UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ____________________ TO ____________________
COMMISSION FILE NUMBER: 0-23374
MFB CORP.
(Exact name of registrant as specified in its charter)
INDIANA 35-1907258
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
121 SOUTH CHURCH STREET
P.O. BOX 528
MISHAWAKA, INDIANA 46546
(Address of principal executive offices,
including Zip Code)
(219) 255-3146
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes X No
(2) Yes X No
The number of shares of the registrant's common stock, without par value,
outstanding as of March 31, 1999 was 1,449,417.
MFB CORP. AND SUBSIDIARY
FORM 10-Q
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Consolidated Balance Sheets, (Unaudited)
March 31, 1999 and September 30, 1998 3
Consolidated Statements of Income, (Unaudited)
Three and six months ended March 31, 1999 and 1998 4
Consolidated Statements of Changes in Shareholders' Equity,
(Unaudited) Six months ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows, (Unaudited)
Six months ended March 31, 1999 and 1998 6
Notes to Unaudited Consolidated Financial Statements March 31, 1999 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk
14
Item 4. Year 2000 Readiness
16
PART II. OTHER INFORMATION 18
Items 1-6. 18
Signatures 19
2
MFB CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, 1999 and September 30, 199
(In thousands)
March 31, September 30,
1999 1998
ASSETS
Cash and due from financial institutions $ 4,905 $ 3,019
Interest-bearing deposits in other financial
institutions - short-term 19,103 14,885
Total cash and cash equivalents $ 24,008 $ 17,904
Securities available for sale 47,397 41,820
Interest-bearing time deposits in other financial
institutions 1,000 -
Federal Home Loan Bank (FHLB) stock, at cost 5,511 4,636
Loans held for sale, net of unrealized losses of $-0- 19,654 13,516
Loans receivable, net of allowance for loan losses
of $544,000 at 3/31/99 and $454,000 at 9/30/98 232,938 231,610
Accrued interest receivable 1,143 968
Premises and equipment, net 3,826 2,795
Mortgage Servicing Rights, net 286 192
Investment in limited partnership 1,213 1,222
Other Assets 460 298
Total assets $ 337,436 $ 314,961
LIABIILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing demand deposits $ 6,386 $ 4,299
Savings, NOW and MMDA deposits 48,810 40,835
Other time deposits 139,700 135,532
Total deposits 194,896 180,666
Securities sold under agreements to repurchase 3,508 2,366
FHLB advances 104,226 97,657
Advances from borrowers for taxes and insurance 2,366 2,316
Accrued expenses and other liabilities 877 1,070
Total liabilities 305,873 284,075
Shareholders' equity
Common stock, 5,000,000 shares authorized;
shares issued:1,689,417-3/31/99, 1689,417-9/30/98
shares outstanding:1,449,417-3/31/99,
1,474,217-9/30/98 $ 12,946 $ 12,847
Retained earnings - substantially restricted 24,731 23,730
Accumulated other comprehensive income ( 70) (45)
Unearned Employee Stock Ownership Plan (ESOP) Shares (345) (445)
Unearned Recognition and Retention Plan (RRP) Shares - (38)
Treasury Stock, 240,000 common shares - 3/31/99
215,200 common shares - 9/30/98 (5,699) (5,163)
Total shareholders' equity 31,563 30,886
Total liabilities and shareholders' equity $ 337,436 $ 314,961
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months and Six months ended March 31, 1999 and 1998
(in thousands)
Three Months Ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
INTEREST INCOME
Loans receivable
First mortgage loans $ 3,732 $ 3,674 $ 7,618 $7,255
Consumer and other loans 283 206 557 398
Financing leases and
Commercial loans 936 365 1,754 634
Securities - taxable 783 707 1,618 1,358
Other interest-bearing assets 223 202 370 328
5,957 5,154 11,917 9,973
INTEREST EXPENSE
Deposits 2,128 2,041 4,290 4,165
Securities sold under agreements
