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February 9, 2007
VIA EDGAR
Mr. John P. Nolan
Accounting Branch Chief
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: Response to letter dated January 26, 2007
MFB Corp.
Form 10-K for the fiscal year ended September 30, 2006
Filed December 22, 2006
File No. 1-12279
Dear Mr. Nolan:
We are writing to respond to the comments, and where appropriate, to show you
the proposed future disclosures as referenced in the Comment Letter noted above.
The numbered paragraphs and headings below correspond to the headings and
numbers set forth in the Comment Letter.
Comment 1
Form 10-K for the fiscal year ended September 30, 2006:
Business
Non-performing and Classified Assets
1. We note your disclosure that the company has an established goal of reviewing
60% of all commercial loans annually. Please explain to us how your loan review
processes provide for timely and current information regarding the
collectibility of your commercial loans. Your response should separately address
processes related to performing and non-performing loans and include, but not be
limited to, the following:
o the specific processes and timing of how and when loans are reviewed;
o the responsibilities of the individual loan officers, internal loan
review department; managers, board committees, and any
outside parties, as applicable;
o the type of software used and the information tracked regarding the loans and
internal review procedures; o the timing and frequency of receiving updated
financial reports from the debtor and guarantors; o the timing and frequency of
reviews of collateral and appraisals obtained; o the nature and timing of
typical communications between the loan officer and the debtor.
Response 1
The Loan Review function entails examining credit and collateral files,
attending loan committee meetings, and communicating with Business Banking and
Senior Management. Business Banking officers are responsible for assigning a
risk grade to new loan relationships. Loan Review is responsible for on-going
reviews, subsequent risk grade monitoring, and approving risk grade
modifications. The loan review criteria used by both Business Banking and Loan
Review is uniform. The Company has established a goal of reviewing 60% of all
commercial loans annually, based on dollar amounts outstanding at each fiscal
year end. It is left up to the discretion of the Loan Review Officer which loans
are chosen for review, with the exception of watch list loans - all watch list
loans have a formal review at least annually. Other factors impacting which
loans are selected for review are the loan size, industry, and other perceived
risk factors such as operating performance, financial condition, credit
structure, management changes, and payment delinquency. The intent is to review
the majority of large dollar non-watch list loans at least annually. Loan grades
are tracked on the main frame commercial loan accounting system.
When completing a review, information regarding the borrower and loan structure
are summarized in an excel spreadsheet in addition to utilizing the main frame
commercial loan accounting system and financial analysis software. Loan grades
are based on a weighted average of the following components: cash flow for debt
service, financial condition, operating performance, collateral structure,
guarantor support, management ability, industry risks, and payment history. The
adequacy of the applicable loan documentation is also considered. The financial
component used to calculate the loan grade is generally based on the most recent
three year history of financial performance. Trend analysis and peer group
comparisons are also part of the process. The possible loan grades are:
o Grade 1 - Excellent o Grade 5 - Special Mention
o Grade 2 - Good o Grade 6 - Substandard
o Grade 3 - Satisfactory o Grade 7 - Doubtful
o Grade 4 - Satisfactory / Monitored o Grade 8 - Loss
Loan relationships with a risk grade of 5 or higher are reported on the watch
list which includes non-performing commercial loans. Loan Review meets with
Business Banking on a monthly basis to discuss the watch list. The Business
Bankers discuss their individual action plans and provide updates on watch list
loans. Senior Management, as well as members of the Board of Directors attends
this meeting. The watch list is presented to all Board Members on a quarterly
basis. The collectibility of performing and non-performing commercial loans is
discussed monthly during the watch list meeting and reviewed in more detail at
least quarterly during the preparation of the allowance for loan losses
allocation.
The processes relating to performing and non-performing loans are consistent
with greater intensity and emphasis placed upon the timing and frequency of
updating information concerning non-performing loans. Monitored on a case by
case basis, the non-performing loans demand more scrutiny and are discussed in
more detail during the watch list meetings and with Senior Management.
Processes Related to Performing and Non-Performing Loans
o The responsibility of the individual Loan Officers:
1. Sufficient contact with the customer to be able to assess the
status of the company 2. Monitor all key financial information
3. Monitor checking accounts
4. Onsite visits to visually inspect inventory, physical
condition of real estate, machinery and equipment, workforce
habits, etc.
