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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, 1996
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 (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 ammendment to this Form 10-K. X__
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of December 2, 1996, was $23,906,370.00.
The number of shares of the registrant's common stock, without par value,
outstanding as of December 2, 1996, was 1,781,517 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Annual Report to Shareholders for the fiscal year ended
September 30, 1996 are incorporated by reference into Part II.
Portions of the Proxy Statement for the 1997 Annual Meeting of the Shareholders
are incorporated into Part I and Part III.
Exhibit Index on Page 47
Page one of 99 Pages
MFB CORP.
Form 10-K
INDEX
PART I
Item 1. Business .............................................. 1
Item 2. Properties ............................................ 40
Item 3. Legal Proceedings ..................................... 41
Item 4. Submission of Matters to a Vote of Security Holders ... 41
Item 4.5 Executive Officers of MFB.............................. 41
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .......................... 42
Item 6. Selected Financial Data ............................... 43
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......... 43
Item 8. Financial Statements and Supplementary Data ........... 43
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........ 43
PART III
Item 10. Directors and Executive Officers of the Registrant..... 44
Item 11. Executive Compensation................................. 44
Item 12. Security Ownership of Certain Beneficial Owners
and Management.............................. 44
Item 13. Certain Relationships and Related Transactions......... 44
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................. 44
Signatures ............................................. 46
Item 15. Exhibit List .......................................... 47
PART 1
Item 1. Business.
General
MFB Corp. ("MFB") 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 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. On November
1, 1996, Mishawaka Federal Savings officially changed its name to MFB Financial.
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) loans secured by deposits; (v)
NOW accounts; (vi) passbook savings accounts; (vii) certificates of deposit;
(viii) consumer and commercial demand deposit accounts; (ix) individual
retirement accounts; and (x) a variety of insurance products through its service
corporation subsidiary, Mishawaka Financial Services, Inc. MFB Financial
provides these full services through its four offices, three in Mishawaka and
one in South Bend, Indiana and 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, 1996, $143.8 million, or 92.9%
of the Company's total loan portfolio, consisted of mortgage loans on one-to
four-family residential real property which are generally secured by first
mortgages on the property. MFB Financial also makes a limited number of
residential construction loans. 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 a limited number of consumer loans, commercial
real estate loans and multi-family mortgage loans. Consumer loans include loans
secured by deposits and home equity and second mortgage loans.
In the early 1980's, most savings association's loan portfolios consisted
of long-term, fixed-rate loans which carried low interest rates. At the same
time, most savings associations had to pay high interest rates on deposits in
order to be competitive and retain deposits. The mismatch between the low fixed
rates on long-term mortgage loans and the high interest rates on short-term
deposits had an adverse effect on these savings associations' business. 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.
1
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. Over the past year, a successful home equity line of credit program
was added as well as a new commercial loan program which is expected to enhance
loan yields. 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 vast 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, five
and 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 90% 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 1% above the normal
residential mortgage rates. A construction
2
loan fee is also charged for these loans. MFB Financial normally requires a 75%
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.
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 ARMs 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 are being taken to
upgrade the loan origination system to allow new loans to more closely conform
to secondary market documentation standards. This upgrade is expected to be
completed in 1997.
MFB Financial confines its loan origination activities primarily in St.
Joseph County and the surrounding area. A new 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
3
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 or an abstract 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
managements 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
Mortgage 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 the 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, 1996, $198,000 or .09% 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, 1996, 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.
4
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 it 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, 1996.
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'
5
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 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 monthly 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 5%. Also,
a savings association currently must maintain short-term liquid assets
constituting at least 1% of its average daily balance of net withdrawable
deposit accounts and current borrowings. Monetary penalties may be imposed for
failure to meet these liquidity requirements. As of September 30, 1996, the
Company had liquid assets of $69.0 million and a regulatory liquidity ratio of
26.3%, of which 5.3% constituted short-term investments.
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, during the year ended
September 30, 1996, the Bank instituted a capital leveraging strategy that
involved the purchase of earning assets funded primarily with FHLB borrowings.
The success of this strategy contributed to net earnings and helped improve the
overall return on equity during the year.
Deposits. Deposits are attracted, principally from within St. Joseph
County, 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 St. Joseph
County. Substantially all of MFB Financial's depositors are residents of that
county. 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.
6
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. 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, 1996, MFB Financial had $ 24.5 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.
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. During fiscal year
1996, Mishawaka Financial received approximately $113,000 in commissions versus
approximately $116,000 in commissions received during fiscal year 1995. Since
Mishawaka Financial conducts all of its activities as agent for its customers,
MFB
7
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, 1996, MFB Financial employed 52 persons on a full-time
basis and 18 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.
