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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, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to__________
Commission file number: 0-23374
MFB CORP.
(Exact name of registrant as specified in its charter)
Indiana 35-1907258
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
121 South Church Street, P.O. Box 528 Mishawaka, Indiana 46546
(Address of principal executive offices) 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 pursuant 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 amendment to this Form 10-K.
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of December 1, 1998, was $24,458,834.
The number of shares of the registrant's common stock, without par value,
outstanding as of December 1, 1998, was 1,463,917 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Annual Report to Shareholders for the fiscal year ended
September 30, 1998 are incorporated by reference into Part II.
Portions of the Proxy Statement for the 1999 Annual Meeting of the Shareholders
are incorporated into Part I and Part III.
Exhibit Index on Page E-1
Page one of 57 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 7a. Quantitative and Qualitative Disclosures
About Market Risks 43
Item 8. Financial Statements and Supplementary Data 44
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 44
PART III
Item 10. Directors and Executive Officers of the Registrant 45
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners
and Management 45
Item 13. Certain Relationships and Related Transactions 45
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 46
Signatures 48
Exhibit List E-1
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) commercial loans; (v) loans
secured by deposits and other consumer loans; (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 Mishawaka Financial
Services, Inc., its service corporation subsidiary. MFB Financial provides these
services through its five offices, three in Mishawaka, one in South Bend, and
one in Goshen, Indiana. The Bank'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,
commercial loans and construction loans. At September 30, 1998, $183.2 million,
or 78.7% 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. 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, home equity
and second mortgage loans, new and used car loans and personal loans. Commercial
loans include term loans and commercial lines of credit.
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. In
an effort to diversify the asset mix of the Bank and enhance loan yields, home
equity loan, commercial loan and consumer loan programs have been established.
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 significant number of the loans made by MFB Financial feature adjustable
rates. Adjustable rate loans permit the Bank to better match the interest it
earns on loans with the interest it pays on deposits. A variety of programs are
offered to borrowers. A majority of these loans adjust on an annual basis after
initial terms of one to five 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.
It is intended that most of these loans be sold in the secondary market. 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 one or more 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. 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
institutions 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 institution 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 secured consumer loans for amounts specifically tied
to the value of the collateral, and, smaller, unsecured loans with higher
interest rates. MFB Financial has been successful in managing consumer loan
risk.
Origination Purchase and Sale of Loans. During the 1997-98 fiscal year, MFB
Financial made significant changes to residential mortgage loan origination
documentation and procedures. A majority of currently originated, fixed rate
loans now meet secondary market requirements. Many of these loans will be sold
as they are originated which reduces interest rate risk, allowing the Bank to
build a fee based servicing portfolio and manage liquidity needs more
effectively. In addition, many of the older fixed rate non-conforming loans have
now been sold in the private market. Adjustable rate loans are now originated on
standard loan forms but are generally intended to be held in portfolio. This
allows flexibility to meet customer needs while providing yields which should
better reflect changing market conditions.
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, and will be replaced by a full service branch
facility in the spring of 1999. 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 institution 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. Fixed rate mortgage loans are
generally underwritten to FHLMC and FNMA standards. 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. Due to competitive issues, MFB Financial has originated
most of its 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 generally are
placed on a non-accrual status when the loans become contractually past due
ninety days or more. In cases where there is sufficient equity in the property
and/or the borrowers are willing and able to ultimately pay all accrued amounts
in full, the loan may be allowed to continue to earn interest. 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, 1998, $269,000 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, 1998, the Company had no impaired loans. One hundred forty-five
thousand dollars in real estate has been 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
wan-ant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "special mention" by management. At
September 30, 1998, the Bank had classified $111,000 of its assets as
"substandard", $0 as "doubtful", and $0 as "loss".
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. The
provision for loan losses was increased from $30,000 during the period ended
September 30, 1997 to $120,000 at September 30, 1998 due to the substantial
increase in the volumes of commercial and consumer loans. In management's
opinion, MFB, Financial's allowance for loan and lease losses is adequate to
absorb anticipated future losses existing at September 30, 1998.
Investments
General. Federally chartered savings institutions 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 institutions may also invest a portion of their assets in
commercial paper, corporate debt securities and asset-backed securities. The
investment policy of NEB 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, corporate securities,
equity securities and Federal Home Loan Bank ("FHLB") stock.
