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, 2002
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 July 31, 2002 was 1,329,839.
MFB CORP. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2002 (Unaudited) and September 30, 2001 3
Consolidated Statements of Income (Unaudited)
Three and nine months ended June 30, 2002 and 2001 4
Condensed Consolidated Statements of Changes in Shareholders' Equity
(Unaudited) Three and nine months ended June 30, 2002 and 2001 5
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended June 30, 2002 and 2001 6
Notes to (Unaudited) Consolidated Financial
Statements June 30, 2002 7
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
Revision to Previously Reported Third Quarter, 2002 earnings (loss) 12
Results of Operations 13
Balance Sheet Composition 14
Asset/Liability Management 15
Liquidity and Capital Resources 17
Critical Accounting Policies 19
Part II. Other Information
Items 1-6. 19
Signatures 20
MFB CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2002 and September 30, 2001
(In thousands, except share information)
(Unaudited)
June 30 September 30
2002 2001
ASSETS
Cash and due from financial institutions $ 18,228 $ 7,229
Interest - bearing deposits in other financial institutions - short term 4,018 26,994
----------------- ---------------
Total cash and cash equivalents 22,246 34,223
Securities available for sale (amortized cost of $61,174 - 06/30/02 and
$47,732- 09/30/01) 60,717 47,860
Interest-bearing time deposits in other financial institutions 1,000 1,500
Federal Home Loan Bank (FHLB) stock, at cost 6,308 6,308
Investment in limited partnership 2,748 2,877
Loans held for sale 1,367 3,074
Loan receivable 317,602 311,613
Less: allowance for loan losses (4,859) (4,632)
----------------- ---------------
Loan receivable, net 312,743 306,981
Accrued interest receivable 1,847 1,774
Premises and equipment, net 4,834 5,100
Mortgage servicing rights, net of accumulated amortization of
$465-06/30/02 and $239-09/30/01 1,458 1,069
Other assets 3,647 2,318
----------------- ---------------
Total assets $ 418,915 $ 413,084
================= ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand deposits $ 17,406 $ 13,895
Savings, NOW and MMDA deposits 84,248 73,082
Other time deposits 154,009 158,202
----------------- ---------------
Total deposits 255,663 245,179
Securities sold under agreements to repurchase 8,781 11,022
FHLB advances 119,215 119,685
Advances from borrowers for taxes and insurance 805 1,599
Accrued expenses and other liabilities 1,143 1,219
----------------- ---------------
Total liabilities 385,607 378,704
Shareholders' equity
Common stock, no par value, 5,000,000 shares authorized;
shares issued: 1,689,417 -06/30/02 and 09/30/01
shares outstanding: 1,325,839-06/30/02 and 1,336,539-09/30/01 12,940 13,023
Retained earnings (losses) - substantially restricted 28,747 29,089
Accumulated other comprehensive income (loss),
net of tax of ($88)-06/30/02 and $83 - 09/30/01 (369) 45
Treasury stock, 363,578 common shares - 06/30/02
352,878 common shares - 09/30/01, at cost (8,010) (7,777)
----------------- ---------------
Total shareholders' equity 33,308 34,380
----------------- ---------------
Total Liabilities and Shareholders' equity $ 418,915 $ 413,084
================= ===============
3
MFB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three and nine months ended June 30, 2002 and 2001
(in thousands except per share information)
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
-------------- ------------- ---------------- -------------
Interest income
Loans receivable, included fees
Mortgage loans $ 2,773 $ 3,387 $ 8,679 $ 10,470
Consumer and other loans 484 612 1,521 1,842
Commercial loans 2,232 2,293 6,585 7,104
Securities - taxable 810 893 2,284 2,695
Other interest-bearing assets 66 223 355 683
-------------- ------------- ---------------- -------------
Total interest income 6,365 7,408 19,424 22,794
Interest expense
Deposits 1,607 2,750 5,292 8,601
Securities sold under agreements to repurchase 36 62 129 228
FHLB advances 1,689 1,655 5,069 4,896
-------------- ------------- ---------------- -------------
Total interest expense 3,332 4,467 10,490 13,725
-------------- ------------- ---------------- -------------
Net interest income 3,033 2,941 8,934 9,069
Provision for loan losses 2,235 261 2,919 2,368
-------------- ------------- ---------------- -------------
Net interest income after provision for loan losses 798 2,680 6,015 6,701
Noninterest income (loss)
Service charges on deposit accounts 262 233 759 664
Trust fee income 53 55 168 156
Insurance commissions 46 41 115 101
