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, 2001
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
ncorporation 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 July 31, 2001 was 1,339,289.
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, 2001 (Unaudited) and September 30, 2000 3
Consolidated Statements of Income (Unaudited)
Three and nine months ended June 30, 2001 and 2000 4
Condensed Consolidated Statements of Changes in
Shareholders' Equity, (Unaudited)
Three and nine months ended June 30, 2001 and 2000 5
Consolidated Statements of Cash Flows, (Unaudited)
Nine months ended June 30, 2001 and 2000 6
Notes to (Unaudited) Consolidated Financial Statements June 30, 2001 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 19
Part II. Other Information 22
Items 1-6 22
Signatures 23
MFB CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 2001 and September 30, 2000
(In thousands, except share information)
(Unaudited)
June 30, September 30,
2001 2000
ASSETS
Cash and due from financial institutions 13,386 9,693
Interest-bearing deposits in other financial
institutions - short-term 20,671 4,851
Total cash and cash equivalents 34,057 14,544
Interest-bearing time deposits in other financial institutions 2,516
Securities available for sale (amortized cost of $52,214 - 6/30/01
and $43,140 - 9/30/00) 51,814 41,623
Federal Home Loan Bank (FHLB) stock, at cost 6,308 6,308
Loans held for sale, net of unrealized losses of $4 - 6/30/01
and $132 - 9/30/00 3,097 6,494
Loans receivable, net of allowance for loan losses of $3,905 - 6/30/01
and $1,672 - 9/30/00 307,862 315,506
Accrued interest receivable 1,830 1,894
Premises and equipment, net 5,219 4,688
Mortgage servicing rights, net of accumulated amortization of
$183 - 6/30/01 and $93 - 9/30/00 921 611
Investment in limited partnerships 2,885 2,948
Other assets 2,038 1,387
Total assets 418,547 396,003
LIABIILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing demand deposits 13,230 11,802
Savings, NOW and MMDA deposits 74,980 56,569
Other time deposits 164,042 171,023
Total deposits 252,252 239,394
Securities sold under agreements to repurchase 7,860 9,143
FHLB advances 119,685 112,152
Advances from borrowers for taxes and insurance 866 2,116
Accrued expenses and other liabilities 4,117 684
Total liabilities 384,780 363,489
Shareholders' equity
Common stock, no par value, 5,000,000 shares authorized;
shares issued:1,689,417-6/30/01 and 9/30/00
shares outstanding: 1,339,289-6/30/01 and 1,358,449-9/30/00 13,037 13,136
Retained earnings - substantially restricted 28,727 27,711
Accumulated other comprehensive income (loss),
net of tax of $(125) - 6/30/01and $(601) - 9/30/00 ( 275) (916)
Treasury stock, 350,128 common shares - 6/30/01
330,968 common shares - 9/30/00, at cost (7,722) (7,417)
Total shareholders' equity 33,767 32,514
Total liabilities and shareholders' equity $ 418,547 $ 396,003
See accompanying notes to (unaudited) consolidated financial statements.
