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, 2007
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
-------
State or other jurisdiction of
incorporation or organization
35-1907258
(I.R.S. Employer 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, 2007, was $36,755,466.
The number of shares of the registrant's common stock, without par value,
outstanding as of December 14, 2007, was 1,313,671 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Annual Report to Shareholders for the fiscal year ended
September 30, 2007 are incorporated by reference into Part II. Portions of the
Proxy Statement for the 2007 Annual Meeting of the Shareholders are incorporated
into Part I and Part III.
MFB CORP.
Form 10-K
INDEX
<table>
<caption>
PART I
<s> <c> <c>
Item 1. Business 3
Item 1A. Risk Factors 41
Item 1B. Unresolved Staff Comments 42
Item 2. Properties 43
Item 3. Legal Proceedings 44
Item 4. Submission of Matters to a Vote of Security Holders 45
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, Executive Officers and Corporate Governance 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, and Director Independence 49
Item 14. Principal Accountant Fees and Services 49
PART IV
Item 15. Exhibits and Financial Statement Schedules 50
Signatures 51
Exhibit List 52
Certifications 54
</table>
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
savings accounts; (viii) certificates of deposit; (ix) consumer and commercial
demand deposit accounts; (x) individual retirement accounts; (xi) health savings
accounts; (xii) trust, investment management and brokerage services; and (xiii)
health and life insurance products. 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. The Bank's wholly-owned subsidiary, Community
Wealth Management Group, Inc., is based out of Hamilton and Montgomery counties
in Indiana, and attracts high net worth clients and offers trust, investment,
insurance, broker advisory, retirement plan and private banking services in the
Bank's market area. 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, 2007, $201.8 million, or 49.4% 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, 2007, commercial loans totaled $154.1
million, or 37.7% 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,
2007, $52.6 million, or 12.9% 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
value. 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, or the
loan committee. Approvals are subject to the limits appearing in this matrix
and monitored by management for appropriate authority. Approval for loans
outside these limits is referred to the Bank's Loan Committee. The voting
members of the loan committee consist of members of the Board of Directors
and the Chief Operating Officer, as Chairman. This committee approves 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
utilizing 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 including a loan
production office in New Buffalo, Michigan. 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. MFB Financial
does not originate or purchase sub-prime mortgage loans.
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 a state-certified residential appraiser. From time to time, MFB
Financial also uses the services of other certified residential appraisers who
are not in-house. MFB Financial requires fire and extended coverage insurance in
amounts at least equal to the principal amount of the loan. It also requires
flood insurance to protect the property securing its interest if the property is
in a flood plain. Tax and insurance payments are typically required to be
escrowed by MFB Financial on new loans.
Origination and Other Fees. MFB Financial realizes 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 $5.2 million and $8.3 million at
September 30, 2007 and 2006, 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 $5.1 million and $7.0 million
at September 30, 2007 and 2006, respectively. Nonperforming loans decreased from
last year in part due to payments received on an outstanding debt from one loan
relationship and the improved financial condition of another commercial
customer. 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 $3.7 million and $6.9 million at
September 30, 2007 and 2006, 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 $144,000 and $1.2 million at September 30, 2007 and 2006,
respectively. The decrease was due primarily to one specific situation. At
September 30, 2006, the Company re-classified a $1.2 million property as held
and used, which was previously accounted for as held for sale. This change in
classification was driven by the longer than expected holding period. This
property was subsequently sold during the first quarter of fiscal year 2007.
The largest loan relationship included in impaired loans as of September 30,
2007 totaled approximately $1.5 million for which $1.5 million of the allowance
for loan losses has been allocated. Principal payments of approximately $1.6
million were made on this impaired loan during fiscal year 2007. The Bank
maintained the $1.5 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's ability
to seek alternative financing or pay down the loan. At September 30, 2006, this
relationship totaled approximately $3.1 million, and $3.1 million of the
allowance was allocated to it. This loan was still performing at September 30,
2006; however it is reported as non-performing at September 30, 2007.
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, 2007, the Bank had classified $13.6 million of its assets as
"special mention," $3.0 million as "substandard," $3.7 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 establish a specific allowance
for the identified loss or 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. 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 at least 50% 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. 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, although some may not be chosen. 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. 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. 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, are invited to attend this meeting. The watch list is
presented to the Board of Directors on a quarterly basis. The collectability 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. During the twelve
months ending September 30, 2007, 63% of the commercial loans were reviewed at
least once.
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. Allocations to the allowance for
loan losses may be made for specific loans, but the entire allowance for loan
losses is available for any loan that, in management's judgment, should be
charged-off. Loan losses are charged against the allowance for loan losses when
management believes the loan balance is uncollectible.
During the year ended September 30, 2007 management received payments from one
impaired commercial loan relationship and noted a few other commercial watch
list loans with improved credit performance. These improved loans were partially
offset by one commercial loan with a deterioration of credit quality. The
Company's allowance for loan losses at September 30, 2007 was $5.3 million or
1.30% of loans, comparable to the $7.2 million or 1.91% of loans at the end of
last year. The ratio of non-performing loans to loans was 1.85% at
September 30, 2006 compared to 1.25% at September 30, 2007. A negative provision
of $1.3 million was recorded to the allowance for loan losses during the year
ended September 30, 2007 compared to a provision expense of $1.0 million
recorded to the allowance for loan losses during the prior year ended
September 30, 2006. The change in the allowance for loan losses was due
predominantly to payments received on impaired loans during the year ended
September 30, 2007, which were previously reserved for in the allowance for loan
losses. In management's opinion, the Company's allowance for loan losses at
September 30, 2007 and loan loss provision for the year is appropriate for the
loan portfolio.