Net realized gains from sales of loans 151 363 1072 735
Loan servicing fees, net 28 (9) (21) 35
Loss on sale or valuation of securities (831) (52) (831) (52)
Other income 38 68 105 247
-------------- ------------- ---------------- -------------
-------------- ------------- ---------------- -------------
Total noninterest income (loss) (253) 699 1,367 1,886
Noninterest expense
Salaries and employee benefits 1,494 1,252 4,414 3,626
Occupancy and equipment 372 357 1,107 1,002
Data processing expense 172 137 500 373
Other expense 564 488 1,505 1,461
-------------- ------------- ---------------- -------------
Total noninterest expense 2,602 2,234 7,526 6,462
Income (loss) before income taxes (2,057) 1,145 (144) 2,125
Income tax expense (benefit) (860) 405 (217) 711
-------------- ------------- ---------------- -------------
Net income (loss) $ (1,197) $ 740 $ 73 $ 1,414
============== ============= ================ =============
Basic earnings (losses) per common share $ (0.90) $ 0.55 $ 0.05 $ 1.05
Diluted earnings (losses) per common share $ (0.90) $ 0.54 $ 0.05 $ 1.02
See accompanying notes to (unaudited) consolidated financial statements.
4
MFB CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY (UNAUDITED)
Three and nine months ended June 30, 2002 and 2001
(In thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Balance at beginning of period $ 34,618 $ 33,371 $ 34,380 $ 32,514
Purchase of treasury stock (250) (239) (431) (564)
Stock option exercise - - 115 160
Cash dividends declared (140) (136) (415) (398)
Comprehensive income (loss):
Net income (loss) (1,197) 740 73 1,414
Net change in net unrealized gains and losses
on securities available for sale, net 277 31 (414) 641
of tax effects.
------------ ------------- ------------- --------------
Total comprehensive income (loss) (920) 771 (341) 2,055
Balance at end of period $ 33,308 $ 33,767 $ 33,308 $ 33,767
============ ============= ============= ==============
See accompanying notes to (unaudited)
consolidated financial statements.
5
MFB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended June 30, 2002 and 2001
(In thousands)
Nine Months Ended
June 30,
2002 2001
---- ----
Cash flows from operating activities
Net income $ 73 $ 1,414
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization, net of accretion 857 265
Provision for loan losses 2,919 2,368
Net losses from sales or valuation of securities available for sale 831 52
Net realized gains from sales of loans (1,072) (735)
Amortization of mortgage servicing rights 225 90
Origination of loans held for sale (47,680) (37,351)
Proceeds from sales of loans held for sale 49,845 41,083
Equity in loss of investment in limited partnership 129 63
Net change in:
Accrued interest receivable (73) 64
Other assets (1,132) (1,083)
Accrued expenses and other liabilities (76) 3,433
------------ -------------
Net cash from operating activities 4,846 9,663
Cash flows from investing activities
Net change in interest-bearing time deposits in other financial institutions 500 (2,516)
Net change in loans receivable (8,681) 5,276
Proceeds from:
Principal payments of mortgage-backed and related securities 17,205 4,633
Maturities and calls of securities available for sale 21,295 45,740
Sales of securities available for sale 1,014 -
Purchase of:
Securities available for sale (54,211) (59,356)
Premises and equipment, net (168) (939)
------------ -------------
Net cash from investing activities (23,046) (7,162)
Cash flows from financing activities
Purchase of MFB Corp common stock (564)
(431)
Net change in deposits 10,484 12,858
Net change in securities sold under agreement to repurchase (2,241) (1,283)
Proceeds from FHLB borrowings - 20,000
Repayment of FHLB borrowings (470) (12,467)
Proceeds from exercise of stock options 90 116
Net change in advances from borrowers for taxes and insurance (794) (1,250)
Cash dividends paid (415) (398)
------------ -------------
Net cash from financing activities 6,223 17,012
Net change in cash and cash equivalents (11,977) 19,513
Cash and cash equivalents at beginning of period 34,223 14,544
------------ -------------
Cash and cash equivalents at end of period 22,246 $ 34,057
============ =============
Supplemental disclosures of cash flow information Cash paid during the period
for:
Interest $ 10,594 $ 13,708
Income taxes 812 1,680
6
MFB CORP. AND SUBSIDIARIES
NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
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 federal
savings 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 subsidiaries, Mishawaka Financial Services, Inc., offers general
property, casualty and life insurance to customers in the Bank's market area.