to repurchase 31 21 52 27
FHLB advances 1,430 896 2,873 1,585
3,589 2,958 7,215 5,777
NET INTEREST INCOME 2,368 2,196 4,702 4,196
PROVISION FOR LOAN LOSSES 45 15 90 30
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,323 2,181 4,612 4,166
NONINTEREST INCOME
Insurance commissions 28 24 64 63
Brokerage Commissions 5 10 13 15
Net realized gains from sales of
securities, available for sale --- --- --- 8
Net realized gains from sales
of loans 108 29 228 46
Loan servicing fees, net 10 10 17 13
Other 135 89 268 181
Total noninterest income 286 162 590 326
NONINTEREST EXPENSE
Salaries and employee benefits 985 949 1,823 1,719
Occupancy and equipment 197 180 382 341
SAIF deposit insurance premium 28 28 53 54
Other 384 304 803 625
Total noninterest expense 1,594 1,461 3,061 2,739
INCOME BEFORE INCOME TAXES 1,015 882 2,141 1,753
Income tax expense 421 216 884 585
NET INCOME $ 594 $ 666 $ 1,257 $ 1,168
Basic earnings per common share $ 0.42 $ 0.43 $ .88 $ 0.75
Diluted earnings per common share $ 0.40 $ 0.40 $ .86 $ 0.70
See accompanying notes to (unaudited) consolidated financial statements.
4
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Six months ended March 31, 1999 and 1998
(In thousands)
Accumulated
Unearned Unearned Other Total
Common Retained ESOP RRP Comprehensive Treasury Shareholders'
STOCK EARNINGS SHARES SHARES INCOME STOCK EQUITY
SIX MONTHS ENDED MARCH 31, 1998
Balance-October 1, 1997 $ 13,108 $ 22,038 $( 665) $( 115) $ 73 $ (889) $ 33,550
Effect of contribution to fund ESOP - - 105 - - - 105
Market adjustment of 19,513 ESOP shares committed
to be released 149 - - - - - 149
Amortization of RRP contribution - - - 38 - - 38
Issuance of 40,000 shares of common stock-
stock option exercise (544) - - - - 944 400
Purchase of 38,800 shares of treasury stock - - - - - (943) (943)
Cash dividends declared -$.165/share - (269) 5 - - - (264)
Net income for the three months ended
March 31, 1998 - 1,168 - - - - 1,168
Other comprehensive income net of tax:
Unrealized gains/losses on securities arising
during the period - - - - 15 - 15
Less reclassification adjustment for
accumulated gains/losses
included in net income - - - - (8) - (8)
Other comprehensive income - - - - 7 - 7
Comprehensive income - - - - - - 1,175
Balance at December 31, 1997 $ 12,713 $ 22,937 $ (555) $ (77) $ 80 $ (888) $ 34,210
SIX MONTHS ENDED MARCH 31, 1999
Balance-October 1, 1998 $ 12,847 $ 23,730 $( 445) $( 38) $ (45) $(5,163) $ 30,886
Effect of contribution to fund ESOP - - 97 - - - 97
Market adjustment of 18,470 ESOP shares
committed to be released 99 - - - - - 99
Amortization of RRP contribution - - - 38 - - 38
Purchase of 10,300 shares of treasury stock - - - - - (536) (536)
Cash dividends declared -$.18/share - (256) 3 - - - (253)
Net income for the three months ended
December 31, 1998 - 1,257 - - - - 1,257
Other comprehensive income, net of tax:
Unrealized gains/losses on securities
arising during the period - - - - (25) - (25)
Other comprehensive income - - - - (25) - (25)
Comprehensive income - - - - - - 1,232
Balance at March 31, 1999 $ 12,946 $ 24,731 $ (345) $ - $ (70) $(5,699) $ 31,563
5
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended March 31, 1999 and 1998
(In thousands)
Six Months Ended
March 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,257 $ 1,168
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization, net of accretion (11) 167
Amortization of RRP contribution 39 38
Provision for loan losses 90 15
Market adjustment of ESOPshares committed to be released 99 149
ESOP expense 100 110
Net realized gains from sales of securities
available for sale - (8)
Net realized gains from sales of loans (228) (46)
Loss on investment in limited partnership 9 -
Amortization of mortgage servicing rights 20 -
Origination of loans held for sale (21,368) -