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 Asset/Liability Committee ("ALCO"), 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, 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 $69.3 million at September 30, 2006 to $43.1 million at September
30, 2007 due to continued principal payments and maturities of the Company's
various securities, while no purchases of investments were made during the
twelve month 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 $850,000 in securities available for
sale at September 30, 2007, $388,000 relates to the reduced value of a trust
preferred bond issued by a regional banking organization. The current unrealized
loss on that bond is the result of the current interest rate structure of the
market for trust preferred instruments, and not credit issues.
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. During fiscal year 2007 the
Company received notification and payment of $402,000 representing a partial
distribution of funds recovered by the U.S. Securities and Exchange Commission
and the WorldCom Securities Litigation in their respective actions against
WorldCom, Inc. 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; however, any further distribution would likely be relatively
small.
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 $57.4 million as of September 30,
2007, compared to $75.6 million at September 30, 2006, and management believes
the liquidity level as of the current year end 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, and beginning in 2005 in Hamilton County, 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. 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,
2007, noninterest bearing demand deposits totaled $39.0 million, savings, NOW,
MMDA deposits were $123.7 million and time deposits were $171.0 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, when they 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. Refer to "Federal Home Loan Bank
System" and "Qualified Thrift Lender" in the Regulation section of this report
for further documentation. At September 30, 2007, MFB Financial had $124.3
million in Federal Home Loan Bank borrowings outstanding at an average rate of
5.32% compared to $97.1 million at September 30, 2006 at an average rate of
5.52%. The Company's additional borrowing capacity with FHLB was $23.5 million
at September 30, 2007.
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 mature in
30 years from the date of issuance, require quarterly distributions and 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. 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 life
insurance and credit-life and health 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 $33.7 million in investment securities are, as of September 30, 2007,
managed by MFB Investments, LP. During the fiscal year ending September 30,
2007, the Company acquired Community Wealth Management Group, Inc., a
wholly-owned subsidiary of the Bank, which attracts high net worth clients and
offers trust, investment, broker advisory, retirement plan and private banking
services in the Bank's market area. All intercompany balances and transactions
between all of the subsidiaries have been eliminated in the consolidation.
Employees
As of September 30, 2007, MFB Financial employed 143 persons on a full-time
basis and 21 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, and including non accrual loans.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
<table>
<caption>
A. The following are the average balance sheets for the years ending
September 30:
2007 2006 2005
Average Average Average
Outstanding Outstanding Outstanding
Balance Balance Balance
------- ------- -------
Assets: (Dollars in thousands)
Interest-earning assets:
<s> <c> <c> <c>
Interest-earning deposits $ 6,132 $ 26,337 $ 22,157
Mortgage-backed securities (1) 29,032 37,554 39,021
Other securities available for sale (1) 21,126 28,436 22,429
FHLB stock 7,796 8,809 8,952
Loans held for sale 254 802 1,105
Loans receivable (2) 389,758 379,568 399,469
------------- ------------ ------------
Total interest-earning assets 454,098 481,506 493,133
Non-interest earning assets, net
of allowance for loan losses 43,924 38,734 39,057
------------- ------------ ------------
Total assets $ 498,022 $ 520,240 $ 532,190
============= ============ ============
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts $ 52,966 $ 58,887 $ 47,071
NOW and money market accounts 74,098 77,428 89,443
Certificates of deposit 179,219 186,109 185,268
Securities sold under agreements to repurchase 74 - -
Federal Home Loan Bank advances 104,197 108,815 131,101
Other borrowings 1,849 6,330 6,500
Subordinated notes - trust 5,000 5,000 875
------------- ------------ ------------
Total interest-bearing liabilities 417,403 442,569 460,258
Other liabilities 40,632 39,634 35,345
------------- ------------ ------------
Total liabilities 458,035 482,203 495,603
Shareholders' equity
Common stock 12,256 11,731 12,413
Retained earnings 36,650 34,629 32,222
Net unrealized gain(loss) on securities
available for sale (110) (506) (418)
Treasury stock (8,809) (7,817) (7,630)
------------- ------------ ------------
Total shareholders' equity 39,987 38,037 36,587
------------- ------------ ------------
Total liabilities and shareholders' equity $ 498,022 $ 520,240 $ 532,190
============= ============ ============
</table>
- --------------------------------------------------------------------------------
(1) Average balance does not reflect unrealized gain (loss) on securities
available for sale. Yield is based on amortized cost without adjustment
for unrealized gain (loss) on securities available for sale.
(2) Total loans less deferred net loan fees and loans in process and
including non accrual loans. (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.
