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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, 1999
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, 1999, was $19,374,107.
The number of shares of the registrant's common stock, without par value,
outstanding as of December 1, 1999, was 1,415,049 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Annual Report to Shareholders for the fiscal year ended
September 30, 1999 are incorporated by reference into Part II.
Portions of the Proxy Statement for the 2000 Annual Meeting of the Shareholders
are incorporated into Part I and Part III.
Exhibit Index on Page 50
Page one of 53 pages
MFB CORP.
Form 10-K
INDEX
PART I
Item 1. Business 1
Item 2. Properties 39
Item 3. Legal Proceedings 40
Item 4. Submission of Matters to a Vote of Security Holders 40
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 41
Item 6. Selected Financial Data 42
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 42
Item 7a. Quantitative and Qualitative Disclosures
About Market Risk 42
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 46
Item 12. Security Ownership of Certain Beneficial Owners
and Management 46
Item 13. Certain Relationships and Related Transactions 46
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 47
Signatures 49
Exhibit List 50
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; (xi) trust
services; and (xii) a variety of insurance products and brokerage services
through Mishawaka Financial Services, Inc., its service corporation subsidiary.
MFB Financial provides these services through its six offices, three in
Mishawaka, one in South Bend, one in Elkhart, 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 residential
mortgage loans, construction loans, commercial loans and consumer loans. At
September 30, 1999, $191.5 million, or 70.62% 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 and Elkhart Counties.
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.
- 1 -
At September 30, 1999, 17.48% of the Company's loan portfolio consist of
commercial loans and 6.56% of the loan portfolio consist of consumer loans.
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
for the purpose of purchasing or refinancing residential properties and building
sites. It is the Company's intent to document and underwrite these loans to
standards established by Freddie Mac to assure that they meet the investor
quality required for sale in the secondary markets.
MFB Financial normally requires private mortgage insurance on all conventional
residential first mortgages with loan-to-value ratios in excess of 80%. In
accordance with the Homeowners Protection Act of 1998, MFB has adopted policies
to assure complete compliance with automatic cancellation provisions, depending
on the date the loan was originated. On first mortgages, MFB will generally lend
up to 95% of the purchase price, or appraised property value, whichever is less.
MFB will also loan up to 97% when the applicants have successfully completed a
Home Buyers education course and earn less than the area median income. Second
mortgages and home equity loans may be originated with loan-to-values up to 100%
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 $500,000 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 an 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.
- 2 -
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 and Sale of Loans. Fixed-rate mortgages secured by single family
owner occupied dwellings are documented and underwritten to conform to the
standards for sale in the secondary market. This provides management with the
opportunity to deliver loans with the intent of increasing its servicing
portfolio and corresponding fee income and creates liquidity in order in order
to fund the acquisition of other assets for the Bank. As loans are originated
with the intent of sale in the secondary market, the Bank can choose to manage
and eliminate interest rate risk by committing forward sales utilizing a Best
Efforts program in which no penalties are incurred for non-delivery of a loan.
Adjustable rate mortgages continue to be originated by the Bank utilizing
standard industry notes and mortgages. They also can be sold to private
institutional investors should the Bank desire additional liquidity or held in
portfolio and provide yields that should better reflect changing market
conditions.
MFB Financial confines its loan origination activities primarily in St. Joseph
and Elkhart Counties and the surrounding area. A full service branch facility
was opened in Elkhart, Indiana in June 1999, and another full service office
will be opened in South Bend, Indiana in January 2000. MFB's loan originations
are generated from referrals from builders, developers, real estate brokers,
existing customers, and limited newspaper and periodical advertising. All loan
applications are underwritten at MFB Financial's main office.
- 3 -
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.
- 4 -
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, 1999, $196,000 or .06% 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, 1999, the Company had no impaired loans. At September 30, 1999,
the Bank has one real estate owned property with a value of $100,000. Such real
estate is classified by the Company as "real estate owned" or "REO" until it is
sold. When property is so acquired, the value of the asset is recorded on the
books of the Company at fair value. Interest accrual ceases when the collection
of interest becomes doubtful. All costs incurred from the date of acquisition in
maintaining the property are expensed.
