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, 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 June 30, 1998 was 1,590,217.
<PAGE>
MFB CORP. AND SUBSIDIARY
FORM 10-Q
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheets, (Unaudited)
June 30, 1998 and September 30, 1997 3
Consolidated Statements of Income, (Unaudited)
Three and nine months ended June 30, 1998 and 1997 4
Consolidated Statements of Changes in Shareholders' Equity,
(Unaudited) Nine months ended June 30, 1998 and 1997 5
Consolidated Statements of Cash Flows, (Unaudited)
Nine months ended June 30, 1998 and 1997 6
Notes to Unaudited Consolidated Financial Statements
June 30, 1998 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risks 14
Item 4. Year 2000 Disclosure 15
PART II. OTHER INFORMATION 15
Items 1-6. 15
Signatures 16
<PAGE>
MFB CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, 1998 and September 30, 1997
(In thousands)
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
ASSETS
<S> <C> <C>
Cash and due from financial institutions $ 2,037 $ 2,906
Interest-bearing deposits in other financial
institutions - short-term 6,477 6,576
Cash and cash equivalents $ 8,514 $ 9,482
Securities available for sale 35,719 39,628
Federal Home Loan Bank (FHLB) stock, at cost 4,137 2,400
Loans held for sale, net of unrealized losses of $-0- - 12,671
Loans receivable, net of allowance for loan losses
of $420,000 in 1998 and $370,000 in 1997 238,657 188,264
Accrued interest receivable 898 719
Premises and equipment, net 2,824 2,613
Other assets 187 144
Total assets $ 290,936 $ 255,921
LIABIILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing demand deposits $ 4,437 $ 2,047
Savings, NOW and MMDA deposits 39,837 38,130
Other time deposits 131,320 131,710
Total deposits 175,594 171,887
Securities sold under agreements to repurchase 3,533 389
FHLB advances 76,726 47,500
Advances from borrowers for taxes and insurance 1,262 1,854
Accrued expenses and other liabilities 721 741
Total liabilities 257,836 222,371
Shareholders' equity
Common stock, 5,000,000 shares authorized
shares issued:1,689,417
shares outstanding:1,590,217 - 1998,
1,650,567 - 1997 12,890 13,108
Treasury Stock, 90,050 common shares (2,533) ( 889)
Retained earnings - substantially restricted 23,284 22,038
Net unrealized appreciation (depreciation) on
securities available for sale, net of tax 17 73
Unearned Employee Stock Ownership Plan (ESOP) Shares (500) (665)
Unearned Recognition and Retention Plan (RRP) Shares (58) (115)
Total shareholders' equity 33,100 33,550
Total liabilities and shareholders' equity $ 290,936 $ 255,921
</TABLE>
See accompanying notes to (unaudited) consolidated financial statements.
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Nine months ended June 30, 1998 and 1997 (in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable
First mortgage loans $ 3,873 $ 3,312 $ 11,128 $ 9.395
Consumer and other loans 218 149 616 381
Financing leases and
Commercial loans 526 112 1,160 240
Securities - taxable 606 921 1,964 2,795
Other interest-bearing assets 168 17 496 77
5,391 4,511 15,364 12,888
INTEREST EXPENSE
Deposits 2,088 2,067 6,253 6,062
Securities sold under agreements
to repurchase 20 --- 47 ---
FHLB advances 1,053 545 2,637 1,316
3,161 2,612 8,937 7,378
NET INTEREST INCOME 2,230 1,899 6,427 5,510
PROVISION FOR LOAN LOSSES 20 7 50 22
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,210 1,892 6,377 5,488
NONINTEREST INCOME
Insurance commissions 37 37 100 99
Brokerage Commissions 8 7 23 7
Net realized gains from sales of
securities, available for sale --- (1) 8 7
Net realized gains from sales
of loans 30 --- 76 ---
Other 107 65 302 193
Total noninterest income 182 108 509 306
NONINTEREST EXPENSE
Salaries and employee benefits 794 684 2,513 1,945
Occupancy and equipment 192 161 534 417
SAIF deposit insurance premium 27 26 81 121
Other 383 285 1,008 812
Total noninterest expense 1,396 1,156 4,136 3,295
INCOME BEFORE INCOME TAXES 996 844 2,750 2,499
Income tax expense 508 336 1,094 993
NET INCOME $ 488 $ 508 $ 1,656 $ 1,506
Basic earnings per common share $ 0.31 $ 0.32 $ 1.06 $ 0.90
Diluted earnings per common share $ 0.30 $ 0.30 $ 1.02 $ 0.87
</TABLE>
See accompanying notes to(unaudited) consolidated financial statements.
