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, 1998
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, 1998 was 1,651,767.
<PAGE>
MFB CORP. AND SUBSIDIARY
FORM 10-Q
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheets, (Unaudited)
March 31, 1998 and September 30, 1997 3
Consolidated Statements of Income, (Unaudited)
Three and six months ended March 31, 1998 and 1997 4
Consolidated Statements of Changes in Shareholders' Equity,
(Unaudited) Six months ended March 31, 1998 and 1997 5
Consolidated Statements of Cash Flows, (Unaudited)
Six months ended March 31, 1998 and 1997 6
Notes to Unaudited Consolidated Financial Statements
-March 31, 1998 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risks 15
Item 4. Year 2000 Disclosure 16
PART II. OTHER INFORMATION 16
Items 1-6. 16
Signatures 17
<PAGE>
MFB CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, 1998 and September 30, 1997
(In thousands)
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
ASSETS
<S> <C> <C>
Cash and due from financial institutions $ 3,570 $ 2,906
Interest-bearing deposits in other financial
institutions - short-term 16,882 6,576
Cash and cash equivalents $ 20,452 $ 9,482
Interest- bearing time deposits in other
financial institutions 99 ---
Securities available for sale 38,728 39,628
Federal Home Loan Bank (FHLB) stock, at cost 3,725 2,400
Loans held for sale,net of unrealized losses of $-0- --- 12,671
Loans receivable, net of allowance for loan losses 223,903 188,264
Accrued interest receivable 812 719
Premises and equipment, net 2,770 2,613
Other assets 142 144
Total assets $ 290,631 $ 255,921
LIABIILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing demand deposits $ 3,849 $ 2,047
Savings, NOW and MMDA deposits 41,711 38,130
Other time deposits 130,467 131,710
Total deposits 176,027 171,887
Securities sold under agreements to repurchase 2,727 389
FHLB advances 74,500 47,500
Advances from borrowers for taxes and insurance 2,355 1,854
Accrued expenses and other liabilities 812 741
Total liabilities 256,421 222,371
Shareholders' equity
Common stock, 5,000,000 shares authorized $ 12,713 $ 13,108
shares issued: 1,689,417
shares outstanding:1,651,767-1998,1,650,567-1997
Treasury Stock (888) ( 889)
Retained earnings - substantially restricted 22,937 22,038
Net unrealized appreciation (depreciation) on
securities available for sale, net of tax 80 73
Unearned Employee Stock Ownership Plan (ESOP) Shares (555) (665)
Unearned Recognition and Retention Plan (RRP) Shares (77) (115)
Total shareholders' equity 34,210 33,550
Total liabilities and shareholders' equity $ 290,631 $ 255,921
</TABLE>
See accompanying notes to (unaudited) consolidated financial statements.
<PAGE>
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Six months ended March 31, 1998 and 1997 (in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1998 1997 1998 1997
INTEREST INCOME
Loans receivable
<S> <C> <C> <C> <C>
First mortgage loans $ 3,674 $ 3,126 $ 7,255 $6,083
Consumer and other loans 206 128 398 232
Financing leases and
Commercial loans 365 67 634 128
Securities - taxable 707 925 1,358 1,874
Other interest-bearing assets 202 24 328 60
5,154 4,270 9,973 8,377
INTEREST EXPENSE
Deposits 2,041 1,987 4,165 3,995
Securities sold under agreements
to repurchase 21 --- 27 ---
FHLB advances 896 440 1,584 771
2,958 2,427 5,766 4,766
NET INTEREST INCOME 2,196 1,843 4,197 3,611
PROVISION FOR LOAN LOSSES 15 8 30 15
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,181 1,835 4,167 3,596
NONINTEREST INCOME
Insurance commissions 24 25 63 62
Brokerage Commissions 10 --- 15 ---
Net realized gains from sales of
securities, available for sale --- 3 8 7
Net realized gains from sales of loans 29 --- 46 ---
Other 99 57 195 129
Total noninterest income 162 85 327 198
NONINTEREST EXPENSE
Salaries and employee benefits 949 655 1,719 1,261
Occupancy and equipment 180 131 342 256
SAIF deposit insurance premium 28 6 54 95
Other 304 263 625 527
Total noninterest expense 1,461 1,055 2,740 2,139
INCOME BEFORE INCOME TAXES 882 865 1,754 1,655
Income tax expense 216 343 586 657
NET INCOME $ 666 $ 522 $ 1,168 $ 998
Basic earnings per common share $ 0.43 $ 0.32 $ 0.75 $ 0.59
Diluted earnings per common share $ 0.40 $ 0.30 $ 0.70 $ 0.56
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
<PAGE>
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Six months ended March 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Net Unrealized