Classified assets. Federal regulations and MFB Financial's Classification of
Assets policy provide for the classification of loans and other assets such as
debt and equity securities considered by the Office of Thrift Supervision
("OTS") to be of lesser quality as "substandard," "doubtful" or "loss" assets.
An asset is considered "substandard" if it is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the association will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to sufficient risk to
warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "special mention" by management. At
September 30, 1999, the Bank had classified $100,000 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.
- 5 -
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 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 $120,000 during the period ended September
30, 1998 to $230,000 at September 30, 1999 due to the substantial increase in
the volumes of commercial and consumer loans. In management's opinion, MFB
Financial's allowance for loan losses is adequate to absorb anticipated future
losses existing at September 30, 1999.
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 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, 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, U.S. 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,
1999, the Bank had liquid assets of $34.9 million and a regulatory liquidity
ratio of 16.87%, well above the minimum regulatory requirements.
- 6 -
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 addition, 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.
- 7 -
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 and investment securities. 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, 1999, MFB
Financial had $104.2 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, 1999, the Bank had $6.6 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
1999, Mishawaka Financial received approximately $151,000 in commissions versus
approximately $162,000 in commissions received during fiscal year 1998. 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.
- 8 -
Employees
As of September 30, 1999, MFB Financial employed 93 persons on a full-time basis
and 27 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.
- 9 -
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:
1999 1998 1997
Average Average Average
Outstanding Outstanding Outstanding
Balance Balance Balance
------------- ------------ ------------
Assets: (In thousands)
Interest-earning assets:
Interest-bearing deposits $ 11,983 $ 9,633 $ 1,856
Securities (1) 17,347 13,647 30,765
Mortgage-backed securities (1) 30,461 23,206 22,222
FHLB stock 5,453 3,446 1,783
Loans held for sale 15,571 2,401 35
Loans receivable (2) 244,132 220,244 175,726
------------- ------------ ------------
Total interest-earning assets 324,947 272,577 232,387
Non-interest earning assets, net
of allowance for loan losses 11,246 5,320 4,663
------------- ------------ ------------
Total assets $ 336,193 $ 277,897 $ 237,050
============= ============ ============
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts $ 12,277 $ 10,737 $ 10,359
NOW and money market accounts 36,422 30,065 26,770
Certificates of deposit 137,734 130,350 126,202
Repurchase agreements 3,892 1,647 97
FHLB advances 104,894 66,123 34,960
------------- ------------ ------------
Total interest-bearing liabilities 295,219 238,922 198,388
Other liabilities 9,351 5,571 4,316
------------- ------------ ------------
Total liabilities 304,570 244,493 202,704
Shareholders' equity
Common stock 12,933 12,921 14,015
Retained earnings 24,550 22,958 21,381
Net unrealized gain(loss) on securities
available for sale 213 56 (100)
Less common stock acquired by:
Employee stock ownership plan (352) (565) (790)
Recognition and retention plans (11) (80) (157)
Treasury stock (5,710) (1,886) (3)
-------------- ------------ ------------
Total shareholders' equity 31,623 33,404 34,346
------------- ------------ ------------
Total liabilities and shareholders' equity $ 336,193 $ 277,897 $ 237,050
============= ============ ============
(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.