The Bank's wholly-owned subsidiaries, MFB Investments I,Inc., MFB Investments
II, Inc. and MFB Investments, LP are Nevada corporations and a Nevada limited
partnership that manage a portion of the Bank's investment portfolio.
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 States of America for a complete presentation
of the 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, 2002 and September 30, 2001, the consolidated
statements of income (loss) and the condensed consolidated statements of changes
in shareholders' equity for the three and nine months ended June 30, 2002, and
the consolidated statements of cash flows for the nine months ended June 30,
2002 and 2001. All significant intercompany transactions and balances are
eliminated in consolidation.
Reclassifications: Some items in the prior consolidated financial statements
have been reclassified to conform with the current presentation.
NOTE 2 - EARNINGS (LOSSES) PER COMMON SHARE
Basic earnings (losses) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted earnings (losses) 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 (losses)per common share and diluted earnings (losses) per
common share is presented below:
(Continued)
7
NOTE 2 - EARNINGS (LOSSES) PER COMMON SHARE (Continued)
The computations of basic earnings (losses) per common share and diluted
earnings (losses) per common share for the periods ended June 30, 2002 and 2001
are presented below.
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(in thousands except per share information)
Basic Earnings (Losses) Per Common Share
Numerator
Net income (loss) ($1,197) $ 740 $ 73 $ 1,414
=========== =========== ========== ============
Denominator
Weighted average common shares outstanding for
basic earnings (losses) per common share 1,330 1,344 1,336 1,349
=========== =========== ========== ============
Basic Earnings (Losses) Per Common Share ( $ 0.90) $ 0.55 $ 0.05 $ 1.05
=========== =========== ========== ============
Diluted Earnings (Losses) Per Common Share
Numerator
Net income (loss) ($1,197) $ 740 $ 73 $ 1,414
=========== =========== ========== ============
Denominator
Weighted average common shares outstanding
for basic earnings (losses) per common share 1,330 1,344 1,336 1,349
Add: Dilutive effects of assumed exercises
of stock options - 35 39 33
----------- ----------- ---------- ------------
Weighed average common and
dilutive potential common shares 1,330 1,379 1,375 1,382
outstanding
=========== =========== ========== ============
Diluted Earnings (Losses) Per Common Share ($ 0.90) $ 0.54 $ 0.05 $ 1.02
=========== =========== ========== ============
Stock options for 193,650 and 64,667 common shares for the three and nine months
ended June 30, 2002 and 75,750 and 78,250 common shares for the three and nine
months ended June 30, 2001 were not considered in computing diluted earnings
(losses) per common share because they were antidilutive.
8
NOTE 3 - SECURITIES
The amortized cost and fair value of securities available for sale are as
follows:
............................June 30, 2002............................