Depreciation
Unearned Unearned on Securities Total
Common Retained ESOP RRP Available- Treasury Shareholders'
STOCK EARNINGS SHARES SHARES FOR-SALE STOCK EQUITY
SIX MONTHS ENDED MARCH 31, 1997
<S> <C> <C> <C> <C> <C> <C> <C>
Balance-October 1, 1996 $ 18,316 $ 20,589 $( 894) $( 192) $ ( 220) $ - $ 37,599
Effect of contribution to fund ESOP - - 108 - - - 108
Market adjustment of ESOP shares committed
to be released 81 - - - - - 81
Amortization of RRP contribution - - - 38 - - 38
Issuance of 2500 shares of common stock
stock option exercise 25 - - - - - 25
Purchase and retirement of 241,963 shares
of common stock (4,494) - - - - - (4,494)
Cash dividends declared -$.16/share - (284) - - - - (284)
Net change in unrealized appreciation
(depreciation) on securities available-
for-sale, net of tax - - - - ( 84) - ( 84)
Net income for the six months
ended March 31, 1997 - 998 - - - - 998
Balance at March 31, 1997 $ 13,928 $ 21,303 $ (786) $ (154) $ ( 304) $ - $ 33,987
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 - - 110 - - - 110
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) - - - - (269)
Net change in unrealized appreciation
(depreciation) on securities
available-for-sale, net of tax - - - - 7 - 7
Net income for the six months
ended March 31, 1998 - 1,168 - - - - 1,168
Balance at March 31, 1998 $ 12,713 $ 22,937 $ (555) $ (77) $ 80 $ (888) $ 34,210
</TABLE>
See accompanying notes to (unaudited ) consolidated financial statements.
<PAGE>
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended March 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
March 31
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,168 $ 998
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization, net of accretion 167 273
Amortization of RRP contribution 38 38
Provision for loan losses 15 15
Market adjustment of ESOP shares 149 81
ESOP expense 110 107
Net realized gains from sales of securities available for sale ( 8) (8)
Proceeds from sale of loans held for sale 12,276 -
Net realized gains from sale of loans held for sale (46) -
Net change in:
Accrued interest receivable (94) 138
Other assets 2 487
Accrued expenses and other liabilities 67 (2,351)
Total adjustments 12,676 (1,220)
Net cash from operating activities 13,844 (222)
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in loans receivable (35,213) (22,270)
Purchase of:
Securities available-for-sale (24,246) (23,102)
FHLB stock (1,325) (339)
Premises and equipment, net (304) (433)
Proceeds from:
Maturities of securities available for sale 16,961 17,300
Principal payments of mortgage-backed and related
securities 5,258 948
Sales of securities available for sale 2,926 18,378
Net change in interest-bearing time deposits in
other financial institutions (99) 495
Net cash from investing activities (36,042) (9,023)
</TABLE>
(CONTINUED)
<PAGE>
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended March 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
1998 1997
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C> <C>
Net change in deposits 4,140 4,358
Net change in securities sold under
agreements to repurchase 2,338 -
Net change in advances from borrowers
for taxes and insurance 501 143
Proceeds from stock option exercise 400 25
Purchase of MFB Corp. common stock (943) (4,494)
Net proceeds from Federal Home Loan Bank advances 27,000 10,000
Cash dividends paid (269) (285)
Net cash from financing activities 33,167 9,748
Net change in cash and cash equivalents 10,969 503
Cash and cash equivalents at beginning of period 9,483 1,734
Cash and cash equivalents at end of period $ 20,452 $ 2,237
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for Interest expense $ 5,688 $ 2,409
Income taxes 654 134
</TABLE>
See accompanying notes to (unaudited) consolidated financial statements
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
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, 1998 and September 30,
1997, and the consolidated statements of income for the three months and six
months ended March 31, 1998 and 1997, and the consolidated statements of
changes in shareholders' equity and the consolidated statements of cash flows
for the six months ended March 31, 1998 and 1997. All significant intercompany
transactions and balances are eliminated in consolidation. The income
reported for the six months ended March 31, 1998 is not necessarily indicative
of the results that may be expected for the full year.
