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, 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
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 February 12, 2002 was 1,339,839.
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, 2001 (Unaudited) and September 30, 2001 3
Consolidated Statements of Income (Unaudited)
Three months ended December 31, 2001 and 2000 4
Condensed Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
Three months ended December 31, 2001 and 2000 5
Consolidated Statements of Cash Flows (Unaudited)
Three months ended December 31, 2001 and 2000 6
Notes to (Unaudited) Consolidated Financial Statements December 31, 2001 8
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 13
Part II. Other Information 20
Items 1-6. 20
Signatures 22
MFB CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and September 30, 2001
(In thousands, except share information)
(Unaudited)
December 31, September 30,
2001 2001
ASSETS
Cash and due from financial institutions $ 13,909 7,229
Interest-bearing deposits in other financial
institutions - short-term 16,638 26,994
Total cash and cash equivalents 30,547 34,223
Interest-bearing time deposits in other financial institutions 1,500 1,500
Securities available for sale 58,142 47,860
Federal Home Loan Bank (FHLB) stock, at cost 6,308 6,308
Loans held for sale, net of unrealized losses of $-0 at 12/31/01
and $-0- at 9/30/01 4,651 3,074
Loans receivable 304,011 311,613
Less: allowance for loan losses (4,857) (4,632)
---------- ----------
Loans receivable, net 299,154 306,981
Accrued interest receivable 1,651 1,774
Premises and equipment, net 5,019 5,100
Mortgage servicing rights, net of accumulated amortization of
$359 - 12/31/01 and $239 - 9/30/01 1,249 1,069
Investment in limited partnership 2,835 2,877
Other assets 1,808 2,318
Total assets $ 412,864 $ 413,084
LIABIILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing demand deposits $ 15,081 $ 13,895
Savings, NOW and MMDA deposits 76,046 73,082
Other time deposits 155,634 158,202
Total deposits 246,761 245,179
Securities sold under agreements to repurchase 10,043 11,022
FHLB advances 119,335 119,685
Advances from borrowers for taxes and insurance 750 1,599
Accrued expenses and other liabilities 962 1,219
Total liabilities 377,851 378,704
Shareholders' equity
Common stock, no par value, 5,000,000 shares authorized;
shares issued:1,689,417-12/31/01 and 9/30/01
shares outstanding: 1,339,839-12/31/01 and 1,336,539-9/30/01 12,940 13,023
Retained earnings - substantially restricted 29,854 29,089
Accumulated other comprehensive income (loss),
net of tax of $(18) - 12/31/01 and $83 - 9/30/01 ( 85) 45
Treasury stock, 349,578 common shares - 12/31/01
352,878 common shares - 9/30/01, at cost (7,696) (7,777)
Total shareholders' equity 35,013 34,380
-------------- -----------------
Total liabilities and shareholders' equity $ 412,864 $ 413,084
See accompanying notes to (unaudited) consolidated financial statements.
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended December 31, 2001 and 2000
(in thousands, except per share information)
Three Months Ended
December 31,
2001 2000
---- ----
Interest income
Loans receivable
Mortgage loans $ 3,050 $ 3,548
Consumer and other loans 557 607
Commercial loans 2,234 2,501
Securities - taxable 736 908
Other interest-bearing assets 158 180
Total interest income 6,735 7,744
Interest expense
Deposits 1,955 2,931
Securities sold under agreements
to repurchase 53 93
FHLB advances 1,709 1,613
Total interest expense 3,717 4,637
Net interest income 3,018 3,107
Provision for loan losses 232 1,957
Net interest income after
provision for loan losses 2,786 1,150
Noninterest income
Service charges on deposit accounts 210 188
Trust fee income 58 46
Insurance commissions 38 35
Brokerage Commissions 5 5
Net realized gains from sales of loans 580 186
Loan servicing fees, net of amortization (58) 26
Other 137 175
Total noninterest income 970 661
Noninterest expense
Salaries and employee benefits 1,398 1,159
Occupancy and equipment 333 276
Data processing expense 159 116
SAIF deposit insurance premium 12 12
Othe 448 486
Total noninterest expense 2,350 2,049
Income (loss) before income taxes 1,406 (238)
Income tax expense (benefit) 507 (103)
Net income (loss) $ 899 $ (135)
Basic earnings (loss) per common share $ .67 $ (.10)
Diluted earnings (loss) per common share $ .66 $ (.10)
See accompanying notes to (unaudited) consolidated financial statements.