<Table>
<caption>
--------Year Ended September 30, 2007-------
-----------------------------
Average Average
Balance Interest Yield/Cost
(Dollars in thousands)
INTEREST-EARNING ASSETS
<s> <c> <c> <c>
Interest-earning deposits $ 6,132 $ 307 5.01%
Mortgage-backed securities (1) 29,533 1,307 4.42
Other securities available for sale (1) 20,793 969 4.66
FHLB stock 7,796 355 4.56
Loans held for sale 254 17 6.76
Loans receivable (2) 389,758 26,344 6.76
------------ ------------
Total interest-earning assets $ 454,266 29,299 6.45
============ ============
INTEREST-BEARING LIABILITIES
Savings accounts $ 52,966 1,038 1.96%
NOW and money market accounts 74,098 1,483 2.00
Certificates of deposit 179,219 7,623 4.25
Securities sold under agreements to repurchase 74 2 3.33
Federal Home Loan Bank advances 104,197 5,342 5.13
Other borrowings 1,849 131 7.07
Subordinated notes - trust 5,000 311 6.22
------------ ------------
Total interest-bearing liabilities $ 417,403 15,930 3.82
============ ============
Net interest-earning assets $ 36,863
============
Net interest income $ 13,369
============
Interest rate spread (3)
2.63%
Net yield on average interest-earning assets (4) 2.94%
=====
</table>
- --------------------------------------------------------------------------------
(1) Average balance does not reflect unrealized gain (loss) on securities
available for sale. Yield is based on amortized cost without adjustment
for unrealized gain (loss) on securities available for sale.
(2) Total loans less deferred net loan fees and loans in process and
including non accrual loans. (3) Interest rate spread is calculated by
subtracting average interest rate cost from average interest rate
earned for the period indicated.
(4) The net yield on average interest-earning assets is calculated by
dividing net interest income by average interest-earning assets for the
period indicated.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL (Continued)
<table>
<caption>
--------Year Ended September 30, 2006-------
-----------------------------
Average Average
Balance Interest Yield/Cost
(Dollars in thousands)
INTEREST-EARNING ASSETS
<s> <c> <c> <c>
Interest-earning 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
Federal Home Loan Bank advances 108,815 5,414 4.98
Other borrowings 6,330 399 6.31
Subordinated notes - trust 5,000 311 6.22
------------ -------------
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%
=====
</table>
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL (Continued)
<table>
<caption>
--------Year Ended September 30, 2005-------
-----------------------------
Average Average
Balance Interest Yield/Cost
(Dollars in thousands)
INTEREST-EARNING ASSETS
<s> <c> <c> <c>
Interest-earning 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
Federal Home Loan Bank advances 131,101 6,308 4.81
Other borrowings 6,500 285 4.38
Subordinated notes - trust 875 53 6.02
------------ --------------
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%
=====
</table>
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 new rate). Changes attributable to both rate and volume
have been allocated proportionally to the change due to volume and the
change due to rate.
<table>
<caption>
Increase (Decrease) in
Net Interest Income
Total Net Due to Due to
Change Rate Volume
(Dollars in thousands)
Year ended September 30, 2007 compared
to year ended September 30, 2006
Interest-earning assets
<s> <c> <c> <c>
Interest-earning deposits $ (563) $ 449 $ (1,012)
Mortgage-backed securities (334) 56 (390)
Other securities available for sale (231) 129 (360)
FHLB stock (67) (21) (46)
Loans held for sale (34) 3 (37)
Loans receivable 1,921 1,232 689
----------- ----------- ------------
Total 692 1,848 (1,156)
Interest-bearing liabilities
Savings accounts (14) 102 (116)
NOW and money market accounts 208 275 (67)
Certificates of deposit 930 1,223 (293)
Securities sold under agreements to repurchase 2 - 2
Federal Home Loan Bank advances (72) 164 (236)
Other borrowings (269) 48 (317)
----------- ----------- ------------
Total 785 1,812 (1,027)
----------- ----------- ------------
Change in net interest income $ (93) $ 36 $ (129)
=========== =========== ============
</table>
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL (Continued)
<table>
<caption>
Increase (Decrease) in
Net Interest Income
Total Net Due to Due to
Change Rate Volume
(Dollars in thousands)
Year ended September 30, 2006 compared
to year ended September 30, 2005
Interest-earning assets
<s> <c> <c> <c>
Interest-earning 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
Federal Home Loan Bank advances 114 125 (11)
Other borrowings (894) 215 (1,109)
Subordinated notes - trust 258 2 256
----------- ----------- ------------
Total 1,868 2,689 (821)
----------- ----------- ------------
Change in net interest income $ (1,208) $ (1,082) $ (126)
=========== =========== ============
</table>
II. INVESTMENT PORTFOLIO
<table>
<caption>
A. The following table sets forth the amortized cost and fair
value of securities available for sale: At September 30,
2007 2006 2005
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(Dollars in thousands)
Debt securities
U.S. Government
and federal
<s> <c> <c> <c> <c> <c> <c>
agencies $ 1,500 $ 1,506 $ 14,392 $ 14,322 $ 11,220 $ 11,179
Municipal bonds - - 338 338 340 344
Mortgage-backed 25,350 25,027 33,839 33,195 40,575 40,275
Corporate debt 3,974 3,506 7,246 7,115 8,745 8,569
----------- ------------ ----------- ---------- ---------- -----------
30,824 30,039 55,815 54,970 60,880 60,367
Marketable equity
securities 3,052 3,370 3,085 3,413 3,180 3,208
----------- ------------ ----------- ---------- ---------- -----------
$ 33,876 $ 33,409 $ 58,900 $ 58,383 $ 64,060 $ 63,575
=========== ============ =========== ========== ========== ===========
</table>
Federal Home Loan Bank ("FHLB") stock is carried at cost, which approximates
fair value, and for the years ending September 30, 2007, 2006 and 2005 was $7.7
million, $8.2 million and $9.0 million.