NOTE 2 - EARNINGS PER COMMON SHARE
Earnings per common share is computed under the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share," which was adopted
retroactively by the Company at the beginning of the fourth quarter of 1997.
Adoption of the Statement did not change the EPS amounts previously reported by
the Company for prior annual or quarterly periods. At March 31, 1998 and 1997,
the Company had 61,032 and 84,308 average unallocated ESOP shares,
respectively, and 15,400 and 23,100 average unearned recognition and retention
plan shares, respectively, which are excluded from the weighted average number
of shares outstanding used to calculate the earnings per share. Basic earnings
per share is based on net income divided by the weighted average number of
shares outstanding during the period. Diluted earnings per share shows the
dilutive effect of additional common stock equivalents.
<PAGE>
A reconciliation of the numerators and denominators of the earnings per common
share and earnings per common share assuming dilution computations for the
periods ended March 31, 1998 and 1997 is presented below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997 1998 1997
EARNINGS PER SHARE
<S> <C> <C> <C> <C>
Net income available to common shareholders $ 665,930 $ 521,879 $1,168,350 $997,653
Weighted average common shares outstanding 1,551,168 1,645,909 1,555,015 1,695,890
EARNINGS PER SHARE $ .43 $ .32 $ .75 $ .59
EARNINGS PER SHARE ASSUMING DILUTION
Net income available to common shareholders $ 665,930 $ 521,879 $1,168,350 $997,653
Weighted average common shares outstanding 1,551,168 1,645,909 1,555,015 1,695,890
Add: dilutive effects of assumed exercises:
Stock options 96,839 69,840 93,416 66,236
Recognition and retention plans 10,977 10,540 10,065 9,317
Weighted average common and dilutive
potential common shares outstanding 1,658,984 1,726,289 1,658,496 1,771,443
EARNINGS PER SHARE ASSUMING DILUTION $ .40 $ .30 $ .70 $ .56
</TABLE>
NOTE 3 - STOCK OPTIONS
The Company's Board of Directors has adopted a stock option plan. Under the
terms of this plan, options for up to 350,000 shares of the Company's common
stock may be granted to key management employees and directors of the Company
and its subsidiaries. The exercise price of the options is determined at the
time of grant by an administrative committee appointed by the Board of
Directors.
SFAS No. 123, which became effective for 1997, requires disclosures for
companies that do not adopt its fair value accounting method for stock-based
employee compensation. Accordingly, the following proforma information presents
net loss and loss per common share had the fair value method been used to
measure compensation cost for stock option plans. No compensation cost has been
recognized for the stock options.
The fair value of options granted during the six months ended March 31, 1998
and 1997 is estimated using the following weighted average information: risk-
free interest rate of 6.0% and 6.2%, expected life of 10 and 10 years, expected
volatility of stock price of .06 and .06, and expected dividends of 1.21% and
.30% per year.
<TABLE>
<CAPTION>
1998 1997
(in thousands)
<S> <C> <C>
Net Income as reported $ 1,168 $ 998
Proforma net income 1,053 988
Basic earnings per common share as reported $ .75 $ .59
Diluted earnings per common share as reported .70 .56
Proforma basic earnings per common share .68 .58
Proforma diluted earnings per common share .63 .56
</TABLE>
In future years, the proforma effect of not applying this standard is expected
to increase as additional options are granted.