Proceeds from sales of loans held for sale 15,343 12,276
Net change in:
Accrued interest receivable (175) (94)
Other assets (162) 2
Accrued expenses and other liabilities (182) 67
Net cash from operating activities (5,169) 13,844
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing time deposits in
other financial institutions (1,000) (99)
Net change in loans receivable (1,418) (35,213)
Purchase of:
Securities available-for-sale (51,832) (24,246)
FHLB stock (875) (1,325)
Premises and equipment, net (1,194) (304)
Proceeds from:
Maturities of securities available for sale 35,545 16,961
Principal payments of mortgage-backed and
related securities 10,848 5,258
Sales of securities available for sale - 2,926
Net cash from investing activities (9,926) (36,042)
(CONTINUED)
6
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended March 31, 1999 and 1998
(In thousands)
Six Months Ended
March 31,
1999 1998
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 14,230 4,140
Net change in securities sold under agreements
to repurchase 1,142 2,338
Net change in advances from borrowers for
taxes and insurance 50 501
Purchase of MFB Corp. common stock (536) (943)
Proceeds from other borrowings 20,000 35,000
Repayment of other borrowings (13,431) (8,000)
Proceeds from stock option exercise - 400
Cash dividends paid (256) (269)
Net cash from financing activities 21,199 33,167
Net change in cash and cash equivalents 6,104 10,969
Cash and cash equivalents at beginning of period 17,904 9,483
Cash and cash equivalents at end of period $ 24,008 $20,452
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest on deposits $ 7,284 $ 5,688
Income taxes 883 709
The accompanying notes are an integral part of these (unaudited) consolidated
financial statements
7
MFB CORP. AND SUBSIDIARY
NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
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
Mishawaka Federal Savings (the "Bank") from a federal mutual savings and loan
association to a federal stock savings bank in March, 1994. On November 1,
1996, the Bank officially changed its name to MFB Financial. 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 five branch locations in St. Joseph and Elkhart Counties of
Indiana. The Bank offers a variety of lending, deposit 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
adjustments necessary to present fairly the consolidated balance sheets of MFB
Corp. and its subsidiary MFB Financial as of March 31, 1999 and September 30,
1998, and the consolidated statements of income for the three and six months
ended March 31, 1999 and 1998, and the consolidated statements of changes in
shareholders' equity and the consolidated statements of cash flows for the six
months ended March 31, 1999 and 1998. All significant intercompany
transactions and balances are eliminated in consolidation. The income
reported for the six months ended March 31, 1999 is not necessarily indicative
of the results that may be expected for the full year.
NOTE 2 - EARNINGS PER COMMON SHARE
Basic and diluted earnings per common share are computed under a new accounting
standard effective beginning with the quarter ended December 31, 1997. All
prior earnings per common share amounts have been restated to be comparable.
Basic earnings per common share is based on the net income divided 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. At March 31, 1999 and 1998, the Company had average
year-to-date unallocated ESOP shares of 36,717 and 61,032, and average year-to-
date nonvested RRP shares of 3,850 and 15,400, respectively, which are excluded
from the weighted average number of shares outstanding.
8
The computations of Basic Earnings per common share and Diluted Earnings per
common share for the periods ended March 31, 1999 and 1998 are presented below.