- 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, 1999-------
Average Average
Balance Interest Yield/Cost
(Dollars in thousands)
INTEREST-EARNING ASSETS
Interest-bearing deposits $ 11,983 $ 613 5.12%
Securities (1) 17,593 1,048 5.96
Mortgage-backed securities (1) 30,572 1,831 5.99
FHLB stock 5,453 436 8.00
Loans held for sale 15,571 1,091 7.01
Loans receivable (2) 244,132 19,235 7.88
------------ ------------
Total interest-earning assets $ 325,304 24,254 7.46
============
INTEREST-BEARING LIABILITIES
Savings accounts $ 12,277 294 2.39%
NOW and money market accounts 36,422 1,001 2.75
Certificates of deposit 137,734 7,285 5.29
Repurchase agreements 3,892 148 3.80
FHLB advances 104,894 5,720 5.45
------------ ------------
Total interest-bearing liabilities $ 295,219 14,448 4.89
============ ------------
Net interest-earning assets $ 30,085
============
Net interest income $ 9,806
============
Interest rate spread (3) 2.57%
Net yield on average interest-earning assets (4) 3.01%
Average interest-earning assets to
average interest-bearing liabilities 110.19%
- --------------------------------------------------------------------------------
(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.
- 11 -
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
--------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 4.07
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.
- 12 -
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
--------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 2.87
Certificates of deposit 126,202 7,135 5.65
Repurchase agreements 97 4 4.12
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.
- 13 -
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
C. The following tables describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities
have affected MFB Corp.'s consolidated interest income and expense
during the periods indicated. For each category of interest-earning
asset and interest-bearing liability, information is provided on changes
attributable to (1) changes in rate (i.e., changes in rate multiplied by
old volume) and (2) changes in volume (i.e., changes in volume
multiplied by old rate). Changes attributable to both rate and volume
have been allocated proportionally to the change due to volume and the
change due to rate.
Increase (Decrease) in
Net Interest Income
Total Net Due to Due to
Change Rate Volume
(In thousands)
Year ended September 30, 1999 compared
to year ended September 30, 1998
Interest-earning assets
Interest-bearing deposits $ 53 $ (73) $ 126
Securities 148 (101) 249
Mortgage-backed securities 474 34 440
FHLB stock 160 - 160
Loans held for sale 913 (10) 923
Loans receivable 1,668 (216) 1,884
----------- ------------ ------------
Total 3,416 (366) 3,782
Interest-bearing liabilities
Savings accounts 23 (14) 37
NOW and money market accounts 149 (26) 175
Certificates of deposit 20 (380) 400
Repurchase agreements 81 (5) 86
FHLB advances 1,971 (148) 2,119
----------- ------------ ------------
Total 2,244 (573) 2,817
----------- ------------ ------------
Change in net interest income $ 1,172 $ 207 $ 965
=========== =========== ============
- 14 -
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
Increase (Decrease) in
Net Interest Income
Total Net Due to Due to
Change Rate Volume
------ ---- ------
(In thousands)
Year ended September 30, 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
=========== =========== ============
- 15 -
II. INVESTMENT PORTFOLIO
A. The following table sets forth the amortized cost and fair value of
securities available for sale:
At September 30,
1999 1998 1997
-------------------------- -------------------------- ----------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
----------- ------------ ----------- ---------- ---------- -----------
(In thousands)
Debt securities
U.S. Government
and federal
agencies $ 7,745 $ 7,563 $ 4,219 $ 4,254 $ 23,618 $ 23,720
Mortgage-
backed 27,112 26,450 22,259 22,267 15,589 15,579
Other securities - - 8,929 8,929 - -
