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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended September 30, 1997
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) Zip Code
Registrant's telephone number, including area code:
(219) 255-3146
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, without par value
Common Share Purchase Rights
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
-----
Indicate by check mark if disclosure of delinquent filers persuant to Item 405,
Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ___
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of December 1, 1997, was $29,070,655.00.
The number of shares of the registrant's common stock, without par value,
outstanding as of December 1, 1997, was 1,627,767 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Annual Report to Shareholders for the fiscal year ended
September 30, 1997 are incorporated by reference into Part II.
Portions of the Proxy Statement for the 1998 Annual Meeting of the Shareholders
are incorporated into Part I and Part III.
Exhibit Index on Page 51
Page one of 122 Pages
MFB CORP.
Form 10-K
INDEX
PART I
Item 1. Business 1
Item 2. Properties 42
Item 3. Legal Proceedings 43
Item 4. Submission of Matters to a Vote of Security Holders 43
Item 4.5 Executive Officers of MFB 43
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 44
Item 6. Selected Financial Data 45
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 46
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data 47
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 47
PART III
Item 10. Directors and Executive Officers of the Registrant 47
Item 11. Executive Compensation 48
Item 12. Security Ownership of Certain Beneficial Owners
and Management 48
Item 13. Certain Relationships and Related Transactions 48
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 48
Signatures 50
Item 15. Exhibit List 51
PART 1
Item 1. Business.
General
MFB Corp. ("MFB" or the "Holding Company") is an Indiana corporation
organized in December, 1993 to become a unitary savings and loan holding
company. MFB became a unitary savings and loan holding company upon the
conversion of MFB Financial (formerly named Mishawaka Federal Savings, the
"Bank", and together with MFB, the "Company") from a federal mutual savings and
loan association to a federal stock savings bank on March 24, 1994.The principal
asset of MFB consists of 100% of the issued and outstanding shares of common
stock, $0.01 par value per share, of the Bank. The Bank began operations in
Mishawaka, Indiana in 1889 under the name Mishawaka Building and Loan
Association.
MFB Financial directly, and indirectly through its service corporation
subsidiary, offers a number of consumer and commercial financial services. These
services include: (i) residential real estate loans; (ii) home equity and second
mortgage loans; (iii) construction loans; (iv) commercial loans; (v) loans
secured by deposits; (vi) NOW accounts; (vii) passbook savings accounts; (viii)
certificates of deposit; (ix) consumer and commercial demand deposit accounts;
(x) individual retirement accounts; and (xi) a variety of insurance products and
brokerage services through its service corporation subsidiary, Mishawaka
Financial Services, Inc. MFB Financial provides these services through its five
offices, three in Mishawaka, one in South Bend, and one in Goshen, Indiana. MFB
Financial also operates a mortgage origination office in Elkhart, Indiana. MFB
Financial's market area for loans and deposits primarily consists of St. Joseph
and Elkhart counties.
The Company's principal source of revenue is interest income from lending
activities, primarily residential mortgage loans, and, to a lesser extent,
residential construction loans. At September 30, 1997, $177.3 million, or 87.7%
of the Company's total loan portfolio, including loans held for sale, consisted
of mortgage loans on one-to four-family residential real property which are
generally secured by first mortgages on the property. A large majority of the
residential real estate loans originated by MFB Financial are secured by
properties located in St. Joseph County.
MFB Financial also makes commercial loans, consumer loans, and multi-family
mortgage loans. Consumer loans include loans secured by deposits and home equity
and second mortgage loans. Commercial loans include term loans and commercial
lines of credit.
A significant portion of MFB Financial's loan portfolio consists of
adjustable rate loans. Adjustable rate loans permit MFB Financial to better
match the interest it earns on loans with the interest it pays on deposits.
Additionally, MFB Financial attempts to lengthen liability repricing by
aggressively pricing longer term certificates of deposit during periods of
relatively low interest rates.
Lending Activities
General. MFB Financial historically has concentrated its lending activities
on the origination of loans secured by first mortgage liens for the purchase,
construction or refinancing of one-to four-family residential real property.
These loans continue to be the major focus of MFB Financial's loan origination
activities. MFB also offers home equity lines of credit and commercial loans.
Management is currently evaluating other loan programs which may be added as
business plans warrant.
Residential Loans. Residential loans consist of one-to four-family loans.
Pursuant to federal regulations, such loans must require at least semi-annual
payments and be for a term of not more than 40 years, and, if the interest rate
is adjustable, it must be correlated with changes in a readily verifiable index.
A majority of the loans made by MFB Financial feature adjustable rates. A
variety of programs are offered to borrowers. Some loans adjust monthly, a
majority adjust on an annual basis after initial terms of one to ten years and
others adjust each three years. Initial offering rates, adjustment caps and
margins are adjusted periodically to reflect market conditions and provide
diversity of the loan portfolio.
MFB Financial also offers fixed-rate loans with a maximum term of thirty
years. They are available for a variety of loan types, including first and
second mortgages and purchases of residential building sites.
MFB Financial normally requires private mortgage insurance on all
conventional residential single-family mortgage loans with loan-to-value ratios
in excess of 80%. The private mortgage insurance obligation may be eliminated
when the principal balance of the loan is reduced below 75% of the original
cost. MFB Financial generally will not lend more than 95% of the lesser of
current cost or appraised value of a residential single-family property. Some
equity lines of credit are originated at up to 100% loan-to-value with higher
yields to compensate for potentially higher risk.
Substantially all of the residential mortgage loans that MFB Financial
originates include "due-on-sale" clauses, which give MFB Financial the right to
declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid.
Residential mortgage loans in excess of $250,000 must be approved by a
majority of the members of MFB Financial's Board of Directors. Loans under that
amount are approved by any two members of MFB Financial's Loan Committee.
Construction Loans. MFB Financial offers construction loans with respect to
owner-occupied residential real estate, to builders or developers constructing
such properties and to owners who are to occupy the premises.
Generally, construction loans are 12-month adjustable rate mortgage loans
with interest calculated on the amount disbursed under the loan and payable on a
monthly basis. Interest rates for such loans are generally tied to the National
Prime Rate. A construction loan fee is also charged for these loans. MFB
Financial normally requires a 80% loan-to-value ratio for its construction
loans. Inspections are made in conjunction with disbursements under a
construction loan, and the construction phase is generally limited to six
months.
Commercial Loans. Commercial real estate loans originated by federal
savings associations are limited to 40% of their capital, and commercial loans
unsecured by real estate may be made in amounts up to 20% of the savings
association's total assets, provided that amounts in excess of 10% of total
assets may be used only for small business loans. MFB Financial has established
a commercial lending department focused on meeting the borrowing needs of small
local businesses. Loans may be secured by real estate, equipment, inventory,
receivables or other appropriate collateral. Terms vary and adjustable rate
loans are generally indexed to the Wall Street Journal prime rate. Loans with
longer amortization periods generally contain balloon payment provisions.
Personal guarantees by business principals are generally required in order to
manage risk on these loans. Commercial lending activity has allowed MFB
Financial to diversify its balance sheet, increase market penetration and
improve earnings.
Consumer Loans. Federal laws and regulations permit federally chartered
savings associations to make secured and unsecured consumer loans in an
aggregate amount of up to 35% of the association's total assets. In addition, a
federally chartered savings association has lending authority above the 35%
limit for certain consumer loans, such as property improvement loans and deposit
account secured loans. However, the Qualified Thrift Lender test places
additional limitations on a savings association's ability to make consumer
loans.
As a general rule, consumer loans made by most financial institutions
involve a higher level of risk than one-to four-family residential mortgage
loans because consumer loans are generally made based upon the borrower's
ability to repay the loan, which is subject to change, rather than the value of
the underlying collateral, if any. However, the relatively higher yields and
shorter terms to maturity of consumer loans are believed to be helpful in
reducing interest-rate risk. MFB Financial makes only secured consumer loans for
amounts specifically tied to the value of the collateral, and, therefore, has
been successful in managing consumer loan risk.
Origination, Purchase and Sale of Loans. MFB Financial currently originates
its loans pursuant to its own underwriting standards and forms of documentation
which are not in conformity with the standard criteria of the Federal Home Loan
Mortgage Corporation ("FHLMC") or Federal National Mortgage Association
("FNMA"). If it desired to sell its loans, MFB Financial might therefore
experience some difficulty selling such loans quickly in the secondary market.
MFB Financial's adjustable rate mortgages vary from secondary market criteria
because, among other things, MFB Financial does not use the standard loan form,
does not require current property surveys in most cases, permits borrowers to
make repayments which reduce subsequent payment obligations on loans and does
not permit the conversion of those loans to fixed rate loans. However, steps
have been taken to upgrade the loan origination system to allow new loans to
more closely conform to secondary market documentation standards. This upgrade
was completed in September 1997. In order to limit interest rate risk, build a
servicing fee base and manage liquidity, MFB Financial intends to be in a
position to sell loans in the future. Such sales will be on a service retained
basis.
MFB Financial confines its loan origination activities primarily in St.
Joseph County and the surrounding area. A loan origination office was opened in
Elkhart County in the fall of 1996. MFB's loan originations are generated from
referrals from builders, developers, real estate brokers and existing customers,
and limited newspaper and periodical advertising. All loan applications are
processed and underwritten at MFB Financial's main office.
A savings association generally may not make any loan to a borrower or its
related entities if the total of all such loans exceeds 15% of its capital (plus
up to an additional 10% of capital in the case of loans fully collateralized by
readily marketable collateral); provided, however, that loans up to $500,000
regardless of the percentage limitations may be made and certain housing
development loans of up to $30 million or 30% of capital, whichever is less, are
permitted. MFB Financial's portfolio of loans currently contains no loans that
exceed the 15% of capital limitation.
MFB Financial's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. To assess the borrower's
ability to repay, MFB Financial studies the employment and credit history and
information on the historical and projected income and expenses of its
mortgagors.
MFB Financial generally requires appraisals on all property securing its
loans and requires title insurance and a valid lien on its mortgaged real
estate. Appraisals for residential real property are generally performed by an
in-house appraiser who is a state-certified residential appraiser. From time to
time, MFB Financial also uses the services of other certified residential
appraisers who are not in-house. MFB Financial requires fire and extended
coverage insurance in amounts at least equal to the principal amount of the
loan. It also requires flood insurance to protect the property securing its
interest if the property is in a flood plain. Tax and insurance payments are
typically required to be escrowed by MFB Financial on new loans.
Origination and Other Fees. MFB Financial realizes income from late
charges, checking account service charges, safety deposit box rental fees, and
fees for other miscellaneous services. MFB Financial charges application fees
for most loan applications, but such are generally credited back to the customer
upon the closing of the loan. If the loan is denied, MFB Financial retains a
portion of the application fee. In order to attract adjustable rate mortgages,
MFB Financial has originated most of its adjustable rate mortgages without
charging points. However, borrowers from time to time wish to pay points and
management negotiates rates on an individual basis. Late charges are generally
assessed if payment is not received within a specified number of days after it
is due. The grace period depends on the individual loan documents.
Non-Performing and Problem Assets
All loans are reviewed by the Company on a regular basis and may be placed
on a non-accrual status when the loans become contractually past due ninety days
or more, depending on a case by case evaluation of the circumstances surrounding
each loan. At the end of each month, delinquency notices are sent to all
borrowers from whom payments have not been received. Contact by phone or in
person is made, if feasible, to all such borrowers.
When loans are sixty days in default, personal contact is made with the
borrower to establish an acceptable repayment schedule. When loans are ninety
days in default, contact is made with the borrower by an employee of MFB
Financial after consultation with a Senior Loan Officer who attempts to
establish an acceptable repayment schedule. Management is authorized to commence
foreclosure proceedings for any loan upon making a determination that it is
prudent to do so. All loans on which foreclosure proceedings have been commenced
are placed on non-accrual status.