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998 1999 1998
EARNINGS PER SHARE
Net income available to common
shareholders $ 594,321 $ 665,930 $1,257,024 $1,168,350
Weighted average common shares
outstanding 1,424,604 1,551,168 1,423,524 1,555,015
EARNINGS PER SHARE $ .42 $ .43 $ .88 $ .75
EARNINGS PER SHARE ASSUMING DILUTION
Net income available to common
shareholders $ 594,321 $665,930 $1,257,024 $1,168,350
Weighted average common shares
outstanding 1,424,604 1,551,168 1,423,524 1,555,015
Add: dilutive effects of assumed exercises:
Stock options 38,130 96,839 37,984 93,416
Recognition and retention plans 1,136 10,977 1,171 10,065
Weighted average common and dilutive
potential common shares outstanding 1,463,870 1,658,984 1,462,679 1,658,496
EARNINGS PER SHARE ASSUMING DILUTION $ .40 $ .40 $ .86 $ .70
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPREHENSIVE INCOME
Under a new accounting standard, comprehensive income is now reported for all
periods. Comprehensive income includes both net income and other comprehensive
income. Other comprehensive income includes the change in unrealized gains and
losses on securities available for sale, foreign currency transaction
adjustments, and additional minimum pension liability adjustments.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The principal business of MFB Financial (the "Bank") has historically consisted
of attracting deposits from the general public and the small business community
and making loans secured by various types of collateral, including real estate
and general business assets. The Bank is significantly affected by prevailing
economic conditions, as well as government policies and regulations
concerning, among other things, monetary and fiscal affairs, housing and
financial institutions. Deposit flows are influenced by a number of factors,
including interest rates paid on competing investments, account maturities,
fee structures, and level of personal income and savings. Lending activities
are influenced by the demand for and supply of housing lenders, the
availability and cost of funds and various other items. 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, 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, excluding FHLB stock. These assets are commonly
referred to as liquid assets. Liquid assets were $72.4 million as of March 31,
1999 compared to $59.7 million as of September 30, 1998. This $12.7 million
increase was primarily due to a $7.1 million increase in cash and interest-
bearing deposits in other financial institutions and a $5.6 million increase in
securities. Management believes the liquidity level of $72.4 million as of
March 31, 1999 is sufficient to meet anticipated liquidity needs.
A standard measure of liquidity for savings associations is the ratio of cash
and eligible investments to a certain percentage of net withdrawable savings
and borrowings due within one year. The minimum required ratio is currently set
by Office of Thrift Supervision regulation at 4%. At March 31, 1999, the
Bank's liquidity ratio was 26.66%. and the short-term liquidity was 13.98%.
Therefore, the Bank's liquidity is well above the minimum regulatory
requirements.
Short-term borrowings or long-term debt may be used to compensate for reduction
in other sources of funds such as deposits and to assist in asset/liability
management. During the year ended September 30, 1996 the Bank instituted a
capital leveraging strategy that involved the purchase of earning assets funded
primarily with FHLB advances. As of March 31, 1999, total FHLB borrowings
amounted to $104.2 million , $27.2 million of which were used as part of this
strategy. The remaining $77.0 million was used primarily to fund loan portfolio
growth. The Bank had commitments to fund loan originations with borrowers
totaling $61.6 million at March 31, 1999, including $34.1 million in available
consumer and commercial lines of credit. In the opinion of management, the
Company has 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, 1998, total FHLB borrowings totaled
$92.7 million, $24.5 million of which were used as part of the capital
leveraging strategy, with the remaining $68.2 million used to fund loan growth.
10
The cash flow statements provide an indication of the Company's sources and
uses of cash as well as an indication of the ability of the Company to maintain
an adequate level of liquidity. A discussion of the changes in the cash flow
statements for the six months ended March 31, 1999 and 1998 follows.
During the six months ended March 31, 1999, net cash and cash equivalents
increased $6.1 million from $17.9 million at September 30, 1998 to $24.0
million at March 31, 1999.
The Company experienced a $5.2 million net decrease in cash from operating
activities for the period ended March 31, 1999, compared to a $13.8 million
net increase for the period ended March 31, 1998. The decrease in the most
recent period was primarily attributable to the origination of $21.4 million of
loans held for sale and $228,000 in net gains from the sale of these loans,
offset by $15.3 million in proceeds realized from the sale of mortgage loans
and net income of $1.3 million. The increase of $13.8 million for the period
ended March 31, 1998 was primarily attributable to $12.3 million in proceeds
from the sale of mortgage loans and $1.2 million in net income during the
period.
