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, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number: 0-23374
MFB CORP.
(Exact name of registrant as specified in its charter)
Indiana 35-1907258
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
121 South Church Street,
P.O. Box 528 Mishawaka, Indiana 46546
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code:
(219) 255-3146
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Common Share Purchase Rights)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No
-----
(2) Yes X No
-----
Indicate by check mark if disclosure of delinquent filers persuant 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 ammendment to this Form 10-K. X__
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of December 2, 1996, was $23,906,370.00.
The number of shares of the registrant's common stock, without par value,
outstanding as of December 2, 1996, was 1,781,517 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Annual Report to Shareholders for the fiscal year ended
September 30, 1996 are incorporated by reference into Part II.
Portions of the Proxy Statement for the 1997 Annual Meeting of the Shareholders
are incorporated into Part I and Part III.
Exhibit Index on Page 47
Page one of 99 Pages
<PAGE>
MFB CORP.
Form 10-K
INDEX
PART I
Item 1. Business .............................................. 1
Item 2. Properties ............................................ 40
Item 3. Legal Proceedings ..................................... 41
Item 4. Submission of Matters to a Vote of Security Holders ... 41
Item 4.5 Executive Officers of MFB.............................. 41
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .......................... 42
Item 6. Selected Financial Data ............................... 43
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......... 43
Item 8. Financial Statements and Supplementary Data ........... 43
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........ 43
PART III
Item 10. Directors and Executive Officers of the Registrant..... 44
Item 11. Executive Compensation................................. 44
Item 12. Security Ownership of Certain Beneficial Owners
and Management.............................. 44
Item 13. Certain Relationships and Related Transactions......... 44
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................. 44
Signatures ............................................. 46
Item 15. Exhibit List .......................................... 47
<PAGE>
PART 1
Item 1. Business.
General
MFB Corp. ("MFB") is an Indiana corporation organized in December, 1993, to
become a unitary savings and loan holding company. MFB became a unitary savings
and loan holding company upon the conversion of Mishawaka Federal Savings (the
"Bank", and together with MFB, the "Company") from a federal mutual savings and
loan association to a federal stock savings bank on March 24, 1994. On November
1, 1996, Mishawaka Federal Savings officially changed its name to MFB Financial.
The principal asset of MFB consists of 100% of the issued and outstanding shares
of common stock, $0.01 par value per share, of the Bank. The Bank began
operations in Mishawaka, Indiana in 1889 under the name Mishawaka Building and
Loan Association.
MFB Financial directly, and indirectly through its service corporation
subsidiary, offers a number of consumer and commercial financial services. These
services include: (i) residential real estate loans; (ii) home equity and second
mortgage loans; (iii) construction loans; (iv) loans secured by deposits; (v)
NOW accounts; (vi) passbook savings accounts; (vii) certificates of deposit;
(viii) consumer and commercial demand deposit accounts; (ix) individual
retirement accounts; and (x) a variety of insurance products through its service
corporation subsidiary, Mishawaka Financial Services, Inc. MFB Financial
provides these full services through its four offices, three in Mishawaka and
one in South Bend, Indiana and also operates a mortgage origination office in
Elkhart, Indiana. MFB Financial's market area for loans and deposits primarily
consists of St. Joseph and Elkhart counties.
The Company's principal source of revenue is interest income from lending
activities, primarily residential mortgage loans and, to a lesser extent,
residential construction loans. At September 30, 1996, $143.8 million, or 92.9%
of the Company's total loan portfolio, consisted of mortgage loans on one-to
four-family residential real property which are generally secured by first
mortgages on the property. MFB Financial also makes a limited number of
residential construction loans. A large majority of the residential real estate
loans originated by MFB Financial are secured by properties located in St.
Joseph County.
MFB Financial also makes a limited number of consumer loans, commercial
real estate loans and multi-family mortgage loans. Consumer loans include loans
secured by deposits and home equity and second mortgage loans.
In the early 1980's, most savings association's loan portfolios consisted
of long-term, fixed-rate loans which carried low interest rates. At the same
time, most savings associations had to pay high interest rates on deposits in
order to be competitive and retain deposits. The mismatch between the low fixed
rates on long-term mortgage loans and the high interest rates on short-term
deposits had an adverse effect on these savings associations' business. A
significant portion of MFB Financial's loan portfolio consists of adjustable
rate loans. Adjustable rate loans permit MFB Financial to better match the
interest it earns on loans with the interest it pays on deposits. Additionally,
MFB Financial attempts to lengthen liability repricing by aggressively pricing
longer term certificates of deposit during periods of relatively low interest
rates.
1
<PAGE>
Lending Activities
General. MFB Financial historically has concentrated its lending activities
on the origination of loans secured by first mortgage liens for the purchase,
construction or refinancing of one-to four-family residential real property.
These loans continue to be the major focus of MFB Financial's loan origination
activities. Over the past year, a successful home equity line of credit program
was added as well as a new commercial loan program which is expected to enhance
loan yields. Management is currently evaluating other loan programs which may be
added as business plans warrant.
Residential Loans. Residential loans consist of one-to four-family loans.
Pursuant to federal regulations, such loans must require at least semi-annual
payments and be for a term of not more than 40 years, and, if the interest rate
is adjustable, it must be correlated with changes in a readily verifiable index.
A vast majority of the loans made by MFB Financial feature adjustable
rates. A variety of programs are offered to borrowers. Some loans adjust
monthly, a majority adjust on an annual basis after initial terms of one, five
and ten years and others adjust each three years. Initial offering rates,
adjustment caps and margins are adjusted periodically to reflect market
conditions and provide diversity of the loan portfolio.
MFB Financial also offers fixed-rate loans with a maximum term of thirty
years. They are available for a variety of loan types, including first and
second mortgages and purchases of residential building sites.
MFB Financial normally requires private mortgage insurance on all
conventional residential single-family mortgage loans with loan-to-value ratios
in excess of 80%. The private mortgage insurance obligation may be eliminated
when the principal balance of the loan is reduced below 75% of the original
cost. MFB Financial generally will not lend more than 95% of the lesser of
current cost or appraised value of a residential single-family property. Some
equity lines of credit are originated at up to 90% loan-to-value with higher
yields to compensate for potentially higher risk.
Substantially all of the residential mortgage loans that MFB Financial
originates include "due-on-sale" clauses, which give MFB Financial the right to
declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid.
Residential mortgage loans in excess of $250,000 must be approved by a
majority of the members of MFB Financial's Board of Directors. Loans under that
amount are approved by any two members of MFB Financial's Loan Committee.
Construction Loans. MFB Financial offers construction loans with respect to
owner-occupied residential real estate, to builders or developers constructing
such properties and to owners who are to occupy the premises.
Generally, construction loans are 12-month adjustable rate mortgage loans
with interest calculated on the amount disbursed under the loan and payable on a
monthly basis. Interest rates for such loans are generally 1% above the normal
residential mortgage rates. A construction
2
<PAGE>
loan fee is also charged for these loans. MFB Financial normally requires a 75%
loan-to-value ratio for its construction loans. Inspections are made in
conjunction with disbursements under a construction loan, and the construction
phase is generally limited to six months.
Consumer Loans. Federal laws and regulations permit federally chartered
savings associations to make secured and unsecured consumer loans in an
aggregate amount of up to 35% of the association's total assets. In addition, a
federally chartered savings association has lending authority above the 35%
limit for certain consumer loans, such as property improvement loans and deposit
account secured loans. However, the Qualified Thrift Lender test places
additional limitations on a savings association's ability to make consumer
loans.
As a general rule, consumer loans made by most financial institutions
involve a higher level of risk than one-to four-family residential mortgage
loans because consumer loans are generally made based upon the borrower's
ability to repay the loan, which is subject to change, rather than the value of
the underlying collateral, if any. However, the relatively higher yields and
shorter terms to maturity of consumer loans are believed to be helpful in
reducing interest-rate risk. MFB Financial makes only secured consumer loans for
amounts specifically tied to the value of the collateral, and, therefore, has
been successful in managing consumer loan risk.
Origination, Purchase and Sale of Loans. MFB Financial currently originates
its loans pursuant to its own underwriting standards and forms of documentation
which are not in conformity with the standard criteria of the Federal Home Loan
Mortgage Corporation ("FHLMC") or Federal National Mortgage Association
("FNMA"). If it desired to sell its loans, MFB Financial might therefore
experience some difficulty selling such loans quickly in the secondary market.
MFB Financial's ARMs vary from secondary market criteria because, among other
things, MFB Financial does not use the standard loan form, does not require
current property surveys in most cases, permits borrowers to make repayments
which reduce subsequent payment obligations on loans and does not permit the
conversion of those loans to fixed rate loans. However, steps are being taken to
upgrade the loan origination system to allow new loans to more closely conform
to secondary market documentation standards. This upgrade is expected to be
completed in 1997.
MFB Financial confines its loan origination activities primarily in St.
Joseph County and the surrounding area. A new loan origination office was opened
in Elkhart County in the fall of 1996. MFB's loan originations are generated
from referrals from builders, developers, real estate brokers and existing
customers, and limited newspaper and periodical advertising. All loan
applications are processed and underwritten at MFB Financial's main office.
A savings association generally may not make any loan to a borrower or its
related entities if the total of all such loans exceeds 15% of its capital (plus
up to an additional 10% of capital in the case of loans fully collateralized by
readily marketable collateral); provided, however, that loans up to $500,000
regardless of the percentage limitations may be made and certain housing
development loans of up to $30 million or 30% of capital, whichever is less, are
permitted. MFB Financial's portfolio of loans currently contains no loans that
exceed the 15% of capital limitation.
MFB Financial's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. To assess the borrower's
ability to repay, MFB Financial studies the employment and
3
<PAGE>
credit history and information on the historical and projected income and
expenses of its mortgagors.
MFB Financial generally requires appraisals on all property securing its
loans and requires title insurance or an abstract and a valid lien on its
mortgaged real estate. Appraisals for residential real property are generally
performed by an in-house appraiser who is a state-certified residential
appraiser. From time to time, MFB Financial also uses the services of other
certified residential appraisers who are not in-house. MFB Financial requires
fire and extended coverage insurance in amounts at least equal to the principal
amount of the loan. It also requires flood insurance to protect the property
securing its interest if the property is in a flood plain. Tax and insurance
payments are typically required to be escrowed by MFB Financial on new loans.
Origination and Other Fees. MFB Financial realizes income from late
charges, checking account service charges, safety deposit box rental fees, and
fees for other miscellaneous services. MFB Financial charges application fees
for most loan applications, but such are generally credited back to the customer
upon the closing of the loan. If the loan is denied, MFB Financial retains a
portion of the application fee. In order to attract adjustable rate mortgages,
MFB Financial has originated most of its adjustable rate mortgages without
charging points. However, borrowers from time to time wish to pay points and
managements negotiates rates on an individual basis. Late charges are generally
assessed if payment is not received within a specified number of days after it
is due. The grace period depends on the individual loan documents.
Non-Performing and Problem Assets
Mortgage loans are reviewed by the Company on a regular basis and may be
placed on a non-accrual status when the loans become contractually past due
ninety days or more, depending on a case by case evaluation of the circumstances
surrounding each loan. At the end of each month, delinquency notices are sent to
all borrowers from whom payments have not been received. Contact by phone or in
person is made, if feasible, to all such borrowers.
When loans are sixty days in default, personal contact is made with the
borrower to establish an acceptable repayment schedule. When loans are ninety
days in default, contact is made with the borrower by an employee of MFB
Financial after consultation with the Senior Loan Officer who attempts to
establish an acceptable repayment schedule. Management is authorized to commence
foreclosure proceedings for any loan upon making a determination that it is
prudent to do so. All loans on which foreclosure proceedings have been commenced
are placed on non-accrual status.
Non-performing assets. At September 30, 1996, $198,000 or .09% of the
Company's total assets, were non-performing assets (loans delinquent more than
90 days, non-accrual loans, real estate owned (REO") and troubled debt
restructurings). At September 30, 1996, the Company had no impaired loans and
there was no real estate acquired as a result of foreclosure, voluntary deed, or
other means. Such real estate is classified by the Company as "real estate
owned" or "REO" until it is sold. When property is so acquired, the value of the
asset is recorded on the books of the Company at fair value. Interest accrual
ceases when the collection of interest becomes doubtful. All costs incurred from
the date of acquisition in maintaining the property are expensed.
4
<PAGE>
Classified assets. Federal regulations and MFB Financial's Classification
of Assets policy provide for the classification of loans and other assets such
as debt and equity securities considered by the Office of Thrift Supervision
("OTS") to be of lesser quality as "substandard," "doubtful" or "loss" assets.
An asset is considered "substandard" if it is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the association will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to sufficient risk to
warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "special mention" by management.
An insured institution is required to establish general allowances for loan
and lease losses in an amount deemed prudent by management for loans classified
substandard, doubtful or impaired, as well as for other problem loans. General
allowances represent loss allowances which have been established to recognize
the inherent risk associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. When an
insured institution classifies problem assets as "loss", it is required either
to establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the establishment of
additional general or specific loss allowances.
MFB Financial regularly reviews it loan portfolio to determine whether any
loans require classification in accordance with applicable regulations. For
reasons such as low loan-to-value ratios, not all of the Company's
non-performing assets constitute classified assets.
Allowance for Loan Losses
The allowance for loan and lease losses is maintained through the provision
for loan losses, which is charged to earnings. The provision is determined in
conjunction with management's review and evaluation of current economic
conditions (including those of MFB Financial's lending area), changes in the
character and size of the loan and lease portfolio, delinquencies (current
status as well as past and anticipated trends) and adequacy of collateral
securing loan delinquencies, historical and estimated net charge-offs, and other
pertinent information derived from a review of the loan and lease portfolio. In
management's opinion, MFB Financial's allowance for loan and lease losses is
adequate to absorb anticipated future losses existing at September 30, 1996.
Investments
General. Federally chartered savings associations 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'
5
<PAGE>
acceptances, repurchase agreements and federal funds sold. Subject to various
restrictions, federally chartered savings associations may also invest a portion
of their assets in commercial paper, corporate debt securities and asset-backed
securities. The investment policy of MFB Financial, which is established and
implemented by MFB Financial's Investment Committee, is designed primarily to
maximize the yield on the investment portfolio subject to minimal liquidity
risk, default risk, interest rate risk, and prudent asset/liability management.
The Company's investment portfolio consists of U.S. Treasury Bonds, U.S.
government agency securities, mortgage-backed securities and Federal Home Loan
Bank ("FHLB") stock.
Liquidity. Federal regulations require FHLB-member savings associations to
maintain an average daily balance of liquid assets equal to a monthly average of
not less than a specified percentage of its net withdrawable savings deposits
plus short-term borrowings. Liquid assets include cash, certain time deposits,
certain bankers' acceptances, specified U.S. government, state or federal agency
obligations, certain corporate debt securities, commercial paper, certain mutual
funds, certain mortgage-related securities, and certain first lien residential
mortgage loans. This liquidity requirement may be changed from time-to-time by
the OTS to any amount within the range of 4% to 10%, and is currently 5%. Also,
a savings association currently must maintain short-term liquid assets
constituting at least 1% of its average daily balance of net withdrawable
deposit accounts and current borrowings. Monetary penalties may be imposed for
failure to meet these liquidity requirements. As of September 30, 1996, the
Company had liquid assets of $69.0 million and a regulatory liquidity ratio of
26.3%, of which 5.3% constituted short-term investments.
Sources of Funds
General. Deposits have traditionally been MFB Financial's primary source of
funds for use in lending and investment activities. In addition to deposits, MFB
Financial derives funds from scheduled loan payments, loan prepayments, retained
earnings and income on earning assets. While scheduled loan payments and income
on earning assets are relatively stable sources of funds, deposit inflows and
outflows can vary widely and are influenced by prevailing interest rates, market
conditions and levels of competition. Borrowings from the FHLB of Indianapolis
may be used in the short-term to compensate for reductions in deposits or
deposit inflows at less than projected levels. Historically, MFB Financial has
rarely borrowed on a longer-term basis to support expanded activities or to
assist in its asset/liability management. However, during the year ended
September 30, 1996, the Bank instituted a capital leveraging strategy that
involved the purchase of earning assets funded primarily with FHLB borrowings.
The success of this strategy contributed to net earnings and helped improve the
overall return on equity during the year.
Deposits. Deposits are attracted, principally from within St. Joseph
County, through the offering of a broad selection of deposit instruments
including NOW and other transaction accounts, fixed-rate certificates of
deposit, individual retirement accounts, and savings accounts. MFB Financial
does not actively solicit or advertise for deposits outside of St. Joseph
County. Substantially all of MFB Financial's depositors are residents of that
county. 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.
6
<PAGE>
Interest rates paid, maturity terms, service fees and withdrawal penalties
are established by MFB Financial on a periodic basis. Determination of rates and
terms are predicated on funds acquisition and liquidity requirements, rates paid
by competitors, growth goals, and federal regulations. MFB Financial relies, in
part, on customer service and long-standing relationships with customers to
attract and retain its deposits, but also prices its deposits in relation to
rates offered by its competitors.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts offered by MFB Financial has
allowed it to be competitive in obtaining funds and to respond with flexibility
to changes in consumer demand. MFB Financial has become more susceptible to
short-term fluctuations in deposit flows as customers have become more interest
rate conscious. MFB Financial manages the pricing of its deposits in keeping
with its asset/liability management and profitability objectives. Based on its
experience, MFB Financial believes that its passbook, NOW and
non-interest-bearing checking accounts are relatively stable sources of
deposits. However, the ability of MFB Financial 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. There
are regulatory restrictions on advances from the Federal Home Loan Banks, See
"Regulation--Federal Home Loan Bank System" and "--Qualified Thrift Lender." At
September 30, 1996, MFB Financial had $ 24.5 million in Federal Home Loan Bank
borrowings outstanding. MFB Financial does not anticipate any difficulty in
obtaining advances appropriate to meet its requirements in the future.
Service Corporation Subsidiary
OTS regulations permit federal savings associations to invest in the
capital stock, obligations, or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants in
an aggregate amount not exceeding 2% of an association's assets, plus an
additional 1% of assets if the amount over 2% is used for specified community or
inner-city development purposes. In addition, federal regulations permit
associations to make specified types of loans to such subsidiaries (other than
special-purpose finance subsidiaries), in which the association owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the association's
regulatory capital if the association's regulatory capital is in compliance with
applicable regulations. A savings association that acquires a non-savings
association subsidiary, or that elects to conduct a new activity within a
subsidiary, must give the Federal Deposit Insurance Corporation ("FDIC") and the
OTS at least 30 days advance written notice. The FDIC may, after consultation
with the OTS, prohibit specific activities if it determines such activities pose
a serious threat to the Savings Association Insurance Fund ("SAIF").
MFB Financial's only subsidiary, Mishawaka Financial Services, Inc.
("Mishawaka Financial"), was organized in 1975 and currently is engaged in the
sale of credit life, general fire and accident, car, home and life insurance, as
agent to MFB Financial's customers and the general public. During fiscal year
1996, Mishawaka Financial received approximately $113,000 in commissions versus
approximately $116,000 in commissions received during fiscal year 1995. Since
Mishawaka Financial conducts all of its activities as agent for its customers,
MFB
7
<PAGE>
Financial is not required to deduct from its capital any portion of this
investment. The consolidated statements of income of MFB included elsewhere
herein include the operation of MFB Financial and Mishawaka Financial. All
significant intercompany balances and transactions have been eliminated in the
consolidation.
Employees
As of September 30, 1996, MFB Financial employed 52 persons on a full-time
basis and 18 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.
8
<PAGE>
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
A. The following are the average balance sheets for the years ending
September 30:
<TABLE>
<CAPTION>
1996 1995 1994
Average Average Average
Outstanding Outstanding Outstanding
Balance Balance Balance
------- ------- -------
Assets: (In thousands)
Interest-earning assets:
<S> <C> <C> <C>
Interest-bearing deposits $ 6,709 $ 7,995 $ 24,117
Securities (1) 35,392 39,841 27,093
Mortgage-backed securities (1) 19,717 12,558 10,698
Loans receivable (2) 133,670 118,735 110,540
Stock in FHLB of Indianapolis 1,303 1,223 1,149
------------- ------------ ------------
Total interest-earning assets 196,791 180,352 173,597
Non-interest earning assets, net
of allowance for loan losses 3,792 3,517 3,546
------------- ------------ ------------
Total assets $ 200,583 $ 183,869 $ 177,143
============= ============ ============
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts $ 9,746 $ 9,774 $ 9,646
NOW and money market accounts 26,006 26,672 30,662
Certificates of deposit 113,570 106,556 107,294
FHLB borrowings 9,625 - -
------------- ------------ ------------
Total interest-bearing liabilities 158,947 143,002 147,602
Other liabilities 4,229 2,838 2,200
------------- ------------ ------------
Total liabilities 163,176 145,840 149,802
Shareholders' equity
Common stock 19,064 20,527 10,524
Retained earnings 19,718 19,117 17,802
Less common stock acquired by:
Employee stock ownership plan (1,007) (1,208) (675)
Recognition and retention plans (235) (407) (310)
Unrealized gain (loss) on securities
available for sale (133) - -
------------- ------------ ------------
Total shareholders' equity 37,407 38,029 27,341
------------- ------------ ------------
Total liabilities and shareholders' equity $ 200,583 $ 183,869 $ 177,143
============= ============ ============
</TABLE>
- ---------------
(1) Average outstanding balance reflects unrealized gain (loss) on securities
available for sale.
(2) Total loans less deferred net loan fees and loans in process.