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three and nine months ended June 30, 2001 and 2000
(in thousands except per share information)
Three Months Ended Nine Months Ended
June 30, June 30,
2001 2000 2001 2000
Interest income
Loans receivable, including fees
Mortgage loans $ 3,382 $ 3,750 $10,454 $11,328
Consumer and other loans 611 515 1,835 1,393
Financing leases and
commercial loans 2,289 2,165 7,094 5,257
Securities - taxable 893 919 2,695 2,652
Other interest-bearing assets 223 56 683 188
Total interest income 7,398 7,405 22,761 20,818
Interest expense
Deposits 2,750 2,616 8,602 7,260
Securities sold under agreements
to repurchase 62 72 228 222
FHLB advances 1,655 1,591 4,896 4,453
Total interest expense 4,467 4,279 13,726 11,935
Net interest income 2,931 3,126 9,035 8,883
Provision for loan losses 261 190 2,368 345
Net interest income after
provision for loan losses 2,670 2,936 6,667 8,538
Noninterest income
Service charges on deposit accounts 188 156 544 367
Trust fee income 55 75 156 102
Insurance commissions 41 37 101 109
Brokerage commissions 5 4 15 14
Net realized losses from sales
of securities available for sale (52) (27) (52) (34)
Net realized gains from sales of loans 367 187 739 303
Loan servicing fees, net (9) 23 35 56
Other income 148 114 468 305
Total noninterest income 743 569 2,006 1,222
Noninterest expense
Salaries and employee benefits 1,252 1,222 3,626 3,414
Occupancy and equipment 332 277 935 804
Data processing expense 137 114 373 330
SAIF deposit insurance premium 12 10 35 50
Provision to adjust loans held
for sale to lower of cost or market 4 (6) 4 125
Other expense 531 543 1,574 1,426
Total noninterest expense 2,268 2,160 6,547 6,149
Income before income taxes 1,145 1,345 2,126 3,611
Income tax expense 405 501 712 1,354
Net income $ 740 $ 844 $ 1,414 $ 2,257
Basic earnings per common share $ 0.55 $ 0.62 $ 1.05 $ 1.63
Diluted earnings per common share $ 0.54 $ 0.61 $ 1.02 $ 1.60
See accompanying notes to (unaudited) consolidated financial statements.
MFB CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED) Three and nine months
ended June 30, 2001 and 2000
(In thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
2001 2000 2001 2000
Balance at beginning of period $33,371 $31,531 $32,514 $31,182
Purchase of treasury stock (239) (169) (564) (869)
Stock option exercise - - 160
Cash dividends declared (136) (131) (398) (391)
Effect of contribution to fund ESOP - 50 - 148
Market adjustment of ESOP shares committed to be released - 22 - 76
Comprehensive income
Net income 740 844 1,414 2,257
Net change in net unrealized gains and losses on
securities available for sale, net of reclassification
adjustments and tax effects 31 9 641 (247)
Total comprehensive income 771 853 2,054 2,010
Balance at end of period $33,767 $32,156 $33,767 $ 32,156
See accompanying notes to (unaudited)consolidated financial statements.
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) Nine months
ended June 30, 2001 and 2000
(In thousands)
Nine Months Ended
June 30,
2001 2000
Cash flows from operating activities
Net income $ 1,414 $ 2,257
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization, net of accretion 265 284
Provision for loan losses 2,368 345
Market adjustment of ESOP shares committed to be released - 76
ESOP expense - 148
Net realized losses from sales of securities available for sale 52 34
Net realized gains from sales of loans (739) (303)
Equity in loss of investment in limited partnership 63 107
Amortization of mortgage servicing rights 90 28
Provision to adjust loans held for sale to lower of cost or market 4 125
Origination of loans held for sale (37,351) (10,846)
Proceeds from sales of loans held for sale 41,083 14,921
Net change in:
Accrued interest receivable 64 (701)
Other assets (1,083) (11)
Accrued expenses and other liabilities 3,433 143
Net cash from operating activities 9,663 6,607
Cash flows from investing activities
Net change in interest-bearing time deposits in other financial institutions (2,516) 1,000
Net change in loans receivable 5,276 (43,826)
Purchase of:
Securities available for sale (59,356) (3,000)
Securities held to maturity - (15,243)
FHLB stock - (797)
Premises and equipment, net (939) (557)
Investment in limited partnership - (1,868)
Proceeds from:
Maturities of securities available for sale 45,740 1,000
Maturities of securities held to maturity - 500
Principal payments of mortgage-backed and related securities 4,633 5,230
Sales of securities available for sale - 9,637
Net cash from investing activities (7,162) (47,924)
Cash flows from financing activities
Net change in deposits $12,858 $29,372
Net change in securities sold under agreements to repurchase (1,283) 237
Net change in advances from borrowers for taxes and insurance (1,250) (893)
Purchase of MFB Corp. common stock (564) (869)
Proceeds from FHLB advances 20,000 91,000
Repayment of FHLB advances (12,467) (77,075)
Proceeds from exercise of stock options 116 -
Cash dividends paid (398) (391)
Net cash from financing activities 17,012 41,381
Net change in cash and cash equivalents 19,513 64
Cash and cash equivalents at beginning of period 14,544 12,062
Cash and cash equivalents at end of period $34,057 $ 12,126
Supplemental disclosures of cash flow information Cash paid during the
period for:
Interest $ 13,708 $ 11,986
Income taxes 1,680 1,536
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.