Liquidity. Federal regulations require FHLB-member savings institutions 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, United States Treasury
obligations, certain certificates of deposit of insured banks and savings
institutions, certain bankers' acceptances and specified state or federal agency
obligations. Subject to various restrictions, FHLB-member savings institutions
may also invest in certain corporate debt securities, commercial paper, mutual
funds, mortgage-related securities, and 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%. As of September 30,
1998, the Bank had liquid assets of $59.7 million and a regulatory liquidity
ratio of 20.36%, well above the minimum regulatory requirements.
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 to compensate for reductions in deposits or deposit inflows at less
than projected levels. In addtion, the Bank has in place a capital leveraging
strategy that involves 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, business checking 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, the Bank believes that its passbook, NOW and non-interest-bearing
checking accounts are relatively stable sources of deposits. However, the
ability of the Bank 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.
Short-term borrowings or long term debt may be used to compensate for reduction
in other sources of funds such as deposits and to assist in asset/liability
management. 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 unencumbered 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, 1998, MFB Financial had $92.7 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, 1998, the Bank had $2.4 million in repurchase agreements
outstanding.
Service Corporation Subsidiary
OTS regulations permit federal savings institutions 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 institution'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 institutions to
make specified types of loans to such subsidiaries (other than special-purpose
finance subsidiaries), in which the institution owns more than 10% of the stock,
in an aggregate amount not exceeding 50% of the institution's regulatory capital
if the association's regulatory capital is in compliance with applicable
regulations. A savings institution that acquires a non-savings institution
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").
The Bank'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 the Bank's customers and the general public. In addition, a range of
investment and insurance related products are offered to customers through a
contractual relationship established with Financial Network Investment
Corporation (FNIC), a full service securities brokerage firm. During fiscal year
1998, Mishawaka Financial received approximately $162,000 in commissions versus
approximately $144,000 in commissions received during fiscal year 1997. Since
Mishawaka Financial conducts all of its activities as agent for its customers,
the Bank is not required to deduct from its capital any portion of this
investment. The consolidated statements of income of MFB Corp. included
elsewhere herein include the operation of the Bank and Mishawaka Financial. All
significant intercompany balances and transactions have been eliminated in the
consolidation.
Employees
As of September 30, 1998, MFB Financial employed 70 persons on a full-time basis
and 29 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:
1998 1997 1996
Average Average Average
Outstanding Outstanding Outstanding
Balance Balance Balance
Assets: (In thousands)
Interest-earning assets:
Interest-bearing deposits $ 9,633 $ 1,856 $ 6,709
Securities (1) 13,647 30,765 35,392
Mortgage-backed securities (1) 23,206 22,222 19,717
FHLB stock 3,446 1,783 1,303
Loans held for sale 2,401 35 -
Loans receivable (2) 220,244 175,726 133,670
------------- ------------ ------------
Total interest-earning assets 272,577 232,387 196,791
Non-interest earning assets, net
of allowance for loan losses 5,320 4,663 3,792
------------- ------------ ------------
Total assets $ 277,897 $ 237,050 $ 200,583
============= ============ ============
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts $ 10,737 $ 10,359 $ 9,746
NOW and money market accounts 30,065 26,770 26,006
Certificates of deposit 130,350 126,202 113,570
Repurchase agreements 1,647 97 -
FHLB advances 66,123 34,960 9,625
------------- ------------ ------------
Total interest-bearing liabilities 238,922 198,388 158,947
Other liabilities 5,571 4,316 3,451
------------- ------------ ------------
Total liabilities 244,493 202,704 162,398
Shareholders' equity
Common stock 12,921 14,015 19,064
Net unrealized gain (loss) on securities
available for sale 56 (100) (133)
Retained earnings 22,958 21,381 20,496
Less common stock acquired by:
Employee stock ownership plan (565) (790) (1,007)
Recognition and retention plans (80) (157) (235)
Treasury stock (1,886) (3) -
------------- ------------ ------------
Total shareholders' equity 33,404 34,346 38,185
------------- ------------ ------------
Total liabilities and shareholders' equity $ 277,897 $ 237,050 $ 200,583
============= ============ ============
(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, 1998-------
Average Average
Balance Interest Yield/Cost
(Dollars in thousands)
INTEREST-EARNING ASSETS
Interest-bearing deposits $ 9,633 $ 560 5.81%
Securities (1) 13,541 900 6.65
Mortgage-backed securities (1) 23,218 1,357 5.84
FHLB stock 3,446 276 8.01
Loans held for sale 2,401 178 7.41
Loans receivable (2) 220,244 17,567 7.98
------------ ------------
Total interest-earning assets $ 272,483 20,838 7.65
============
INTEREST-BEARING LIABILITIES
Savings accounts $ 10,737 271 2.52%
NOW and money market accounts 30,065 852 2.83
Certificates of deposit 130,350 7,265 5.57
Repurchase agreements 1,647 67 4.09
FHLB advances 66,123 3,749 5.67
------------ ------------
Total interest-bearing liabilities $ 238,922 12,204 5.11
============ ------------
Net interest earning assets $ 33,561
============
Net interest income $ 8,634
============
Interest rate spread (3) 2.54%
Net yield on average interest-earning assets (4) 3.17%
Average interest-earning assets to
average interest-bearing liabilities 114.05%
(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.