-------------
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities
U.S. Government and federal agencies $ 13,029 $ 203 $ - $ 13,232
Municipal bonds 349 8 - 357
Mortgage-backed 29,224 322 (46) 29,500
Corporate notes 14,335 181 (892) 13,624
------------ -------------- ------------- --------------
56,937 714 (938) 56,713
Marketable equity securities 4,237 - (233) 4,004
------------ -------------- ------------- --------------
$ 61,174 $ 714 $ (1,171) $ 60,717
============ ============== ============= ==============
..........................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
============ ============== ============= ==============
9
NOTE 4 - LOANS RECEIVABLE, NET
Loans receivable at June 30, 2002 and September 30, 2001 are summarized as
follows:
June 30, September 30,
2002 2001
---------------- ----------------
(in thousands)
First mortgage loans (principally conventional)
Principal balances
Secured by one to four family residences $ 154,605 $ 157,187
Construction loans 15,601 18,658
Others 7,352 4,331
---------------- ----------------
177,558 180,176
Less undisbursed portion of construction and other mortgage loans (92) (143)
---------------- ----------------
Total first mortgage loans 177,466 180,033
Commercial and consumer loans:
Principal balances
Home equity and second mortgage $ 19,859 $ 20,275
Commercial 115,062 105,556
Municipal 10 19
Other 6,005 6,537
---------------- ----------------
Total commercial and consumer loans 140,936 132,387
Net deferred loan origination fees (800) (807)
---------------- ----------------
Total loans receivable $ 317,602 $ 311,613
================ ================
Activity in the allowance for loan losses is summarized as follows for the nine
months ended June 30, 2002 and for the year ended September 30, 2001.
June 30, September 30,
2002 2001
---------------- -----------------
(in thousands)
Balance at beginning of year $ 4,632 $ 1,672
Provision for loan losses
2,919 3,097
Charge-offs (2,705) (141)
Recoveries
13 4
---------------- -----------------
Balance at end of year $ 4,859 $ 4,632
================ =================
10
NOTE 4 - LOANS RECEIVABLE, NET (continued)
Impaired loans were as follows:
Quarter Ended Year Ended
June 30, September 30,
2002 2001
------------------ ------------------
(in thousands)
Quarter-ended and year-end balances with no allocated allowance for loan losses
$ 2,176 $ 1,290
Quarter-ended and year-end loans with allocated allowances for loan losses 5,211 7,641
------------------ ------------------
Total $ 7,387 $ 8,931
================== ==================
Amount of the allowance for loan losses allocated $ 1,857 $ 2,700
Average of impaired loans 6,903 $ 2,274
Interest income recognized during impairment 50 $ -0-
Cash-basis interest income recognized during impairment 50 $ -0-
Nonperforming loans were as follows at June 30, 2002 and September 30, 2001:
June 30, September 30,
2002 2001
------------------ ------------------
(in thousands)
Loans past due over 90 days still on accrual status $ 209 $ 152
Nonaccrual loans 4,347 2,632
------------------ ------------------
Total Nonperforming loans $ 4,556 $ 2,784
================== ==================
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
REVISION TO PREVIOUSLY REPORTED THIRD QUARTER, 2002 EARNINGS(LOSS)
MFB Corp's net income (loss) for the three months ended June 30,2002 of ($1.2
million) or ($0.90) diluted earnings (loss) per common share, and net income for
the nine months ended June 30, 2002 of $73,000 or $0.05 diluted earnings per
common share, reflects an adjustment downward of $465,000 from the third quarter
earnings (losses) press release issued July 18, 2002.
On August 9, 2002 the Office of Thrift Supervision (OTS) completed a required
periodic regulatory examination of the Company. Based on information from that
examination, Management increased its loss allocations on certain classified
loans. This resulted in the increase in the Company's loan loss allowance of
$770,000 ($465,000 net of tax, noted above) through a non-cash charge to its
quarterly loan loss provision.
The Company's Audit Committee reviewed the change on August 9, 2002 and, after
consulting with the Company's independent auditors, agreed that based on a
variety of factors including the current economic and regulatory environment,
changes in the character and size of the loan portfolio, loan delinquencies
(current and anticipated trends), adequacy of collateral securing those
classified loans, historical and estimated charge-offs and other pertinent loan
portfolio review information, the increase in the loan loss allowance was
appropriate.