<PAGE>
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, 1996
--------------------------------------------
Average Average
Balance Interest Yield/Cost
------- -------- ----------
(Dollars in thousands)
INTEREST-EARNING ASSETS
<S> <C> <C> <C>
Interest-bearing deposits $ 6,709 $ 422 6.29%
Securities (1) 35,410 2,186 6.17
Mortgage-backed securities (1) 19,920 1,225 6.15
Loans receivable (2) 133,670 10,246 7.67
Stock in FHLB of Indianapolis 1,303 103 7.90
------------ ------------ ----
Total interest-earning assets $ 197,012 14,182 7.20
============ ====== ====
INTEREST-BEARING LIABILITIES
Savings accounts $ 9,746 270 2.77%
NOW and money market accounts 26,006 811 3.12
Certificates of deposit 113,570 6,447 5.68
FHLB borrowings 9,625 529 5.50
------------ ------------ ----
Total interest-bearing liabilities $ 158,947 8,057 5.07
============ ====== ====
Net interest earning assets $ 38,065
============
Net interest income $ 6,125
============
Interest rate spread (3) 2.13%
Net yield on average interest-earning assets (4) 3.11%
Average interest-earning assets to
average interest-bearing liabilities 123.95%
</TABLE>
- -----------------
(1) Average balance does not reflect unrealized gain (loss) on securities
available for sale and yield is based on amortized cost.
(2) Total loans less deferred net loan fees and loans in process.
(3) Interest rate spread is calculated by subtracting average interest rate
cost from average interest rate earned for the period indicated.
(4) The net yield on average interest-earning assets is calculated by dividing
net interest income by average interest-earning assets for the period
indicated.
<PAGE>
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
<TABLE>
<CAPTION>
Year Ended September 30, 1995
--------------------------------------------
Average Average
Balance Interest Yield/Cost
(Dollars in thousands)
INTEREST-EARNING ASSETS
<S> <C> <C> <C>
Interest-bearing deposits $ 7,995 $ 482 6.03%
Securities 39,841 2,300 5.77
Mortgage-backed securities 12,558 692 5.51
Loans receivable (1) 118,735 8,816 7.42
Stock in FHLB of Indianapolis 1,223 93 7.60
------------ ------------ ----
Total interest-earning assets $ 180,352 12,383 6.87
============ ============ ====
INTEREST-BEARING LIABILITIES
Savings accounts $ 9,774 274 2.80%
NOW and money market accounts 26,672 863 3.24
Certificates of deposit 106,556 5,651 5.30
------------ ------------ ----
Total interest-bearing liabilities $ 143,002 6,788 4.75
============ ============ ====
Net interest earning assets $ 37,350
============
Net interest income $ 5,595
============
Interest rate spread (2) 2.12%
Net yield on average interest-earning assets (3) 3.10%
Average interest-earning assets to
average interest-bearing liabilities 126.12%
</TABLE>
- ----------------
(1) Total loans less deferred net loan fees and loans in process.
(2) Interest rate spread is calculated by subtracting average interest rate
cost from average interest rate earned for the period indicated.
(3) The net yield on average interest-earning assets is calculated by dividing
net interest income by average interest-earning assets for the period
indicated.
<PAGE>
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
<TABLE>
<CAPTION>
Year Ended September 30, 1994
--------------------------------------------
Average Average
Balance Interest Yield/Cost
------- -------- ----------
(Dollars in thousands)
INTEREST-EARNING ASSETS
<S> <C> <C> <C>
Interest-bearing deposits $ 24,117 $ 922 3.82%
Investment securities 27,093 1,498 5.53
Mortgage-backed securities 10,698 586 5.48
Loans receivable (1) 110,540 8,479 7.67
Stock in FHLB of Indianapolis 1,149 60 5.22
------------ ------------ ----
Total interest-earning assets $ 173,597 11,545 6.65
============ ============ ====
INTEREST-BEARING LIABILITIES
Savings accounts $ 9,646 265 2.75%
NOW and money market accounts 30,662 813 2.65
Certificates of deposit 107,294 4,941 4.61
------------ ------------ ----
Total interest-bearing liabilities $ 147,602 6,019 4.08
============ ============ ====
Net interest earning assets $ 25,995
============
Net interest income $ 5,526
============
Interest rate spread (2) 2.57%
Net yield on average interest-earning assets (3) 3.18%
Average interest-earning assets to
average interest-bearing liabilities 117.61%
</TABLE>
- ----------------
(1) Total loans less deferred net loan fees and loans in process.
(2) Interest rate spread is calculated by subtracting average interest rate
cost from average interest rate earned for the period indicated.
(3) The net yield on average interest-earning assets is calculated by dividing
net interest income by average interest-earning assets for the period
indicated.
<PAGE>
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
C. The following tables describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities
have affected MFB Corp.'s consolidated interest income and expense
during the periods indicated. For each category of interest-earning
asset and interest-bearing liability, information is provided on changes
attributable to (1) changes in rate (i.e., changes in rate multiplied by
old volume) and (2) changes in volume (i.e., changes in volume
multiplied by old rate). Changes attributable to both rate and volume
have been allocated proportionally to the change due to volume and the
change due to rate.
<TABLE>
<CAPTION>
Increase (Decrease) in
Net Interest Income
------------------------------------------------
Total Net Due to Due to
Change Rate Volume
----------- ----------- ------------
(In thousands)
Year ended September 30, 1996 compared
to year ended September 30, 1995
Interest-earning assets
<S> <C> <C> <C>
Interest-bearing deposits $ (60) $ 20 $ (80)
Securities (114) 154 (268)
Mortgage-backed securities 533 97 436
Loans receivable 1,430 293 1,137
Stock in FHLB of Indianapolis 10 4 6
----------- ----------- ------------
Total 1,799 568 1,231
Interest-bearing liabilities
Savings accounts (4) (3) (1)
NOW and money market accounts (52) (31) (21)
Certificates of deposit 796 411 385
FHLB borrowings 529 - 529
----------- ----------- ------------
Total 1,269 377 892
----------- ----------- ------------
Change in net interest income $ 530 $ 191 $ 339
=========== =========== ============
</TABLE>
13
<PAGE>
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
----------- ----------- ------------
(In thousands)
Year ended September 30, 1995 compared
to year ended September 30, 1994
Interest-earning assets
<S> <C> <C> <C>
Interest-bearing deposits $ (440) $ 367 $ (807)
Securities 802 69 733
Mortgage-backed securities 106 4 102
Loans receivable 337 (278) 615
Stock in FHLB of Indianapolis 33 29 4
----------- ----------- ------------
Total 838 191 647
Interest-bearing liabilities
Savings accounts 9 5 4
NOW and money market accounts 50 164 (114)
Certificates of deposit 710 744 (34)
----------- ----------- ------------
Total 769 913 (144)
----------- ----------- -------------
Change in net interest income $ 69 $ (722) $ 791
=========== =========== ============
</TABLE>
<PAGE>
II. INVESTMENT PORTFOLIO
A. The following table sets forth the amortized cost and fair value of
securities available for sale:
<TABLE>
<CAPTION>
At September 30,
1996 1995 1994
--------------------------- -------------------------- ---------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
----------- ----------- ----------- ----------- ----------- -----------
(In thousands)
Debt securities
U.S. Government
and federal
<S> <C> <C> <C> <C> <C> <C>
agencies $ 40,160 $ 40,207 $ - $ - $ - $ -
Mortgage-backed 24,473 24,074 - - - -
----------- ----------- ----------- ----------- ----------- -----------
64,633 64,281 - - - -
Marketable equity
securities 2,494 2,482 - - - -
----------- ----------- ----------- ----------- ----------- -----------
$ 67,127 $ 66,763 $ - $ - $ - $ -
=========== =========== =========== =========== =========== ===========
</TABLE>
The following table sets forth the amortized cost and fair value of securities
held to maturity:
<TABLE>
<CAPTION>
At September 30,
1996 1995 1994
--------------------------- -------------------------- ---------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
----------- ----------- ----------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt securities
U.S. Government
and federal
agencies $ - $ - $ 40,117 $ 40,180 $ - $ -
Mortgage-
backed - - 11,905 11,524 - -
----------- ----------- ----------- ----------- ----------- -----------
$ - $ - $ 52,022 $ 51,704 $ - $ -
=========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
II. INVESTMENT PORTFOLIO (Continued)
A. The following table sets forth the amortized cost and estimated market
value of investment securities and other securities:
<TABLE>
<CAPTION>
At September 30,
1996 1995 1994
-------------------------- -------------------------- ------------------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
----------- ----------- ----------- ----------- ----------- -----------
(In thousands)
Investment Securities
U.S. Government
and federal
<S> <C> <C> <C> <C> <C> <C>
agencies $ - $ - $ - $ - $ 41,773 $ 40,792
Mortgage-backed - - - - 13,158 12,328
----------- ------------ ----------- ---------- ---------- -------------
$ - $ - $ - $ - $ 54,931 $ 53,120
=========== ============ =========== ========== ========== =============
Other securities
FHLB stock, at
cost $ 1,336 $ 1,336 $ 1,271 $ 1,271 $ 1,176 $ 1,176
=========== ============ =========== ========== ========== =============
</TABLE>
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, 1996, which matures in
One One to Five to
Year or Less Five Years Ten Years Totals
------------------- ------------------ ----------------- ------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value
--------- ------- --------- ------ --------- ------- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and federal
agencies $ 6,837 $ 6,849 $ 32,973 $ 33,019 $ 350 $ 339 $ 40,160 $ 40,207
========= ========= ========= ========= ========= ========= ========= =========
Weighted average yield 5.88% 6.85% 6.50% 6.68%
</TABLE>
The weighted average interest rates are based upon coupon rates for
securities purchased at par value and on effective interest rates
considering amortization or accretion if the securities were purchased at a
premium or discount.
C. Excluding those holdings of the investment portfolio in U.S. Treasury
securities and other agencies of the U.S. Government, there were no
investments in securities of any one issuer which exceeded 10% of the
shareholders' equity of the Company at September 30, 1996.
<PAGE>
III. LOAN PORTFOLIO
A. The following table sets for the composition of MFB Corp.'s
consolidated loan portfolio and mortgage-backed securities by
loan type as of the dates indicated, including a reconciliation
of gross loans receivable to net loans receivable after
consideration of the allowance for loan losses, deferred net loan
fees and loans in process:
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------------------
1996 1995 1994
-------------------------- ------------------------- -------------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ----- ----------- ------ -----
(Dollars in thousands)
Mortgage loans
<S> <C> <C> <C> <C> <C> <C>
Residential $ 143,751 92.87% $ 119,720 97.60% $113,770 97.25%
Commercial real estate 876 .57 206 .17 443 .38
Multi-family 163 .10 189 .15 192 .16
Residential construction 5,005 3.23 2,106 1.72 2,213 1.89
Consumer loans
Home equity and second
mortgage loans 3,790 2.45 375 .30 298 .26
Financing leases 1,125 .73 - - - -
Other 83 .05 74 .06 69 .06
----------- ------- ------------ ------------------------ --------
Gross loans receivable 154,793 100.00% 122,670 100.00% %116,985 100.00%
======= ======== ======== ======
Less
Allowance for loan losses (340) (310) (280)
Deferred net loan fees (440) (370) (447)
Loans in process (1,961) (809) (961)
----------- ------------ --------
Net loans receivable $ 152,052 $ 121,181 $115,297
=========== ============ ========
Mortgage-backed securities
FHLMC certificates $ 5,013 $ 11,905 $ 13,158
CMO - REMIC 19,061 - -
----------- ----------- --------
Net mortgage-
backed securities $ 24,074 $ 11,905 $ 13,158
=========== ============ ========
Mortgage loans
Adjustable rate $ 130,336 87.01% $ 113,394 92.78% $110,853 95.06%
Fixed rate 19,459 12.99 8,827 7.22 5,765 4.94
----------- ------- ------------ ------------------------ --------
Total $ 149,795 100.00% $ 122,221 100.00% $ 116,618 100.00%
=========== ======= ============ ====== ============ ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------
1993 1992
-------------------------- ---------------------------
Percent Percent
of of
Amount Total Amount Total
------ ----- ------ -----
(Dollars in thousands)
Mortgage loans
<S> <C> <C> <C> <C>
Residential $ 107,168 97.87% $ 110,338 97.08%
Commercial real estate 496 .45 607 .54
Multi-family 625 .57 691 .61
Residential construction 848 .78 1,333 1.17
Consumer loans
Home equity and second
mortgage loans 256 .24 434 .38
Financing leases - - - -
Other 106 .09 248 .22
------------ ------- ------------ ---------
Gross loans receivable 109,499 100.00% 113,651 100.00%
======= ======
Less
Allowance for loan losses (250) (58)
Deferred net loan fees (556) (646)
Loans in process (481) (721)
------------ ------------
Net loans receivable $ 108,212 $ 112,226
============ ============
Mortgage-backed securities
FHLMC certificates $ - $ -
CMO - REMIC - -
------------ ------------
Net mortgage-
backed securities $ - $ -
============ ============
Mortgage loans
Adjustable rate $ 102,837 94.23% $ 104,034 92.09%
Fixed rate 6,300 5.77 8,935 7.91
------------ ------- ------------ ---------
Total $ 109,137 100.00% $ 112,969 100.00%
============ ======= ============ ======
</TABLE>
17
<PAGE>
III. LOAN PORTFOLIO (Continued)
B. Loan Maturity. The following table sets forth certain information at
September 30, 1996, 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>
Balance Due during years ended September 30,
Outstanding 2000 2002 2007 2012
at September 30, and to to and
1996 1997 1998 1999 2001 2006 2011 Following
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands)
Mortgage Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential $143,751 $ 24 $ 117 $ 201 $ 1,264 $ 8,027 $ 31,054 $103,064
Commercial real estate 876 -- -- -- 314 259 303 --
Multi-family 163 7 -- -- -- 91 21 44
Residential construction 5,005 1,430 -- -- -- -- 339 3,236
Consumer Loans
Home equity and second mortgage 3,790 -- -- -- 212 3,476 48 54
Financing leases 1,125 -- -- -- -- 1,125 -- --
Other 83 74 9 -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total $154,793 $ 1,535 $ 126 $ 201 $ 1,790 $ 12,978 $ 31,765 $106,398
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The following table sets forth, as September 30, 1996, the dollar amount of all
loans due after one year which have fixed interest rates and floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Due After September 30, 1997
-----------------------------------------
Variable
Fixed Rates Rates Total
-------- -------- --------
(In thousands)
Mortgage loans
<S> <C> <C> <C>
Residential $ 17,095 $126,632 $143,727
Commercial real estate 266 610 876
Multi-family 21 135 156
Residential construction 1,488 2,087 3,575
Consumer loans
Home equity and second mortgage 388 3,402 3,790
Financing leases 1,125 -- 1,125
Other 9 -- 9
-------- -------- --------
Total $ 20,392 $132,866 $153,258
======== ======== ========
</TABLE>
20
<PAGE>
III. LOAN PORTFOLIO (Continued)
C. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans
The table below sets forth the amounts and categories of MFB
Corp.'s consolidated non-performing assets (accruing loans
delinquent more than 90 days, non-accrual loans, troubled debt
restructurings and real estate owned). It is the policy of MFB
Corp. that all earned but uncollected interest on all loans be
reviewed quarterly to determine if any portion thereof be
classified as uncollectible for any loan past due in excess of
90 days.
<TABLE>
<CAPTION>
At September 30,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
Accruing loans delinquent
<S> <C> <C> <C> <C> <C>
more than 90 days $ 198 $ 308 $ 107 $ 223 $ 177
Non-accruing loans (1) - - - - -
Troubled debt
restructurings - - - - -
---------- --------- ----------- ---------- -------------
Total non-performing
loans 198 308 107 223 177
Real estate owned, net - 18 22 50 -
---------- --------- ----------- ---------- -------------
Total non-performing
assets $ 198 $ 326 $ 129 $ 273 $ 177
========== ========= =========== ========== =============
Non-performing loans to
total loans, net (2) .13% .25% .09% .21% .16%
Non-performing assets to
total assets .09% .17% .07% .16% .11%
</TABLE>
Management believes that the allowance for loan losses balance at September 30,
1996 is adequate to absorb any losses on nonperforming loans, as the allowance
balance is maintained by management at a level considered adequate to cover
losses that are currently anticipated based on past loss experience, general
economic conditions, information about specific borrower situations including
their financial position and collateral values, and other factors and estimates
which are subject to change over time.
- --------------------------------------------------------------------------------
(1) MFB Corp. generally places mortgage loans on a nonaccrual status when
serious doubt exists as to theri collectibility. At September 30, 1996,
there were no loans on nonaccrual.
(2) Total lonas less deferred net loan fees an loans in process.
<PAGE>
III. LOAN PORTFOLIO (Continued)
C. Risk Elements (Continued)
2. Potential Problem Loans
As of September 30, 1996, there are no loans where there
are serious doubts as to the ability of the borrower to
comply with present loan repayment terms, which may result
in disclosure of such loans pursuant to Item III.C.1.
Consideration was given to loans classified for regulatory
purposes as loss, doubtful, substandard, or special
mention that have not been disclosed in Section 1 above.
Management believes that these loans do not represent or
result from trends or uncertainties which management
reasonably expects will materially impact future operating
results, liquidity, or capital resources, or management
believes that these loans do not represent material
credits about which management is aware of any information
which causes management to have serious doubts as to the
ability of such borrowers to comply with the loan
repayment terms.
3. Foreign Outstandings
None
4. Loan Concentrations
MFB Corp. historically has concentrated its lending
activities on the origination of loans secured by first
mortgage liens for the purchase, construction or
refinancing of one- to four-family residential real
property. These loans continue to be the major focus of
MFB Corp.'s loan origination activities, representing
96.10% of MFB Corp.'s total loan portfolio at September
30, 1996.
D. Other Interest-Earning Assets
There are no other interest-earning assets as of September 30,
1996 which would be required to be disclosed under Item III. C.1
or 2 if such assets were loans.
20
<PAGE>
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The allowance for loan losses is maintained through the provision
for loan losses, which is charged to earnings. The provision for
loan losses is determined in conjunction with management's review
and evaluation of current economic conditions (including those of
MFB Corp.'s lending area), changes in the characteristic and size
of the loan portfolio, loan delinquencies (current status as well
as past and anticipated trends) and adequacy of collateral
securing loan delinquencies, historical and estimated net
charge-offs, and other pertinent information derived from a
review of the loan portfolio. In management's opinion, MFB
Corp.'s allowance for loan losses is adequate to absorb
anticipated future losses from loans at September 30, 1996.
The following table analyzes changes in the consolidated
allowance for loan losses during the past five years ended
September 30, 1996.
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance of allowance at
beginning of period $310 $280 $250 $ 58 $ 31
Add
Recoveries of loans
previously charged-
off--residential real
estate loans -- -- -- -- --
Less charge offs
Residential real estate
loans -- -- -- -- --
Commercial real estate
loans -- -- -- -- --
Consumer loans -- -- -- -- --
---- ---- ---- ---- ----
Net charge-offs -- -- -- -- --
Provisions for loan losses 30 30 30 192 27
---- ---- ---- ---- ----
Balance of allowance at
end of period $340 $310 $280 $250 $ 58
==== ==== ==== ==== ====
Net charge-offs to total
average loans out-
standing for period -% -% -% -% -%
Allowance at end of
period to total loans, net
at end of period (1) .22% .26% .24% .23% .05%
Allowance to total non-
performing loans at
end of period 171.72% 100.65% 261.68% 112.11% 32.77%
</TABLE>
- ---------------------------------
(1) Total loans less deferred net loan fees and loans in process.
<PAGE>
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,
--------------------------------------------------------
1996 1995
----------------------------- --------------------------
Percent Percent
of loans of loans
in each in each
category category
to total to total
Amount Loans Amount Loans
------ ----- -----------
Balance at end of period
applicable to
<S> <C> <C> <C> <C>
Residential $ 311 92.87% $ 281 97.60%
Commercial real
estate 1 .57 1 .17
Multi-family 1 .10 1 .15
Residential construction 1 3.23 1 1.72
Consumer loans (1) 1 3.23 1 .36
Unallocated 25 - 25 -
------------- ------ ----------- ------
Total $ 340 100.0% $ 310 100.00%
============= ====== =========== ======
</TABLE>
<TABLE>
<CAPTION>
September 30,
1994 1993 1992
--------------------------- -------------------------- --------------------------
Percent Percent Percent
of loans of loans of loans
in each in each in each
category category category
to total to total to total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to
Residential $ 251 97.25% $ 221 97.87% $ 33 97.08%
Commercial real
estate 1 .38 1 .45 - .54
Multi-family 1 .16 1 .57 - .61
Residential construction 1 1.89 1 .78 - 1.17
Consumer loans (1) 1 .32 1 .33 - .60
Unallocated 25 - 25 - 25 -
------------ -------- ----------- --------- ------------ --------
Total $ 280 100.00% $ 250 100.00% $ 58 100.00%
============ ======= =========== ========= ============ ======
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes home equity and second mortgage lonas, financing leases, and other
loans including, education loans and loans secured by deposits.
<PAGE>
V. DEPOSITS
The average amount of deposits and average rates paid are summarized as
follows for the years ended September 30:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings accounts $ 9,746 2.77% $ 9,774 2.80% $ 9,646 2.75%
Now and money market accounts 26,006 3.12 26,672 3.24 30,662 2.65
Certificates of deposit 113,570 5.68 106,556 5.30 107,294 4.61
Demand deposits (noninterest-bearing) 816 839 625
------------ ------------ ------------
$ 150,138 $ 143,841 $ 148,227
============ ============ ============
</TABLE>
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at September 30, 1996 is summarized as follows:
Amount
(In thousands)
Three months or less $ 3,946
Over three months and through six months 3,942
Over six months and through twelve months 6,379
Over twelve months 10,221
------------
$ 24,488
23
<PAGE>
VI. RETURN ON EQUITY AND ASSETS
The ratio of net income to average total assets and average
shareholders' equity and certain other ratios are as follows:
<TABLE>
<CAPTION>
September 30,
----------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Average total assets $ 200,583 $ 183,869 $ 177,143
============ ============ ============
Average shareholders' equity $ 37,407 $ 38,029 $ 27,341
============ ============ ============
Net income $ 975 $ 1,236 $ 1,532
============ ============ ============
Return on average total assets .49% .67% .86%
=========== ========= ==========
Return on average shareholders' equity 2.61% 3.25% 5.60%
=========== ========= ==========
Dividend payout ratio (dividends
declared per share divided by net
income per share) 12.24% -% -%
=========== =========== ===========
Average shareholders' equity
to average total assets 18.65% 20.68% 15.43%
=========== ========= ==========
</TABLE>
VII. SHORT-TERM BORROWINGS
The Company did not have any category of short-term borrowings for
which the average balance outstanding during the reported periods was
30 percent or more of shareholders' equity at the end of the reported
periods.
