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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, 2006
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)
4100 Edison Lakes Parkway, P.O. Box 528 Mishawaka, Indiana 46546
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (574) 273-7600
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered Common
Stock, without par value NASDAQ Stock Market LLC Common Share Purchase
Rights NASDAQ Stock Market LLC
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes
No _X_
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes No_X_
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. 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. _______
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated file" in Rule 12b-2 of the Exchange Act. (Check
one): Large accelerated filer __ Accelerated filer __ Non-accelerated filer X
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No _X_
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of March 31, 2006, was $34,233,862.
The number of shares of the registrant's common stock, without par value,
outstanding as of December 20, 2006, was 1,316,771 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Annual Report to Shareholders for the fiscal year ended
September 30, 2006 are incorporated by reference into Part II. Portions of the
Proxy Statement for the 2006 Annual Meeting of the Shareholders are incorporated
into Part I and Part III.
MFB CORP.
Form 10-K
INDEX
PART I
Item 1. Business 3
Item 1A. Risk Factors 41
Item 1B. Unresolved Staff Comments 42
Item 2. Properties 42
Item 3. Legal Proceedings 44
Item 4. Submission of Matters to a Vote of Security Holders 44
Item 4.5 Executive Officers of Registrant 45
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 46
Item 6. Selected Financial Data 47
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 47
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 47
Item 8. Financial Statements and Supplementary Data 47
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 48
Item 9A. Controls and Procedures 48
Item 9B. Other Information 48
PART III
Item 10. Directors and Executive Officers of the Registrant 48
Item 11. Executive Compensation 49
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 49
Item 13. Certain Relationships and Related Transactions 49
Item 14. Principal Accountant Fees and Services 49
PART IV
Item 15. Exhibits and Financial Statement Schedules 50
Signatures 51
Exhibit List 52
PART 1
Item 1. Business.
General
MFB Corp. ("MFB" or the "Company") is an Indiana corporation organized in
December, 1993, and parent company of its wholly owned savings bank subsidiary,
MFB Financial ("MFB Financial" or the "Bank"). MFB Corp. became a unitary
savings and loan holding company upon the conversion of Mishawaka Federal
Savings 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.
MFB Financial offers a number of consumer and business 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) statement
and passbook savings accounts; (viii) certificates of deposit; (ix) consumer and
commercial demand deposit accounts; (x) individual retirement accounts; (xi)
trust, investment management; and brokerage services; and (xii) a variety of
insurance products through Mishawaka Financial Services, Inc., its insurance
agency subsidiary. The Bank's wholly-owned subsidiaries, MFB Investments I,
Inc., MFB Investments II, Inc. and MFB Investments, LP are Nevada corporations
and a Nevada limited partnership that manage a portion of the Bank's investment
portfolio. MFB Financial provides banking services through twelve offices in St.
Joseph, Elkhart, and Hamilton counties in Indiana. MFBC Statutory Trust I is MFB
Corp's wholly-owned trust preferred security subsidiary.
The company's operations are managed and financial performance is evaluated on a
company-wide basis and, accordingly, considered a single operation segment.
Lending Activities
General. The Company's principal source of revenue is interest income from
residential mortgage loans, construction loans, commercial loans and consumer
loans. MFB Financial has concentrated its mortgage 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. At
September 30, 2006, $199.7 million, or 52.6% of the Company's total loan
portfolio, consisted of mortgage loans and residential construction loans on
one-to-four family residential real property, and multi-family loans 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. In an effort to diversify
the asset mix of the Bank and enhance growth, commercial loans have been
generated over the past ten years. Commercial loans include term loans,
construction loans for commercial buildings, working capital lines of credit and
letters of credit. At September 30, 2006, commercial loans totaled $134.6
million, or 35.4% of the Company's loan portfolio. Consumer loans include loans
secured by deposits, home equity and second mortgage loans, new and used car
loans, boat and recreational vehicle loans and personal loans. At September 30,
2006, $45.6 million, or 12.0% of the loan portfolio consisted of consumer loans.
Residential Mortgage Loans. Residential mortgage loans consist of one-to-four
family loans. MFB Financial offers fixed-rate loans with a maximum term of forty
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 the secondary market to assure that they meet
the investor quality guidelines.
A significant number of the residential mortgage loans made and retained in the
loan portfolio 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 seven
years. Initial offering rates, adjustment caps and margins are adjusted
periodically to reflect market conditions and the loans are underwritten to
secondary market standards to allow salability as an option.
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 compliance with automatic cancellation provisions, depending on the
date the loan was originated. On first mortgages, MFB will generally lend up to
103% loan-to-value, based upon the lesser of the purchase price or appraisal.
MFB also offers programs that target first-time homebuyers when the applicants
have successfully completed a homebuyer's education course and earn less than
80% of 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.
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.
All residential mortgage loans must be approved by named individuals appearing
on the board approved "Individual Lending Limits" approval matrix, and or the
loan committee. Approval will be bound by the limits appearing in this matrix
and monitored by management for appropriate authority. Approval for loans
outside these limits will be referred to the Bank's Loan Committee. The voting
members of the loan committee will consist of members of the Board of Directors
and the Chief Operating Officer, as Chairman. This committee will approve all
loans above the individual officer lending limits.
Construction Loans. MFB Financial offers construction loans on residential and
commercial real estate to builders or developers constructing such properties
and to owners who are to occupy the premises. Both residential and commercial
construction and development loans to builders are underwritten in the
commercial loan department with consistent underwriting standards, including
adequate collateral and sufficient debt coverage ratios. The loan reviews are
based on current economic conditions and personal guarantees are generally
required. Residential construction loans to owners who will occupy the premises
are underwritten in the mortgage loan department.
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 may also be charged for these loans. MFB
Financial normally requires an 80% or less 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 to
twelve months.
Commercial Loans. MFB Financial's commercial lending department focuses on
meeting the borrowing needs of local businesses primarily located in St. Joseph
and Elkhart counties. 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 prime rate. Loans with longer amortization
periods generally contain fixed interest rate balloon payment provisions of
seven years or less. Personal guarantees by business principals may be required
in order to manage risk on these loans.
When appropriate, MFB Financial uses guaranteed lending programs, such as the
Small Business Administration and the Indiana Department of Finance Authority,
to reduce risk. Lending activity is controlled with individual loan officer
lending limits and a loan committee consisting of board members and the
commercial loan officers. 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 Bank'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 institution's ability to make consumer loans.
Consumer loans involve a higher level of risk than one-to-four family
residential mortgage loans because the collateral, if any, tends to be less
stable. 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.
Consumer loans would include home equity loans and lines of credit, new and used
automobile, boat and recreational vehicle loans, savings account loans,
overdraft lines of credit and Visa credit card loans.
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 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
mitigate interest rate risk by committing forward sales utilizing a Best Efforts
program in which no penalties are incurred for non-delivery of a loan, or
utilize FHLMC mandatory delivery programs. Adjustable rate mortgages continue to
be originated by the Bank utilizing standard industry notes and mortgages. They
also can be sold 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. 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 corporate office.
A savings institution generally may not make any loans to one 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 combinations
of loans to any one borrower 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.
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 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 loan fee income from late
charges, origination fees, and miscellaneous fees. MFB Financial charges
application fees for most loan applications. 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.
Nonperforming and Classified Assets
Nonperforming assets. Nonperforming assets were $8.3 million and $3.1 million at
September 30, 2006 and 2005, respectively. Nonperforming assets include
nonperforming loans (loans delinquent 90 days or more and non-accrual loans),
other real estate owned, repossessions and nonperforming investment securities.
Total nonperforming loans for MFB Financial were $7.0 million and $1.4 million
at September 30, 2006 and 2005, respectively. Nonperforming loans increased from
last year in part due to the inclusion of two commercial loans with a
deterioration of credit quality which are discussed further in the Allowance for
Loan Losses section. Impaired loans consist of non-accrual loans and other loans
where principal and interest is not expected to be collected in accordance with
the original loan terms. Impaired loans were $6.9 million and $8.7 million at
September 30, 2006 and 2005, respectively. The decrease in impaired loans from
last year was due primarily to the improved financial condition of a commercial
loan customer and loan repayments. Other real estate owned, repossessions and
foreclosures were $1.3 million and $1.7 million at September 30, 2006 and 2005,
respectively.
The largest loan relationship included in impaired loans as of September 30,
2006 totaled approximately $3.1 million for which $3.1 million of the allowance
for loan losses has been allocated. As of September 30, 2006, the customer was
in compliance with a forbearance agreement dated September 8, 2006, and has made
payments of $624,000. The agreement provides for full payment of the outstanding
debt by December 31, 2006. However, the Bank maintained the $3.1 million
allowance for the loan losses allocation based upon the history of unreliable
and inconsistent financial reporting and cash flows of the customer's business.
The actual loss on this loan relationship may vary significantly from the
current estimate contingent upon the borrower remaining in compliance with the
terms of the forbearance agreement. At September 30, 2005, this relationship
totaled approximately $3.8 million, and $1.4 million of the allowance was
allocated to it. This loan was still performing at September 30, 2005; however
it is reported as non-performing at September 30, 2006 and is the primary cause
of the increase in non-performing loans. As of November 30, 2006 the customer
was in compliance with the forbearance agreement and made payments of $854,000
subsequent to September 30, 2006. At November 30, 2006 this relationship totaled
approximately $2.3 million with an allocation of allowance of loan losses of
$2.3 million. We expect that the reduction in the allowance for loan losses
allocation on this credit will result in the Company recording a recovery of
provision for loan losses in the quarter ending December 31, 2006.
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 Bank 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, 2006, the Bank had classified $5.2 million of its assets as
"special mention," $4.3 million as "substandard," $2.6 million as "doubtful" and
$-0- as "loss" for regulatory purposes.
An insured institution is required to establish a specific allowance for loan
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 on pools or types of loans, which have been
established to recognize the inherent risk associated with lending activities.
Unlike specific allowances, general allowances have not been allocated to
particular problem assets. When an insured institution classifies problem assets
as "loss", it is required by the OTS to either to establish a specific allowance
for the identified loss or to charge off such amount. An institution's
determination as to the classification of its assets and the amount of its
valuation allowances is subject to review by the OTS which can order the
establishment of additional general or specific loss allowances. MFB Financial
regularly reviews its loan portfolio to determine whether any loans require
classification in accordance with applicable regulations.
