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, 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 December 31, 2000 was 1,346,489.
MFB CORP. AND SUBSIDIARY
FORM 10-Q
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Consolidated Balance Sheets
December 31, 2000 (Unaudited) and September 30, 2000 3
Consolidated Statements of Income (Unaudited)
Three months ended December 31, 2000 and 1999 4
Condensed Consolidated Statements of Changes in Shareholders'
Equity, (Unaudited)
Three months ended December 31, 2000 and 1999 5
Consolidated Statements of Cash Flows, (Unaudited)
Three months ended December 31, 2000 and 1999 6
Notes to (Unaudited) Consolidated Financial Statements
December 31, 2000 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION 21
Items 1-6. 21
Signatures 22
2
MFB CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and September 30, 2000
(In thousands except share information)
(Unaudited)
December 31, September 30,
2000 2000
ASSETS
Cash and due from financial institutions $ 12,260 $ 9,693
Interest-bearing deposits in other financial
institutions - short-term 10,154 4,851
Total cash and cash equivalents 22,414 14,544
Securities available for sale (amortized cost
of $46,756 - 12/31/00 and $43,140 - 9/30/00) 45,927 41,623
Federal Home Loan Bank (FHLB) stock, at cost 6,308 6,308
Loans held for sale, net of unrealized losses of
$0 - 12/31/00 and $132 - 9/30/00 872 6,494
Loans receivable, net of allowance for loan
losses of $3,531-12/31/00 and $1,672-9/30/00 313,969 315,506
Accrued interest receivable 2,279 1,894
Premises and equipment, net 4,743 4,688
Mortgage servicing rights, net of accumulated
amortization of $106-12/31/00 and $93-9/30/00 693 611
Investment in limited partnerships 2,922 2,948
Other assets 1,316 1,387
Total assets $ 401,443 $ 396,003
LIABIILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing demand deposits $ 12,114 $ 11,802
Savings, NOW and MMDA deposits 64,488 56,569
Other time deposits 172,127 171,023
Total deposits 248,729 239,394
Securities sold under agreements to repurchase 8,465 9,143
FHLB advances 109,802 112,152
Advances from borrowers for taxes and insurance 971 2,116
Accrued expenses and other liabilities 1,054 684
Total liabilities 369,021 363,489
Shareholders' equity
Common stock, no par value, 5,000,000 shares
authorized; shares issued:1,689,417-12/31/00
and 9/30/00 shares outstanding: 1,346,489-12/31/00
and 1,358,449-9/30/00 13,130 13,136
Retained earnings - substantially restricted 27,448 27,711
Accumulated other comprehensive income (loss),
net of tax of $(351)-12/31/00 and $(601)-9/30/00 (535) (916)
Treasury stock, 342,928 common shares-12/31/00
330,968 common shares-9/30/00, at cost (7,621) (7,417)
Total shareholders' equity 32,422 32,514
Total liabilities and shareholders' equity $ 401,443 $ 396,003
See accompanying notes to (unaudited) consolidated financial statements.
3
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended December 31, 2000 and 1999
(in thousands, except per share information)
Three Months Ended
December 31,
2000 1999
INTEREST INCOME
Loans receivable
Mortgage loans $ 3,548 $ 3,798
Consumer and other loans 607 420
Financing leases and Commercial loans 2,501 1,448
Securities - taxable 908 796
Other interest-bearing assets 180 58
Total interest income 7,744 6,520
INTEREST EXPENSE
Deposits 2,931 2,165
Securities sold under agreements
to repurchase 93 75
FHLB advances 1,613 1,445
Total interest expense 4,637 3,685
NET INTEREST INCOME 3,107 2,835
PROVISION FOR LOAN LOSSES 1,957 75
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,150 2,760
NONINTEREST INCOME
Service charges on deposit accounts 188 110
Trust fee income 46 28
Insurance commissions 35 41
Brokerage Commissions 5 5
Net realized gains from sales of loans 186 57
Loan servicing fees, net of amortization 26 17
Other 175 100
Total noninterest income 661 358
NONINTEREST EXPENSE
Salaries and employee benefits 1,159 1,138
Occupancy and equipment 276 242
Data processing expense 116 108
SAIF deposit insurance premium 12 29
Provision to adjust loans held for sale
to lower of cost or market - 112
Other 486 381
Total noninterest expense 2,049 2,010
Income (Loss) before income taxes (238) 1,108
Income tax expense (benefit) (103) 419
NET INCOME (LOSS) $ (135) $ 689
Basic earnings (loss) per common share $ (.10) $ .49
Diluted earnings (loss) per common share $ (.10) $ .48
See accompanying notes to (unaudited) consolidated financial statements.