Non-performing assets. At September 30, 1997, $261,000 or .10% of the
Company's total assets, were non-performing assets (loans delinquent more than
90 days, non-accrual loans, real estate owned (REO") and troubled debt
restructurings). At September 30, 1997, the Company had no impaired loans and
there was no real estate acquired as a result of foreclosure, voluntary deed, or
other means. Such real estate is classified by the Company as "real estate
owned" or "REO" until it is sold. When property is so acquired, the value of the
asset is recorded on the books of the Company at fair value. Interest accrual
ceases when the collection of interest becomes doubtful. All costs incurred from
the date of acquisition in maintaining the property are expensed.
Classified assets. Federal regulations and MFB Financial's Classification
of Assets policy provide for the classification of loans and other assets such
as debt and equity securities considered by the Office of Thrift Supervision
("OTS") to be of lesser quality as "substandard," "doubtful" or "loss" assets.
An asset is considered "substandard" if it is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the association will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to sufficient risk to
warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "special mention" by management.
An insured institution is required to establish general allowances for loan
and lease losses in an amount deemed prudent by management for loans classified
substandard, doubtful or impaired, as well as for other problem loans. General
allowances represent loss allowances which have been established to recognize
the inherent risk associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. When an
insured institution classifies problem assets as "loss", it is required either
to establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the establishment of
additional general or specific loss allowances.
MFB Financial regularly reviews its loan portfolio to determine whether any
loans require classification in accordance with applicable regulations. For
reasons such as low loan-to-value ratios, not all of the Company's
non-performing assets constitute classified assets.
Allowance for Loan Losses
The allowance for loan and lease losses is maintained through the provision
for loan losses, which is charged to earnings. The provision is determined in
conjunction with management's review and evaluation of current economic
conditions (including those of MFB Financial's lending area), changes in the
character and size of the loan and lease portfolio, delinquencies (current
status as well as past and anticipated trends) and adequacy of collateral
securing loan delinquencies, historical and estimated net charge-offs, and other
pertinent information derived from a review of the loan and lease portfolio. In
management's opinion, MFB Financial's allowance for loan and lease losses is
adequate to absorb anticipated future losses existing at September 30, 1997.
Investments
General. Federally chartered savings associations have the authority to
invest in various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds sold. Subject to various restrictions, federally
chartered savings associations may also invest a portion of their assets in
commercial paper, corporate debt securities and asset-backed securities. The
investment policy of MFB Financial, which is established and implemented by MFB
Financial's Investment Committee, is designed primarily to maximize the yield on
the investment portfolio subject to minimal liquidity risk, default risk,
interest rate risk, and prudent asset/liability management.
The Company's investment portfolio consists of U.S. Treasury Bonds, U.S.
government agency securities, mortgage-backed securities, equity securities and
Federal Home Loan Bank ("FHLB") stock.
Liquidity. Federal regulations require FHLB-member savings associations to
maintain an average daily balance of liquid assets equal to a quarterly average
of not less than a specified percentage of its net withdrawable savings deposits
plus short-term borrowings. Liquid assets include cash, certain time deposits,
certain bankers' acceptances, specified U.S. government, state or federal agency
obligations, certain corporate debt securities, commercial paper, certain mutual
funds, certain mortgage-related securities, and certain first lien residential
mortgage loans. This liquidity requirement may be changed from time-to-time by
the OTS to any amount within the range of 4% to 10%, and is currently 4%.
Monetary penalties may be imposed for failure to meet this liquidity
requirement. As of September 30, 1997, the Company had liquid assets of $33.6
million and a regulatory liquidity ratio of 17.0%.
Sources of Funds
General. Deposits have traditionally been MFB Financial's primary source of
funds for use in lending and investment activities. In addition to deposits, MFB
Financial derives funds from scheduled loan payments, loan prepayments, retained
earnings and income on earning assets. While scheduled loan payments and income
on earning assets are relatively stable sources of funds, deposit inflows and
outflows can vary widely and are influenced by prevailing interest rates, market
conditions and levels of competition. Borrowings from the FHLB of Indianapolis
may be used in the short-term to compensate for reductions in deposits or
deposit inflows at less than projected levels. Historically, MFB Financial has
rarely borrowed on a longer-term basis to support expanded activities or to
assist in its asset/liability management. However, in 1996, the Bank instituted
a capital leveraging strategy that involved the purchase of earning assets
funded primarily with FHLB borrowings. This strategy has contributed to net
earnings and helps improve the overall return on equity.
Deposits. Deposits are attracted, principally from within St. Joseph and
Elkhart counties, through the offering of a broad selection of deposit
instruments including NOW and other transaction accounts, fixed-rate
certificates of deposit, individual retirement accounts, and savings accounts.
MFB Financial does not actively solicit or advertise for deposits outside of
these counties. Substantially all of MFB Financial's depositors are residents of
these counties. Deposit account terms vary, with the principal differences being
the minimum balance required, the amount of time the funds remain on deposit and
the interest rate. MFB Financial does not pay a fee for any deposits it
receives.
Interest rates paid, maturity terms, service fees and withdrawal penalties
are established by MFB Financial on a periodic basis. Determination of rates and
terms are predicated on funds acquisition and liquidity requirements, rates paid
by competitors, growth goals, and federal regulations. MFB Financial relies, in
part, on customer service and long-standing relationships with customers to
attract and retain its deposits, but also prices its deposits in relation to
rates offered by its competitors.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts offered by MFB Financial has
allowed it to be competitive in obtaining funds and to respond with flexibility
to changes in consumer demand. MFB Financial has become more susceptible to
short-term fluctuations in deposit flows as customers have become more interest
rate conscious. MFB Financial manages the pricing of its deposits in keeping
with its asset/liability management and profitability objectives. Based on its
experience, MFB Financial believes that its passbook, NOW and
non-interest-bearing checking accounts are relatively stable sources of
deposits. However, the ability of MFB Financial to attract and maintain
certificates of deposit, and the rates paid on these deposits, has been and will
continue to be significantly affected by market conditions.
Borrowings. MFB Financial focuses on generating high quality loans and then
seeks the best source of funding from deposits, investments or borrowings.
Although deposits are the Bank's primary source of funds, the Bank's policy has
been to utilize borrowings when they are a less costly source of funds, can be
invested at a positive interest rate spread or when the Bank desires additional
capacity to fund loan demand.
MFB Financial's borrowings consist mainly of advances from the FHLB of
Indianapolis upon the security of a blanket collateral agreement of a percentage
of unemcumbered loans. Such advances can be made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. There are regulatory restrictions on advances from the Federal Home
Loan Banks, See "Regulation--Federal Home Loan Bank System" and "--Qualified
Thrift Lender." At September 30, 1997, MFB Financial had $ 47.5 million in
Federal Home Loan Bank borrowings outstanding. MFB Financial does not anticipate
any difficulty in obtaining advances appropriate to meet its requirements in the
future.
With selected business entities, MFB Financial has entered into repurchase
agreements. These agreements are all one day retail repurchase agreements, are
accounted for as borrowings by the Bank, and are secured by certain investment
securities of the Bank. At September 30, 1997, the Bank had $389,000 in
repurchase agreements outstanding.
Service Corporation Subsidiary
OTS regulations permit federal savings associations to invest in the
capital stock, obligations, or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants in
an aggregate amount not exceeding 2% of an association's assets, plus an
additional 1% of assets if the amount over 2% is used for specified community or
inner-city development purposes. In addition, federal regulations permit
associations to make specified types of loans to such subsidiaries (other than
special-purpose finance subsidiaries), in which the association owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the association's
regulatory capital if the association's regulatory capital is in compliance with
applicable regulations. A savings association that acquires a non-savings
association subsidiary, or that elects to conduct a new activity within a
subsidiary, must give the Federal Deposit Insurance Corporation ("FDIC") and the
OTS at least 30 days advance written notice. The FDIC may, after consultation
with the OTS, prohibit specific activities if it determines such activities pose
a serious threat to the Savings Association Insurance Fund ("SAIF").
MFB Financial's only subsidiary, Mishawaka Financial Services, Inc.
("Mishawaka Financial"), was organized in 1975 and currently is engaged in the
sale of credit life, general fire and accident, car, home and life insurance, as
agent to MFB Financial's customers and the general public. In addition, a range
of investment and insurance related products is offered to customers through a
contractual relationship established with Financial Network Investment
Corporation (FNIC), a full service securities brokerage firm. During fiscal year
1997, Mishawaka Financial received approximately $144,000 in commissions versus
approximately $113,000 in commissions received during fiscal year 1996. Since
Mishawaka Financial conducts all of its activities as agent for its customers,
MFB Financial is not required to deduct from its capital any portion of this
investment. The consolidated statements of income of MFB included elsewhere
herein include the operation of MFB Financial and Mishawaka Financial. All
significant intercompany balances and transactions have been eliminated in the
consolidation.
Employees
As of September 30, 1997, MFB Financial employed 63 persons on a full-time
basis and 23 persons on a part-time basis. None of MFB Financial's employees are
represented by a collective bargaining group. Management considers its employee
relations to be excellent.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
A. The following are the average balance sheets for the years ending
September 30:
1997 1996 1995
Average Average Average
Outstanding Outstanding Outstanding
Balance Balance Balance
Assets: (In thousands)
Interest-earning assets:
Interest-bearing deposits $ 1,856 $ 6,709 $ 7,995
Securities (1) 30,765 35,392 39,841
Mortgage-backed securities (1) 22,222 19,717 12,558
Loans receivable (2) 175,761 133,670 118,735
Stock in FHLB of Indianapolis 1,783 1,303 1,223
--------- --------- ---------
Total interest-earning assets 232,387 196,791 180,352
Noninterest earning assets, net
of allowance for loan losses 4,663 3,792 3,517
--------- --------- ---------
Total assets $ 237,050 $ 200,583 $ 183,869
========= ========= =========
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts $ 10,359 $ 9,746 $ 9,774
NOW and money market accounts 26,770 26,006 26,672
Certificates of deposit 126,202 113,570 106,556
Borrowings 35,057 9,625 --
--------- --------- ---------
Total interest-bearing liabilities 198,388 158,947 143,002
Other liabilities 5,388 4,229 2,838
--------- --------- ---------
Total liabilities 203,776 163,176 145,840
Shareholders' equity
Common stock 14,015 19,064 20,527
Treasury stock (3) -- --
Retained earnings 20,309 19,718 19,117
Less common stock acquired by:
Employee stock ownership plan (790) (1,007) (1,208)
Recognition and retention plans (157) (235) (407)
Net unrealized gain (loss) on securities
available for sale (100) (133) --
--------- --------- ---------
Total shareholders' equity 33,274 37,407 38,029
--------- --------- ---------
Total liabilities and shareholders' equity $ 237,050 $ 200,583 $ 183,869
========= ========= =========
- --------------------------------------------------------------------------------
(1) Average outstanding balance reflects unrealized gain (loss) on securities
available for sale.
(2) Total loans, including loans held for sale, less deferred net loan fees and
loans in process.
10
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
B. The following tables set forth, for the years indicated, the condensed
average balance of interest-earning assets and interest-bearing
liabilities, the interest earned or paid on such amounts, and the
average interest rates earned or paid thereon.
