SCHEDULE 14A
Information Required in Proxy Statement
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant: Yes.
Filed by a Party other than the Registrant: No.
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as Permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
MFB Corp.
(Name Of Registrant As Specified In Its Charter)
MFB Corp.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11
(1) Title of each class of securities to which transaction
applies: N/A
(2) Aggregate number of securities to which transaction
applies: N/A
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth
the amount on which the filing fee is calculated and
state how it was determined): N/A
(4) Proposed maximum aggregate value of transaction: N/A
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing. N/A
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
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(4) Date Filed:
<PAGE>
MFB CORP.
121 South Church Street
Mishawaka, Indiana 46544
(219) 255-3146
----------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
----------------------------------------
To Be Held On January 20, 1998
Notice is hereby given that the Annual Meeting of Shareholders of MFB Corp.
(the "Holding Company") will be held at the McKinley Branch Office of Mishawaka
Federal Savings at 411 W. McKinley Avenue, Mishawaka, Indiana 46545, on Tuesday,
January 20, 1998, at 7:00 p.m., Eastern Standard Time.
The Annual Meeting will be held for the following purposes:
1. Election of Directors. Election of two directors of the Holding
Company to serve three-year terms expiring in 2001.
2. Approval of Stock Option Plan. Approval and ratification of the MFB
Corp. 1997 Stock Option Plan (the "Option Plan").
3. Ratification of Auditors. Ratification of the appointment of Crowe,
Chizek and Company LLP as auditors for MFB Corp. for the fiscal year
ending September 30, 1998.
4. Other Business. Such other matters as may properly come before the
meeting or any adjournment thereof.
Shareholders of record at the close of business on December 1, 1997, are
entitled to vote at the meeting or any adjournment thereof.
We urge you to read the enclosed Proxy Statement carefully so that you may
be informed about the business to come before the meeting, or any adjournment
thereof. At your earliest convenience, please sign and return the accompanying
proxy in the postage-paid envelope furnished for that purpose.
A copy of our Annual Report for the fiscal year ended September 30, 1997,
is enclosed. The Annual Report is not a part of the proxy soliciting material
enclosed with this letter.
By Order of the Board of Directors
/s/ Charles J. Viater
Charles J. Viater, President and
Chief Executive Officer
Mishawaka, Indiana
December 15, 1997
IT IS IMPORTANT THAT THE PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT
YOU PLAN TO BE PRESENT IN PERSON AT THE ANNUAL MEETING, PLEASE SIGN, DATE AND
COMPLETE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
<PAGE>
MFB CORP.
121 South Church Street
Mishawaka, Indiana 46544
(219) 255-3146
---------------
PROXY STATEMENT
---------------
FOR
ANNUAL MEETING OF SHAREHOLDERS
January 20, 1998
This Proxy Statement is being furnished to the holders of common stock,
without par value (the "Common Stock"), of MFB Corp. (the "Holding Company"), an
Indiana corporation, in connection with the solicitation of proxies by the Board
of Directors of the Holding Company to be voted at the Annual Meeting of
Shareholders to be held at 7:00 p.m., Eastern Standard Time, on January 20,
1998, at the McKinley Branch Office of MFB Financial at 411 W. McKinley Avenue,
Mishawaka, Indiana, and at any adjournment of such meeting. The principal asset
of the Holding Company consists of 100% of the issued and outstanding shares of
common stock, $.01 par value per share, of MFB Financial. This Proxy Statement
is expected to be mailed to the shareholders on or about December 15, 1997.
The proxy solicited hereby, if properly signed and returned to the Holding
Company and not revoked prior to its use, will be voted in accordance with the
instructions contained therein. If no contrary instructions are given, each
proxy received will be voted for each of the matters described below and, upon
the transaction of such other business as may properly come before the meeting,
in accordance with the best judgment of the persons appointed as proxies.
Any shareholder giving a proxy has the power to revoke it at any time
before it is exercised by (i) filing with the Secretary of the Holding Company
written notice thereof (M. Gilbert Eberhart, 121 South Church Street, Mishawaka,
Indiana 46544), (ii) submitting a duly executed proxy bearing a later date, or
(iii) by appearing at the Annual Meeting and giving the Secretary notice of his
or her intention to vote in person. Proxies solicited hereby may be exercised
only at the Annual Meeting and any adjournment thereof and will not be used for
any other meeting.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Only shareholders of record at the close of business on December 1, 1997
("Voting Record Date"), will be entitled to vote at the Annual Meeting. On the
Voting Record Date, there were 1,627,767 shares of the Common Stock issued and
outstanding, and the Holding Company had no other class of equity securities
outstanding. Each share of Common Stock is entitled to one vote at the Annual
Meeting on all matters properly presented at the Annual Meeting. The holders of
over 50% of the outstanding shares of Common Stock as of the Voting Record Date
must be present in person or by proxy at the Annual Meeting to constitute a
quorum. In determining whether a quorum is present, shareholders who abstain,
cast broker non-votes, or withhold authority to vote on one or more director
nominees will be deemed present at the Annual Meeting.
<PAGE>
The following table sets forth certain information regarding the beneficial
ownership at the Common Stock as of December 1, 1997, by each person who is
known by the Holding Company to own beneficially 5% or more of the Common Stock.
Unless otherwise indicated, the named beneficial owner has sole voting and
dispositive power with respect to the shares.
<TABLE>
<CAPTION>
Number of Shares
Name and Address of of Common Stock Percent of
Beneficial Owner (1) Beneficially Owned Class (2)
- ------------------------------------------ -------------------- -------------
<S> <C> <C>
First Manhattan Co., General Partner 100,883 (3) 6.20%
First Save Associates, L.P. and
Second First Save Associates, L.P. (3)
437 Madison Avenue
New York, New York 10022
Valley American Bank and 134,399 (4) 8.26%
Trust Company, Trustee
101 North Main Street
P.O. Box 328
South Bend, Indiana 46624-0328
John Hancock Mutual Life Insurance Company 90,000 (5) 5.53%
John Hancock Subsidiaries, Inc.
John Hancock Asset Management
The Berkeley Financial Group
John Hancock Advisers, Inc. (5)
101 Huntington Avenue
Boston, Massachusetts 02199
</TABLE>
(1) The information in this chart is based on Schedule 13D and 13G reports
filed by the above-listed persons with the Securities and Exchange
Commission and subsequent communications from such persons. It does not
reflect any changes in those shareholdings which may have occurred since
the date of such filings or communications.
(2) Based upon 1,627,767 shares of Common Stock outstanding which does not
include options for 190,350 shares of Common Stock granted to certain
directors, officers and employees of the Holding Company and MFB Financial.
(3) First Manhattan Co. is a securities broker and dealer and investment
advisor. First Manhattan Co. is the general partner of each of the limited
partnerships which own these shares. First Manhattan Co. disclaims that
First Save Associates, L.P. and Second First Save Associates, L.P., both of
which are New Jersey limited partnerships, constitute a group. First Save
Associates, L.P. has sole voting and dispositive power with respect to
50,450 of he shares listed above. Second Save Associates, L.P. has sole
voting and dispositive power with respect to 50,433 of the shares listed
above.
(4) These shares are held by the Trustee of the Holding Company's Employee
Stock Ownership Plan. The employees participating in that Plan are entitled
to instruct the Trustee how to vote shares held in their accounts under the
Plan. Unallocated shares held in a suspense account under the Plan are
required under the Plan terms to be voted by the Trustee in the same
proportion as allocated shares are voted.
(5) Sole voting and dispositive power with respect to these shares is held by
John Hancock Advisers, Inc., a registered investment adviser. The other
listed companies directly or indirectly control John Hancock Advisers, Inc.
<PAGE>
PROPOSAL I -- ELECTION OF DIRECTORS
The Board of Directors consists of seven members. The By-Laws provide that
the Board of Directors is to be divided into three classes as nearly equal in
number as possible. The members of each class are to be elected for a term of
three years and until their successors are elected and qualified. One class of
directors is to be elected annually. Directors must have their principal
domicile in St. Joseph County, Indiana, must have had a loan or deposit
relationship with MFB Financial for a continuous period of 12 months prior to
their nomination to the board, and non-employee directors must have served as a
member of a civic or community organization based in St. Joseph County, Indiana
for at least a continuous period of 12 months during the five years prior to
their nomination to the Board. The nominees for director this year are Marian K.