The $9.9 million net decrease in cash from investing activities during the
six months ended March 31, 1999 is primarily related to purchases of
securities, interest-bearing time deposits and buildings and equipment
totaling $54.0 million along with the $1.4 million increase in loan
originations exceeding principal payments, offset by $35.5 million of security
maturities and $10.8 million of principal payments of mortgage-backed and
related securities. For the six months ended March 31, 1998, there was a $36.0
million net decrease in cash from investing activities. This decrease was
primarily attributable to the $35.2 million increase in loan originations
exceeding principal payments and the $25.6 million purchase of securities and
FHLB stock, offset by sales and maturities of securities totaling $20.0 million
and mortgage-backed securities principal payments of $5.3 million.
Financing activities generated net cash of $21.2 million for the period ending
March 31, 1999. The net cash was provided primarily from $6.6 million in net
new FHLB advances, net deposit increases of $14.2 million and repurchase
agreement increases of $1.1 million, offset by $536,000 to repurchase the
Company's stock and cash dividend payments of $256,000 during the first two
quarters. Net cash generated from financing activities was $33.2 million for
the six months ended March 31, 1998. The net cash was provided primarily from
$27.0 million in net new FHLB advances, net deposit increases of $4.1 million
and net increases of securities sold under repurchase agreements of $2.3
million. Offsetting these increases was $943,000 used to repurchase the
Company's stock and $269,000 in cash dividend payments.
CAPITAL RESOURCES
Total shareholders' equity increased from $30.9 million as of September 30,
1998 to $31.6 million as of March 31, 1999 mainly from net income of $1.3
million offset by the repurchase of 24,800 shares of outstanding common stock
during this period at a cost of $536,000, along with the payment of cash
dividends of $256,000.
The Bank is subject to various regulatory capital requirements. Failure to meet
minimum capital requirements can initiate certain mandatory or discretionary
actions by regulators that could have a direct material effect on the Bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
quantitative capital guidelines using the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's requirements are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth below) of
Tier I Capital, Tier I Risk-Based Capital, and Total Risk-Based Capital.
11
The Bank's actual capital and required capital amounts and ratios at March 31,
1999 and 1998 are presented below:
Requirement to be
Well Capitalized Under
Requirement for Capital Prompt Corrective
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
As of March 31, 1999
Tier I Capital $ 29,440 8.73% $ 13,491 4.00% $16,863 5.00%
Tier I Risk-Based
Capital 29,984 15.61% $ 7,541 4.00 11,312 6.00
Total Risk-Based
Capital 29,984 15.90% $ 15,084 8.00 18,855 10.00
As of March 31, 1998
Tier I Capital $ 30,824 10.61% $ 11,624 4.00% $ 14,529 5.00%
Tier I Risk-Based
Capital 31,224 20.91% 5,897 4.00 8,845 6.00
Total Risk-Based
Capital 31,224 21.18% 11,794 8.00 14,742 10.00
AS OF MARCH 31, 1999, 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
MARCH 31, 1999 COMPARED TO SEPTEMBER 30, 1998
Total assets increased $19.7 million from $315.0 million as of September 30,
1998 to $337.4 million as of March 31, 1999.
Loans held for sale increased by $6.2 million from $13.5 million at September
30, 1998 to $19.7 million at March 31, 1999 due to the origination of loans
held for sale exceeding the proceeds generated from the sale of mortgage loans
during the period. Loan sales are conducted from time to time in an effort to
manage interest rate risk and to generate servicing fee income. During the six
month period ended March 31, 1999, these loan sales resulted in net realized
gains of $228,000, including the recording of mortgage servicing rights income.
Total net loans increased from $245.1 million to $252.6 million during this
same six month period, an increase of $7.5 million. Securities available for
sale increased from $41.8 million at September 30, 1998 to $47.4 million at
March 31, 1999, an increase of $5.6 million. The investment and loan growth
has been funded primarily by the growth in total savings deposits and
additional borrowings through Federal Home Loan Bank advances.