<PAGE>
COMPETITION
MFB Financial originates most of its loans to and accepts most of its
deposits from residents of St. Joseph 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 County with significantly larger
resources than MFB Financial. In total, there are 13 financial institutions
located in Mishawaka, Indiana, including MFB Financial. These financial
institutions consist of three commercial banks, three savings banks and seven
credit unions. MFB Financial must also compete with banks and savings
institutions in Elkhart and South Bend since media advertising from these cities
reaches the Mishawaka community. MFB Financial also competes with money market
funds with respect to deposit accounts and with insurance companies with respect
to individual retirement accounts.
Under current law, bank holding companies may acquire savings associations.
Savings associations may also acquire banks under federal law. To date, several
bank holding company acquisitions of healthy savings associations in Indiana
have been completed. Affiliations between banks and healthy 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 recently passed a law establishing
interstate branching provisions for Indiana state-chartered banks consistent
with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The
Indiana Branching Law authorizes Indiana banks to branch interstate by merger or
de novo expansion and authorizes out-of-state banks meeting certain requirements
to branch into Indiana by merger de novo expansion. The Indiana Branching Law
became effective March 15, 1996, provided that prior to June 1, 1997 interstate
mergers and de novo branches are not permitted to out-of-state banks unless the
laws of their home states permit Indiana banks to merge or establish de novo
branches on a reciprocal basis. This new legislation may also result in
increased competition for the Holding Company and the Bank.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. MFB Financial competes for
loan originations primarily through the efficiency and quality of services it
provides borrowers, builders and realtors, and 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.
<PAGE>
REGULATION
General
The Bank is a federally chartered savings bank, the deposits of which are
federally insured and backed by the full faith and credit of the United States
Government. Accordingly, the Bank is subject to broad federal regulation and
oversight extending to all its operations. The Bank is a member of the FHLB of
Indianapolis and is subject to certain limited regulation by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board"). As the
savings and loan holding company of the Bank, the Company also is subject to
federal regulation and oversight. The purpose of the regulation of the Company
and other holding companies is to protect subsidiary savings associations. The
Bank is a member of the Savings Association Insurance Fund ("SAIF") which
together with the Bank Insurance Fund (the "BIF") are the two deposit insurance
funds administered by the FDIC, and the deposits of the Bank are insured by the
FDIC. As a result, the FDIC has certain regulatory and examination authority
over the Bank. Certain of these regulatory requirements and restrictions are
discussed below or elsewhere in this document.
The OTS has extensive authority over the operations of savings
associations. 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 June 10, 1996 .
When these examinations are conducted by the OTS, the examiners may require the
Company to provide for higher general or specific loan loss reserves. All
savings associations are subject to a semi-annual assessment, based upon the
savings association's total assets, to fund the operations of the OTS.
Currently, the assessment rates range from .0172761% of assets for associations
with assets of $67 million or less to .0045864% for associations with assets in
excess of $35 billion. The Bank's OTS assessment for the fiscal year ended
September 30, 1996, was approximately $57,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws and it is prohibited from engaging in any activities
not permitted by such laws. For instance, no savings institution may invest in
non-investment grade corporate debt securities. In addition, the permissable
level of investment by federal associations in loans secured by non-residential
real property may not exceed 400% of total capital, except with approval of the
OTS. The Bank is in compliance with the noted restrictions.
<PAGE>
Congress is considering legislation that would consolidate the supervision
and regulation of all U.S. financial institutions into one or two administrative
bodies, would expand the powers of financial institutions, and would provide
regulatory relief to financial institutions ("the legislation"). It cannot be
predicted whatever or when the legislation will be enacted or the extent to
which the Bank or the Holding Company would be affected thereby.
Safety and Soundness Standards
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. In general the standards are designed to assist the
federal banking agencies in identifying and addressing problems at insured
institutions before capital becomes impaired. Any institution which fails to
comply with these standards must submit a compliance plan. Failure to submit a
plan or to comply with an approved plan will subject the institution to further
enforcement action.
Federal Home Loan Bank System
The Bank is a member of the FHLB system, which consists of 12 regional
banks. The federal Housing Finance Board ("FHFB"), an independent agency,
controls the FHLB System including the FHLB of Indianapolis. The FHLB System
provides a central credit facility primarily for member savings associations and
other member financial institutions. The Bank is required to hold shares of
capital stock in the FHLB of Indianapolis in an amount at least equal to the
greater of 1% of the aggregate principal amount of its unpaid residential
mortgage loans, home purchase contracts and similar obligations at the end of
each calendar year, .3% of its assets or 1/20 (or such greater fraction
established by the FHLB) of outstanding FHLB advances, commitments, lines of
credit and letters of credit. The Bank is currently in compliance with this
requirement. At September 30, 1996, the Bank's investment in stock of the FHLB
of Indianapolis was $1.3 million.
In past years, the Bank received substantial dividends on its FHLB stock.
All 12 FHLB's are required to provide funds for the resolution of troubled
savings associations and to establish affordable housing programs through direct
loans or interest subsidies on advances to members to be used for lending at
subsidized interest rates for low-and moderate-income, owner-occupied housing
projects, affordable rental housing, and certain other community projects. These
contributions and obligations could adversely affect the value of FHLB stock in
the future. A reduction in value of such stock may result in a corresponding
reduction in the Bank's capital.
The FHLB of Indianapolis serves as a reserve or central bank for member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHLB and the Board of Directors of the FHLB of Indianapolis.
All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. Eligible collateral includes first mortgage loans less
than 90 days delinquent or securities
<PAGE>
evidencing interests therein, securities (including mortgage-backed securities)
issued, insured or guaranteed by the federal government or any agency thereof,
FHLB deposits and, to a limited extent, real estate with readily ascertainable
value in which a perfected security interest may be obtained. Other forms of
collateral may be accepted as over collateralization or, under certain
circumstances, to renew outstanding advances. All long-term advances are
required to provide funds for residential home financing and the FHLB has
established standards of community service that members must meet to maintain
access to long-term advances.
Interest rates charged for advances vary depending upon maturity, the cost
of funds to the FHLB of Indianapolis and the purpose of the borrowing. Under
current law, savings associations which cease to be Qualified Thrift Lenders are
ineligible to receive advances from their FHLB.
Insurance of Deposits
The FDIC administers two separate insurance funds, which are not
commingled: one primarily for federally insured banks ("BIF") and one primarily
for federally insured savings associations ("SAIF"). As the federal insurer of
deposits of savings associations, the FDIC determines whether to grant insurance
to newly-chartered savings associations, has authority to prohibit unsafe or
unsound activities and has enforcement powers over savings associations (usually
in conjunction with the OTS or on its own if the OTS does not undertake
enforcement action).
Deposit accounts in the Bank are generally insured by the SAIF to a maximum
of $100,000 for each insured depositor. As a condition to such insurance, the
FDIC is authorized to issue regulations and, in conjunction with OTS, conduct
examinations and generally supervise the operations of its insured members. This
supervision extends to a comprehensive regulatory scheme governing, among other
things, the form of deposit instruments issued by savings associations, and
certain aspects of their lending activities, including appraisal requirements,
private mortgage insurance coverage and lending authority.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well-capitalized (i.e. a core capital ratio of at least 5%, a ratio of Tier 1 or
core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least
6% and a risk-based capital ratio of at least 10%) pay the lowest premium while
institutions that are less than adequately capitalized (i.e. core or Tier 1
risk-based capital ratio of less than 4% or a risk- based capital ratio of less
than 8%) and considered of substantial supervisory concern pay the highest
premium. Risk classification of all insured institutions is made by the FDIC
semi-annually.
The FDIC is authorized to increase assessment rates, on a semiannual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts
<PAGE>
borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
For the first six months of 1995, the assessment schedule for BIF members
and SAIF members ranged from .23% to .31% of deposits. As is the case with the
SAIF, the FDIC is authorized to adjust the insurance premium rates for banks
that are insured by the BIF of the FDIC in order to maintain the reserve ratio
of the BIF at 1.25% of BIF insured deposits. As a result of the BIF reaching its
statutory reserve ratio, the FDIC revised the premium schedule for BIF insured
institutions to provide a range of .04% to .31% of deposits. The revisions
became effective in the third quarter of 1995. In addition BIF rates were
further revised, effective January 1996, to provide a range of .0% to .27%. The
SAIF rates, however, were not adjusted. At the time the FDIC revised the BIF
premium schedule, it noted that, absent legislative action (as discussed below)
, the SAIF would not attain its designated reserve ratio until the year 2002. As
a result, SAIF insured members would continue to be generally subject to higher
deposit insurance premiums than BIF insured institutions until, all things being
equal, the SAIF attained its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September, 1996.
The legislation provided for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate was
established at .657% of assessable deposits by the FDIC and the resulting
assessment on the Bank of $955,000 was paid in November, 1996. This special
assessment significantly increased noninterest expense and adversely affected
the Company's results of operations for the year ended September 30, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations. " As a result of the special assessment, the Bank's annual deposit
insurance premiums beginning in 1997 will be reduced to approximately $102,000
based upon its current risk classification and the new assessment schedule for
SAIF insured institutions. These premiums are subject to change in future
periods.
Prior to the enactment of the legislation, a portion of the SAIF assessment
imposed on savings associations was used to repay obligations issued by a
federally chartered corporation to provide financing ("FICO") for resolving the
thrift crisis in the 1980's. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective, October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment will be limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999 or
when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as the Bank. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as
SAIF-member institutions. The rates to be established by the FDIC to implement
this requirement for all FDIC- insured institutions are uncertain at this time,
but are anticipated to be about a 6.5 basis points assessment on SAIF deposits
and 1.5 basis points assessment on BIF deposits until BIF insured institutions
participate fully in the assessment.
<PAGE>
Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common stockholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, purchased mortgage
servicing rights and purchased credit card relationships (which may be included
in an amount up to 25% of core capital, but which are to be reported on an
association's balance sheet at the lesser of 90% of their fair market value, 90%
of their original price, or 100% of their remaining unamortized book value),
less nonqualifying intangibles. Under the tangible capital requirement, a
savings bank must maintain tangible capital (core capital less all intangible
assets except purchased mortgage servicing rights and purchased credit card
relationships which may be included after making the above-noted adjustments) 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 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, 1996, based
on the capital standards then in effect, the Bank was in compliance with its
fully phased-in capital requirements.
The Comptroller of the Currency requires minimum leverage ratio of 3% Tier
1 capital-to-total assets for the highest rated national banks, with an
additional requirement of 100 to 200 basis points for all other national banks.
Current law requires that the capital standards for savings associations be no
less stringent than those applicable to national banks. Accordingly, the OTS has
proposed revised capital regulations imposing a minimum core capital requirement
of 3% for the highest rated savings associations, with an additional requirement
of 100 to 200 basis points for all other savings associations. These regulations
have not become effective and there can be no assurance as to whether, or in
what form, such regulations will be adopted.
The OTS has delayed indefinitely implementation of a final rule which sets
forth the methodology for calculating an interest rate risk component to be
incorporated into the OTS regulatory capital rule. Under the new rule, only
savings associations with "above normal" interest rate risk (institutions whose
portfolio equity would decline in value by more than 2% of assets in the event
of a hypothetical 200-basis-point move in interest rates) will be required to
maintain additional capital for interest rate risk under the risk-based capital
framework. In addition, most institutions with less than $300 million in assets
and a risk-based capital ratio in excess of 12%, such as the Bank, are subject
to less stringent reporting requirements and are
<PAGE>
exempt from the new interest rate component of the new rule. Although the OTS
has decided to delay implementation of this rule, it will continue to monitor
the level of interest rate risk at individual institutions and it retains the
authority, on a case-by-case basis, to impose additional capital requirements
for individual institutions with significant interest rate risk.
If an association is not in compliance with its capital requirements, the
OTS is required to prohibit asset growth and to impose a capital directive that
may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings bank that fails to meet its capital
requirements, which actions may include restrictions on operations and banking
activities, the imposition of a capital directive, a cease and desist order,
civil money penalties or harsher measures such as the appointment of a receiver
or conservator or a forced merger into another institution.
Prompt Corrective Action
Certain regulatory action is mandated or recommended for savings
associations that are deemed to be well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. At each successively lower capital category, an institution is
subject to more restrictive and numerous mandatory or discretionary regulatory
actions or limits, and the OTS has less flexibility in determining how to
resolve the problems of the institution. OTS regulations define these capital
levels as follows: (1) well-capitalized associations 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% (except for institutions receiving the highest examination rating, in which
case the requirement is 3%), but which are not well capitalized; (3)
undercapitalized associations are those that do not meet the requirements for
adequately capitalized associations, but that are not significantly
undercapitalized; (4) significantly undercapitalized associations 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
associations are those with tangible capital of less than 2% of total assets. In
addition, the OTS can downgrade an association'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 association 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, 1996, meets the
standards for a well-capitalized association.
<PAGE>
Federal law prohibits an insured institution from making a capital
distribution to anyone or paying management fees to any person having control of
the institution if, after such distribution or payment, the institution would be
undercapitalized. In addition, each company controlling an undercapitalized
institution must guarantee that the institution will comply with its capital
plan until the institution has been adequately capitalized on an average during
each of four consecutive calendar quarters and must provide adequate assurances
of performance. The aggregate liability pursuant to such guarantee is limited to
the lesser of (a) an amount equal to 5% of the institution's total assets at the
time the institution became undercapitalized, or (b) the amount which is
necessary to bring the institution into compliance with all capital standards
applicable to such institution at the time the institution fails to comply with
its capital restoration plan.
Capital Distributions Regulation
An OTS regulation imposes limitations upon all "capital distributions" by
savings associations, 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 regulation establishes a three-tiered system of regulation, with
the greatest flexibility being afforded to well-capitalized institutions. A
savings bank which has total capital (immediately prior to and after giving
effect to the capital distribution) that is a least equal to its fully phased-in
capital requirements would be a Tier 1 institution ("Tier 1 Institution"). An
institution that has total capital at least equal to its minimum capital
requirements, but less than its fully phased-in capital requirements, would be a
Tier 2 institution ("Tier 1 Institution"). An institution having total capital
that is less than its minimum capital requirements would be a Tier 3 institution
("Tier 3 Institution"). However, an institution which otherwise qualifies as a
Tier 1 institution may be designated by the OTS as a Tier 2 or Tier 3
institution if the OTS determines that the institution is "in need of more than
normal supervision." The Bank is currently a Tier 1 Institution.
A Tier 1 Institution could, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year up to 100% of its net
income to date during the calendar year plus an amount that would reduce by
one-half its "surplus capital ratio" (the excess over its Fully Phased-in
Capital Requirements) at the beginning of the calendar year. Any additional
amount of capital distributions would require prior regulatory approval.
The OTS has proposed revisions to these regulations which would permit
savings associations to declare dividends in amount which would assure that they
remain adequately capitalized following the dividend declaration. Savings
associations in a holding company system which are rated Camel 1 or 2 and which
are not in troubled condition would need to file a prior notice with the OTS
concerning such dividend declaration.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and
<PAGE>
sound banking practices and appropriate to the size of the association and the
nature and scope of its operations. The policies must establish loan portfolio
diversification standards; establish prudent underwriting standards, including
loan-to-value limits, that are clear and measurable; establish loan
administration procedures for the association's real estate portfolio; and
establish documentation approval, and reporting requirements to monitor
compliance with the association's real estate lending policies.
The association's written real estate lending policies must be reviewed and
approved by the association's board of directors at least annually. Further,
each association is expected to monitor conditions in its real estate market to
ensure that its lending policies continue to be appropriate for current market
conditions.
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.
A federal savings bank, like other depository institutions maintaining
reservable accounts, may borrow from the Federal Reserve Bank "discount window,"
but the FRB's regulations require the savings bank to exhaust other reasonable
alternative sources, including borrowing from its regional FHLB, before
borrowing from the Federal Reserve Bank. Certain limitations are imposed on the
ability of undercapitalized depository institutions to borrow from Federal
Reserve Banks.
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, is controlled by or is under common
control with 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. The subsidiaries of a
savings bank, however, are not deemed affiliates under Section 23A and 23B;
however, transactions between a subsidiary of a savings bank and any of the
affiliates of a savings bank are subject to the requirements and limitations of
Sections 23A and 23B.
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 association'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 association or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar types of transactions.
<PAGE>
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, except for affiliates which are
subsidiaries 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 than 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
association 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 associations.
Holding Company Regulation
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.
<PAGE>
MFB's Board of Directors presently intends to operate MFB as a unitary
savings and loan holding company. There are generally no restrictions on the
permissible business activities of a unitary savings and loan holding company.
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.
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 would become subject to the activities
restrictions applicable to multiple holding companies. (Additional restrictions
on securing advances from the FHLB also apply). See "--Qualified Thrift Lender."
At September 30, 1996, the Bank's asset composition was in excess of that
required to qualify the Bank as a Qualified Thrift Lender.
If MFB were to acquire control of another savings institution other than
through a merger or other business combination with the Bank, MFB would
thereupon become a multiple savings and loan holding company. Except where such
acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings bank meets the QTL test, the
activities of MFB and any of its subsidiaries (other than the Bank or other
subsidiary savings associations) would thereafter be subject to further
restrictions. HOLA provides that, among other things, no multiple savings and
loan holding company or subsidiary thereof which is not a savings bank shall
commence or continue for a limited period of time after becoming a multiple
savings and loan holding company or subsidiary thereof, any business activity
other than (i) furnishing or performing management services for a subsidiary
savings bank, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings institution, (iv) holding or managing properties used or occupied by a
subsidiary savings institution, (v) acting as trustee under deeds of trust, (vi)
those activities previously directly authorized by the FSLIC by regulation as of
March 5, 1987, to be engaged in by multiple holding companies or (vii) those
activities authorized by the FRB as permissible for bank holding companies,
unless the Director of the OTS by regulation prohibits or limits such activities
for savings and loan holding companies. Those activities described in (vii)
above must also be approved by the Director of the OTS prior to being engaged in
by a multiple holding company.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings bank which operated a home or branch office
in the state of the association to be acquired as of March 5, 1987, or if the
laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state-chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). Also, the Director of the OTS may
<PAGE>
approve an acquisition resulting in a multiple savings and loan holding company
controlling savings associations in more than one state in the case of certain
emergency thrift acquisitions.
Indiana law permits acquisitions of certain federal and state SAIF-insured
savings banks and their holding companies ("Savings Banks") located in Indiana,
Ohio, Kentucky, Illinois, and Michigan (the "Region") by other savings banks
located in the Region. Savings Banks with their principal place of business in
one of the states in the Region (other than Indiana) may acquire Savings Banks
with their principal place of business in Indiana if, subject to certain other
conditions, the state of the acquiring Savings Bank has reciprocal legislation
permitting the acquisition of savings banks and their holding companies in that
state by Indiana Savings Banks. Each of the states in the Region has, at least
to a certain degree, reciprocal legislation. The Indiana statute also authorizes
Indiana Savings Banks to acquire other Savings Banks in the Region. Following
the acquisition, an acquired Indiana Savings Bank and any other Indiana Savings
Bank subsidiary owned by the acquirer must hold no more than 15% of the total
Savings Bank deposits in Indiana.
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
associations to branch outside of their home state if the association meets the
domestic building and loan test in Section 7701(a)(19) of the Internal Revenue
Code of 1986, as amended (the "Code") or the asset composition test of Section
7701(c) of the Code. Branching that would result in the formation of a multiple
savings and loan holding company controlling savings associations 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
associations by state-chartered associations or their holding companies in the
state where the acquiring association 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. After the third anniversary of the Bank's conversion to stock form,
if MFB has fewer than 300 shareholders, 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 (including the two-year
<PAGE>
holding period and those that require the affiliate's sale to be aggregated with
those of certain other persons) 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.
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 include: (i) loans made to purchase,
refinance, construct, improve or repair domestic residential housing or
manufactured housing; (ii) home equity loans; (iii) mortgage-backed securities;
(iv) direct or indirect existing obligations of either the FDIC or the FSLIC for
ten years from the date of issuance, if issued prior to July 1, 1989; (v)
obligations of the FDIC, FSLIC, FSLIC Resolution Fund and the Resolution Trust
Corporation for a five year period from July 1, 1989, if issued after such date;
(vi) FHLB stock; (vii) 50% of the dollar amount of residential mortgage loans
originated and sold within 90 days of origination; (viii) investments in service
corporations that derive at least 80% of their gross revenues from activities
directly related to purchasing, refinancing, constructing, improving or
repairing domestic residential real estate or manufactured housing; (ix) 200% of
the dollar amount of loans and investments made to acquire, develop and
construct one to four-family residences that are valued at no more than 60% of
the median value of homes constructed in the area; (x) 200% of the dollar amount
of loans for the acquisition or improvement of residential real property,
churches, schools, and nursing homes located within, and loans for any purpose
to any small business located within, an area where credit needs of its low and
moderate income residents are determined not to have been adequately met; (xi)
loans for the purchase, construction improvement or upkeep of churches, schools,
nursing homes and hospitals not qualified under (x); (xii) up to 10% of
portfolio assets held in consumer loans or loans for educational purposes; and
(xiii) FHLMC and FNMA stock. However, the aggregate amount of investments in
categories (vii)-(xiii) which may be taken into account for the purpose of
whether an institution meets the QTL test cannot exceed 15% of portfolio assets.