--------Year Ended September 30, 1997-------
Average Average
Balance Interest Yield/Cost
(Dollars in thousands)
INTEREST-EARNING ASSETS
Interest-bearing deposits $ 1,856 $ 96 5.17%
Securities (1) 30,808 2,112 6.86
Mortgage-backed securities (1) 22,246 1,436 6.46
Loans receivable (2) 175,761 13,897 7.91
Stock in FHLB of Indianapolis 1,783 144 8.08
-------- ------
Total interest-earning assets $232,454 17,685 7.61
--------
INTEREST-BEARING LIABILITIES
Savings accounts $ 10,359 278 2.68%
NOW and money market accounts 26,770 773 2.89
Certificates of deposit 126,202 7,134 5.65
Borrowings 35,057 1,972 5.63
-------- ------
Total interest-bearing liabilities $198,388 10,157 5.12
======== ------
Net interest earning assets $ 34,066
========
Net interest income $ 7,528
========
Interest rate spread (3) 2.49%
Net yield on average interest-earning assets (4) 3.24%
Average interest-earning assets to
average interest-bearing liabilities 117.17%
- --------------------------------------------------------------------------------
(1) Average balance does not reflect unrealized gain (loss) on securities
available for sale and yield is based on amortized cost.
(2) Total loans, including loans held for sale, less deferred net loan fees and
loans in process.
(3) Interest rate spread is calculated by subtracting average interest rate
cost from average interest rate earned for the period indicated.
(4) The net yield on average interest-earning assets is calculated by dividing
net interest income by average interest-earning assets for the period
indicated.
11
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
--------Year Ended September 30, 1996-------
Average Average
Balance Interest Yield/Cost
(Dollars in thousands)
INTEREST-EARNING ASSETS
Interest-bearing deposits $ 6,709 $ 422 6.29%
Securities (1) 35,410 2,186 6.17
Mortgage-backed securities (1) 19,920 1,225 6.15
Loans receivable (2) 133,670 10,246 7.67
Stock in FHLB of Indianapolis 1,303 103 7.90
------------ ------------
Total interest-earning assets $ 197,012 14,182 7.20
============
INTEREST-BEARING LIABILITIES
Savings accounts $ 9,746 270 2.77%
NOW and money market accounts 26,006 811 3.12
Certificates of deposit 113,570 6,447 5.68
Borrowings 9,625 529 5.50
------------ ------------
Total interest-bearing liabilities $ 158,947 8,057 5.07
============ ------------
Net interest earning assets $ 38,065
============
Net interest income $ 6,125
============
Interest rate spread (3) 2.13%
Net yield on average interest-earning assets (4) 3.11%
Average interest-earning assets to
average interest-bearing liabilities 123.95%
- --------------------------------------------------------------------------------
(1) Average balance does not reflect unrealized gain (loss) on securities
available for sale and yield is based on amortized cost.
(2) Total loans, including loans held for sale, less deferred net loan fees and
loans in process.
(3) Interest rate spread is calculated by subtracting average interest rate
cost from average interest rate earned for the period indicated.
(4) The net yield on average interest-earning assets is calculated by dividing
net interest income by average interest-earning assets for the period
indicated.
12
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
--------Year Ended September 30, 1995-------
Average Average
Balance Interest Yield/Cost
(Dollars in thousands)
INTEREST-EARNING ASSETS
Interest-bearing deposits $ 7,995 $ 482 6.03%
Securities 39,841 2,300 5.77
Mortgage-backed securities 12,558 692 5.51
Loans receivable (1) 118,735 8,816 7.42
Stock in FHLB of Indianapolis 1,223 93 7.60
------------ ------------
Total interest-earning assets $ 180,352 12,383 6.87
============
INTEREST-BEARING LIABILITIES
Savings accounts $ 9,774 274 2.80%
NOW and money market accounts 26,672 863 3.24
Certificates of deposit 106,556 5,651 5.30
------------ ------------
Total interest-bearing liabilities $ 143,002 6,788 4.75
============ ------------
Net interest earning assets $ 37,350
============
Net interest income $ 5,595
============
Interest rate spread (2) 2.12%
Net yield on average interest-earning assets (3) 3.10%
Average interest-earning assets to
average interest-bearing liabilities 126.12%
- --------------------------------------------------------------------------------
(1) Average balance does not reflect unrealized gain (loss) on securities
available for sale and yield is based on amortized cost.
(2) Total loans, including loans held for sale, less deferred net loan fees and
loans in process.
(3) Interest rate spread is calculated by subtracting average interest rate
cost from average interest rate earned for the period indicated.
(4) The net yield on average interest-earning assets is calculated by dividing
net interest income by average interest-earning assets for the period
indicated.
13
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
C. The following tables describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities
have affected MFB Corp.'s consolidated interest income and expense
during the periods indicated. For each category of interest-earning
asset and interest-bearing liability, information is provided on changes
attributable to (1) changes in rate (i.e., changes in rate multiplied by
old volume) and (2) changes in volume (i.e., changes in volume
multiplied by old rate). Changes attributable to both rate and volume
have been allocated proportionally to the change due to volume and the
change due to rate.
Increase (Decrease) in
Net Interest Income
-----------------------------------
Total Net Due to Due to
Change Rate Volume
(In thousands)
Year ended September 30, 1997 compared
to year ended September 30, 1996
Interest-earning assets
Interest-bearing deposits $ (326) $ (64) $ (262)
Securities (74) 230 (304)
Mortgage-backed securities 211 64 147
Loans receivable 3,651 332 3,319
Stock in FHLB of Indianapolis 41 2 39
------- ------- -------
Total 3,503 564 2,939
Interest-bearing liabilities
Savings accounts 8 (9) 17
NOW and money market accounts (38) (61) 23
Certificates of deposit 687 (27) 714
Borrowings 1,443 15 1,428
------- ------- -------
Total 2,100 (82) 2,182
------- ------- -------
Change in net interest income $ 1,403 $ 646 $ 757
======= ======= =======
- --------------------------------------------------------------------------------
14
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
Increase (Decrease) in
Net Interest Income
--------------------------------------------------
Total Net Due to Due to
Change Rate Volume
(In thousands)
Year ended September 30, 1996 compared
to year ended September 30, 1995
Interest-earning assets
Interest-bearing deposits $ (60) $ 20 $ (80)
Securities (114) 154 (268)
Mortgage-backed securities 533 97 436
Loans receivable 1,430 293 1,137
Stock in FHLB of Indianapolis 10 4 6
----------- ----------- ------------
Total 1,799 568 1,231
Interest-bearing liabilities
Savings accounts (4) (3) (1)
NOW and money market accounts (52) (31) (21)
Certificates of deposit 796 411 385
FHLB borrowings 529 - 529
----------- ----------- ------------
Total 1,269 377 892
----------- ----------- ------------
Change in net interest income $ 530 $ 191 $ 339
=========== =========== ============
- --------------------------------------------------------------------------------
15
II. INVESTMENT PORTFOLIO
A. The following table sets forth the amortized cost and fair value of
securities available for sale:
At September 30,
---------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- -------------------------- -------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(In thousands)
Debt securities
U.S. Government
and federal
agencies $23,618 $23,720 $40,160 $40,207 $- $-
Mortgage-backed
securities 15,589 15,579 24,473 24,074 -- --
------- ------- ------- -------- ----
39,207 39,299 64,633 64,281 -- --
Marketable equity
securities 300 329 2,494 2,482 -- --
------- ------- ------- -------- -------- ----
$39,507 $39,628 $67,127 $66,763 $- $-
======= ======= ======= ======= ======== ====
The following table sets forth the amortized cost and fair value of securities
held to maturity:
At September 30,
---------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- -------------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(In thousands)
Debt securities
U.S. Government
and federal
agencies $- $-- $- $- $40,117 $40,180
Mortgage-backed
securities -- -- - - 11,905 11,524
--- --- -- -- ------- -------
$-- $-- $- $- $52,022 $51,704
=== === == == ======= =======
16
II. INVESTMENT PORTFOLIO (Continued)
A. The following table sets forth the amortized cost and estimated market
value of Federal Home Loan Bank (FHLB) stock:
At September 30,
-------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- -------------------------- --------------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
(In thousands)
Other securities
FHLB stock, at
cost $ 2,400 $ 2,400 $ 1,336 $ 1,336 $ 1,271 $1,271
========= ======== ======== ======= ======== ======
B. The maturity distribution and weighted average interest rates of debt
securities available for sale, excluding mortgage-backed securities,
are as follows:
Amount at September 30, 1997, which matures in
-------------------------------------------------------------------------------------------
One One to Five to
Year or Less Five Years Ten Years Totals
---------------------- ------------------------ ---------------- -------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value
--------- --------- ---------- ---------- ------- ------- ------- -------
(Dollars in thousands)
U.S. Government and federal
agencies $ 4,190 $ 4,208 $ 16,081 $ 16,138 $ 3,347 $ 3,374 $23,618 $23,720
========= ========= ========== ========== ======= ======= ======= =======
Weighted average yield 6.68% 6.81% 7.24% 6.85%
The weighted average interest rates are based upon coupon rates for
securities purchased at par value and on effective interest rates
considering amortization or accretion if the securities were purchased at a
premium or discount.
C. Excluding those holdings of the investment portfolio in U.S. Treasury
securities and other agencies of the U.S. Government, there were no
investments in securities of any one issuer which exceeded 10% of the
shareholders' equity of the Company at September 30, 1997.
17
III. LOAN PORTFOLIO
A. The following table sets for the composition of MFB Corp.'s
consolidated loan portfolio and mortgage-backed securities by
loan type as of the dates indicated, including a reconciliation
of gross loans receivable to net loans receivable after
consideration of the allowance for loan losses, deferred net loan
fees and loans in process:
-----------------------------September 30,----------------------------------
1997 1996 1995
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Mortgage loans
Residential(1) $ 177,269 87.73% $ 143,751 92.87% $ 119,720 97.60%
Multi-family 130 .06 163 .10 189 .15
Residential construction 8,245 4.08 5,005 3.23 2,106 1.72
Consumer and other loans
Home equity and second
mortgage loans 7,177 3.55 3,790 2.45 375 .30
Commercial loans 8,833 4.37 876 .57 206 .17
Financing leases 325 .16 1,125 .73 -- --
Other 96 .05 83 .05 74 .06
------- ------ ------- ------ ------- ------
Gross loans receivable(1) 202,075 100.00% 154,793 100.00% 122,670 100.00%
====== ====== ======
Less
Allowance for loan losses (370) (340) (310)
Deferred net loan fees (653) (440) (370)
Loans in process (117) (1,961) (809)
------ ------ ---------
Net loans receivable(1) $ 200,935 $ 152,052 $ 121,181
Mortgage-backed securities
FHLMC certificates $ 3,508 $ 5,013 $ 11,905
CMO - REMIC 12,071 19,061 --
------ ------ ---------
Net mortgage-backed securities $ 15,579 $ 24,074 $ 11,905
========= ========= =========
Mortgage loans
Adjustable rate $ 139,665 75.23% $ 130,336 87.01% $ 113,394 92.78%
Fixed rate(1) 45,980 24.77 19,459 12.99 8,827 7.22
------- ------ ------- ------ ------- ------
Total(1) $ 185,645 100.00% $ 149,795 100.00% $ 122,221 100.00%
========= ====== ========= ====== ========= ======
(1) Includes loans held for sale
18
---------------------September 30,--------------------
1994 1993
Percent Percent
of of
Amount Total Amount Total
------ ----- ------ -----
(Dollars in thousands)
Mortgage loans
Residential(1) $ 113,770 97.25% $ 107,168 97.87%
Multi-family 192 .16 625 .57
Residential construction 2,213 1.89 848 .78
Consumer and other loans
Home equity and second
mortgage loans 298 .26 256 .24
Commercial loans 443 .38 496 .45
Financing leases -- -- -- --
Other 69 .06 106 .09
------- ------ ------- ------
Gross loans receivable(1) 116,985 100.00% 109,499 100.00%
====== ======
Less
Allowance for loan losses (280) (250)
Deferred net loan fees (447) (556)
Loans in process (961) (481)
---- ----
Net loans receivable(1) $ 115,297 $ 108,212
========= ==========
Mortgage-backed securities
FHLMC certificates $ 13,158 $-
CMO - REMIC -- --
--------- ----
Net mortgage-backed securities $ 13,158 $ -
========= ====
Mortgage loans
Adjustable rate $ 110,853 95.06% $ 102,837 94.23%
Fixed rate(1) 5,765 4.94 6,300 5.77
--------- ----- --------- -----
Total(1) $ 116,618 100.00% $ 109,137 100.00%
========= ====== ========= ======
(1) Includes loans held for sale
18
III. LOAN PORTFOLIO (Continued)
B. Loan Maturity. The following table sets forth certain information at
September 30, 1997, regarding the dollar amount of loans maturing in
MFB Corp.'s consolidated loan portfolio based on the date that final
payment is due under the terms of the loan. Demand loans having no
stated schedule of repayments and no stated maturity and overdrafts
are reported as due in one year or less. This schedule does not
reflect the effects of possible prepayments or enforcement of
due-on-sale clauses. Management expects prepayments will cause actual
maturities to be shorter.