The Company has also adopted an internal risk classification system, and all
commercial loans are assigned a risk grade based on factors such as capacity to
repay, capital, collateral, character of the borrower, and economic conditions.
The risk grading process assists in identifying classified assets for regulatory
purposes, as well as determining the general and specific loss allowances for
classified commercial loans.
The Company maintains an internal loan review function reporting directly to the
President and Chief Executive Officer. Loan review focuses on the commercial
loan portfolio. The primary objectives are to evaluate the credit risk of
individual loan relationships, as well as the aggregate credit risk associated
with the entire commercial loan portfolio, to help ensure that underwriting
standards are followed and provide a foundation for assessing the adequacy of
the allowance for loan losses. The Company has established a goal of reviewing
60% of all commercial loans annually, based on dollar amounts outstanding.
During the twelve months ending September 30, 2006, 61% of the commercial loans
were reviewed at least once. The Company reviews all "special mention,"
"substandard," "doubtful" and "loss" assets at least quarterly.
All mortgage and consumer 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 remain on accrual
status. 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 a loan is 30 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 or
repossession proceedings for any loan upon making a determination that it is
prudent to do so. All loans on which foreclosure or repossession proceedings
have been commenced are placed on non-accrual status.
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, changes
in the character and size of the loan portfolio, delinquencies (current status
as well as past 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. Total commercial loans at September
30, 2006 were $134.4 million compared to $158.8 million at September 30, 2005.
Concurrently, the Bank continued to improve its loan review and risk assessment
procedures however; management's increased attention to and the Company's
subsequent decrease in nonperforming loans was offset by an increase in
Commercial Impaired Loans. During the year ended September 30, 2006 management
noted several commercial loans with improved credit performance which was offset
by two commercial loans with a deterioration of credit quality. Based on the
factors above, the provision for loan losses was increased from $723,000 during
the year ended September 30, 2005 to $1.0 million for the year ending September
30, 2006. The balance of the allowance for loan losses at September 30, 2005 was
$6.4 million or 1.63% of loans, compared to $7.2 million or 1.91% of loans at
September 30, 2006. In management's opinion, MFB Financial's allowance for loan
losses is adequate to absorb probable incurred losses existing at September 30,
2006.
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 ALCO Committee, is designed primarily to maximize the yield on the
investment portfolio subject to liquidity risk, default risk, interest rate
risk, and prudent asset/liability management.
The Company's investment portfolio consists of U.S. government agency
securities, municipal bonds, mortgage-backed securities, corporate debt
securities, equity securities, Federal Home Loan Bank ("FHLB") stock, low income
housing projects and Certificates of deposits in other financial institutions.
Investments decreased from $76.1 million at September 30, 2005 to $69.3 million
at September 30, 2006 primarily due to continued principal pay downs of the
Company's mortgage-backed securities related to the mortgage refinancing volume
during the period.
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the Company
to retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value.
Of the total gross unrealized losses of $867,000 in securities available for
sale at September 30, 2006, $430,000 relates to the reduced value of various
mortgage-backed securities of government sponsored agencies. This decline in
value is primarily attributable to the current level of interest rates.
Related to the $131,000 of net unrealized losses for debt securities classified
as corporate notes, $96,000 of unrealized losses is attributable to a trust
preferred bond issued by a regional banking organization. This unrealized loss
is primarily attributable to the low interest rate environment, and the variable
interest rate structure of the bond. Such interest rate adjustments resulted in
coupons being set at a level lower than the current market. As interest rates
rise and the bonds coupon rate increases, management anticipates recovery of the
unrealized losses. Management has the ability to hold this bond to maturity, at
which time the face value of the bond would be realized. Credit issues are not
considered to be a significant factor relative to the current unrealized losses.
During the fiscal year ended September 30, 2002, the Company recorded an
$895,000 write down on a $1.0 million WorldCom, Inc. corporate debt security.
That security was sold in October 2002 for $160,000. On November, 27, 2006, the
Company received notification and payment of $16,000 representing an initial
distribution of funds recovered by the U.S. Securities and Exchange Commission
in its action against WorldCom, Inc. On December 19, 2006, the Company received
notification and payment of $360,000 representing an initial distribution of
funds recovered in the federal securities class action law suit brought on
behalf of purchasers of WorldCom, Inc. securities. These amounts will be
recorded as a recovery of loss on securities during the quarter ended December
31, 2006. The Company may receive an additional distribution depending upon the
resolution of disputed claims, appeals from court determinations and additional
administrative expenses, interest and taxes incurred by the settlement funds.
Liquidity. Liquidity relates primarily to the Company's ability to fund loan
demand, meet deposit customers' withdrawal requirements and provide for
operating expenses. Liquid assets include cash, certain certificates of deposit
of insured banks and savings institutions, certain bankers' acceptances and
securities available for sale. 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. Savings associations remain subject to the OTS
regulation that requires them to maintain sufficient liquidity to ensure their
safe and sound operation. Liquid assets were $75.7 million as of September 30,
2006 compared to the $119.3 million at September 30, 2005, and management
believes the liquidity level as of September 30, 2006 is sufficient to meet
anticipated liquidity needs.
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,
secondary market loan sales, Federal Home Loan Bank advances and income provided
from operations. While scheduled loan payments and income on earning assets are
relatively stable sources of funds, deposit inflows and outflows and secondary
market sales can vary widely and are influenced by prevailing interest rates,
market conditions and levels of competition. Borrowings from the FHLB of
Indianapolis are used to compensate for reductions in deposits or deposit
inflows at less than projected levels.
Deposits. Deposits are attracted principally from within St. Joseph and Elkhart
counties in Indiana through the offering of a broad selection of deposit
instruments including NOW, business checking and other transaction accounts,
certificates of deposit, individual retirement accounts, and savings accounts.
MFB Financial does not actively solicit or advertise for deposits outside of
these counties with the exception of the new office in Hamilton County, Indiana.
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. At
September 30, 2006, noninterest bearing demand deposits totaled $30.0 million,
Savings, NOW, MMDA deposits were $129.2 million and time deposits were $187.0
million.
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 manages the pricing of its deposits in keeping
with its asset/liability management and profitability objectives. Based on its
experience, the Bank's savings, NOW and non-interest-bearing checking accounts
have been 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 secured by a blanket collateral agreement and based on percentage
of unencumbered loans and investment securities held by the bank. 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, 2006, MFB
Financial had $97.1 million in Federal Home Loan Bank borrowings outstanding at
an average rate of 5.52% compared to $125.9 million at September 30, 2005 at an
average rate of 5.35%. The Company's additional borrowing capacity with FHLB was
$51.6 million at September 30, 2006. In September 2006, the Company had
outstanding borrowings of $4.5 million at a rate of 6.92% from one of its
correspondent banks.
MFBC Statutory Trust I, a trust formed by the Company, issued $5.0 million of
trust preferred securities on July 29, 2005 as part of a private placement of
such securities. The Company issued subordinated debentures to the trust in
exchange for the proceeds of the offering; the debentures and related debt
issuance costs represent the sole assets of the trust. The securities will
mature in 30 years, will require quarterly distributions and will bear a fixed
rate of interest of 6.22% per annum for the first five years, resetting
quarterly thereafter at the prevailing three-month LIBOR rate plus 1.7% per
annum. Interest on the securities is payable quarterly in arrears each September
15, December 15, March 15, and June 15 commencing September 15, 2005. The
Company may redeem the trust preferred securities, in whole or in part, without
penalty, on or after September 15, 2010, or earlier upon the occurrence of
certain events with the payment of a premium upon redemption, and the securities
mature on September 15, 2035.
Bank Subsidiaries
The Bank's insurance agency subsidiary, Mishawaka Financial Services, Inc. ("MFB
Insurance"), was organized in 1975 and currently is engaged in the sale of
credit life and health and life insurance, as agent to the Bank's customers and
the general public. During the fiscal year 2006, Mishawaka Financial sold the
property and casualty segment of its business for a gain of $200,000. During the
fiscal year ending September 30, 2002, the Company established three new
wholly-owned subsidiaries of the Bank to manage a portion of its investment
portfolio. MFB Investments I, Inc. and MFB Investments II, Inc. are Nevada
corporations which jointly own MFB Investments, LP, a Nevada limited partnership
which holds and manages investment securities previously owned by the Bank. A
total of $59.1 million in investment securities are, as of September 30, 2006,
managed by MFB Investments, LP. All intercompany balances and transactions
between all of the subsidiaries have been eliminated in the consolidation.
Employees
As of September 30, 2006, MFB Financial employed 140 persons on a full-time
basis and 26 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.
(1) Average outstanding balances reflect unrealized gain (loss) on securities
available for sale. (2) Total loans less deferred net loan fees and loans in
process.
13
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:
2006 2005 2004
Average Average Average
Outstanding Outstanding Outstanding
Balance Balance Balance
------- ------- -------
Assets: (In thousands)
Interest-earning assets:
Interest-bearing deposits $ 26,337 $ 22,157 $ 21,210
Mortgage-backed securities (1) 37,554 39,021 18,741
Other securities available for sale (1) 28,436 22,429 24,235
FHLB stock 8,809 8,952 6,932
Loans held for sale 802 1,105 1,287
Loans receivable (2) 379,568 399,469 343,545
------------- ------------ ------------
Total interest-earning assets 481,506 493,133 415,950
Non-interest earning assets, net
of allowance for loan losses 38,734 39,057 29,116
------------- ------------ ------------
Total assets $ 520,240 $ 532,190 $ 445,066
============= ============ ============
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts $ 58,887 $ 47,071 $ 35,309
NOW and money market accounts 77,428 89,443 79,500
Certificates of deposit 186,109 185,268 156,961
Subordinated notes - trust 5,000 875 -
Other Borrowings 6,330 6,500 1,078
FHLB advances 108,815 131,101 104,801
------------- ------------ ------------
Total interest-bearing liabilities 442,569 460,258 377,649
Other liabilities 39,634 35,345 31,974
------------- ------------ ------------
Total liabilities 482,203 495,603 409,623
Shareholders' equity
Common stock 11,731 12,413 12,393
Retained earnings 34,629 32,222 32,120
Net unrealized gain(loss) on securities
available for sale (506) (418) (812)
Treasury stock (7,817) (7,630) (8,258)
-------------- ------------- ------------
Total shareholders' equity 38,037 36,587 35,443
------------- ------------ ------------
Total liabilities and shareholders' equity $ 520,240 $ 532,190 $ 445,066
============= ============ ============
(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.