8
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:
1996 1995 1994
Average Average Average
Outstanding Outstanding Outstanding
Balance Balance Balance
------- ------- -------
Assets: (In thousands)
Interest-earning assets:
Interest-bearing deposits $ 6,709 $ 7,995 $ 24,117
Securities (1) 35,392 39,841 27,093
Mortgage-backed securities (1) 19,717 12,558 10,698
Loans receivable (2) 133,670 118,735 110,540
Stock in FHLB of Indianapolis 1,303 1,223 1,149
------------- ------------ ------------
Total interest-earning assets 196,791 180,352 173,597
Non-interest earning assets, net
of allowance for loan losses 3,792 3,517 3,546
------------- ------------ ------------
Total assets $ 200,583 $ 183,869 $ 177,143
============= ============ ============
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts $ 9,746 $ 9,774 $ 9,646
NOW and money market accounts 26,006 26,672 30,662
Certificates of deposit 113,570 106,556 107,294
FHLB borrowings 9,625 - -
------------- ------------ ------------
Total interest-bearing liabilities 158,947 143,002 147,602
Other liabilities 4,229 2,838 2,200
------------- ------------ ------------
Total liabilities 163,176 145,840 149,802
Shareholders' equity
Common stock 19,064 20,527 10,524
Retained earnings 19,718 19,117 17,802
Less common stock acquired by:
Employee stock ownership plan (1,007) (1,208) (675)
Recognition and retention plans (235) (407) (310)
Unrealized gain (loss) on securities
available for sale (133) - -
------------- ------------ ------------
Total shareholders' equity 37,407 38,029 27,341
------------- ------------ ------------
Total liabilities and shareholders' equity $ 200,583 $ 183,869 $ 177,143
============= ============ ============
- ---------------
(1) Average outstanding balance reflects unrealized gain (loss) on securities
available for sale.
(2) Total loans less deferred net loan fees and loans in process.
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, 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
FHLB 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 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.
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) Total loans less deferred net loan fees and loans in process.
(2) Interest rate spread is calculated by subtracting average interest rate
cost from average interest rate earned for the period indicated.
(3) The net yield on average interest-earning assets is calculated by dividing
net interest income by average interest-earning assets for the period
indicated.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
Year Ended September 30, 1994
--------------------------------------------
Average Average
Balance Interest Yield/Cost
------- -------- ----------
(Dollars in thousands)
INTEREST-EARNING ASSETS
Interest-bearing deposits $ 24,117 $ 922 3.82%
Investment securities 27,093 1,498 5.53
Mortgage-backed securities 10,698 586 5.48
Loans receivable (1) 110,540 8,479 7.67
Stock in FHLB of Indianapolis 1,149 60 5.22
------------ ------------ ----
Total interest-earning assets $ 173,597 11,545 6.65
============ ============ ====
INTEREST-BEARING LIABILITIES
Savings accounts $ 9,646 265 2.75%
NOW and money market accounts 30,662 813 2.65
Certificates of deposit 107,294 4,941 4.61
------------ ------------ ----
Total interest-bearing liabilities $ 147,602 6,019 4.08
============ ============ ====
Net interest earning assets $ 25,995
============
Net interest income $ 5,526
============
Interest rate spread (2) 2.57%
Net yield on average interest-earning assets (3) 3.18%
Average interest-earning assets to
average interest-bearing liabilities 117.61%
- ----------------
(1) Total loans less deferred net loan fees and loans in process.
(2) Interest rate spread is calculated by subtracting average interest rate
cost from average interest rate earned for the period indicated.
(3) The net yield on average interest-earning assets is calculated by dividing
net interest income by average interest-earning assets for the period
indicated.