Balance Due during years ended September 30,
Outstanding 2001 2003 2008 2013
at September 30, and to to and
1997 1998 1999 2000 2002 2007 2012 Following
---- ---- ---- ---- ---- ---- ---- ---------
(In thousands)
Mortgage loans
Residential (1) $177,269 $ 356 $180 $1,644 $ 4,567 $ 9,517 $36,082 $124,923
Multi-family 130 - - - - 88 42 -
Residential construction 8,245 6,886 - - - - 341 1,018
Consumer and other loans
Home equity
and second mortgage 7,177 27 105 5 1,007 5,947 30 56
Commercial loans 8,833 1,807 234 1,423 4,623 551 195 -
Financing leases 325 - - - - 325 - -
Other 96 81 - - - - - 15
-------- ------ ---- ------ ------- ------- ------- --------
Total (1) $202,075 $9,157 $519 $3,072 $10,197 $16,428 $36,690 $126,012
======== ====== ==== ====== ======= ======= ======= ========
The following table sets forth, as September 30, 1997, the dollar amount of all
loans due after one year which have fixed interest rates and floating or
adjustable interest rates.
Due After September 30, 1997
Variable
Fixed Rates Rates Total
----------- ----------- ---------
(In thousands)
Mortgage loans
Residential (1) $ 44,408 $ 132,505 $ 176,913
Multi-family 17 113 130
Residential construction 1,102 257 1,359
Consumer and other loans
Home equity and second mortgage 1,005 6,145 7,150
Commercial loans 6,317 709 7,026
Financing leases 325 - 325
Other - 15 15
----------- ----------- ---------
Total (1) $ 53,174 $ 139,744 $ 192,918
=========== =========== =========
(1) Includes loans held for sale
19
III. LOAN PORTFOLIO (Continued)
C. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans
The table below sets forth the amounts and categories of MFB
Corp.'s consolidated non-performing assets (accruing loans
delinquent more than 90 days, non-accrual loans, troubled debt
restructurings and real estate owned). It is the policy of MFB
Corp. that all earned but uncollected interest on all loans be
reviewed quarterly to determine if any portion thereof be
classified as uncollectible for any loan past due in excess of
90 days.
At September 30,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
Accruing loans delinquent
more than 90 days $261 $198 $308 $107 $223
Non-accruing loans(1) -- -- -- -- --
Troubled debt
restructurings -- -- -- -- --
---- ---- ---- ---- ----
Total non-performing
loans 261 198 308 107 223
Real estate owned, net -- -- 18 22 50
---- ---- ---- ---- ----
Total non-performing
assets $261 $198 $326 $129 $273
==== ==== ==== ==== ====
Non-performing loans to
total loans, net (2) .13% .13% .25% .09% .21%
Non-performing assets to
total assets .10% .09% .17% .07% .16%
Management believes that the allowance for loan losses balance at September 30,
1997 is adequate to absorb any losses on nonperforming loans, as the allowance
balance is maintained by management at a level considered adequate to cover
losses that are currently anticipated based on past loss experience, general
economic conditions, information about specific borrower situations including
their financial position and collateral values, and other factors and estimates
which are subject to change over time.
- --------------------------------------------------------------------------------
(1) MFB Corp. generally places mortgage loans on a nonaccrual status when
serious doubt exists as to their collectibility. At September 30, 1997,
there were no loans on nonaccrual.
(2) Total loans, including loans held for sale, less deferred net loan fees and
loans in process.
20
III. LOAN PORTFOLIO (Continued)
C. Risk Elements (Continued)
2. Potential Problem Loans
As of September 30, 1997, there are no loans where there
are serious doubts as to the ability of the borrower to
comply with present loan repayment terms, which may result
in disclosure of such loans pursuant to Item III.C.1.
Consideration was given to loans classified for regulatory
purposes as loss, doubtful, substandard, or special
mention that have not been disclosed in Section 1 above.
Management believes that these loans do not represent or
result from trends or uncertainties which management
reasonably expects will materially impact future operating
results, liquidity, or capital resources, or management
believes that these loans do not represent material
credits about which management is aware of any information
which causes management to have serious doubts as to the
ability of such borrowers to comply with the loan
repayment terms.
3. Foreign Outstandings
None
4. Loan Concentrations
MFB Corp. historically has concentrated its lending
activities on the origination of loans secured by first
mortgage liens for the purchase, construction or
refinancing of one- to four-family residential real
property. These loans continue to be the major focus of
MFB Corp.'s loan origination activities, representing
91.81% of MFB Corp.'s total loan portfolio, including
loans held for sale, at September 30, 1997.
D. Other Interest-Earning Assets
There are no other interest-earning assets as of September 30,
1997 which would be required to be disclosed under Item III. C.1 or 2 if such
assets were loans.
21
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The allowance for loan losses is maintained through the
provision for loan losses, which is charged to earnings. The
provision for loan losses is determined in conjunction with
management's review and evaluation of current economic
conditions (including those of MFB Corp.'s lending area),
changes in the characteristic and size of the loan portfolio,
loan delinquencies (current status as well as past and
anticipated trends) and adequacy of collateral securing loan
delinquencies, historical and estimated net charge-offs, and
other pertinent information derived from a review of the loan
portfolio. In management's opinion, MFB Corp.'s allowance for
loan losses is adequate to absorb anticipated future losses from
loans at September 30, 1997.
The following table analyzes changes in the consolidated
allowance for loan losses during the past five years ended September 30, 1997.
Years Ended September 30,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
Balance of allowance at
beginning of period $340 $310 $280 $250 $ 58
Add
Recoveries of loans
previously charged-
off--residential real
estate loans -- -- -- -- --
Less charge offs
Residential real estate
loans -- -- -- -- --
Commercial loans -- -- -- -- --
Consumer loans -- -- -- -- --
---- ---- ---- ---- ----
Net charge-offs -- -- -- -- --
Provisions for loan losses 30 30 30 30 192
---- ---- ---- ---- ----
Balance of allowance at
end of period $370 $340 $310 $280 $250
==== ==== ==== ==== ====
Net charge-offs to total
average loans out-
standing for period -% -% -% -% -%
Allowance at end of
period to total loans, net
at end of period (1) .18% .22% .26% .24% .23%
Allowance to total non-
performing loans at
end of period 141.76% 171.72% 100.65% 261.68% 112.11%
- --------------------------------------------------------------------------------
(1) Total loans, including loans held for sale, less deferred net loan fees and
loans in process.
22
IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued)
Allocation of Allowance for Loan Losses. The following table presents
an analysis of the allocation of MFB Corp.'s allowance for loan losses
at the dates indicated.
September 30,
--------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- ------------------- ------------------ ------------------ --------------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
to total to total to total to total to total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Balance at end of period
applicable to
Residential(1) $323 87.73% $311 92.87% $281 97.60% $251 97.25% $221 97.87%
Commercial loans 19 4.37 1 .57 1 .17 1 .38 1 .45
Multi-family 1 .06 1 .10 1 .15 1 .16 1 .57
Residential construction 1 4.08 1 3.23 1 1.72 1 1.89 1 .78
Consumer loans(2) 1 3.76 1 3.23 1 .36 1 .32 1 .33
Unallocated 25 -- 25 -- 25 -- 25 --
---- ------ ---- ------ ---- ------ ---- ------ ---- ------
Total $370 100.00% $340 100.00% $310 100.00% $280 100.00% $250 100.00%
==== ====== ==== ====== ==== ====== ==== ====== ==== ======
- --------------------------------------------------------------------------------
(1) Includes loans held for sale
(2) Includes home equity and second mortgage loans, financing leases, and other
loans including, education loans and loans secured by deposits.
23
V. DEPOSITS
The average amount of deposits and average rates paid are summarized as
follows for the years ended September 30:
1 9 9 7 1 9 9 6 1 9 9 5
----------------------- --------------------------- -----------------------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
Savings accounts $ 10,359 2.68% $ 9,746 2.77% $ 9,774 2.80%
Now and money market accounts 26,770 2.89 26,006 3.12 26,672 3.24
Certificates of deposit 126,202 5.65 113,570 5.68 106,556 5.30
Demand deposits (noninterest-bearing) 1,274 816 839
----------- ------- ---------
$ 164,605 $150,138 $ 143,841
=========== ======== =========
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at September 30, 1997 is summarized as follows:
Amount
(In thousands)
Three months or less $ 1,980
Over three months and through six months 3,649
Over six months and through twelve months 7,485
Over twelve months 11,778
------------
$ 24,892
============
24
VI. RETURN ON EQUITY AND ASSETS
The ratio of net income to average total assets and average
shareholders' equity and certain other ratios are as follows:
September 30,
----------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
Average total assets $237,050 $200,583 $183,869
======== ======== ========
Average shareholders' equity $ 33,274 $ 37,407 $ 38,029
======== ======== ========
Net income $ 2,002 $ 975 $ 1,236
======== ======== ========
Return on average total assets .84% .49% .67%
======== ======== ========
Return on average shareholders' equity 6.02% 2.61% 3.25%
======== ======== ========
Dividend payout ratio (dividends
declared per share divided by net
income per share) 27.59% 12.24% -%
======== ======== ========
Average shareholders' equity
to average total assets 14.04% 18.65% 20.68%
======== ======== ========
VII. SHORT-TERM BORROWINGS
The following table sets forth the maximum month-end balance and
average balance of FHLB advances and securities sold under agreements
to repurchase at the dates indicated.
Year Ended September 30,
------------------------------------
1997 1996 1995
------------------------------------
(Dollars in Thousands)
Maximum Balance:
FHLB advances......................................... $47,500 $29,500 ---
Securities sold under agreements to repurchase........ 389 --- ---
Average Balance:
FHLB advances:........................................ 34,960 9,625 ---
Securities sold under agreements to repurchase........ 97 --- ---
Average Rate Paid On:
FHLB advances......................................... 5.64% 5.50% ---
Securities sold under agreements to repurchase........ 4.25% --- ---
The following table sets forth the Bank's borrowings at the dates indicated:
Year Ended September 30,
----------------------------
1997 1996 1995
----------------------------
(Dollars in Thousands)
Amounts Outstanding
FHLB advances .................................... $47,500 $24,500 --
Securities sold under agreements to repurchase.... 389 -- --
Weighted Average Interest Rate
FHLB advances .................................... 5.66% 5.53% --
Securities sold under agreements to repurchase.... 4.25% -- --
25
COMPETITION
MFB Financial originates most of its loans to and accepts most of its
deposits from residents of St. Joseph and Elkhart counties in Indiana.
MFB Financial is subject to competition from various financial
institutions, including state and national banks, state and federal savings
associations, credit unions, certain non-banking consumer lenders, and other
companies or firms, including brokerage houses and mortgage brokers, that
provide similar services in St.. Joseph County with significantly larger
resources than MFB Financial. In total, there are 15 financial institutions
located in Mishawaka, Indiana, including MFB Financial. These financial
institutions consist of five commercial banks, three savings banks and seven
credit unions. MFB Financial must also compete with banks and savings
institutions in Elkhart and South Bend since media advertising from these cities
reaches the Mishawaka community. MFB Financial also competes with money market
funds with respect to deposit accounts and with insurance companies with respect
to individual retirement accounts.