14
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, 2006-------
-----------------------------
Average Average
Balance Interest Yield/Cost
(Dollars in thousands)
INTEREST-EARNING ASSETS
Interest-bearing deposits $ 26,337 $ 871 3.31%
Mortgage-backed securities (1) 38,340 1,640 4.28
Other securities available for sale (1) 28,513 1,200 4.21
FHLB stock 8,809 422 4.79
Loans held for sale 802 52 6.43
Loans receivable (2) 379,568 24,422 6.43
------------ ------------
Total interest-earning assets $ 482,369 28,607 5.93
============ ============
INTEREST-BEARING LIABILITIES
Savings accounts $ 58,887 1,053 1.79%
NOW and money market accounts 77,428 1,275 1.65
Certificates of deposit 186,109 6,693 3.60
Subordinated notes - trust 5,000 311 6.22
Other Borrowings 6,330 399 6.31
FHLB advances 108,815 5,414 4.98
------------ ------------
Total interest-bearing liabilities $ 442,569 15,145 3.42
============ ============
Net interest-earning assets $ 39,800
============
Net interest income $ 13,462
============
Interest rate spread (3) 2.51%
=====
Net yield on average interest-earning assets (4) 2.79%
=====
(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.
16
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL (Continued)
--------Year Ended September 30, 2005-------
-----------------------------
Average Average
Balance Interest Yield/Cost
(Dollars in thousands)
INTEREST-EARNING ASSETS
Interest-bearing deposits $ 22,157 $ 403 1.82%
Mortgage-backed securities (1) 39,152 1,523 3.89
Other securities available for sale (1) 22,429 732 3.26
FHLB stock 8,952 385 4.30
Loans held for sale 1,105 69 6.22
Loans receivable (2) 399,469 24,835 6.22
------------ ------------
Total interest-earning assets $ 493,264 27,947 5.67
============ ============
INTEREST-BEARING LIABILITIES
Savings accounts $ 47,071 421 0.89%
NOW and money market accounts 89,443 902 1.01
Certificates of deposit 185,268 5,308 2.87
Subordinated notes - trust 875 53 6.02
Other Borrowings 6,500 285 4.38
FHLB advances 131,101 6,308 4.81
------------ ------------
Total interest-bearing liabilities $ 460,258 13,277 2.88
============ ============
Net interest-earning assets $ 33,006
============
Net interest income $ 14,670
============
Interest rate spread (3) 2.79%
=====
Net yield on average interest-earning assets (4) 2.97%
=====
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL (Continued)
--------Year Ended September 30, 2004-------
-----------------------------
Average Average
Balance Interest Yield/Cost
(Dollars in thousands)
INTEREST-EARNING ASSETS
Interest-bearing deposits $ 21,210 $ 174 0.82%
Mortgage-backed securities (1) 18,808 604 3.21
Other securities available for sale (1) 25,013 771 3.08
FHLB stock 6,932 321 4.63
Loans held for sale 1,287 78 6.07
Loans receivable (2) 343,545 20,844 6.07
------------ ------------
Total interest-earning assets $ 416,795 22,792 5.47
============ ============
INTEREST-BEARING LIABILITIES
Savings accounts $ 35,309 220 0.62%
NOW and money market accounts 79,500 575 0.72
Certificates of deposit 156,961 4,614 2.94
Other Borrowings 1,078 38 3.52
FHLB advances 104,801 5,642 5.38
------------ ------------
Total interest-bearing liabilities $ 377,649 11,089 2.94
============ ============
Net interest-earning assets $ 39,146
============
Net interest income $ 11,703
============
Interest rate spread (3) 2.53%
=====
Net yield on average interest-earning assets (4) 2.81%
17
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL (Continued)
C. The following tables describe 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, 2006 compared
to year ended September 30, 2005
Interest-earning assets
Interest-bearing deposits $ 468 $ 330 $ 138
Mortgage-backed securities 468 212 256
Other securities available for sale 117 152 (35)
FHLB stock 37 44 (7)
Loans held for sale (17) 2 (19)
Loans receivable (413) 867 (1,280)
------------ ----------- -------------
Total 660 1,607 (947)
Interest-bearing liabilities
Savings accounts 632 421 211
NOW and money market accounts 373 571 (198)
Certificates of deposit 1,385 1,355 30
Subordinated notes - trust 258 2 256
Other Borrowings (894) 215 (1,109)
FHLB advances 114 125 (11)
----------- ----------- -------------
Total 1,868 2,689 (821)
----------- ----------- -------------
Change in net interest income $ (1,208) $ (1,082) $ (126)
============ ============ =============
18
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, 2005 compared
to year ended September 30, 2004
Interest-earning assets
Interest-bearing deposits $ 229 $ 221 $ 8
Mortgage-backed securities 919 150 769
Other securities available for sale (39) 52 (91)
FHLB stock 64 (21) 85
Loans held for sale (9) 2 (11)
Loans receivable 3,991 525 3,466
----------- ----------- ------------
Total 5,155 929 4,226
Interest-bearing liabilities
Savings accounts 201 114 87
NOW and money market accounts 327 249 78
Certificates of deposit 694 (114) 808
Subordinated notes - trust 53 - 53
Other Borrowings 666 (489) 1,155
FHLB advances 247 11 236
----------- ----------- ------------
Total 2,188 (229) 2,417
----------- ------------ ------------
Change in net interest income $ 2,967 $ 1,158 $ 1,809
=========== =========== ============
19
II. INVESTMENT PORTFOLIO
A. The following table sets forth the amortized cost and fair
value of securities available for sale: At September 30,
2006 2005 2004
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(In thousands)
Debt securities
U.S. Government
and federal
agencies $ 14,392 $ 14,322 $ 11,220 $ 11,179 $ 9,303 $ 9,352
Municipal bonds 337 338 340 344 343 356
Mortgage-
backed 33,839 33,195 40,575 40,275 45,266 45,405
Corporate debt 7,246 7,115 8,745 8,569 7,734 7,655
----------- ------------ ----------- ---------- ---------- -----------
55,814 54,970 60,880 60,367 62,646 62,768
Marketable equity
securities 3,085 3,413 3,180 3,208 4,128 3,253
----------- ------------ ----------- ---------- ---------- -----------
$ 58,899 $ 58,383 $ 64,060 $ 63,575 $ 66,774 $ 66,021
=========== ============ =========== ========== ========== ===========
Federal Home Loan Bank (FHLB) stock is carried at cost which approximates fair
value and for the years endings September 30, 2006, 2005 and 2004 was $8.8
million, $9.0 million and $8.2 million.
20
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, 2006, 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 $ 9,892 $ 9,827 $ 3,500 3,495 $ 1,000 $ 1,000 $ - $ - $ 14,392 $ 14,322
Municipal bonds 337 338 - - - - - - 337 338
Corporate Debt 3,275 3,252 - - - - 3,971 3,863 7,246 7,115
----- --------- --------- --------- --------- --------- --------- --------- --------- ----------
$ 13,504 $ 13,417 $ 3,500 $ 3,495 $ 1,000 $ 1,000 $ 3,971 $ 3,863 $ 21,975 $ 21,775
========== ========= ========= ========= ========= ========= ========= ========= ========= =========
Weighted
average yield 4.57 % 4.84% 6.94% 4.49% 4.71%
There were no securities held to maturity at September 30, 2006.
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.There were no investments in securities of any one issuer which exceeded
10% of the shareholders' equity of the Company at September 30, 2006.
22
III. LOAN PORTFOLIO
A. The following table sets forth 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,
2006 2005 2004 2003 2002
Percent Percent Percent Percent Percent
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Mortgage loans
Residential $ 174,399 45.91% $ 167,395 42.67% $ 176,817 44.10% $ 129,472 40.60% $ 146,943 46.31%
Residential construction 22,232 5.85 21,757 5.56 20,259 5.05 22,066 6.92 15,863 5.00
Multi-family 3,089 0.81 3,249 0.83 3,899 0.97 6,728 2.11 6,027 1.90
Commercial and other loans
Commercial loans 134,610 35.44 158,071 40.49 160,952 40.15 130,623 40.96 121,140 38.18
Home equity and second
mortgage loans 37,779 9.94 33,901 8.66 32,006 7.98 24,535 7.70 21,151 6.67
Other 7,776 2.05 7,010 1.78 6,973 1.75 5,462 1.71 6,165 1.94
---------- ------- ---------- ----- ---------- ------ ---------- ------ --------- ------
Gross loans receivable 379,885 100.00% 391,383 100.00% 400,906 100.00% 318,886 100.00% 317,289 100.00%
Less
Allowance for loan losses (7,230) (6,388) (6,074) (5,198) (5,143)
Deferred net loan fees (707) (766) (843) (820) (794)
Loans in process 44 78 (138) 89 (104)
----------- ------------ ------------- ------------ -------------
Net loans receivable $ 371,992 $ 384,307 $ 393,851 $ 312,957 $ 311,248
Mortgage-backed securities
FHLMC certificates $ 24,243 $ 26,621 $ 25,767 $ 6,966 $ 13,748
CMO - REMIC 8,952 13,654 19,639 9,803 13,289
----------- ------------ ---------- ------------ ------------
Net mortgage-backed $ 33,195 $ 40,275 $ 45,406 $ 16,769 $ 27,037
Securities
Mortgage loans
Adjustable rate $ 124,925 62.55% $ 122,437 63.64% $ 122,473 60.94% $ 113,639 71.80% $ 132,836 78.68%
Fixed rate 74,795 37.45 69,964 36.36 78,502 39.06 44,627 28.20 35,997 21.32
----------- ------- ---------- ------ --------- ------ ---------- ------ --------- --------
Total $ 199,720 100.00% $ 192,401 100.00% $ 200,975 100.00% $ 158,266 100.00% $ 168,833 100.00%
III. LOAN PORTFOLIO (Continued)
B. Loan Maturity. The following table sets forth certain information at
September 30, 2006, 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 2010 2012 2017 2022
at September 30, and to to and
2006 2007 2008 2009 2011 2016 2021 Following
(In thousands)
Mortgage Loans
Residential $ 174,399 $ 71 $ 739 $ 382 $ 1,156 $ 8,841 $ 25,320 $ 137,890
Residential construction 22,232 22,232 - - - - - -
Multi-family 3,089 1,798 - 1,134 - - - 157
Commercial and other Loans-
Commercial loans 134,610 13,364 30,232 13,506 29,590 9,513 381 38,024
Home equity and second 37,779 3,040 2,201 5,301 16,929 3,910 1,392 5,006
mortgage
Other 7,776 393 666 1,147 3,281 487 91 1,711
------------ ----------- ---------- ----------- ----------- --------- ----------- ---------
Total $ 379,885 $ 40,898 $ 33,838 $ 21,470 $ 50,956 $ 22,751 $ 27,184 $ 182,788
The following table sets forth, as of September 30, 2006, the dollar amount of
all loans which have fixed interest rates and floating or adjustable interest
rates.
