousand for the period ended June 30, 1999 was primarily attributable to
$17.4 million in proceeds from the sale of mortgage loans and net income of
$1.6 million, offset by the origination of $18.2 million of loans held for sale
and $253 thousand in net gains from the sale of these loans. Beginning 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 $47.9 million net decrease in cash from investing activities during the
nine months ended June 30, 2000 is primarily attributable to the $43.8 million
increase in loan originations exceeding principal payments and investment
security purchases of $18.2 million, offset by sales and maturities of
securities totaling $11.1 million, $5.2 million of mortgage-backed and related
securities principal payments and a $1.9 million low income housing limited
partnership investment. For the nine months ended June 30, 1999, there was a
$32.3 million net decrease in cash from investing activities. This decrease was
primarily attributable to the purchases of securities, interest-bearing time
deposits and FHLB stock and premises and equipment expenditures totaling $69.8
million along with the $20.3 million increase in loan originations exceeding
principal payments, offset by $39.0 million of security maturities, $16.9
million of principal payments of mortgage-backed and related securities and
$2.0 million of security sales.
Financing activities generated net cash of $41.4 million for the period ending
June 30, 2000. The net cash was provided primarily from net deposit increases
of $29.4 million and $13.9 million of net new FHLB advances, offset by $893
thousand in net changes in advances from borrowers for taxes and insurance,
$869 thousand to repurchase the Company's stock and cash dividend payments of
$391 thousand during the quarter. Net cash generated from financing activities
was $22.4 million for the nine months ended June 30, 1999. The net cash was
provided primarily from $6.6 million in net new FHLB advances, net deposit
increases of $15.6 million and repurchase agreement increases of $2.7 million,
offset by $911 thousand to repurchase the Company's stock and cash dividend
payments of $383 thousand during the quarter.
CAPITAL RESOURCES
Total shareholders' equity increased from $31.2 million as of September 30,
1999 to $32.2 million as of June 30, 2000 mainly from net income of $2.3
million offset by the repurchase of 49,600 shares of outstanding common stock
during this period at a cost of $869 thousand, cash dividends declared of $391
thousand, and a $247 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 June 30,
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 June 30, 2000
Total capital
(to risk
weighted assets) $ 32,681 13.18% $ 19,841 8.00% $ 24,801 10.00%
Tier 1 (core) capital
(to risk
weighted assets) 31,729 12.79 9,921 4.00 14,881 6.00
Tier 1 (core) capital
(to adjusted
total assets 31,729 8.12 15,624 4.00 19,529 5.00
As of September 30, 1999
Total capital
(to risk
weighted assets) $31,268 15.23% $16,428 8.00% $ 20,356 10.00%
Tier 1 (core) capital
(to risk
weighted assets) 30,630 15.42 8,214 4.00 12,321 6.00
Tier 1 (core) (to
adjusted total
assets 30,630 8.83 13,868 4.00 17,335 5.00
As of June 30, 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
JUNE 30, 2000 COMPARED TO SEPTEMBER 30, 1999
Total assets increased $43.8 million from $346.5 million as of September 30,
1999 to $390.2 million as of June 30, 2000.
Net loans receivable increased from $269.5 million to $317.0 million during the
nine month period ended June 30, 2000, an increase of $47.5 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 $34.6 million from $47.4 million at September
30, 1999 to $82.0 million at June 30, 2000. Mortgage loans and home equity
loans outstanding increased by $12.1 million during the nine months ended June
30, 2000 net of secondary market sales totaling $14.9 million during the first
three quarters. Consumer loans outstanding also increased by $1.4 million from
$4.5 million at September 30, 1999 to $5.8 million at June 30, 2000. The growth
in all lending divisions, which has been funded primarily by the growth in
total deposits and FHLB advances, is primarily attributable to a strong
marketing effort, general economic conditions, and 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 zero at June 30, 2000 due to the transfer of seasoned
loans (i.e. loans over 12 months old) from the held for sale classification to
loans receivable and net sales of $4.1 million during the nine months ended
June 30, 2000. During the nine month period ended June 30, 2000, loan sales
resulted in net realized gains of $303 thousand, including the recording of
mortgage servicing rights. Securities held to maturity increased $14.8 million
from September 30, 1999 to June 30, 2000, while securities available for sale
decreased $13.4 million during the same period. An additional low income
housing investment of $1.9 million was completed during the quarter ended June
30, 2000.
The allowance for loan losses was increased from $638 thousand at September 30,
1999 to $977 thousand at June 30, 2000. 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. In management's opinion, the allowance for loan
losses is adequate to absorb anticipated future loan losses from loans at June
30, 2000. 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 June 30, 2000 was .01% compared to .07% as of June 30, 1999
and .06% as of September 30, 1999.