Under current law, bank holding companies may acquire savings associations.
Savings associations may also acquire banks and other savings associations under
federal law and state law. To date, several bank holding company acquisitions of
healthy savings associations in Indiana have been completed. Continued
consolidation of financial institutions based in Indiana may also increase the
competition faced by the Company.
In addition, The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire
banks in other states and, with state consent and subject to certain
limitations, allows banks to acquire out-of-state branches either through merger
or de novo expansion. The State of Indiana passed a law establishing interstate
branching provisions for Indiana state-chartered banks consistent with those
established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana
Branching Law authorizes Indiana banks to branch interstate by merger or de novo
expansion and authorizes out-of-state banks meeting certain requirements to
branch into Indiana by merger de novo expansion. The Indiana Branching Law
became effective March 15, 1996 and provided that interstate mergers and de novo
branches are not permitted to out-of-state banks unless the laws of their home
states permit Indiana banks to merge or establish de novo branches on a
reciprocal basis. This new legislation may also result in increased competition
for the Holding Company and the Bank.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. MFB Financial competes for
loan originations primarily through the efficiency and quality of services it
provides borrowers, builders and Realtors and through interest rates and loan
fees it charges. Competition is affected by, among other things, the general
availability of lendable funds, general and local economic conditions, current
interest rate levels, and other factors that are not readily predictable.
26
REGULATION
General
The Bank is a federally chartered savings bank, the deposits of which are
federally insured and backed by the full faith and credit of the United States
Government. Accordingly, the Bank is subject to broad federal regulation and
oversight extending to all its operations. The Bank is a member of the FHLB of
Indianapolis and is subject to certain limited regulation by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board"). As the
savings and loan holding company of the Bank, the Company also is subject to
federal regulation and oversight. The purpose of the regulation of the Company
and other holding companies is to protect subsidiary savings associations. The
Bank is a member of the Savings Association Insurance Fund ("SAIF") which
together with the Bank Insurance Fund (the "BIF") are the two deposit insurance
funds administered by the FDIC, and the deposits of the Bank are insured by the
FDIC. As a result, the FDIC has certain regulatory and examination authority
over the Bank. Certain of these regulatory requirements and restrictions are
discussed below or elsewhere in this document.
The OTS has extensive authority over the operations of savings
associations. As part of this authority, the Bank is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. The last regular OTS examination of the Bank was as of June 10, 1996 .
When these examinations are conducted by the OTS, the examiners may require the
Company to provide for higher general or specific loan loss reserves. All
savings associations are subject to a semi-annual assessment, based upon the
savings association's total assets, to fund the operations of the OTS.
Currently, the assessment rates range from .0172761% of assets for associations
with assets of $67 million or less to .0045864% for associations with assets in
excess of $35 billion. The Bank's OTS assessment for the fiscal year ended
September 30, 1997, was approximately $66,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws and it is prohibited from engaging in any activities
not permitted by such laws. For instance, no savings institution may invest in
non-investment grade corporate debt securities. In addition, the permissable
level of investment by federal associations in loans secured by non-residential
real property may not exceed 400% of total capital, except with approval of the
OTS. The Bank is in compliance with the noted restrictions.
27
The Bank is also subject to federal and state regulation as to such matters
as loans to officers, directors, or principal shareholders, required reserves,
limitations as to the nature and amount of its loans and investments, regulatory
approval of any merger or consolidation, issuance or retirements of its own
securities, and limitations upon other aspects of banking operations. In
addition, the activities and operations of the Bank are subject to a number of
additional detailed, complex and sometimes overlapping federal and state laws
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and anti-trust
laws.
The United States Congress is considering legislation that would require all
federal savings associations, such as the Bank, to either convert to a national
bank or a state-chartered financial institution by a specified date to be
determined. In addition, under the legislation, the Holding Company likely would
not be regulated as a savings and loan holding company, but rather as a bank
holding company. The OTS would also be abolished and its functions transferred
among the other federal banking regulators. Certain aspects of the legislation
remain to be resolved and therefore no assurance can be given as to whether or
in what form the legislation will be enacted or its effect on the Holding
Company and the Bank.
Safety and Soundness Standards
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. In general the standards are designed to assist the
federal banking agencies in identifying and addressing problems at insured
institutions before capital becomes impaired. Any institution which fails to
comply with these standards must submit a compliance plan. Failure to submit a
plan or to comply with an approved plan will subject the institution to further
enforcement action.
Federal Home Loan Bank System
The Bank is a member of the FHLB system, which consists of 12 regional
banks. The federal Housing Finance Board ("FHFB"), an independent agency,
controls the FHLB System including the FHLB of Indianapolis. The FHLB System
provides a central credit facility primarily for member savings associations and
other member financial institutions. The Bank is required to hold shares of
capital stock in the FHLB of Indianapolis in an amount at least equal to the
greater of 1% of the aggregate principal amount of its unpaid residential
mortgage loans, home purchase contracts and similar obligations at the end of
each calendar year, .3% of its assets or 1/20 (or such greater fraction
established by the FHLB) of outstanding FHLB advances, commitments, lines of
credit and letters of credit. The Bank is currently in compliance with this
requirement. At September 30, 1997, the Bank's investment in stock of the FHLB
of Indianapolis was $2.4 million.
28
In past years, the Bank received substantial dividends on its FHLB stock.
All 12 FHLB's are required to provide funds for the resolution of troubled
savings associations and to establish affordable housing programs through direct
loans or interest subsidies on advances to members to be used for lending at
subsidized interest rates for low-and moderate-income, owner-occupied housing
projects, affordable rental housing, and certain other community projects. These
contributions and obligations could adversely affect the value of FHLB stock in
the future. A reduction in value of such stock may result in a corresponding
reduction in the Bank's capital.
The FHLB of Indianapolis serves as a reserve or central bank for member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHLB and the Board of Directors of the FHLB of Indianapolis.
All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. Eligible collateral includes first mortgage loans less
than 60 days delinquent or securities evidencing interests therein, securities
(including mortgage-backed securities) issued, insured or guaranteed by the
federal government or any agency thereof, FHLB deposits and, to a limited
extent, real estate with readily ascertainable value in which a perfected
security interest may be obtained. Other forms of collateral may be accepted as
over collateralization or, under certain circumstances, to renew outstanding
advances. All long-term advances are required to provide funds for residential
home financing and the FHLB has established standards of community service that
members must meet to maintain access to long-term advances.
Interest rates charged for advances vary depending upon maturity, the cost
of funds to the FHLB of Indianapolis and the purpose of the borrowing. Under
current law, savings associations which cease to be Qualified Thrift Lenders are
ineligible to receive advances from their FHLB.
Insurance of Deposits
The FDIC administers two separate insurance funds, which are not commingled:
one primarily for federally insured banks ("BIF") and one primarily for
federally insured savings associations ("SAIF"). As the federal insurer of
deposits of savings associations, the FDIC determines whether to grant insurance
to newly-chartered savings associations, has authority to prohibit unsafe or
unsound activities and has enforcement powers over savings associations (usually
in conjunction with the OTS or on its own if the OTS does not undertake
enforcement action).
Deposit accounts in the Bank are generally insured by the SAIF to a maximum
of $100,000 for each insured depositor. As a condition to such insurance, the
FDIC is authorized to issue regulations and, in conjunction with the OTS,
conduct examinations and generally supervise the operations of its insured
members. This supervision extends to a comprehensive regulatory scheme
governing, among other things, the form of deposit instruments issued by savings
associations, and certain aspects of their lending activities, including
appraisal requirements, private mortgage insurance coverage and lending
authority.
29
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well-capitalized (i.e. a core capital ratio of at least 5%, a ratio of Tier 1 or
core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least
6% and a risk-based capital ratio of at least 10%) pay the lowest premium while
institutions that are less than adequately capitalized (i.e. core or Tier 1
risk-based capital ratio of less than 4% or a risk-based capital ratio of less
than 8%) and considered of substantial supervisory concern pay the highest
premium. Risk classification of all insured institutions is made by the FDIC
semi-annually.
The FDIC is authorized to increase assessment rates, on a semiannual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
For the first six months of 1995, the assessment schedule for BIF members
and SAIF members ranged from .23% to .31% of deposits. As is the case with the
SAIF, the FDIC is authorized to adjust the insurance premium rates for banks
that are insured by the BIF of the FDIC in order to maintain the reserve ratio
of the BIF at 1.25% of BIF insured deposits. As a result of the BIF reaching its
statutory reserve ratio, the FDIC revised the premium schedule for BIF insured
institutions to provide a range of .04% to .31% of deposits. The revisions
became effective in the third quarter of 1995. In addition BIF rates were
further revised, effective January 1996, to provide a range of .0% to .27%. The
SAIF rates, however, were not adjusted. At the time the FDIC revised the BIF
premium schedule, it noted that, absent legislative action (as discussed below)
, the SAIF would not attain its designated reserve ratio until the year 2002. As
a result, SAIF insured members would continue to be generally subject to higher
deposit insurance premiums than BIF insured institutions until, all things being
equal, the SAIF attained its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September, 1996.
The legislation provided for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate was
established at .657% of assessable deposits by the FDIC and the resulting
assessment on the Bank of $955,000 was paid in November, 1996. This special
assessment significantly increased noninterest expense and adversely affected
the Company's results of operations for the year ended September 30, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations. " As a result of the special assessment, the Bank's annual deposit
insurance premium for the year ended September 30, 1997 was reduced to
approximately $147,000 based upon its current risk classification and the new
assessment schedule for SAIF insured institutions. These premiums are subject to
change in future periods.
30
Prior to the enactment of the legislation, a portion of the SAIF assessment
imposed on savings associations was used to repay obligations issued by a
federally chartered corporation to provide financing ("FICO") for resolving the
thrift crisis in the 1980's. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective, October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment will be limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999 or
when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as the Bank. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as
SAIF-member institutions. The rates established by the FDIC to implement this
requirement for all FDIC-insured institutions are a 6.3 basis point assessment
on SAIF deposits and a 1.26 basis points assessment on BIF deposits until BIF
insured institutions participate fully in the assessment.
Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common stockholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, purchased mortgage
servicing rights and purchased credit card relationships (subject to certain
limits), less nonqualifying intangibles. Under the tangible capital requirement,
a savings bank must maintain tangible capital (core capital less all intangible
assets except purchased mortgage servicing rights and purchased credit card
relationships which may be included subject to certain limits) of at least 1.5%
of total assets. Under the risk-based capital requirements, a minimum amount of
capital must be maintained by a savings bank to account for the relative risks
inherent in the type and amount of assets held by the savings bank. The
risk-based capital requirement requires a savings bank to maintain capital
(defined generally for these purposes as core capital plus general valuation
allowances and permanent or maturing capital instruments such as preferred stock
and subordinated debt less assets required to be deducted) equal to 8.0% of
risk-weighted assets. Assets are ranked as to risk in one of four categories
(0-100%) with a credit risk-free asset such as cash requiring no risk-based
capital and an asset with a significant credit risk such as a non-accrual loan
being assigned a factor of 100%. At September 30, 1997, based on the capital
standards then in effect, the Bank was in compliance with its fully phased-in
capital requirements.
31
The Comptroller of the Currency requires a minimum leverage ratio of 3% Tier
1 capital-to-total assets for the highest rated national banks, with an
additional requirement of 100 to 200 basis points for all other national banks.
Current law requires that the capital standards for savings associations be no
less stringent than those applicable to national banks. Accordingly, the OTS has
proposed revised capital regulations imposing a minimum core capital requirement
of 3% for the highest rated savings associations, with an additional requirement
of 100 to 200 basis points for all other savings associations. These regulations
have not become effective and there can be no assurance as to whether, or in
what form, such regulations will be adopted.