Corporate notes 3,959 3,728 5,945 5,863 - -
----------- ------------ ----------- ---------- ---------- -----------
38,816 37,741 41,352 41,313 39,207 39,299
Marketable equity
securities 543 429 543 506 300 329
----------- ------------ ----------- ---------- ---------- -----------
$ 39,359 $ 38,170 $ 41,895 $ 41,819 $ 39,507 $ 39,628
=========== ============ =========== ========== ========== ===========
The following table sets forth the amortized cost and fair value of securities
held to maturity:
At September 30,
1999 1998 1997
-------------------------- -------------------------- -------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(In thousands)
Debt securities
Corporate notes $3,984 $3,709 $ - $ - $ - $ -
------ ------ ----- ----- ----- -----
$3,984 $3,709 $ - $ - $ - $ -
====== ====== ===== ===== ===== =====
The following table sets forth the amortized cost and estimated market value of
Federal Home Loan Bank (FHLB) stock:
At September 30,
1999 1998 1997
-------------------------- -------------------------- --------------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
(In thousands)
Other securities
FHLB stock, at
cost $ 5,511 $ 5,511 $ 4,636 $ 4,636 $ 2,400 $ 2,400
=========== ============ =========== ========== ========== ===========
- 16 -
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, 1999, which matures in
---------------------------------------------------------------------------------------------------------
One One to Over Five to Over 10
Year or Less Five Years Ten Years Years Totals
---------------- ------------------ ------------------ ------------------ -------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value Cost Value
---------------- --------- ----- --------- ----- --------- ----- --------- -----
(Dollars in thousands)
U.S. Government
and federal
agencies $501 $ 501 $2,498 $2,464 $4,000 $3,894 $ 746 $ 704 $ 7,745 $ 7,563
Corporate
notes - - - - - - 3,959 3,728 3,959 3,728
---- ------ ------ ------ ------ ------ ------ ------ ------- -------
$501 $ 501 $2,498 $2,464 $4,000 $3,894 $4,705 $4,432 $11,704 $11,291
==== ====== ====== ====== ====== ====== ====== ====== ======= =======
Weighted
average yield 5.41% 5.81% 6.69% 6.00% 6.17%
The maturity distribution and weighted average interest rates of debt
securities held to maturity, excluding mortgage-backed securities, are as
follows:
Amount at September 30, 1999, which matures in
--------------------------------------------------------------------------------------
One One to Over 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)
Corporate notes $ 501 $ 501 $ - $ - $ 3,483 $ 3,208 $ 3,984 $ 3,709
--------- --------- --------- --------- --------- --------- --------- ---------
$ 501 $ 501 $ - $ - $ 3,483 $ 3,208 $ 3,984 $ 3,709
========= ========= ========= ========= ========= ========= ========= =========
Weighted average yield 5.85% n/a 7.13% 6.97%
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, 1999.
- 17 -
III. LOAN PORTFOLIO
A. The following table sets for the composition of MFB Corp.'s
consolidated loan portfolio and mortgage-backed securities by
loan type as of the dates indicated, including a reconciliation
of gross loans receivable to net loans receivable after
consideration of the allowance for loan losses, deferred net loan
fees and loans in process:
----------------------------------September 30,------------------------------
1999 1998 1997
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Mortgage loans
Residential $ 191,480 70.62% $ 183,151 78.49% $ 164,598 86.91%
Residential construction 11,158 4.12 8,233 3.53 8,245 4.35
Multi-family 3,299 1.22 120 .05 130 .07
Commercial and other loans
Commercial loans 47,399 17.48 30,775 13.19 8,833 4.66
Home equity and second
mortgage loans 13,308 4.91 9,067 3.89 7,177 3.79
Financing leases 17 .01 83 .03 325 .17
Other 4,461 1.64 1,914 .82 96 .05
----------- ------- ------------ ------- ------------ --------
Gross loans receivable 271,122 100.00% 233,343 100.00% 189,404 100.00%
======= ======= ========
Less