Due After September 30, 2006
Variable
Fixed Rates Rates Total
(In thousands)
Mortgage loans
Residential & Construction $ 74,706 $ 124,925 $ 196,631
Multi-family 3,089 - 3,089
Commercial and other loans
Commercial loans 98,922 35,688 134,610
Home equity and second mortgage 25,104 12,675 37,779
Other 7,618 158 7,776
------------ ----------- ----------
Total $ 209,439 $ 173,446 $379,885
============ =========== ========
23
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 nonperforming assets. 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,
-----------------------------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(Dollars in thousands)
Accruing loans delinquent
more than 90 days $ 619 $ 136 $ - $ - $ -
Non-accruing loans 6,390 1,284 2,719 3,845 5,464
---------- --------- ----------- ---------- -----------
Total nonperforming
loans 7,009 1,420 2,719 3,845 5,464
Real estate owned, net 1,135 1,444 1,527 704 365
Repossessions & Foreclosures 110 252 - - -
Nonperforming Investments - - - - 120
---------- --------- ----------- ---------- -----------
Total nonperforming
assets $ 8,254 $ 3,116 $ 4,246 $ 4,549 $ 5,949
========== ========= =========== ========== ===========
Nonperforming loans to
total loans 1.85% 0.36% 0.68% 1.21% 1.73%
Nonperforming assets to
total loans 2.17% 0.80% 1.07% 1.43% 1.88%
The increase in nonperforming loans is discussed in the Nonperforming and
Classified Assets section and the Allowance for Loan Losses section. Management
believes that the allowance for loan losses balance at September 30, 2006 is
adequate to absorb estimated losses on nonperforming loans, as the allowance
balance is maintained by management at a level considered adequate to cover
probable incurred losses 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.
24
III. LOAN PORTFOLIO (Continued)
C. Risk Elements (Continued)
2. Potential Problem Loans
As of September 30, 2006, impaired loans totaled $6.9
million. Loans are classified as impaired loans if 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. The
impaired loans had specific loan loss allowances totaling
$4.3 million at September 30, 2006. A total of $5.4
million of the impaired loans are nonaccrual loans and
included in the nonperforming loans of $7.0 million in the
table above.
3. Foreign Outstandings
None
4. Loan Concentrations
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 and multi-family
residential real property. These loans continue to be a
major focus of MFB Financial's loan origination
activities, representing 52.3% of the total loan portfolio
at September 30, 2006. However, MFB Financial continues to
place increased emphasis on diversifying its balance sheet
and improving earnings in commercial lending, which
represent 35.4% of the total loan portfolio at September
30, 2006, and consumer and other lending, which represents
12.3%.
D. Other Interest-Earning Assets
There are no other interest-earning assets as of September 30,
2006 which would be required to be disclosed under Item III. C.1
or 2 if such assets were loans.
* Not including loans held for sale
25
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 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 probable incurred losses from loans at September 30,
2006.
The following table analyzes changes in the consolidated
allowance for loan losses during the past five years ended
September 30, 2006.
Years Ended September 30,
-------------------------------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(Dollars in thousands)
Balance of allowance at
beginning of period $ 6,388 $ 6,074 $ 5,198 $ 5,143 $ 4,632
Add: recoveries
Mortgage Residential loans - - - - 14
Residential Construction - - 8 - -
Commercial real estate - - 5 333 -
Commercial Loans 2 80 2 - -
Other loans 3 10 2 - -
Less charge offs:
Mortgage Residential loans (36) (40) - - -
Commercial real estate (48) (80) (11) (305) (2,826)
Commercial loans (45) (266) (508) (1,060) -
Home Equity (3) - - (7) -
Other loans (63) (113) (24) (16) (46)
------------- ------------ ------------- ---------- ------------
Net charge-offs (190) (409) (526) (1,055) (2,858)
Allowance acquired through
acquisition - - 602 - -
Provisions for loan losses 1,032 723 800 1,110 3,369
------------ ----------- ------------- ---------- ------------
Balance of allowance at
end of period $ 7,230 $ 6,388 $ 6,074 $ 5,198 $ 5,143
============ =========== ============= ========== ============
Net charge-offs to total
average loans out-
standing for period * 0.05% 0.10% 0.15% 0 .33% 0.91%
Allowance at end of
period to total loans
at end of period * 1.91% 1.63% 1.52% 1.63% 1.63%
27
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,
2006 2005 2004 2003 2002
-------------------- ----------------- ----------------- ----------------- ------------------
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 $ 210 45.90% $ 242 42.74% $ 318 44.11% $ 94 40.60% $ 121 46.31%
Commercial 6,460 35.43 5,603 40.39 5,126 40.15 4,591 40.96 4,814 38.18
Multi-family 6 .81 6 0.83 8 0.97 7 2.11 6 1.90
Residential construction 44 5.85 44 5.57 40 5.05 22 6.92 16 5.50
Consumer loans (1) 195 12.01 144 10.47 153 9.72 70 9.41 67 8.61
Unallocated 315 349 429 414 119
----------- ----- ----------- ------ -------- ------ --------- ----- ---------- ------
Total $ 7,230 100.00% $ 6,388 100.00% $ 6,074 100.00% $ 5,198 100.00% $ 5,143 100.00%
(1) Includes home equity and second mortgage loans, 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:
2006 2005 2004
---- ---- ----
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in thousands)
Savings accounts $ 58,887 1.79% $ 47,071 0.89% $ 35,309 0.62%
Now and money market accounts 77,428 1.65 89,443 1.01 79,500 0.72
Certificates of deposit 186,109 3.60 185,268 2.87 156,961 2.94
Demand deposits (noninterest-bearing) 34,960 30,387 28,923
$ 357,384 $ 352,169 $ 300,693
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at September 30, 2006 is summarized as
follows:
Amount
(In thousands)
Three months or less $ 10,954
Over three months and through six months 11,673
Over six months and through twelve months 18,178
Over twelve months 9,709
------------
$ 50,514
29
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,
----------------------------------------------
2006 2005 2004
---- ---- ----
(Dollars in thousands)
Average total assets $ 520,240 $ 532,190 $ 445,066
Average shareholders' equity $ 38,037 $ 36,587 $ 35,443
Net income $ 2,166 $ 2,496 $ 1,790
Return on average total assets 0.42% 0.47% 0.40%
Return on average shareholders' equity 5.69% 6.82% 5.05%
Dividend payout ratio (dividends
declared per share divided by net
income per share) 32.92% 26.73% 34.56%
Average shareholders' equity
to average total assets 7.31% 6.87% 7.96%
VII. SHORT-TERM AND FEDERAL HOME LOAN BANK BORROWINGS
The following table sets forth the maximum month-end balance and average balance
of FHLB advances at the dates indicated.
September 30,
2006 2005 2004
---- ---- ----
(Dollars in thousands)
Maximum Balance:
FHLB advances............................................. $123,675 $136,260 $ 133,443
Average Balance:
FHLB advances:............................................ 108,815 131,101 104,801
Average Rate Paid On:
FHLB advances............................................. 4.98% 4.81% 5.38%
The calculation of the average rate paid on FHLB advances is impacted by
purchase adjustment amortization for the years ended September 30, 2006, 2005
and 2004 of $472,000; $804,000 and $156,000.
The following table sets forth the Bank's borrowings at the dates indicated:
September 30,
2006 2005 2004
---- ---- ----
(Dollars in thousands)
Amounts Outstanding:
FHLB advances............................................. $ 97,053 $ 125,854 $ 133,443
Weighted Average Interest Rate:
FHLB Advances............................................. 5.52% 5.35% 5.53%
VIII. CONTRACTUAL OBLIGATIONS AND COMMITTMENTS
The following table sets forth contractual obligations and commitments based on
the due date:
Payments due by Period
Less than Over
Total 1 year 1-3 years 3-5 years 5 years
----- ------ --------- --------- -------
(Dollars in thousands)
Time deposits $ 186,979 $ 138,057 $ 44,358 $ 4,261 $ 303
FHLB borrowings 97,053 9,000 65,886 19,000 3,167
Loan from correspondent
Bank 4,500 4,500 - - -
Subordinated debenture 5,000 - - - 5,000
Unused commitments to
extend credits 77,281 77,281 - - -
------------ ----------- ------------- ---------- ------------
Total $ 370,813 $ 228,838 $ 110,244 $ 23,261 $ 8,470
=============== ============= ============= ============ ============
41
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 and beginning in
2005 in Hamilton County, Indiana. MFB Financial is subject to competition from
various financial institutions, including state and national banks, state and
federal savings associations, credit unions, certain non-banking consumer
lenders, and other companies or firms, including brokerage houses and mortgage
brokers that provide similar services in St. Joseph and Elkhart Counties. In
total, there are 34 financial institutions located in this two county market
area. These financial institutions consist of 17 commercial banks, one savings
bank and 16 credit unions. 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.
The primary factors influencing competition for deposits are interest rates,
service and convenient access. 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.
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 legislation has resulted in
increased competition for the Company and the Bank.
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 by the Office of Thrift Supervision (the "OTS") 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 Deposit
Insurance Fund ("DIF") which is 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.
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 December 31, 2005 and dated April
3, 2006. 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, 2006, was approximately $109,000.
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 permissible
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 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.