The OTS has delayed indefinitely implementation of a final rule which sets
forth the methodology for calculating an interest rate risk component to be
incorporated into the OTS regulatory capital rule. Under the new rule, only
savings associations with "above normal" interest rate risk (institutions whose
portfolio equity would decline in value by more than 2% of assets in the event
of a hypothetical 200-basis-point move in interest rates) will be required to
maintain additional capital for interest rate risk under the risk-based capital
framework. In addition, most institutions with less than $300 million in assets
and a risk-based capital ratio in excess of 12%, such as the Bank, are subject
to less stringent reporting requirements and are exempt from the new interest
rate component of the new rule. Although the OTS has decided to delay
implementation of this rule, it will continue to monitor the level of interest
rate risk at individual institutions and it retains the authority, on a
case-by-case basis, to impose additional capital requirements for individual
institutions with significant interest rate risk.
If an association is not in compliance with its capital requirements, the
OTS is required to prohibit asset growth and to impose a capital directive that
may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings bank that fails to meet its capital
requirements, which actions may include restrictions on operations and banking
activities, the imposition of a capital directive, a cease and desist order,
civil money penalties or harsher measures such as the appointment of a receiver
or conservator or a forced merger into another institution.
Prompt Corrective Action
Certain regulatory action is mandated or recommended for savings
associations that are deemed to be well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. At each successively lower capital category, an institution is
subject to more restrictive and numerous mandatory or discretionary regulatory
actions or limits, and the OTS has less flexibility in determining how to
resolve the problems of the institution. OTS regulations define these capital
levels as follows: (1) well-capitalized associations must have total risk-based
capital of at least 10%, core risk-based capital (consisting only of items that
qualify for inclusion in core capital) of at least 6% and a leverage ratio of at
least 5% and are not subject to any order or written directive of the OTS to
maintain a specific capital level for any capital measure; (2) adequately
capitalized associations are those that meet the regulatory minimum of total
risk-based capital of 8%, core risk-based capital of 4% and a leverage ratio of
4% (except for institutions receiving the highest examination rating, in which
case the requirement is 3%), but which are not well capitalized; (3)
undercapitalized associations are those that do not meet the requirements for
adequately capitalized associations, but that are not significantly
undercapitalized; (4) significantly undercapitalized associations have total
32
risk-based capital of less than 6%, core risk-based capital of less than 3% and
a leverage ratio of less than 3%; and (5) critically undercapitalized
associations are those with tangible capital of less than 2% of total assets. In
addition, the OTS can downgrade an association's designation notwithstanding its
capital level, based on less than satisfactory examination ratings in areas
other than capital or if the institution is deemed to be in an unsafe or unsound
condition. Each undercapitalized association must submit a capital restoration
plan to the OTS within 45 days after it becomes undercapitalized. Such
institution will be subject to increased monitoring and asset growth
restrictions and will be required to obtain prior approval for acquisitions,
branching and engaging in new lines of business. Significantly undercapitalized
institutions must restrict the payment of bonuses and raises to their senior
executive officers. Furthermore, a critically undercapitalized institution must
be placed in conservatorship or receivership within 90 days after reaching such
capitalization level, except under limited circumstances. It will also be
prohibited from making payments on any subordinated debt securities without the
prior approval of the FDIC and will be subject to significant additional
operating restrictions. The Bank's capital at September 30, 1997, meets the
standards for a well-capitalized association.
Federal law prohibits an insured institution from making a capital
distribution to anyone or paying management fees to any person having control of
the institution if, after such distribution or payment, the institution would be
undercapitalized. In addition, each company controlling an undercapitalized
institution must guarantee that the institution will comply with its capital
plan until the institution has been adequately capitalized on an average during
each of four consecutive calendar quarters and must provide adequate assurances
of performance. The aggregate liability pursuant to such guarantee is limited to
the lesser of (a) an amount equal to 5% of the institution's total assets at the
time the institution became undercapitalized, or (b) the amount which is
necessary to bring the institution into compliance with all capital standards
applicable to such institution at the time the institution fails to comply with
its capital restoration plan.
Capital Distributions Regulation
An OTS regulation imposes limitations upon all "capital distributions" by
savings associations, including cash dividends, payments by an institution to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system of regulation, with
the greatest flexibility being afforded to well-capitalized institutions. A
savings bank which has total capital (immediately prior to and after giving
effect to the capital distribution) that is a least equal to its fully phased-in
capital requirements would be a Tier 1 institution ("Tier 1 Institution"). An
institution that has total capital at least equal to its minimum capital
requirements, but less than its fully phased-in capital requirements, would be a
Tier 2 institution ("Tier 1 Institution"). An institution having total capital
that is less than its minimum capital requirements would be a Tier 3 institution
("Tier 3 Institution"). However, an institution which otherwise qualifies as a
Tier 1 institution may be designated by the OTS as a Tier 2 or Tier 3
institution if the OTS determines that the institution is "in need of more than
normal supervision." The Bank is currently a Tier 1 Institution.
33
A Tier 1 Institution could, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year up to the greater of
(a) 100% of its net income to date during the calendar year plus an amount that
would reduce by one-half its "surplus capital ratio" at the beginning of the
calendar year (the smallest excess over its capital requirements), or (b) 75% of
its net income over the most recent four-quarter period. Any additional amount
of capital distributions would require prior regulatory approval.
The OTS has proposed revisions to these regulations which would permit
savings associations to declare dividends in amounts which would assure that
they remain adequately capitalized following the dividend declaration. Savings
associations in a holding company system which are rated Camel 1 or 2 and which
are not in troubled condition would need to file a prior notice with the OTS
concerning such dividend declaration.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies.
The association's written real estate lending policies must be reviewed and
approved by the association's board of directors at least annually. Further,
each association is expected to monitor conditions in its real estate market to
ensure that its lending policies continue to be appropriate for current market
conditions.
Federal Reserve System
Under FRB regulations, the Bank is required to maintain reserves against
its transaction accounts (primarily checking and NOW accounts) and non-personal
money market deposit accounts. The effect of these reserve requirements is to
increase the Bank's cost of funds. The Bank is in compliance with its reserve
requirements.
34
A federal savings bank, like other depository institutions maintaining
reservable accounts, may borrow from the Federal Reserve Bank "discount window,"
but the FRB's regulations require the savings bank to exhaust other reasonable
alternative sources, including borrowing from its regional FHLB, before
borrowing from the Federal Reserve Bank. Certain limitations are imposed on the
ability of undercapitalized depository institutions to borrow from Federal
Reserve Banks.
Transactions with Affiliates
Transactions between savings associations and any affiliate are governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings bank
is any company or entity which controls, is controlled by or is under common
control with the savings bank. In a holding company context, the parent holding
company of a savings bank (such as MFB) and any companies controlled by such
parent holding company are affiliates of the savings bank. The subsidiaries of a
savings bank, however, are not deemed affiliates under Section 23A and 23B;
however, transactions between a subsidiary of a savings bank and any of the
affiliates of a savings bank are subject to the requirements and limitations of
Sections 23A and 23B.
Generally, Sections 23A and 23B (i) limit the extent to which the savings
bank or its subsidiaries may engage in "covered transactions" with any one
affiliate to an amount equal to 10% of such association's capital stock and
surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable, to the association or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar types of transactions.
In addition to the restrictions imposed by Sections 23A and 23B, no savings
bank may (i) loan or otherwise extend credit to an affiliate, except for any
affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes, or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings bank.
The restrictions contained in Section 22(h) of the Federal Reserve Act on
loans to executive officers, directors and principal shareholders also apply to
savings associations. Under Section 22(h), loans to an executive officer and to
a greater than 10% shareholder of a savings bank (18% in the case of
institutions located in an area with less than 30,000 in population), and
certain affiliated entities of either, may not exceed together with all other
outstanding loans to such person and affiliated entities the association's
loan-to-one-borrower limit (generally equal to 15% of the institution's
unimpaired capital and surplus and an additional 10% of such capital and surplus
for loans fully secured by certain readily marketable collateral). Section 22(h)
also prohibits certain loans, above amounts prescribed by the appropriate
federal banking agency, to directors, executive officers and greater than 10%
shareholders of a savings bank, and their respective affiliates, unless such
loan is approved in advance by a majority of the board of directors of the
association with any "interested" director not participating in the voting.
Currently, the FRB requires board of director approval for certain loans to
directors, officers, and 10% shareholders (including all other outstanding loans
to such persons) above the greater of $25,000 or 5% of capital and surplus (up
to $500,000). Further, the FRB requires that loans to directors, executive
officers and principal shareholders be made on terms substantially the same as
offered in comparable transactions to other unaffiliated parties. Section 22(g)
of the Federal Reserve Act, which imposes limitations on loans made to executive
officers, also applies to savings associations.
35
Holding Company Regulation
MFB is regulated as a "non-diversified unitary savings and loan holding
company" within the meaning of the Home Owners' Loan Act, as amended ("HOLA"),
and subject to regulatory oversight of the Director of the OTS. As such, MFB is
registered with the OTS and thereby subject to OTS regulations, examinations,
supervision and reporting requirements. As a subsidiary of a savings and loan
holding company, the Bank is subject to certain restrictions in its dealings
with MFB and with other companies affiliated with MFB.
HOLA generally prohibits a savings and loan holding company from (i)
acquiring control of any other savings bank or savings and loan holding company
or controlling the assets thereof without prior approval of the Director of the
OTS, or from (ii) acquiring or retaining more than 5 percent of the voting
shares of a savings bank or holding company thereof which is not a subsidiary.
Additionally, under certain circumstances a savings and loan holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15
percent of previously unissued voting shares of an under-capitalized savings
bank for cash without that savings bank being deemed controlled by the holding
company. Except with the prior approval of the Director of the OTS, no director
or officer of a savings and loan holding company or person owning or controlling
by proxy or otherwise more than 25% of such company's stock, may also acquire
control of any savings institution, other than a subsidiary institution, or any
other savings and loan holding company.
MFB's Board of Directors presently intends to operate MFB as a unitary
savings and loan holding company. There are generally no restrictions on the
permissible business activities of a unitary savings and loan holding company.
However, if the Director of OTS determines that there is reasonable cause to
believe that the continuation by a savings and loan holding company of an
activity constitutes a serious risk to the financial safety, soundness, or
stability of its subsidiary savings bank, the Director of the OTS may impose
such restrictions as deemed necessary to address such risk and limiting (i)
payment of dividends by the savings bank, (ii) transactions between the savings
bank and its affiliates, and (iii) any activities of the savings bank that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings bank.
Notwithstanding the above rules as to permissible business activities of
unitary savings and loan holding companies, if the savings bank subsidiary of
such a holding company fails to meet the Qualified Thrift Lender ("QTL") test,
then such unitary holding company would become subject to the activities
restrictions applicable to multiple holding companies. (Additional restrictions
on securing advances from the FHLB also apply). See "--Qualified Thrift Lender."
At September 30, 1997, the Bank's asset composition was in excess of that
required to qualify the Bank as a Qualified Thrift Lender.