Allowance for loan losses (638) (454) (370)
Deferred net loan fees (933) (798) (653)
Loans in process (87) (485) (117)
------------ ------------ ------------
Net loans receivable $ 269,464 $ 231,606 $ 188,264
=========== ============ ============
Mortgage-backed securities
FHLMC certificates $ 868 $ 2,316 $ 3,508
CMO - REMIC 25,582 19,951 12,071
----------- ------------ ------------
Net mortgage-backed securities $ 26,450 $ 22,267 $ 15,579
=========== ============ ============
Mortgage loans
Adjustable rate $ 142,756 69.32% $ 153,897 80.36% $ 139,665 80.74%
Fixed rate 63,181 30.68 37,607 19.64 33,308 19.26
----------- ------- ------------ ------- ------------ --------
Total $ 205,937 100.00% $ 191,504 100.00% $ 172,973 100.00%
=========== ======= ============ ======= ============ ========
--------------------September 30,-------------------
1996 1995
Percent Percent
of of
Amount Total Amount Total
------ ----- ------ -----
Mortgage loans
Residential $ 143,751 92.87% $ 119,720 97.60%
Residential construction 5,005 3.23 2,106 1.72
Multi-family 163 .10 189 .15
Commercial and other loans
Commercial loans 876 .57 206 .17
Home equity and second
mortgage loans 3,790 2.45 375 .30
Financing leases 1,125 .73 - -
Other 83 .05 74 .06
------------ ------- ------------ ---------
Gross loans receivable 154,793 100.00% 122,670 100.00%
======= =========
Less
Allowance for loan losses (340) (310)
Deferred net loan fees (440) (370)
Loans in process (1,961) (809)
------------ ------------
Net loans receivable $ 152,052 $ 121,181
============ ============
Mortgage-backed securities
FHLMC certificates $ 5,013 $ 11,905
CMO - REMIC 19,061 -
------------ ------------
Net mortgage-backed securities $ 24,074 $ 11,905
============ ============
Mortgage loans
Adjustable rate $ 130,336 87.01% $ 113,394 92.78%
Fixed rate 19,459 12.99 8,827 7.22
------------ ------- ------------ ---------
Total $ 149,795 100.00% $ 122,221 100.00%
============ ======= ============ =========
- 18 -
III. LOAN PORTFOLIO (Continued)
B. Loan Maturity. The following table sets forth certain information at
September 30, 1999, 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 2003 2005 2010 2015
at September 30, and to to and
1999 2000 2001 2002 2004 2009 2014 Following
---- ---- ---- ---- ---- ---- ---- ---------
(In thousands)
Mortgage Loans
Residential $ 191,480 $ 29 $ 190 $ 264 $ 1,266 $ 10,809 $ 44,664 $ 134,258
Residential construction 11,158 10,752 406 - - - - -
Multi-family 3,299 80 40 1,132 1,906 71 70 -
Commercial and other Loans
Commercial loans 47,399 15,529 676 2,743 23,969 3,763 719 -
Home equity and
second mortgage 13,308 517 292 366 6,426 5,471 81 155
Financing leases 17 - - - - 17 - -
Other 4,461 290 341 781 2,755 215 - 79
--------- -------- ------- -------- -------- --------- -------- ---------
Total $ 271,122 $ 27,197 $ 1,945 $ 5,286 $ 36,322 $ 20,346 $ 45,534 $ 134,492
========= ======== ======= ======== ======== ========= ======== =========
The following table sets forth, as September 30, 1999, 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, 2000
Variable
Fixed Rates Rates Total
(In thousands)
Mortgage loans
Residential $ 49,093 $ 142,358 $ 191,451
Multi-family 3,126 93 3,219
Residential construction 169 237 406
Commercial and other loans
Commercial loans 31,290 580 31,870
Home equity and second mortgage 8,432 4,359 12,791
Financing leases 17 - 17
Other 4,092 79 4,171
------------ ----------- ----------
Total $ 96,219 $ 147,706 $ 243,925
============ =========== ==========
- 19 -
III. LOAN PORTFOLIO (Continued)
C. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans
The table below sets forth the amounts and categories of MFB
Corp.'s consolidated non-performing assets (accruing loans
delinquent more than 90 days, non-accrual loans, troubled debt
restructurings and real estate owned). It is the policy of MFB
Corp. that all earned but uncollected interest on all loans be
reviewed quarterly to determine if any portion thereof should
be classified as uncollectible for any loan past due in excess
of 90 days.