MFB CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Three months ended December 31, 2001 and 2000
(In thousands)
Three Months Ended
December 31,
2001 2000
---- ----
Balance at beginning of period $ 34,380 $ 32,514
Purchase of treasury stock (117) (218)
Stock option exercise 115 8
Cash dividends declared (134) (128)
Comprehensive income (loss):
Net income (loss) 899 (135)
Net change in net unrealized gains (losses) on
securities available for sale, net of tax effects (130) 381
Total comprehensive income 769 246
Balance at end of period $35,013 32,422
See accompanying notes to (unaudited) consolidated financial statements.
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended December 31, 2001 and 2000
(In thousands)
Three Months Ended
December 31,
2001 2000
Cash flows from operating activities
Net income (loss) $ 899 $ (135)
Adjustments to reconcile net income (loss) to net
cash from operating activities
Depreciation and amortization, net of accretion 195 96
Provision for loan losses 232 1,957
Net realized gains from sales of loans (580) (186)
Amortization of mortgage servicing rights 120 13
Origination of loans held for sale (25,584) (5,714)
Proceeds from sales of loans held for sale 24,287 11,427
Equity in loss of investment in limited partnership 42 26
Net change in:
Accrued interest receivable 123 (385)
Other assets 600 (236)
Accrued expenses and other liabilities (257) 372
Net cash from operating activities 77 7,235
Cash flows from investing activities
Net change in loans receivable 7,595 (420)
Proceeds from:
Principal payments of mortgage-backed
and related securities 4,961 380
Maturities and calls of securities available for sale 9,145 -
Purchase of:
Securities available for sale (24,630) (3,961)
Premises and equipment, net
(67) (186)
Net cash from investing activities (2,996) (4,187)
Cash flows from financing activities
Purchase of MFB Corp. common stock (117) $(218)
Net change in deposits 1,582 9,335
Net change in securities sold under agreements to repurchase (979) (678)
Proceeds from FHLB borrowings - 10,000
Repayment of FHLB borrowings (350) (12,350)
Proceeds from exercise of stock options 90 6
Net change in advances from borrowers for taxes and insurance (849) (1,145)
Cash dividends paid (134) (128)
-------- ---------
Net cash from financing activities (757) 4,822
----- -----
Net change in cash and cash equivalents (3,676) 7,870
Cash and cash equivalents at beginning of period 34,223 14,544
------ ------
Cash and cash equivalents at end of period $30,547 $22,414
======= =======
Supplemental disclosures of cash flow information Cash paid during the
period for:
Interest $ 3,734 $ 4,635
Income taxes 100 150
See accompanying notes to (unaudited) consolidated
financial statements.
MFB CORP. AND SUBSIDIARY
NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE 1 - BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Nature of Operations: MFB Corp. is an Indiana unitary savings and loan holding
company organized in 1993, and parent company of its wholly owned bank
subsidiary, MFB Financial (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., offers general
property, casualty and life insurance to customers in the Bank's market area.
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 accounting principles
generally accepted In the United Sates of America 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, 2001 and September 30, 2001, and the consolidated statements
of income, the condensed consolidated statements of changes in shareholders'
equity and the consolidated statements of cash flows for the three months ended
December 31, 2001 and 2000. All significant intercompany transactions and
balances are eliminated in consolidation.
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.
Diluted earnings (loss) per common share shows the dilutive effect of additional
potential common shares issuable under stock options.
A reconciliation of the numerators and denominators used in the computation of
the basic earnings per common share and diluted earnings per common share is
presented below:
NOTE 2 - EARNINGS (LOSS) PER COMMON SHARE (Continued).