5. Keep current information in file relevant to the current
status of the credit in the form of correspondence
o The responsibility of Managers:
1. Oversee all requirements of individual officers
2. Dig deep into each credit to make sure all relevant information is secure and
accurate 3. Coordinate meetings when necessary with the customer, address the
pertinent issues 4. Assess the loan structure 5. Evaluate collateral and cash
flow positions in-depth with the account officer 6. Report pertinent and timely
information to the Board
o The responsibility of the Board Committees:
1. Oversee and monitor the activities through the managers of the non-performing
and classified assets 2. Challenge findings 3. Look for trends in these assets
4. Review goals and objectives as it relates to this area
o The responsibility of outside parties - legal counsel, appraisers, etc.
1. Supply expertise in matters that are beyond internal personnel
2. Research requested information
3. Submit reports that will supplement action plans associated with these
credits
o The timing and frequency of receiving updated financial reports:
1. Financial statements including balance sheet and profit and
loss statements - monthly to quarterly when possible and
depending on the credit and industry involved. Prefer audited
statements.
2. Accounts Receivable, Account Payable, Aging Reports - monthly
to quarterly where appropriate 3. Borrowing Base Certificates
- weekly to monthly where appropriate 4. Personal financial
statements annually for guarantors 5. Tax returns annually for
small business owners 6. Other financial reports - as needed
o The timing and frequency of reviews of collateral and appraisals
obtained - varies on a case by case basis and contingent upon the
circumstances and specific reliance on collateral for each credit.
Initially the timing is discussed and established during approval at
loan committee
1. Accounts Receivable - monthly as needed 2. Accounts Payable - monthly to
quarterly as needed 3. Equipment appraisals - as needed 4. Real estate
appraisals - as needed or updated 5. Savings instruments in our possession - as
needed 6. Equities - values reviewed weekly to monthly
o The nature and timing of typical communications between the loan officer and
the debtor:
1. Communication is defined as over the phone, face to face, both
at the customer's place of business or in our facility as well
as communication with key personnel of the customer
2. Takes place daily to monthly depending on the type of
communication needed
Comment 2
Exhibit 13
Consolidated Financial Statements
Note 4 - Loans Receivable
2. We note that you do not provide the underlying assumptions used in your
estimation of fair value of mortgage servicing rights. Although the net carrying
value of your mortgage servicing rights does not appear significant to your
balance sheet, the impact on your results of operations due to changes in the
valuation of your mortgage servicing rights could be significant to your results
of operations. In future filings please provide all of the disclosures required
by paragraphs 17(e) and (g) of SFAS 140 as amended by SFAS 156. Provide us with
your proposed future disclosure using your September 30, 2006 financial
information as an example.
Response 2
In addition to the information already included in Note 4 of the Consolidated
Financial Statements, we will include in future filings, the following
information required by paragraphs 17(e) and (g) of SFAS 140 as amended by SFAS
156. The following table uses September 30, 2006 and 2005 financial information
as an example:
The fair value of capitalized mortgage servicing rights was $2,527,000 and
$2,340,000 at September 30, 2006 and 2005. The serviced loan portfolio was
stratified by interest rate and fair value was determined at period end based
upon the following weighted averages assumptions:
2006 2005
---- ----
Weighted-average constant prepayment rate 11.9 % 14.7 %
Weighted-average coupon rate 5.95 % 5.93 %
Weighted-average net servicing fee 0.25 % 0.25 %
Weighted-average discount rate 9.10 % 8.79 %
Weighted-average current age (in years) 3.1 2.8
Additions to capitalized servicing rights are included in gains from the sales
of loans on the consolidated statement of income. Service fee income received
for servicing those loans, net of the amortization of capitalized servicing
rights, aggregated to $229,000, $126,000, and $51,000 for 2006, 2005, and 2004
and is included in other income on the consolidated statement of income.
MFB acknowledges that we are responsible for the adequacy and accuracy of the
disclosure in the filing; and that staff comments or changes to disclosure in
response to staff comments do not foreclose the Commission from taking any
action with respect to the filing; and that we may not assert staff comments as
a defense in any proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
Please contact the undersigned at 574-273-7618 or by email at
terry.clark@mfbbank.com should you require any additional information or have
any questions.
Very truly yours,
/s/ Terry L. Clark
Terry L. Clark
Executive Vice President
Chief Financial Officer