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, 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
=========== =========== ============
13
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, 1995 compared
to year ended September 30, 1994
Interest-earning assets
Interest-bearing deposits $ (440) $ 367 $ (807)
Securities 802 69 733
Mortgage-backed securities 106 4 102
Loans receivable 337 (278) 615
Stock in FHLB of Indianapolis 33 29 4
----------- ----------- ------------
Total 838 191 647
Interest-bearing liabilities
Savings accounts 9 5 4
NOW and money market accounts 50 164 (114)
Certificates of deposit 710 744 (34)
----------- ----------- ------------
Total 769 913 (144)
----------- ----------- -------------
Change in net interest income $ 69 $ (722) $ 791
=========== =========== ============
II. INVESTMENT PORTFOLIO
A. The following table sets forth the amortized cost and fair value of
securities available for sale:
At September 30,
1996 1995 1994
--------------------------- -------------------------- ---------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
----------- ----------- ----------- ----------- ----------- -----------
(In thousands)
Debt securities
U.S. Government
and federal
agencies $ 40,160 $ 40,207 $ - $ - $ - $ -
Mortgage-backed 24,473 24,074 - - - -
----------- ----------- ----------- ----------- ----------- -----------
64,633 64,281 - - - -
Marketable equity
securities 2,494 2,482 - - - -
----------- ----------- ----------- ----------- ----------- -----------
$ 67,127 $ 66,763 $ - $ - $ - $ -
=========== =========== =========== =========== =========== ===========
The following table sets forth the amortized cost and fair value of securities
held to maturity:
At September 30,
1996 1995 1994
--------------------------- -------------------------- ---------------------------
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 - - 11,905 11,524 - -
----------- ----------- ----------- ----------- ----------- -----------
$ - $ - $ 52,022 $ 51,704 $ - $ -
=========== =========== =========== =========== =========== ===========
II. INVESTMENT PORTFOLIO (Continued)
A. The following table sets forth the amortized cost and estimated market
value of investment securities and other securities:
At September 30,
1996 1995 1994
-------------------------- -------------------------- ------------------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
----------- ----------- ----------- ----------- ----------- -----------
(In thousands)
Investment Securities
U.S. Government
and federal
agencies $ - $ - $ - $ - $ 41,773 $ 40,792
Mortgage-backed - - - - 13,158 12,328
----------- ------------ ----------- ---------- ---------- -------------
$ - $ - $ - $ - $ 54,931 $ 53,120
=========== ============ =========== ========== ========== =============
Other securities
FHLB stock, at
cost $ 1,336 $ 1,336 $ 1,271 $ 1,271 $ 1,176 $ 1,176
=========== ============ =========== ========== ========== =============
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, 1996, 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 $ 6,837 $ 6,849 $ 32,973 $ 33,019 $ 350 $ 339 $ 40,160 $ 40,207
========= ========= ========= ========= ========= ========= ========= =========
Weighted average yield 5.88% 6.85% 6.50% 6.68%
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, 1996.
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,
-------------------------------------------------------------------------------
1996 1995 1994
-------------------------- ------------------------- -------------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ----- ----------- ------ -----
(Dollars in thousands)
Mortgage loans
Residential $ 143,751 92.87% $ 119,720 97.60% $113,770 97.25%
Commercial real estate 876 .57 206 .17 443 .38
Multi-family 163 .10 189 .15 192 .16
Residential construction 5,005 3.23 2,106 1.72 2,213 1.89
Consumer loans
Home equity and second
mortgage loans 3,790 2.45 375 .30 298 .26
Financing leases 1,125 .73 - - - -
Other 83 .05 74 .06 69 .06
----------- ------- ------------ ------------------------ --------
Gross loans receivable 154,793 100.00% 122,670 100.00% %116,985 100.00%
======= ======== ======== ======
Less
Allowance for loan losses (340) (310) (280)
Deferred net loan fees (440) (370) (447)
Loans in process (1,961) (809) (961)
----------- ------------ --------
Net loans receivable $ 152,052 $ 121,181 $115,297
=========== ============ ========
Mortgage-backed securities
FHLMC certificates $ 5,013 $ 11,905 $ 13,158
CMO - REMIC 19,061 - -
----------- ----------- --------
Net mortgage-
backed securities $ 24,074 $ 11,905 $ 13,158
=========== ============ ========
Mortgage loans
Adjustable rate $ 130,336 87.01% $ 113,394 92.78% $110,853 95.06%
Fixed rate 19,459 12.99 8,827 7.22 5,765 4.94
----------- ------- ------------ ------------------------ --------
Total $ 149,795 100.00% $ 122,221 100.00% $ 116,618 100.00%
=========== ======= ============ ====== ============ ========
September 30,