4
MFB CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Three months ended December 31, 2000 and 1999
(In thousands)
Three Months Ended
December 31,
2000 1999
Balance at beginning of period $32,514 $31,181
Purchase of treasury stock (218) (146)
Stock option exercise 8 -
Cash dividends declared (128) (126)
Effect of contribution to fund ESOP - 48
Market adjustment of ESOP shares committed to be
released - 31
Comprehensive income (loss):
Net income (loss) (135) 689
Other comprehensive income (loss) 381 (260)
Total comprehensive income 246 429
Balance at end of period $32,422 $31,417
See accompanying notes to (unaudited) consolidated financial statements.
5
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended December 31, 2000 and 1999
(In thousands)
Three Months Ended
December 31,
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (135) $ 689
Adjustments to reconcile net income (loss) to net
cash from operating activities
Depreciation and amortization, net of accretion 96 133
Provision for loan losses 1,957 75
Market adjustment of ESOP shares committed to be
released - 31
ESOP expense - 50
Net realized gains from sales of loans (186) (57)
Equity in loss of investment in limited partnership 26 5
Amortization of mortgage servicing rights 13 8
Provision to adjust loans held for sale to lower of
cost or market - 112
Origination of loans held for sale (5,714) (3,198)
Proceeds from sales of loans held for sale 11,427 2,963
Net change in:
Accrued interest receivable (385) (118)
Other assets (236) 456
Accrued expenses and other liabilities 372 (284)
Net cash from operating activities 7,235 865
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing time deposits
in other financial institutions - (100)
Net change in loans receivable (420) (10,963)
Purchase of:
Securities available for sale (3,961) -
Securities held to maturity - (484)
FHLB stock - (200)
Premises and equipment, net (186) (233)
Proceeds from:
Maturities of securities available for sale - 500
Maturities of securities held to maturity - 500
Principal payments of mortgage-backed and
related securities 380 2,766
Net cash from investing activities (4,187) (8,214)
(CONTINUED)
6
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended December 31, 2000 and 1999
(In thousands)
Three Months Ended
December 31,
2000 1999
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits $ 9,335 $ 1,827
Net change in securities sold under agreements
to repurchase (678) 2,378
Net change in advances from borrowers for taxes
and insurance (1,145) (1,024)
Purchase of MFB Corp. common stock (218) (146)
Proceeds from FHLB advances 10,000 40,500
Repayment of FHLB advances (12,350) (33,500)
Proceeds from exercise of stock options 6 -
Cash dividends paid (128) (128)
Net cash from financing activities 4,822 9,907
Net change in cash and cash equivalents 7,870 2,558
Cash and cash equivalents at beginning of period 14,544 12,062
CASH AND CASH EQUIVALENTS AT END OF PERIOD $22,414 $14,620
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 4,635 $ 3,242
Income taxes 150 120
Supplemental schedule of noncash investing
activities
Transfer from:
Loans held for sale to loans receivable $ - 2,405
See accompanying notes to (unaudited) consolidated financial statements.
7
MFB CORP. AND SUBSIDIARY
NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
December 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 December 31,
2000 and September 30, 2000, the consolidated statements of income and the
condensed consolidated statements of changes in shareholders' equity for the
three months ended December 31, 2000 and 1999, and the consolidated statements
of cash flows for the three months ended December 31, 2000 and 1999. All
significant intercompany transactions and balances are eliminated in
consolidation. The income reported for the three months ended December 31,
2000 is not necessarily indicative of the results that may be expected for the
full year.