At September 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Accruing loans delinquent
more than 90 days $ 96 $ 124 $ 261 $ 198 $ 308
Non-accruing loans (1) - - - - -
Troubled debt
restructurings - - - - -
---------- --------- ----------- ---------- -----------
Total non-performing
loans 96 124 261 198 308
Real estate owned, net 100 145 - - 18
---------- --------- ----------- ---------- -----------
Total non-performing
assets $ 196 $ 269 $ 261 $ 198 $ 326
========== ========= =========== ========== ===========
Non-performing loans to
total loans, net (2) .03% .05% .14% .13% .25%
Non-performing assets to
total assets .06% .09% .10% .09% .17%
Management believes that the allowance for loan losses balance at September 30,
1999 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, 1999,
there were no loans on nonaccrual.
(2) Total loans less deferred net loan fees and loans in process.
- 20 -
III. LOAN PORTFOLIO (Continued)
C. Risk Elements (Continued)
2. Potential Problem Loans
As of September 30, 1999, 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
74.74% of MFB Corp.'s total loan portfolio at September
30, 1999.
D. Other Interest-Earning Assets
There are no other interest-earning assets, other than $100,000
in foreclosed real estate owned, as of September 30, 1999 which
would be required to be disclosed under Item III. C.1 or 2 if
such assets were loans.
- 21 -
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The allowance for loan losses is maintained through the provision
for loan losses, which is charged to earnings. The provision for
loan losses is determined in conjunction with management's review
and evaluation of current economic conditions (including those of
MFB Corp.'s lending area), changes in the characteristic and size
of the loan portfolio, loan delinquencies (current status as well
as past and anticipated trends) and adequacy of collateral
securing loan delinquencies, historical and estimated net
charge-offs, and other pertinent information derived from a
review of the loan portfolio. In management's opinion, MFB
Corp.'s allowance for loan losses is adequate to absorb
anticipated future losses from loans at September 30, 1999.
The following table analyzes changes in the consolidated
allowance for loan losses during the past five years ended
September 30, 1999.
Years Ended September 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Balance of allowance at
beginning of period $ 454 $ 370 $ 340 $ 310 $ 280
Add
Recoveries of loans
previously charged-
off--residential real
estate loans - - - - -
Less charge offs
Residential real estate
loans - - - - -
Commercial real estate
loans 45 36 - - -
Consumer loans 1 - - - -
------------ ----------- ------------- ---------- ------------
Net charge-offs 46 36 - - -
Provisions for loan losses 230 120 30 30 30
------------ ----------- ------------- ---------- ------------
Balance of allowance at
end of period $ 638 $ 454 $ 370 $ 340 $ 310
============ =========== ============= ========== ============
Net charge-offs to total
average loans out-
standing for period *.02% *.02% -% -% -%
Allowance at end of
period to total loans, net
at end of period (1) *.24% *.20% .20% .22% .26%
Allowance to total non-
performing loans at
end of period 664.58% 366.13% 141.76% 171.72% 100.65%
- --------------------------------------------------------------------------------
(1) Total loans less deferred net loan fees and loans in process.
* Not including loans held for sale
- 22 -
IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued)
Allocation of Allowance for Loan Losses. The following table presents an
analysis of the allocation of MFB Corp.'s allowance for loan losses at
the dates indicated.
September 30,
-------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ------------------- ---------------- ------------------ ----------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
to total to total to total to total to total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Balance at end of period
applicable to
Residential $ 110 70.62% $ 181 78.49% $ 323 86.91% $ 311 92.87% $ 281 97.60%
Commercial 387 17.48 213 13.19 19 4.66 1 .57 1 .17
Multi-family 3 1.22 1 .05 1 .07 1 .10 1 .15
Residential construction 11 4.12 8 3.53 1 4.35 1 3.23 1 1.72
Consumer loans (1) 45 6.56 26 4.74 1 4.01 1 3.23 1 .36
Unallocated 82 - 25 - 25 - 25 - 25 -
----- ------ ----- ------- ----- ------- ----- ------ ----- ------
Total $ 638 100.00% $ 454 100.00% $ 370 100.00% $ 340 100.0% $ 310 100.00%
===== ======= ===== ======= ===== ====== ===== ===== ===== ======
- --------------------------------------------------------------------------------
(1) Includes home equity and second mortgage loans, financing leases, and other
loans including, education loans and loans secured by deposits.