II. INVESTMENT PORTFOLIO (Continued)
B. The maturity distribution and weighted average interest rates of debt
securities available for sale, excluding mortgage-backed securities, are as
follows:
<table>
<caption>
Amount at September 30, 2007, which matures in
------------------------------------------------------------------------------------------------------------
One One to Over Five to Over 10
Year or Less Five Years Ten Years Years Totals
-------------------- -------------------- -------------------- -------------------- --------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- ----- ---- ------ ---- -----
(Dollars in thousands)
U.S. Government and federal
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
agencies$ 1,000 $ 1,003 $ 500 $ 503 $ - $ - $ - $ - $ 1,500 $ 1,506
Corporate Debt - - - - - - 3,974 3,506 3,974 3,506
----- --------- --------- --------- --------- --------- --------- --------- --------- ----------
$ 1,000 $ 1,003 $ 500 $ 503 $ - $ - $ 3,974 $ 3,506 $ 5,474 $ 5,012
========== ========= ========= ========= ========= ========= ========= ========= ========= =========
Weighted
average yield 5.00% 5.60% -% 6.32% 6.01%
</table>
The Company had no securities classified as held to maturity at September 30,
2007.
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, 2007.
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:
<table>
<caption>
---------------------------------------------September 30,--------------------------------------------
2007 2006 2005 2004 2003
-------------------- -------------------- -------------------- ------------------ --------------------
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
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Residential $178,056 43.60% $ 174,399 45.90% $167,395 42.77% $176,817 44.10% $129,472 40.60%
Residential construction 18,107 4.43 22,232 5.85 21,757 5.56 20,259 5.05 22,066 6.92
Multi-family 5,588 1.37 3,090 0.81 3,249 0.83 3,899 0.97 6,728 2.11
Commercial and other loans
Commercial loans 154,131 37.73 134,621 35.43 158,071 40.39 160,952 40.15 130,623 40.96
Home equity and second
mortgage loans 42,593 10.43 37,779 9.95 33,901 8.66 32,006 7.98 24,535 7.70
Other 9,985 2.44 7,835 2.06 7,010 1.79 6,973 1.75 5,462 1.71
--------- ------- ----------- ------- --------- ------ -------- ------- ------- ------
Gross loans receivable 408,460 100.00% 379,956 100.00% 391,383 100.00% 400,906 100.00% 318,886 100.00%
======= ======= ====== ====== ======
Less
Allowance for loan losses (5,298) (7,230) (6,388) (6,074) (5,198)
Deferred net loan fees (652) (707) (766) (843) (820)
Loans in process (52) (27) 78 (138) 89
-------- ----------- --------- -------- -------
Net loans receivable$ 402,458 $ 371,992 $384,307 $393,851 $312,957
========= =========== ======== ======== ========
Mortgage-backed securities
FHLMC certificates $ 19,282 $ 24,243 $ 26,621 $ 25,767 $ 6,966
CMO - REMIC 5,745 8,952 13,654 19,639 9,803
----------- ----------- -------- --------- --------
Net mortgage-backed $ 25,027 $ 33,195 $ 40,275 $45,506 $16,769
Securities =========== =========== ======== ======== =========
Mortgage loans
Adjustable rate $126,631 62.77% $ 124,926 62.55% $122,437 63.64% $122,473 60.94%$ 113,639 71.80%
Fixed rate 75,120 37.23 74,795 37.45 69,964 36.36 78,502 39.06 44,627 28.20
-------- ------ ---------- ------- -------- ------ -------- ------ --------- -------
Total $201,751 100.00% $ 199,721 100.00% $192,401 100.00% $200,975 100.00% $158,266 100.00%
======== ======= ========= ======= ======== ======= ======== ======= ======== =======
</table>
III. LOAN PORTFOLIO (Continued)
B. Loan Maturity. The following table sets forth certain information at
September 30, 2007, 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.
<table>
<caption>
Due during years ended September 30,
Balance --------------------------------------------------------------------------------------
Outstanding 2011 2013 2018 2023
at September 30, and to to and
2007 2008 2009 2010 2012 2017 2022 Following
---- ---- ---- ---- ---- ---- ---- ---------
(Dollars in thousands)
Mortgage Loans
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Residential $ 178,056 $ 2,980 $ 206 $ 456 $ 1,191 $ 10,157 $ 19,099 $143,967
Residential construction 18,107 15,140 - 78 - - - 2,889
Multi-family 5,588 381 2,409 338 2,312 10 138 -
Commercial and other Loans-
Commercial loans 154,131 29,918 14,069 12,513 45,891 12,165 422 39,153
Home equity and second 42,593 3,516 3,783 7,779 20,222 2,232 2,497 2,564
mortgage
Other 9,985 2,080 835 1,836 4,019 784 26 405
------------ -------- -------- ------- ----------- --------- --------- ---------
Total $ 408,460 $ 54,015 $ 21,302 $23,000 $ 73,635 $ 25,348 $22,182 $188,978
============ ========== ======== ======= =========== ========= ========= ========
</table>
The following table sets forth, as of September 30, 2007, the dollar amount of
all loans which have fixed interest rates and floating or adjustable interest
rates.