MFB CORP. AND SUBSIDIARY
NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
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, 2001 and
September 30, 2000, the consolidated statements of income and the condensed
consolidated statements of changes in shareholders' equity for the three and
nine months ended June 30, 2001 and 2000, and the consolidated statements of
cash flows for the nine months ended June 30, 2001 and 2000. All significant
intercompany transactions and balances are eliminated in consolidation. The
income reported for the nine months ended June 30, 2001 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. The computations of basic earnings per common share and
diluted earnings per common share for the periods ended June 30, 2001 and 2000
are presented below.
Three Months Ended Nine Months Ended
June 30, June 30,
2001 2000 2001 2000
(in thousands except per share information)
Basic Earnings Per Common Share
Numerator
Net income $ 740 $ 844 $ 1,414 $ 2,257
Denominator
Weighted average common shares outstanding 1,344 1,376 1,349 1,397
Less: Average unallocated ESOP shares - (10) - ( 14)
Weighted average common shares outstanding
for basic earnings per common share 1,344 1,366 1,349 1,383
Basic Earnings Per Common Shares $ .55 $ .62 $ 1.05 $ 1.63
Diluted Earnings Per Common Share
Numerator
Net income $ 740 $ 844 $ 1,414 $ 2,257
Denominator
Weighted average common shares outstanding
for basic earnings per common share 1,344 1,366 1,349 1,383
Add: Dilutive effects of assumed exercises of
stock options 35 29 33 29
Weighted average common and dilutive
potential common shares outstanding 1,379 1,395 1,382 1,412
Diluted Earnings Per Common Share $ .54 $ .61 $ 1.02 $ 1.60
Stock options for 75,750 and 78,250 shares of common stock for the three and
nine months ended June 30, 2001 and 85,500 for the three and nine months ended
June 30, 2000 were not considered in computing diluted earnings per common
share because they were antidilutive.
NOTE 3 - SECURITIES
The amortized cost and fair value of securities available for sale are as
follows:
Available for Sale
June 30, 2001
(in thousands)
Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities
U.S. Government
and federal agencies $ 7,663 $ 32 $ (13) $ 7,682
Mortgage-backed 21,274 107 (57) 21,324
Commercial Paper 3,988 - - 3,988
Corporate notes 15,029 118 (502) 14,645
47,954 257 (572) 47,639
Marketable equity securities 4,260 - (85) 4,175
$ 52,214 $ 257 $ (657) $ 51,814
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
NOTE 4 - LOANS RECEIVABLE, NET
Loans receivable, net at June 30, 2001 and September 30, 2000 are summarized as
follows:
June 30, September 30,
2001 2000
(in thousands)
First mortgage loans (principally conventional)
Principal balances
Secured by one-to-four family residences $ 165,787 $ 185,267
Construction loans 17,181 13,146
Other 3,902 3,631
186,870 202,044
Less undisbursed portion of construction and
other mortgage loans (59) (54)
Total first mortgage loans 186,811 201,990
Commercial and consumer loans:
Principal balances
Home equity and second mortgage $ 19,593 $ 18,917
Commercial 99,549 91,105
Other 6,649 6,089
Total commercial and consumer loans 125,791 116,111
Allowance for loan losses (3,905) (1,672)
Net deferred loan origination fees (835) (923)
$ 307,862 $ 315,506
Activity in the allowance for loan losses is summarized as follows for the nine
months ended June 30, 2001 and for the year ended September 30, 2000.