Recent Legislative Developments
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. This 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 statute grandfathered MFB's status as a unitary savings and
loan holding company and its authority to engage in commercial activities. The
legislation also provides, however, that a company that acquires a unitary
savings and loan holding company through a merger or other business combination
may engage only in those activities that are permissible for a multiple savings
and loan holding company or for a financial holding company. This provision
likely could reduce the number of potential acquirers 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.
On October 26, 2001, President Bush signed the USA Patriot Act of 2001 (the
"Patriot Act"). The Patriot Act is intended to strengthen the ability of U.S.
Law Enforcement to combat terrorism on a variety of fronts. The potential impact
of the Patriot Act on financial institutions is significant and wide-ranging.
The Patriot Act contains sweeping anti-money laundering and financial
transparency laws and requires financial institutions to implement additional
policies and procedures with respect to, or additional measures designed to
address, any or all the following matters, among others: money laundering,
suspicious activities and currency transaction reporting, and currency crimes.
Many of the provisions in the Patriot Act were to have expired December 31,
2005, but the U.S. Congress authorized renewals that extended the provisions
until March 10, 2006. In early March 2006, the U.S. Congress approved the USA
Patriot Improvement and Reauthorization Act of 2005 (the "Reauthorization Act")
and the USA Patriot Act Additional Reauthorizing Amendments Act of 2006 (the
"Patriot Act Amendments"), and they were signed into law by President Bush on
March 9, 2006. The Reauthorization Act makes permanent all but two of the
provisions that had been set to expire and provides that the remaining two
provisions, which relate to surveillance and the production of business records
under the Foreign Intelligence Surveillance Act, will expire in four years. The
Patriot Act Amendments include provisions allowing recipients of certain
subpoenas to obtain judicial review of nondisclosure orders and clarifying the
use of certain subpoenas to obtain information from libraries. The Company does
not anticipate that these changes will materially affect its operations.
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002
(the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act represents a comprehensive
revision of laws affecting corporate governance, accounting obligations and
corporate reportings. The Sarbanes-Oxley Act is applicable to all companies with
equity or debt securities registered under the Securities Exchange Act of 1934
(the "1934 Act"). In particular, the Sarbanes-Oxley Act establishes: (i) new
requirements for audit committees, including independence, expertise, and
responsibilities; (ii) additional responsibilities regarding financial
statements for the Chief Executive Officer and Chief Financial Officer of the
reporting company; (iii) new standards for auditors and regulation of audits;
(iv) increased disclosure and reporting obligations for the reporting company
and their directors and executive officers; and (v) new and increased civil and
criminal penalties for violation of the securities laws.
The Securities and Exchange Commission had adopted final rules implementing
Section 404 of the Sarbanes-Oxley Act of 2002 but has delayed the implementation
of 404 regulations for non-accelerated filers. The Company may at some point in
the future be required to include a report from management on the Company's
internal control over financial reporting. The internal control report must
include a statement of management's responsibility for establishing and
maintaining adequate control over financial reporting of the Company, identify
the framework used by management to evaluate the effectiveness of the Company's
internal control over financial reporting, provide management's assessment of
the effectiveness of the Company's internal control over financial reporting and
state that the Company's independent accounting firm has issued an attestation
report on management's assessment of the Company's internal control over
financial reporting. Management expects that if and when applicable to the
Company, significant efforts will be required to comply with Section 404 and
that the cost of such compliance may be material upon implementation.
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, 2006, the Bank's investment in stock of the FHLB of Indianapolis
was $8.2 million.
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.
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
On March 31, 2006, the FDIC merged the Bank Insurance Fund ("BIF") and the
Savings Association Insurance Fund ("SAIF") into a new fund, the Deposit
Insurance Fund ("DIF"). 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 insured by the DIF within prescribed statutory
limits which generally provide a maximum of $100,000 coverage for each insured
account and effective March 31, 2006 increase the coverage limit for retirement
accounts to $250,000 and indexing the coverage limit for retirement accounts to
inflation as with the general deposit insurance coverage limit. 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.
The FDIC is authorized to establish a range of 1.15% to 1.50% within which the
FDIC Board of Directors may set the Designated Reserve Ratio ("DRR"). If the DDR
falls below 1.15% - or is expected to within 6 months - the FDIC must adopt a
restoration plan that provides that the DIF will return to 1.15% generally
within 5 years. If the DDR exceeds 1.35%, the FDIC must generally dividend to
DIF members half of the amount above the amount necessary to maintain the DIF at
1.35%. If the reserve ration exceeds 1.5%, the FDIC must generally dividend to
DIF members all amounts above the amount necessary to maintain the DIF at 1.5%.
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 with the highest rating for safety and
soundness maintain "core capital" of at least 3% of total assets, with other
savings associations maintaining core capital of 4% to 5% of total assets,
depending on their condition. Core capital is generally defined as common
shareholders' 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, 2006,
based on the capital standards then in effect, the Bank was in compliance with
all capital requirements imposed by law.
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
Applicable Federal law requires that federal bank regulatory authorities take
"prompt corrective action" with respect to institutions that do not meet minimum
capital requirements. For these purposes, five capital tiers have been
established: 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 total risk-based capital of
at least 10%, core risk-based capital (consisting only of items that qualify for
inclusion in core capital) of at least 6% and a leverage ratio of at least 5%
and are not subject to any order or written directive of the OTS to maintain a
specific capital level for any capital measure; (2) adequately capitalized
associations are those that meet the regulatory minimum of total risk-based
capital of 8%, core risk-based capital of 4% and a leverage ratio of 4%, but
which are not well capitalized; (3) undercapitalized institutions are those that
do not meet the requirements for adequately capitalized institutions, but that
are not significantly undercapitalized; (4) significantly undercapitalized
institutions have total risk-based capital of less than 6%, core risk-based
capital of less than 3% and a leverage ratio of less than 3%; and (5) critically
undercapitalized institutions are those with tangible capital of less than 2% of
total assets. In addition, the OTS can downgrade an institution's designation
notwithstanding its capital level, based on less than satisfactory examination
ratings in areas other than capital or if the institution is deemed to be in an
unsafe or unsound condition. Each undercapitalized institution must submit a
capital restoration plan to the OTS within 45 days after it becomes
undercapitalized. Such institution will be subject to increased monitoring and
asset growth restrictions and will be required to obtain prior approval for
acquisitions, branching and engaging in new lines of business. Significantly
undercapitalized institutions must restrict the payment of bonuses and raises to
their senior executive officers. Furthermore, a critically undercapitalized
institution must be placed in conservatorship or receivership within 90 days
after reaching such capitalization level, except under limited circumstances. It
will also be prohibited from making payments on any subordinate debt securities
without the prior approval of the FDIC and will be subject to significant
additional operating restrictions. The Bank's capital at September 30, 2006,
meets the standards for a well-capitalized institution.
Capital Distributions Regulation
An OTS regulation imposes limitations upon all "capital distributions" by
savings institutions, including cash dividends, payments by an institution to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The OTS regulations permit a savings institution to make a capital
distribution to its shareholders in a maximum amount that does not exceed the
institution's undistributed net income for the prior two years plus the amount
of its undistributed income from the current year. The rule requires a savings
institution, such as the Bank, that is a subsidiary of a savings and loan
holding company to file a notice with the OTS thirty days before making a
capital distribution up to the maximum amount described above. The rule also
requires all savings institutions, whether a holding company or not, to file an
application with the OTS prior to making any capital distribution where the
association is not eligible for "expedited processing" under the OTS "Expedited
Processing Regulation," where the proposed distribution, together with any other
distributions made in the same year, would exceed the "maximum amount" described
above, where the institution would be under capitalized following the
distribution or where the distribution would otherwise be contrary to a statute,
regulation or agreement with the OTS.
Federal Reserve System
Under FRB regulations, the Bank is required to maintain reserves against its
transaction accounts (primarily checking and NOW accounts) and non-personal
money market deposit accounts. The effect of these reserve requirements is to
increase the Bank's cost of funds. The Bank is in compliance with its reserve
requirements.
Transactions with Affiliates
Transactions between savings associations and any affiliate are governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings bank
is any company or entity which controls the savings bank, any company that is
under common control with the savings bank, or a bank or savings association
subsidiary of the savings bank. In a holding company context the parent holding
company of a savings bank (such as MFB) and any companies controlled by such
parent holding company are affiliates of the savings bank.
Generally, Sections 23A and 23B (i) limit the extent to which the savings bank
or its subsidiaries may engage in "covered transactions" with any one affiliate
to an amount equal to 10% of such institution's capital stock and surplus, and
contain an aggregate limit on all such transactions with all affiliates to an
amount equal to 20% of such capital stock and surplus and (ii) require that all
such transactions be on terms substantially the same, or at least as favorable,
to the institution or subsidiary as those provided to a non-affiliate. The term
"covered transaction" with respect to an affiliate of a financial institution
includes a loan to the affiliate, a purchase of assets from the affiliate, the
issuance of a guarantee on behalf of the affiliate, and similar types of
transactions.
In addition to the restrictions imposed by Sections 23A and 23B, no savings bank
may (i) loan or otherwise extend credit to an affiliate, except for any
affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes, or similar obligations of any affiliate other than shares of a bank or
savings association subsidiary of the savings bank.
The restrictions contained in Section 22(h) of the Federal Reserve Act on loans
to executive officers, directors and principal shareholders also apply to
savings associations. Under Section 22(h), loans to an executive officer and to
a greater than 10% shareholder of a savings bank (18% in the case of
institutions located in an area with less then 30,000 in population), and
certain affiliated entities of either, may not exceed together with all other
outstanding loans to such person and affiliated entities the association's
loan-to-one-borrower limit (generally equal to 15% of the institution's
unimpaired capital and surplus and an additional 10% of such capital and surplus
for loans fully secured by certain readily marketable collateral). Section 22(h)
also prohibits certain loans, above amounts prescribed by the appropriate
federal banking agency, to directors, executive officers and greater than 10%
shareholders of a savings bank, and their respective affiliates, unless such
loan is approved in advance by a majority of the board of directors of the
institution with any "interested" director not participating in the voting.
Currently, the FRB requires board of director approval for certain loans to
directors, officers, and 10% shareholders (including all other outstanding loans
to such persons) above the greater of $25,000 or 5% of capital and surplus (up
to $500,000). Further, the FRB requires that loans to directors, executive
officers and principal shareholders be made on terms substantially the same as
offered in comparable transactions to other unaffiliated parties. Section 22(g)
of the Federal Reserve Act, which imposes limitations on loans made to executive
officers, also applies to savings institutions.