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
FHLB stock 1,783 144 8.08
Loans held for sale 35 - -
Loans receivable (2) 175,726 13,897 7.91
------------ ------------
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 26,770 768 2.89
Certificates of deposit 126,202 7,135 5.65
Repurchase agreements 97 4 4.27
FHLB advances 34,960 1,972 5.64
------------ ------------
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 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, 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
FHLB stock 1,303 103 7.90
Loans receivable (2) 133,670 10,246 7.67
------------ ------------
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 advances 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)
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, 1998 compared
to year ended September 30, 1997
Interest-earning assets
Interest-bearing deposits $ 464 $ 13 $ 451
Securities (1,212) (62) (1,150)
Mortgage-backed securities (79) (140) 61
FHLB stock 132 (1) 133
Loans held for sale 178 - 178
Loans receivable 3,670 120 3,550
----------- ----------- ------------
Total 3,153 (70) 3,223
Interest-bearing liabilities
Savings accounts (7) (17) 10
NOW and money market accounts 84 (9) 93
Certificates of deposit 130 (102) 232
Repurchase agreements 63 - 63
FHLB advances 1,777 10 1,767
----------- ----------- ------------
Total 2,047 (118) 2,165
----------- ----------- ------------
Change in net interest income $ 1,106 $ 48 $ 1,058
=========== =========== ============
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, 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
FHLB stock 41 2 39
Loans receivable 3,651 332 3,319
----------- ----------- ------------
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 683 (27) 710
Repurchase agreements 4 - 4
FHLB advances 1,443 15 1,428
----------- ----------- ------------
Total 2,100 (82) 2,182
----------- ----------- ------------
Change in net interest income $ 1,403 $ 646 $ 757
=========== =========== ============
II. INVESTMENT PORTFOLIO
A. The following table sets forth the amortized cost and fair value of
securities available for sale:
At September 30,
1998 1997 1996
-------------------------- -------------------------- ---------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(In thousands)
Debt securities
U.S. Government
and federal
agencies $ 4,219 $ 4,254 $ 23,618 $ 23,720 $ 40,160 $ 40,207
Mortgage-
backed 22,259 22,267 15,589 15,579 24,473 24,074
Other securities 8,929 8,929 - - - -
Corporate notes 5,945 5,863 - - - -
----------- ------------ ----------- ---------- ---------- -----------
41,352 41,313 39,207 39,299 64,633 64,281
Marketable equity
securities 543 506 300 329 2,494 2,482
----------- ------------ ----------- ---------- ---------- -----------
$ 41,895 $ 41,819 $ 39,507 $ 39,628 $ 67,127 $ 66,763
=========== ============ =========== ========== ========== ===========
The following table sets forth the amortized cost and estimated market value of
Federal Home Loan Bank (FHLB) Stock:
At September 30,
1998 1997 1996
-------------------------- -------------------------- --------------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
(In thousands)
Other securities
FHLB stock, at
cost $ 4,636 $ 4,636 $ 2,400 $ 2,400 $ 1,336 $ 1,336
=========== ============ =========== ========== ========== ===========
II. INVESTMENT PORTFOLIO (Continued)
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, 1998, which matures in
One One to Over
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 $ 2,712 $ 2,740 $ 1,507 $ 1,514 $ - $ - $ 4,219 $ 4,254
Other securities 8,929 8,929 - - - - 8,929 8,929
Corporate notes - - - - 5,945 5,863 5,945 5,863
--------- --------- --------- --------- --------- --------- --------- ---------
$ 11,641 $ 11,669 $ 1,507 $ 1,514 $ 5,945 $ 5,863 $ 19,093 $ 19,046
========= ========= ========= ========= ========= ========= ========= =========
Weighted average yield 6.00% 6.73% 6.37% 6.17%
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, 1998.