NOTE 2 - EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. ESOP shares are considered outstanding for earnings (loss) 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 (loss) per common share
calculations as they become vested. Diluted earnings (loss) 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 (LOSS) PER COMMON SHARE (CONTINUED)
The computations of basic earnings (loss) per common share and diluted
earnings (loss) per common share for the periods ended December 31, 2000 and
1999 are presented
below.
THREE MONTHS ENDED
DECEMBER 30,
2000 1999
(in thousands except per share information)
BASIC EARNINGS (LOSS) PER COMMON SHARE
Numerator
Net income $ (135) $ 689
Denominator
Weighted average common shares outstanding 1,352 1,420
Less: Average unallocated ESOP shares - (19)
Weighted average common shares outstanding
for basic earnings per common share 1,352 1,401
BASIC EARNINGS (LOSS) PER COMMON SHARES $ (.10) $ .49
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Numerator
Net income $ (135) $ 689
Denominator
Weighted average common shares outstanding
for basic earnings per common share 1,352 1,401
Add: Dilutive effects of assumed exercises of
stock options - 36
Weighted average common and dilutive
potential common shares outstanding 1,352 1,437
DILUTED EARNINGS (LOSS) PER COMMON SHARE $ (.10) $ .48
Stock options for 202,750 for the three months ended December 31, 2000 and
78,250 for the three months ended December 31, 1999 were not considered in
computing diluted earnings per common share because they were antidilutive.
9
NOTE 3 - SECURITIES
The amortized cost and fair value of securities available for sale are as
follows:
Available for Sale
DECEMBER 31, 2000
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
COST GAINS LOSSES VALUE
Debt securities
U.S. Government
and federal agencies $17,946 $ 67 $ (56) $17,957
Mortgage-backed 14,449 7 (195) 14,261
Commercial Paper 3,994 6 - 4,000
Corporate notes 9,930 10 (582) 9,358
46,319 90 (833) 45,576
Marketable equity securities 438 - (87) 351
$46,757 $ 90 $ (920) $45,927
Available for Sale
SEPTEMBER 30, 2000
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
COST GAINS LOSSES VALUE
Debt securities
U.S. Government
and federal agencies $17,944 $ 6 $ (212) $17,738
Mortgage-backed 14,834 - (622) 14,212
Corporate notes 9,924 3 (572) 9,355
42,702 9 (1,406) 41,305
Marketable equity securities 438 - (120) 318
$43,140 $ 9 $ (1,526) $41,623
10
NOTE 4 - LOANS RECEIVABLE, NET
Loans receivable, net at December 31, 2000 and September 30, 2000 are
summarized as follows:
December 31, September 30,
2000 2000
(in thousands)
First mortgage loans (principally conventional)
Principal balances
Secured by one-to-four family residences $182,997 $185,267
Construction loans 10,869 13,146
Other 3,776 3,631
197,642 202,044
Less undisbursed portion of construction
and other mortgage loans (360) (54)
Total first mortgage loans 197,282 201,990
Commercial and consumer loans:
Principal balances
Home equity and second mortgage $ 19,991 $ 18,917
Commercial 94,706 91,105
Other 6,393 6,089
Total commercial and consumer loans 121,090 116,111
Allowance for loan losses (3,531) (1,672)
Net deferred loan origination fees (872) (923)
$313,969 $315,506
Activity in the allowance for loan losses is summarized as follows for the
three months ended December 31, 2000 and for the year ended September 30, 2000.