36
If MFB were to acquire control of another savings institution other than
through a merger or other business combination with the Bank, MFB would
thereupon become a multiple savings and loan holding company. Except where such
acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings bank meets the QTL test, the
activities of MFB and any of its subsidiaries (other than the Bank or other
subsidiary savings associations) would thereafter be subject to further
restrictions. HOLA provides that, among other things, no multiple savings and
loan holding company or subsidiary thereof which is not a savings bank shall
commence or continue for a limited period of time after becoming a multiple
savings and loan holding company or subsidiary thereof, any business activity
other than (i) furnishing or performing management services for a subsidiary
savings bank, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings institution, (iv) holding or managing properties used or occupied by a
subsidiary savings institution, (v) acting as trustee under deeds of trust, (vi)
those activities previously directly authorized by the FSLIC by regulation as of
March 5, 1987, to be engaged in by multiple holding companies or (vii) those
activities authorized by the FRB as permissible for bank holding companies,
unless the Director of the OTS by regulation prohibits or limits such activities
for savings and loan holding companies. Those activities described in (vii)
above must also be approved by the Director of the OTS prior to being engaged in
by a multiple holding company.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings bank which operated a home or branch office
in the state of the association to be acquired as of March 5, 1987, or if the
laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state-chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
Indiana law permits acquisitions of certain federal and state SAIF-insured
savings banks and their holding companies ("Savings Banks") located in Indiana,
Ohio, Kentucky, Illinois, and Michigan (the "Region") by other savings banks
located in the Region. Savings Banks with their principal place of business in
one of the states in the Region (other than Indiana) may acquire Savings Banks
with their principal place of business in Indiana if, subject to certain other
conditions, the state of the acquiring Savings Bank has reciprocal legislation
permitting the acquisition of savings banks and their holding companies in that
state by Indiana Savings Banks. Each of the states in the Region has, at least
to a certain degree, reciprocal legislation. The Indiana statute also authorizes
Indiana Savings Banks to acquire other Savings Banks in the Region. Following
the acquisition, an acquired Indiana Savings Bank and any other Indiana Savings
Bank subsidiary owned by the acquirer must hold no more than 15% of the total
Savings Bank deposits in Indiana.
37
No subsidiary savings bank of a savings and loan holding company may
declare or pay a dividend on its permanent or nonwithdrawable stock unless it
first gives the Director of the OTS 30 days advance notice of such declaration
and payment. Any dividend declared during such period or without the giving of
such notice shall be invalid.
Branching
The OTS has adopted regulations which permit nationwide branching to the
extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in Section 7701(a)(19) of the Internal Revenue
Code of 1986, as amended (the "Code") or the asset composition test of Section
7701(c) of the Code. Branching that would result in the formation of a multiple
savings and loan holding company controlling savings associations in more than
one state is permitted if the law of the state in which the savings bank to be
acquired is located specifically authorizes acquisition of its state-chartered
associations by state-chartered associations or their holding companies in the
state where the acquiring association or holding company is located.
Federal Securities Law
The shares of Common Stock of MFB are registered with the SEC under the
1934 Act. MFB is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the 1934 Act and the rules of the SEC
thereunder.
If MFB has fewer than 300 shareholders, it may deregister its shares under
the 1934 Act and cease to be subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of MFB may not be
resold without registration or unless sold in accordance with the resale
restrictions of Rule 144 under the 1933 Act. If MFB meets the current public
information requirements under Rule 144, each affiliate of MFB who complies with
the other conditions of Rule 144 (including the two-year holding period and
those that require the affiliate's sale to be aggregated with those of certain
other persons) would be able to sell in the public market, without registration,
a number of shares not to exceed, in any three-month period, the greater of (i)
1% of the outstanding shares of MFB or (ii) the average weekly volume of trading
in such shares during the preceding four calendar weeks.
38
Qualified Thrift Lender
Under current OTS regulations, the QTL test requires that a savings bank
have at least 65 % of its portfolio assets invested in "qualified thrift
investments" on a monthly average basis in 9 out of every 12 months. Qualified
thrift investments under the QTL test consist primarily of housing related loans
and investments. Portfolio assets under the QTL test include all of an
association's assets less (i) goodwill and other intangibles, (ii) the value of
property used by the association to conduct its business, and (iii) its liquid
assets as required to be maintained under law up to 20% of total assets.
A savings bank which fails to meet the QTL test must either convert to a
bank (but its deposit insurance assessments and payments will be those of and
paid to SAIF) or be subject to the following penalties: (i) it may not enter
into any new activity except for those permissible for a national bank and for a
savings bank; (ii) its branching activities shall be limited to those of a
national bank; (iii) it shall not be eligible for any new FHLB advances; and
(iv) it shall be bound by regulations applicable to national banks respecting
payment of dividends. Three years after failing the QTL test the association
must (i) dispose of any investment or activity not permissible for a national
bank and a savings bank and (ii) repay all outstanding FHLB advances. If such a
savings bank is controlled by a savings and loan holding company, then such
holding company must, within a prescribed time period, become registered as a
bank holding company and become subject to all rules and regulations applicable
to bank holding companies (including restrictions as to the scope of permissible
business activities).
A savings bank failing to meet the QTL test may re-qualify as a QTL if it
thereafter meets the QTL test. In the event of such re-qualification it shall
not be subject to the penalties described above. A savings bank which
subsequently again fails to qualify under the QTL test shall become subject to
all of the described penalties without application of any waiting period.
At September 30, 1997, 88.71% of the Bank's portfolio assets (as defined on
that date) were invested in qualified thrift investment (as defined on that
date), and therefore the Bank's asset composition was in excess of that required
to qualify the Bank as a QTL. Also, the Bank does not expect to significantly
change its lending or investment activities in the near future, and therefore
expects to continue to qualify as a QTL, although there can be no such
assurance.
Community Reinvestment Act Matters
Under current law, ratings of depository institutions under the Community
Reinvestment Act of 1977 ("CRA") must be disclosed. The disclosure includes both
a four-unit descriptive rating--using terms such as satisfactory and
unsatisfactory--and a written evaluation of each institution's performance. Each
FHLB is required to establish standards of community investment or service that
its members must maintain for continued access to long-term advances from the
FHLBs. The standards take into account a member's performance under the
Community Reinvestment Act and its record of lending to first-time home buyers.
The FHLBs have established an "Affordable Housing Program" to subsidize the
interest rate of advances to member associations engaged in lending for
long-term, low-and moderate-income, owner-occupied and affordable rental housing
at subsidized rates. The Bank is participating in this program. The examiners
have determined that the Bank has a satisfactory record of meeting community
credit needs governing the classification of assets of insured institutions
consistent with the requirements.
39
TAXATION
Federal Taxation
Historically, savings associations, such as the Bank, have been permitted
to compute bad debt deductions using either the bank experience method or the
percentage of taxable income method.
However, in future years, only the specified experience formula method will be
allowed as, in August, 1996, legislation was enacted that repealed the reserve
method of accounting for federal income tax purposes. As a result, the Bank must
recapture that portion of the reserve that exceeds the amount that could have
been taken under the experience method for post-1987 tax years. The recapture
will occur over a six-year period, the commencement of which will be delayed
until the first taxable year beginning after December 31, 1997, provided the
institution meets certain residential lending requirements. In addition, the
pre-1988 reserve, for which no deferred taxes have been recorded, will not have
to be recaptured into income unless (i) the Bank no longer qualifies as a bank
under the Code, or (ii) excess dividends or distributions are paid out by the
Bank. The total amount of bad debt to be recaptured is approximately $1,310,000.
Depending on the composition of its items of income and expense, a savings
bank may be subject to the alternative minimum tax. A savings bank must pay an
alternative minimum tax equal to the amount (if any) by which 20% of alternative
minimum taxable income ("AMTI"), as reduced by an exemption varying with AMTI,
exceeds the regular tax due. AMTI equals regular taxable income increased or
decreased by certain tax preferences and adjustments, including depreciation
deductions in excess of that allowable for alternative minimum tax purposes,
tax-exempt interest on most private activity bonds issued after August 7, 1986
(reduced by any related interest expense disallowed for regular tax purposes),
the amount of the bad debt reserve deduction claimed in excess of the deduction
based on the experience method and 75% of the excess of adjusted current
earnings over AMTI (before this adjustment and before any alternative tax net
operating loss). AMTI may be reduced only up to 90% by net operating loss
carryovers, but alternative minimum tax paid can be credited against regular tax
due in later years.
For federal income tax purposes, MFB reports its income and expenses on the
accrual method of accounting. MFB, the Bank and Mishawaka Financial file a
consolidated federal income tax return for each fiscal year ending September 30.
The federal income tax returns filed by MFB (or previously by the Bank) have not
been audited in the last five years.
40
The consolidated federal income tax return filed by MFB has the effect of
eliminating intercompany distributions, including dividends, in the computation
of consolidated taxable income. Income of MFB generally would not be taken into
account in determining the bad debt deduction allowed to the Bank, regardless of
whether a consolidated tax return is filed. However, certain "functionally
related" losses of MFB would be required to be taken into account in determining
the permitted bad debt deduction, which, depending upon the particular
circumstances, could reduce the bad debt deduction.
State Taxation
The Bank is subject to Indiana's new Financial Institutions Tax ("FIT"),
which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted
gross income," for purposes of FIT, begins with taxable income as defined by
Section 63 of the Code and, thus, incorporates federal tax law to the extent
that it affects the computation of taxable income. Federal taxable income is
then adjusted by several Indiana modifications. Other applicable state taxes
include generally applicable sales and use taxes plus real and personal property
taxes.
MFB's state income tax returns have not been audited in the last five
years.
41
Item 2. Properties.
At September 30, 1997, MFB Financial conducted its business from its main
office at 121 South Church Street, Mishawaka, Indiana 46544, four full service
branch offices and an additional loan origination office The main office and
three branch offices in Mishawaka and South Bend are owned by MFB Financial,
while the loan origination office in Elkhart and the Goshen branch office are
leased.
The following table provides certain information with respect to MFB
Financial's offices as of September 30, 1997:
Year Approximate
Description and Address Opened Square Footage
Main Office
121 S. Church Street
Mishawaka, IN 46544 1961 13,738
Branch Office
411 W. McKinley Ave.
Mishawaka, IN 46545 1975 4,800
Branch Office
402 W. Cleveland Rd.
Mishawaka, IN 46545 1977 2,540
Branch Office
2427 Mishawaka Ave.
South Bend, IN 46615 1978 2,600
Loan Origination Office
227 S. Main St.
Suite 110
Elkhart, In. 46516 1996 600
Branch Office
Wal*Mart Super Store
2304 Lincolnway East
Goshen, In. 46526 1997 500
MFB Financial operates three automatic teller machines (ATMs), one at its
McKinley branch, one at its Cleveland Road branch and the other at the Goshen
branch. MFB Financial's ATMs participate in the nationwide CIRRUS ATM network.
MFB Financial owns computer and data processing equipment which is used for
transaction processing and accounting.
42
MFB Financial also has contracted for the date processing and reporting
services of BISYS, Inc. in Houston, Texas. The cost of these data processing
services is approximately $24,000 per month.
Item 3. Legal Proceedings.
The Bank is involved in various legal actions arising in the normal course
of its business. In the opinion of management, the resolutions of these legal
actions are in the aggregate not expected to have a material adverse effect on
the Company's results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of MFB's shareholders during the quarter
ended September 30, 1997.
Item 4.5. Executive Officers of MFB.
Presented below is certain information regarding the executive officers of
MFB and MFB Financial:
Name Position
------------------------ ----------------------------------------------
Charles J. Viater President and Chief Executive Officer of MFB
and MFB Financial
M. Gilbert Eberhart Secretary of MFB and MFB Financial
Steven F. Rathka Senior Vice President of MFB Financial
William L. Stockton, Jr. Senior Vice President of MFB Financial
Timothy C. Boenne Vice President and Controller of MFB Financial
Michael J. Portolese Vice President of MFB Financial
Charles J. Viater (age 43) has served as President and Chief Executive
Officer of MFB Financial since September 1, 1995. Previously, he served as Chief
Financial Officer of Amity Bancshares and Executive Vice President of Amity
Federal Savings in Tinley Park, Illinois.
M. Gilbert Eberhart (age 63) has served as Secretary of MFB Financial since
1987 and of MFB since its organization. He is also a dentist based in Mishawaka.
43
Steven F. Rathka (age 55) has been in the banking business since 1964. He
joined MFB Financial in February, 1997, as Senior Vice President in charge of
commercial lending.