Three Months Ended
December 30,
2001 2000
---- ----
(in thousands except per share information)
Basic Earnings (Loss) Per Common Share
Numerator
Net income $ 899 $ (135)
Denominator
Weighted average common shares outstanding
for basic earnings per common share 1,339 1,352
Basic Earnings (Loss) Per Common Shares $ .67 $ (.10)
Diluted Earnings (Loss) Per Common Share
Numerator
Net income $ 899 $ (135)
Denominator
Weighted average common shares outstanding
for basic earnings per common share 1,339 1,352
Add: Dilutive effects of assumed exercises of
stock options 34 -
Weighted average common and dilutive
potential common shares outstanding 1,373 1,352
Diluted Earnings (Loss) Per Common Share $ .66 $ (.10)
Stock options for 75,750 common shares at December 31, 2001 and 202,750 common
shares at December 31, 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
..........................December 31, 2001..........................
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities
U.S. Government
and federal agencies $ 8,379 $ 123 $ - $ 8,502
Mortgage-backed 25,259 253 (52) 25,460
Commercial Paper 4,998 - - 4,998
Corporate notes 14,328 318 (586) 14,060
---------------- ------------ -------------- ------
52,964 694 (638) 53,020
Marketable equity securities 5,245 - (123) 5,122
---------------- ------------ -------------- ---------------
$ 58,209 $ 694 $ (761) $ 58,142
================ ============ ============== ===============
Available for Sale
..........................September 30, 2001.........................
------------------
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities
U.S. Government
and federal agencies $ 2,920 $ 102 $ - $ 3,022
Municipal bonds 145 - - 145
Mortgage-backed 20,091 244 (15) 20,320
Commercial paper 4,995 - - 4,995
Corporate notes 15,329 403 (525) 15,207
---------------- ------------ ------------- ---------------
43,480 749 (540) 43,689
Marketable equity securities 4,252 - (81) 4,171
---------------- ------------ ------------- ---------------
$ 47,732 $ 749 $ (621) $ 47,860
================ ============ ============= ===============
NOTE 4 - LOANS RECEIVABLE, NET
Loans receivable at December 31, 2001 and September 30, 2001 are summarized as
follows:
December 31, September 30,
2001 2001
---- ----
(in thousands)
First mortgage loans (principally conventional)
Principal balances
Secured by one-to-four family residences $ 150,763 $ 157,187
Construction loans 15,251 18,658
Other 6,747 4,331
----------------- -----------------
172,761 180,176
Less undisbursed portion of construction and
other mortgage loans (52) (143)
------------------ -----------------
Total first mortgage loans 172,709 180,033
Commercial and consumer loans:
Principal balances
Home equity and second mortgage $ 18,490 $ 20,275
Commercial 107,032 105,556
Municipal 19 19
Other 6,554 6,537
----------------- -----------------
Total commercial and consumer loans 132,095 132,387
Net deferred loan origination fees (793) (807)
------------------ -----------------
$ 304,011 $ 311,613
==========================================
Activity in the allowance for loan losses is summarized as follows for the three
months ended December 31, 2001 and for the year ended September 30, 2001.
December 31, September 30,
2001 2001
Balance at beginning of year $ 4,631,981 $ 1,672,000
Provision for loan losses 232,460 3,096,594
Charge-offs (7,460) (140,483)
Recoveries - 3,870
Balance at end of year $ 4,856,981 $ 4,631,981
================ ============
11
NOTE 4 - LOANS RECEIVABLE, NET (continued)
Impaired loans were as follows:
Quarter Ended Year Ended
December 31, September 30,
2001 2001
Quarter-end and year-end balances with no allocated
allowance for loan losses $ 2,182,000 $ 1,290,000
Quarter-end and year-end loans with allocated allowance
for loan losses 7,785,000 7,641,000
Total $ 9,967,000 $ 8,931,000
Amount of the allowance for loan losses allocated $ 2,700,000 $ 2,700,000
Average of impaired loans $ 9,057,000 $ 2,274,000
Interest income recognized during impairment $ 93,000 $ -
Cash-basis interest income recognized during impairment $ 87,000 $ -
Nonperforming loans were as follows at December 31, 2001 and September 30, 2001:
Loans past due over 90 days still on accrual status $ - $ 152,000
Nonaccrual loans 2,716,000 2,632,000
Total Nonperforming loans $ 2,716,000 $ 2,784,000
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
losses, service charges, fee income, gains from sales of loans, retained
mortgage loan servicing fees, income from subsidiary activities, operating
expenses and income taxes.