------------------------------------------------------
1993 1992
-------------------------- ---------------------------
Percent Percent
of of
Amount Total Amount Total
------ ----- ------ -----
(Dollars in thousands)
Mortgage loans
Residential $ 107,168 97.87% $ 110,338 97.08%
Commercial real estate 496 .45 607 .54
Multi-family 625 .57 691 .61
Residential construction 848 .78 1,333 1.17
Consumer loans
Home equity and second
mortgage loans 256 .24 434 .38
Financing leases - - - -
Other 106 .09 248 .22
------------ ------- ------------ ---------
Gross loans receivable 109,499 100.00% 113,651 100.00%
======= ======
Less
Allowance for loan losses (250) (58)
Deferred net loan fees (556) (646)
Loans in process (481) (721)
------------ ------------
Net loans receivable $ 108,212 $ 112,226
============ ============
Mortgage-backed securities
FHLMC certificates $ - $ -
CMO - REMIC - -
------------ ------------
Net mortgage-
backed securities $ - $ -
============ ============
Mortgage loans
Adjustable rate $ 102,837 94.23% $ 104,034 92.09%
Fixed rate 6,300 5.77 8,935 7.91
------------ ------- ------------ ---------
Total $ 109,137 100.00% $ 112,969 100.00%
============ ======= ============ ======
17
III. LOAN PORTFOLIO (Continued)
B. Loan Maturity. The following table sets forth certain information at
September 30, 1996, 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 2000 2002 2007 2012
at September 30, and to to and
1996 1997 1998 1999 2001 2006 2011 Following
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands)
Mortgage Loans
Residential $143,751 $ 24 $ 117 $ 201 $ 1,264 $ 8,027 $ 31,054 $103,064
Commercial real estate 876 -- -- -- 314 259 303 --
Multi-family 163 7 -- -- -- 91 21 44
Residential construction 5,005 1,430 -- -- -- -- 339 3,236
Consumer Loans
Home equity and second mortgage 3,790 -- -- -- 212 3,476 48 54
Financing leases 1,125 -- -- -- -- 1,125 -- --
Other 83 74 9 -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total $154,793 $ 1,535 $ 126 $ 201 $ 1,790 $ 12,978 $ 31,765 $106,398
======== ======== ======== ======== ======== ======== ======== ========
The following table sets forth, as September 30, 1996, 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 $ 17,095 $126,632 $143,727
Commercial real estate 266 610 876
Multi-family 21 135 156
Residential construction 1,488 2,087 3,575
Consumer loans
Home equity and second mortgage 388 3,402 3,790
Financing leases 1,125 -- 1,125
Other 9 -- 9
-------- -------- --------
Total $ 20,392 $132,866 $153,258
======== ======== ========
20
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,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
Accruing loans delinquent
more than 90 days $ 198 $ 308 $ 107 $ 223 $ 177
Non-accruing loans (1) - - - - -
Troubled debt
restructurings - - - - -
---------- --------- ----------- ---------- -------------
Total non-performing
loans 198 308 107 223 177
Real estate owned, net - 18 22 50 -
---------- --------- ----------- ---------- -------------
Total non-performing
assets $ 198 $ 326 $ 129 $ 273 $ 177
========== ========= =========== ========== =============
Non-performing loans to
total loans, net (2) .13% .25% .09% .21% .16%
Non-performing assets to
total assets .09% .17% .07% .16% .11%
Management believes that the allowance for loan losses balance at September 30,
1996 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 theri collectibility. At September 30, 1996,
there were no loans on nonaccrual.
(2) Total lonas less deferred net loan fees an loans in process.
III. LOAN PORTFOLIO (Continued)
C. Risk Elements (Continued)
2. Potential Problem Loans
As of September 30, 1996, 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
96.10% of MFB Corp.'s total loan portfolio at September
30, 1996.
D. Other Interest-Earning Assets
There are no other interest-earning assets as of September 30,
1996 which would be required to be disclosed under Item III. C.1
or 2 if such assets were loans.
20
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, 1996.
The following table analyzes changes in the consolidated
allowance for loan losses during the past five years ended
September 30, 1996.
Years Ended September 30,
----------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
Balance of allowance at
beginning of period $310 $280 $250 $ 58 $ 31
Add
Recoveries of loans
previously charged-
off--residential real
estate loans -- -- -- -- --
Less charge offs
Residential real estate
loans -- -- -- -- --
Commercial real estate
loans -- -- -- -- --
Consumer loans -- -- -- -- --
---- ---- ---- ---- ----
Net charge-offs -- -- -- -- --
Provisions for loan losses 30 30 30 192 27
---- ---- ---- ---- ----
Balance of allowance at
end of period $340 $310 $280 $250 $ 58
==== ==== ==== ==== ====
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) .22% .26% .24% .23% .05%
Allowance to total non-
performing loans at
end of period 171.72% 100.65% 261.68% 112.11% 32.77%
- ---------------------------------
(1) Total loans less deferred net loan fees and loans in process.