Holding Company Regulation
Under current law, MFB is regulated as a "non-diversified unitary savings and
loan holding company" within the meaning of the Home Owners' Loan Act, as
amended ("HOLA"), and subject to regulatory oversight of the Director of the
OTS. As such, MFB is registered with the OTS and thereby subject to OTS
regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, the Bank is subject to certain
restrictions in its dealings with MFB and with other companies affiliated with
MFB.
HOLA generally prohibits a savings and loan holding company, without prior
approval of the Director of the OTS, from (i) acquiring control of any other
savings bank or savings and loan holding company or controlling the assets
thereof or (ii) acquiring or retaining more than 5 percent of the voting shares
of a savings bank or holding company thereof which is not a subsidiary.
Additionally, under certain circumstances a savings and loan holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15
percent of previously unissued voting shares of an under-capitalized savings
bank for cash without that savings bank being deemed controlled by the holding
company. Except with the prior approval of the Director of the OTS, no director
or officer of a savings and loan holding company or person owning or controlling
by proxy or otherwise more than 25% of such company's stock, may also acquire
control of any savings institution, other than a subsidiary institution, or any
other savings and loan holding company.
Under current law, there are generally no restrictions on the permissible
business activities of a grandfathered unitary savings and loan holding
companies such as MFB. However, if the Director of OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness, or stability of its subsidiary savings bank, the Director of the OTS
may impose such restrictions as deemed necessary to address such risk and
limiting (i) payment of dividends by the savings bank, (ii) transactions between
the savings bank and its affiliates, and (iii) any activities of the savings
bank that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings bank. Further, the
recently enacted Gramm-Leach-Bliley Act prohibits a company that engages in
activities in which a multiple thrift holding company or financial holding
company may not engage from acquiring a savings and loan holding company, such
as MFB.
Notwithstanding the above rules as to permissible business activities of unitary
savings and loan holding companies, if the savings bank subsidiary of such a
holding company fails to meet the Qualified Thrift Lender ("QTL") test, then
such unitary holding company must, within one year of the savings association's
failure to meet the QTL test, register as a bank holding company and become
subject to all of the provisions of the Bank Holding Company Act of 1956.
See-"Qualified Thrift Lender." At September 30, 2006, the Bank's asset
composition qualifies the Bank as a Qualified Thrift Lender.
No subsidiary savings bank of a savings and loan holding company may declare or
pay a dividend on its permanent or nonwithdrawable stock unless it first gives
the Director of the OTS 30 days advance notice of such declaration and payment.
Any dividend declared during such period or without the giving of such notice
shall be invalid.
Branching
The OTS has adopted regulations which permit nationwide branching to the extent
permitted by federal statute. Federal statutes permit federal savings
institutions to branch outside of their home state if the institution meets the
domestic building and loan test in Section 7701 (a)(l 9) of the Internal Revenue
Code of 1986, as amended (the "Code") or the asset composition test of Section
770 1 (c) of the Code. Branching that would result in the formation of a
multiple savings and loan holding company controlling savings institutions in
more than one state is permitted if the law of the state in which the savings
bank to be acquired is located specifically authorizes acquisition of its
state-chartered institutions by state-chartered institutions or their holding
companies in the state where the acquiring institution or holding company is
located.
Federal Securities Law
The shares of Common Stock of MFB are registered with the SEC under the 1934
Act. MFB is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the 1934 Act and the rules of the SEC
thereunder.
If MFB has less than 300 shareholders of record, it may deregister its shares
under the 1934 Act and cease to be subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of MFB may not be
resold without registration or unless sold in accordance with the resale
restrictions of Rule 144 under the 1933 Act. If MFB meets the current public
information requirements under Rule 144, each affiliate of MFB who complies with
the other conditions of Rule 144 would be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of (i) 1% of the outstanding shares of MFB or (ii) the
average weekly volume of trading in such shares during the preceding four
calendar weeks.
Loans to One Borrower
Under OTS regulations, the Bank may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. Additional amounts may be lent, not in excess of 10% of unimpaired
capital and surplus, if such loans or extensions of credit are fully secured by
readily marketable collateral, including certain debt and equity securities but
not including real estate. In some cases, a savings bank may lend up to 30% of
unimpaired capital and surplus to one borrower for purposes of developing
domestic residential housing, provided that the savings bank meets its
regulatory capital requirements and the OTS authorizes the savings bank to use
this expanded lending authority. At September 30, 2006, the Bank did not have
any loans or extensions of credit to a single or related group of borrowers in
excess of its regulatory lending limits. Management does not believe that the
loans-to-one-borrower limits will have a significant impact on the Bank's
business operations or earnings.
Qualified Thrift Lender
Under current OTS regulations, the QTL test requires that a savings bank have at
least 65% of its portfolio assets invested in "qualified thrift investments" on
a monthly average basis in 9 out of every 12 months. Qualified thrift
investments under the QTL test consist primarily of housing related loans and
investments. Portfolio assets under the QTL test include all of an association's
assets less (i) goodwill and other intangibles, (ii) the value of property used
by the association to conduct its business, and (iii) its liquid assets as
required to be maintained under law up to 20% of total assets.
A savings bank which fails to meet the QTL test must either convert to a bank or
be subject to the following penalties: (i) it may not enter into any new
activity except for those permissible for a national bank and for a savings
bank; (ii) its branching activities shall be limited to those of a national
bank; and (iii) it shall be bound by regulations applicable to national banks
respecting payment of dividends. Three years after failing the QTL test the
association must dispose of any investment or activity not permissible for a
national bank and a savings bank. If such a savings bank is controlled by a
savings and loan holding company, then such holding company must, within a
prescribed time period, become registered as a bank holding company and become
subject to all rules and regulations applicable to bank holding companies.
A savings bank failing to meet the QTL test may re-qualify as a QTL if it
thereafter meets the QTL test. In the event of such re-qualification it shall
not be subject to the penalties described above. A savings bank which
subsequently again fails to qualify under the QTL test shall become subject to
all of the described penalties without application of any waiting period.
At September 30, 2006, 81.85% of the Bank's portfolio assets (as defined on that
date) were invested in qualified thrift investments (as defined on that date),
and therefore the Bank's asset composition was in excess of that required to
qualify the Bank as a QTL. Also, the Bank does not expect to significantly
change its lending or investment activities in the near future, and therefore
expects to continue to qualify as a QTL, although there can be no such
assurance.
Community Reinvestment Act Matters
Under current law, ratings of depository institutions under the Community
Reinvestment Act of 1977 must be disclosed. This disclosure includes both a four
tier descriptive rating using terms such as satisfactory and unsatisfactory and
a written evaluation of each institutions performance. The Bank offers programs
that meet the needs of all buyers including loans to first time homebuyers that
require no down payment. Borrowers living or purchasing homes in low-income
areas pay reduced closing costs. The Bank is also actively involved with lending
consortiums that provide market rate loans to low and moderate-income families
that are unable to obtain mortgages through the traditional lending channels.
The OTS has determined that the Bank has a satisfactory record of meeting
community credit needs.
TAXATION
Federal Taxation
Historically, savings institutions, such as the Bank, had been permitted to
compute bad debt deductions using either the bank experience method or the
percentage of taxable income method. However, in August, 1996, legislation was
enacted that repealed the reserve method of accounting for federal income tax
purposes. As a result, the Bank must recapture that portion of the reserve that
exceeds the amount that could have been taken under the experience method for
post-1987 tax years. The recapture is occurring over a six-year period, the
commencement of which began with the Bank's taxable year ending September 30,
1999, since the Bank met certain residential lending requirements. In addition,
the pre-1988 reserve, for which no deferred taxes have been recorded, will not
have to be recaptured into income unless (i) the Bank no longer qualifies as a
bank under the Code, or (ii) excess dividends or distributions are paid out by
the Bank. The total amount of bad debt to be recaptured has been fully captured
in 2006.
Depending on the composition of its items of income and expense, a savings bank
may be subject to the alternative minimum tax. A savings bank must pay an
alternative minimum tax equal to the amount (if any) by which 20% of alternative
minimum taxable income ("AMTI"), as reduced by an exemption varying with AMTI,
exceeds the regular tax due. AMTI equals regular taxable income increased or
decreased by certain tax preferences and adjustments, including depreciation
deductions in excess of that allowable for alternative minimum tax purposes,
tax-exempt interest on most private activity bonds issued after August 7, 1986
(reduced by any related interest expense disallowed for regular tax purposes),
the amount of the bad debt reserve deduction claimed in excess of the deduction
based on the experience method, the cash surrender value of bank owned life
insurance and 75% of the excess of adjusted current earnings over AMTI (before
this adjustment and before any alternative tax net operating loss). AMTI may be
reduced only up to 90% by net operating loss carryovers, but alternative minimum
tax paid can be credited against regular tax due in later years.
For federal income tax purposes, MFB reports its income and expenses on the
accrual method of accounting. MFB, the Bank and its subsidiaries file a
consolidated federal income tax return for each fiscal year ending September 30.
The federal income tax returns filed by MFB have not been audited in the last
five years.
State Taxation
The Bank is subject to Indiana's Financial Institutions Tax ("FIT"), which is
imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross
income," for purposes of FIT, begins with taxable income as defined by Section
63 of the Code and, thus, incorporates federal tax law to the extent that it
affects the computation of taxable income. Federal taxable income is then
adjusted by several Indiana modifications. Currently, income from the Bank's
subsidiaries MFB Investment, I, Inc., MFB Investments II, Inc. and MFB
Investments, LP is not subject to the FIT. Other applicable state taxes include
generally applicable sales and use taxes plus real and personal property taxes.
MFB's state income tax returns have not been audited in the last five years.
Item 1A. Risk Factors.
Statements contained in this filing on Form 10-K that are not historical facts
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The words or phrases "would be," "will allow,"
"intends to," "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," or similar expressions are also intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act. MFB cautions readers that forward-looking
statements, including without limitation those relating to MFB's future business
prospects, interest income and expense, net income, liquidity, and capital needs
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those indicated in the forward-looking statements, due
to, among other things, factors identified in this filing, including the
following:
Regulatory changes could adversely impact us or the businesses in which we are
engaged.