<table>
<caption>
Due After September 30, 2007
Variable
Fixed Rates Rates Total
(Dollars in thousands)
Mortgage loans
<s> <c> <c> <c>
Residential & Construction $ 75,111 $ 126,630 $ 201,741
Multi-family 10 - 10
Commercial and other loans
Commercial loans 114,440 39,691 154,131
Home equity and second mortgage 33,550 9,043 42,593
Other 9,660 325 9,985
------------ ----------- ----------
Total $ 232,771 $ 175,689 $ 408.460
============ =========== =========
</table>
- --------------------------------------------------------------------------------
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.
<table>
<caption>
At September 30,
-----------------------------------------------------------------------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
(Dollars in thousands)
Accruing loans delinquent
<c> <c> <c> <c> <c>
more than 90 days $ 41 $ 619 $ 136 $ - $ -
Non-accruing loans 4,693 6,390 1,284 2,719 3,845
Restructured loans 361 - - - -
---------- --------- ----------- ---------- -----------
Total nonperforming
loans 5,095 7,009 1,420 2,719 3,845
Real estate owned, net 80 1,135 1,444 1,527 704
Repossessions & foreclosures 65 110 252 - -
---------- ---------- ---------- ------ --------
Total nonperforming
assets $ 5,240 $ 8,254 $ 3,116 $ 4,246 $ 4,549
========== ========= =========== ========== ===========
Nonperforming loans to
total loans 1.25% 1.85% 0.36% 0.68% 1.21%
Nonperforming assets to
total loans 1.28% 2.17% 0.80% 1.06% 1.43%
</table>
The decrease 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, 2007 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.
III. LOAN PORTFOLIO (Continued)
C. Risk Elements (Continued)
2. Potential Problem Loans
As of September 30, 2007, impaired loans totaled $3.7
million, of which are all nonaccrual loans and included in
the nonperforming loans of $5.1 million in the table
above. 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
$2.4 million at September 30, 2007.
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 49.4% of the total loan portfolio
at September 30, 2007. However, MFB Financial continues to
place increased emphasis on diversifying its balance sheet
and improving earnings in commercial lending, which
represent 37.7% of the total loan portfolio at September
30, 2007, and consumer and other lending, which represents
12.9%.
D. Other Interest-Earning Assets
There are no other interest-earning assets as of September 30,
2007 which would be required to be disclosed under Item III. C.1
or 2 if such assets were loans.
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------*
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The allowance for loan losses is maintained through the
provision for loan losses, which is charged to earnings.
The provision for loan losses is determined in
conjunction with management's review and evaluation of current
economic conditions (including those of MFB Corp.'s lending
area), changes in the characteristic and size of the loan
portfolio, loan delinquencies (current status as well as past
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, 2007.
The following table analyzes changes in the consolidated
allowance for loan losses during the past five years ended
September 30, 2007.
<table>
<caption>
Years Ended September 30,
-------------------------------------------------------------------------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
(Dollars in thousands)
Balance of allowance at
<c> <c> <c> <c> <c>
beginning of period $ 7,230 $ 6,388 $ 6,074 $ 5,198 $ 5,143
Add: recoveries
Mortgage residential loans 7 - - - -
Residential construction - - - 8 -
Commercial real estate - - - 5 333
Commercial loans 12 2 80 2 -
Other loans 7 3 10 2 -
Less charge offs:
Mortgage residential loans (19) (36) (40) - -
Commercial real estate - (48) (80) (11) (305)
Commercial loans (598) (45) (266) (508) (1,060)
Home equity (55) (3) - - (7)
Other loans (29) (63) (113) (24) (16)
------------ ----------- ------------- ---------- ------------
Net charge-offs (675) (190) (409) (526) (1,055)
Allowance acquired through
acquisition - - - 602 -
Provisions for loan losses (1,257) 1,032 723 800 1,110
------------ ----------- ------------- ---------- ------------
Balance of allowance at
end of period $ 5,298 $ 7,230 $ 6,388 $ 6,074 $ 5,198
============ =========== ============= ========== ============
Net charge-offs to total
average loans out-
standing for period * 0.17% 0.05% 0.10% 0 .15% 0.33%
Allowance at end of
period to total loans
at end of period * 1.30% 1.91% 1.63% 1.52% 1.63%
</table>
* Not including loans held for sale
IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued)
Allocation of Allowance for Loan Losses. The following table presents an
analysis of the allocation of MFB Corp.'s allowance for loan losses at
the dates indicated.