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 (but its deposit insurance assessments and payments will be those of and
paid to SAIF) 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; (iii) it shall not be eligible for any new FHLB advances; and
(iv) it shall be bound by regulations applicable to national banks respecting
payment of dividends. Three years after failing the QTL test the association
must (i) dispose of any investment or activity not permissible for a national
bank and a savings bank and (ii) repay all outstanding FHLB advances. 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 (including restrictions as to the scope of permissible
business activities).
<PAGE>
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, 1996, 96.20% of the Bank's portfolio assets (as defined on
that date) were invested in qualified thrift investment (as defined on that
date), and therefore the Bank's asset composition was in excess of that required
to qualify the Bank as a QTL. Also, the Bank does not expect to significantly
change its lending or investment activities in the near future, and therefore
expects to continue to qualify as a QTL, although there can be no such
assurance.
Community Reinvestment Act Matters
Under current law, ratings of depository institutions under the Community
Reinvestment Act of 1977 ("CRA") must be disclosed. The disclosure includes both
a four-unit descriptive rating-- using terms such as satisfactory and
unsatisfactory--and a written evaluation of each institution's performance. Each
FHLB is required to establish standards of community investment or service that
its members must maintain for continued access to long-term advances from the
FHLBs. The standards take into account a member's performance under the
Community Reinvestment Act and its record of lending to first-time home buyers.
The FHLBs have established an "Affordable Housing Program" to subsidize the
interest rate of advances to member associations engaged in lending for
long-term, low-and moderate-income, owner-occupied and affordable rental housing
at subsidized rates. The Bank is participating in this program. The examiners
have determined that the Bank has a satisfactory record of meeting community
credit needs governing the classification of assets of insured institutions
consistent with the requirements.
TAXATION
Federal Taxation
Historically, Savings associations, such as the Bank, have been permitted
to compute bad debt deductions using either the bank experience method or the
percentage of taxable income method. However, in future years, only the
specified experience formula method will be allowed as, 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 will occur over a
six-year period, the commencement of which will be delayed until the first
taxable year beginning after December 31, 1997, provided the institution meets
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 is approximately $1,310,000.
Depending on the composition of its items of income and expense, a savings
bank may be
<PAGE>
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 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 Mishawaka Financial file a
consolidated federal income tax return for each fiscal year ending September 30.
The federal income tax returns filed by MFB (or previously by the Bank) have not
been audited in the last five years.
The consolidated federal income tax return filed by MFB has the effect of
eliminating intercompany distributions, including dividends, in the computation
of consolidated taxable income. Income of MFB generally would not be taken into
account in determining the bad debt deduction allowed to the Bank, regardless
whether a consolidated tax return is filed. However, certain "functionally
related" losses of MFB would be required to be taken into account in determining
the permitted bad debt deduction, which, depending upon the particular
circumstances, could reduce the bad debt deduction.
State Taxation
For its taxable period beginning January 1, 1990, the Bank became subject
to Indiana's new 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. Other applicable state taxes include generally applicable sales
and use taxes plus real and personal property taxes.
MFB's (or previously the Bank's) state income tax returns have not been
audited in the last five years.
<PAGE>
Item 2. Properties.
At September 30, 1996, MFB Financial conducted its business from its main
office at 121 South Church Street, Mishawaka, Indiana 46544, three full service
branch offices and an additional loan origination office The main office and the
three branch offices are owned by MFB Financial, while the loan origination
office is leased.
The following table provides certain information with respect to MFB
Financial's offices as of September 30, 1996:
Year Approximate
Description and Address Opened Square Footage
- ----------------------- ------ --------------
Main Office
121 S. Church Street
Mishawaka, IN 46544 1961 13,738
Branch Office
411 W. McKinley Ave.
Mishawaka, IN 46545 1975 4,800
Branch Office
402 W. Cleveland Rd.
Mishawaka, IN 46545 1977 2,540
Branch Office
2427 Mishawaka Ave.
South Bend, IN 46615 1978 2,600
Loan Origination Office
227 S. Main St.
Suite 110
Elkhart, In. 46516 1996 600
MFB Financial operates two automatic teller machines (ATMs), one at its
McKinley branch and the other at its Cleveland Road branch. MFB Financial's ATMs
participate in the nationwide CIRRUS ATM network.
MFB Financial owns computer and data processing equipment which is used for
transaction processing and accounting.
MFB Financial also has contracted for the date processing and reporting
services of BISYS, Inc. in Houston, Texas. The cost of these date processing
services is approximately $17,000 per month.
<PAGE>
Item 3. Legal Proceedings.
The Bank is involved in various legal actions arising in the normal course
of its business. In the opinion of management, the resolutions of these legal
actions are in the aggregate not expected to have a material adverse effect on
the Company's results of operations.
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, 1996.
Item 4.5. Executive Officers of MFB.
Presented below is certain information regarding the executive officers of
MFB and MFB Financial:
Name Position
---- --------
Charles J. Viater President and Chief Executive Officer of
MFB and MFB Financial
M. Gilbert Eberhart Secretary of MFB and MFB Financial
Timothy C. Boenne Vice President and Controller of MFB
Financial
Michael J. Portolese Vice President of MFB Financial
William L. Stockton, Jr. Vice President of MFB Financial
Charles J. Viater (age 42) has served as President and Chief Executive
Officer of MFB Financial since September 1, 1995. For the previous he served as
Chief Financial Officer of Amity Bancshares and Executive Vice President of
Amity Federal Savings in Tinley Park, Illinois.
M. Gilbert Eberhart (age 62) has served as Secretary of MFB Financial since
1987 and of MFB since its organization. He is also a dentist based in Mishawaka.
Timothy C. Boenne (age 50) has served as Vice President and Controller of
MFB Financial since 1992. Until 1992, he also served as Branch Manager for MFB
Financial's McKinley Branch.
Michael J. Portolese (age 45) has served as Vice President of MFB
Financial since 1977. He also serves as MFB Financial's Savings Administrator,
Security Director and Compliance Coordinator.
<PAGE>
William L. Stockton, Jr. (age 49) has served as Vice President of MFB
Financial since 1988 and has been in charge of lending operations at MFB
Financial since 1992.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Bank converted from a federally-chartered mutual savings and loan
association to a federally-chartered stock savings bank effective March 24, 1994
(the "Conversion") and simultaneously formed a savings and loan holding company,
MFB. MFB's common stock, without par value ("Common Stock"), is quoted on the
National Association of Security Dealers Automated Quotation System ("NASDAQ"),
National Market System, under the symbol "MFBC." The following table sets forth
the high and low bid prices as reported by NASDAQ, and dividends paid per share
for Common Stock for the quarters indicated. Such over-the-counter quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not necessarily represent actual transactions.
Quarter Dividends
Ended High Bid Low Bid Declared
- ------------------ -------- -------- ---------
December 31, 1994 $13.75 $10.625 None
March 31, 1995 14.50 12.50 None
June 30, 1995 14.25 13.00 None
September 30, 1995 16.25 13.00 None
December 31, 1995 16.25 14.75 None
March 31, 1996 15.25 13.75 None
June 30, 1996 14.75 13.75 $ .06/share
September 30, 1996 19.00 13.75 None
As of September 30, 1996, there were approximately 728 shareholders of
record of MFB's Common Stock. MFB estimates that, as of that date, there were
approximately 914 additional shareholders in "street name".
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 a
"capital distribution," which includes, among other things, cash dividends, will
depend upon which one of three categories, based upon levels of capital, that
savings bank is classified. The Bank is now and expects to continue to be a
"tier one institution" and therefore would be able to pay cash dividends to MFB
during any calendar year up to 100% of its net income during that calendar year
plus the amount that would reduce by one-half its "surplus capital ratio" (the
excess over its fully phased-end capital requirements) at the beginning of the
calendar year. Prior notice of any dividend to be paid by the Bank will have to
be given to the OTS.
<PAGE>
Under current federal income tax law, dividend distributions with respect
to the Common Stock, to the extent that such dividends paid are from the current
or accumulated earnings and profits of the Bank (as calculated for federal
income tax purposes), will be taxable as ordinary income to the recipient and
will not be deductible by the Bank. 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.
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 of MFB Corp.
and Subsidiary" on page 4 of MFB's Annual Report to Shareholders for its fiscal
year ended September 30, 1996 (the "Annual Report").
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
of Operations.
The information required by this item is incorporated by reference to pages
5 through 15 of the Annual Report.
Item 8. Financial Statements and Supplementary Data.
MFB's Consolidated Financial Statements and Notes thereto contained on
pages 16 through 46 of the Annual Report are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is
incorporated by reference to pages 2 through 3 of MFB's Proxy Statement for its
1997 Annual Shareholder Meeting (the "Proxy Statement"). Information concerning
MFB's executive officers is included in Item 4.5 in Part 1 of this report.
Information concerning compliance by such persons with Section 16(a) of the 1934
Act is incorporated by reference to page 7 of the Proxy Statement.
Item 11. Executive Compensation
The information required by this item with respect to executive
compensation is incorporated by reference to pages 4 through 6 of the Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to pages
1 through 3 of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to page
6 of the Proxy Statement.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following financial statements are included in this report:
Pages in this
Form 10-K
Financial Statements 43
Report of Independent Auditors 49
Consolidated Balance Sheets at September 30, 1996, and 1995 65
Consolidated Statements of Income for the Years Ended 66
September 30, 1996, 1995 and 1994
Consolidated Statements of Changes in Shareholders' Equity 67
for the Years ended September 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years ended 68
September 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements 70
(b) MFB filed three Form 8-K reports during the quarter ended September 30,
1996.
Date of report: September 13, 1996
Item reported : News release dated September 13, 1996 regarding the
announcement of its annual meeting date and amendment to
the Code of Bylaws.
Date of report: August 5, 1996
Item reported : News release dated July 17, 1996 regarding
the declaration of a $ .06 per share cash dividend
payable on August 20, 1996 to holders of record on
August 6, 1996.
Date of report: July 11, 1996
Item reported : News release dated July 11, 1996 regarding the
announcement of third quarter earnings and the Board
of Director's approval of plan to repurchase up to 5%
of the outstanding shares of the Company's stock.
MFB filed one Form 8-K report during the quarter ended June 30, 1996.
Date of report: April 19, 1996
Item reported : News release dated April 9, 1996
announcing second quarter 1996 earnings and the
Board of Director's approval of a plan to
repurchase up to 5% of the outstanding shares of the
company's stock.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on page E-1
(d) All schedules are omitted as the required information either is not
applicable or is included in the consolidated Financial Statements or
related notes.
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act 9f 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 30, 1996
By:/s/ Charles J. Viater
--------------------------------
Charles J. Viater, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 30th day of December,
1996.
/s/ Charles J. Viater /s/ M. Gilbert Eberhart
- ---------------------------------- ------------------------------
Charles J. Viater M. Gilbert Eberhart, Director
President, Chief Executive Officer
and Director
(Principal Executive Officer) /s/ Thomas F. Hums
------------------------------
Thomas F. Hums, Director
/s/ Timothy C. Boenne /s/ Jonathan E. Kintner
- ---------------------------------- ------------------------------
Timothy C. Boenne Jonathan E. Kintner, Director
Vice President and Controller
(Principal Financial and Accounting
Officer) /s/ Michael J. Marien
------------------------------
Michael J. Marien, Director
/s/ Marian K. Torian /s/ Reginald H. Wagle
- ---------------------------------- ------------------------------
Marian K. Torian, Reginald H. Wagle, Director
Chairman of the Board
<PAGE>
EXHIBIT LIST
Exhibit
Index Page
3(1) The Articles of Incorporation of the Registrant is
incorporated by Reference to Exhibit 3(1) to the Registration
Statement on Form S-1 (Registration No. 33-73098).
3(2) The Code of By-Laws of Registration is incorporated by
reference to Item 7-Exhibit 3 of the October 15, 1995
Securities and Exchange Commission Form 8K Report.
10(1) MFB Corp. Stock Option Plan is incorporated by reference to
Exhibit A to the Registrant's definitive Proxy Statement in
respect of its 1996 Annual Shareholder Meeting. *
10(2) Mishawaka Federal Savings Recognition and Retention Plans and
Trusts are incorporated by reference to Exhibit B to the
Registrant's definitive Proxy Statement in respect of its
1996 Annual Shareholder Meeting. *
10(3) Employment Agreement between Mishawaka Federal Savings and
Charles J. Viater is incorporated by reference to Exhibit
10(3) to the September 30, 1995 Form 10-K filed on December
27, 1995.
10(4) Employment Agreement between Mishawaka Federal Savings and
Timothy C. Boenne is incorporated by reference to Exhibit
10(8) to the Registration on Form S-1 (Registration No.
33-73098). *
10(5) Employment Agreement between Mishawaka Federal Savings and
Michael J. Portolese is incorporated by reference to Exhibit
10(10) to the Registration Statement on Form S-1
(Registration No. 33-73098). *
10(6) Employment Agreement between Mishawaka Federal Savings and
William L. Stockton, Jr. is incorporated by reference to
Exhibit 10(11) to the Registration Statement on Form S-1
(Registration No. 33-73098). *
21 Subsidiaries of the Registrant is incorporated by reference
to Exhibit 22 to the Registration Statement on Form S-1
(Registration No. 33-73098).
23 Consent of Crowe, Chizek and Company. 97
27 Financial Data Schedule 98
- -------------
* Management contracts and plans required to be filed as
exhibits are included as Exhibits 10(1)-10(6).
ANNUAL REPORT
TO SHAREHOLDERS
TABLE OF CONTENTS
Page
Letter to Shareholders ........................................ 2
Selected Consolidated Financial Data .......................... 4
Management's Discussion and Analysis .......................... 5
Report of Independent Auditors ................................ 16
Consolidated Balance Sheets ................................... 17
Consolidated Statements of Income ............................. 18
Consolidated Statements of Changes in Shareholders' Equity..... 19
Consolidated Statements of Cash Flows ......................... 20
Notes to Consolidated Financial Statements .................... 22
Directors and Officers ........................................ 47
Shareholder Information ....................................... 48
DESCRIPTION OF BUSINESS
MFB Corp. is an Indiana corporation organized in December, 1993, to
become a unitary savings and loan holding company. MFB Corp. became a unitary
savings and loan holding company upon the conversion of Mishawaka Federal
Savings (the "Bank") from a federal mutual savings and loan association to a
federal stock savings bank in March, 1994. MFB Corp. is the sole shareholder of
the Bank. MFB Corp. and the Bank (collectively referred to as the "Company")
conduct business from their main office in Mishawaka, Indiana, and three branch
locations in St. Joseph County, Indiana. The Bank offers a variety of lending,
deposit and other financial services to its retail and commercial customers. The
Bank's wholly-owned subsidiary, Mishawaka Financial Services, Inc., is engaged
in the sale of credit life, general fire and accident, car, home, and life
insurance as agent for the Bank's customers and the general public.
49
<PAGE>
MFB CORP.
- --------------------------------------------------------------------------------
P.O. Box 528 Mishawaka, IN 46546-0528 219/255-3146 Fax 219/255-3044
TO OUR SHAREHOLDERS:
On behalf of myself and the entire Board of Directors, it is a pleasure
to provide you with the 1996 Annual Report of MFB Corp., the holding company for
Mishawaka Federal Savings (the "Bank"). In March of 1994, after the formation of
MFB Corp., the Bank converted to a federal stock savings bank and this report
depicts only the second full year of operations as a stock company.
This past year has been one of many changes for our company. The emphasis
has been on growth within our market that allows us to effectively utilize our
capital, generate improved returns on your investment and enhance the value of
the company's stock. We have improved our product and service offerings which
has created opportunities to attract new customers and secure our relationship
with existing customers. As we look at the financial highlights of the past
year, I believe you will agree that the changes we've instituted are propelling
the Company and the Bank forward toward the achievement of the above goals.
In 1996, the Company began offering a wider array of loan products to
meet the needs of the community we serve. These products, combined with a
concerted effort to increase the awareness level of the Bank in the marketplace,
resulted in net loan portfolio growth of $30.9 million, the greatest single year
of such growth in our 106 year history. At the same time, asset quality has not
just remained unchanged, but has improved over the prior year. The Bank also
began to develop a small business banking division that will allow us to attract
local businesses that desire to receive a level of personal service that is
critical to their success. Growth of this segment of our business in the coming
years will be an important focus.
Deposit based product offerings have also been enhanced. The emphasis on
core relationships, competitive terms and the highest quality service to
customers has resulted in an increase in our deposit base of $14.4 million
during the year. Non-interest bearing demand accounts increased significantly as
did our certificate of deposit account base.
In addition to the growth discussed above, the Company undertook a
leveraging strategy during this past year designed to further enhance earnings.
The success of this strategy contributed to net earnings and helped improve the
overall return on equity during the year.
A major legislative event effecting our Company took place on September 30,
1996. President Clinton signed into law a bill that included a provision to
recapitalize the Savings Association Insurance Fund ("SAIF"). This bill resulted
in a one time special assessment to all SAIF insured institutions equivalent to
.657% of total assessable deposits as of March 31, 1995. This one time
assessment amounted to $955,000 for our Company, or $577,000 on an after tax
basis. Had this assessment not been incurred, the net income for the year would
have been $l.5 million or $.76 per share. This assessment will result in a
reduction in future insurance premiums and is expected to result in a payback
period of approximately 3.6 years.
<PAGE>
In April and May of 1996, the Company repurchased over 103,000 shares of
its common stock. This activity resulted in a reduction of the total shares
outstanding., an improvement in the book value of the remaining outstanding
shares and had a positive impact on our return on equity. In addition, I am sure
you are aware of the payment of our initial dividend in August, 1996 in the
amount of $.06 per outstanding share. These events are part of our systematic
approach to enhancing the long term value of your investment in our Company.
It has indeed been a year of change. The following pages of this report
provide more details about the past year's results. Management will remain
vigilant in our effort to identify additional opportunities to serve the
financial needs of our community effectively and profitably. We are committed to
growing the long term value of your investment in a prudent, intelligent
fashion. We appreciate the confidence you have shown in MFB Corp. and we will
continue to operate the Company in an effort to reward that confidence.
/s/ Charles J. Viater
Charles J. Viater
President and Chief Executive Officer
51
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF
MFB CORP. AND SUBSIDIARY
The following selected consolidated financial data of MFB Corp. and its
subsidiary is qualified in its entirety by, and should be read in conjunction
with, the consolidated financial statements, including notes thereto, included
elsewhere in this Annual Report.
<TABLE>
<CAPTION>
At September 30,
(In Thousands)
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Summary of Financial Condition:
<S> <C> <C> <C> <C> <C>
Total assets $225,809 $187,065 $183,753 $168,581 $164,554
Loans receivable, net 152,052 121,181 115,297 108,212 112,226
Cash and cash equivalents 1,734 7,454 6,153 20,820 7,888
Securities 68,099 53,293 56,107 16,624 21,714
Interest-bearing time deposits in other
financial institutions 495 1,880 3,365 20,469 20,108
Deposits 158,964 144,552 143,604 149,220 146,681
FHLB advances 24,500 -- -- -- --
Shareholders' equity 37,599 37,999 37,705 16,964 15,677
</TABLE>
<TABLE>
<CAPTION>
Years Ended September 30,
(In Thousands)
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Summary of Operating Results:
<S> <C> <C> <C> <C> <C>
Interest income $ 14,182 $ 12,383 $ 11,545 $ 11,931 $ 13,684
Interest expense 8,057 6,788 6,019 6,559 8,445
-------- -------- -------- -------- --------
Net interest income 6,125 5,595 5,526 5,372 5,239
Provision for loan losses 30 30 30 192 27
-------- -------- -------- -------- --------
Net interest income after
provision for
loan losses 6,095 5,565 5,496 5,180 5,212
Noninterest income
Insurance commissions 127 128 127 126 133
Net gain from sales of securities 3 -- -- 10 --
Other 232 189 151 159 160
-------- -------- -------- -------- --------
Total noninterest income 362 317 278 295 293
Noninterest expense
Salaries and employee benefits 2,153 2,336 1,969 1,600 1,483
Occupancy and equipment expense 422 406 379 378 409
SAIF deposit insurance premium 1,291 332 341 280 321
Other expense 969 753 666 621 580
-------- -------- -------- -------- --------
Total noninterest expense 4,835 3,827 3,355 2,879 2,793
Income before income
taxes and cumulative
effect of change in
accounting principles 1,622 2,055 2,419 2,596 2,712
Income tax expense 647 819 887 1,121 1,011
-------- -------- -------- -------- --------
Income before cumulative effect
of change in accounting principles 975 1,236 1,532 1,475 1,701
Cumulative effect of change in
accounting for income taxes -- -- -- (188) --
-------- -------- -------- -------- --------
Net income $ 975 $ 1,236 $ 1,532 $ 1,287 $ 1,701
======== ======== ======== ======== ========
Supplemental Data:
Return on assets (1) .49% .67% .86% .77% 1.04%
Return on equity (2) 2.61 3.25 5.60 7.75 11.30
Interest rate spread (3) 2.13 2.12 2.57 2.85 2.74
Net yield on average interest-
earning assets (4) 3.11 3.10 3.18 3.28 3.26
Dividend pay-out ratio (5) 12.24 -- -- -- --
Net interest income to
operating expenses (6) 126.68 146.20 164.71 186.59 187.58
Equity-to-assets (7) 16.65 20.31 20.52 10.06 9.53
Average interest-earning assets to
average interest-bearing
liabilities 123.95 126.12 117.61 110.73 109.68
Non-performing assets to total assets .09 .17 .07 .16 .11
Non-performing loans to total loans .13 .25 .09 .21 .16
Allowance for loan losses to
total loans, net .22 .26 .24 .23 .05
Allowance for loan losses to
non-performing loans 171.72 100.65 261.68 112.11 32.77
Earnings per share (8) $ .49 $ .59 $ .43 $-- $--
Earnings per share fully diluted (8) $ .48 $ .59 $ .43 $-- $--
Dividends declared per share $ .06 $-- $-- $-- $--
Book value per share $ 19.05 $ 18.29 $ 17.24 $-- $--
Number of offices 4 4 4 4 4
</TABLE>
- ------------------
(1) Net income divided by average total assets.