December 31, September 30,
2000 2000
Balance at beginning of year $1,672,000 $ 639,000
Provision for loan losses 1,957,000 1,106,000
Charge-offs (98,000) (73,000)
Recoveries - -
Balance at end of year $3,531,000 $1,672,000
Impaired loans were as follows:
December 31, September 30,
2000 2000
Quarter-end and year-end balances with
no allocated allowance for loan losses $ 60,000 $ 60,000
Quarter-end and year-end loans with
allocated allowance for loan losses 2,649,000 1,591,000
Total $2,709,000 $ 1,651,000
11
NOTE 4 - LOANS RECEIVABLE, NET (CONTINUED)
December 31, September 30,
2000 2000
Amount of the allowance for loan losses allocated $ 1,800,000 $ 150,000
Average of impaired loans during the quarter
and during the year $ 88,793 $ 12,000
Interest income recognized during impairment $ 723 $ 1,000
Cash-basis interest income recognized
during impairment $ - $ -
Nonperforming loans were as follows at December 31, 2000 and September 30, 2000:
December 31, September 30,
2000 2000
Loans past due over 90 days still
on accrual status $ - $ 60,000
Nonaccrual loans 92,000 6,000
On January 22, 2001, a commercial customer with a $2.5 million loan as of
December 31, 2000 filed an emergency petition for protection under Chapter 11
or the United States Bankruptcy Code. Because of this bankruptcy filing and
uncertainty as to the status of the underlying collateral for the loan, the
Bank recorded an additional $1.8 million provision to loan loss reserves in
the quarter ended December 31, 2000. This loan is also considered impaired at
September 30, 2000.
12
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, fee income,
gains from sales of loans, 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 $68.3 million as of December
31, 2000 compared to $56.1 million as of September 30, 2000. This $12.2 million
increase was due to a $7.9 million increase in cash and cash equivalents and a
$4.3 million increase in securities available for sale. Management believes
the liquidity level of $68.3 million as of December 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 December 31, 2000, the
Bank's liquidity ratio was 11.39%, 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 December
31, 2000, total FHLB borrowings amounted to $109.8 million and were used
primarily to fund loan portfolio growth. The Bank had commitments to fund loan
originations with borrowers totaling $65.1 million at December 31, 2000,
including $51.3 million in available consumer and commercial lines of credit.
Certificates of deposits scheduled to mature in one year or less totaled $93.1
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, 2000, total
FHLB borrowings totaled $112.2 million.
13
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, 2000 and 1999 follows.
During the three months ended December 31, 2000, net cash and cash equivalents
increased $7.9 million from $14.5 million at September 30, 2000 to $22.4
million at December 31, 2000.
The Company experienced a $7.2 million net increase in cash from operating
activities for the three months ended December 31, 2000, compared to an $865
thousand net increase for the three months ended December 31, 1999. The
increase in the most recent period was primarily attributable to $11.4 million
in proceeds realized from the sale of mortgage loans offset by the
origination of $5.7 million of loans held for sale. The increase of $865
thousand for the period ended December 31, 1999 was primarily attributable
to $3.0 million in proceeds 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. 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 $4.2 million net decrease in cash from investing activities during the
three months ended December 31, 2000 is primarily attributable to investment
security purchases of $4.0 million. For the three months ended December 31,
1999, there was an $8.2 million net decrease in cash from investing activities.
This decrease was 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.
Financing activities generated net cash of $4.8 million for the period ending
December 31, 2000. The net cash was provided primarily from net deposit
increases of $9.3 million offset by decreases in FHLB advances of $2.3 million,
net changes of $1.1 million in advances from borrowers for taxes and insurance,
repurchase agreement decreases totaling $678 thousand, $218,000 to repurchase
the Company's stock and cash dividend payments of $129,000 during the quarter.
Net cash generated from financing activities was $9.9 million for the three
months ended 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.
CAPITAL RESOURCES
Total shareholders' equity decreased from $32.5 million as of September 30,
2000 to $32.4 million as of December 31, 2000 mainly from a $381,000
adjustment to reflect the increase in the market value of securities available
for sale, net of tax, offset by the repurchase of 12,560 shares of outstanding
common stock during this period at a cost of $218 thousand, cash dividends of
$128,000 and a net loss during the quarter of $135,000. The equity to assets
ratio was 8.08% at December 31, 2000 compared to 8.21% at September 30, 2000.
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
14
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, 2000 and September 30, 2000 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, 2000
Total capital (to risk
weighted assets) $ 33,768 13.05% $ 20,708 8.00% $ 25,885 10.00%
Tier 1 (core) capital
(to risk weighted
assets) 32,037 12.38 10,355 4.00 15,531 6.00
Tier 1 (core) capital
(to adjusted total
assets 32,037 7.98 16,056 4.00 20,070 5.00
As of September 30, 2000
Total capital (to risk
weighted assets $ 33,810 13.25% $20,416 8.00% $ 25,520 10.00%
Tier 1 (core) capital
(to risk weighted
assets) 32,288 12.65 10,208 4.00 15,312 6.00
Tier 1 (core) (to
adjusted total assets 32,288 8.14 15,869 4.00 19,836 5.00
As of December 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.