<table>
<caption>
September 30,
2007 2006 2005 2004 2003
---------------------- -------------------- ----------------- ------------------- --------------
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
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Residential $ 200 43.60% $ 210 45.90% $ 242 42.74% $ 318 44.11% $ 94 40.60%
Commercial 4,531 37.73 6,460 35.43 5,603 40.39 5,126 40.15 4,591 40.96
Multi-family 11 1.37 6 0.81 6 0.83 8 0.97 7 2.11
Residential construction 36 4.43 44 5.85 44 5.57 40 5.05 22 6.92
Consumer loans (1) 205 12.87 195 12.01 144 10.47 153 9.72 70 9.41
Unallocated 315 315 349 429 414
----- ------ ----- ------ -------- ------ -------- ------ ------- -----
Total $ 5,298 100.00% $ 7,230 100.00% $ 6,388 100.00% $ 6,074 100.00% $5,198 100.00%
====== ======= ======= ======== ======== ======= ======= ======= ====== =======
</table>
(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:
<table>
<caption>
2007 2006 2005
---- ---- ----
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
Savings accounts $ 52,966 1.96% $ 58,887 1.79% $47,071 0.89%
Now and money market accounts 74,098 2.00 77,428 1.65 89,443 1.01
Certificates of deposit 179,219 4.25 186,109 3.60 185,268 2.87
Demand deposits (noninterest-bearing) 35,461 34,960 30,387
------------ ------------ ----------
$ 341,744 $357,384 $352,169
========= =========== ==========
</table>
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at September 30, 2007 is summarized as
follows:
Amount
(Dollars in thousands)
Three months or less $ 13,446
Over three months and through six months 6,109
Over six months and through twelve months 10,251
Over twelve months 18,796
------------
$ 48,602
VI. RETURN ON EQUITY AND ASSETS
<table>
<caption>
The ratio of net income to average total assets and average
shareholders' equity and certain other ratios are as follows:
September 30,
----------------------------------------------
2007 2006 2005
---- ---- ----
(Dollars in thousands)
<s> <c> <c> <c>
Average total assets $ 498,022 $ 520,240 $ 532,190
Average shareholders' equity $ 39,987 $ 38,037 $ 36,587
Net income $ 3,232 $ 2,166 $ 2,496
Return on average total assets 0.65% 0.42% 0.47%
Return on average shareholders' equity 8.08% 5.69% 6.82%
Dividend payout ratio (dividends
declared per share divided by net
income per share) 26.94% 32.92% 26.73%
Average shareholders' equity
to average total assets 8.03% 7.31% 6.87%
</table>
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.
<table>
<caption>
September 30,
----------------------------------------------
2007 2006 2005
---- ---- ----
(Dollars in thousands)
Maximum Balance:
<s> <c> <c> <c>
FHLB advances............................................. $ 123,622 $123,675 $ 136,260
Average Balance:
FHLB advances:............................................ 104,197 108,815 131,101
Average Rate Paid On:
FHLB advances............................................. 5.13% 4.98% 4.81%
The calculation of the average rate paid on FHLB advances is impacted by
purchase adjustment amortization for the years ended September 30, 2007, 2006
and 2005 of $332,000, $472,000, and $804,000.
</table>
<table>
<caption>
The following table sets forth the Bank's borrowings at the dates indicated:
September 30,
----------------------------------------------
2007 2006 2005
---- ---- ----
(Dollars in thousands)
Amounts Outstanding:
<s> <c> <c> <c>
FHLB advances............................................. $ 124,258 $ 97,053 $ 125,854
Weighted Average Interest Rate:
FHLB Advances............................................. 5.32% 5.52% 5.53%
</table>
VIII. CONTRACTUAL OBLIGATIONS AND COMMITTMENTS
The following table sets forth contractual obligations and commitments based on
the due date:
<table>
<caption>
Payments due by Period
---------------------------
Less than Over
Total 1 year 1-3 years 3-5 years 5 years
----- ------ --------- --------- -------
(Dollars in thousands)
Deposits without a
<s> <c> <c> <c> <c> <c>
stated maturity $ 162,761 $ 162,761 $ - $ - $ -
Certificates of deposit 171,042 97,733 48,731 22,142 2,436
Long-term debt obligations 123,622 69,134 36,238 18,250 -
Subordinated debentures 5,000 - - - 5,000
Purchase obligations 2,100 851 1,249 - -
Securities sold under
agreement to repurchase 540 540 - - -
Unused commitments to
extend credits 78,820 78,820 - - -
------------ ----------- ------------- ---------- ------------
Total $ 543,885 $ 409,839 $ 86,218 $ 40,392 $ 7,436
============= ============ ============== =========== ============
</table>
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. 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 newly acquired Community Wealth Management Group
competes with firms in and around Carmel and Crawfordsville and the surrounding
areas in Indiana.
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 March 31, 2007 and dated September
24, 2007. 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, 2007, was approximately $120,000.
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 will be required to
include a report from management on the Company's internal control over
financial reporting for the fiscal year ended September 30, 2008. 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, and provide
management's assessment of the effectiveness of the Company's internal control
over financial reporting. For the fiscal year ending September 30, 2009, the
internal control report must 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
significant efforts will be required to comply with Section 404 and that the
cost of such compliance may be material upon implementation.
The Securities and Exchange Commission in 2006 adopted significant changes to
its proxy statement disclosure rules relating to executive compensation. Among
other things, several tables, more detailed narrative disclosures, and a new
compensation discussion and analysis section are required in proxy statements.
These changes have required and will require a significant commitment of
managerial resources and will result in increased costs to us, which could
adversely affect results of operations, or cause flucuations in results of
operations.
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, 2007, the Bank's investment in stock of the FHLB of Indianapolis
was $7.7 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 1.50%, the FDIC must generally dividend to
DIF members all amounts above the amount necessary to maintain the DIF at 1.50%.
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 non-qualifying 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, 2007, 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, 2007,
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, 2007, 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, 2007, 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, 2007, 75.10% of the Bank's portfolio assets (as defined on that
date) were invested in qualified thrift investments (as defined on that date);
and, the Bank's asset composition was in excess of that required to qualify the
Bank as a QTL in each of the twelve months of the fiscal year. 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.