Torian and Reginald H. Wagle, each of whom is a current director of the Holding
Company. If elected by the shareholders at the Annual Meeting, the terms of Mrs.
Torian and Mr. Wagle will expire in 2001.
Unless otherwise directed, each proxy executed and returned by a
shareholder will be voted for the election of the nominees listed below. If any
person named as a nominee should be unable or unwilling to stand for election at
the time of the Annual Meeting, the proxy holders will nominate and vote for a
replacement nominee recommended by the Board of Directors. At this time, the
Board of Directors knows of no reason why the nominees listed below may not be
able to serve as directors if elected.
The following table sets forth certain information regarding the nominees
for the position of director of the Holding Company, including the number and
percent of shares of Common Stock beneficially owned by such persons as of the
Voting Record Date. Unless otherwise indicated, each nominee has sole investment
and/or voting power with respect to the shares shown as beneficially owned by
him. No nominee for director is related to any other nominee for director or
executive officer of the Holding Company by blood, marriage, or adoption, and
there are no arrangements or understandings between any nominee and any other
person pursuant to which such nominee was selected. The table also sets forth
the number of shares of Holding Company Common Stock beneficially owned by all
directors and executive officers of the Holding Company as a group.
<TABLE>
<CAPTION>
Director Common Stock
Director of of the Beneficially
Expiration of MFB Holding Owned as of
Term as Financial Company December 1, Percentage
Name Director Since Since 1997 (1) of Class
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Director Nominees:
- ------------------
Marian K. Torian 2001 1975 1994 25,400(2) 1.55%
Reginald H. Wagle 2001 1982 1994 34,100(3) 2.08%
Directors Continuing in Office:
- -------------------------------
M. Gilbert Eberhart, DDS 2000 1979 1994 41,900(3) 2.56%
Thomas F. Hums 1996 1961 1994 73,354(4) 4.37%
Dr. Jonathan E. Kintner, OD 2000 1977 1994 40,420(3) 2.46%
Michael J. Marien 1996 1987 1994 50,300(3) 3.07%
Charles J. Viater 1996 1995 1995 33,081(5) 2.03%
All directors and executive officers
as a group (10 persons) 364,537(6) 20.52%
</TABLE>
<PAGE>
(1) Based upon information furnished by the respective director nominees. Under
applicable regulations, shares are deemed to be beneficially owned by a
person if he or she directly or indirectly has or shares the power to vote
or dispose of the shares, whether or not he or she has any economic power
with respect to the shares. Includes shares beneficially owned by members
of the immediate families of the director nominees residing in their homes.
(2) Of these shares, 11,000 shares are subject to a stock option granted under
the MFB Corp. Stock Option Plan (the "Option Plan"), and 1,960 are held
under MFB Financial's Recognition and Retention Plan and Trust (the "RRP").
(3) Of these shares, 12,000 shares are subject to a stock option granted under
the Option Plan and 1,960 are held under the RRP.
(4) Of these shares, 50,000 are subject to a stock option granted under the
Option Plan.
(5) Includes 2,954 whole shares allocated to Mr. Viater under the MFB Financial
Employee Stock Ownership Plan and Trust (the"ESOP"), 627 whole shares
allocated to his account under the MFB Financial Employees' Savings &
Profit Sharing Plan and Trust (the "401(k) Plan"), and 10,000 shares
subject to a stock option granted under the Option Plan. Does not include
20,000 shares subject to stock options granted under the Option Plan which
are not exercisable within 60 days of the Voting Record Date.
(6) The total of such shares includes 149,000 shares subject to stock options
granted under the Option Plan, 14,600 shares which are held under the RRP,
12,651 shares allocated to such persons under the ESOP, and 1,192 shares
allocated to such persons under the 401(k) Plan.
Presented below is certain information concerning the directors and
director nominees of the Holding Company:
M. Gilbert Eberhart, DDS (age 63) has served as Secretary of MFB Financial
since 1987. He is also a dentist based in Mishawaka.
Thomas F. Hums (age 64) is retired and perviously served as President and
Chief Executive Officer of the Holding Company and MFB Financial.
Dr. Jonathan E. Kintner, OD (age 54) is an optometrist based in Mishawaka.
Michael J. Marien (age 50) is a Sales Representative with Signode
Corporation, a division of ITW.
Marian K. Torian (age 76) serves as the Holding Company's Chairman of the
Board and has served as Chairman of MFB Financial and of MFB Financial Services,
Inc. since 1977. She also served as a teacher with School City of Mishawaka.
Charles J. Viater (age 43) has served as the President and Chief Executive
Officer of the Holding Company and of MFB Financial since September 1, 1995.
During the prior five years, he served as Executive Vice President and Chief
Financial Officer of Amity Federal Savings (Tinley Park, Illinois) which was
acquired by another financial institution in 1995.
Reginald H. Wagle (age 55) 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.
Christine A. Lauber serves as a non-voting advisory director of the Holding
Company. Ms. Lauber serves for a one-year term, running from the date of the
Annual Meeting, is entitled to attend meetings of the Holding Company's Board of
Directors and receives advisory director fees of $4,000 per year and $425 per
Board meeting attended. Ms. Lauber is a certified public accountant in private
practice in South Bend, Indiana.
THE DIRECTORS WILL BE ELECTED UPON RECEIPT OF A PLURALITY OF VOTES CAST AT
THE ANNUAL SHAREHOLDERS MEETING. PLURALITY MEANS THAT INDIVIDUALS WHO RECEIVE
THE LARGEST NUMBER OF VOTES CAST ARE ELECTED UP TO THE MAXIMUM NUMBER OF
DIRECTORS TO BE CHOSEN AT THE MEETING. ABSTENTIONS, BROKER NON-VOTES, AND
INSTRUCTIONS ON THE ACCOMPANYING PROXY TO WITHHOLD AUTHORITY TO VOTE FOR ONE OR
MORE OF THE NOMINEES WILL RESULT IN THE RESPECTIVE NOMINEE RECEIVING FEWER
VOTES. HOWEVER, THE NUMBER OF VOTES OTHERWISE RECEIVED BY THE NOMINEE WILL NOT
BE REDUCED BY SUCH ACTION.
<PAGE>
The Board of Directors and its Committees
During the fiscal year ended September 30, 1997, the Board of Directors of
the Holding Company met or acted by written consent twelve times. No director
attended fewer than 75% of the aggregate total number of meetings during the
last fiscal year of the Board of Directors of the Holding Company held while he
served as director and of meetings of committees which he served during that
fiscal year. The Board of Directors of the Holding Company has an Audit
Committee and a Stock Compensation Committee. All committee members are
appointed by the Board of Directors.
The Audit Committee, comprised of all members of the Board of Directors,
recommends the appointment of the Holding Company's independent accountants, and
meets with them to outline the scope and review the results of such audit. The
Audit Committee held one meeting during the fiscal year ended September 30,
1997.
The Stock Compensation Committee administers the Option Plan and the RRPs.
The members of that Committee are Mrs. Torian and Messrs. Eberhart, Kintner,
Marien and Wagle. It held one meeting during the fiscal year ended September 30,
1997.
The Board of Directors nominated the slate of directors set forth in the
Proxy Statement. Although the Board of Directors of the Holding Company will
consider nominees recommended by shareholders, it has not actively solicited
recommendations for nominees from shareholders nor has it established procedures
for this purpose. Article III, Section 12 of the Holding Company's By-Laws
provides that shareholders entitled to vote for the election of directors may
name nominees for election to the Board of Directors but there are certain
requirements that must be satisfied in order to do so. Among other things,
written notice of a proposed nomination must be received by the Secretary of the
Holding Company not less than 120 days prior to the Annual Meeting; provided,
however, that in the event that less than 130 days' notice or public disclosure
of the date of the meeting is given or made to shareholders (which notice or
public disclosure includes the date of the Annual Meeting specified in the
Holding Company's By-Laws if the Annual Meeting is held on such date), notice
must be received not later than the close of business on the 10th day following
the day on which such notice of the date of the meeting was mailed or such
public disclosure was made.