The banking industry is heavily regulated. These regulations are intended to
protect depositors, not shareholders. As discussed in this Form 10-K, MFB and
its subsidiaries are subject to regulation and supervision by the FDIC, the OTS,
and the SEC. The burden imposed by federal and state regulations puts banks at a
competitive disadvantage compared to less regulated competitors such as finance
companies, mortgage banking companies and leasing companies.
Legislative actions or significant litigation could adversely impact us or the
clients we serve.
Because of concerns relating to the competitiveness and the safety and soundness
of the industry, Congress continues to consider a number of wide-ranging
proposals for altering the structure, regulation, and competitive relationships
of the nation's financial institutions. Among such bills are proposals to
combine banks and thrifts under a unified charter, to combine regulatory
agencies, and to make changes to deposit insurance protection of depositors.
Management cannot predict whether or in what form any of these proposals will be
adopted or the extent to which the business of the MFB and its subsidiaries may
be affected thereby.
We must effectively manage credit risk to reduce the possibility of potential
losses.
One of the greatest risks facing lenders is credit risk, that is, the risk of
losing principal and interest due to a borrower's failure to perform according
to the terms of a loan agreement. While management attempts to provide an
allowance for loan losses at a level adequate to cover probable incurred losses
based on loan portfolio growth, past loss experience, general economic
conditions, information about specific borrower situations, and other factors,
future adjustments to reserves may become necessary, and net income could be
significantly affected, if circumstances differ substantially from assumptions
used with respect to such factors.
Our commercial and consumer loans expose us to increased credit risk.
We have a large percentage of commercial and consumer loans. Commercial loans
generally have greater credit risk than residential mortgage loans because
repayment of these loans often depends on the successful business operations of
the borrowers. These loans also typically have much larger loan balances than
residential mortgage loans. Consumer loans generally involve greater risk than
residential mortgage loans because they are unsecured or secured by assets that
depreciate in value. Although we undertake a variety of underwriting, monitoring
and reserving protections with respect to these types of loans, there can be no
guarantee that we will not suffer unexpected losses.
Changes in local economic and political conditions could adversely affect our
earnings and those of our borrowers.
MFB's primary market area for deposits and loans encompasses St. Joseph and
Elkhart Counties, in northwest Indiana. Ninety-five percent of MFB's business
activities are within this area. This concentration exposes MFB to risks
resulting from changes in the local economy. A dramatic drop in local real
estate values would, for example, adversely affect the quality of MFB
Financial's loan portfolio.
Changes in interest rate risk could have a material adverse effect on our
financial condition and results of operations. MFB's earnings depend to a great
extent upon the level of net interest income, which is the difference between
interest income earned on loans and investments and the interest expense paid on
deposits and other borrowings. Interest rate risk is the risk that the earnings
and capital will be adversely affected by changes in interest rates. While MFB
attempts to adjust its asset/liability mix in order to limit the magnitude of
interest rate risk, interest rate risk management is not an exact science.
Rather, it involves estimates as to how changes in the general level of interest
rates will impact the yields earned on assets and the rates paid on liabilities.
Moreover, rate changes can vary depending upon the level of rates and
competitive factors. From time to time, maturities of assets and liabilities are
not balanced, and a rapid increase or decrease in interest rates could have an
adverse effect on net interest margins and results of operations of MFB. Further
discussion of interest rate risk can be found under the caption "Asset/Liability
Management" in the Management's Discussion and Analysis of Financial Condition
and Results of Operations section of MFB's 2006 Annual Report to Shareholders.
Our market is extremely competitive and our earnings will suffer if we are
unable to compete effectively.
The activities of MFB and the MFB Financial in the geographic market served
involve competition with other banks as well as with other financial
institutions and enterprises, many of which have substantially greater resources
than those available to MFB. In addition, non-bank competitors are generally not
subject to the extensive regulation applicable to the MFB and MFB Financial.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
At September 30, 2006, MFB Financial conducted its business from its corporate
headquarters at 4100 Edison Lakes Parkway, Mishawaka, Indiana 46545, and twelve
full service financial centers which includes the main office at corporate
headquarters. The corporate headquarters/main office and nine branch offices are
owned by MFB Financial and the Wayne Street and Carmel offices are leased.
The corporate headquarters consists of approximately 114,000 square feet with
approximately 44% (51,000 square feet) of the space utilized by the Company. At
September 30, 2006 the Company had leased approximately 81% of the available
tenant space.
The following table provides certain information with respect to MFB Financial's
offices as of September 30, 2006:
Year Approximate
Description and Address Opened Square Footage
Corporate Headquarters
4100 Edison Lakes Parkway
Mishawaka, IN 46545 2004 51,000
Main Office
4100 Edison Lakes Parkway 2006 500
Mishawaka, IN 46544
Branch Office
411 W. McKinley Ave.
Mishawaka, IN 46545 1975 4,800
Branch Office
402 W. Cleveland Rd.
Mishawaka, IN 46545 1977 2,500
Branch Office
2427 Mishawaka Ave.
South Bend, IN 46615 1978 2,600
Branch Office
25990 County Road 6
Elkhart, IN 46514 1999 3,200
Branch Office
100 E. Wayne St., Suite 150
South Bend, IN 46601 2000 3,200
Branch Office
23132 U.S. 33
Elkhart, IN 46517 2003 2,700
Branch Office
2850 West Cleveland Rd.
South Bend, IN 46628 2006 3,200
Branch Office
121 S. Church Street
Mishawaka, IN 46545 1961 13,700
Branch Office
23761 Western Ave
South Bend, IN 46619 2005 3,400
Year Approximate
Description and Address Opened Square Footage
Branch Office
742 E Ireland Rd
South Bend, IN 46614 2005 3,100
Branch Office
11611 N. Meridian Suite 110
Carmel, IN 46032 2006 1,400
MFB Financial also operates thirteen automatic teller machines (ATMs). MFB
Financial's ATMs participate in the nationwide CIRRUS ATM network.
MFB Financial owns computer and data processing equipment which is used for
transaction processing and accounting. In 2003, MFB Financial also renegotiated
its contract for data processing and reporting services with Open Solutions
(formerly known as BISYS, Inc.) in Glastonbury, Connecticut. The cost of these
data processing services was approximately $838,000 for the year ended September
30, 2006 and $754,000 for the year ended September 30, 2005.
Item 3. Legal Proceedings.
The Company and the Bank are subject to certain claims and legal actions arising
in the ordinary course of business. A creditor of a $3.1 million impaired loan
relationship discussed in Note 4 to the Company's consolidated financial
statements in its Annual Report to Shareholders has filed a lawsuit against MFB
seeking to recover $171,000 from MFB. A forbearance agreement, also discussed in
Note 4, provides for payments to this creditor from the impaired loan
relationship and has resulted in payments of approximately $816,000 during
fiscal year 2006. The Company believes it has valid defenses and will vigorously
contest this lawsuit should the impaired loan relationship not comply with the
terms of the forbearance agreement and no liability for this lawsuit has been
recorded at September 30, 2006. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of all other legal matters is not
expected to have a material adverse effect on the consolidated financial
position or results of operation of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of MFB's shareholders during the quarter ended
September 30, 2006.
Item 4.5. Executive Officers of Registrant.
Presented below is certain information regarding the executive officers of MFB
and MFB Financial:
Name Position
---- --------
Charles J. Viater President and Chief Executive Officer of MFB
and MFB Financial
Donald R. Kyle Executive Vice President and Chief Operating Officer
of MFB Financial
Terry L. Clark Vice President and Controller of
MFB Financial
James P. Coleman, III Executive Vice President and Director of Wealth
Management of MFB Financial
M. Gilbert Eberhart Secretary of MFB and MFB Financial
Charles J. Viater (age 52) has served as President and Chief Executive Officer
of MFB Financial since September 1, 1995. Previously, he served as Chief
Financial Officer of Amity Bancshares and Executive Vice President of Amity
Federal Savings in Tinley Park, Illinois.
Donald R. Kyle (age 59) has served as Executive Vice President and Chief
Operating Officer of MFB Financial since July, 1999. Previously, he served as
Regional President of National City Bank in Cleveland, Ohio.
Terry L. Clark (age 40) joined MFB in January 2005 as Vice President and
Controller. Previously, he served as an Accounting Officer at 1st Source Bank in
South Bend, Indiana and as Controller at Trustcorp Mortgage Company in South
Bend, Indiana prior to his employment with 1st Source.
James P Coleman (age 60) joined MFB in June 2004 as Executive Vice President and
Director of Wealth Management. Previously, he served as President of STAR Wealth
Management in Fort Wayne, Indiana and as Senior Vice President of 1st Source
Bank in South Bend, Indiana prior to his employment with STAR .
M. Gilbert Eberhart (age 72) has served as Secretary of MFB Financial since 1987
and of MFB since its organization. He is also a dentist based in Mishawaka.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters,
and Issuer Purchases of Securities.
Information concerning the market price of and dividends paid on the common
stock of MFB and related shareholder matters is incorporated by reference to
page 57 of MFB's Annual Report to Shareholders for the fiscal year ended
September 30, 2006 (the "Annual Report"). MFB sold no equity securities during
the period covered by this report that were not registered under the Securities
Act of 1933 (the "1933 Act").
Since MFB has no independent operations or other subsidiaries to generate
income, its ability to accumulate earnings for the payment of cash dividends to
its shareholders is directly dependent upon the earnings on its investment
securities and ability of the Bank to pay dividends to MFB.
Under OTS regulations, a converted savings bank may not declare or pay a cash
dividend if the effect would be to reduce net worth below the amount required
for the liquidation account created at the time it converted. In addition, under
OTS regulations, the extent to which a savings bank may make "capital
distributions" is limited (See "Regulation - Capital Distributions Regulation.")
Prior notice of any dividend to be paid by the Bank will have to be given to the
OTS.
Any dividend distributions in excess of current or accumulated earnings and
profits will be treated for federal income tax purposes as a distribution from
the Bank's accumulated bad debt reserves, which could result in increased
federal income tax liability for the Bank.
Unlike the Bank, generally there is no restriction on the payment of dividends
by MFB, subject to the determination of the director of the OTS that there is
reasonable cause to believe that the payment of dividends constitutes a serious
risk to the financial safety, soundness or stability of the Bank. Indiana law,
however, would prohibit MFB from paying a dividend if, after giving effect to
the payment of that dividend, MFB would not be able to pay its debts as they
become due in the ordinary course of business, or if MFB's total assets would be
less than the sum of its total liabilities plus preferential rights of holders
of preferred stock, if any.