(2) Net income divided by average total equity.
(3) Interest rate spread is calculated by subtracting average
interest rate cost from average interest rate earned.
(4) Net interest income divided by average interest-earning
assets.
(5) Dividends declared per share divided by earnings per share.
(6) Operating expenses consist of other expenses less taxes.
(7) Total equity divided by total assets.
(8) Earnings per common and common equivalent share subsequent to
conversion.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The principal business of the Bank has historically consisted of
attracting deposits from the general public and making loans secured by
residential and other real estate. The Bank is significantly affected by
prevailing economic conditions as well as government policies and regulations
concerning, among other things, monetary and fiscal affairs, housing and
financial institutions. Deposit flows are influenced by a number of factors,
including interest rates paid on competing investments, account maturities and
level of personal income and savings. In addition, deposit growth is affected by
how customers perceive the stability of the financial services industry amid
various current events such as regulatory changes and financing of the deposit
insurance fund. Lending activities are influenced by the demand for and supply
of housing lenders, the availability and cost of funds and various other items.
Sources of funds for lending activities of the Bank include deposits,
borrowings, payments on loans and income provided from operations. The Company's
earnings are primarily dependent upon the Bank's net interest income, the
difference between interest income and interest expense.
Interest income is a function of the balances of loans and investments
outstanding during a given period and the yield earned on such loans and
investments. Interest expense is a function of the amount of deposits and
borrowings outstanding during the same period and interest rates paid on such
deposits and borrowings. The Company's earnings are also affected by the Bank's
provisions for loan and real estate losses, service charges, income from
subsidiary activities, operating expenses and income taxes.
ASSET/LIABILITY MANAGEMENT
The Company is subject to interest rate risk to the degree that its
interest-bearing liabilities, primarily deposits with short and medium-term
maturities, mature or reprice at different rates than its interest-earning
assets. Although having liabilities that mature or reprice less frequently on
average than assets will be beneficial in times of rising interest rates, such
an asset/liability structure will result in lower net income during periods of
declining interest rates, unless offset by other factors such as noninterest
income.
A key element of the Company's asset/liability plan is to protect net
earnings from changes in interest rates by reducing the maturity or repricing
mismatch between its interest-earning assets and rate-sensitive liabilities. The
Company's one year interest rate gap has been between a negative 36.01% and a
positive 9.14% at the end of each year from September 30, 1992, to September 30,
1996. This assumes that deposit accounts reprice based on assumptions indicated
below the following table. The Company's interest rate gap was a negative 36.01%
as of September 30, 1996. A negative interest rate gap leaves the Company's
earnings vulnerable to periods of rising interests rates because during such
periods the interest expense paid on liabilities will generally increase more
rapidly than the interest income earned on assets. Conversely, in a falling
interest rate environment, the total expense paid on liabilities will generally
decrease more rapidly than the interest income earned on assets. A positive
interest rate gap would have the opposite effect. The Company's management
believes that the Company's interest rate gap in recent periods has generally
been maintained within an acceptable range in view of the prevailing interest
rate environment.
<PAGE>
The Office of Thrift Supervision (the "OTS") also provides a Net
Portfolio Value ("NPV") approach to the measurement of interest rate risk. In
essence, this approach calculates the difference between the present value of
expected cash flows from assets and the present value of expected cash flows
from liabilities, as well as cash flows from off-balance sheet contracts. The
difference is the NPV. As of June 30, 1996, (the most recently available data),
after a 200 basis point rate change, the Bank's NPV ratio was 13.34%. Management
reviews the quarterly OTS measurements on a quarterly basis as the
implementation of the Company's interest rate risk policy is done within limits
established by the Board of Directors on the amount of change in NPV which is
acceptable given certain interest rate changes.
In addition to monitoring selected measures on NPV, management also
monitors effects on net interest income resulting from increases or decreases in
rates. This measure is used in conjunction with NPV measures to identify
excessive interest rate risk. In managing its asset/liability mix, the Company,
depending on the relationship between long and short term interest rates, market
conditions and consumer preference, may place somewhat greater emphasis on
maximizing its net interest margin than on strictly matching the interest rate
sensitivity of its assets and liabilities. Management believes that the
increased net income which may result from an acceptable mismatch in the actual
maturity or repricing of its asset and liability portfolios can, during periods
of declining or stable interest rates, provide sufficient returns to justify the
increased exposure to sudden and unexpected increases in interest rates which
may result from such a mismatch. Management believes that the Company's level of
interest rate risk is acceptable under this approach as well.
The following table illustrates the projected maturities and repricing
of the major consolidated asset and liability categories of the Company as of
September 30,1996. Maturity and repricing dates have been projected by applying
the assumptions set forth below to contractual maturity, call dates and
repricing dates. The information presented in the following table is derived
from data maintained by the Company and is not adjusted for prepayments. Since
most of the loans are adjustable rate loans which are due to reprice within five
years or less, management feels that loan prepayments will not have a
significant impact on the results of the table below.
<TABLE>
<CAPTION>
At September 30, 1996
maturing or Repricing Within
---------------------------------------------------------------------------------
Less 6 Months 5 to
Than 3 3 to 6 to 1 to 3 3 to 5 10
Months Months 1 Year Years Years Years
------ ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Adjustable rate mortgages $ 16,671 $ 12,613 $ 35,427 $ 33,223 $ 16,551 $ 15,851
Fixed rate mortgages 4 11 10 202 625 1,787
Equity Loans 3,522 -- -- -- 91 177
Financing leases -- -- 37 -- 190 898
Consumer loans 22 17 35 9 -- --
Securities 15,509 6,038 5,789 13,515 1,838 --
Mortgage-backed securities 4,537 -- -- 5,013 -- --
Interest -earning time deposits 297 198
Stock in FHLB of Indianapolis
Deferred loan fees (16) (14) (22) (9) (15) (21)
Loans in process (441) (12) (9) (402) (420) (269)
40,105 18,851 41,267 51,551 18,860 18,423
------ ------ ------ ------ ------ ------
Interest-bearing Liabiliites
Certificates of deposit 25,426 20,163 39,940 32,923 3,466 325
Savings acoounts 9,695 -- -- -- -- --
NOW and money market accounts 25,085 -- -- -- -- --
FHLB advances 15,000 1,000 -- 8,500 -- --
------ ------ ------ ------ ----- ---
75,206 21,163 39,940 41,423 3,466 325
------ ------ ------ ------ ----- ---
Excess (deficiency) of interest-earning
assets over interest bearing liabilities (35,101) (2,312) 1,327 10,128 15,394 18,098
======= ====== ===== ====== ====== ======
Cumulative excess (deficiency) of
interest-earning assets over interest
bearing liabilities (35,101) (37,413) (36,086) (25,958) (10,564) 7,534
Cumulative interest rate gap to total
interest-earning assets -87.52% -63.46% -36.01% -17.10% -6.19% 3.99%
Off balance sheet assets (1) 2,771 7,303 2,994 402 727 6,625
</TABLE>
<PAGE>
At September 30, 1996
maturing or Repricing Within
-------------------------------------
10 to
20 Over 20
Years Years Total
----- ----- -----
Adjustable rate mortgages $--- $--- $130,336
Fixed rate mortgages 13,448 3,372 19,459
Equity Loans -- -- 3,790
Financing leases -- -- 1,125
Consumer loans -- -- 83
Securities -- -- 42,689
Mortgage-backed securities 5,007 9,517 24,074
Interest -earning time deposits 495
Stock in FHLB of Indianapolis 1,336 1,336
Deferred loan fees (180) (163) (440)
Loans in process (408) -- (1,961)
17,867 14,062 220,986
------ ------ -------
Interest-bearing Liabiliites
Certificates of deposit -- -- 122,243
Savings acoounts -- -- 9,695
NOW and money market accounts -- -- 25,085
FHLB advances -- -- 24,500
------ ------ -------
-- -- 181,523
------ ------ -------
Excess (deficiency) of interest-earning
assets over interest bearing liabilities 17,867 14.062 39,463
====== ====== ======
Cumulative excess (deficiency) of
interest-earning assets over interest
bearing liabilities 25,401 39,463 39,463
Cumulative interest rate gap to total
interest-earning assets 12.28% 17.86% 17.86%
Off balance sheet assets (1) 408 -- 21,230
- -----------
(1) Includes loan commitments and loans in process
<PAGE>
It is assumed that fixed maturity deposits are not withdrawn prior to
maturity, that other deposits are withdrawn or reprice in three months or less
due to the likelihood that such deposits will reprice in the event of
significant changes in the overall level of interest rates available in the
marketplace and that callable securities are repricing at the call date.
In evaluating the Company's exposure to interest rate movements,
certain shortcomings inherent in the method of analysis presented in the
foregoing table must be considered. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in interest rates. Additionally, certain assets, such as ARM's,
have features which restrict changes in interest rates on a short-term basis and
over the life of the asset. Further, in the event of a significant change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed above. Finally, the ability of many borrowers
to service their debt may decrease in the event of an interest rate increase.
The Company considers all of these factors in monitoring its exposure to
interest rate risk.
The adjustable rate first mortgage loans the Bank holds in its
portfolio are primarily indexed to the National Median Cost of Funds and
interest rate adjustments on these loans may lag behind changes in market rates.
At September 30,1996, these loans totaled $130.3 million, or 84.2% of the Bank's
total loan portfolio. In August, 1996 the Bank began originating adjustable rate
mortgage loans using the One Year Treasury Index. As a general rule, market rate
adjustments on loans indexed to the National Median Cost of Funds lag
<PAGE>
behind changes in market rates due to the fact that the index is tied to
variables that may not reprice on a basis as quickly as market rates (e. g., the
One Year Treasury). In a period of rising interest rates, the Bank's adjustable
rate residential loans may not adjust upward as quickly as market rates thereby
adversely affecting the Company's net interest income. Conversely, in a period
of declining interest rates, the Bank's adjustable rate residential loans may
not adjust downward as quickly as market rates thereby positively affecting the
Company's net interest income. In any case, such adjustments may be limited by
loan terms which restrict changes in interest rates on a short-term basis and
over the life of the loan.
AVERAGE BALANCE SHEETS
The following are the average balance sheets for the years ended
September 30:
<TABLE>
<CAPTION>
1996 1995 1994
Average Average Average
Outstanding Outstanding Outstanding
Balance Balance Balance
------- ------- -------
Assets: (In thousands)
Interest-earning assets:
<S> <C> <C> <C>
Interest-bearing deposits $ 6,709 $ 7,995 $ 24,117
Securities (1) 35,392 39,841 27,093
Mortgage-backed securities (1) 19,717 12,558 10,698
Loans receivable (2) 133,670 118,735 110,540
Stock in FHLB of Indianapolis 1,303 1,223 1,149
------------- ------------ ------------
Total interest-earning assets 196,791 180,352 173,597
Non-interest earning assets, net
of allowance for loan losses 3,792 3,517 3,546
------------- ------------ ------------
Total assets $ 200,583 $ 183,869 $ 177,143
============= ============ ============
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts $ 9,746 $ 9,774 $ 9,646
NOW and money market accounts 26,006 26,672 30,662
Certificates of deposit 113,570 106,556 107,294
FHLB borrowings 9,625 - -
------------- ------------ ------------
Total interest-bearing liabilities 158,947 143,002 147,602
Other liabilities 4,229 2,838 2,200
------------- ------------ ------------
Total liabilities 163,176 145,840 149,802
Shareholders' equity
Common stock 19,064 20,527 10,524
Retained earnings 19,718 19,117 17,802
Less common stock acquired by:
Employee stock ownership plan (1,007) (1,208) (675)
Recognition and retention plans (235) (407) (310)
Unrealized gain (loss) on securities
available for sale (133) - -
------------- ------------ ------------
Total shareholders' equity 37,407 38,029 27,341
------------- ------------ ------------
Total liabilities and shareholders' equity $ 200,583 $ 183,869 $ 177,143
============= ============ ============
</TABLE>
- ------------
(1) Average outstanding balance reflects unrealized gain (loss) on securities
available for sale.
(2) Total loans less deferred net loan fees and loans in process.
<PAGE>
INTEREST RATE SPREAD
The following table sets forth the average effective interest rate
earned by the Company on its consolidated loan and investment portfolios, the
average effective cost of the Company's consolidated deposits and FHLB
borrowings, the interest rate spread of the Company, and the net yield on
average interest-earning assets for the periods presented. Average balances are
based on daily average balances.
Year ended September 30,
1996 1995 1994
---- ---- ----
Average interest rate earned on:
Interest-earning deposits 6.29% 6.03% 3.82%
Securities(l) 6.17% 5.77% 5.53%
Mortage-backed securities(l) 6.15% 5.51% 5.48%
Loans receivable 7.67% 7.42% 7.67%
Stock in FHLB of Indianapolis 7.90% 7.60% 5.22%
Total interest-earning assets 7.20% 6.87% 6.65%
Average interst rate of:
Savings accounts 2.77% 2.80% 2.75%
NOW and money market accounts 3.12% 3.24% 2.65%
Certificates of depoist 5.68% 5.30% 4.61%
FHLB advances 5.50% --- ---
Total interst-bearing liabilities 5.07% 4.75% 4.08%
Interst rate spread (2) 2.13% 2.12% 2.57%
Net yield on interest-eaming assets (3) 3.11% 3.10% 3.18%
- ---------------
(1) Yield is based on amortized cost without adjustment for unrealized gain
(loss) on securities available for sale
(2) Interest rate spread is calculated by subtracting the average interest
rate cost from the average interest rate earned for the period
indicated.
(3) The net yield on average interest-earning assets is calculated by
dividing net interest income by the average interest-earning assets for
the period indicated.
<PAGE>
The following table describes the extent to which changes in interest rates and
changes in volume of interest-related assets and liabilities have affected the
Company's consolidated interest income and expense during the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (1) changes in rate (i.e.,
changes in rate multiplied by old volume) and (2) changes in volume (i.e.,
changes in volume multiplied by old rate). Changes attributable to both rate and
volume have been allocated proportionally to the change due to volume and the
change due to rate.
<TABLE>
<CAPTION>
Increase (Decrease) in
Net Interest Income
------------------------------------------------
Total Net Due to Due to
Change Rate Volume
----------- ----------- ------------
(In thousands)
Year ended September 30, 1996 compared
to year ended September 30, 1995
Interest-earning assets
<S> <C> <C> <C>
Interest-bearing deposits $ (60) $ 20 $ (80)
Securities (114) 154 (268)
Mortgage-backed securities 533 97 436
Loans receivable 1,430 293 1,137
Stock in FHLB of Indianapolis 10 4 6
----------- ----------- ------------
Total 1,799 568 1,231
Interest-bearing liabilities
Savings accounts (4) (3) (1)
NOW and money market accounts (52) (31) (21)
Certificates of deposit 796 411 385
FHLB borrowings 529 - 529
----------- ----------- ------------
Total 1,269 377 892
----------- ----------- ------------
Change in net interest income $ 530 $ 191 $ 339
=========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
Increase (Decrease) in
Net Interest Income
Total Net Due to Due to
Change Rate Volume
----------- ----------- ------------
(In thousands)
Year ended September 30, 1995 compared
to year ended September 30, 1994
Interest-earning assets
<S> <C> <C> <C>
Interest-bearing deposits $ (440) $ 367 $ (807)
Securities 802 69 733
Mortgage-backed securities 106 4 102
Loans receivable 337 (278) 615
Stock in FHLB of Indianapolis 33 29 4
----------- ----------- ------------
Total 838 191 647
Interest-bearing liabilities
Savings accounts 9 5 4
NOW and money market accounts 50 164 (114)
Certificates of deposit 710 744 (34)
----------- ----------- ------------
Total 769 913 (144)
----------- ----------- -------------
Change in net interest income $ 69 $ (722) $ 791
=========== =========== ============
</TABLE>
<PAGE>
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30,1996 AND SEPTEMBER
30, 1995.
Consolidated net income for the Company for the year ended September
30,1996 was $975,000 compared to $1.2 million for the same period in 1995. The
decrease of $261,000 resulted primarily from a one time special assessment to
recapitalize the Savings Association Insurance Fund ("SAIF") of $955,000,
partially offset by a $530,000 increase in net interest income from $5.6 million
in 1995 to $6.1 million in 1996 and a $172,000 decrease in income tax expense.
Had the special assessment not been incurred, net income for the year ended
September 30, 1996 would have amounted to $1.6 million.
The increase in net interest income was due to increases in both the
volume of interest-earning assets and higher rates earned which was partially
offset by increases in the volume of interest-bearing liabilities and rates
paid. The average rate paid on interest-bearing liabilities increased 32 basis
points from 4.75% in 1995 to 5.07% in 1996, while the yield on interest-earning
assets increased 33 basis points from 6.87% in 1995 to 7.20% in 1996. As a
result, the interest rate spread increased one basis point from 2.12% in 1995 to
2.13% in 1996.
As of September 30, 1996 net loans were $152.1 million, $30.9 million
more than net loans of $121.2 million as of September 30, 1995. Deposits
increased $14.4 million to $159.0 million as of September 30, 1996 from $144.6
million as of September 30, 1995.
Cash and cash equivalents decreased $5.8 million from $7.5 million as
of September 30, 1995 to $1.7 million as of September 30, 1996 primarily as a
result of a $5.4 million decrease in interest-bearing time deposits in other
financial institutions.
The securities portfolio consists of government, government agency and
mortgage-related securities. Several changes occurred in this portfolio during
the year ended September 30,1996. In November, 1995, the Financial Accounting
Standards Board ("FASB") issued a special report, A Guide to Implementation of
SFAS No.115 on Accounting for Certain Investments in Debt and Equity Securities
("Guide"). As permitted by the Guide, on November 30, 1995, the Company made a
one-time reassessment and transferred securities from the held-to-maturity
portfolio to the available-for-sale portfolio. At the date of transfer, these
securities had an amortized cost of $47.9 million, and the transfer increased
the unrealized appreciation on securities available-for-sale by $196,000 and
increased shareholders' equity by $119,000 net of tax of $77,000. In addition,
during the year ended September 30, 1996, the Company adopted a capital
leveraging strategy that involved the purchase of mortgage related and other
securities funded primarily with Federal Home Loan Bank ("FHLB") advances. This
leveraging portfolio represented $26.6 million of the total securities portfolio
at September 30, 1996. As of September 30, 1996 the total securities portfolio
amounted to $66.8 million, an increase of $14.8 million from $52.0 million at
September 30, 1995. This increase is primarily related to the $26.6 million
increase in the leveraging portfolio, partially offset by net sales and
maturities of other securities of $11.8 million during the year.
The $30.9 million increase in net loans was funded primarily from the
$14.4 million increase in deposits, the $5.8 million decrease in cash and cash
equivalents and the $11.8 million decrease in securities discussed above.
Total liabilities increased $39.1 million from $149.1 million as of
September 30, 1995 to $188.2 million as of September 30, 1996 primarily due to
the $14.4
<PAGE>
million increase in deposits and a $24.5 million increase in FHLB borrowings
used to fund the leveraged securities portfolio.
Total shareholders' equity decreased $400,000 from $38.0 million as of
September 30, 1995 to $37.6 million as of September 30, 1996. The decrease was
primarily attributable to the repurchase of the Company's common stock during
the year in the amount of $1.5 million, partially offset by net income of
$975,000 for the year ended September 30, 1996.
The book value of MFB Corp. Common stock, based on the actual number of
shares outstanding at each period, increased from $18.29 as of September 30,
1995 to $19.05 as of September 30, 1996.
Interest income increased $1.8 million during the year ended September
30, 1996 compared to the same period one year ago. The increase was primarily
related to increased volumes of loans receivable and mortgage-backed securities
partially offset by a decrease in the volume of lower yielding interest-bearing
deposits and securities. A general increase in rates also contributed to the
increase. Interest expense increased $1.3 million during the most recently
reported twelve month period primarily as a result of increased volumes of
certificates of deposit and FHLB borrowings. Increased rates paid on
certificates of deposit also contributed to the interest expense increase. Net
interest income increased $530,00 for the year ended September 30, 1996 compared
to the year ended September 30, 1995.
Noninterest income increased from $317,000 for the year ended September
30, 1995 to $362,000 for the twelve months ended September 30, 1996. The
increase was primarily due to increased fee income related to demand deposit
accounts. Non-interest expense increased to $4.8 million for the year ended
September 30, 1996 from $3.8 million for the same period last year. This
increase is primarily related to the one time special assessment to recapitalize
the SAIF of $955,000.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30,1995 AND SEPTEMBER
30,1994.
Consolidated net income for the Company for the year ended September
30, 1995 was $1.2 million compared to $1.5 million for the same period in 1994.
The decrease of $296,000 resulted primarily from a $472,000 increase in
noninterest expense from $3.4 million to $3.8 million for the comparative twelve
month periods, which was partially offset by a $69,000 increase in net interest
income and a $68,000 decrease in income tax expense.
As of September 30, 1995, net loans receivable were $121.2 million,
$5.9 million more than net loans of $115.3 million as of September 30, 1994.
Deposits increased $947,000 to $144.6 million as of September 30, 1995 from
$143.6 million as of September 30, 1994.
Cash and cash equivalents increased $1.3 million from $6.2 million as
of September 30, 1994 to $7.5 million as of September 30, 1995 as a result of
increasing the interest-bearing deposits in other financial institutions from
$4.3 million to $5.4 million during the same period.