Upon the conclusion of the examination, the OTS recommended no adjustments to
specific loan loss reserves previously established by the Company for certain
classified loans. Likewise, the examination identified no additional loans
requiring classification nor recommended any adjustments to the carrying value
of the Company's investment portfolio.
GENERAL
The principal business of MFB Financial 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 (losses) 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 (losses) 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 subsidiaries
activities, operating expenses and income taxes.
12
COMPARISON OF THREE AND NINE MONTHS ENDED JUNE 30, 2002 AND 2001
Results Of Operation
The Company's consolidated net loss for the three months ended June 30, 2002 was
($1.2 million) or ($0.90) diluted earnings (losses) per common share, compared
to net income of $740,000 or $0.54 diluted earnings (losses) per share, for the
three months ended June 30, 2001. MFB Corp's net loss for the quarter was
attributable to three previously reported significant events that resulted in
charges against earnings (losses) during the quarter: an $830,000 charge taken
on a $1.0 million WorldCom, Inc. corporate note investment; a $750,000 charge
related to a commercial loan to a furniture manufacturing company and a $770,000
adjustment to the provision for loan losses previously discussed.
The Company's consolidated net income for the nine months ended June 30, 2002
was $73,000 or $0.05 diluted earnings (losses) per share, compared to net income
of $1.4 million or $1.02 diluted earnings (losses) per share for the same period
last year. Net income for the nine months ended June 30, 2002 is down from last
year primarily due to the events described above.
Net interest income before provision for loan losses for the three month period
ended June 30, 2002 totaled $3.0 million compared to $2.9 million for the same
period one year ago. Total interest income for the third quarter decreased $1.0
million and total interest expense decreased $1.1 million from the third quarter
last year as a result of the overall decline in interest rates. For the nine
months ended June 30, 2002 net interest before provision for loan losses income
declined from $9.1 million last year to $8.9 million this year.
The provision for loan losses for the third quarter ended June 30, 2002 was
$2.24 million compared to $261,000 for the third quarter last year. In addition
to the specific $750,000 loan loss provision and the $770,000 adjustment to the
loan loss reserve previously discussed, management increased the provision this
year for the third quarter based on the evaluation of many factors including
current economic conditions, changes in the character and size of the loan
portfolio, current and past delinquency trends, adequacy of collateral on loans
and historical and estimated net charge-offs. The provision for loan losses for
the nine months ended June 30, 2002 was $2.9 million compared to $2.4 million
for the same period last year. For the year, the provision has been charged
$1.25 million ($755,000 net of tax) on the loan to the furniture manufacturing
company previously mentioned and a charge to the provision of $1.8 million ($1.1
million net of tax) was taken last year on a loan to an auto dealership that
declared bankruptcy.
Noninterest income (loss) decreased from $699,000 for the three months ended
June 30, 2001 to ($253,000) for the most recent three month period due to the
charge taken on the impaired corporate note investment and due to a decline in
gain on sale of mortgage loans for those respective quarters. For the nine
months ended June 30, 2002 noninterest income decreased from $1.9 million to
$1.4 million due to the recording of the $830,000 valuation reserve on the
impaired security previously mentioned offset by increases in deposit fees and
gains on sale of mortgage loans. Noninterest expenses increased 16.5% from $2.2
million for the third quarter ended June 30, 2001 to $2.6 million this current
quarter. For the nine months ended June 30, 2002 noninterest expense increased
16.5% from $6.5 million last year to $7.5 million this year. The increases for
both the three and nine month periods were primarily due to increases in
salaries and employee benefits, occupancy and equipment and data processing
expense. The significant growth in salaries and benefits is the result of
staffing several key positions in the organization designed to position the bank
for growth in the coming years.
Corresponding to the reported income before taxes, income tax expense declined
from the third quarter ended June 30, 2001 to the third quarter ended June 30,
2002, and decreased for the nine months ended June 30, 2002 over the same period
last year.