June 30, September 30,
2001 2000
Balance at beginning of year $ 1,672,000 $ 639,000
Provision for loan losses 2,368,000 1,106,000
Charge-offs (135,000) (73,000)
Recoveries
Balance at end of year $ 3,905,000 $ 1,672,000
Impaired loans were as follows:
Quarter-end and year-end balances with no allocated
allowance for loan losses 99,000 $ 60,000
Quarter-end and year-end loans with allocated allowance
for loan losses 2,593,000 1,591,000
Total $ 2,692,000 $ 1,651,000
NOTE 4 - LOANS RECEIVABLE, NET (continued)
Nonperforming loans were as follows at June 30, 2001 and
September 30,2000:
Loans past due over 90 days still on accrual status $ - $ 60,000
Nonaccrual loans 2,692,000 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
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. This loan was considered impaired at June 30,
2001.
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 $88.4 million as of June 30,
2001 compared to $56.1 million as of September 30, 2000. This $32.3 million
increase was due to a $19.6 million increase in cash and cash equivalents, a
$2.5 million increase in time deposits held in other financial institutions,
and a $10.2 million increase in securities available for sale. Management
believes the liquidity level of $88.4 million as of June 30, 2001 is sufficient
to meet anticipated liquidity needs.
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,
2001 total FHLB borrowings amounted to $119.7 million and were used primarily
to fund loan portfolio growth. The Bank had commitments to fund loan
originations with borrowers totaling $98.6 million at June 30, 2001, including
$55.0 million in available consumer and commercial lines of credit.
Certificates of deposits scheduled to mature in one year or less totaled
$139.3 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,
FHLB borrowings totaled $112.2 million.
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, 2001 and 2000 follows.
During the nine months ended June 30, 2001, net cash and cash equivalents
increased $19.5 million from $14.5 million at September 30, 2000 to $34.0
million at June 30, 2001.
The Company experienced a $9.6 million net increase in cash from operating
activities for the nine months ended June 30, 2001, compared to an $6.6 million
net increase for the nine months ended June 30, 2000. The increase in the most
recent period was primarily attributable to $41.1 million in proceeds realized
from the sale of mortgage loans, a $3.4 million increase in accrued expenses and
other liabilities, a $2.4 million provision for loan losses, and net income of
$1.4 million, offset by the origination of $37.4 million of loans held for sale
and a $1.1 million net change in other assets. The increase of $6.6 million for
the period ended June 30, 2000 was primarily attributable to $14.9 million in
proceeds 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 Bank continues
to originate, sell and deliver 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 $7.1 million net decrease in cash from investing activities during the nine
months ended June 30, 2001 is primarily attributable to investment security
purchases exceeding maturities by $13.6 million and $2.5 million of time deposit
purchases, offset by principal loan payments exceeding loan originations of $5.3
million and $4.6 million of mortgage-backed securities principal payments. 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 securities
principal payments and a $1.9 million low income housing limited partnership
investment.
Financing activities generated net cash of $17.0 million for the nine months
ended June 30, 2001. The net cash was provided primarily from net deposit
increases of $12.9 million and $7.5 million of increases in FHLB advances,
offset by repurchase agreement decreases totaling $1.3 million and $1.3 million
in net changes in advances from borrowers for taxes and insurance. Net cash
generated from financing activities was $41.4 million for the nine months ended
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 $893,000 in
net changes in advances from borrowers for taxes and insurance, $869,000 to
repurchase the Company's stock and cash dividend payments of $391,000 during the
nine months.
CAPITAL RESOURCES
Total shareholders' equity increased from $32.5 million as of September 30, 2000
to $33.8 million as of June 30, 2001 mainly from net income of $1.4 million and
a $640,000 adjustment to reflect the increase in the market value of securities
available for sale, net of tax, offset by the repurchase of 30,760 shares of
outstanding common stock during this period at a cost of $564,000 and cash
dividend payments of $398,000. Book value per common share was $25.21 at June
30, 2001 compared to $23.93 at September 30, 2000. The equity to assets ratio
was 8.07% at June 30, 2001 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 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,
2001 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 June 30, 2001
Total capital (to risk
weighted assets) $ 35,249 13.16% $ 21,425 8.00% $ 26,412 10.00%
Tier 1 (core) capital
(to risk weighted assets) 33,144 12.38 10,712 4.00 16,068 6.00
Tier 1 (core) capital (to
adjusted total assets 33,144 7.92 16,733 4.00 20,916 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 June 30, 2001, 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.