15
MATERIAL CHANGES IN FINANCIAL CONDITION
DECEMBER 31, 2000 COMPARED TO SEPTEMBER 30, 2000
Total assets increased $5.4 million from $396.0 million as of September 30,
2000 to $401.4 million as of December 31, 2000.
Total cash and cash equivalents increased $7.9 million from $14.5 million to
$22.4 million and total securities available for sale increased $4.3 million
from $41.6 to $45.9 million during the three month period ended December 31,
2000. Offsetting these increases was the $7.2 million decrease in total net
loans outstanding during this same three month period.
Commercial loans outstanding increased by $3.6 million from $91.1 million at
September 30, 2000 to $94.7 million at December 31, 2000. Consumer loans
outstanding, including home equity and second mortgages, also increased by $1.4
million from $25.0 million at September 30, 2000 to $26.4 million at December
31, 2000. Offsetting these increases was the $4.4 million decrease in mortgage
loans outstanding during the same period net of secondary market sales totaling
$11.5 million. Total gross loans held for sale decreased from $6.5 million at
September 30, 2000 to $872,000 at December 31, 2000.
During the quarter ended December 31, 2000, the Company completed secondary
market mortgage loans sales totaling $11.5 million and the net gains realized
on these loan sales were $186,000, including $96,000 related to recording
mortgage loans servicing rights. The loans sold during the quarter ended
December 31, 2000 were fixed rate mortgage loans with maturities of fifteen
years or longer. Servicing of the sold loans has been retained by the Company
and the fees generated during this period were approximately $26,000, net of
$13,000 in amortization of mortgage servicing rights. Management, in order to
meet consumer demand, anticipates that the Company will continue to deliver
fixed rate loans to the secondary market to manage interest rate risk and to
diversify the asset mix of the Company.
The allowance for loan losses increased from $1.7 million at September 30,
2000 to $3.5 million at December 31, 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. During
this three month period, $2.0 million was added to the loan loss reserve,
while $98,000 was charged off due to unrecoverable commercial and consumer
loans. On January 22, 2001, a commercial customer with a $2.5 million loan
as of December 31, 2000 filed an emergency petition for protection under
Chapter 11 of the United States Bankruptcy Code. Because of this bankruptcy
filing and uncertainty as to the status of the underlying collateral for
the loan, the Bank recorded an additional $1.8 million provision to loan
loss reserves in the quarter ended December 31, 2000 which has an approximate
after tax effect to net income of $(1.1) million, or $(.80) diluted earnings
per share. The Bank is aggressively pursuing steps to recover the loan
proceeds from the customer. In management's opinion, the allowance for
loan losses is adequate to absorb anticipated future loan losses from loans
at December 31, 2000.
Total liabilities increased $5.5 million from $363.5 at September 30, 2000 to
$369.0 million at December 31, 2000. Total deposits increased from $239.4
million at September 30, 2000 to $248.7 million at December 31, 2000, primarily
due to a $7.9 million increase in savings, NOW and MMDA deposits of which $7.7
million were new NOW public funds with a 6.68% cost of funds.
Time certificates of deposit also increased $1.1 million during this same
three month period. FHLB advances decreased $2.4 million from $112.2
million at September 30, 2000 to $109.8 million at December 31, 2000 and
securities sold under agreements to repurchase decreased $678,000 during the
same three month period. The increase of $370,000 from September 30, 2000 to
December 31, 2000 in accrued expenses and other liabilities can primarily be
attributed to a $304,000 ATM processor error which was a deduction from other
liabilities on September 30, 2000. This error was resolved on October 3, 2000.
The $109.8 million of Federal Home Loan Bank advances have a weighted average
interest rate of 5.74% 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 4.10%.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1999
The Company's consolidated net income (loss) for the three months ended
December 31, 2000 was $(135,000) or $(.10) basic diluted earnings (loss) per
common share compared to $689,000 or $.49 basic and $.48 diluted earnings
per share for the three months ended December 31, 1999.