13
COMPARISON OF JUNE 30, 2002 TO SEPTEMBER 30, 2001
Balance Sheet Composition
The Company's total assets increased $5.8 million from $413.1 million as of
September 30, 2001 to $418.9 million as of June 30, 2002.
Cash and cash equivalents decreased $12.0 million from $34.2 million at
September 30, 2001 to $22.2 million at
June 30, 2002. Net cash used in investing activities amounted to $23.0 million
and net cash from financing activities totaled $6.2 million during the nine
months ended June 30, 2002.
As of June 30, 2002, the total securities available for sale portfolio amounted
to $60.7 million, an increase of $12.8 million from $47.9 million at September
30, 2001. The securities portfolio activity during that period included security
purchases of $54.2 million, security maturities of $21.3 million, and principal
payments on mortgage-backed and related securities of $17.2 million and the
$830,000 write down of the impaired WorldCom, Inc. security.
As of June 30, 2002, loans receivable were $317.6 million, a increase of $6.0
million from $311.6 million at September 30, 2001. Commercial loans outstanding
increased by $9.5 million from $105.6 million at September 30, 2001 to $115.1
million at June 30, 2002. Due to increased volume of mortgage loans sold into
the secondary market, mortgage loans declined $2.5 million from $180.0 million
at September 30, 2001 to $177.5 million at June 30, 2002. Consumer loans,
including home equity and second mortgages, also decreased $416,000 during the
nine month period. Loans held for sale at June 30, 2002 declined to $1.4 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 third quarter ended June 30, 2002, the Company completed secondary
market mortgage loans sales totaling $8.6 million and the net gains realized on
these loan sales were $151,000 including $107,000 related to recording mortgage
loans servicing rights. During the third quarter ended June 30, 2001 sales of
$18.3 million yielded net gains on loan sales of $363,000, including $228,000
related to recording mortgage loan servicing rights. For the nine month period
ending June 30, 2002, loan sales totaling $49.5 million and the net gains
realized on these loan sales were $1.07 million including $614,000 related to
recording mortgage loans servicing rights. During the nine month period ended
June 30, 2001 sales of $41.1 million yielded net gains on loan sales of
$735,000, including $401,000 related to recording mortgage loan servicing
rights. The loans sold this year 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, or 1.49% of loans, at
September 30, 2001 to $4.9 million or 1.53% of loans at June 30, 2002. The
allowance is maintained through the provision for loan losses, which is charged
to earnings (losses). During this nine month period, $2.9 million was added to
the loan loss reserve which includes the $770,000 adjustment previously
mentioned. A total of $2.7 million of net charge offs were recorded during the
same period reducing the loan loss reserve. Included in the charge offs for this
year was $1.60 million on the commercial customer who filed Chapter 11
bankruptcy during the quarter ending December 31, 2000. A $1.80 million
provision to the loan loss reserve had been recorded at that time for this loan
as previously mentioned. The Company also reduced the reserve by $1.0 million
for the partial charge off of the commercial credit in the furniture
manufacturing industry, as previously mentioned.
The Company's non-performing assets have increased from $2.78 million at
September 30, 2001 to $4.70 million at June 30, 2002. A total of $1.94 million
of the non-performing assets at June 30. 2002 are non-accrual loans of the
aforemention commercial furniture manufacturer. Impaired loans have decreased
from $8.93 million at September 30, 2001 to $7.39 million at June 30, 2002. The
reduction in impaired loans is largely attributable to the charge offs
previously discussed. In management's opinion, the allowance for loan losses is
adequate to cover losses that are currently anticipated at June 30, 2002. 14
Total liabilities increased from $378.7 million at September 30, 2001 to $385.6
million at June 30, 2002. Total deposits increased $10.5 million from $245.2
million at September 30, 2001 to $255.7 million at June 30, 2002, primarily due
to a $11.2 million increase in savings, NOW and MMDA deposits and a $3.5 million
increase in noninterest-bearing demand deposits, offset by a $4.2 million
decrease in time certificates of deposits.