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,--------------------------------
1998 1997 1996
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Mortgage loans
Residential $ 183,151 78.08% $ 164,598 86.91% $ 143,751 92.87%
Multi-family 120 .05 130 .07 163 .10
Residential construction 8,233 3.51 8,245 4.35 5,005 3.23
Commercial and other loans
Commercial loans 32,001 13.64 8,833 4.66 876 .57
Home equity and second
mortgage loans 9,067 3.87 7,177 3.79 3,790 2.45
Financing leases 83 .03 325 .17 1,125 .73
Other 1,914 .82 96 .05 83 .05
----------- ------- ------------ ------- ------------ --------
Gross loans receivable 234,569 100.00% 189,404 100.00% 154,793 100.00%
======= ======= ========
Less
Allowance for loan losses (454) (370) (340)
Deferred net loan fees (798) (653) (440)
Loans in process (485) (117) (1,961)
----------- ------------ ------------
Net loans receivable $ 232,832 $ 188,264 $ 152,052
=========== ============ ============
Mortgage-backed securities
FHLMC certificates $ 2,316 $ 3,508 $ 5,013
CMO - REMIC 19,951 12,071 19,061
----------- ------------ ------------
Net mortgage-backed securities $ 22,267 $ 15,579 $ 24,074
=========== ============ ============
Mortgage loans
Adjustable rate $ 153,897 80.36% $ 139,665 80.74% $ 130,336 87.01%
Fixed rate 37,607 19.64 33,308 19.26 19,459 12.99
----------- ------- ------------ ------- ------------ --------
Total $ 191,504 100.00% $ 172,973 100.00% $ 149,795 100.00%
=========== ======= ============ ======= ============ ========
--------------------September 30,--------------------
1995 1994
Percent Percent
of of
Amount Total Amount Total
------ ----- ------ -----
Mortgage loans
Residential $ 119,720 97.60% $ 113,770 97.25%
Multi-family 189 .15 192 .16
Residential construction 2,106 1.72 2,213 1.89
Commercial and other loans
Commercial loans 206 .17 443 .38
Home equity and second
mortgage loans 375 .30 298 .26
Financing leases - - - -
Other 74 .06 69 .06
------------ ------- ------------ ---------
Gross loans receivable 122,670 100.00% 116,985 100.00%
======= =========
Less
Allowance for loan losses (310) (280)
Deferred net loan fees (370) (447)
Loans in process (809) (961)
------------ ------------
Net loans receivable $ 121,181 $ 115,297
============ ============
Mortgage-backed securities
FHLMC certificates $ 11,905 $ 13,158
CMO - REMIC - -
----------- ------------
Net mortgage-backed securities $ 11,905 $ 13,158
============ ============
Mortgage loans
Adjustable rate $ 113,394 92.78% $ 110,853 95.06%
Fixed rate 8,827 7.22 5,765 4.94
------------ ------- ------------ ---------
Total $ 122,221 100.00% $ 116,618 100.00%
============ ======= ============ ======
III. LOAN PORTFOLIO (Continued)
B. Loan Maturity. The following table sets forth certain information at
September 30, 1998, 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 2002 2004 2009 2014
at September 30, and to to and
1998 1999 2000 2001 2003 2008 2013 Following
---- ---- ---- ---- ---- ---- ---- ---------
(In thousands)
Mortgage Loans
Residential $183,151 $ 19 $ 78 $ 333 $ 1,509 $ 11,509 $46,583 $ 123,120
Multi-family 120 - - - - 80 40 -
Residential construction 8,233 8,233 - - - - - -
Commercial and other Loans
Commercial loans 32,001 4,257 10,751 598 13,994 1,786 615 -
Home equity and second mortgage 9,067 - 4 188 2,663 5,866 192 154
Financing leases 83 - - - - 83 - -
Other 1,914 117 124 284 1,319 24 - 46
-------- ------- ------- ------ -------- --------- ------- ---------
Total $234,569 $12,626 $10,957 $1,403 $ 19,485 $ 19,348 $47,430 $ 123,320
======== ======= ======= ====== ======== ========= ======= =========
The following table sets forth, as September 30, 1998, 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, 1999
Variable
Fixed Rates Rates Total
(In thousands)
Mortgage loans
Residential $ 33,283 $ 149,849 $ 183,132
Multi-family 15 105 120
Residential construction - - -
Commercial and other loans
Commercial loans 16,962 10,782 27,744
Home equity and second mortgage 4,021 5,046 9,067
Financing leases 83 - 83
Other 1,751 46 1,797
------------ ----------- ----------
Total $ 56,115 $ 165,828 $ 221,943
============ =========== ==========
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 should
be classified as uncollectible for any loan past due in excess
of 90 days.