Management Remuneration and Related Transactions
Remuneration of Named Executive Officer
During the fiscal year ended September 30, 1997, no cash compensation was
paid directly by the Holding Company to any of its executive officers. Each of
such officers was compensated by MFB Financial.
The following table sets forth information as to annual, long-term and
other compensation for services in all capacities to the Holding Company and its
subsidiaries for the last two fiscal years of the person who served as chief
executive officer of the Holding Company during the fiscal year ended September
30, 1997 (the "Named Executive Officer"). There were no other executive officers
of the Holding Company who earned over $100,000 in salary and bonuses during
that fiscal year.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards
Name Other All
and Annual Restricted Securities Other
Principal Fiscal Compen- Stock Underlying Compen-
Position Year Salary ($)(1) Bonus ($) sation($)(2) Awards($) Options(#) sation($)(3)
<S> <C> <C> <C> <C> <C> <C> <C>
Charles J. Viater 1997 $136,858 12,000 --- --- --- $25,193
President and Director 1996 $127,203 --- --- --- 10,000 (5) 4,750
1995 (4) $ 10,663 --- --- --- 20,000 (6) ---
</TABLE>
<PAGE>
(1) Includes fees received for service on MFB Financial's Board of Directors.
(2) The Named Executive Officer of the Holding Company receive certain
perquisites, but the incremental cost of providing such perquisites does
not exceed the lesser of $50,000 or 10% of the officer's salary and bonus.
(3) Includes MFB Financial's contributions to the MFB Financial Employee Stock
Ownership Plan and Trust allocable to the Named Executive Officer.
(4) Mr. Hums retired as President and Chief Executive Officer of the Holding
Company and Mr. Viater assumed those positions on September 1, 1995. Mr.
Viater was not previously employed by the Holding Company or MFB Financial.
(5) These options vest at the rate of 20% per year commencing August 9, 1997.
(6) These options vest at the rate of 20% per year commencing September 1,
1996.
Stock Options
The following table includes the number of shares covered by stock options
held by the Named Executive Officer as of September 30, 1997. Also reported are
the values for "in-the-money" options (options whose exercise price is lower
than the market value of the shares at fiscal year end) which represent the
spread between the exercise price of any such existing stock options and the
fiscal year-end market price of the stock. The Named Executive Officer did not
receive or exercise any stock options during the fiscal year.
Outstanding Stock Option Grants and Value Realized As Of 9/30/97
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised In-the-Money
Options at Fiscal Year End Options at Fiscal Year End (1)
Name Exercisable Unexercisable(2) Exercisable Unexercisable(2)
<S> <C> <C> <C> <C>
Charles J. Viater 10,000 20,000 $80,750 $160,500
</TABLE>
(1) Amounts reflecting gains on outstanding options are based on the average
between the high and low prices for the shares on September 30, 1997, which
was $23.125 per share.
(2) The shares represented could not be acquired by the Named Executive Officer
as of September 30, 1997.
Employment Contracts
MFB Financial has entered into a three-year employment contract with Mr.
Viater, the Holding Company's Named Executive Officer. The contract extends
annually for an additional one-year term to maintain its three-year term if the
Board of Directors of MFB Financial determines to so extend it, unless notice
not to extend is properly given by either party to the contract. Mr. Viater
receives salary under the contract equal to his current salary subject to
increases approved by the Board of Directors. The contract also provides, among
other things, for participation in other fringe benefits and benefit plans
available to MFB Financial's employees. Mr. Viater may terminate his employment
upon sixty days' written notice to MFB Financial. MFB Financial may discharge
him for cause (as defined in the contract) at any time or in certain events
specified by OTS regulations. If MFB Financial terminates Mr. Viater's
employment for other than cause or if Mr. Viater terminates his own employment
for cause (as defined in the contract), he will receive his base compensation
under the contract for an additional three years if the termination follows a
change of control of the Holding Company (as defined below). In addition, during
such period, he will continue to participate in MFB Financial's group insurance
plans or receive comparable benefits. Moreover, within a period of three months
after such termination following a change of control, Mr. Viater will have the
right to cause MFB Financial to purchase any stock options they hold for a price
equal to the fair market value (as defined in the contact) of the shares subject
to such options minus their option price. Mr. Viater's employment may not be
terminated by MFB Financial without cause. If the payments provided for in the
contract, together with any other payments made to Mr. Viater by MFB Financial,
are deemed to be payments in violation of the "golden parachute" rules of the
Code, such payments will be reduced to the largest amount which would not cause
MFB Financial to lose a tax deduction for such payments under those rules. As of
the date hereof, the cash compensation which would be paid under the contracts
if the three-year payment obligation were triggered under the contracts would be
$417,924 to Mr. Viater. For purposes of this employment contract, a change of
control of the Holding Company is generally an acquisition of control, as
defined in regulations issued under the Change in Bank Control Act and the
Savings and Loan Holding Company Act.
<PAGE>
The employment contracts provide MFB Financial protection of its
confidential business information and protection from competition by Mr. Viater
should he voluntarily terminate his employment without cause or be terminated by
MFB Financial for cause. Similar contracts have been entered into with respect
to three other executive officers of the Holding Company.
Compensation of Directors
All directors of MFB Financial receive an annual fee of $4,000, plus a fee
of $425 per Board meeting attended. Members of Board Committees, who are not
employees of MFB Financial, are paid a separate fee of $30 per meeting. As
Chairman of the Board of MFB Financial, Mrs. Torian receives additional
directors' fees of $2,600 per year.
Directors of the Holding Company are not currently paid directors' fees.
The Holding Company may, if it believes it is necessary to attract qualified
directors or otherwise beneficial to the Holding Company, adopt a policy of
paying directors' fees.
Transactions With Certain Related Persons
MFB Financial has followed a policy of offering to its directors and
executive officers real estate mortgage loans secured by their principal
residence and other loans. These loans are made in the ordinary course of
business with the same collateral, interest rates and underwriting criteria as
those of comparable transactions prevailing at the time and do not involve more
than the normal risk of collectibility or present other unfavorable features.
PROPOSAL II -- STOCK OPTION PLAN
The Board of Directors of the Holding Company adopted the MFB Corp. Stock
Option Plan (the "Option Plan") on August 19, 1997. The essential features of
the Option Plan are summarized below, but the Option Plan is set forth in full
in Exhibit A to this Proxy Statement, and all statements made in this summary
are qualified by reference to the full text of the Option Plan.
Purpose
The purpose of the Option Plan is to provide to certain directors, officers
and other key employees of the Holding Company and its subsidiaries (currently
approximately ten persons) a favorable opportunity to acquire Common Stock of
the Holding Company and thereby increase the incentive of such persons to work
for the success of the Holding Company and its subsidiaries and better enabling
such entities to attract or retain capable directors and executive personnel.
The Option Plan provides for the grant of both incentive stock options
(options that afford favorable tax treatment to recipients upon compliance with
certain restrictions and that do not normally result in tax deductions to the
Holding Company) and options that do not so qualify (non-qualified stock
options).
Administration
The Option Plan is administered, construed and interpreted by a committee
consisting of at least two members of the Holding Company's Board of Directors.
Currently, the Holding Company's Stock Compensation Committee administers the
Option Plan. The Stock Compensation Committee selects the individuals to whom
options or cash awards will be granted and determines the time of grant, the
number of shares of stock to be covered by each option, the amount of any cash
awards, the option price, the period within which the option may be exercised,
whether the option is an incentive stock option or non-qualified stock option,
and any other terms and conditions of the options or cash awards granted.
Members of the Stock Compensation Committee must be nonemployee directors of the
Holding Company. The current members of that Committee are set forth on page 4
of this Proxy Statement.
Reservation of Shares
<PAGE>
The Holding Company has reserved 150,000 shares of its Common Stock for
issuance upon exercise of options to be granted under the Option Plan. No stock
options have been granted under the Option Plan as yet. Shares issued under the
Option Plan may be authorized but unissued shares or treasury shares of the
Holding Company. In the event of corporate changes affecting the Holding
Company's Common Stock, such as reorganizations, recapitalizations, stock
splits, stock dividends, mergers, consolidations, liquidations, and
extraordinary distributions (consisting of cash, securities, or other assets),
the Stock Compensation Committee may make appropriate adjustments in the number
and kind of shares reserved under the Option Plan and in the option price under,
and the number and kind of shares covered by, outstanding options granted under
the Option Plan. Any shares subject to an option which expires or is terminated
before exercise will again be available for issuance under the Option Plan.