Stock option plans are used to reward employees and provide them with an
additional equity interest. Options are issued for 10 year periods with varying
vesting periods. Information about option grants follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Weighted
Number of Weighted Average
Outstanding Exercise Average Fair Value
Options Price Exercise Price Of Grants
Balance at September 30,1995 190,000 $10.00-$15.00 $10.53
Granted 10,000 15.25 15.25 $10.22
Balance at September 30, 1996 200,000 10.00-15.25 10.76
Exercised (2,500) 10.00 10.00
Balance at March 31, 1997 197,500 10.00-15.25 10.77
Exercised (7,150) 10.00 10.00
Balance at September 30, 1997 190,350 10.00-15.25 10.80
Granted 45,000 26.75 26.75 $ 9.76
Exercised 40,000 10.00 10.00
Balance at March 31, 1998 195,350 10.00-26.75 14.64
</TABLE>
The weighted average remaining contractual life of options outstanding at March
31, 1998 was approximately eight years. Stock options exercisable at March 31,
1998 and 1997 totaled 145,350 and 177,500 at a weighted average exercise price
of $11.46 and $10.17.
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 making loans secured by
residential and other real estate. 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 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 $59.3 million as of March 31,
1998 compared to $49.1 million as of September 30, 1997. This $10.2 million
increase was primarily due to a $11.0 million increase in cash as a result of
net proceeds from FHLB advances, offset by a $900,000 million decrease in
securities available for sale. Management believes the liquidity level of $59.3
million as of March 31, 1998 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%, and, at March 31, 1998, the
Bank's liquidity ratio was 16.71%. Therefore, the Bank's liquidity is well
above the minimum regulatory requirements.
The Company uses its liquidity mainly to fund existing and future loan
commitments, to fund deposit withdrawals, to invest in securities, and to meet
operating expenses. At March 31, 1998, the Company had commitments to fund
loan originations with borrowers totaling $43.3 million (including $22.0
million in available consumer and commercial lines of credit) . Management
believes that loan repayments and other sources of funds will be adequate to
meet the Company's liquidity needs.
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, 1998 and 1997 follows.
During the six months ended March 31, 1998, net cash increased $11.0 million
from $9.5 million at September 30, 1997 to $20.5 million at March 31, 1998.
The Company experienced a $13.8 million net increase in cash from operating
activities for the period ended March 31, 1998, compared to a $222,000 net
decrease for the period ended March 31, 1997. The increase in the most recent
period was primarily attributable to $12.3 million in proceeds from the sales
of mortgage loans and $1.2 million in net income during the period. The
$222,000 decrease for the period ended March 31, 1997 was due to a $2.4 million
decrease in accrued expenses and other liabilities resulting primarily from the
payment during the first quarter of the one time Savings Association Insurance
Fund assessment of $955,000 and the reduction in other borrowings of $1.7
million. Partially offsetting the lower accrued expenses and other liabilities
was net income during the period of $998,000 and a decrease in other assets of
$487,000.
The $36.0 million net decrease in cash from investing activities during the
six months ended March 31, 1998 is primarily related 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. During the six months ended March 31, 1997, net cash
used in investing activities was $9.0 million, resulting primarily form the
$22.2 million increase in net loans and the $23.4 million of securities
purchased exceeding the $35.7 million generated from the normal maturities and
sales of securities and the $948,000 in principal reductions of mortgage-backed
securities.
Financing activities generated net cash of $33.2 million for the period ending
March 31, 1998. The cash was provided primarily from $27.0 million in net new
FHLB advances, net deposit increases of $4.1 million, net increases of
securities sold under repurchase agreements of $2.3 million, $501,000 in
increased escrows held for borrowers taxes and $400,000 obtained from stock
option exercises during the period. Offsetting these increases was $943,000
used to repurchase the Company's stock and cash dividend payments of $269,000
during the quarter. Net cash provided by financing activities was $9.7 million
for the six months ended March 31, 1997 as $10.0 million in Federal Home Loan
Bank advances and $4.4 million in net deposits were used to provide the funds
for the purchase and retirement of 241,963 shares of MFB Corp. common stock
totaling $4.5 million.
CAPITAL RESOURCES
Total shareholders' equity increased from $33.6 million as of September 30,
1997 to $34.2 million as of March 31, 1998, mainly as a result of the Company's
repurchase of 38,000 shares of outstanding common stock at a cost of $943,000
and the payment of cash dividends of $269,000 during this period, partially
offset by $1.2 million in net income for the same period.
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
tangible capital, leverage capital, and risk-based capital.