Total liabilities increased from $284.1 million at September 30 , 1998 to
$305.9 million at March 31, 1999. Significant liability changes included the
addition of $8.0 million in savings , NOW and MMDA deposits, $4.1 million
additional time deposits, and $2.1 million additional noninterest bearing
demand deposits. Enhancement of our deposit based product offerings and
emphasis on core relationships and quality service has contributed to the
deposit increases. As mentioned above, net FHLB advances increased by $6.6
million during the period to facilitate the loan and securities growth.
The $104.2 million of Federal Home Loan Bank advances have a weighted average
interest rate of 5.38% and mature in eleven years or less. The one-day retail
repurchase agreements totaled $3.5 million at March 31, 1999 and have a
weighted average interest rate of 4.01%.
12
MATERIAL CHANGES IN RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1999 COMPARED TO THE SIX MONTHS ENDED MARCH 31, 1998
The Company's consolidated net income for the six months ended March 31, 1999
was $1,257,000 or $.86 per share compared with $1,168,000 or $.70 for the six
months ended March 31, 1998. This represents a 22.86% increase in earnings per
share for the Corporation.
Net interest income after provision for loan losses for the most recent three
month period totaled $2.3 million and $4.6 million compared to $2.2 and $4.2
million for the same periods one year ago. During the three months ended March
31, 1999 total interest income increased by $803,000 compared to the same
period one year ago, primarily as a result of a $32.7 million increase in
commercial and consumer loan receivables. The Bank continues to place increased
emphasis on growing the small business lending division and developing the
consumer lending program within the areas serviced by its branches. The desire
for local service and local decision making has clearly influenced the growth
the Bank has experienced. Total interest expense increased $631,000 reflecting
the growth in both savings account deposits and borrowed funds. For the six
months ended March 31, 1999 total interest income increased $1.9 million while
total interest expense increased $1.4 million.
Noninterest income increased from $162,000 and $326,000 for the three and six
months ended March 31, 1998 to $286,000 and $590,000 for the most recent three
and six month periods. These increases are primarily due to gains realized on
the sale of first mortgage loans, servicing fee income retained on those sold
loans, and fees generated from the increasing number of core deposit account
relationships. Noninterest expense increased from $1.5 million during the
three months ended March 31, 1998 to $1.6 million during the three months ended
March 31, 1999, and from $2.7 million to $3.1 million for the comparable six
month periods. The noninterest expense increases are primarily attributable to
staffing increases, facility upgrades, and expenses incurred in the offering of
additional services to the Bank's customers.
SUPPLEMENTAL INFORMATION
The Company continues to maintain asset quality that compares favorably to its
industry peer group. The ratio of nonperforming assets to total assets as of
March 31, 1999 was .05% compared to .02% as of March 31, 1998.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to interest rate risk to the degree that its interest-
bearing liabilities, primarily deposits with short and medium-term maturities,
mature or reprice at different rates than its interest-earning assets.
Although having liabilities that mature or reprice less frequently on average
than assets will be beneficial in times of rising interest rates, such an
asset/liability structure will result in lower net income during periods of
declining interest rates, unless offset by other factors such as noninterest
income.
A key element of the Company's asset/liability plan is to protect net earnings
from changes in interest rates by managing the maturity or repricing mismatch
between its interest-earning assets and rate-sensitive liabilities. The
Company has sought to reduce exposure to its earnings through the use of
adjustable rate loans and through the sale of fixed rate loans in the secondary
market, and by extending funding maturities through the use of FHLB advances.