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
Results Of Operation
The Company's consolidated net income for the three months ended December 31,
2001 was $899,000 or $.66 diluted earnings per common share compared to a net
loss of $(135,000) or $(.10) diluted earnings per share for the three months
ended December 31, 2000.
Net interest income before provision for loan losses for the three month period
ended December 31, 2001 totaled $3.0 million compared to $3.1 million for the
same period one year ago. Total interest income for the first quarter decreased
$1.0 million and total interest expense decreased $920,000 from the first
quarter last year as a result of the overall decline in interest rates. The
provision for loan losses for the first quarter ended December 31, 2001 was
$232,000 compared to $1.96 million for the first quarter last year. The net loss
for the first quarter ended December 31, 2000 included an additional $1.8
million ($1.1 million after tax) provision to the loan loss reserve as a result
of a Chapter 11 bankruptcy filing by a commercial customer.
Noninterest income increased 46.7% from $661,000 for the three months ended
December 31, 2000 to $970,000 for the most recent three month period.
Significant growth occurred in deposit fees, trust fees and gains on sales of
mortgage loans. Noninterest expenses increased 14.7% from $2.1 million for the
first quarter ended December 31, 2000 to $2.4 million this current quarter
primarily due to increases in salaries and employee benefits and equipment and
data processing expense.
Income tax expense (benefit) for the period ended December 31, 2001 increased to
$507,000 from $(103,000) last year.
COMPARISON OF DECEMBER 31, 2001 TO SEPTEMBER 30, 2001
Balance Sheet Composition
Total assets decreased $220,000 from $413.1 million as of September 30, 2001 to
$412.9 million as of December 31, 2001.
Cash and cash equivalents decreased $3.7 million from $34.2 million at September
30, 2001 to $30.5 million at
December 31, 2001. Net cash used in investing activities amounted to $3.0
million and net cash used in financing activities totaled $757,000 during the
quarter.
As of December 31, 2001, the total securities portfolio amounted to $58.1
million, an increase of $10.2 million from $47.9 million at September 30, 2001.
The securities portfolio activity included security purchases of $24.7 million,
security maturities of $9.1 million, and principal payments on mortgage-backed
and related securities of $5.0 million.
As of December 31, 2001, loans receivable were $304.0 million, a decrease of
$7.6 million from $311.6 million at September 30, 2001. Commercial loans
outstanding increased by $1.5 million from $105.5 million at September 30, 2001
to $107.0 million at December 30, 2001. Due to increased volume of mortgage loan
sales into the secondary market, mortgage loans declined $7.3 million from
$180.0 million at September 30, 2001 to $172.7 million at December 31, 2001.
Consumer loans, including home equity and second mortgages, also decreased $1.8
million during the three month period. Loans held for sale for the quarter
ended December 31, 2001 grew to $4.7 million from $3.1 million at September 30,
2001. Diversification of the asset mix in the balance sheet continued to be a
focus to improve profit margins, control margin volatility and to appeal to a
broader range of customers and potential customers.
During the quarter ended December 31, 2001, the Company completed secondary
market mortgage loans sales totaling $24.3 million and the net gains realized on
these loan sales were $580,000, including $300,000 related to recording mortgage
loans servicing rights. The loans sold during the quarter ended December 31,
2001 were fixed rate mortgage loans with maturities of fifteen years or longer.
The sale of loan production serves as a source of additional liquidity and
management anticipates that the Company will continue to deliver fixed rate
loans to the secondary market to meet consumer demand, manage interest rate
risk, and diversify the asset mix of the Company.
The allowance for loan losses increased from $4.6 million at September 30, 2001
to $4.9 million at December 31, 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 three month period, $232,000 was added to the
loan loss reserve, while $7,000 was charged off due to unrecoverable consumer
loans. In management's opinion, the allowance for loan losses is adequate to
cover losses that are currently anticipated at December 31, 2001.