Options and cash awards may be granted to directors, officers (including
officers who are members of the Board of Directors) and other key employees of
the Holding Company and its subsidiaries who are materially responsible for the
management or operation of the business of the Holding Company or its
subsidiaries and have provided valuable services to the Holding Company or its
subsidiaries.
Such individuals may be granted more than one option under the Option Plan.
Terms of the Options
Stock Option Price. The price to be paid for shares of Common Stock upon
the exercise of each incentive stock option shall not be less than the fair
market value of such shares on the date on which the option is granted. However,
the Committee does have the discretion to award non-qualified stock options to
eligible employees and directors of the Holding Company or of its subsidiaries
at a price no less than 85% of the fair market value of the Common Stock on the
date the option is granted. Incentive stock options granted to holders of more
than 10% of the combined voting power of all classes of stock of the Holding
Company may be granted at an option price no less than 110% of the fair market
value of the stock on the date of grant.
Option Term. No option may have a term longer than ten years and one day
from the date grant. However, under the Internal Revenue Code of 1986, as
amended (the "Code"), incentive stock options may not have terms in excess of
ten years. Incentive stock options granted to holders of more than 10% of the
combined voting power of all classes of stock of the Holding Company may not
have terms in excess of five years.
Exercise of Option. The option price of each share of stock is to be paid
in full in cash at the time of exercise. Under certain circumstances, the Option
Plan permits optionees to deliver a notice to their broker to deliver to the
Holding Company the total option price in cash and the amount of any taxes to be
withheld from the optionee's compensation as a result of any withholding tax
obligation of the Holding Company. Payment of the option price may also be
effected by tendering whole shares of the Holding Company's Common Stock owned
by the Optionee and cash having a fair market value equal to the cash exercise
price of the shares with respect to which the option is being exercised. Options
may be exercisable in full at any time during their term or in such
installments, on a cumulative basis, as the Stock Compensation Committee may
determine, except that no option may be exercised at any time as to fewer than
100 shares unless the exercise is with respect to an entire residue of fewer
than 100 shares, and no option may be exercised during the first six months of
its term.
Exercise of Options by Other than Outside Directors. Except as provided
below, upon termination of an optionholder's employment by the Holding Company
and its subsidiaries, all rights under any options granted to him but not yet
exercised terminate. In the event that an optionee retires pursuant to any then
existing pension plan of the Holding Company or its subsidiaries, his option may
be exercised by him in whole or in part within three years after his retirement
until the expiration of the option term fixed by the Committee, whether or not
the option was otherwise exercisable by him at his date of retirement; provided,
however, that if he remains a director or director emeritus of the Holding
Company he may exercise such option until the later of (a) three years after his
retirement or (b) six months after he ceases to be a director or director
emeritus of the Holding Company. If an optionee's employment by the Holding
Company and its subsidiaries terminates by reason of permanent and total
disability, his option may be exercised by him in whole or in part within one
year after such termination of employment, whether or not the option was
otherwise exercisable by him at the time of such termination of employment. If
the optionee dies while employed by the Holding Company or its subsidiaries,
within three years after his retirement (or, if later, six months following his
termination of service as a director or director emeritus of the Holding
Company), or within one year after his termination of employment because of
permanent and total disability, his option may be exercised by his estate or by
the person or persons entitled thereto by will or by the applicable laws of
descent or distribution at any time within one year after the date of such
death, whether or not the option was otherwise exercisable by the optionee at
the date of his death. Notwithstanding the foregoing, in no event may any option
be exercised after the expiration of the option term set by the Stock
Compensation Committee.
<PAGE>
Exercise of Options by Outside Directors. Options granted to Outside
Directors terminate six months after the date such Outside Director ceases to be
a director and director emeritus of the Holding Company for any reason. If an
optionee who is an Outside Director ceases to be a director and a director
emeritus by reason of disability, any option granted to him may be exercised in
whole or in part within one year of such termination of service, whether or not
the option was otherwise exercisable by him at the time of such termination of
service. In the event of the death of an Outside Director while serving as a
director or director emeritus of the Holding Company, within six months after he
ceases to be a director and a director emeritus of the Holding Company, or
within one year after he ceases to be a director and a director emeritus of the
Holding Company by reason of disability, any option granted to him may be
exercised by his estate or by the person or persons entitled thereto by will or
by the applicable laws of descent or distribution at any time within one year
after the date of such death, whether or not the option was exercisable by the
optionee at the date of his death. Notwithstanding the foregoing, in no event
may any option be exercised after the expiration of the option term set by the
Stock Compensation Committee.
Nontransferability of Option. Options may not be transferred except by will
or the laws of descent and distribution or pursuant to a qualified domestic
relations order. During the lifetime of an optionee, they may be exercised only
by him or his guardian or legal representative.
Maximum Incentive Stock Options. The aggregate fair market value of stock
with respect to which incentive stock options are exercisable for the first time
by an optionee during any calendar year under the Option Plan may not exceed
$100,000. For purposes of these computations, the fair market value of the
shares is to be determined as of the date the option is granted and computed in
the manner determined by the Stock Compensation Committee consistent with the
requirements of the Code. This limitation does not apply to non-qualified stock
options granted under the Option Plan.
Cash Awards. The Stock Compensation Committee may grant to optionees who
are granted non-qualified stock options the right to receive a cash amount which
is intended to reimburse the optionee for all or a portion of the federal, state
and local income taxes imposed upon the optionee as a result of the exercise of
a non-qualified stock option and the receipt of a cash award.
Replacement and Extension of the Terms of Options and Cash Awards. The
Stock Compensation Committee from time to time may permit an optionee under the
Option Plan or any other stock option plan adopted by the Holding Company or any
of its subsidiaries, to surrender for cancellation any unexercised outstanding
stock option and receive from the optionee's employing corporation in exchange
therefor an option for such number of shares of Common Stock as may be
designated by the Stock Compensation Committee. Such optionees may also be
granted related cash awards.
Change of Control. In the event of a change of control of the Holding
Company, and subject to certain limitations set forth in the Option Plan,
outstanding options which are not otherwise exercisable will become immediately
exercisable. Change of control, for this purpose, means an acquisition of
control of the Holding Company or MFB Financial within the meaning of 12 C.F.R.
ss. 574.4(a) (other than a change of control resulting from a trustee or other
fiduciary holding shares of Common Stock under an employee benefit plan of the
Holding Company or any of its subsidiaries). This provision could result in
adverse tax consequences to the Holding Company and to the optionee as a result
of the golden parachute provisions in the Code. Under the golden parachute
provisions, compensatory payments made by the Holding Company to an employee
following a change in control which are contingent on a change in control and
which exceed certain limits based on the average annual compensation of the
employee for the five calendar years before the change in control are not
deductible by the Holding Company and would subject the optionee to a 20% excise
tax. The value of any option which would become immediately exercisable
following a change in control (the spread between the then fair market value of
the option shares and the option price) could be deemed to be a compensatory
payment contingent on a change in control, and, thus, if such amount, when added
to any other payments made by the Holding Company to the employee which are
contingent on a change in control, would exceed the limits described above, the
excess amounts would be non-deductible and subject to the excise tax.
<PAGE>
The effect of this change of control provision which, under certain
circumstances, could accelerate benefits to optionholders may be to increase the
cost of a potential business combination or acquisition of control of the
Holding Company. To the extent that this increased cost is significant,
potential acquirors may be deterred from pursuing a transaction involving the
Holding Company, and its shareholders may be deprived of an opportunity to sell
their shares at a favorable price. However, the options which have been granted
to date under the Option Plan are fully exercisable within six months following
the date of the grant, so the change of control provision described above is not
expected to have a significant deterrent effect. Moreover, to the extent this
provision could operate to accelerate benefits under stock options awarded in
the future, the Board of Directors believes that the expected benefits of these
provisions in attracting and retaining qualified management personnel outweigh
these possible disadvantages.