Total liabilities increased $3.1 million from $146.0 million as of
September 30, 1994 to $149.1 million as of September 30, 1995 primarily due to
the September, 1995 commitments to purchase $2.0 million in securities with
settlement dates in
<PAGE>
October, 1995. As a result of these security transactions, accrued expenses and
other liabilities increased from $244,000 as of September 30, 1994 to $2.3
million as of September 30, 1995.
Total shareholders' equity increased from $37.7 million as of September
30, 1994 to $38.0 million as of September 30, 1995. This increase was primarily
attributable to the $1.2 million in net income for the year ended September 30,
1995, along with the amortization of $250,000 relative to the recognition and
retention plans contra equity account and $300,000 relative to the contribution
to fund the Employee Stock Ownership Plan (ESOP) and market adjustment of ESOP
shares. Offsetting these increases was the purchase and retirement of 109,361
shares of common stock for $1.5 million.
The book value of MFB Corp. Common stock, based on the actual number of
shares outstanding at each period, increased from $17.24 as of September 30,
1994 to $18.29 as of September 30, 1995.
As the $20.3 million in net proceeds from the March, 1994 stock
conversion was used primarily to purchase securities, $2.3 million in interest
income was generated from securities, excluding mortgage-backed securities, for
the year ended September 30, 1995 versus $1.6 million for the year ended
September 30, 1994, an $802,000 increase for the comparative periods. Also
contributing to the $838,000 total interest income increase from $11.5 million
for the year ended September 30, 1994 to $12.4 million for the year ended
September 30, 1995 was the increase in the volume of loans receivable and
decrease in the volume of lower yielding interest-bearing deposits in other
financial institutions.
Total noninterest expense increased $472,000 from $3.4 million for the
year ended September 30, 1994 to $3.8 million for the year ended September 30,
1995. The increase was primarily due to a $367,000 increase in salaries and
employee benefits. Higher legal and auditing fees associated with the conversion
to a stock savings bank, and costs incurred in the search for a successor CEO,
also contributed to increasing noninterest expense for the comparable periods.
BIF/SAIF FUND RESOLUTION
On September 30, 1996, the president signed into law a bill that
included a measure to recapitalize the Savings Association Insurance Fund
("SAIF") with a one-time special assessment. The Company accrued the expense for
this one-time assessment as of September 30, 1996 in the amount of $955,000, or
65.7 basis points of the Bank's deposits at March 31, 1995. Beginning January 1,
1997 the regular insurance premium decreases from 23 basis points to 6.4 basis
points. Based on deposits at September 30, 1996 annualized insurance premiums
will decreases approximately $264,000 from $366,000 to $102,000, resulting in a
3.6 year recovery period for the special assessment.
LIQUIDITY AND CAPITAL RESOURCES
A standard measure of liquidity for savings associations is the ratio
of cash and eligible investments to a certain percentage of net withdrawable
savings and
<PAGE>
borrowings due within one year. The minimum required ratio is currently set by
OTS regulation at 5%, of which at least 1% must be comprised of short-term
investments (i.e., generally with a term of less than one year). At September
30, 1996, the Bank's liquidity ratio was 26.3% and the short-term liquidity
ratio was 5.3%. Therefore, the Bank's liquidity is well above the minimum
regulatory requirements.
Changes in the Bank's liquidity occur as a result of its operating,
investing and financing activities. These activities are discussed below for the
years ended September 30, 1996, 1995 and 1994.
Liquidity relates primarily to the Company's ability to fund loan
demand, meet deposit customers' withdrawal requirements and provide for
operating expenses. Assets used to satisfy these needs consist of cash, deposits
with other financial institutions, overnight interest-bearing deposits in other
financial institutions, interest-bearing time deposits in other financial
institutions and securities, excluding FHLB stock. These assets are commonly
referred to as liquid assets. Liquid assets totaled $69.0 million as of
September 30, 1996 compared to $61.4 million as of September 30, 1995 and $64.4
million as of September 30, 1994. The $7.6 million increase in liquidity from
September 30, 1995 to September 30, 1996 was primarily due to a $14.7 million
increase in securities, partially offset by a $5.4 million decrease in short
term interest-bearing deposits in other financial institutions. Management
believes the liquidity level of $69.0 million as of September 30, 1996 is
sufficient to meet anticipated future loan growth.
Liquidity levels decreased $3.0 million from September 30, 1994 to
September 30, 1995 due to a $1.5 million decrease in interest-bearing time
deposits in other financial institutions, a $1.6 million decrease in securities,
a $1.2 million decrease in mortgage-backed securities and a $1.3 million
increase in cash and cash equivalents. This decrease in liquidity, along with
increased customer deposits, was primarily used to fund a $5.9 million increase
in net loans during that year.
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 has historically not borrowed significant
amounts. However, during the year ended September 30, 1996 the Bank instituted a
capital leveraging strategy that involved the purchase of earning assets funded
primarily with FHLB borrowings. As of September 30, 1996, total FHLB borrowings
amounted to $24.5 million, all of which were used as part of this strategy. The
Bank has commitments to fund loan originations with borrowers totaling $21.2
million at September 30, 1996. In the opinion of management, the Company has
sufficient cash flow to meet current and anticipated loan funding commitments,
deposit customer withdrawal requirements and operating expenses. There were no
short-term borrowings or long-term debt as of September 30, 1995.
The cash flow statements provide an indication of the Company's sources
and uses of cash as well as an indication of the ability of the Company to
maintain an adequate level of liquidity. A discussion of the changes in the cash
flow statements for the years ended September 30, 1996, 1995 and 1994 follows.
During the year ended September 30, 1996, net cash decreased $5.8
million from $7.5 million at September 30, 1995 to $1.7 million at September 30,
1996.
The Company experienced a net increase in cash from operating
activities of $2.2 million during the year that was primarily attributable to
net income as adjusted
<PAGE>
for accrual basis accounting. The $44.9 million net decrease in cash from
investing activities for the year ended September 30, 1996 was primarily related
to the net increase in loans of $30.9 million and net purchases of securities of
$15.2 million.
Financing activities generated net cash of $37.0 million for the year
ended September 30, 1996. The net cash was provided primarily from $24.5 million
in new FHLB borrowings and a $14.4 million increase in net deposits, partially
offset by the use of $1.5 million to repurchase the Company's stock during the
year.
For the year ended September 30, 1995, net cash increased $1.3 million
from $6.2 million at September 30, 1994 to $7.5 million at September 30, 1995.
Net cash from operating activities totaled $3.8 million. Of this amount, $2.0
million was related to the September, 1995 commitment to purchase securities
(settlement October, 1995), thereby increasing accrued expenses and other
liabilities for 1995. The remaining $1.8 million increase for the year ended
September 30, 1995 was a result of net income as adjusted for accrual basis
accounting.
The Company experienced a $2.0 million net decrease in cash from
investing activities for the year ended September 30, 1995. This decrease in
cash resulted primarily from the net increase in loans exceeding the net
decrease in securities and interest-bearing time deposits in other financial
institutions.
The Company also experienced a $461,000 net decrease in cash from
financing activities for the year ended September 30, 1995, as the purchases and
retirement of $1.5 million of MFB Corp. common stock exceeded the net increases
in deposits and advance payments by borrowers for taxes and insurance.
As of September 30, 1996 management is not aware of any current
recommendations by regulatory authorities which, if they were to be implemented,
would have, or are reasonably likely to have, a material adverse effect on the
Company's liquidity, capital resources or operations.
CURRENT ACCOUNTING ISSUES
Several new accounting standards have been issued by the FASB that will
apply for the year ending September 30, 1997. SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of,
requires a review of long-term assets for impairment of recorded value and
resulting write-downs if the value is impaired. SFAS No. 122, Accounting for
Mortgage Servicing Rights, requires recognition of an asset when servicing
rights are retained on in-house originated loans that are sold. SFAS No. 123,
Accounting for Stock- Based Compensation, encourages, but does not require,
entities to use "fair value based methods to account for stock-based
compensation plans and requires disclosure of the pro forma effect on the net
income and on earnings per share had the accounting been adopted. SFAS No. 125,
Accounting for Transfer and Servicing of Financial Assets and Extinguishment of
Liabilities, provides accounting and reporting standard for transfers and
servicing of financial assets and extinguishments of liabilities when
extinguished. SFAS No. 125 also supersedes SFAS No. 122, and requires that
servicing assets and liabilities be subsequently measured by amortization in
proportion to and over the period of estimated net servicing income or loss and
requires assessment for asset impairment or increased obligation based on their
fair values. SFAS No. 125 applies to transfers and extinguishments occurring
after December 31, 1996, and early or retroactive application is not permitted.
These
<PAGE>
statements are not expected to have a material effect on the Company's
consolidated financial position or results of operation.
IMPACT OF INFLATION
The audited consolidated financial statements presented herein have
been prepared in accordance with generally accepted accounting principles. These
principles require measurement of financial position and operating results in
terms of historical dollars (except for securities available for sale which are
reported at fair market value), without considering changes in the relative
purchasing power of money over time due to inflation.
The primary assets and liabilities of the Bank are monetary in nature.
As a result, interest rates have a more significant impact on the Company's
performance than the effects of general levels of inflation. Interest rates,
however, do not necessarily move in the same direction or with the same
magnitude as the price of good and services, since such prices are affected by
inflation.
In periods of rapidly rising interest rates, the liquidity and maturity
structures of the Company's assets and liabilities are critical to the
maintenance of acceptable performance levels. For a discussion of the Company's
continuing efforts to reduce its vulnerability to changes in interest rates, see
"Asset/Liability Management".
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of noninterest expense. Such expense items as
employee compensation employee benefits, and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans made by the Bank. Management is unable to determine the extent,
if any, to which properties securing the Bank's loans have appreciated in dollar
value due to inflation.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
MFB Corp.
Mishawaka, Indiana
We have audited the accompanying consolidated balance sheets of MFB Corp. as of
September 30, 1996 and 1995 and the related consolidated statements of income,
changes in shareholders' equity and cash flows for the years ended September 30,
1996, 1995 and 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MFB Corp. as of
September 30, 1996 and 1995, and the results of its operations and its cash
flows for the years ended September 30, 1996, 1995 and 1994 in conformity with
generally accepted accounting principles.
As discussed in Note 1, effective October 1, 1994, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 115 and changed
its method of accounting for its Employee Stock Ownership Plan to conform to new
accounting guidance.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
South Bend, Indiana
November 4, 1996
<PAGE>
MFB CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
ASSETS
<S> <C> <C>
Cash and due from financial institutions $ 1,734,388 $ 2,063,229
Interest-bearing deposits in other financial
institutions - short-term - 5,390,822
----------------- -----------------
Cash and cash equivalents 1,734,388 7,454,051
Interest- bearing time deposits in other financial institutions 495,000 1,880,000
Securities available for sale 66,762,558 -
Securities held to maturity (fair value: 1995 - $51,704,000) - 52,022,355
Federal Home Loan Bank (FHLB) stock, at cost 1,336,100 1,270,800
Loans receivable, net of allowance for loan losses of
$340,000 in 1996 and $310,000 in 1995 152,052,092 121,181,162
Accrued interest receivable 818,014 818,108
Premises and equipment, net 1,969,264 1,976,527
Other assets 641,707 462,236
----------------- -----------------
Total assets $ $ 225,809,123 $ 187,065,239
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing demand deposits $ 1,942,145 $ 743,000
Savings, NOW and MMDA deposits 34,779,548 34,687,208
Other time deposits 122,242,796 109,121,562
----------------- -----------------
Total deposits 158,964,489 144,551,770
FHLB advances 24,500,000 -
Advances from borrowers for taxes and insurance 1,864,427 2,169,578
Accrued expenses and other liabilities 2,880,838 2,345,293
----------------- -----------------
Total liabilities 188,209,754 149,066,641
Shareholders' equity
Common stock, no par value, 5,000,000
shares authorized; shares issued
and outstanding: 1996 - 1,973,980; 1995 - 2,077,873 18,316,651 19,656,664
Retained earnings - substantially restricted 20,588,797 19,732,086
Net unrealized depreciation on securities available
for sale, net of tax benefit of $144,252 in 1996 (219,928) -
Unearned Employee Stock Ownership Plan (ESOP) Shares (893,651) (1,100,000)
Unearned Recognition and Retention Plan (RRP) Shares (192,500) (290,152)
----------------- -----------------
Total shareholders' equity 37,599,369 37,998,598
----------------- -----------------
Total liabilities and shareholders' equity $ 225,809,123 $ 187,065,239
================= =================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans receivable
Mortgage loans $ 9,956,394 $ 8,780,654 $ 8,452,229
Consumer and other loans 182,177 35,433 26,506
Financing leases and commercial loans 107,321 - -
Securities - taxable 3,514,380 3,085,427 2,143,983
Other interest-earning assets 421,984 482,044 922,372
--------------- --------------- ----------------
14,182,256 12,383,558 11,545,090
Interest expense
Deposits 7,528,321 6,788,376 6,019,113
FHLB advances 529,025 - -
--------------- --------------- ----------------
8,057,346 6,788,376 6,019,113
Net interest income 6,124,910 5,595,182 5,525,977
Provision for loan losses 30,000 30,000 30,000
--------------- --------------- ----------------
Net interest income after provision
for loan losses 6,094,910 5,565,182 5,495,977
Noninterest income
Insurance commissions 126,819 127,766 126,420
Net realized gains from sales of securities
available for sale 3,731 - -
Other income 231,766 189,648 151,349
--------------- --------------- ----------------
362,316 317,414 277,769
Noninterest expense
Salaries and employee benefits 2,152,656 2,336,230 1,969,110
Occupancy and equipment expense 422,388 405,998 378,972
SAIF deposit insurance premium 1,291,288 332,175 340,511
Other expense 968,951 752,635 666,135
--------------- --------------- ----------------
4,835,283 3,827,038 3,354,728
--------------- --------------- ----------------
Income before income taxes 1,621,943 2,055,558 2,419,018
Income tax expense 646,793 819,452 887,452
--------------- --------------- ----------------
Net income $ 975,150 $ 1,236,106 $ 1,531,566
=============== =============== ================
Earnings per common and common equiva-
lent share subsequent to conversion $ .49 $ .59 $ .43
Earning per share-assuming full dilution-
subsequent to conversion .48 .59 .43
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY Years ended
September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Net Unrealized
Depreciation
on Securities
Available
Retained For Sale,
Common Stock Earnings Net of Tax
------------ -------- ----------
<S> <C> <C> <C>
Balances at September 30, 1993 $ - $ 16,964,414 $ -
Issuance of 2,302,351 shares of common stock 22,426,665 -
Purchase and retirement of 115,117 shares of common stock (1,377,925) -
Common stock acquired by ESOP - 140,000 shares - -
Common stock acquired by RRP - 70,000 shares - -
Effect of contribution to fund ESOP - -
Amortization of RRP contribution - -
Net income for the year ended September 30, 1994 - 1,531,566
---------------- ---------------- --------------
Balance at September 30, 1994 21,048,740 18,495,980
Purchase and retirement of 109,361 shares of common stock (1,530,486) -
Effect of contribution to fund ESOP - -
Market adjustment of 22,516 ESOP shares committed to be released 99,592 -
Amortization of RRP contribution - -
Tax benefit related to employee stock plans 38,818 -
Net income for the year ended September 30, 1995 - 1,236,106
---------------- ---------------- --------------
Balance at September 30, 1995 19,656,664 19,732,086
Purchase and retirement of 103,893 shares of common stock (1,499,024) - -
Net unrealized appreciation on securities available for
sale, net of tax $77,821 from transfer of securities - - 118,648
Cash dividends declared - $.06 per share - (118,439) -
Effect of contribution to fund ESOP - - -
Market adjustment of 21,515 ESOP shares committed to be released 117,247 - -
Amortization of RRP contribution - - -
Tax benefit related to employee stock plans 41,764 - -
Net change in unrealized depreciation on securities
available for sale, net of tax of ($222,073) - - (338,576)
Net income for the year ended September 30, 1996 - 975,150 -
---------------- ---------------- --------------
Balance at September 30, 1996 $ 18,316,651 $ 20,588,797 $ (219,928)
================ ================ ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total
Unearned Unearned Shareholders'
ESOP Shares RRP Shares Equity
----------- ---------- ------
<S> <C> <C> <C>
Balances at September 30, 1993 $ - $ - $16,964,414
Issuance of 2,302,351 shares of common stock - - 22,426,665
Purchase and retirement of 115,117 shares of common stock - - (1,377,925)
Common stock acquired by ESOP - 140,000 shares (1,400,000) - (1,400,000)
Common stock acquired by RRP - 70,000 shares - (700,000) (700,000)
Effect of contribution to fund ESOP 100,000 - 100,000
Amortization of RRP contribution - 159,948 159,948
Net income for the year ended September 30, 1994 - - 1,531,566
-------------- ------------ -----------
Balance at September 30, 1994 (1,300,000) (540,052) 37,704,668
Purchase and retirement of 109,361 shares of common stock - - (1,530,486)
Effect of contribution to fund ESOP 200,000 - 200,000
Market adjustment of 22,516 ESOP shares committed to be released - - 99,592
Amortization of RRP contribution - 249,900 249,900
Tax benefit related to employee stock plans - - 38,818
Net income for the year ended September 30, 1995 - - 1,236,106
-------------- ------------ -----------
Balance at September 30, 1995 (1,100,000) (290,152) 37,998,598
Purchase and retirement of 103,893 shares of common stock - - (1,499,024)
Net unrealized appreciation on securities available for
sale, net of tax $77,821 from transfer of securities - - 118,648
Cash dividends declared - $.06 per share - - (118,439)
Effect of contribution to fund ESOP 206,349 - 206,349
Market adjustment of 21,515 ESOP shares committed to be released - - 117,247
Amortization of RRP contribution - 97,652 97,652
Tax benefit related to employee stock plans - - 41,764
Net change in unrealized depreciation on securities
available for sale, net of tax of ($222,073) - - (338,576)
Net income for the year ended September 30, 1996 - - 975,150
-------------- ------------ ----------
Balance at September 30, 1996 $ (893,651) $ (192,500) $37,599,369
============== ============ ===========
</TABLE>
<PAGE>
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Cash flows from operating activities
<S> <C> <C> <C>
Net income $ 975,150 $ 1,236,106 $ 1,531,566
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization, net of
accretion 272,595 315,899 330,675
Amortization of RRP contribution 97,652 249,900 159,948
Provision for loan losses 30,000 30,000 30,000
Net realized gains from sales of
securities available for sale (3,731) - -
Market adjustment of ESOP shares committed
to be released 117,247 99,592 -
ESOP expense 206,349 200,000 100,000
Net change in:
Accrued interest receivable 94 (70,836) (365,179)
Other assets (44,501) (301,900) 100,176
Accrued expenses and other liabilities 586,591 2,050,282 (65,551)
--------------- --------------- ---------------
Total adjustments 1,262,296 2,572,937 290,069
--------------- --------------- ---------------
Net cash provided by operating
activities 2,237,446 3,809,043 1,821,635
Cash flows from investing activities
Net change in interest-bearing time
deposits in other financial institutions 1,385,000 1,485,000 17,104,126
Net change in loans receivable (30,900,930) (5,914,327) (7,114,736)
Proceeds from:
Sales of securities available for sale 10,212,124 - -
Principal payments of mortgage-backed
and related securities 2,280,597 1,283,272 474,928
Maturities of securities available for sale 16,697,252 - -
Maturities of securities held to maturity 4,300,000 14,350,000 -
Maturities of investment securities - - 16,300,000
Purchase of:
Securities available for sale (48,218,517) - -
Securities held to maturity (500,000) (12,910,926) -
Investment securities - - (56,479,171)
FHLB stock (65,300) (95,300) -
Premises and equipment, net (137,440) (244,856) (170,745)
--------------- --------------- ---------------
Net cash used in investing activities (44,947,214) (2,047,137) (29,885,598)
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities
Proceeds from stock issue, net of conversion
costs and stock acquired by ESOP and RRP $ - $ - 20,326,665
Purchase of MFB Corp. common stock (1,499,024) (1,530,486) (1,377,925)
Net change in deposits 14,412,719 947,319 (5,615,081)
Proceeds from FHLB advances 24,500,000 - -
Net change in advances from
borrowers for taxes and insurance (305,151) 122,579 63,005
Cash dividends paid (118,439) - -
--------------- --------------- ---------------
Net cash provided by (used in) financing
activities 36,990,105 (460,588) 13,396,664
--------------- --------------- ---------------
Net change in cash and cash equivalents (5,719,663) 1,301,318 (14,667,299)
Cash and cash equivalents at beginning of period 7,454,051 6,152,733 20,820,032
--------------- --------------- ---------------
Cash and cash equivalents at end of period $ 1,734,388 $ 7,454,051 $ 6,152,733
=============== =============== ===============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 7,459,231 $ 6,786,274 $ 6,019,588
Income taxes 974,755 883,000
837,119
Supplemental schedule of noncash investing activities Transfer from:
Investment securities to securities
held to maturity $ - $ 54,931,715 $ -
Securities held to maturity to securities
available for sale 47,898,025 - -
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial statements
include the accounts of MFB Corp., Inc. and its wholly-owned subsidiary
(together referred to as "the Company"), Mishawaka Federal Savings (the "Bank"),
a federal stock savings bank, and Mishawaka Financial Services, Inc., a
wholly-owned subsidiary of the Bank. Mishawaka Financial Services, Inc. is
engaged in the sale of credit life, general fire and accident, car, home and
life insurance as agent for the Bank's customers and the general public. All
significant intercompany transactions and balances are eliminated in
consolidation.
On November 1, 1996, the Bank changed its name to MFB Financial.
Nature of Business and Concentrations of Credit Risk: The primary source of
income for the Company results from granting commercial and residential real
estate loans in Mishawaka and the surrounding area. Loans secured by real estate
mortgages comprise approximately 99% of the loan portfolio at September 30, 1996
and are primarily secured by residential mortgages. The Company operates
primarily in the banking industry which accounts for more than 90% of its
revenues, operating income and assets.