- 23 -
V. DEPOSITS
The average amount of deposits and average rates paid are summarized as
follows for the years ended September 30:
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
Savings accounts $ 12,277 2.39% $ 10,737 2.52% $ 10,359 2.68%
Now and money market accounts 36,422 2.75 30,065 2.83 26,770 2.89
Certificates of deposit 137,734 5.29 130,350 5.57 126,202 5.65
Demand deposits (noninterest-bearing) 6,763 3,554 1,274
------------ ------------ ------------
$ 193,196 $ 174,706 $ 164,605
============ ============ ============
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at September 30, 1999 is summarized as follows:
Amount
(In thousands)
Three months or less $ 11,679
Over three months and through six months 6,349
Over six months and through twelve months 5,683
Over twelve months 6,541
------------
$ 30,252
============
- 24 -
VI. RETURN ON EQUITY AND ASSETS
The ratio of net income to average total assets and average
shareholders' equity and certain other ratios are as follows:
September 30,
1999 1998 1997
------------ ------------ ------------
(Dollars in thousands)
Average total assets $ 336,193 $ 277,897 $ 237,050
============ ============ ===========
Average shareholders' equity $ 31,623 $ 33,404 $ 34,346
============ ============ ===========
Net income $ 2,204 $ 2,236 $ 2,002
============ ============ ===========
Return on average total assets .66% .80% .84%
============ ============ ===========
Return on average shareholders' equity 6.97% 6.69% 5.83%
============ ============ ===========
Dividend payout ratio (dividends
declared per share divided by net
income per share) 22.76% 23.26% 26.45%
============ ============ ===========
Average shareholders' equity
to average total assets 9.41% 12.02% 14.49%
============ ============ ===========
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,
---------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Maximum Balance:
FHLB advances............................................. $ 110,226 $ 92,726 $ 47,500
Securities sold under agreements to repurchase.. 7,079 3,882 389
Average Balance:
FHLB advances:............................................ 104,894 66,123 34,960
Securities sold under agreements to repurchase............ 3,892 1,647 97
Average Rate Paid On:
FHLB advances............................................. 5.45% 5.67% 5.64%
Securities sold under agreements to repurchase............ 3.80 4.07 4.12
The following table sets forth the Bank's borrowings at the dates indicated:
September 30,
----------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Amounts Outstanding:
FHLB advances............................................. $ 104,226 $ 92,726 $ 47,500
Securities sold under agreements to repurchase............ 6,566 2,366 389
Weighted Average Interest Rate:
FHLB Advances............................................. 5.37% 5.42% 5.66%
Securities sold under agreements to repurchase............ 3.52 4.02 4.25
- 25 -
COMPETITION
MFB Financial originates most of its loans to and accepts most of its deposits
from residents of St. Joseph and Elkhart counties in Indiana.
MFB Financial is subject to competition from various financial institutions,
including state and national banks, state and federal savings associations,
credit unions, certain non-banking consumer lenders, and other companies or
firms, including brokerage houses and mortgage brokers, that provide similar
services in St. Joseph and Elkhart Counties 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 six 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 and mutual funds with
respect to deposit accounts and with insurance companies with respect to
individual retirement accounts.
Under current federal law, bank holding companies may acquire savings
institutions and savings institutions may also acquire banks. Commercial
companies may not, however, acquire unitary savings and loan holding companies,
such as MFB Corp. 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 or 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.
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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, 1999. 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, 1999, was
approximately $71,000.
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.