Other Provisions
The Stock Compensation Committee may provide for such other terms,
provisions and conditions of an option as are not inconsistent with the Option
Plan. The Stock Compensation Committee may also prescribe, and amend, waive and
rescind rules and regulations relating to the Option Plan, may accelerate the
vesting of stock options or cash awards granted or made under the Option Plan,
may make amendments or modifications in the terms and conditions (including
exercisability) of the options relating to the effect of termination of
employment of the optionees, and may waive any restrictions or conditions
applicable to any option or the exercise thereof.
Amendment and Termination
The Board of Directors of the Holding Company may amend the Option Plan
from time to time, and, with the consent of the optionee, the terms and
provisions of his option or cash award, provided, however, that (1) no amendment
may, without the consent of an optionee, make any changes in any outstanding
option or cash award which would adversely affect the rights of the optionee and
(2) without approval of the holders of at least a majority of the shares of the
Holding Company voting in person or by proxy at a duly constituted meeting, or
adjournment thereof, the following changes in the Option Plan may not be made:
an increase in the number of shares reserved for issuance under the Option Plan
(except as permitted by the antidilutive provisions in the Option Plan); an
extension of the option terms to more than 10 years and one day from the date of
grant of the option; or a material modification of the class of employees
eligible to receive options or cash awards under the Option Plan. The Board of
Directors of the Holding Company may terminate the Option Plan at any time. In
any event, no incentive stock options may be granted under the Stock Option Plan
after January 19, 2008.
Federal Income Tax Consequences
The grant of incentive and non-qualified stock options will have no federal
tax consequences to the Holding Company or the optionee. Moreover, if an
incentive stock option is exercised (a) while the employee is employed by the
Holding Company or its subsidiaries, (b) within three months after the optionee
ceases to be an employee of the Holding Company or its subsidiaries, (c) after
the optionee's death, or (d) within one year after the optionee ceases to be an
employee of the Holding Company or its subsidiaries if the optionee's employment
is terminated because of permanent and total disability (within the meaning of
ss. 22(e)(3) of the Code), the exercise of the incentive stock option will
ordinarily have no federal income tax consequences to the Holding Company or the
optionee. However, the amount by which the fair market value of the shares at
the time of exercise exceeds the option price of the option will, along with
other specified items, be considered taxable income in the taxable year of the
optionee in which the option was exercised for purposes of determining the
applicability of the alternative minimum tax. As a result, the exercise of an
incentive stock option may subject an optionee to an alternative minimum tax
depending on that optionee's particular circumstances.
<PAGE>
On the other hand, the recipient of a non-qualified stock option generally
will realize taxable ordinary income at the time of exercise of his option in an
amount equal to the excess of the fair market value of the shares acquired at
the time of such exercise over the option price. A like amount is generally
deductible by the Holding Company for federal income tax purposes as of that
date, as long as the Holding Company withholds federal income tax with respect
to that taxable amount, assuming the optionholder's income is subject to income
tax withholding by the Holding Company. The Option Plan permits, under certain
circumstances, holders of non-qualified stock options to satisfy their
withholding obligation by having shares equal in value to the applicable
withholding taxes withheld from the shares which they would otherwise receive
upon the exercise of a non-qualified stock option.
Upon the sale of the shares acquired upon the exercise of an incentive
stock option no sooner than two years after the grant of the option and no
sooner than one year after receipt of the shares by the optionee, any capital
gain recognized would be taxed to the optionee at long-term or mid-term rates.
Upon the sale of shares acquired upon the exercise of an incentive stock option
prior to two years after the grant of an option or prior to one year after
receipt of the shares by the optionee, the optionee will generally recognize, in
the year of disposition, ordinary income equal to the lesser of (a) the spread
between the fair market value of the shares on the date of exercise and the
exercise price; and (b) the gain realized upon the disposition of those shares.
The Holding Company will be entitled to a deduction equal to the amount of
income recognized as ordinary income by the optionee, so long as the Holding
Company withholds federal income tax with respect to that taxable amount
(assuming the optionholder's income is subject to income tax withholding by the
Holding Company). If the spread is the basis for determining the amount of
ordinary income realized by the optionee, there will be additional long-term,
mid-term or short-term capital gain realized if the proceeds of such sale exceed
such spread.
Upon the subsequent sale of shares acquired upon exercise of a
non-qualified stock option, the optionholder will recognize long-term capital
gain or loss if the shares are deemed to have been held for more than 18 months,
mid-term capital gain or loss if the shares have been held for more than 12
months but less than 18 months, and short-term capital gain or loss in all other
cases. Currently, long-term capital gains for noncorporate taxpayers are
generally taxed at a maximum rate of 20% and mid-term capital gains for
noncorporate taxpayers are generally taxed at a maximum rate of 28%. Short-term
capital gains are taxed at the same rates as ordinary income.
Financial Accounting Consequences
At this time, neither the grant of incentive or non-qualified stock options
nor the issuance of shares upon exercise of such options will result in a
compensation expense charge to the Holding Company's earnings for financial
accounting purposes, except that for non-qualified stock options, earnings will
be charged with the excess, if any, of the fair market value on the date of
grant over the exercise price of the option shares. Option proceeds from the
exercise of these options and tax savings from non-qualified stock options
(other than tax savings resulting from charges to earnings made when the
exercise price is less than fair market value of the option shares on the date
of grant) are credited to capital. The Financial Accounting Standards Board (the
"FASB") has adopted rules that require increased disclosure about the value of
stock options in financial statements for the Holding Company, including their
impact on earnings.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE TO APPROVE AND
RATIFY THE OPTION PLAN. SUCH ACTION REQUIRES THE APPROVAL OF THE HOLDERS OF AT
LEAST A MAJORITY OF THE SHARES OF THE HOLDING COMPANY'S COMMON STOCK VOTING IN
PERSON OR BY PROXY AND ENTITLED TO VOTE AT THE ANNUAL MEETING, OR ANY
ADJOURNMENT THEREOF. ABSTENTIONS WILL BE INCLUDED IN THE NUMBER OF SHARES
PRESENT AND ENTITLED TO VOTE ON THE PROPOSAL AND ACCORDINGLY TREATED AS "NO"
VOTES, BUT BROKER NON-VOTES WILL BE EXCLUDED FROM THE NUMBER OF SHARES PRESENT
AND ENTITLED TO VOTE ON THE PROPOSAL AND WILL HAVE NO EFFECT ON THE VOTE.
<PAGE>
PROPOSAL III -- RATIFICATION OF AUDITORS
The Board of Directors proposes for the ratification of the shareholders at
the Annual Meeting the appointment of Crowe, Chizek and Company LLP, certified
public accountants, as independent auditors for the fiscal year ended September
30, 1998. Crowe, Chizek and Company LLP has served as auditors for MFB Financial
since 1977. A representative of Crowe, Chizek and Company LLP will be present at
the Annual Meeting with the opportunity to make a statement if he so desires. He
will also be available to respond to any appropriate questions shareholders may
have.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934, as amended (the
"1934 Act"), requires that the Holding Company's officers and directors and
persons who own more than 10% of the Holding Company's Common Stock file reports
of ownership and changes in ownership with the Securities and Exchange
Commission (the "SEC"). Officers, directors and greater than 10% shareholders
are required by SEC regulations to furnish the Holding Company with copies of
all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms received by it,
and/or written representations from certain reporting persons that no Forms 5
were required for those persons, the Holding Company believes that during the
fiscal year ended September 30, 1997, all filing requirements applicable to its
officers, directors and greater than 10% beneficial owners with respect to
Section 16(a) of the 1934 Act were satisfied in a timely manner; provided,
however that Marian K. Torian was approximately two months late in reporting the
exercise of a stock option for 1,000 shares and simultaneous sale on the open
market of 550 of those shares.
SHAREHOLDER PROPOSALS
Any proposal which a shareholder wishes to have presented at the next
Annual Meeting of the Holding Company and included in the Holding Company's
proxy statement, must be received at the main office of the Holding Company no
later than 120 days in advance of December 15, 1998. Any such proposal should be
sent to the attention of the Secretary of the Holding Company at 121 South
Church Street, Mishawaka, Indiana, 46544.