Net interest income after provision for loan losses for the most recent three
month period totaled $1.2 million compared to $2.8 million for the same
period one year ago. During the three months ended December 31, 2000 total
interest income increased by $1.2 million compared to the same period one year
ago, primarily as a result of a $38.0 million increase in commercial loan
receivables and a $6.4 million increase in consumer loan receivables, which
includes home equity term loans and lines of credit. Total interest expense
increased $952,000 during the three months ended December 31, 2000, as compared
to the same period a year ago, reflecting both growth in deposits and higher
cost of funds. Due primarily to the bankruptcy filing of a commercial customer
as discussed in the material changes in financial condition, the provision for
loan and lease losses was increased from $75,000 for the period ended December
31, 1999 to $2.0 million for the three months ended December 31, 2000.
Noninterest income increased from $358,000 for the three months ended December
31, 1999 to $661,000 for the most recent three month period. This increase is
primarily due to fees generated from the increasing number of core deposit
account relationships, increased income generated from the Bank's trust
department, net gains from loan sales and the servicing fees retained on these
sold loans. Noninterest expenses for both periods ended December 31, 2000 and
1999 amounted to $2.0 million.
Income tax expense (benefit) for the period ended December 31, 1999 decreased
from $419,000 to $(103,000) at December 31, 2000.
17
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 September 30, 2000, (the most recently available
data), after a 200 basis point rate decrease, the Company's NPV ratio was
10.69%. In the event of a 200 basis point increase in rates, the Company's
NPV ratio was 7.71%. 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, 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 Rate NPV as % of Portfolio
Changes in Basis NET PORTFOLIO VALUE VALUE OF ASSETS
Points NPV
(RATE SHOCK)(1) $ AMOUNT $ CHANGE % CHANGE RATIO CHANGE (1)
(Dollars in Thousands)
+300 24,190 (15,162) (39) 6.43 (340)
+200 29,641 (9,711) (25) 7.71 (212)
+100 34,817 (4,535) (12) 8.87 (96)
0 39,352 - - 9.83 -
- -100 42,695 3,343 8 10.49 66
- -200 44,037 4,685 12 10.69 86
- -300 45,232 5,880 15 10.85 102
(1)Expressed in basis points
18
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,
2000, the Company's NPV was $39.4 million or 9.83% 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 $9.7 million or 25%
decline in the Company's NPV and would result in a 212 basis point or 21.6%
decline in the Company's NPV ratio to 7.71%. Conversely, an immediate 200
basis point decrease in market interest rates would result in a $4.7 million or
12% increase in the Company's NPV, and a 86 basis point or 8.7% increase in the
Company's NPV ratio to 10.69%. The percentage change in the Company's NPV at
September 30, 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 December 31, 2000, $63.1 million in such loans
were being serviced for others. The Company also maintains capital well in
excess of regulatory requirements.
19
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 December 31, 2000, the Bank had $76.6 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.
20
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.
(a) The Annual Meeting of Shareholders was held on January 16, 2001.
(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
Election of Directors
Reginald H. Wagle 1,010,787 100,375
Christine A. Lauber 1,010,887 100,275
Appointment of Crowe, Chizek
& Company as auditors for
2001 1,108,795 1,350 1,100
The text of the matters referred to under this Item 4 is set forth in the
proxy statement dated December 12, 2000 previously filed with the Securities
and Exchange Commission, and is incorporated herein as reference.
Item 5. Other Information.
None
Item 6. Reports on Form 8-K.
MFB Corp. filed one Form 8-K report during the quarter ended
December 31, 2000.
Date of report: October 20, 2000
Items reported: News release dated October 18, 2000 regarding
the announcement of annual earnings and
announcement of a cash dividend payable on
November 14, 2000 to holders of record on
October 31, 2000.
21
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 FEBRUARY 14, 2001 By
Charles J. Viater
President
Date FEBRUARY 14, 2001 By
Timothy C. Boenne
Vice President
22