AS PART OF ITS EFFORTS TO MONITOR AND MANAGE INTEREST RATE RISK, THE COMPANY
USES THE
NET PORTFOLIO VALUE ("NPV") METHODOLOGY ADOPTED BY THE OFFICE OF THRIFT
SUPERVISION AS PART OF ITS CAPITAL REGULATIONS. IN ESSENCE, THIS APPROACH
CALCULATES THE DIFFERENCE BETWEEN THE PRESENT VALUE OF EXPECTED CASH FLOWS FROM
ASSETS AND THE PRESENT VALUE OF EXPECTED CASH FLOWS FROM LIABILITIES, AS WELL
AS CASH FLOWS FROM OFF-BALANCE-SHEET CONTRACTS. THE DIFFERENCE IS THE NPV. AS
OF DECEMBER 31, 1998, (THE MOST RECENTLY AVAILABLE DATA), AFTER A 200 BASIS
POINT RATE DECREASE, THE COMPANY'S NPV RATIO WAS 9.01%. IN THE EVENT OF A 200
BASIS POINT INCREASE IN RATES, THE COMPANY'S NPV RATIO WAS 9.16%. MANAGEMENT
AND THE BOARD OF DIRECTORS REVIEW THE OTS MEASUREMENTS ON A QUARTERLY BASIS TO
DETERMINE WHETHER THE COMPANY'S INTEREST RATE EXPOSURE IS WITHIN THE LIMITS
ESTABLISHED BY THE BOARD OF DIRECTORS IN THE COMPANY'S INTEREST RATE RISK
POLICY.
THE COMPANY'S ASSET/LIABILITY MANAGEMENT STRATEGY DICTATES ACCEPTABLE LIMITS ON
THE AMOUNTS OF CHANGE IN NPV GIVEN CERTAIN CHANGES IN INTEREST RATES. THE
TABLE PRESENTED HERE, AS OF DECEMBER 31, 1998, 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 400 BASIS POINTS.
INTEREST RATES NPV AS % OF PORTFOLIO
CHANGE IN BASIS NET PORTFOLIO VALUE VALUE OF ASSETS
Points
NPV
(RATE SHOCK)(1) $ AMOUNT $ CHANGE % CHANGE RATIO CHANGE (1)
(Dollars in Thousands)
+400 $ 23,272 $ ( 10,166) (30)% 7.38% (247)
+300 26,923 ( 6,515) (19) 8.35 (149)
+200 30,122 ( 3,316) (10) 9.16 (69)
+100 32,479 ( 959) (3) 9.70 (15)
0 33,438 - - 9.47 -
- 100 32,450 (988) (3) 9.85 (38)
- 200 31,141 (2,297) (7) 9.01 ( 84)
- 300 30,279 (3,159) (9) 8.67 (118)
- 400 29,213 (4,225) (13) 8.28 (157)
(1) EXPRESSED IN BASIS POINTS
14
AS ILLUSTRATED IN THE TABLE, THE COMPANY'S NPV DECLINES BOTH IN RISING AND
FALLING INTEREST RATE ENVIRONMENTS. THIS PHENOMENON OCCURS PRIMARILY AS A
RESULT OF THE HISTORICALLY LOW INTEREST RATE ENVIRONMENT THAT EXISTED AT
DECEMBER 31, 1998, THE HEAVY CONCENTRATION OF ADJUSTABLE RATE LOANS IN THE
LOAN PORTFOLIO AND THE RELATED PREPAYMENT ASSUMPTION USED IN THE OTS
MODEL. SPECIFICALLY, THE TABLE INDICATES THAT, AT DECEMBER 31, 1998, THE
COMPANY'S NPV WAS $33.4 MILLION OR 9.85% 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 $3.3 MILLION OR 9.9%
DECLINE IN THE COMPANY'S NPV AND WOULD RESULT IN A 69 BASIS POINT OR 7.0%
DECLINE IN THE COMPANY'S NPV RATIO TO 9.16%. SIMILARLY, AN IMMEDIATE 200
BASIS POINT DECREASE IN MARKET INTEREST RATES WOULD RESULT IN A $2.3
MILLION OR 6.9%% DECLINE IN THE COMPANY'S NPV, AND A 84 BASIS POINT OR
8.5% DECLINE IN THE COMPANY'S NPV RATIO TO 9.01%. BOTH PERCENTAGE
DECLINES IN THE COMPANY'S NPV AT DECEMBER 31, 1998 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.