Use of Estimates In Preparing Financial Statements: The preparation of
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period, as well as the
disclosures provided. Areas involving the use of estimates and assumptions in
the accompanying financial statements include the allowance for loan losses,
fair values of securities and other financial instruments, determination and
carrying value of impaired loans, the realization of deferred tax assets, and
the determination of depreciation of premises and equipment recognized in the
Company's financial statements. Actual results could differ from those
estimates. Estimates associated with the allowance for loan losses and the fair
values of securities and other financial instruments are particularly
susceptible to material change in the near term.
Cash and Cash Equivalents: For purposes of reporting cash flows, cash and cash
equivalents is defined to include the Company's cash on hand, due from financial
institutions and short-term interest-bearing deposits in other financial
institutions. The Company reports net cash flows for customer loan transactions,
deposit transactions, advances from borrowers for taxes and insurance, and
interest-bearing time deposits in other financial institutions.
- --------------------------------------------------------------------------------
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities: On October 1, 1994, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company now classifies
securities into held to maturity, available for sale and trading categories.
Held to maturity securities are those which the Company has the positive intent
and ability to hold to maturity, and are reported at amortized cost. Available
for sale securities are those the Company may decide to sell if needed for
liquidity, asset-liability management or other reasons. Available for sale
securities are reported at fair value, with unrealized gains and losses included
as a separate component of shareholders' equity, net of tax. Trading securities
are bought principally for sale in the near term, and are reported at fair value
with unrealized gains and losses included in earnings. Adoption of SFAS No. 115
had no impact on the equity of the Company because all investment securities
held by the Company were classified as securities held to maturity as of October
1, 1994.
The Financial Accounting Standards Board ("FASB") issued a Special Report, "A
Guide to Implementation of SFAS No. 115 on Accounting for Certain Investments in
Debt and Equity Securities ("Guide")." As permitted by the Guide, on November
30, 1995, the Company made a one-time reassessment and transferred securities
from the held to maturity portfolio to the available for sale portfolio. At the
date of transfer, these securities had an amortized cost of $47,898,025, and the
transfer increased the unrealized appreciation on securities available for sale
by $196,469 and increased shareholders' equity by $118,648, net of tax of
$77,821.
Gains and losses on the sale of securities are determined using the specific
identification method based on amortized cost and are reflected in results of
operations at the time of sale. Interest and dividend income, adjusted by
amortization of purchase premium or discount over the estimated life of the
security using the level yield method, is included in earnings.
Loans Receivable: Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or pay-off are reported at
their outstanding principal balances adjusted for any charge-offs, the allowance
for loan losses, and any deferred fees or costs on originated loans, and
unamortized premiums or discounts on purchased loans.
Premiums or discounts on mortgage loans are amortized to income using the level
yield method over the remaining period to contractual maturity, adjusted for
anticipated prepayments. Loan fees and certain direct loan origination costs are
deferred, and the net fee or cost is recognized as an adjustment to interest
income using the interest method.
- --------------------------------------------------------------------------------
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Because some loans may not be repaid in full, an allowance for loan losses is
recorded. The allowance for loan losses is increased by a provision for loan
losses charged to expense and decreased by charge-offs (net of recoveries).
Estimating the risk of loss and the amount of loss on any loan is necessarily
subjective. Accordingly, the allowance is maintained by management at a level
considered adequate to cover losses that are currently anticipated. Management's
periodic evaluation of the adequacy of the allowance is based on the Company's
past loan loss experience, known and inherent risks in the portfolio, periodic,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, and current economic conditions.
While management may periodically allocate portions of the allowance for
specific problem loan situations, the whole allowance is available for any loan
charge-offs that occur.
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by
SFAS No. 118, was adopted effective October 1, 1995 and requires recognition of
loan impairment. Loans are considered impaired if full principal or interest
payments are not anticipated in accordance with the contractual loan terms.
Impaired loans are carried at the present value of expected future cash flows
discounted at the loan's effective interest rate or at the fair value of the
collateral if the loan is collateral dependent. A portion of the allowance for
loan losses is allocated to impaired loans if the value of such loans is deemed
to be less than the unpaid balance. If these allocations cause the allowance for
loan losses to require increase, such increase is reported as a component of the
provision for loan losses. The effect of adopting these standards was not
material to the consolidated financial statements.
Smaller-balance homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by one-to-four family
residences, residential construction loans, automobile, manufactured homes, home
equity and second mortgage loans. Commercial loans and mortgage loans secured by
other properties are evaluated individually for impairment. When analysis of
borrower operating results and financial condition indicates that underlying
cash flows of the borrower's business are not adequate to meet its debt service
requirements, the loan is evaluated for impairment. Often this is associated
with a delay or shortfall in payments of 30 days or more. Nonaccrual loans are
often also considered impaired. Impaired loans, or portions thereof, are charged
off when deemed uncollectible. The nature of disclosures for impaired loans is
considered generally comparable to prior nonaccrual and renegotiated loans and
non-performing and past due asset disclosures.
- --------------------------------------------------------------------------------
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interest income on loans is accrued over the term of the loans based upon the
principal outstanding. The accrual of interest on impaired loans in discontinued
when, in management's opinion, the borrower may be unable to meet payments as
they become due. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to the
extent that cash payments are received until, in management's judgment, the
borrower has the ability to make contractual interest and principal payments, in
which case the loan is returned to accrual status.
Foreclosed Real Estate: Real estate properties acquired through, or in lieu of,
loan foreclosure are initially recorded at fair value at the date of
acquisition, establishing a new cost basis. Any reduction to fair value from the
carrying value of the related loan at the time of acquisition is accounted for
as a loan loss and charged against the allowance for loan losses. Valuations are
periodically performed by management and valuation allowances are adjusted
through a charge to income for changes in fair value or estimated selling costs.
Foreclosed real estate amounted to approximately $-0- and $18,000 at September
30, 1996 and 1995, respectively, and is included in other assets in the
consolidated balance sheets.
Income Taxes: Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through income tax expense.
Premises and Equipment: Land is carried at cost. Buildings and improvements and
furniture and equipment are carried at cost, less accumulated depreciation and
amortization computed principally by using the straight-line method over the
estimated useful lives of the assets.
Employee Stock Ownership Plan (ESOP): Effective October 1, 1994, the Company
began to account for its ESOP under AICPA Statement of Position (SOP) 93-6. The
cost of shares issued to the ESOP, but not yet allocated to participants, are
presented as a reduction of shareholders' equity. Compensation expense is
recorded based on the average market price of the shares committed to be
released for allocation to participant accounts. The difference between the
market price and the cost of shares committed to be released is recorded as an
adjustment to common stock. Dividends on allocated ESOP shares are recorded as a
reduction of retained earnings; dividends on unearned ESOP shares are reflected
as a reduction of debt and accrued interest.
ESOP shares are outstanding for earnings per share calculations as they are
committed to be released; unearned shares are not considered outstanding.
Prior to the adoption of SOP 93-6, the expense was limited to the principal
repayment on the loan and the earnings per share calculation included as
outstanding all 140,000 ESOP shares.
- --------------------------------------------------------------------------------
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Financial Instruments with Off-Balance-Sheet Risk: The Company, in the normal
course of business, makes commitments to make loans which are not reflected in
the consolidated financial statements. A summary of these commitments is
disclosed in Note 11.
Earnings Per Share: Earnings per common share is computed by dividing net income
by the weighted average number of common shares outstanding and common share
equivalents which would arise from considering dilutive stock options. The
weighted average number of shares for calculating earnings per common share is:
1996 1995 1994
---- ---- ----
Primary 2,008,323 2,083,528 2,232,132
Fully diluted 2,035,087 2,106,785 2,229,058
Reclassifications: Certain amounts in the 1995 and 1994 consolidated financial
statements were reclassified to conform with the 1996 presentation.
NOTE 2 - SECURITIES
The amortized cost and fair value of securities available for sale are as
follows:
<TABLE>
<CAPTION>
.........................September 30, 1996..........................
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Debt securities
U.S. Government and
federal agencies $ 40,159,602 $ 142,886 $ (95,325) $40,207,163
Mortgage-backed 24,473,181 - (399,246) 24,073,935
64,632,783 142,886 (494,571) 64,281,098
Marketable equity securities 2,493,955 - (12,495) 2,481,460
--------------- ------------ ------------- ---------------
$ 67,126,738 $ 142,886 $ (507,066) $ 66,762,558
============== ============ ============= ===============
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 2 - SECURITIES (Continued)
The amortized cost and fair value of securities held to maturity are as follows:
<TABLE>
<CAPTION>
.........................September 30, 1995..........................
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Debt securities
U.S. Government and
federal agencies $ 40,116,970 $ 216,334 $ (153,304) $ 40,180,000
Mortgage-backed 11,905,385 - (381,385) 11,524,000
--------------- ------------ ------------- ---------------
$ 52,022,355 $ 216,334 $ (534,689) $ 51,704,000
============== ============ ============= ============
</TABLE>
The amortized cost and fair value of debt securities by contractual maturity are
shown below. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
.........September 30, 1996........
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $ 6,836,633 $ 6,849,522
Due after one year through five years 32,972,969 33,019,125
Due after five years through ten years 350,000 338,516
---------------- ---------------
40,159,602 40,207,163
Mortgage-backed securities 24,473,181 24,073,935
---------------- ---------------
$ 64,632,783 $ 64,281,098
================ ===============
</TABLE>
Proceeds from sales of securities available for sale were $10,212,124 during the
year ended September 30, 1996. Gross gains of $25,154 and gross losses of
$21,423 were realized on these sales. The Company did not sell any securities
during the years ended September 30, 1995 and 1994.
- --------------------------------------------------------------------------------
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 3 - LOANS RECEIVABLE, NET
Loans receivable, net at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
First mortgage loans (principally conventional)
Principal balances
<S> <C> <C>
Secured by one-to-four family residences $ 143,750,857 $ 119,719,473
Construction loans 5,004,730 2,106,358
Commercial 876,348 206,363
Other 162,643 189,189
----------------- -----------------
149,794,578 122,221,383
Less undisbursed portion of construction and
other mortgage loans (1,961,107) (809,280)
Net deferred loan-origination fees (439,921) (369,870)
----------------- -----------------
Total first mortgage loans 147,393,550 121,042,233
Consumer and other loans:
Principal balances
Home equity and second mortgage 3,790,075 375,102
Financing leases 1,124,624 -
Other 83,843 73,827
----------------- -----------------
Total consumer and other loans 4,998,542 448,929
Allowance for loan losses (340,000) (310,000)
----------------- -----------------
$ 152,052,092 $ 121,181,162
================= =================
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the years
ended September 30:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 310,000 $ 280,000 $ 250,000
Provision for loan losses 30,000 30,000 30,000
Charge-offs - - -
Recoveries - - -
------------- ------------ ------------
Balance at end of year $ 340,000 $ 310,000 $ 280,000
============= ============ ============
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 3 - LOANS RECEIVABLE, NET (Continued)
At September 30, 1996, no portion of the allowance for loan losses was allocated
to impaired loan balances as there were no loans considered impaired loans as
of, or for the year ended September 30, 1996.
Certain directors and executive officers of the Company and its subsidiary,
including associates of such persons, were loan customers during the year ended
September 30, 1996. A summary of the related party loan activity, for loans
aggregating $60,000 or more to any one related party, is as follows for the year
ended September 30, 1996:
Balance - October 1, 1995 $ 592,367
===========
New loans 494,208
Repayments (54,081)
--------------
Balance - September 30, 1996 $ 1,032,494
==============
NOTE 4 - PREMISES AND EQUIPMENT, NET
Premises and equipment at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $ 558,681 $ 558,681
Buildings and improvements 1,618,722 1,729,322
Real estate held for future expansion 128,885 128,885
Furniture and equipment 868,737 731,307
--------------- --------------
Total cost 3,175,025 3,148,195
Accumulated depreciation and amortization (1,205,761) (1,171,668)
--------------- --------------
$ 1,969,264 $ 1,976,527
=============== ==============
</TABLE>
Depreciation and amortization of premises and equipment, included in occupancy
and equipment expense was approximately $145,000, $129,000 and $110,000 for the
years ended September 30, 1996, 1995 and 1994, respectively.
- --------------------------------------------------------------------------------
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 5 - DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit in denomination
of $100,000 or more was approximately $24,488,000 and $20,333,000 at September
30, 1996 and 1995, respectively.
At September 30, 1996, the scheduled maturities of certificates of deposit are
as follows for the years ended September 30:
1997 $ 85,529,043
1998 27,132,879
1999 5,789,996
2000 3,233,687
2001 and thereafter 557,191
---------------
$ 122,242,796
===============
NOTE 6 - FEDERAL HOME LOAN BANK ADVANCES
At September 30, 1996, advances from the Federal Home Loan Bank of Indianapolis
with fixed and variable rates ranging from 5.01% to 5.74% mature in the year
ending September 30 as follows:
1997 $ 15,000,000
1998 3,000,000
1999 6,500,000
--------------
$ 24,500,000
==============
FHLB advances are secured by all FHLB stock, qualifying first mortgage loans,
government agency and mortgage backed securities. At September 30, 1996,
collateral of approximately $206,000,000 is pledged to the FHLB to secure
advances outstanding.
NOTE 7 - EMPLOYEE BENEFITS
Employee Pension Plan: The Bank is part of a qualified noncontributory
multiple-employer defined benefit pension plan covering substantially all of its
employees. The plan is administered by the trustees of the Financial
Institutions Retirement Fund (Retirement Fund). There is no separate valuation
of plan benefits nor segregation of plan assets specifically for the Bank
because the plan is a multiple-employer plan and separate actuarial valuations
are not made with respect to each employer nor are the plan assets so
segregated. As of July 1, 1996, the latest actuarial valuation date, total plan
assets exceeded the actuarially determined value of total vested benefits. The
cost of the plan is set annually as an established percentage of wages. Pension
plan expense for the years ended September 30, 1996, 1995 and 1994 was
approximately $3,000, $179,000 and $140,000, respectively. Pension plan expense
for the year ended September 30, 1996 was reduced due to a change in the benefit
formula from 2% of high 5 year average salary for each year of benefit service
to 1.5%
401(k) Plan: On July 1, 1996, the Company adopted a retirement savings 401(k)
plan which covers all full time employees who are 21 or older and have completed
one year of service. Beginning August 1, 1996, participants may defer up to 15%
of compensation. The Company matches 50% of elective deferrals on 6% of the
participants' compensation. Expense for the 401(k) was approximately $5,000 for
the year ended September 30, 1996.
- --------------------------------------------------------------------------------
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
Employee Stock Ownership Plan (ESOP): In conjunction with its stock conversion,
the Company established an ESOP for eligible employees. Employees with at least
one year of employment and who have attained agetwenty-one are eligible to
participate. The ESOP borrowed $1,400,000 from the Company to purchase 140,000
shares of common stock issued in the conversion at $10 per share. Collateral for
the loan is the unearned shares of common stock purchased by the ESOP with the
loan proceeds. The loan will be repaid principally from the Company's
discretionary contributions to the ESOP over a period of seven years. The
interest rate for the loan is 6.25%. Shares purchased by the ESOP will be held
in suspense until allocated among ESOP participants as the loan is repaid.
ESOP expense was approximately $324,000, $300,000 and $100,000 for the years
ended September 30, 1996, 1995 and 1994, respectively. Contributions to the ESOP
was approximately $206,000, $200,000 and $100,000 during the years ended
September 30, 1996, 1995 and 1994, respectively.
Company contributions to the ESOP and shares released from suspense proportional
to the repayment of the ESOP loan are allocated among ESOP participants on the
basis of compensation in the year of allocation. Benefits generally become 100%
vested after five years of credited service. A participant who terminates
employment for reasons other than death, normal retirement (or early
retirement), or disability prior to the completion of five years of credited
service does not receive any benefits under the ESOP. Forfeitures are
reallocated among the remaining participating employees, in the same proportion
as contributions. Benefits are payable in the form of stock except for
fractional shares which are paid in cash upon termination of employment. The
Company's contributions to the ESOP are not fixed, so benefits payable under the
ESOP cannot be estimated.
ESOP participants receive distributions from their ESOP accounts only upon
termination of service.
At September 30, 1996 and 1995, 21,515 and 22,516 shares with an average fair
value of $15.04 and $13.31 per share, respectively, were committed to be
released.
- --------------------------------------------------------------------------------
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 7 - EMPLOYEE BENEFITS PLANS (Continued)
The ESOP shares as of September 30 were as follows:
1996 1995
------------ ------------
Allocated shares 55,692 34,177
Unearned shares 84,308 105,823
------------ ------------
Total ESOP shares 140,000 140,000
============ ============
Fair value of unearned
shares at September 30 $ 1,560,000 $ 1,720,000
============ ============
Recognition and Retention Plans (RRPs): In conjunction with its stock
conversion, the Company established RRPs as a method of providing directors,
officers and other key employees of the Company with a proprietary interest in
the Company in a manner designed to encourage such persons to remain with the
Company. Eligible directors, officers and other key employees of the Company
become vested in awarded shares of common stock at a rate of 20% per year
commencing March 24, 1994. The RRPs acquired, in the aggregate, 70,000 shares of
common stock issued in the conversion at $10 per share and 70,000 shares were
awarded to RRP participants at no cost to them. RRP expense for the years ended
September 30, 1996, 1995 and 1994 was approximately $98,000, $250,000 and
$160,000, respectively.
Stock Option Plan: The Board of Directors of the Company adopted the MFB Corp.
Stock Option Plan (the "Option Plan"). The number of options authorized under
the Plan is 200,000 shares of common stock. Officers, employees and outside
directors of the Company and its subsidiary are eligible to participate in the
Option Plan. The option exercise price must be no less than 85% of the fair
market value of common stock on the date of the grant, and the option term
cannot exceed ten years and one day from the date of the grant.
- --------------------------------------------------------------------------------
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 7 - EMPLOYEE BENEFITS PLANS (Continued)
Activity in the Option Plan for the years ended September 30 is summarized as
follows:
<TABLE>
<CAPTION>
Number of
Options Number of Option
Available Options Exercise
For Grant Outstanding Price
<S> <C> <C> <C>
Balance at September 30, 1994 30,000 170,000 $10
Options granted during the year (20,000) 20,000 $15
------------- -------------
Balance at September 30, 1995 10,000 190,000 $10-$15
Options granted during the year (10,000) 10,000 $15.25
------------- -------------
Balance at September 30, 1996 - 200,000 $10-$15.25
============= =============
</TABLE>
NOTE 8 - INCOME TAXES
The Company files consolidated federal income tax returns. If certain conditions
are met in determining taxable income as reported on the consolidated federal
income tax return, the Bank is allowed a special bad debt deduction based on a
percentage of taxable income (presently 8%) or on specified experience formulas.
The Bank used the percentage of taxable income method for its tax return as of
September 1994. For its tax return as of September 30, 1995, the Bank did not
use the percentage of taxable income method. The Bank is not expected to be able
to use the percentage of taxable income method for the tax year ended September
30, 1996. In future years, only the specified experience formula method will be
allowed as, 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
will occur over a six-year period, the commencement of which will be delayed
until the first taxable year beginning after December 31, 1997, provided the
institution meets certain residential lending requirements. The total amount of
bad debt to be recaptured is approximately $1,310,000.
- --------------------------------------------------------------------------------
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 8 - INCOME TAXES (Continued)
Income tax expense for the years ended September 30 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Federal
<S> <C> <C> <C>
Current $ 725,920 $ 622,992 $ 630,399
Deferred (225,467) 12,487 67,652
------------- ------------ ------------
500,453 635,479 698,051
State
Current 225,213 176,270 195,220
Deferred (78,873) 7,703 (5,819)
------------- ------------ ------------
146,340 183,973 189,401
------------- ------------ ------------
Total income tax expense $ 646,793 $ 819,452 $ 887,452
============= ============ ============
</TABLE>
Total income tax expense differed from the amounts computed by applying the U.S.
Federal income tax rate of 34% to income before income taxes for the years ended
September 30 as a result of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Expected income tax expense at federal tax rate $ 551,461 $ 698,890 $ 822,466
State taxes based on income, net of federal
tax benefit 96,584 121,422 125,005
Excess of fair value of ESOP shares released over cost 39,864 33,861 -
Other (41,116) (34,721) (60,019)
------------- ------------ -------------
Total income tax expense $ 646,793 $ 819,452 $ 887,452
============= ============ ===============
</TABLE>
The components of the net deferred tax asset (liability) recorded in the
consolidated balance sheets as of September 30 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
Deferred tax assets
<S> <C> <C>
RRP expense $ 16,363 $ 78,985
Net deferred loan fees 186,966 157,195
Net unrealized depreciation on securities available for sale 144,252 -
SAIF assessment 405,235 -
Other - 24,596
------------ ------------
752,816 260,776
Deferred tax liabilities
Accretion (28,817) (48,161)
Depreciation (42,807) (39,288)
Bad debt deduction (300,895) (248,232)
Other (27,354) (20,744)
------------ ------------
(399,873) (356,425)
Valuation allowance - -
------------ ------------
Net deferred tax asset (liability) $ 352,943 $ (95,649)
============ ============
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 8 - INCOME TAXES (Continued)
Retained earnings at September 30, 1996 and 1995 includes approximately
$4,596,000, for which no deferred federal income tax liability has been
recognized as it represents bad debt deductions for tax purposes only for
pre-1987 tax years. Reduction of amounts so allocated for purposes other than
tax bad debt losses would create tax return income, which would be taxed at
current income tax rates. The unrecorded deferred income tax liability on the
above amount was approximately $1,563,000 at September 30, 1996 and 1995.
NOTE 9 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
The Bank is subject to various regulatory capital requirements. Failure to meet
minimum capital requirements can initiate certain mandatory or discretionary
actions by regulators that could have a direct material effect on the Bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific quantitative
capital guidelines using the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's requirements are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth below) of
tangible capital, leverage capital, and risk-based capital. Management believes,
as of September 30, 1996, that the Bank meets the capital adequacy requirements.