The Indiana Department of Revenue is currently conducting an audit of MFB's
state income tax returns for fiscal years 2004, 2005 and 2006.
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 2007 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 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, 2007, MFB Financial conducted its business from its corporate
headquarters and main office at 4100 Edison Lakes Parkway, Mishawaka, Indiana
46545, eleven full service financial centers, one wealth management group office
in Crawfordsville, Indiana, and one loan production office in New Buffalo,
Michigan. The corporate headquarters/main office and eleven branch offices are
owned by MFB Financial and the Wayne Street, Carmel, Crawfordsville and New
Buffalo locations are leased.
The corporate headquarters consists of approximately 114,000 square feet with
approximately 44% of the space utilized by the Company. At September 30, 2007
the Company had leased approximately 87% of the available tenant space.
The following table provides certain information with respect to MFB Financial's
offices as of September 30, 2007:
Year Approximate
Description and Address Opened Square Footage
Corporate Headquarters
4100 Edison Lakes Parkway
Suite 300
Mishawaka, IN 46545 2004 63,000
Main Office
4100 Edison Lakes Parkway
Suite 300
Mishawaka, IN 46544 2006 500
Branch Office
411 W. McKinley Ave.
Mishawaka, IN 46545 1975 4,800
Branch Office
402 W. Cleveland Rd.
Granger, IN 46545 1977 4,400
Branch Office
2427 Mishawaka Ave.
South Bend, IN 46615 1978 2,600
Branch Office
25990 County Road 6
Elkhart, IN 46514 1999 3,300
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 46544 1961 13,700
Year Approximate
Description and Address Opened Square Footage
Branch Office
23761 State Road 2
South Bend, IN 46619 2005 3,400
Branch Office
742 E Ireland Rd
South Bend, IN 46614 2005 3,100
Branch Office
11711 N. Meridian Suite 170
Carmel, IN 46032 2006 3,200
Loan Production Office
307 West Buffalo St.
New Buffalo, MI 49117 2007 2,000
Wealth Management Office
119 East Main St.
Crawfordsville, IN 47933 2007 2,600
MFB Financial also operates thirteen automatic teller machines (ATMs). MFB
Financial's ATMs participate in the nationwide CIRRUS and STAR ATM networks, and
accept all others.
MFB Financial owns computer and data processing equipment which is used for
transaction processing and accounting. In 2007, MFB Financial 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 $793,000 for the year ended September
30, 2007 and $838,000 for the year ended September 30, 2006.
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 the $1.5 million impaired loan
relationship discussed in Note 4 to the Company's consolidated financial
statements in its Annual Report to Shareholders filed a lawsuit during the
fiscal year ending September 30, 2006 against MFB seeking to recover $171,000
from MFB. A forbearance agreement provided for payments to this creditor and
the Bank from the impaired loan relationship and resulted in payments of
approximately $1.6 million during fiscal year 2007 to the Bank and full recovery
to the creditor. This legal matter was resolved during the fiscal year 2007 and
the Company and the Bank did not incur any losses. 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, 2007.
Item 4.5. Executive Officers of Registrant.
- --------- ---------------------------------
Presented below is certain information regarding the executive officers of MFB
and MFB Financial:
<table>
<caption>
Name Position
---- --------
<s> <c>
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 Executive Vice President and Chief Financial Officer of
MFB Financial
James P. Coleman, III Executive Vice President and Director of Wealth
Management of MFB Financial
Scott A. Taylor Vice President and Chief Deposit Officer of
MFB Financial
M. Gilbert Eberhart Secretary of MFB and MFB Financial
</table>
Charles J. Viater (age 52) has served as President and Chief Executive Officer
of MFB Financial since September 1995.
Donald R. Kyle (age 60) 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.
Terry L. Clark (age 41) joined MFB in January 2005 as Vice President and
Controller and was elected as Executive Vice President and Chief Financial
Officer of MFB Financial in January 2007. 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 61) 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.
Scott A. Taylor (age 41) joined MFB in November 1999 as Assistant Vice President
and Branch Manager. He assumed the role of Vice President and Chief Deposit
Officer of MFB Financial in May 2007. Previously, he served as a Retail Market
Manager for National City Bank.
M. Gilbert Eberhart (age 73) has served as Secretary of MFB Financial since 1987
and of MFB Corp. since its inception. He is a dentist based in Mishawaka.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters,
and Issuer Purchases of Equity 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 60 of MFB's Annual Report to Shareholders for the fiscal year ended
September 30, 2007 (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 the buyback program announced Febuary 2, 2006 with respect to its Common
Stock during the three months ended September 30, 2007:
<table>
<caption>
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 (1) (2)
------ --------- ---------- --------------------- -----------------
<s> <c> <c> <c> <c>
July 01-31, 2007 - - - 67,721
August 01-31, 2007 - - - 67,721
September 01-30, 2007 - - - 67,721
Total - -
</table>
(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, of which
approximately 1,700 may yet be purchased.
(2) On February 23, 2007, the Company announced in a press release that
the board of directors had authorized a new stock repurchase program
to purchase up to 5%, or approximately 66,000 shares of outstanding
stock, but no shares were repurchased under this new program during
the quarter ended September 30, 2007.
At September 30, 2007, the Company had nothing outstanding from correspondent
banks.