The Bank's actual capital and required capital amounts and ratios at March 31,
1998 and 1997 are presented below:
<TABLE>
<CAPTION>
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, 1998
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital $ 30,824 10.61% $ 4,359 1.50% $ 8,718 3.00%
Leverage Capital 30,824 10.61% $ 8,718 3.00 17,436 6.00
Risk-Based Capital 31,224 21.18% $11,794 8.00 14,742 10.00
As of March 31, 1997
Tangible Capital $ 32,532 13.86% $ 3,522 1.50% $ 7,044 3.00%
Leverage Capital 32,532 13.86 7,044 3.00 14,088 6.00
Risk-Based Capital 32,887 30.36 8,666 8.00 10,832 10.00
</TABLE>
AS OF MARCH 31, 1998, 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, 1998 COMPARED TO SEPTEMBER 30, 1997
Total assets increased $34.7 million from $255.9 million as of September 30,
1997 to $290.6 million as of March 31, 1998.
Net loans increased by $23.0 million from $200.9 million at September 30, 1997
to $223.9 million at March 31, 1998 due to loan originations exceeding
principal payments by approximately $35.2 million, offset by the proceeds
received from first mortgage loan sales of $12.3 million. In October, 1997, 85
loans totaling $6.4 million with a weighted average interest rate of 7.90%, and
in January, 1998, 57 loans totaling $5.9 million with a weighted average rate
of 7.69% were sold to private investors. Servicing of these loans has been
retained by the Bank with a .25% service fee. These loan sales were implemented
to lower the Bank's interest rate risk exposure, obtain additional funds for
loans generating higher yields and generate fee income through the servicing of
these loans for our customers. The loans sold were fixed rate loans with a
remaining maturity of 15 years or longer. Securities available for sale
decreased during this same period from $39.6 million at September 30, 1997 to
$38.7 million at March 31, 1998 due primarily to maturities, sales and
principal payments exceeding purchases by $899,000 during the period. As
indicated above, the net loan growth has been funded in part by the two
mortgage loan sales completed during the period, along with additional
borrowings through the Federal Home Bank advances.
Total liabilities increased from $222.4 million at September 30 , 1997 to
$256.4 million at March 31, 1998. Significant liability changes included the
addition of $3.6 million in savings , NOW and MMDA deposits and $1.8 million in
noninterest-bearing demand deposits, increased securities sold under agreements
to repurchase of $2.3 million, and net new FHLB advances of $27.0 million.
Enhancement of our deposit based product offerings and emphasis on core
relationships and quality service has contributed to the deposit and repurchase
increases.
The $74.5 million of Federal Home Loan Bank advances have a weighted average
interest rate of 5.53% and mature in ten years or less. The one-day retail
repurchase agreements totaled $2.7 million at March 31, 1998 and had a
weighted average interest rate of 4.25%.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO THE SIX MONTHS ENDED MARCH 31, 1997
The Company's consolidated net income for the six months ended March 31, 1998
was $1,168,000 compared with $998,000 for the six months ended March 31, 1997,
an increase of 17.03%.
Net interest income after provision for loan losses for the most recent three
and six month periods totaled $2.2 million and $4.2 million compared to $1.8
million and $3.6 million for the same periods one year ago. During the three
months ended March 31, 1998 total interest income increased by $884,000
compared to the same period one year ago, primarily as a result of a $31.3
million increase in first mortgage loan receivables and a $18.3 million
increase in commercial and consumer loan receivables. Total interest expense
increased $531,000 reflecting the growth in both savings account deposits and
borrowed funds. For the six months ended March 31, 1998 total interest income
increased $1.6 million while total interest expense increased $1.0 million.
Noninterest income increased from $85,000 and $198,000 for the three and six
months ended March 31, 1997 to $162,000 and $327,000 for the most recent three
and six month periods. These increases are primarily due to fees generated from
the growing number of core deposit account relationships and the additional
services offered to bank's customers, along with servicing fees retained on
sold loans. Noninterest expenses, primarily compensation and building expenses,
increased from $1.1 million during the three months ended March 31, 1997 to
$1.5 million during the three months ended March 31, 1998, and from $2.1
million to $2.7 million for the comparable six month periods.