FHLB advances decreased from $119.7 million at September 30, 2001 to $119.2
million at June 30, 2002 and securities sold under agreements to repurchase
decreased $2.2 million during the same nine month period. The $119.2 million of
Federal Home Loan Bank advances have a weighted average interest rate of 5.60%
and mature over the next nine years beginning in October 2002. The one-day
retail repurchase agreements with a weighted average interest rate of 1.29% are
secured by investment securities.
Total shareholders' equity decreased from $34.4 million as of September 30, 2001
to $33.3 million as of June 30, 2002. Net income of $73,000 was offset by a
reduction in the market value of available for sale securities of $414,000, net
of tax, cash dividend payments of $415,000 and the repurchase of 10,700 shares
of outstanding common stock during this period at a cost of $431,000. MFB Corp's
equity to assets ratio was 7.95% at June 30, 2002 compared to 8.32% at September
30, 2001. The book value of MFB Corp. stock decreased from $25.72 at September
30, 2001 to $25.12 at June 30, 2002.
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
(losses) 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 (losses) 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 (OTS). 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 as a percentage of the value of
assets is the NPV ratio which was 8.44% as of March 31, 2002. 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, 2002, 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 300 basis points
and down 300 basis points. Due to the abnormally low interest rate environment
prevailing at March 31, 2002, meaningful data was not available from the OTS
model for the (-200) and (-300) basis point scenario and therefore is not
included in the table below.
15
(dollars are in thousands)
Interest Rate Net Portfolio Value NPV as % of Portfolio
-------------------
Changes in Basis Value of Assets
------- ---------------
Points NPV
(Rate Shock) (1) $ Amount $ Change % Change Ratio Change (1)
- ----------------------------- ----------------- ---------------- ------------- ------------- -----------------
+300 24,212 (11,881) (33%) 5.98% (246)
+200 29,201 (6,892) (19%) 7.07% (137)
+100 33,331 (2,762) (8%) 7.92% (52)
0 36,093 - - 8.44% -
-100 36,276 183 1% 8.38% (6)
(1) Expressed in basis points
As illustrated in the March 31, 2002 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 ratio also decreases in the
model because the corresponding increase in market value of fixed rate loans is
partially mitigated by an expected increase in borrower prepayments.
Specifically, the table indicates that at March 31, 2002, the Company's NPV was
$36.1 million or 8.44% of the market value of portfolio assets. Based upon the
assumptions utilized, an immediate 300 basis point increase in market interest
rates would result in a $11.9 million or 33% decline in the Company's NPV and
would result in a 246 basis point or 29% decline in the Company's NPV ratio to
5.98%. Conversely, an immediate 100 basis point decrease in market interest
rates would result in a $183,000 or 1% increase in the Company's NPV, and a 6
basis point or 0.7% decrease in the Company's NPV ratio to 8.38%. The resulting
NPV ratios for the above scenarios at March 31, 2002 were within the limits in
the Company's Board-approved guidelines.
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.
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.
16
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 June 30, 2002
totaled $1.37 million compared to $1.24 million at March 31, 2002. The Company
retains the servicing on the majority of loans sold in the secondary market and,
at June 30, 2002, $120 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. The Company's investment portfolio primarily consists of US government
and federal agency obligations, mortgage-backed securities and corporate note
obligations. The Company's policy dictates all securities must satisfy the
investment grade requirements of the Office of Thrift Supervision at the time of
purchase. 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 $84.0 million as of June 30, 2002 compared to $83.6 million
as of September 30, 2001. This $400,000 increase was primarily due to an
increase in securities available for sale. 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 June 30,
2002 is sufficient to meet anticipated cash needs.
Short-term borrowings or long-term debt, such as Federal Home Loan Bank
advances, are used to compensate for reduction in other sources of funds such as
deposits and to assist in asset/liability management. As of June 30, 2002, total
FHLB borrowings amounted to $119.2 million and were used primarily to fund loan
portfolio growth. The Bank had commitments to fund loan originations with
borrowers totaling $101.9 million at June 30, 2002, including $65.1 million in
available consumer and commercial lines and letters of credit. Certificates of
deposits scheduled to mature in one year or less totaled $61.2 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 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.