Total liabilities decreased from $378.7 million at September 30, 2001 to $377.8
million at December 31, 2001. Total deposits increased $1.6 million from $245.2
million at September 30, 2001 to $246.8 million at December 31, 2001, primarily
due to a $3.0 million increase in savings, NOW and MMDA deposits and a $1.2
million increase in noninterest-bearing demand deposits exceeding the $2.6
million decrease in time certificates of deposits.
FHLB advances decreased from $119.7 million at September 30, 2001 to $119.3
million at December 31, 2001 and securities sold under agreements to repurchase
decreased $1.0 million during the same three month period. The decrease of
$850,000 from September 30, 2001 to December 31, 2001 in advances from borrowers
was the result of the payment of property taxes in November, 2001. The $119.3
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 with a weighted average interst rate of 1.55% are secured by
investment securities.
Total shareholders' equity increased $633,000 from $34.4 million as of September
30, 2001 to $35.0 million as of December 31, 2001 mainly from net income of
$899,000 offset by cash dividend payments of $134,000 and the repurchase of
5,700 shares of outstanding common stock during this period at a cost of
$117,000. MFB Corp's equity to assets ratio was 8.5% at December 31, 2001
compared to 8.3% at September 30, 2001. The book value of MFB Corp. stock
increased from $25.72 at September 30, 2001 to $26.13 at December 31, 2001
ASSET/LIABILITY MANAGEMENT
The Company is subject to interest rate risk to the degree that its
interest-bearing liabilities, primarily deposits and Federal Home Loan Bank
(FHLB) advances with short and medium-term maturities, reprice more rapidly, or
at different rates than its interest-earning assets.
A key element of the Company's asset/liability plan is to protect net earnings
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, 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 which was
7.75% as of September 30, 2001 (the most recently available data). 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, 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
200 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)
+200 27,971 (4,716) ( 14) 6.82 (93)
+100 31,187 (1,500) (5) 7.49 (26)
0 32,687 - - 7.75 -
- 100 31,424 (1,264) (4) 7.38 (37)
- 200 28,486 (4,201) (13) 6.63 (112)
(1) Expressed in basis points
As illustrated in the table, the Company's interest rate risk has similar
sensitivity to rising rates as declining rates. When rates rise, the decline in
market value of fixed-rate loans due to the rate increases and slowing
prepayments exceeds the decline in market value of fixed rate deposits and
borrowings. However, when rates decline, the NPV also decreases in the model
because the corresponding increase in market value of fixed rate loans is
partially mitigated by increased borrower prepayments.
Specifically, the table indicates that, at September 30, 2001, the Company's NPV
was $32.7 million or 7.75% 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 $4.7 million or 14.4% decline in the Company's
NPV and would result in a 93 basis point or 12% decline in the Company's NPV
ratio to 6.82%. Conversely, an immediate 200 basis point decrease in market
interest rates would result in a $4.2 million or 12.9% decrease in the Company's
NPV, and a 112 basis point or 14.5% decrease in the Company's NPV ratio to
6.63%. 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 process 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 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.
In evaluating the Company's interest rate risk exposure to interest rate
movements, certain shortcomings inherent in the method of analysis presented in
the foregoing table must be considered. 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
adjustable rate mortgages (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. While the Company generally originates
mortgage loans for its own portfolio, sales of fixed rate first mortgage loans
with maturities of 15 years or greater are currently undertaken to manage
interest rate risk. Loans classified as held for sale as of December 31, 2001
totaled $4.7 million. The Company retains the servicing on the majority of loans
sold in the secondary market and, at December 31, 2001, $105 million in such
loans were being serviced for others.
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. Wholesale banking activities are conducted as a means to supplement net
income and to achieve desired growth targets. This strategy involves the
acquisition of assets funded through sources other than retail deposits, such as
FHLB advances. The goal is to create interest rate spreads between asset yields
and funding costs within acceptable risk parameters while improving return on
equity.
The Company's cost of funds responds to changes in interest rates due to the
relatively short-term nature of its deposit portfolio. The Company offers a
range of maturities on its deposit products at competitive rates and monitors
the maturities on an ongoing basis.