See Item 12 for disclosure required about certain equity compensation plans.
The following table provides information about purchases by the company pursuant
to a previously announced buyback program with respect to its Common Stock
during the three months ended September 30, 2006:
Total Total Number of Approximate Number
Number Shares Purchased of Shares that May
of Shares Average as part of Publicly Yet be Purchased
Period Purchased Price Paid Announced Program (1) Under the Program
------ --------- ---------- --------------------- -----------------
July 01-31, 2006 22,877 $30.79 22,877 28,044
August 01-31, 2006 5,000 $30.95 5,000 23,044
September 01-30, 2006 4,250 $31.83 4,250 18,794
Total 32,127 32,127
(1) On February 2, 2006, MFB announced in a press release that the board of
directors had authorized a stock repurchase program to purchase up to 5%, or
approximately 67,000 shares of outstanding stock.
At September 30, 2006, the Company had outstanding $4.5 million from a
correspondent bank. This variable rate line of credit, tied to the one month
LIBOR rate plus 160 basis points (6.92% as of September 30, 2006), matures on
August 31, 2007, at which time it may be converted to a term loan to be
amortized over a five year period. The borrowing is collateralized by MFB
Financial stock and requires the Bank to remain "well-capitalized" as defined by
regulatory capital adequacy guidelines.
Item 6. Selected Financial Data.
The information required by this item is incorporated by reference to the
material under the heading "Selected Consolidated Financial Data" on page 2 of
the Annual Report.
Item 7.Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required by this item is incorporated by reference to pages 3
through 19 of the Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated by reference to pages 10
through 13 of the Annual Report.
Item 8. Financial Statements and Supplementary Data
MFB's Consolidated Financial Statements and Notes thereto contained on pages 21
through 55 of the Annual Report are incorporated herein by reference. MFB's
Supplementary Data is contained on page 58 of the Annual Report and is
incorporated herein by reference.
Item 9.Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
Item 9A. Controls and Procedures.
a) Evaluation of disclosure controls and procedures.
MFB's chief executive officer and chief financial officer, after
evaluating the effectiveness of MFB's disclosure controls and
procedures (as defined in Sections 13a - 15(e) and 15d - 15(e)
of the Securities Exchange Act of 1934, as amended) (the "Exchange
Act"), as of September 30, 2006 (the "Evaluation Date"),
have concluded that as of the Evaluation Date, MFB's disclosure
controls and procedures were effective in ensuring that
information required to be disclosed by MFB in reports it files or
submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms and
are designed to ensure that information required to be disclosed
in those reports is accumulated and communicated to
management as appropriate to allow timely decisions regarding required
disclosure.
b) Changes in internal controls. There were no significant changes in the
Company's internal control over financial reporting identified in
connection with the Company's evaluation of controls that occurred
during the Company's last fiscal quarter that have materially affected,
or is reasonably likely to materially affect, the Company's internal
control over financial reporting
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is incorporated
by reference to pages 2-7 of MFB's Proxy Statement for its 2006 Annual
Shareholder Meeting (the "Proxy Statement"). Information concerning MFB's
executive officers is included in Item 4.5 in Part I of this report. Information
concerning compliance by such persons with Section 16(a) of the 1934 Act is
incorporated by reference to page 12 of the Proxy Statement.
Code of Ethics
The Company has adopted an Ethics Policy that applies to all officers, employees
and directors of the Company and its subsidiaries. A copy of the Ethics Policy
is attached on Exhibit 14 to this Annual Report.
Item 11. Executive Compensation
The information required by this item with respect to executive compensation is
incorporated by reference to pages 7 through 10 of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
The information on security ownership of management and certain beneficial
owners is incorporated by reference to pages 1 to 4 of the Proxy Statement.
The following table provides the information about MFB's common stock that may
be issued upon the exercise of options and rights under all existing equity
compensation plans as of September 30, 2006.
Number of securities remaining
available for future issuance
under equity compensation plans
Number of securities to be as of September 30, 2006
issued upon exercise of Weighted-average exercise (excluding securities reflected
outstanding options, warrants price of outstanding options, in column (1)
and rights as of September 30, warrants and rights (c)
2006 (b)
Plan category (a)
Equity compensation plans 217,110 $ 24.89 8,000
approved by security holders
Equity compensation plans not
approved by security holders - - -
Total 217,110 $ 24.89 8,000
(1) Includes the following plans: MFB's stock option plan, 1997 stock
option plan and 2002 stock option plan.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to page 11 of
the Proxy Statement.
Item 14. Principal Accountant Fees and Services.
The information required by this item is incorporated by reference to page 11
and 12 of the Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) The following financial statements are incorporated by reference as part of
this report:
Pages in the Annual
Report to Shareholders
Financial Statements
Report of Independent Registered Public Accounting Firm 20
Consolidated Balance Sheets at September 30, 2006 and 2005 21
Consolidated Statements of Income for the Years Ended September 30, 2006, 2005 22
and 2004
Consolidated Statements of Shareholders' Equity for the Years ended September 23
30, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the Years ended September 30, 2006, 24-25
2005 and 2004
Notes to Consolidated Financial Statements 26-55 (b) The exhibits filed herewith
or incorporated by reference herein are set forth on the Exhibit Index on page
51.
(c) All schedules are omitted as the required information either is not
applicable or is included in the consolidated Financial Statements or
related notes.
51
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant had duly caused this report to be signed
on behalf of the undersigned, thereto duly authorized.
MFB CORP.
Date: December 22, 2006 By: __/s/Charles J. Viater
Charles J. Viater, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Charles J Viater /s/ M Gilber Eberhart
- --------------------------- ------------------------
Charles J. Viater M. Gilbert Eberhart, Director
President, Chief Executive Officer
and Director Date: December 22, 2006
(Principal Executive Officer) /s/Edward Levy
------------------------
Date: December 22, 2006 Edward Levy, Director
Date: December 22, 2006
/s/ Terry L Clark /s/ Jonathan Kintner
- ------------------------- -------------------------
Terry L. Clark Jonathan E. Kintner, Director
Vice President and Controller
of MFB Financial Date: December 22, 2006
(Principal Financial Officer and
Principal Accounting Officer) /s/ Christine A Lauber
-----------------------
Date: December 22, 2006 Christine A. Lauber, Director
Date: December 22, 2006
/s/Michael J Marien /s/ Reginald H Wagle
- ------------------------- -----------------------
Michael J. Marien, Reginald H. Wagle, Director
Chairman of the Board
Date: December 22, 2006
Date: December 22, 2006
/s/ Robert C Beutter /s/ Jonathan Housand
- ------------------------- -----------------------
Robert C. Beutter, Director Jonathan Housand, Director
Date: December 22, 2006 Date: December 22, 2006
EXHIBIT LIST
Exhibit Index
3(l) The Articles of Incorporation of the Registrant are incorporated by
Reference to Exhibit 3(l) to the Registration Statement on Form S-
1 (Registration No. 33-73098).
3(2) The Code of By-Laws of Registrant (as amended through December 6,
2006) is incorporated by reference to Exhibit 3.1 of the Company's
Form 8-K filed on December 12, 2006.
4(1) Rights Agreement, dated October 2, 2006, between the Registrant and
Registrar and Transfer Company is incorporated by reference to
Exhibit 4.1 to the Registrant's Form 8-K filed on October 2, 2006.
10(1) MFB Financial Recognition and Retention Plans and Trusts are
incorporated by reference to Exhibit B to Registrant's definitive
proxy statement in respect of its 1996 Annual Shareholder Meeting.
*
10(2) MFB Corp. Stock Option Plan is incorporated by reference to Exhibit
A to Registrant's definitive proxy statement in respect of its 1996
Annual Shareholder Meeting. *
10(3) The MFB Corp. 1997 Stock Option Plan is incorporated by reference
to Exhibit A to Registrant's definitive proxy statement in respect
of its 1997 Annual Shareholder Meeting. Amendment thereto is
incorporated by reference to Exhibit 10.1 of MFB's Form 8-K dated
September 29, 2006. *
10(4) MFB Corp. 2002 Stock Option Plan is incorporated by reference to
Exhibit A to Registrant's definitive proxy statement in respect of
its 2001 Annual Shareholder Meeting. Amendment thereto is
incorporated by reference to Exhibit 10.1 of MFB's Form 8-K dated
September 29, 2006. *
10(5) Employment Agreement between MFB Financial and Charles J. Viater
dated January 19, 1999 is incorporated by reference to Exhibit
10(5) to Registrant's Form 10-K filed for the fiscal year ended
September 30, 2005. *
10(6) Employment Agreement between MFB Financial and Donald R. Kyle dated
July 1, 1999 is incorporated by reference to Exhibit 10(8) to the
Registrant's Form 10-K filed for its fiscal year end September 30,
2001. *
10(7) Form of Non-Qualified Stock Option Agreement for Directors is
incorporated by reference to Exhibit 10(2)
of MFB's Form 8-K dated September 29, 2006. *
10(8) Form of Non-Qualified Stock Option Agreement for Employees is
incorporated by reference to Exhibit 10.3
of MFB's Form 8-K dated September 29, 2006. *
10(9) Form of Incentive Stock Option Agreement is incorporated by
reference to Exhibit 10.4 of MFB's Form 8-K
dated September 29, 2006. *
11 Statement regarding computation of earnings per share (**)
13 Shareholder Annual Report.
14 Code of Ethics is incorporated by reference to Exhibit 14 to
Registrant's Form 10-K filed for the fiscal
year ended September 30, 2005.
21 Subsidiaries of the Registrant is incorporated by reference to
Exhibit 21 to Registrant's Form 10-K for
the fiscal year ended September 30, 2005.
23 Consent of Crowe Chizek and Company LLC.
31.1 Certification of Charles J. Viater.
31.2 Certification of Terry L. Clark.
32 Certification of Officers.
* Management contracts and plans required to be filed as exhibits are included
as Exhibits 10(1) - 10(7). ** See Notes 1 and 2 of Notes to Consolidated
Financial Statements, included in the 2006 Shareholder Annual
Report as Exhibit 13.