MATERIAL CHANGES IN FINANCIAL CONDITION
June 30, 2001 Compared to September 30, 2000
Total assets increased $22.5 million from $396.0 million as of September 30,
2000 to $418.5 million as of June 30, 2001.
Total cash and cash equivalents increased $19.5 million from $14.5 million to
$34.1 million and total securities available for sale increased $10.2 million
from $41.6 to $51.8 million, and time deposits in other financial institutions
increased $2.5 million during the nine month period ended June 30, 2001.
Offsetting these increases was the $11.0 million decrease in total net loans
outstanding during this same nine month period.
Commercial loans outstanding increased by $8.4 million from $91.1 million at
September 30, 2000 to $99.5 million at June 30, 2001. Consumer loans
outstanding, including home equity and second mortgages, also increased by $1.2
million from $25.0 million at September 30, 2000 to $26.2 million at June 30,
2001. Offsetting these increases was the $15.2 million decrease in mortgage
loans outstanding during the same period net of secondary market sales totaling
$41.1 million. Total gross loans held for sale decreased from $6.5 million at
September 30, 2000 to $3.1 million at June 30, 2001.
During the nine months ended June 30, 2001, the Company completed secondary
market mortgage loans sales totaling $41.1 million and the net gains realized on
these loan sales were $739,000, including $401,000 related to recording mortgage
loans servicing rights. The loans sold during the quarter ended June 30, 2001
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 $35,000, net of $90,000 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 $3.9 million at June 30, 2001. 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 nine month period, $2.4 million was added to
the loan loss reserve, while $135,000 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 loan losses from existing loans at
June 30, 2001.
The increase of $651,000 in other assets from September 30, 2000 to June 30,
2001 can primarily be attributed to a $537,000 increase in current and deferred
tax assets during the period.
Total liabilities increased $21.3 million from $363.5 at September 30, 2000 to
$384.8 million at June 30, 2001. Total deposits increased from $239.4 million at
September 30, 2000 to $252.3 million at June 30, 2001, primarily due to the
$18.4 million increase in savings, NOW and MMDA deposits and the $1.4 million
increase in noninterest-bearing demand accounts exceeding the $7.0 million
decrease in time deposits over the nine month period. FHLB advances increased
$7.5 million from $112.2 million at September 30, 2000 to $119.7 million at June
30, 2001 and securities sold under agreements to repurchase decreased $1.3
million during the same nine month period.
The $119.7 million of Federal Home Loan Bank advances have a weighted average
interest rate of 5.60% and mature in ten years or less. The one-day retail
repurchase agreements are secured by investment securities that have a weighted
average interest rate of 3.00%.
Accrued expenses and other liabilities increased $3.4 million from September 30,
2000 to June 30, 2001 due to the recognition of commitments to purchase
securities totaling $3.0 million at June 30, 2001.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Three and nine months ended June 30, 2001 compared to three and nine months
ended June 30, 2000
The Company's consolidated net income for the three months ended June 30, 2001
was $740,000 or $.54 diluted earnings per common share compared to $844,000 or
$.61 diluted earnings per share for the three months ended June 30, 2000. Net
income for the nine months ended June 30, 2001 was $1.4 million or $1.02 diluted
earnings per share compared to $2.3 million or $1.60 diluted earnings per share
for the nine months ended June 30, 2000.