<PAGE>
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Nine months ended June 30, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
(Depreciation)
Unearned Unearned on Securities Total
Common Retained ESOP RRP Available- Treasury Shareholders'
STOCK EARNINGS SHARES SHARES FOR-SALE STOCK EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED JUNE 30, 1997
<CAPTION>
Balance-October 1, 1996 $ 18,316 $ 20,589 $( 894) $( 192) $ ( 220) $ - $ 37,599
Effect of contribution to fund ESOP - - 172 - - - 172
Market adjustment of 23,276 ESOP shares
committed to be released 130 - - - - - 130
Amortization of RRP contribution - - - 57 - - 57
Issuance of 3500 shares of common stock
- stock option exercise 35 - - - - - 35
Purchase and retirement of 287,263 shares
of common stock (5,365) - - - - - (5,365)
Cash dividends declared -$.24 per share - (419) - - - - (419)
Net change in unrealized appreciation
(depreciation) on securities available-
for-sale, net of tax - - - - 176 - 176
Net income for the nine months ended June 30 1997 - 1,506 - - - - 1,506
Balance at June 30, 1997 $ 13,116 $ 21,676 $ (722) $ (135) $ ( 44) $ - $ 33,891
NINE MONTHS ENDED JUNE 30, 1998
Balance-October 1, 1997 $ 13,108 $ 22,038 $( 665) $( 115) $ 73 $ (889) $ 33,550
Effect of contribution to fund ESOP - - 165 - - - 165
Market adjustment of 19,513 ESOP shares
committed to be released 226 - - - - - 226
Amortization of RRP contribution - - - 57 - - 57
Issuance of 58,850 shares of common stock
-stock option exercise (825) - - - - 1,414 589
Tax benefit related to stock option exercise 381 - - - - - 381
Purchase of 119,200 shares of treasury stock - - - - - (3,058) (3,058)
Cash dividends declared -$.25 per share - (409) - - - - (409)
Net change in unrealized appreciation
(depreciation) on securities available-
for-sale, net of tax - - - - (57) - (57)
Net income for the nine months ended June 30, 1998 - 1,656 - - - - 1,656
Balance at June 30, 1998 $ 12,890 $ 23,285 $ (500) $ (58) $ 16 $ (2,533) $33,100
</TABLE>
See accompanying notes to (unaudited ) consolidated financial statements.
<PAGE>
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended June 30, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Nine Months
Ended
June 30,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,656 $ 1,506
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization, net of accretion 277 384
Amortization of RRP contribution 57 58
Provision for loan losses 35 23
Market adjustment of ESOP shares 226 129
ESOP expense 165 172
Net realized gains from sales of securities
available for sale ( 8) (7)
Proceeds from sale of mortgage loans 20,091 -
Net realized gains from sale of mortgage loans (76) -
Net change in:
Accrued interest receivable (179) (18)
Other assets (43) 506
Accrued expenses and other liabilities 399 (895)
Total adjustments 20,944 352
Net cash from operating activities 22,600 1,858
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in loans receivable (57,772) (34,608)
Purchase of:
Securities available-for-sale (33,617) (28,530)
FHLB stock (1,737) (851)
Premises and equipment, net (433) (694)
Proceeds from:
Maturities of securities available for sale 21,708 18,300
Principal payments of mortgage-backed
and related securities 12,750 1,897
Sales of securities available for sale 2,926 21,924
Net change in interest-bearing time
deposits in other financial institutions - 495
Net cash from investing activities (56,175) (22,067)
(CONTINUED)
6
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended June 30, 1998 and 1997
(In thousands)
Nine Months Ended
June 30,
1998 1997
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 3,707 8,552
Net change in securities sold under
agreements to repurchase 3,144 184
Net change in advances from borrowers
for taxes and insurance (592) (1,051)
Proceeds from stock option exercise 589 35
Purchase of MFB Corp. common stock (3,058) (5,365)
Net proceeds from Federal Home Loan Bank
advances 29,226 19,235
Cash dividends paid (409) (418)
Net cash from financing activities 32,607 21,172
Net change in cash and cash equivalents (968) 963
Cash and cash equivalents at beginning
of period 9,482 1,734
Cash and cash equivalents at end of period $ 8,514 $ 2,697
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest expense $ 9,013 $ 7,406
Income taxes 826 466
See accompanying notes to (unaudited) consolidated financial statements
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 1998 and September 30,
1997, and the consolidated statements of income for the three months and nine
months ended June 30, 1998 and 1997, and the consolidated statements of
changes in shareholders' equity and the consolidated statements of cash flows
for the nine months ended June 30, 1998 and 1997. All significant intercompany
transactions and balances are eliminated in consolidation. The income