OTHER MATTERS
Management is not aware of any business to come before the Annual Meeting
other than those matters described in the Proxy Statement. However, if any other
matters should properly come before the Annual Meeting, it is intended that the
proxies solicited hereby will be voted with respect to those other matters in
accordance with the judgment of the persons voting the proxies.
The cost of solicitation of proxies will be borne by the Holding Company.
The Holding Company will reimburse brokerage firms and other custodians,
nominees and fiduciaries for reasonable expenses incurred by them in sending
proxy material to the beneficial owners of the Common Stock. In addition to
solicitation by mail, directors, officers, and employees of the Holding Company
may solicit proxies personally or by telephone without additional compensation.
Each shareholder is urged to complete, date and sign the proxy and return
it promptly in the enclosed envelope.
By Order of the Board of Directors
/s/ Charles J. Viater
Charles J. Viater, President
December 15, 1997
<PAGE>
MFB CORP.
1997 STOCK OPTION PLAN
1. Purpose. The purpose of the MFB Corp. 1997 Stock Option Plan (the
"Plan") is to provide to directors, officers and other key employees of MFB
Corp. (the "Holding Company") and its majority-owned and wholly-owned
subsidiaries (individually a "Subsidiary" and collectively the "Subsidiaries"),
including, but not limited to, MFB Financial ("MFB"), who are materially
responsible for the management or operation of the business of the Holding
Company or a Subsidiary and have provided valuable services to the Holding
Company or a Subsidiary, a favorable opportunity to acquire Common Stock,
without par value ("Common Stock"), of the Holding Company, thereby providing
them with an increased incentive to work for the success of the Holding Company
and its Subsidiaries and better enabling each such entity to attract and retain
capable directors and executive personnel.
2. Administration of the Plan. The Plan shall be administered,
construed and interpreted by a committee (the "Committee") consisting of at
least two members of the Board of Directors of the Holding Company, each of whom
is a "Non-Employee Director" within the meaning of the definition of that term
contained in Reg. ss. 16b-3 promulgated under the Securities Exchange Act of
1934, as amended (the "1934 Act"). The members of the Committee shall be
designated from time to time by the Board of Directors of the Holding Company.
The decision of a majority of the members of the Committee shall constitute the
decision of the Committee, and the Committee may act either at a meeting at
which a majority of the members of the Committee is present or by a written
consent signed by all members of the Committee. The Committee shall have the
sole, final and conclusive authority to determine, consistent with and subject
to the provisions of the Plan:
(a) the individuals (the "Optionees") to whom options or
successive options or cash awards shall be granted under the Plan;
(b) the time when options or cash awards shall be granted
hereunder;
(c) the number of shares of Common Stock to be covered under each
option and the amount of any cash awards;
(d) the option price to be paid upon the exercise of each option;
(e) the period within which each such option may be exercised;
(f) the extent to which an option is an incentive stock option or
a non-qualified stock option; and
(g) the terms and conditions of the respective agreements by
which options granted or cash awards shall be evidenced.
The Committee shall also have authority to prescribe, amend, waive, and rescind
rules and regulations relating to the Plan, to accelerate the vesting of any
stock options or cash awards made hereunder, to make amendments or modifications
in the terms and conditions (including exercisability) of the options relating
to the effect of termination of employment of the optionee (subject to the last
sentence of Section 12 hereof), to waive any restrictions or conditions
applicable to any option or the exercise thereof, and to make all other
determinations necessary or advisable in the administration of the Plan.
<PAGE>
3. Eligibility. The Committee may, consistent with the purposes of the
Plan, grant options and cash awards to officers, directors and other key
employees of the Holding Company or of a Subsidiary who in the opinion of the
Committee are from time to time materially responsible for the management or
operation of the business of the Holding Company or of a Subsidiary and have
provided valuable services to the Holding Company or a Subsidiary; provided,
however, that in no event may any employee who owns (after application of the
ownership rules in ss. 425(d) of the Internal Revenue Code of 1986, as amended
(the "Code")) shares of stock possessing more than 10 percent of the total
combined voting power of all classes of stock of the Holding Company or any of
its Subsidiaries be granted an incentive stock option hereunder unless at the
time such option is granted the option price is at least 110% of the fair market
value of the stock subject to the option and such option by its terms is not
exercisable after the expiration of five (5) years from the date such option is
granted. An individual who has been granted an option under the Plan (an
"Optionee"), if he is otherwise eligible, may be granted an additional option or
options if the Committee shall so determine.
4. Stock Subject to the Plan. There shall be reserved for issuance upon
the exercise of options granted under the Plan, 150,000 shares of Common Stock
of the Holding Company, which may be authorized but unissued shares or treasury
shares of the Holding Company. Subject to Section 7 hereof, the shares for which
options may be granted under the Plan shall not exceed that number. If any
option shall expire or terminate or be surrendered for any reason without having
been exercised in full, the unpurchased shares subject thereto shall (unless the
Plan shall have terminated) become available for other options under the Plan.
5. Terms of Options. Each option granted under the Plan shall be
subject to the following terms and conditions and to such other terms and
conditions not inconsistent therewith as the Committee may deem appropriate in
each case:
(a) Option Price. The price to be paid for shares of stock upon
the exercise of each option shall be determined by the Committee at the
time such option is granted, but such price in no event shall be less
than the fair market value, as determined by the Committee consistent
with Treas. Reg. ss. 20.2031-2 and any requirements of ss. 422A of the
Code, of such stock on the date on which such option is granted;
provided, however that the Committee shall have discretion to award
non-qualified stock options to eligible employees or directors of the
Holding Company or of a Subsidiary at a price no less than 85% of the
fair market value of the Common Stock on the date of grant, as
determined by the Committee consistent with Treas. Reg ss. 20.2031-2.
(b) Period for Exercise of Option. An option shall not be
exercisable after the expiration of such period as shall be fixed by
the Committee at the time of the grant thereof, but such period in no
event shall exceed ten (10) years and one day from the date on which
such option is granted; provided, that incentive stock options granted
hereunder shall have terms not in excess of ten (10) years and
non-qualified stock options shall be for a period not in excess of ten
(10) years and one day from the date of grant thereof. Options shall be
subject to earlier termination as hereinafter provided.
(c) Exercise of Options. The option price of each share of stock
purchased upon exercise of an option shall be paid in full at the time
of such exercise. Payment may be in (i) cash, (ii) if the Optionee may
do so in conformity with Regulation T (12 C.F.R. ss. 220.3(e)(4))
without violating ss. 16(b) or ss. 16(c) of the 1934 Act, pursuant to a
broker's cashless exercise procedure, by delivering a properly executed
exercise notice together with irrevocable instructions to a broker to
promptly deliver to the Holding Company the total option price in cash
and, if desired, the amount of any taxes to be withheld from the
Optionee's compensation as a result of any withholding tax obligation
of the Holding Company or any of its Subsidiaries, as specified in such
notice, or (iii) with the approval of the Committee, by tendering whole
shares of the Holding Company's Common Stock owned by the Optionee and
cash having a fair market value equal to the cash exercise price of the
shares with respect to which the option is being exercised. For this
purpose, any shares so tendered by an Optionee shall be deemed to have
<PAGE>
a fair market value equal to the mean between the highest and lowest
quoted selling prices for the shares on the date of exercise of the
option (or if there were no sales on such date the weighted average of
the means between the highest and lowest quoted selling prices for the
shares on the nearest date before and the nearest date after the date
of exercise of the options as prescribed by Treas. Reg. ss. 20-2031-2),
as reported in The Wall Street Journal or a similar publication
selected by the Committee. The Committee shall have the authority to
grant options exercisable in full at any time during their term, or
exercisable in such installments at such times during their term as the
Committee may determine; provided, however, that options shall not be
exercisable during the first six (6) months of their term. Installments
not purchased in earlier periods shall be cumulated and be available
for purchase in later periods. Subject to the other provisions of this
Plan, an option may be exercised at any time or from time to time
during the term of the option as to any or all whole shares which have
become subject to purchase pursuant to the terms of the option or the
Plan, but not at any time as to fewer than one hundred (100) shares
unless the remaining shares which have become subject to purchase are
fewer than one hundred (100) shares. An option may be exercised only by
written notice to the Holding Company, mailed to the attention of its
Secretary, signed by the Optionee (or such other person or persons as
shall demonstrate to the Holding Company his or their right to exercise
the option), specifying the number of shares in respect of which it is
being exercised, and accompanied by payment in full in either cash or
by check in the amount of the aggregate purchase price therefor, by
delivery of the irrevocable broker instructions referred to above, or,
if the Committee has approved the use of the stock swap feature
provided for above, followed as soon as practicable by the delivery of
the option price for such shares.