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, 1998 was .02% compared to .03% as of March 31, 1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The OTS provides a Net Portfolio Value (*NPV*) approach to the quantification
of interest rate risk for thrift institutions such as MFB Financial, (the
"Bank"). 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 OTS issued a regulation which uses a net market value methodology to
measure the interest rate risk exposure of thrift institutions. Under OTS
regulations, an institution's "normal" level of interest rate risk in the event
of an assumed 200 basis point change in interest rates is a decrease in the
institution's NPV in an amount not to exceed two percent of the present value
of its assets. Thrift institutions with greater than "normal" interest rate
risk exposure must take a deduction from their total capital available to meet
their risk-based capital requirement. The amount of that deduction is one half
of the difference between (a) the institution's actual calculated exposure to a
200 basis point interest rate increase or decrease (whichever results in the
greater pro forma decrease in NPV) and (b) its "normal" level of exposure which
is 2.00% of the present value of its assets. The regulation, however, will not
become effective until the OTS evaluates the process by which thrift
institutions may appeal an interest rate risk deduction determination. It is
uncertain as to when this evaluation may be completed.
Presented below, as of March 31, 1998, is an analysis of the Bank's interest
rate risk as measured by changes in NPV for an instantaneous and sustained
parallel shift in the yield curve, in 100 basis point increments, up and down
400 basis points, in accordance with OTS regulations. As illustrated in the
table, the Bank's interest rate risk is more sensitive to rising rate changes
than declining rates. This occurs primarily because, as rates rise, the market
value of fixed-rate loans declines due to both the rate increases and slowing
prepayments. When rates decline, the Bank does not experience a significant
rise in market value for these loans because borrowers prepay at relatively
higher rates. The value of the Bank's deposits and borrowings change in
approximately the same proportion in rising and falling rate scenarios.
Management reviews the OTS measurements and related peer reports on a quarterly
basis. In addition to monitoring selected measures of NPV, management also
monitors effects on net interest income resulting from increases or decreases
in interest rates. This measure is used in conjuction with NPV measures to
identify excessive interest rate risk.
<TABLE>
<CAPTION
At March 31,1998
(Dollars in thousands)
Change in
Interest Rates
(Basis Points) $ Change % Change
<C> <C> <C>
+ 400 bp $ (15,007) (39)%
+ 300 bp (10,603) (27)
+ 200 bp ( 6,368) (16)
+ 100 bp ( 2,652) ( 7)
0 bp ---
- 100 bp 1,034 3
- 200 bp 936 2
- 300 bp 1,271 3
- 400 bp 2,075 5
</TABLE>
ITEM 4. YEAR 2000 DISCLOSURES
MFB Financial has inventoried and risk assessed all computerized systems,
embedded systems and significant customer relationships. To date, no items of
concern are noted that may significantly impact the present or future
financial or business operations of MFB.
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 20, 1998.
(a) 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, 1997.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K
(a) MFB Corp. filed one Form 8-K report during the quarter ended March
31, 1998.
Date of report: February 10, 1998
Items reported: News release dated January 26, 1998 regarding
the announcement of first quarter earnings and the declaration
of an $ .08 per share cash dividend payable on February 17,1998
to holders of record on February 3, 1998.
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
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 20,452
<INT-BEARING-DEPOSITS> 99
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 38,728
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 224,303
<ALLOWANCE> 400
<TOTAL-ASSETS> 290,631
<DEPOSITS> 176,027
<SHORT-TERM> 2,727
<LIABILITIES-OTHER> 3,167
<LONG-TERM> 74,500
0
0
<COMMON> 12,713
<OTHER-SE> 21,497
<TOTAL-LIABILITIES-AND-EQUITY> 290,631
<INTEREST-LOAN> 4,245
<INTEREST-INVEST> 707
<INTEREST-OTHER> 202
<INTEREST-TOTAL> 5,154
<INTEREST-DEPOSIT> 2,041
<INTEREST-EXPENSE> 2,958
<INTEREST-INCOME-NET> 2,196
<LOAN-LOSSES> 15
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,461
<INCOME-PRETAX> 882
<INCOME-PRE-EXTRAORDINARY> 882
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 666
<EPS-PRIMARY> .43
<EPS-DILUTED> .40
<YIELD-ACTUAL> 3.21
<LOANS-NON> 0
<LOANS-PAST> 62
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 385
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 400
<ALLOWANCE-DOMESTIC> 337
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 63
</TABLE>