reported for the nine months ended June 30, 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 June 30, 1998 and 1997,
the Company had 61,032 and 84,308 average unallocated ESOP shares,
respectively, and 7,700 and 15,400 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 June 30, 1998 and 1997 is presented below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
<S> 1998 1997 1998 1997
<C> <C> <C> <C>
EARNINGS PER SHARE
Net income available to common shareholders $ 487,454 $ 508,448 $1,655,804 $1,506,102
Weighted average common shares outstanding 1,559,215 1,594,998 1,561,619 1,671,639
EARNINGS PER SHARE $ .31 $ .32 $ 1.06 $ .90
EARNINGS PER SHARE ASSUMING DILUTION
Net income available to common shareholders $ 487,454 $ 508,448 $1,655,804 $1,506,102
Weighted average common shares outstanding 1,559,215 1,594,998 1,561,619 1,671,639
Add: dilutive effects of assumed exercises:
Stock options 67,119 69,568 62,277 61,396
Recognition and retention plans 5,488 10,540 6,710 6,211
Weighted average common and dilutive
potential common shares outstanding 1,631,822 1,675,106 1,630,606 1,739,246
EARNINGS PER SHARE ASSUMING DILUTION $ .30 $ .30 $ 1.02 $ .87
</TABLE>
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 $44.2 million as of June 30,
1998 compared to $49.1 million as of September 30, 1997. This $ 4.9 million
decrease was primarily due to a $3.9 million decrease in securities available
for sale and a $1.0 million decrease in cash and cash equivalents. This
decrease in liquidity was used primarily to fund the $37.7 million increase in
net loans from September 30, 1997 to June 30, 1998. Management believes the
liquidity level of $44.2 million as of June 30, 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 June 30, 1998, the
Bank's liquidity ratio was 8.93%. 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 June 30, 1998, the Company had commitments to fund loan
originations with borrowers totaling $49.8 million (including $26.5 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 nine months ended June 30, 1998 and 1997 follows.
During the nine months ended June 30, 1998, net cash decreased $ 1.0 million
from $9.5 million at September 30, 1997 to $ 8.5 million at June 30, 1998.
The Company experienced a $22.6 million net increase in cash from operating
activities for the period ended June 30, 1998, compared to a $1.9 million net
increase for the period ended June 30, 1997. The increase in the most recent
period was primarily attributable to $20.1 million in proceeds from the sales
of mortgage loans and $1.7 million in net income during the period. The $1.9
million increase for the period ended June 30, 1997 was primarily due to the
$1.5 million net income generated and increases in other assets. Offsetting
these increases was an $895,000 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.
The $56.2 million net decrease in cash from investing activities during the
nine months ended June 30, 1998 is primarily related to the $57.8 million
increase in loan originations exceeding principal payments and the $35.3
million purchase of securities and FHLB stock, offset by sales and maturities
of securities totaling $24.6 million and mortgage-backed securities principal
payments of $12.7 million. During the nine months ended June 30, 1997, net cash
used in investing activities was $22.1 million, resulting primarily from the
$34.6 million increase in net loans and the $28.5 million of securities and
$851,000 of FHLB stock purchased exceeding the $40.2 million generated from
the normal maturities and sales of securities and the $1.9 in principal
reductions of mortgage-backed securities.
Financing activities generated net cash of $32.6 million for the nine month
period ending June 30, 1998. The cash was provided primarily from $29.2
million in net new FHLB advances, net deposit increases of $3.7 million and
net increases of securities sold under repurchase agreements of $3.1 million.
Offsetting these increases was $3.1 million used to repurchase the Company's
stock and cash dividend payments of $409,000 during the period. Net cash
provided by financing activities was $21.2 million for the nine months ended
June 30, 1997 as $19.2 million in Federal Home Loan Bank advances and $8.6
million in net deposits were used to provide the funds for the purchase and
retirement of 287,263 shares of MFB Corp. common stock totaling $5.4 million.
CAPITAL RESOURCES
Total shareholders' equity decreased from $33.6 million as of September 30,
1997 to $33.1 million as of June 30, 1998. The decreases to equity resulted
mainly from the repurchase of 119,200 shares of outstanding common stock during
the period at a cost of $3.1 million, along with the payment of cash dividends
of $409,000. These decreases were offset by $1.7 million in net income and $1.0
million generated from the exercise of stock options.