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,
--------------------------------------------------------
1996 1995
----------------------------- --------------------------
Percent Percent
of loans of loans
in each in each
category category
to total to total
Amount Loans Amount Loans
------ ----- -----------
Balance at end of period
applicable to
Residential $ 311 92.87% $ 281 97.60%
Commercial real
estate 1 .57 1 .17
Multi-family 1 .10 1 .15
Residential construction 1 3.23 1 1.72
Consumer loans (1) 1 3.23 1 .36
Unallocated 25 - 25 -
------------- ------ ----------- ------
Total $ 340 100.0% $ 310 100.00%
============= ====== =========== ======
September 30,
1994 1993 1992
--------------------------- -------------------------- --------------------------
Percent Percent Percent
of loans of loans of loans
in each in each in each
category category category
to total to total to total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Balance at end of period
applicable to
Residential $ 251 97.25% $ 221 97.87% $ 33 97.08%
Commercial real
estate 1 .38 1 .45 - .54
Multi-family 1 .16 1 .57 - .61
Residential construction 1 1.89 1 .78 - 1.17
Consumer loans (1) 1 .32 1 .33 - .60
Unallocated 25 - 25 - 25 -
------------ -------- ----------- --------- ------------ --------
Total $ 280 100.00% $ 250 100.00% $ 58 100.00%
============ ======= =========== ========= ============ ======
- --------------------------------------------------------------------------------
(1) Includes home equity and second mortgage lonas, financing leases, and other
loans including, education loans and loans secured by deposits.
V. DEPOSITS
The average amount of deposits and average rates paid are summarized as
follows for the years ended September 30:
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
Savings accounts $ 9,746 2.77% $ 9,774 2.80% $ 9,646 2.75%
Now and money market accounts 26,006 3.12 26,672 3.24 30,662 2.65
Certificates of deposit 113,570 5.68 106,556 5.30 107,294 4.61
Demand deposits (noninterest-bearing) 816 839 625
------------ ------------ ------------
$ 150,138 $ 143,841 $ 148,227
============ ============ ============
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at September 30, 1996 is summarized as follows:
Amount
(In thousands)
Three months or less $ 3,946
Over three months and through six months 3,942
Over six months and through twelve months 6,379
Over twelve months 10,221
------------
$ 24,488
23
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,
----------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
Average total assets $ 200,583 $ 183,869 $ 177,143
============ ============ ============
Average shareholders' equity $ 37,407 $ 38,029 $ 27,341
============ ============ ============
Net income $ 975 $ 1,236 $ 1,532
============ ============ ============
Return on average total assets .49% .67% .86%
=========== ========= ==========
Return on average shareholders' equity 2.61% 3.25% 5.60%
=========== ========= ==========
Dividend payout ratio (dividends
declared per share divided by net
income per share) 12.24% -% -%
=========== =========== ===========
Average shareholders' equity
to average total assets 18.65% 20.68% 15.43%
=========== ========= ==========
VII. SHORT-TERM BORROWINGS
The Company did not have any category of short-term borrowings for
which the average balance outstanding during the reported periods was
30 percent or more of shareholders' equity at the end of the reported
periods.
COMPETITION
MFB Financial originates most of its loans to and accepts most of its
deposits from residents of St. Joseph County, 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 13 financial institutions
located in Mishawaka, Indiana, including MFB Financial. These financial
institutions consist of three 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 under federal law. To date, several
bank holding company acquisitions of healthy savings associations in Indiana
have been completed. Affiliations between banks and healthy savings associations
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 recently 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, provided that prior to June 1, 1997 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.
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, 1996, was approximately $57,000.
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.
Congress is considering legislation that would consolidate the supervision
and regulation of all U.S. financial institutions into one or two administrative
bodies, would expand the powers of financial institutions, and would provide
regulatory relief to financial institutions ("the legislation"). It cannot be
predicted whatever or when the legislation will be enacted or the extent to
which the Bank or the Holding Company would be affected thereby.
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, 1996, the Bank's investment in stock of the FHLB
of Indianapolis was $1.3 million.
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 90 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 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.
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 premiums beginning in 1997 will be reduced to approximately $102,000
based upon its current risk classification and the new assessment schedule for
SAIF insured institutions. These premiums are subject to change in future
periods.
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 to be established by the FDIC to implement
this requirement for all FDIC- insured institutions are uncertain at this time,
but are anticipated to be about a 6.5 basis points assessment on SAIF deposits
and 1.5 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 (which may be included
in an amount up to 25% of core capital, but which are to be reported on an
association's balance sheet at the lesser of 90% of their fair market value, 90%
of their original price, or 100% of their remaining unamortized book value),
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 after making the above-noted adjustments) 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, 1996, based
on the capital standards then in effect, the Bank was in compliance with its
fully phased-in capital requirements.
The Comptroller of the Currency requires 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