At September 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
Accruing loans delinquent
more than 90 days $ 124 $ 261 $ 198 $ 308 $ 107
Non-accruing loans (1) - - - - -
Troubled debt
restructurings - - - - -
---------- --------- ----------- ---------- -----------
Total non-performing
loans 124 261 198 308 107
Real estate owned, net 145 - - 18 22
---------- --------- ----------- ---------- -----------
Total non-performing
assets $ 269 $ 261 $ 198 $ 326 $ 129
========== ========= =========== ========== ===========
Non-performing loans to
total loans, net (2) .05% .14% .13% .25% .09%
Non-performing assets to
total assets .09% .10% .09% .17% .07%
Management believes that the allowance for loan losses balance at September 30,
1998 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, 1998,
there were no loans on nonaccrual.
(2) Total loans less deferred net loan fees and loans in process.
III. LOAN PORTFOLIO (Continued)
C. Risk Elements (Continued)
2. Potential Problem Loans
As of September 30, 1998, 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 81.59% of MFB Corp.'s
total loan portfolio at September 30, 1998.
D. Other Interest-Earning Assets
There are no other interest-earning assets, other than
$145,000 in foreclosed real estate owned as of September 30,
1998 which would be required to be disclosed under Item III.
C.1 or 2 if such assets were loans.
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, 1998.
The following table analyzes changes in the consolidated allowance for
loan losses during the past five years ended September 30, 1998.
Years Ended September 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
Balance of allowance at
beginning of period $ 370 $ 340 $ 310 $ 280 $ 250
Add
Recoveries of loans
previously charged-
off--residential real
estate loans - - - - -
Less charge offs
Residential real estate
loans - - - - -
Commercial real estate
loans 36 - - - -
Consumer loans - - - - -
------------ ----------- ------------- ---------- ------------
Net charge-offs 36 - - - -
Provisions for loan losses 120 30 30 30 30
------------ ----------- ------------- ---------- ------------
Balance of allowance at
end of period $ 454 $ 370 $ 340 $ 310 $ 280
============ =========== ============= ========== ============
Net charge-offs to total
average loans out-
standing for period *.02% -% -% -% -%
Allowance at end of
period to total loans, net
at end of period (1) *.19% .20% .22% .26% .24%
Allowance to total non-
performing loans at
end of period 366.13% 141.76% 171.72% 100.65% 261.68%
- --------------------------------------------------------------------------------
(1) Total loans less deferred net loan fees and loans in process.