LIQUIDITY AND CAPITAL RESOURCES
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 $90.2 million as of December 31, 2001 compared to $83.6
million as of September 30, 2001. This $6.6 million increase was due to a $10.3
million increase in securities available for sale offset by a $3.7 million
decrease in cash and cash equivalents. The sale of fixed rate loan production
along with the growth in deposits has provided the source of additional
liquidity. Management believes the liquidity level as of December 31, 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 December 31,
2001, total FHLB borrowings amounted to $119.3 million and were used primarily
to fund loan portfolio growth. The Bank had commitments to fund loan
originations with borrowers totaling $121.7 million at December 31, 2001,
including $56.7 million in available consumer and commercial lines and letters
of credit. Certificates of deposits scheduled to mature in one year or less
totaled $116.9 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.
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, 2001 and 2000 follows.
During the three months ended December 31, 2001, net cash and cash equivalents
decreased $3.7 million from $34.2 million at September 30, 2001 to $30.5 million
at December 31, 2001.
The Company experienced a $77,000 net increase in cash from operating activities
for the three months ended December 31, 2001, compared to an $7.2 million net
increase for the three months ended December 31, 2000. The increase in the most
recent period was primarily the result of $24.3 million in proceeds from sales
of loans held for sale, net income of $899,000 and $600,000 resulting from the
decrease in other assets offset by the origination of $25.6 million of loans
held for sale. Other assets decreased primarily as a result of adjustments made
to deferred and current tax accounts. The increase in the period ended December
31, 2000 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 Bank continues to originate, sell and deliver 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
reduces interest rate risk exposure by minimizing the volume of loans closed and
carried in the held for sale loan portfolio.
The $3.0 million net decrease from investing activities for the three months
ended December 31, 2001 is the result of investment security purchases exceeding
maturities by $15.5 million, offset by principal loan payments exceeding loan
originations by $7.6 million and $5.0 million of mortgage-backed securities
principal payments. 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.
Net cash used in financing activities for the quarter ended December 31, 2001
was $757,000. This usage was primarily the result of $979,000 in repurchase
agreement decreases, $849,000 in escrow reductions from borrowers for taxes and
insurance, $350,000 of FHLB advance repayments and $134,000 of cash dividend
payments exceeding net deposit increases of $1.6 million. 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 $678,000, $218,000 to repurchase the Company's stock and cash
dividend payments of $128,000 during the quarter.
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.
The Bank's actual capital and required capital amounts and ratios at December
31, 2001 and September 30, 2001 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, 2001
Total capital (to risk
weighted assets) $ 36,463 13.61% $ 21,435 8.00% $ 26,794 10.00%
Tier 1 (core) capital
(to risk weighted assets) 34,306 12.80 10,718 4.00 16,076 6.00
Tier 1 (core) capital (to
adjusted total assets 34,306 8.31 16,508 4.00 20,635 5.00
As of September 30, 2001
Total capital (to risk
weighted assets) $ 35,454 13.11% $ 21,627 8.00% $ 27,033 10.00%
Tier 1 (core) capital
(to risk weighted assets) 33,522 12.40 10,813 4.00 16,220 6.00
Tier 1 (core) (to
adjusted total assets 33,522 8.12 16,509 4.00 20,636 5.00
As of December 31, 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.
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 15, 2002.
(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 Broker Non-Vote
--- ------- ------- --------------- -
1) Election of Directors
Thomas F. Hums 1,029,417 108,916 - -
Michael J. Marien 1,029,417 108,916 - -
Charles J. Viater 1,028,193 110,140 - -
2) Approval, adoption and
ratification of the MFB Corp.
2002 Stock Option Plan 688,455 181,375 17,629 250,874
3) Appointment of Crowe, Chizek
& Company as auditors for 2002 1,125,159 3,664 9,510
The text of the matters referred to under this Item 4 is set forth in the proxy
statement dated December 13, 2001 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.
(a)MFB Corp.filed one Form 8-K report during the quarter ended December 31,2001
Date of report: October 23, 2001
Items reported: News release dated October 18, 2001 regarding
the announcement of fourth quarter and annual
earnings and announcement of a cash dividend payable
on November 13, 2001 to holders of record on
October 30, 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 February 13, 2002 By: Charles J. Viater
President
Date February 13, 2002 By: Thomas J. Flournoy
Chief Financial Officer