(d) Certificates. The certificate or certificates for the shares
issuable upon an exercise of an option shall be issued as promptly as
practicable after such exercise. An Optionee shall not have any rights
of a shareholder in respect to the shares of stock subject to an option
until the date of issuance of a stock certificate to him for such
shares. In no case may a fraction of a share be purchased or issued
under the Plan, but if, upon the exercise of an option, a fractional
share would otherwise be issuable, the Holding Company shall pay cash
in lieu thereof.
(e) Termination of Option. If an Optionee (other than a director
of the Holding Company or a Subsidiary who is not an employee of the
Holding Company or a Subsidiary (an "Outside Director")) ceases to be
an employee of the Holding Company and the Subsidiaries for any reason
other than retirement, permanent and total disability (within the
meaning of ss. 22(e)(3) of the Code), or death, any option granted to
him shall forthwith terminate. Leave of absence approved by the
Committee shall not constitute cessation of employment. If an Optionee
(other than an Outside Director) ceases to be an employee of the
Holding Company and the Subsidiaries by reason of retirement, any
option granted to him may be exercised by him in whole or in part
within three (3) years after the date of his retirement, whether or not
the option was otherwise exercisable at the date of his retirement;
provided, however, that if such employee remains a director or director
emeritus of the Holding Company, the option granted to him may be
exercised by him in whole or in part until the later of (a) three (3)
years after the date of his retirement, or (b) six months after his
service as a director or director emeritus of the Holding Company
terminates. (The term "retirement" as used herein means such
termination of employment as shall entitle such individual to early or
normal retirement benefits under any then existing pension plan of the
Holding Company or a Subsidiary.) If an Optionee (other than an Outside
Director) ceases to be an employee of the Holding Company and the
Subsidiaries by reason of permanent and total disability (within the
meaning of ss. 22(e)(3) of the Code), any option granted to him may be
exercised by him in whole or in part within one (1) year after the date
of his termination of employment by reason of such disability whether
or not the option was otherwise exercisable at the date of such
termination. Options granted to Outside Directors shall cease to be
<PAGE>
exercisable six (6) months after the date such Outside Director is no
longer a director or director emeritus of the Holding Company or a
Subsidiary for any reason other than death or disability. If an
Optionee who is an Outside Director ceases to be a director and a
director emeritus by reason of disability, any option granted to him
may be exercised in whole or in part within one (1) year after the date
the Optionee ceases to be a director and a director emeritus by reason
of such disability, whether or not the option was otherwise exercisable
at such date. In the event of the death of an Optionee while in the
employ or service as a director or director emeritus of the Holding
Company or a Subsidiary, or, if the Optionee is not an Outside
Director, within three (3) years after the date of his retirement (or,
if later, six months following his termination of service as a director
or director emeritus of the Holding Company or a Subsidiary) or within
one (1) year after the termination of his employment by reason of
permanent and total disability (within the meaning of ss. 22(e)(3) of
the Code), or, if the Optionee is an Outside Director, within six (6)
months after he is no longer a director and a director emeritus of the
Holding Company or of Subsidiary for reasons other than disability or,
within one (1) year after the termination of his service by reason of
disability, any option granted to him may be exercised in whole or in
part at any time within one (1) year after the date of such death by
the executor or administrator of his estate or by the person or persons
entitled to the option by will or by applicable laws of descent and
distribution until the expiration of the option term as fixed by the
Committee, whether or not the option was otherwise exercisable at the
date of his death. Notwithstanding the foregoing provisions of this
subsection (e), no option shall in any event be exercisable after the
expiration of the period fixed by the Committee in accordance with
subsection (b) above.
(f) Nontransferability of Option. No option may be transferred by
the Optionee otherwise than by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order as
defined by the Code or Title I of the Employee Retirement Income
Security Act, or the rules thereunder, and during the lifetime of the
Optionee options shall be exercisable only by the Optionee or his
guardian or legal representative.
(g) No Right to Continued Service. Nothing in this Plan or in any
agreement entered into pursuant hereto shall confer on any person any
right to continue in the employ or service of the Holding Company or
its Subsidiaries or affect any rights the Holding Company, a
Subsidiary, or the shareholders of the Holding Company may have to
terminate his service at any time.
(h) Maximum Incentive Stock Options. The aggregate fair market
value of stock with respect to which incentive stock options (within
the meaning of ss. 422A of the Code) are exercisable for the first time
by an Optionee during any calendar year under the Plan or any other
plan of the Holding Company or its Subsidiaries shall not exceed
$100,000. For this purpose, the fair market value of such shares shall
be determined as of the date the option is granted and shall be
computed in such manner as shall be determined by the Committee,
consistent with the requirements of ss. 422A of the Code.
(i) Agreement. Each option shall be evidenced by an agreement
between the Optionee and the Holding Company which shall provide, among
other things, that, with respect to incentive stock options, the
Optionee will advise the Holding Company immediately upon any sale or
transfer of the shares of Common Stock received upon exercise of the
option to the extent such sale or transfer takes place prior to the
later of (a) two (2) years from the date of grant or (b) one (1) year
from the date of exercise.
<PAGE>
(j) Investment Representations. Unless the shares subject to an
option are registered under applicable federal and state securities
laws, each Optionee by accepting an option shall be deemed to agree for
himself and his legal representatives that any option granted to him
and any and all shares of Common Stock purchased upon the exercise of
the option shall be acquired for investment and not with a view to, or
for the sale in connection with, any distribution thereof, and each
notice of the exercise of any portion of an option shall be accompanied
by a representation in writing, signed by the Optionee or his legal
representatives, as the case may be, that the shares of Common Stock
are being acquired in good faith for investment and not with a view to,
or for sale in connection with, any distribution thereof (except in
case of the Optionee's legal representatives for distribution, but not
for sale, to his legal heirs, legatees and other testamentary
beneficiaries). Any shares issued pursuant to an exercise of an option
may bear a legend evidencing such representations and restrictions.
6. Incentive Stock Options and Non-Qualified Stock Options. Options
granted under the Plan may be incentive stock options under ss. 422A of the Code
or non-qualified stock options, provided, however, that Outside Directors shall
be granted only non-qualified stock options. All options granted hereunder will
be clearly identified as either incentive stock options or non-qualified stock
options. In no event will the exercise of an incentive stock option affect the
right to exercise any non-qualified stock option, nor shall the exercise of any
non-qualified stock option affect the right to exercise any incentive stock
option. Nothing in this Plan shall be construed to prohibit the grant of
incentive stock options and non-qualified stock options to the same person,
provided, further, that incentive stock options and non-qualified stock options
shall not be granted in a manner whereby the exercise of one non-qualified stock
option or incentive stock option affects the exercisability of the other.
7. Adjustment of Shares. In the event of any change after the effective
date of the Plan in the outstanding stock of the Holding Company by reason of
any reorganization, recapitalization, stock split, stock dividend, combination
of shares, exchange of shares, merger or consolidation, liquidation,
extraordinary distribution (consisting of cash, securities, or other assets), or
any other change after the effective date of the Plan in the nature of the
shares of stock of the Holding Company, the Committee shall determine what
changes, if any, are appropriate in the number and kind of shares reserved under
the Plan, and the Committee shall determine what changes, if any, are
appropriate in the option price under and the number and kind of shares covered
by outstanding options granted under the Plan. Any determination of the
Committee hereunder shall be conclusive.
8. Cash Awards. The Committee may, at any time and in its discretion,
grant to any Optionee who is granted a non-qualified stock option the right to
receive, at such times and in such amounts as determined by the Committee in its
discretion, a cash amount ("cash award") which is intended to reimburse the
Optionee for all or a portion of the federal, state and local income taxes
imposed upon such Optionee as a consequence of the exercise of a non-qualified
stock option and the receipt of a cash award.