The following is a reconciliation of the Bank's capital under generally accepted
accounting principles (GAAP) to regulatory capital at September 30, 1996 and
1995.
- --------------------------------------------------------------------------------
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 9 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED
EARNINGS (Continued)
<TABLE>
<CAPTION>
Tangible Leverage Risk-Based
Capital Capital Capital
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
GAAP capital at September 30, 1996 $ 31,108 $ 31,108 $ 31,108
Additional capital items and capital adjustments
Net unrealized depreciation on securities
available for sale 220 220 220
Includable allowance for loan losses - - 340
------------ ------------ ------------
Regulatory capital at September 30, 1996 $ 31,328 $ 31,328 $ 31,668
============ ============ ============
GAAP capital at September 30, 1995 $ 29,844 $ 29,844 $ 29,844
Additional capital items
Includable allowance for loan losses - - 306
------------ ------------ ------------
Regulatory capital at September 30, 1995 $ 29,844 $ 29,844 $ 30,150
============ ============ ============
</TABLE>
The Bank's actual capital and required capital amounts and ratios are presented
below:
<TABLE>
<CAPTION>
Requirement to be
Well Capitalized Under
Requirement for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
As of September 30, 1996
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital $ 31,328 13.85% $ 3,392 1.50% $ 6,785 3.00%
Leverage Capital 31,328 13.85 6,785 3.00 13,570 6.00
Risk-Based Capital 31,668 32.69 7,749 8.00 9,686 10.00
As of September 30, 1995
Tangible Capital 29,844 16.06 2,787 1.50 5,574 3.00
Leverage Capital 29,844 16.06 5,574 3.00 11,148 6.00
Risk-Based Capital 30,150 40.77 5,916 8.00 7,395 10.00
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 9 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED
EARNINGS (Continued)
Regulations of the Office of Thrift Supervision limit the amount of dividends
and other capital distributions that may be paid by a savings institution
without prior approval of the Office of Thrift Supervision. The regulatory
restriction is based on a three-tiered system with the greatest flexibility
being afforded to well-capitalized (Tier 1) institutions. The Bank is currently
a Tier 1 institution. Accordingly, the Bank can make, without prior regulatory
approval, distributions during a calendar year up to 100% of its net income to
date during the calendar year plus an amount that would reduce by one-half its
"surplus capital ratio" (the excess over its capital requirements) at the
beginning of the calendar year. Accordingly, at September 30, 1996 approximately
$12,000,000 of the Bank's retained earnings is potentially available for
distribution to the Company under this calculation. See also Note 15.
NOTE 10 - OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income and expense amounts are summarized as follows for the
years ended September 30:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
Other noninterest income
<S> <C> <C> <C>
Service charges and fees $ 174,315 $ 124,232 $ 87,835
Loan late charges 3,808 4,762 5,282
Rental income 32,989 39,725 35,975
Other 20,654 20,929 22,257
------------ ------------ ------------
$ 231,766 $ 189,648 $ 151,349
============ ============ ============
Other noninterest expense
Advertising and promotion $ 190,614 $ 15,000 $ 59,000
Data processing 200,940 175,734 163,918
Professional fees 175,341 116,008 76,030
Printing, postage, stationery,
and supplies 123,215 87,229 95,563
Telephone 33,110 24,433 23,142
Directors fees 70,186 56,940 57,411
Direct loan origination costs deferred (203,332) (99,228) (104,034)
Other 378,877 376,519 295,105
------------ ------------ ------------
$ 968,951 $ 752,635 $ 666,135
============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 11 - COMMITMENTS AND CONTINGENCIES AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company is
involved in legal actions arising in the ordinary course of business. In the
opinion of management, after consultation with legal counsel, the ultimate
disposition of these matters is not expected to have a material adverse effect
on the consolidated financial position of the Company and Subsidiary. The
principal commitments of the Company are as follows:
Loan Commitments
At September 30, 1996, excluding loans in process, the Company had outstanding
firm commitments to originate loans as follows:
<TABLE>
<CAPTION>
Fixed Variable
Rate Loans Rate Loans Total
---------------- --------------- ---------------
<S> <C> <C> <C>
First mortgage loans $ 1,680,256 $ 7,500,852 $ 9,181,108
Unused lines of credit 307,028 7,059,117 7,366,145
Unused construction loan lines of credit - 2,721,545 2,721,545
---------------- --------------- ---------------
$ 1,987,284 $ 17,281,514 $ 19,268,798
================ =============== ===============
</TABLE>
Fixed rate loan commitments at September 30, 1996 are at rates primarily ranging
from 7.625% to 10.95%. These fixed rate loan commitments are primarily for terms
ranging from 15 to 30 year terms. Rates on variable rate loans range from 6.50%
to 10.75% and are tied primarily to the National Monthly Median Cost of Funds
Ratio to SAIF - Insured Institutions.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since commitments to make loans and fund lines of
credit may expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if it is deemed necessary by the Company upon extension of credit, is
based on management's credit evaluation of the counterparty. The Company uses
the same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments. The Company's exposure to credit loss in
the event of nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual amount of those
instruments. No losses are anticipated as a result of these transactions.
- --------------------------------------------------------------------------------
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 11 - COMMITMENTS AND CONTINGENCIES AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK (Continued)
The deposits of savings associations such as the Bank are presently insured by
the Savings Association Insurance Fund (SAIF). A recapitalization plan
formulated by the Treasury Department, the FDIC, the OTS and the Congress in
September 1996 required a one-time assessment of approximately $955,000 which
has been accrued for as of September 30, 1996 and is included in the Company's
noninterest expense for the year ended September 30, 1996.
Under employment agreements with certain executive officers, certain events
leading to separation from the Company could result in cash payments totaling
approximately $969,000 as of September 30, 1996.
NOTE 12 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed financial statements for the parent company,
MFB Corp.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
-------------------------------------
1996 1995
ASSETS ---------------- -----------------
<S> <C> <C>
Cash and cash equivalents $ 887,580 $ 68,948
Interest-bearing deposits in other financial institutions - 948,366
Investment in Bank subsidiary 31,108,173 29,843,715
Note receivable from Bank subsidiary 4,750,000 5,750,000
Loan receivable from ESOP 893,651 1,100,000
Other assets 31,501 319,160
---------------- -----------------
Total assets $ 37,670,905 $ 38,030,189
================ =================
LIABILITIES
Accrued expenses and other liabilities $ 71,536 $ 31,591
SHAREHOLDERS' EQUITY 37,599,369 37,998,598
---------------- -----------------
Total liabilities and shareholders' equity $ 37,670,905 $ 38,030,189
================ =================
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 12 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended March 24 to
September 30, September 30, September 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income $ 74,390 $ 85,212 $ 53,924
Other expenses 153,973 132,605 68,230
---------------- ---------------- -----------------
Loss before income taxes and equity
in undistributed net income of Bank
subsidiary (79,583) (47,393) (14,306)
Income tax benefit 32,887 19,326 5,667
---------------- ---------------- -----------------
Loss before equity in undistributed net
income of Bank subsidiary (46,696) (28,067) (8,639)
Equity in undistributed net income of Bank
subsidiary 1,021,846 1,264,173 971,161
---------------- ---------------- -----------------
Net income $ 975,150 $ 1,236,106 $ 962,522
================ ================ =================
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 12 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended March 24 to
September 30, September 30, September 30,
1996 1995 1994
---- ---- ----
Cash flows from operating activities
<S> <C> <C> <C>
Net income $ 975,150 $ 1,236,106 $ 962,522
Adjustments to reconcile net income to
net cash from operating activities
Amortization, net of accretion - (4,237) -
Equity in undistributed net income of
Bank subsidiary (1,021,846) (1,264,173) (971,161)
Net change in other assets 287,659 (317,424) (1,736)
Net change in accrued expenses and
other liabilities 40,417 27,738 3,853
--------------- --------------- ----------------
Net cash provided by (used in)
operating activities 281,380 (321,990) (6,522)
Cash flows from investing activities
Net change in interest-bearing deposits
in other financial institutions 948,366 - -
Loan to ESOP - - (1,400,000)
Principal repayments on loan receivable
from ESOP 206,349 200,000
100,000
Loan to Bank subsidiary - - (6,750,000)
Principal repayments on note receivable
from Bank subsidiary 1,000,000 1,000,000 -
Investment in Bank subsidiary - - (9,226,665)
Purchase of securities - (4,945,231) (12,490,918)
Proceeds from maturities of securities - 5,400,000 11,092,020
--------------- --------------- ----------------
Net cash provided by (used in) investing
activities 2,154,715 1,654,769 (18,675,563)
Cash flows from financing activities
Proceeds from stock issue, net of conversion
costs and stock acquired by ESOP and RRP - - 20,326,665
Purchase of MFB Corp. common stock (1,499,024) (1,530,486) (1,377,925)
Cash dividends paid (118,439) - -
--------------- --------------- ----------------
Net cash provided by (used in)
financing activities (1,617,463) (1,530,486) 18,948,740
--------------- --------------- ----------------
Net change in cash and cash equivalents 818,632 (197,707) 266,655
Cash and cash equivalents at beginning
of period 68,948 266,655 -
--------------- --------------- ----------------
Cash and cash equivalents at end of period $ 887,580 $ 68,948 $ 266,655
=============== =============== ================
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair values and the related carrying
amounts of the Company's financial instruments at September 30, 1996 and 1995.
Items which are not financial instruments are not included.
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5
------- -------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,734,388 $ 1,734,000 $ 7,454,051 $ 7,454,000
Interest-bearing time deposits
in other financial institutions 495,000 495,000 1,880,000 1,882,000
Securities available for sale 66,762,558 66,763,000 - -
Securities held to maturity - - 52,022,355 51,704,000
FHLB stock 1,336,100 1,336,000 1,270,800 1,271,000
Loans receivable, net of
allowance for loan losses 152,052,092 152,341,000 121,181,162 121,857,000
Accrued interest receivable 818,014 818,000 818,108 818,000
Noninterest bearing demand
deposits (1,942,145) (1,942,000) (743,000) (743,000)
Savings, NOW and MMDA
deposits (34,779,548) (34,780,000) (34,687,208) (34,687,000)
Other time deposits (122,242,796) (122,579,000) (109,121,562) (109,607,000)
FHLB advances (24,500,000) (24,337,000) - -
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of September 30, 1996 and 1995. The estimated fair
value for cash and cash equivalents is considered to approximate cost. The
estimated fair value of interest-bearing time deposits in other financial
institutions is based upon estimates of the rate the Company would receive on
such deposits at September 30, 1996 and 1995, applied for the time period until
maturity. The estimated fair value for securities available for sale and
securities held to maturity, is based upon quoted market values for the
individual securities or for equivalent securities. The estimated fair value for
loans receivable is based upon estimates of the difference in interest rates the
Company would charge the borrowers for similar such loans with similar
maturities made at September 30, 1996 and 1995, applied for an estimated time
period until the loan is assumed to reprice or be paid. In addition, when
computing the estimated fair value for loans receivable, the allowance for loan
losses was subtracted from the calculated fair value for consideration of credit
issues. The estimated fair value for FHLB stock, accrued interest receivable,
noninterest bearing demand deposits, savings, NOW and MMDA deposits is based
upon their carrying value. The estimated fair value for other time deposits as
well as FHLB advances is based upon estimates of the rate the Company would pay
on such deposits or borrowings at September 30, 1996 and 1995, applied for the
time period until maturity. The estimated fair value of other financial
instruments and off-balance-sheet loan commitments approximate cost and are not
considered significant to this presentation.
- --------------------------------------------------------------------------------
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were the Company to have
disposed of such items at September 30, 1996 and 1995, the estimated fair values
would necessarily have been achieved at that date, since market values may
differ depending on various circumstances. The estimated fair values at
September 30, 1996 and 1995 should not necessarily be considered to apply at
subsequent dates.
In addition, other assets and liabilities of the Company that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not recognized
in financial statements nevertheless may have value but are not included in the
above disclosures. Excluded, among other items, are the estimated earning power
of core deposit accounts, the trained work force, customer goodwill and similar
items.
NOTE 14 - IMPACT OF NEW ACCOUNTING STANDARDS
Several new accounting standards have been issued by the FASB that will apply
for the year ending September 30, 1997. SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of,"
requires a review of long-term assets for impairment of recorded value and
resulting write-downs if the value is impaired. SFAS No. 122, "Accounting for
Mortgage Servicing Rights," requires recognition of an asset when servicing
rights are retained on in-house originated loans that are sold. SFAS No. 123,
"Accounting for Stock-Based Compensation," encourages, but does not require,
entities to use a "fair value based method" to account for stock-based
compensation plans and requires disclosure of the pro forma effect on net income
and on earnings per share had the accounting been adopted. SFAS No. 125,
"Accounting for Transfer and Servicing of Financial Assets and Extinguishment of
Liabilities," provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities and requires a
consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred and derecognizes liabilities when extinguished. SFAS No. 125 also
supersedes SFAS No. 122, and requires that servicing assets and liabilities be
subsequently measured by amortization in proportion to and over the period of
estimated net servicing income or loss and requires assessment for asset
impairment or increased obligation based on their fair values. SFAS No. 125
applies to transfers and extinguishments occurring after December 31, 1996, and
early or retroactive application is not permitted. Upon adoption, these
statements are not expected to have a material effect on the Company's
consolidated financial position or results of operations.
- --------------------------------------------------------------------------------
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 15 - ADOPTION OF PLAN OF CONVERSION
The Bank completed a conversion from a mutual to a stock savings bank on March
24, 1994. Simultaneous with the conversion was the formation of the Company,
incorporated in the State of Indiana. The initial issuance of shares of common
stock in the Company on March 24, 1994 was 2,302,351 shares at $10 per share,
resulting in proceeds net of costs of $22,426,665, and was accomplished through
an offering to the Bank's tax-qualified ESOP, RRPs, eligible account holders of
record, and other members of the Bank. Costs associated with the conversion and
stock offering amounted to $596,845, and were accounted for as a reduction of
the proceeds from the issuance of common stock of the Company. Upon closing of
the stock offering, the Company purchased all common shares issued by the Bank.
At the time of the conversion, the Company established a liquidation account in
an amount equal to its net worth as of the date of the latest consolidated
financial statements contained in the final offering circular used to sell the
common stock ($16,964,414 at September 30, 1993). The liquidation account will
be maintained for the benefit of eligible depositors, with deposits of at least
$50 as of the December 31, 1992 eligibility record date, who continue to
maintain their deposits in the Bank after the conversion. In the event of a
complete liquidation (and only in such an event), each eligible depositor will
be entitled to receive a liquidation distribution from the liquidation account,
in the proportionate amount of the then current adjusted balance of deposits
then held, before any liquidation distribution may be made with respect to the
stockholders. Except for the repurchase of stock and payment of dividends by the
Bank, the existence of the liquidation account will not restrict the use or
application of net worth. The Bank has not recalculated the liquidation account
balance which would currently be less than the initial $16,964,414 amount. If
the liquidation account balance was unchanged from the initial amount, the Bank
would be subject to a divided limitation of approximately $3,800,000 as of
September 30, 1996.
- --------------------------------------------------------------------------------
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 16 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
..............Year Ended September 30, 1996..............
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $ 3,215 $ 3,400 $ 3,633 $ 3,934
Interest expense 1,834 1,932 2,050 2,241
----------- ----------- ----------- -----------
Net interest income 1,381 1,468 1,583 1,693
Provision for loan losses 8 7 8 7
----------- ----------- ----------- -----------
Net interest income after provision for loan
losses 1,373 1,461 1,575 1,686
Noninterest income 83 121 91 67
Noninterest expense 871 924 963 2,077
----------- ----------- ----------- -----------
Income before income taxes 585 658 703 (324)
Income tax expense 233 262 279 (127)
----------- ----------- ----------- ----------
Net income $ 352 $ 396 $ 424 $ (197)
=========== =========== =========== ==========
Earnings per common and common
equivalent share $ .17 $ .20 $ .22 $ (.10)
========== =========== =========== ==========
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
NOTE 16 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)
<TABLE>
<CAPTION>
..............Year Ended September 30, 1995..............
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $ 3,051 $ 3,063 $ 3,125 $ 3,145
Interest expense 1,590 1,636 1,743 1,820
----------- ----------- ----------- -----------
Net interest income 1,461 1,427 1,382 1,325
Provision for loan losses 8 8 7 7
----------- ----------- ----------- -----------
Net interest income after provision for loan
losses 1,453 1,419 1,375 1,318
Noninterest income 75 81 80 82
Noninterest expense 936 956 935 1,000
----------- ----------- ----------- -----------
Income before income taxes 592 544 520 400
Income tax expense 235 217 207 161
----------- ----------- ----------- -----------
Net income $ 357 $ 327 $ 313 $ 239
=========== =========== =========== ===========
Earnings per common and common
equivalent share $ .17 $ .16 $ .15 $ .11
========== =========== =========== ==========
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
DIRECTORS AND OFFICERS
MFB Corp. and Mishawaka Federal Savings Directors
M. Gilbert Eberhart (age 62) has served as Secretary of the Bank since
1987. He is also a dentist based in Mishawaka.
Thomas F. Hums (age 63) served as President and Chief Executive Officer
of the Bank from 1972 until September, 1995. He also served as President and
Chief Executive Officer of Mishawaka Financial from 1975 until September, 1995.
Jonathan E. Kintner (Age 53) is an optometrist based in Mishawaka.
Michael J. Marien (Age 49) is a Sales Representative with Signode
Corporation, a division of ITW.
Marian K. Torian (age 75) has served as Chairman of the Bank and of
Mishawaka Financial since 1977. She also served as a teacher with School City of
Mishawaka.
Charles J. Viater (age 41) has served as President and Chief Executive
Officer of the Bank and Mishawaka Financial since September, 1995. He previously
served as Executive Vice President for Amity Federal Bank and Chief Financial
Officer of Amity Bancshares, Inc. beginning in December, 1990.
Reginald H. Wagle (age 54) has served as Vice President of Memorial
Health Foundation since 1992. Until 1992, he was a free-lance political
consultant and until 1991, he also served as District Director for the Office of
United States Representative John P.
Hiler, Third Congressional District of Indiana.
MISHAWAKA FEDERAL SAVINGS OFFICERS
Charles J. Viater Timothy C. Boenne
President and Chief Executive Officer* Vice President and
Controller
M. Gilbert Eberhart Michael J. Portolese
Secretary* Vice President
William L. Stockton, Jr.
Vice President
* Holds same position with MFB Corp.
95
<PAGE>
SHAREHOLDER INFORMATION
Market Information
The common stock of MFB Corp. is traded on the National Association of
Securities Dealers Automated Quotation System, National Market System, under the
symbol "MFBC." As of September 30, 1996, there were approximately 900
shareholders of record and the Company estimates that, as of that date, there
were an additional 811 beneficial shareholders in "street" name. The following
table sets forth market price information for the Company's common stock for the
periods indicated.
High Low
Fiscal Quarters Ended Bid Bid
December 31, 1995 16.25 14.75
March 31, 1996 15.25 13.75
June 30, 1996 14.75 13.75
September 30, 1996 19.00 13.75
Transfer Agent and Registrar Special Counsel
Registrar and Transfer Co. Barnes & Thornburg
10 Commerce Drive 1313 Merchants Building
Cranford, New Jersey 07016 11 South Meridian Street
Indianapolis, Indiana 46204
Independent Auditors
Crowe, Chizek & Co.
330 E. Jefferson Boulevard
South Bend, Indiana 46624
Shareholder and General Inquiries
The Company is required to file an Annual Report on Form 10-K
for its fiscal year ended September 30, 1996 with the Securities and Exchange
Commission. Copies of this annual report may be obtained without charge upon
written request to:
Charles J. Viater
President and Chief Executive Officer
MFB Corp.
121 South Church Street
P.O. Box 528
Mishawaka, Indiana 46546
Office Locations
Main Office Branch Office Mortgage Office
121 S. Church St. 411 W. McKinley Ave. 227 S. Main St. Suite 110
Mishawaka, IN 46544 Mishawaka, IN 46545 Elkhart, IN 46516
Branch Office Branch Office
402 W. Cleveland Rd. 2427 Mishawaka Ave.
Mishawaka, IN 46545 South Bend, IN 46615
96
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference of our report, dated
November 4, 1996, on the consolidated financial statements of MFB Corp. which
appears in MFB Corp.'s Annual Report on Form 10-K for the year ended September
30, 1996 in MFB Corp.'s Registration Statement on Form S-8 (Registration No.
33-84340)
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
South Bend, Indiana
December 26, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED
SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000916396
<NAME> MFB Corp.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-1-1995
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 1,734
<INT-BEARING-DEPOSITS> 495
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 1,336
<INVESTMENTS-MARKET> 66,763
<LOANS> 152,372
<ALLOWANCE> 340
<TOTAL-ASSETS> 225,809
<DEPOSITS> 158,964
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,745
<LONG-TERM> 24,500
<COMMON> 18,317
0
0
<OTHER-SE> 19,283
<TOTAL-LIABILITIES-AND-EQUITY> 225,809
<INTEREST-LOAN> 10,246
<INTEREST-INVEST> 3,514
<INTEREST-OTHER> 422
<INTEREST-TOTAL> 14,182
<INTEREST-DEPOSIT> 7,528
<INTEREST-EXPENSE> 529
<INTEREST-INCOME-NET> 6,125
<LOAN-LOSSES> 30
<SECURITIES-GAINS> 4
<EXPENSE-OTHER> 4,835
<INCOME-PRETAX> 1,622
<INCOME-PRE-EXTRAORDINARY> 1,622
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 975
<EPS-PRIMARY> .49
<EPS-DILUTED> .48
<YIELD-ACTUAL> 3.11
<LOANS-NON> 0
<LOANS-PAST> 198
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 310
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 340
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 25
</TABLE>