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 3 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 4
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 11
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 57 of the Annual Report are incorporated herein by reference. MFB's
Supplementary Data is contained on page 61 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, 2007 (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, Executive Officers and Corporate Governance.
The information required by this item with respect to directors is incorporated
by reference to pages 3-7 of MFB's Proxy Statement for its 2007 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 29 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
was attached as Exhibit 14 to the Company's Annual Report for the fiscal year
ended September 30, 2005.
Item 11. Executive Compensation
The information required by this item with respect to executive compensation and
compensation committee interlocks is incorporated by reference to pages 7
through 22 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 3 to 5 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, 2007.
<table>
<caption>
- ---------------------------------------------- -------------------------------------------- ----------------------------------------
Number of securities
Number of securities to be remaining available for
issued upon exercise of future issuance under equity
outstanding options, Weighted-average exercise compensation plans as of
warrants and rights as of price of outstanding options September 30, 2007
September 30, 2007 warrants and rights (excluding securities
reflected in column (1)
Plan category
<s> <c> <c> <c>
- ----------------------------------------- ------------------------------- --------------------------------------------------------
- ----------------------------------------- --------------------------------- --------------------------------------------------------
Equity compensation plans approved by 201,410 $ 24.83 8,000
security holders
- ----------------------------------------- --------------------------------- --------------------------------------------------------
- ----------------------------------------- --------------------------------- --------------------------------------------------------
Equity compensation plans not approved
by security holders - - -
- ----------------------------------------- --------------------------------- --------------------------------------------------------
- ----------------------------------------- --------------------------------- --------------------------------------------------------
Total 201,410 $ 24.83 8,000
- ----------------------------------------- --------------------------------- --------------------------------------------------------
</table>
(1) Includes the following plans: 1997 stock option plan and 2002 stock
option plan.
Item 13. Certain Relationships and Related Transactions, and Director
Independence
The information required by this item is incorporated by reference to pages 5
and 21 to 22 of the Proxy Statement.
Item 14. Principal Accounting Fees and Services.
The information required by this item is incorporated by reference to pages 28
to 29 of the Proxy Statement.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) The following financial statements are incorporated by reference as part of
this report:
<table>
<caption>
Pages in the Annual Report to
Shareholders
<s> <c>
Financial Statements
Report of Independent Registered Public Accounting Firm 20
Consolidated Balance Sheets at September 30, 2007 and 2006 21
Consolidated Statements of Income for the Years Ended September 30, 2007, 2006 and 2005 22
Consolidated Statements of Shareholders' Equity for the Years ended September 30, 2007, 2006 and 2005 23
Consolidated Statements of Cash Flows for the Years ended September 30, 2007, 2006 and 2005 24-25
Notes to Consolidated Financial Statements 26-57
</table>
(b) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on pages 52 to 53.
(c) All schedules are omitted as the required information either is not
applicable or is included in the consolidated Financial Statements or
related notes.
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 __, 2007 By: ______________________
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.
<table>
<caption>
- --------------------------- ------------------------
<s> <c>
Charles J. Viater M. Gilbert Eberhart, Director
President, Chief Executive Officer
and Director Date: December 18, 2007
(Principal Executive Officer)
------------------------
Date: December 18, 2007 Edward Levy, Director
Date: December 18, 2007
- ------------------------- -------------------------
Terry L. Clark Jonathan E. Kintner, Director
Executive Vice President and Chief
Financial Officer of MFB Financial Date: December 18, 2007
(Principal Financial Officer and
Principal Accounting Officer)
------------------------
Date: December 18, 2007 Christine A. Lauber, Director
Date: December 18, 2007
- ------------------------- -----------------------
Michael J. Marien, Reginald H. Wagle, Director
Chairman of the Board
Date: December 18, 2007
Date: December 18, 2007
- ------------------------- -----------------------
Robert C. Beutter, Director Jonathan Housand, Director
Date: December 18, 2007 Date: December 18, 2007
</table>
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 dated November 20, 2007.
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) 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(2) 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(3) Amended and restated Employment Agreement between MFB Financial
and Charles J. Viater dated September 18, 2007.*
10(4) Amended and restated Employment Agreement between MFB
Financial and Donald R. Kyle dated September 18, 2007.*
10(5) 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(6) 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(7) Form of Incentive Stock Option Agreement is incorporated by
reference to Exhibit 10.4 of MFB's Form 8-K dated
September 29, 2006. *
10(8) Amended and restated Employment Agreement between MFB Financial
and Terry L. Clark dated September 18, 2007.*
10(9) Change in Control Agreement between MFB Financial and James P.
Coleman, III. dated September 18, 2007.*
10(10) MFB Financial Executive Group Life Plan is incorporated by
reference to Exhibit 10.1 of the Company's Form 8-K dated
September 18, 2007.*
10(11) Salary Continuation Agreement between MFB Financial and Charles
J. Viater dated September 18, 2007 is incorporated by reference
to Exhibit 10.2 of the Company's Form 8-K dated September
18, 2007.
10(12) Director Fee Continuation Agreement between MFB Financial and
the Directors dated September 18, 2007 is incorporated by
reference to Exhibit 10.7 of the Company's Form 8-K dated
September 18, 2007.
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(11).
** See Notes 1 and 2 of Notes to Consolidated Financial Statements,
included in the 2006 Shareholder Annual Report as Exhibit 13.