17
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 June 30,
2002 and September 30, 2001 are presented below:
Requirement to be
Well Capitalized Under
Requirement for Capital Prompt Corrective
Actual Adequacy Purposes Actual Provisions
Amount Ratio Amount Ratio Amount Ratio
As of June 30, 2002
Total capital
(to risk weighted $ 35,383 12.66% $ 22,361 8.00% $ 27,952 10.00%
assets)
Tier 1 (core) capital
(to risk weighted 32,381 11.58 11,181 4.00 16,771 6.00
assets)
Tier 1 (core) capital
(to adjusted total 32,381 7.74 16,725 4.00 20,906
assets) 5.00
As of September 30, 2001
Total capital
(to risk weighted $ 35,454 13.11% $ 21,627 8.00% $ 27,033 10.00%
assets)
Tier 1 (core) capital
(to risk weighted 33,522 12.40 10,813 4.00 16,220 6.00
assets)
Tier 1 (core) capital
(to adjusted total 33,522 8.12 16,509 4.00 20,636 5.00
assets)
As of June 30, 2002, 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.
The forgoing discussion contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, which involve a number
of risks and uncertainties. A number of factors could cause results to differ
materially from the objectives and estimates expressed in such forward-looking
statements. These factors include, but are not limited to, changes in the
financial condition of issuers of the Company's investments and borrowers,
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, changes in the position of banking regulators on the
adequacy of our allowance for loan losses and competition, all or some of which
could cause actual results to differ materially from historical earnings and
those presently anticipated or projected. These factors should be considered in
evaluating any forward-looking statements, and undue reliance should not be
placed on such statements. The Corporation does not undertake and specifically
disclaims any obligation to update any forward-looking statements to reflect
occurrence of anticipated or unanticipated events or circumstances after the
date of such statements.
18
CRITICAL ACCOUNTING POLICIES
Note 1 of the consolidated financial statements in the Company's Annual Report
for the year ended September 30, 2001, incorporated by reference as part of the
Company's 10K filing, contains a summary of its significant accounting policies
on pages 23-26. That note includes such critical accounting policies as the
valuation of securities (including write downs of securities to fair value when
the decline is not temporary) and loans receivable and the method of determining
the Company's allowance for loan losses for probable incurred credit losses
(including its policy toward loan charge offs and impaired loans). Some of these
policies require management to make subjective judgments as to matters that are
inherently uncertain. Estimates associated with the allowance for loan losses,
the fair value of securities, and the value of impaired loans are particularly
susceptible to material changes as a result of changes in facts and
circumstances. Facts and circumstances which could affect these judgements
include, without limitation, changes in the strength of the economy or in the
financial condition of borrowers or issuers of our investment securities, and
changes in the position of banking regulators on the adequacy of our allowance
for loan losses.
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 three Form 8-K reports during the quarter ended
June 30, 2002.
Date of report: April 17, 2002
Items reported: News release dated April
17,2002 regarding the announcement of
second quarter earnings (losses) and
announcement of a cash dividend payable on
May 14, 2002 to holders of
record on April 30, 2002.
Date of report: June 21, 2002
Items reported: News release dated June 21, 2002
regarding the announcement of third quarter
charge to earnings (losses).
Date of report: July 2, 2002
Items reported: News release dated July 2, 2002 regarding the announcement of
third quarter charge to earnings
(losses) for WorldCom Inc. Investment.
19
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 and Chief Executive Officer
Date By
-------- ---------------------------------------------
Thomas J. Flournoy
Chief Financial Officer
CERTIFICATION
By signing below, each of the undersigned officers hereby certifies
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to his knowledge, (i) this report fully
complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and (ii) the information contained in this report fairly
presents, in all material respects, the financial condition and results of
operations of MFB Corp.
Signed this ____ day of ____________, 2002.
- ----------------------------------- -----------------------------------
Thomas J. Flournoy Charles J. Viater
Chief Financial Officer President and Chief Executive Officer
20