In evaluating the Company's 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 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 March 31, 1999 are
$19.6 million. The Company retains the servicing on loans sold in the
secondary market and, at March 31, 1999, $38.1 million in such loans were being
serviced for others. The Company also maintains capital well in excess of
regulatory requirements.
15
The Company's investment strategy is to maintain a diversified portfolio of
high quality investments that minimize interest rate and credit risks while
maximizing 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
ITEM 4. YEAR 2000 READINESS
The Company is aware of the issues associated with programming code in existing
computer systems as the year 2000 approaches. The issue is whether computer
systems will properly recognize date sensitive information when the year
changes to 2000. Systems that do not properly recognize such information could
generate erroneous data or cause a system to fail. The Company is heavily
dependent on computer processing in its business activities and the year 2000
issue creates risk for the Company from unforseen problems in the Company's
computer system and from third parties whom the Company uses to process
information. Such failure of the Company's computer system and/or third
parties computer systems could have a material impact on the Company's ability
to conduct its business.
A major third party vendor provides the Company's primary data processing.
This provider has advised the Company that is has completed the renovation of
its system to be year 2000 ready, and is currently in the process of providing
users of the system the opportunity to test the system for readiness. The
Company has completed testing of the data processing provider's current system
for year 2000 readiness. Any new software or systems that may be installed in
the future will also be tested prior to implementation.
The Company has negotiated a new contract with its current data processing
provider following an extensive search process.
The Company has performed an assessment of its computer hardware and software,
and has determined those systems that require upgrade to be year 2000 ready.
Such upgrades have either been completed or will be completed by June 30, 1999.
In addition, the Company has reviewed other external third party vendors that
provide services to the Company (i.e., utility companies, electronic funds
transfer providers, and software companies) and has requested or already
received certification letters from these vendors that their systems will be
year 2000 ready on a timely basis. Testing will be performed with the service
providers, if possible, to determine their year 2000 readiness.
16
The Company could incur losses if loan payments are delayed due to year 2000
problems affecting significant borrowers. The Company is communicating with
such parties to assess their progress in evaluating and implementing any
corrective measures required by them to be year 2000 ready. To date, the
Company has not been advised by such parties that they do not have plans in
place to address and correct the issues associated with the year 2000 problem;
however, no assurance can be given as to the adequacy of such plans or to the
timeliness of their implementation. As part of the current credit approval
process, new and renewed loans are evaluated as to the borrower's year 2000
readiness.
Based on the Company's review of its computer systems, management believes the
cost of the remediation effort to make its systems year 2000 ready will not
have an adverse impact on the Company's financial condition, results of
operations or liquidity. The Company had already planned to replace many of
its computers and associated equipment. As part of a general upgrade to improve
system efficiency, costs directly related to year 2000 issues are not expected
to exceed $50,000. These cost and time estimates are based on management's
best estimates and could differ from those actually incurred.
The Company has developed a year 2000 contingency plan that addresses, among
other issues, critical operations and potential failures thereof, and
strategies for business continuation.
Although management believes the Company's computer systems and service
providers will be year 2000 ready, there can be no assurance that these
systems, or those systems of other companies on which the Company's systems
rely, will be fully functional in the year 2000. Such failure could have a
significant adverse impact on the financial condition and results of operations
of the Company.
17
MFB CORP. AND SUBSIDIARY
FORM 10-Q
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
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 19, 1999.
(b) Each of the persons named in the proxy statement as a
nominee for director was elected.
(a) The voting results on each of the matters which were submitted to
the shareholders can be
found in Form 10-Q filed for the quarter ended December 31,
1998.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K
(a) MFB Corp. filed one Form 8-K reports during the quarter ended March
31, 1999.
Date of report: February 18, 1999
Items reported: News release dated January 20, 1999 regarding
the announcement of first quarter earnings and the
declaration of a $.09 per share cash dividend payable
on February 16, 1999 to holders of record on
February 2, 1999.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MFB CORP.
Date By
Charles J. Viater
President
Date By
Timothy C. Boenne
Vice President
19