* Not including loans held for sale
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,
1998 1997 1996
----------------------------- -------------------------- ---------------------------
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 $ 181 78.08% $ 323 86.91% $ 311 92.87%
Multi-family 1 .05 1 .07 1 .10
Residential construction 8 3.51 1 4.35 1 3.23
Commerical 213 13.64 19 4.66 1 .57
Consumer loans (1) 26 4.72 1 4.01 1 3.23
Unallocated 25 - 25 - 25 -
------------- ------ ----------- -------- ------------ --------
Total $ 454 100.00% $ 370 100.00% $ 340 100.0%
============= ======= =========== ======== ============ ======
1995 1994
-------------------------- -------------------------
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 $ 281 97.60% $ 251 97.25%
Commerical 1 .17 1 .38
Multi-family 1 .15 1 .16
Residential construction 1 1.72 1 1.89
Consumer loans (1) 1 .36 1 .32
Unallocated 25 - 25 -
----------- --------- ------------ --------
Total $ 310 100.00% $ 280 100.00%
=========== ========= ============ ========
(1) Includes home equity and second mortgage loans, 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 8 1 9 9 7 1 9 9 6
------- ------- -------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
Savings accounts $ 10,737 2.52% $ 10,359 2.68% $ 9,746 2.77%
Now and money market accounts 30,065 2.83 26,770 2.89 26,006 3.12
Certificates of deposit 130,350 5.57 126,202 5.65 113,570 5.68
Demand deposits (noninterest-bearing) 3,554 1,274 816
------------ ------------ ------------
$ 174,706 $ 164,605 $ 150,138
============ ============ ============
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at September 30, 1998 is summarized as follows:
Amount
(In thousands)
Three months or less $ 5,075
Over three months and through six months 2,765
Over six months and through twelve months 10,653
Over twelve months 9,075
------------
$ 27,568
============
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,
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Average total assets $ 277,897 $ 237,050 $ 200,583
============ ============ ============
Average shareholders' equity $ 33,404 $ 34,346 $ 38,185
============ ============ ============
Net income $ 2,236 $ 2,002 $ 975
============ ============ ============
Return on average total assets .80% .84% .49%
=========== ========= ==========
Return on average shareholders' equity 6.69% 5.83% 2.55%
=========== ========= ==========
Dividend payout ratio (dividends
declared per share divided by net
income per share) 23.26% 26.45% 11.76%
=========== =========== ===========
Average shareholders' equity
to average total assets 12.02% 14.49% 19.04%
=========== ========= ==========
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.
September 30,
------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Maximum Balance:
FHLB advances............................................. $ 92,726 $ 47,500 $ 29,500
Securities sold under agreements to repurchase.. 3,882 389 -
Average Balance:
FHLB advances:............................................ 66,123 34,960 9,625
Securities sold under agreements to repurchase............ 1,647 97 -
Average Rate Paid On:
FHLB advances............................................. 5.67% 5.64% 5.50%
Securities sold under agreements to repurchase............ 4.09 4.27 -
The following table sets forth the Bank's borrowings at the dates indicated:
September 30,
------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Amounts Outstanding:
FHLB advances............................................. $ 92,726 $ 47,500 $ 24,500
Securities sold under agreements to repurchase............ 2,366 389 -
Weighted Average Interest Rate:
FHLB Advances............................................. 5.42% 5.66% 5.53%
Securities sold under agreements to repurchase............ 4.02 4.25 -
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 16 financial institutions located in Mishawaka,
Indiana, including MFB Financial. These financial institutions consist of seven
commercial banks, three savings banks and six 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 and mutual 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 institutions.
Savings institutions may also acquire banks under federal law. Affiliations
between banks and 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 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. 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, Realtors and the small business community 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 institutions. 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 January 5, 1998 . When these
examinations are conducted by the OTS, the examiners may require the Company to
provide for higher general or specific loan loss reserves. To fund the
operations of the OTS, all savings institutions are subject to a semi-annual
assessment, based on the total assets, condition, and complexity of operations.
The Bank's OTS assessment for the fiscal year ended September 30, 1998, was
approximately $73,000.
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 nonresidential
real property may not exceed 400% of total capital, except with approval of the
OTS. The Bank is in compliance with the noted restrictions.
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 or 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 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 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, 1998, the Bank's investment
in stock of the FHLB of Indianapolis was $4.6 million.
In past years, the Bank received substantial dividends on its FHLB stock. All 12
FHLB's are required to provide funds 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 institutions 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 institutions, the FDIC determines whether to grant insurance to
newly-chartered savings institutions, has authority to prohibit unsafe or
unsound activities and has enforcement powers over savings institutions (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 institutions, 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 total 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 total 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 .3 1 % 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 institutions 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. As a
result of the special assessment, the Bank's annual deposit insurance premium
for the year ended September 30, 1998 was approximately $108,000 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 institutions 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 institution continues to exist, thereby imposing a greater
burden on SAW 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 points assessment
on SAIF deposits and 1.26 basis points assessment on BIF deposits until BIF
insured institutions participate fully in the assessment.
Regulatory Capital
Currently, savings institutions 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 total
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, 1998, 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 institutions 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 institutions, with an additional requirement
of 100 to 200 basis points for all other savings institutions. 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 institutions 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 les