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The Bank is also subject to federal and state regulation as to such matters as
loans to officers, directors, or principal shareholders, required reserves,
limitations as to the nature and amount of its loans and investments, regulatory
approval of any merger or consolidation, issuance or retirements of its own
securities, and limitations upon other aspects of banking operations. In
addition, the activities and operations of the Bank are subject to a number of
additional detailed, complex and sometimes overlapping federal and state laws
and regulations, These include state usury and consumer credit laws, state laws
relating to fiduciaries, The Federal Truth-In-Lending; Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and anti-trust
laws.
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Financial Services Modernization Act of 1999, federal legislation which
modernizes the laws governing the financial services industry. The new law
establishes a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms and other financial service
providers. As a result of this legislation, bank holding companies will be
permitted to engage in a wider variety of financial activities than permitted
under prior law, particularly with respect to insurance and securities
activities. To the extent the law permits banks, securities firms and insurance
companies to affiliate, the financial services industry may experience further
consolidation. This could result in a growing number of larger financial
institutions that offer wider varieties of financial services than are currently
offered by MFB and that could aggressively compete in the markets currently
served by MFB. The legislation also prohibits the sale of unitary savings and
loan holding companies to commercial entities and, to that extent, reduces the
number of potential acquirors of MFB. The law also increases commercial banks'
access to loan funding by the Federal Home Loan Bank System, and includes new
provisions in the privacy area, restricting the ability of financial
institutions to share nonpublic personal customer information with third
parties.
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. At
September 30, 1999, the Bank's investment in stock of the FHLB of Indianapolis
was $5.5 million.
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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 60 days
delinquent or securities evidencing interests therein, securities (including
mortgage-backed securities) issued, insured or guaranteed by the federal
government or any agency thereof, FHLB deposits, certain small business and
agricultural loans of smaller institutions and 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.
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 the OTS, conduct
examinations and generally supervise the operations of its insured members. This
supervision extends to a comprehensive regulatory scheme governing, among other
things, the form of deposit instruments issued by savings institutions, and
certain aspects of their lending activities, including appraisal requirements,
private mortgage insurance coverage and lending authority.
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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.
In addition to the assessment for deposit insurance, institutions are required
to pay on bonds issued in the late 1980s by the Financing Corporation to
recapitalize the predecessor to the SAIF. During 1998, Financial Corporation
payments for SAIF members approximated 6.10 basis points, while BIF members paid
1.22 basis points. By law, there will be equal sharing of Financing Corporation
payments between the members of both insurance funds January 1, 2000. The Bank's
annual deposit insurance premium for the year ended September 30, 1999,
including the Financial Corporation payments, was approximately $113,000 based
upon its current risk classification and the new assessment schedule for SAIF
insured institutions. These premiums are subject to change in future periods.
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.
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 4% 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,
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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, 1999, based on the capital
standards then in effect, the Bank was in compliance with its fully phased-in
capital requirements.
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. Although the OTS has decided to delay implementation of this rule, it
will continue to monitor the level of interest rate risk at individual
institutions and it retains the authority, on a case-by-case basis, to impose
additional capital requirements for individual institutions with significant
interest rate risk. The OTS recently updated its standards regarding the
management of interest rate risk to include summary guidelines to assist savings
institutions in determining their exposure to interest rate risk.
If an institution is not in compliance with its capital requirements, the OTS is
required to prohibit asset growth and to impose a capital directive that may
restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings bank that fails to meet its capital
requirements, which actions may include restrictions on operations and banking
activities, the imposition of a capital directive, a cease and desist order,
civil money penalties or harsher measures such as the appointment of a receiver
or conservator or a forced merger into another institution.
Prompt Corrective Action
Certain regulatory action is mandated or recommended for savings institutions
that are deemed to be well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. At each successively lower capital category, an institution is
subject to more restrictive and numerous mandatory or discretionary regulatory
actions or limits, and the OTS has less flexibility in determining how to
resolve the problems of the institution. OTS regulations define these capital
levels as follows: (1) well-capitalized institutions must have tota