William L. Stockton, Jr. (age 50) serves as Senior Vice President of MFB
Financial and has been in charge of residential lending operations at MFB
Financial since 1992.
Timothy C. Boenne (age 51) has served as Vice President and Controller of
MFB Financial since 1992. Until 1992, he also served as Branch Manager for MFB
Financial's McKinley Branch.
Michael J. Portolese (age 46) has served as Vice President of MFB
Financial since 1977. He also serves as MFB Financial's Retail Banking
Administrator, Security Director and Compliance Coordinator.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Bank converted from a federally-chartered mutual savings and loan
association to a federally-chartered stock savings bank effective March 24, 1994
(the "Conversion") and simultaneously formed a savings and loan holding company,
MFB. MFB's common stock, without par value ("Common Stock"), is quoted on the
National Association of Security Dealers Automated Quotation System ("NASDAQ"),
National Market System, under the symbol "MFBC." The following table sets forth
the high and low bid prices as reported by NASDAQ, and dividends paid per share
for Common Stock for the quarters indicated. Such over-the-counter quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not necessarily represent actual transactions.
Quarter Dividends
Ended High Trade Low Trade Declared
- ------------------- ---------- --------- -----------
December 31, 1995 $16.25 $14.75 None
March 31, 1996 15.25 13.75 None
June 30, 1996 14.75 13.75 None
September 30, 1996 19.00 13.75 $ .06/share
December 31, 1996 19.25 15.50 $ .08/share
March 31, 1997 19.75 16.63 $ .08/share
June 30, 1997 19.75 18.75 $ .08/share
September 30, 1997 23.50 19.13 $ .08/share
As of September 30, 1997, there were approximately 667 shareholders of
record of MFB's Common Stock.
44
Since MFB has no independent operations or other subsidiaries to generate
income, its ability to accumulate earnings for the payment of cash dividends to
its shareholders is directly dependent upon the earnings on its investment
securities and ability of the Bank to pay dividends to MFB.
Under OTS regulations, a converted savings bank may not declare or pay a
cash dividend if the effect would be to reduce net worth below the amount
required for the liquidation account created at the time it converted. In
addition, under OTS regulations, the extent to which a savings bank may make a
"capital distribution," which includes, among other things, cash dividends, will
depend upon which one of three categories, based upon levels of capital, that a
savings bank is classified. The Bank is now and expects to continue to be a
"tier one institution" and therefore would be able to pay cash dividends to MFB
during any calendar year up to 100% of its net income during that calendar year
plus the amount that would reduce by one-half its "surplus capital ratio" (the
excess over its fully phased-end capital requirements) at the beginning of the
calendar year. Prior notice of any dividend to be paid by the Bank will have to
be given to the OTS.
Under current federal income tax law, dividend distributions with respect
to the Common Stock, to the extent that such dividends paid are from the current
or accumulated earnings and profits of the Bank (as calculated for federal
income tax purposes), will be taxable as ordinary income to the recipient and
will not be deductible by the Bank. Any dividend distributions in excess of
current or accumulated earnings and profits will be treated for federal income
tax purposes as a distribution from the Bank's accumulated bad debt reserves,
which could result in increased federal income tax liability for the Bank.
Unlike the Bank, generally there is no restriction on the payment of
dividends by MFB, subject to the determination of the director of the OTS that
there is reasonable cause to believe that the payment of dividends constitutes a
serious risk to the financial safety, soundness or stability of the Bank.
Indiana law, however, would prohibit MFB from paying a dividend if, after giving
effect to the payment of that dividend, MFB would not be able to pay its debts
as they become due in the ordinary course of business, or if MFB's total assets
would be less than the sum of its total liabilities plus preferential rights of
holders of preferred stock, if any.
On October 1, 1996, the Board of Directors of the Holding Company
declared a dividend of one common share purchase right (a "Right" or "Rights")
for each outstanding share of Common Stock. The dividend was paid to
shareholders of record as of October 21, 1996. If and when the Rights become
exercisable, each Right will entitle the registered holder to purchase from the
Holding Company one share of Common Stock at a purchase price of $46.00 (the
"Purchase Price"), subject to adjustment as described in the Rights Agreement
between the Holding Company and Registrar and Transfer Company (the "Rights
Agreement") which specifies the terms of the Rights. The Rights will be
represented by the outstanding Common Stock certificates and the Rights cannot
be bought, sold or otherwise traded separately from the Common Stock until the
"Distribution Date," which is the earliest to occur of (i) 10 calendar days
following a public announcement that a person or group (an "Acquiring Person")
has (a) acquired beneficial ownership of 12% or more of the outstanding Common
Stock or (b) become the beneficial owner of an amount of the outstanding Common
Stock (but not less than 10%) which the Board of Directors determines to be
substantial and which ownership the Board of Directors determines is intended or
may be reasonably anticipated, in general, to cause the Holding Company to take
actions determined by the Board of Directors to be not in the Holding Company's
best long-term interests (an "Adverse Person"), or (ii) 10 business days
following the commencement or announcement of an intention to make a tender
offer or exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 30% or more of such outstanding Common Stock.
45
The Rights have certain anti-takeover effects. The Rights may cause
substantial dilution to a person or group that attempts to acquire the Holding
Company or over 15% of the outstanding shares of the Company on terms not
approved by the Board of Directors or the Holding Company, except pursuant to an
offer conditioned on a substantial number of Rights being acquired. The Rights
should not interfere with any merger or other business combination approved by
the Board of Directors since the Rights may be redeemed by the Holding Company
at $.01 per Right prior to the time that a person or group has acquired
beneficial ownership of 12% or more of the Common Shares.
Item 6. Selected Financial Data.
The information required by this item is incorporated by reference to the
material under the heading "Selected Consolidated Financial Data of MFB Corp.
and Subsidiary" on page 2 of MFB's Annual Report to Shareholders for its fiscal
year ended September 30, 1997 (the "Annual Report").
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
of Operations.
The information required by this item is incorporated by reference to pages
3 through 14 of the Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
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
sheets 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 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.
46
Presented below, as of September 30, 1997, 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 conjunction with NPV
measures to identify excessive interest rate risk.
At September 30, 1997
(Dollars in thousands)
Change in
Interest Rates
(Basis Points) $ Change % Change
+ 400 bp $ (20,637) (54)%
+ 300 bp (15,081) (40)
+ 200 bp (9,528) (25)
+ 100 bp (4,321) (11)
0 bp - -
- 100 bp 2,638 7
- 200 bp 3,971 10
- 300 bp 5,424 14
- 400 bp 7,454 20
Item 8. Financial Statements and Supplementary Data.
MFB's Consolidated Financial Statements and Notes thereto contained on
pages 15 through 45 of the Annual Report are incorporated by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is
incorporated by reference to pages 2 through 4 of MFB's Proxy Statement for its
1998 Annual Shareholder Meeting (the "Proxy Statement"). Information concerning
MFB's executive officers is included in Item 4.5 in Part 1 of this report.
Information concerning compliance by such persons with Section 16(a) of the 1934
Act is incorporated by reference to page 11 of the Proxy Statement.
47
Item 11. Executive Compensation
The information required by this item with respect to executive
compensation is incorporated by reference to pages 5 through 6 of the Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to pages
1 through 3 of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to page
6 of the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following financial statements are incorporated by reference as part of
this report:
Pages in the
Annual Report
to Shareholders
Financial Statements
Report of Independent Auditors 15
Consolidated Balance Sheets at September 30, 1997 and 1996 17
Consolidated Statements of Income for the years ended 18
September 30, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity 19
for the years ended September 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended 20
September 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements 22
48
(b) MFB filed five Form 8-K reports during the year ended September 30, 1997.
Date of report: June 16, 1997
Item reported : News release dated June 16, 1997 regarding the
announcement of its third quarter earnings and declaration
of an $ .08 per share cash dividend, payable on August 12,
1997 to shareholders of record on July 29, 1997.
Date of report: April 18, 1997
Item reported : News release dated April 18, 1997 regarding second quarter
earnings and the declaration of a $ .08 per share cash
dividend payable on May 13, 1997 to holders of record on
April 29, 1997.
Date of report: January 17, 1997
Item reported : News release dated January 17, 1997 regarding the
announcement of first quarter earnings.
Date of report: October 15, 1996
Item reported : News release dated October 15, 1996, announcing fourth
quarter earnings and dividend declaration.
Date of report: October 8, 1996
Item reported: The Corporation's 5% stock repurchase program, adoption of
a shareholders rights plan and SAIF assessment.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on page 51.
(d) All schedules are omitted as the required information either is not
applicable or is included in the consolidated Financial Statements or
related notes.
49
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant had duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
MFB CORP.
Date: December 23, 1997 By: /s/ Charles J. Viater
---------------------------------
Charles J. Viater, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 23rd day of December,
1997.
/s/ Charles J. Viater /s/ M. Gilbert Eberhart
- -------------------------- --------------------------
Charles J. Viater M. Gilbert Eberhart, Director
President, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ Thomas F. Hums
--------------------------
Thomas F. Hums, Director
/s/ Timothy C. Boenne /s/ Jonathan E. Kintner
- -------------------------- --------------------------
Timothy C. Boenne Jonathan E. Kintner, Director
Vice President and Controller
(Principal Financial and Accounting
Officer)
/s/ Michael J. Marien
--------------------------
Michael J. Marien, Director
/s/ Marian K. Torian
--------------------------
Marian K. Torian,
Chairman of the Board
/s/ Reginald H. Wagle
--------------------------
Reginald H. Wagle, Director
50
EXHIBIT LIST
Exhibit
Index
Page
3(1) The Articles of Incorporation of the Registrant is incorporated by
Reference to Exhibit 3(1) to the Registration Statement on Form S-1
(Registration No. 33-73098).
3(2) The Code of By-Laws of Registration is incorporated by reference to
Item 7-Exhibit 3 of the October 15, 1995 Securities and Exchange
Commission Form 8-K Report.
10(1) MFB Corp. Stock Option Plan is incorporated by reference to Exhibit A
to the Registrant's definitive Proxy Statement in respect of its 1996
Annual Shareholder Meeting.*
10(2) Mishawaka Federal Savings Recognition and Retention Plans and Trusts
are incorporated by reference to Exhibit B to the Registrant's
definitive Proxy Statement in respect of its 1996 Annual Shareholder
Meeting.*
10(3) Employment Agreement between Mishawaka Federal Savings and
Charles J. Viater is attached hereto.
10(4) Employment Agreement between Mishawaka Federal Savings and Timothy C.
Boenne is incorporated by reference to Exhibit 10(8) to the
Registration on Form S-1 (Registration No. 33-73098).*
10(5) Employment Agreement between Mishawaka Federal Savings and Michael J.
Portolese is incorporated by reference to Exhibit 10(10) to the
Registration Statement on Form S-1 (Registration No. 33-73098).*
10(6) Employment Agreement between Mishawaka Federal Savings and William L.
Stockton, Jr. is incorporated by reference to Exhibit 10(11) to the
Registration Statement on Form S-1 (Registration No. 33-73098).*
10(7) MFB Corp. 1997 Stock Option Plan is incorporated by reference to
Exhibit A to the Registrant's definitive Proxy Statement in respect of
its January, 1998 Annual Shareholder Meeting.*
11 Statement regarding computation of earnings per share (**)
13 Shareholder Annual Report, incorporated by reference.
51
Page
21 Subsidiaries of the Registrant is incorporated by reference to Exhibit
22 to the Registration Statement on Form S-1 (Registration No.
33-73098).
23 Consent of Crowe, Chizek and Company LLP.
27 Financial Data Schedule
* Management contracts and plans required to be filed as exhibits are
included as Exhibits 10(1)-10(6).
** See Note 1 of Notes to Consolidated Financial Statements, incorporated by
reference. Shareholder Annual Report, included as Exhibit 13.
52