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 June 30,
1998 and 1997 are presented below:
Requirement to be
Well Capitalized Under
Requirement for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
As of June 30,1998
Tier I Capital $ 30,473 10.49% $11,619 4.00% $14,523 5.00%
Tier I Risk-
Based Capital 30,473 18.40% $ 6,625 4.00 9.938 6.00
Total Risk-
Based Capital 30,893 18.65% $13,250 8.00 16,563 10.00
As of June 30,1997
Tier I Capital $ 32,183 12.96% $ 9,937 4.00% $ 12,432 5.00%
Tier I Risk-
Based Capital 32,183 27.47 4,686 4.00 7,028 6.00
Total Risk-
Based-Capital 32,545 27.78 9,371 8.00 11,714 10.00
AS OF JUNE 30, 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
JUNE 30, 1998 COMPARED TO SEPTEMBER 30, 1997
Total assets increased $35.0 million from $255.9 million as of September 30,
1997 to $290.9 million as of June 30, 1998.
Net loans increased by $37.8 million from $200.9 million at September 30, 1997
to $238.7 million at June 30, 1998 due to loan originations exceeding
principal payments by approximately $57.8 million, offset by the proceeds
received from first mortgage loan sales of $20.1 million. 237 mortgage loans
were sold to private investors during this period at a weighted average rate of
7.69%. Servicing of these loans has been retained by the Bank with a .25%
service fee. These loan sales were completed to lower the Bank's interest rate
risk exposure, generate additional funds for new loan originations and create
servicing fee income. The loans sold were fixed rate loans with a remaining
maturity of greater than 15 years. Securities available for sale decreased
during this same period from $39.6 million at September 30, 1997 to $35.7
million at June 30, 1998 due primarily to maturities, sales and principal
payments exceeding purchases by $3.8 million during the period. In addition to
the proceeds from the above mentioned loan sales, net loan growth was funded by
additional borrowings through Federal Home Bank advances, savings deposit
growth and the decreases in security investments.
Total liabilities increased from $222.4 million at September 30 , 1997 to
$257.8 million at June 30, 1998. Significant liability changes included the
addition of $1.7 million in savings , NOW and MMDA deposits and $2.4 million in
noninterest-bearing demand deposits, increased securities sold under agreements
to repurchase of $3.1 million, and net new FHLB advances of $29.2 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 $76.7 million of Federal Home Loan Bank advances have a weighted average
interest rate of 5.51% and mature in eleven years or less. The one-day retail
repurchase agreements totaled $3.5 million at June 30, 1998 and had a weighted
average interest rate of 4.00%.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 1997
The Company's consolidated net income for the nine months ended June 30, 1998
was $1,656,000 compared with $1,506,000 for the nine months ended June 30,
1997, an increase of 9.96%.
Net interest income after provision for loan losses for the most recent three
and nine month periods totaled $2.2 million and $6.4 million compared to $1.9
million and $5.5 million for the same periods one year ago. During the three
months ended June 30, 1998 total interest income increased by $880,000 compared
to the same period one year ago, primarily as a result of a $29.1 million
increase in first mortgage loan receivables and a $23.0 million increase in
commercial and consumer loan receivables. Total interest expense increased
$549,000 reflecting the growth in both savings account deposits and borrowed
funds. For the nine months ended June 30, 1998 total interest income increased
$2.5 million while total interest expense increased $1.6 million.
Noninterest income increased from $108,000 and $306,000 for the three and nine
months ended June 30, 1997 to $182,000 and $509,000 for the most recent three
and nine 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 $1.2 million during the three months ended
June 30, 1997 to $1.4 million during the three months ended June 30, 1998, and
from $3.3 million to $4.1 million for the comparable nine month periods. The
additional compensation and building expenses are mainly attributable to
staffing increases and renovated facilities to support lending operations.
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
June 30, 1998 was .06% compared to .08% as of June 30, 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.
At March 31, 1998
(Dollars in thousands)
Change in
Interest Rates
(Basis Points) $ Change % Change
+ 400 bp $ (14,588) (37)%
+ 300 bp $ (10,169) (26)
+ 200 bp $ ( 5,984) (15)
+ 100 bp $ ( 2,394) ( 6)
0 bp ---
- 100 bp $ 288 1
- 200 bp $ (1,095) (3)
- 300 bp $ (2,518) (6)
- 400 bp $ (3,501) (9)
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 June 30,
1998.
Date of report: May 8, 1998
Items reported: News release dated April 23, 1998 regarding the
announcement of second quarter earnings and the declaration
of an $ .085 per share cash dividend payable on May 19, 1998
to holders of record on May 5, 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
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