Total liabilities increased $42.8 million from $315.3 at September 30, 1999 to
$358.1 million at June 30, 2000. Total deposits increased from $201.4 million
at September 30, 1999 to $231.8 million at June 30, 2000, primarily due to a
$18.9 million increase in time deposits, of which $6.9 million were short term
public funds with a 6.4% weighted average rate and a weighted average remaining
maturity of six months at June 30, 2000. Savings, NOW and MMDA deposits
increased $5.6 million and noninterest-bearing demand deposits rose $4.8
million during the period. Securities sold under agreements to repurchase
increased from $6.6 million at September 30, 1999 to $6.8 million at June 30,
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 increased from $104.2 million at September
30, 1999 to $118.2 million at June 30, 2000 to facilitate the strong loan
growth.
The $118.2 million of Federal Home Loan Bank advances have a weighted average
interest rate of 5.72% 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 4.07%.
13
MATERIAL CHANGES IN RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE AND NINE MONTHS
ENDED JUNE 30, 1999
The Company's consolidated net income for the three months ended June 30, 2000
was $844 thousand or $.62 basic and $.61 diluted earnings per common share
compared to $365 thousand or $.26 basic and $.25 diluted earnings per share for
the three months ended June 30, 1999, representing a 144.0% increase in diluted
earnings per share for the Company. Net income for the nine months ended June
30, 2000 was $2.3 million or $1.63 basic and $1.60 diluted earnings per common
share compared to $1.6 million or $1.14 basic and $1.12 diluted earnings per
share for the nine months ended June 30, 1999, representing a 42.9% year to
date diluted earnings per share increase.
Net interest income after provision for loan losses for the most recent three
and nine month periods totaled $2.9 million and $8.5 million compared to $2.4
million and $7.0 million for the same periods one year ago. During the three
months ended June 30, 2000 total interest income increased by $1.3 million
compared to the same period one year ago, primarily as a result of increased
volumes of loans receivable, particularly commercial and consumer loans.
Commercial and consumer loan receivables, including home equity and second
mortgage loans, increased $47.3 million and mortgage loan receivables increased
$18.2 million from June 30, 1999 to June 30, 2000. Total interest expense for
the three month period increased $671 thousand reflecting the growth in
savings account deposits and borrowed funds. For the nine months ended June
30, 2000, total interest income increased $2.8 million while total interest
expense increased $1.1 million.
The provision for loan losses for the three and nine months ended June 30, 2000
was $190 thousand and $345 thousand compared to $65 thousand and $155 thousand
for the three and nine months ended June 30, 1999. These increases were due to
management's review of the loan portfolio as previously discussed in the third
paragraph of the material changes in financial condition.
Noninterest income increased from $258 thousand and $848 thousand for the three
and nine months ended June 30, 1999 to $569 thousand and $1.2 million for the
most recent three and nine month periods. These increases are primarily due to
fees generated from the increasing number of core deposit account
relationships, increased income generated from the Bank's trust department,
increased net gains from loan sales and the servicing fees retained on these
sold loans. Noninterest expenses increased from $2.0 million during the three
months ended June 30, 1999 to $2.2 million during the three months ended June
30, 2000, and from $5.1 million to $6.1 million for the comparable nine 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. During the quarter ended June 30, 1999, the
Bank incurred a $433,000 or $268,000 after tax noninterest expense reflecting
the proper recognition of changes in the market value of loans held for sale.
The Company's effective income tax rate decreased from 42.7% and 41.6% for the
three and nine months ended June 30, 1999 to 37.2% and 37.5% for the same
periods ended June 30, 2000 primarily due to less impact of nondeductible
expense related to the ESOP market value adjustment and tax credits from the
investment in low income housing limited partnership investments.
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 more frequently on average
than assets will be beneficial in times of declining interest rates, such an
asset/liability structure will result in lower net income during periods of
rising 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 March 31, 2000, (the most recently available data), after a 200 basis point
rate decrease, the Company's NPV ratio was 11.17%. In the event of a 200 basis
point increase in rates, the Company's NPV ratio was 7.13%. 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 March 31, 2000, 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 20,059 (17,485) (47) 5.63 (417)
+200 26,053 (11,491) (31) 7.13 (267)
+100 31,981 ( 5,563) (15) 8.54 (126)
0 37,544 - - 9.80 -
- -100 42,119 4,575 12 10.77 97
- -200 44,326 6,782 18 11.17 137
- -300 45,578 8,034 21 11.34 154
(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 March 31,
2000, the Company's NPV was $37.5 million or 9.80% 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 $11.5 million or 31%
decline in the Company's NPV and would result in a 267 basis point or 27.2%
decline in the Company's NPV ratio to 7.13%. Conversely, an immediate 200
basis point decrease in market interest rates would result in a $6.8 million or
18% increase in the Company's NPV, and a 137 basis point or 14.0% increase in
the Company's NPV ratio to 11.17%. The percentage change in the Company's NPV
at March 31, 2000 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. The Company retains the servicing on the majority of loans sold in
the secondary market and, at June 30, 2000, $50.4 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 June 30, 2000, the Bank had $70.2 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
June 30,2000.
Date of report: April 20, 2000
Items reported: News release dated April 20, 2000 regarding
the announcement of second quarter earnings
and announcement of a cash dividend payable
on May 16, 2000 to holders of record on
May 2, 2000.
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 AUGUST 14, 2000 By
Charles J. Viater
President
Date AUGUST 14, 2000 By
Timothy C. Boenne
Vice President
19