Net interest income after provision for loan losses for the most recent three
and six month periods totaled $2.7 million and $6.7 million compared to $2.9
million and $8.5 million for the same periods one year ago. During the nine
months ended June 30, 2001 total interest income increased by $1.9 million
compared to the same period one year ago, primarily as a result of increased
volumes of commercial and consumer loans receivables, offset by lower yields
generated on these loans related to interest rate decreases in the period. In
the past nine months, commercial loan receivables increased $8.7 million and
consumer loan receivables, which include home equity term loans and lines of
credit, increased $1.2 million, while residential mortgage loan receivables
decreased $15.2 million. Total interest expense increased $188,000 during the
three months ended June 30, 2001, as compared to the same period a year ago,
reflecting the growth in deposits and FHLB advances. For the nine months ended
June 30, 2001, total interest expense increased $1.8 million. The bank's
provision for loan loss reserves was increased from $345,000 for the period
ended June 30, 2000 to $2.4 million for the period ended June 30, 2001. The
current year's provision includes a one-time addition of $1.8 million ($1.1
million after tax) that was established as a result of a Chapter 11 bankruptcy
filing by a commercial borrower.
Noninterest income increased from $569,000 and $1.2 million for the three and
nine months ended June 30, 2000 to $743,000 and $2.0 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 and net realized
gains from loan sales. Noninterest expenses increased from $2.2 million during
the three months ended June 30, 2000 to $2.3 million during the three months
ended June 30, 2001 and from $6.1 million to $6.5 million for the comparable
nine month periods. The noninterest expense increases are primarily attributable
to staffing increases and expenses incurred in the offering of additional
services to the Bank's customers.
Income tax expense for the three and nine months ended June 30, 2001 was
$405,000 and $712,000 compared to $501,000 and $1.4 million for the same periods
ended June 30, 2000.
FORWARD LOOKING STATEMENTS
When used in this filing and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases, "anticipate,"
"would be," "will allow," "intends to," "will likely result," "are expected to,"
"will continue," "is anticipated," "estimated," "project," or similar
expressions are intended to identify, "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to risks and uncertainties, including but not limited to changes in
economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area, and competition, all or some of which could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and advise
readers that various factors, including regional and national conditions,
substantial changes in levels of market interest rates, credit and other risks
of lending and investing activities, and competitive and regulatory factors,
could affect the Company's financial performance and could cause the Company's
actual results for future periods to differ materially from those anticipated or
projected.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
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, 2001, (the most recently available data), after a 200 basis point rate
decrease, the Company's NPV ratio was 7.39%. In the event of a 200 basis point
increase in rates, the Company's NPV ratio was 6.90%. 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, 2001, is an analysis of the Company's interest
rate risk as measured by changes in NPV for instantaneous and sustained parallel
shifts in the yield curve, in 100 basis point increments, up and down 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 22,917 ( 11,588) (34) 5.76 (249)
+200 27,954 (6,551) ( 19) 6.90 (135)
+100 31,941 ( 2,564) (7) 7.75 (50)
0 34,505 - - 8.24 -
- 100 40,275 (596) (2) 8.02 (22)
- 200 41,851 (2,976) (9) 7.39 ( 85)
- 300 44,090 (6,003) (17) 6.62 (162)
(1) Expressed in basis points
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, 2001,
the Company's NPV was $34.5 million or 8.24% of the market value of portfolio
assets. Based upon the assumptions utilized, an immediate 200 basis point
increase in market interest rates would result in a $6.6 million or 19% decline
in the Company's NPV and would result in a 134 basis point or 16.3% decline in
the Company's NPV ratio to 6.90%. Conversely, an immediate 200 basis point
decrease in market interest rates would result in a $3.0 million or 9% decrease
in the Company's NPV, and a 85 basis point or 10.3% decrease in the Company's
NPV ratio to 7.39%. The percentage change in the Company's NPV at March 31, 2001
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, 2001, $80.3 million in such loans were being
serviced for others. The Company also maintains capital well in excess of
regulatory requirements.
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, 2001, the Bank had $88.2 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.
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. Reports on Form 8-K.
(a) MFB Corp. filed one Form 8-K report during the quarter ended
June 30, 2001.
Date of report: April 18, 2001
Items reported: News release dated April 18, 2001 regarding
the announcement of second quarter earnings
and announcement of a cash dividend payable
on May 15, 2001 to holders of record on
May 1, 2001
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, 2001 By
Charles J. Viater
President
Date August 14, 2001 By
Timothy C. Boenne
Vice President