9. Replacement and Extension of the Terms of Options and Cash Awards.
The Committee from time to time may permit an Optionee under the Plan or any
other stock option plan heretofore or hereafter adopted by the Holding Company
or any Subsidiary to surrender for cancellation any unexercised outstanding
stock option and receive from his employing corporation in exchange therefor an
option for such number of shares of Common Stock as may be designated by the
Committee. Such Optionees also may be granted related cash awards as provided in
Section 8 hereof.
10. Change in Control. In the event of a Change in Control, all options
previously granted and still outstanding under the Plan regardless of their
terms, shall become exercisable. For this purpose, "Change in Control" shall
mean a change in control of the Holding Company or MFB, within the meaning of 12
C.F.R. ss. 574.4(a) (other than a change of control resulting from a trustee or
other fiduciary holding shares of Common Stock under an employee benefit plan of
the Holding Company or any of its Subsidiaries).
<PAGE>
11. Tax Withholding. Whenever the Holding Company proposes or is
required to issue or transfer shares of Common Stock under the Plan, the Holding
Company shall have the right to require the Optionee or his or her legal
representative to remit to the Holding Company an amount sufficient to satisfy
any federal, state and/or local withholding tax requirements prior to the
delivery of any certificate or certificates for such shares, and whenever under
the Plan payments are to be made in cash, such payments shall be net of an
amount sufficient to satisfy any federal, state and/or local withholding tax
requirements. If permitted by the Committee and pursuant to procedures
established by the Committee, an Optionee may make a written election to have
shares of Common Stock having an aggregate fair market value, as determined by
the Committee, consistent with the requirements of Treas. Reg. ss. 20.2031-2,
sufficient to satisfy the applicable withholding taxes, withheld from the shares
otherwise to be received upon the exercise of a non-qualified option.
12. Amendment. The Board of Directors of the Holding Company may amend
the Plan from time to time and, with the consent of the Optionee, the terms and
provisions of his option or cash award, except that without the approval of the
holders of at least a majority of the shares of the Holding Company voting in
person or by proxy at a duly constituted meeting or adjournment thereof:
(a) the number of shares of stock which may be reserved for
issuance under the Plan may not be increased, except as provided in
Section 7 hereof;
(b) the period during which an option may be exercised may not
be extended beyond ten (10) years and one day from the date on which
such option was granted; and
(c) the class of persons to whom options or cash awards may be
granted under the Plan shall not be modified materially.
No amendment of the Plan, however, may, without the consent of the
Optionees, make any changes in any outstanding options or cash awards
theretofore granted under the Plan which would adversely affect the rights of
such Optionees.
13. Termination. The Board of Directors of the Holding Company may
terminate the Plan at any time and no option or cash award shall be granted
thereafter. Such termination, however, shall not affect the validity of any
option or cash award theretofore granted under the Plan. In any event, no
incentive stock option may be granted under the Plan after the date which is ten
(10) years from the effective date of the Plan.
14. Successors. This Plan shall be binding upon the successors and
assigns of the Holding Company.
15. Governing Law. The terms of any options granted hereunder and the
rights and obligations hereunder of the Holding Company, the Optionees and their
successors in interest shall be governed by Indiana law.
16. Government and Other Regulations. The obligations of the Holding
Company to issue or transfer and deliver shares under options granted under the
Plan or make cash awards shall be subject to compliance with all applicable
laws, governmental rules and regulations, and administrative action.
17. Effective Date. The Plan shall become effective on the date the
Plan is approved by the holders of at least a majority of the shares of the
Holding Company voting in person or by proxy at a duly constituted meeting or
adjournment thereof and any options granted pursuant to the Plan may not be
exercised until the Board of Directors of the Holding Company has been advised
by counsel that such approval has been obtained and all other applicable legal
requirements have been met.
<PAGE>
|X| PLEASE MARK VOTES REVOCABLE PROXY
AS IN THIS EXAMPLE MFB CORP.
[PROXY CARD, LEFT COLUMN]
ANNUAL MEETING OF SHAREHOLDERS
JANUARY 20, 1998
The undersigned hereby appoints Michael J. Portolese and Timothy C. Boenne,
with full powers of substitution, to act as attorneys and proxies for the
undersigned to vote all shares of capital stock of MFB Corp. which the
undersigned is entitled to vote at the Annual Meeting of Shareholders to be held
at the McKinley Branch Office, 411 W. McKinley Avenue, Mishawaka, Indiana, on
Tuesday, January 20, 1998, at 7:00 P.M., and at any and all adjournments
thereof, as follows:
Please be sure to sign and Date
date this Proxy in the box
below.
Shareholder sign above Co-holder (if any) sign
above
- ------------------------------- --------------------------
<PAGE>
[PROXY CARD RIGHT COLUMN]
For With- For All
hold Except
1. The election as directors of |_| |_| |_|
Marian K. Torian and Reginald H. Wagle, each for a three year term (except
as marked to the contrary below).
INSTRUCTION: To withhold authority to vote for any individual nominee, mark "For
All Except" and write that nominee's name in the space provided below.
For Against Abstain
2. Approval and ratification of the |_| |_| |_|
MFB Corp. 1997 Stock Option
Plan
For Against Abstain
3. Ratification of the appointment of |_| |_| |_|
Crowe Chizek & Co. as audi-
tors for the fiscal year ending
September 30, 1998.
The Board of Directors recommends a vote "FOR" each of the listed
propositions.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
This proxy may be revoked at any time prior to the voting thereof.
The undersigned acknowledges receipt from MFB Corp., prior to the execution
of this proxy, of a Notice of the Meeting, a Proxy Statement and an Annual
Report to Shareholders.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED,
THIS PROXY WILL BE VOTED FOR EACH OF THE PROPOSITIONS STATED. IF ANY OTHER
BUSINESS IS PRESENTED AT SUCH MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED
IN THIS PROXY IN THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF
DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE MEETING.
<PAGE>
[PROXY CARD, BACK]
Detach above card, sign, date and mail in postage paid envelope provided.
MFB CORP.
Please sign as your name appears hereon. When signing as attorney,
executor, administrator, trustee or guardian, please give your full title. If
shares are held jointly, each holder should sign.
PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY CARD TODAY
- --------------------------------------------------------------------------------
ANNUAL REPORT
TO SHAREHOLDERS
TABLE OF CONTENTS
Page
Letter to Shareholders 2
Selected Consolidated Financial Data 3
Management's Discussion and Analysis 4
Report of Independent Auditors 16
Consolidated Balance Sheets 17
Consolidated Statements of Income 18
Consolidated Statements of Shareholders' Equity . 19
Consolidated Statements of Cash Flows 21
Notes to Consolidated Financial Statements 23
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 MFB Financial, formerly known as
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
five branch locations in St. Joseph and Elkhart Counties of 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. ("Mishawaka Financial"), 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.
<PAGE>
TO OUR SHAREHOLDERS:
On behalf of our employees, the Board of Directors and myself, it is a
pleasure to provide you with the 1997 Annual Report of MFB Corp. (the
"Company"), the holding company for MFB Financial (the "Bank"). In March of
1994, after the formation of MFB Corp., the Bank converted to a federal stock
savings bank and this report summarizes our third full year of operation as a
stock company.
This past year has been one of continued growth and change for our Company.
We remain committed to bringing state-of-the-art products and unparalleled
service to both consumers and small businesses in our community. The goals of
growth and diversification were the primary impetus for the first major change
that took place this year. In November, 1996 we changed the name of the Bank
from Mishawaka Federal Savings to MFB Financial. We believe our new name more
accurately describes our Bank as a full service institution offering the wide
variety of products and services necessary to grow and remain competitive. We
added investment and brokerage services, broadened commercial deposit product
offerings, established a corporate lending department and opened a new full
service facility. As we look at the financial highlights of the past year, I
believe you will agree that these changes continue to move the Company and the
Bank forward toward the achievement of our strategic goals.
1997 again saw solid balance sheet growth for our Company. The Bank's loan
portfolio grew by $48.9 million, the greatest single year of such growth in our
107 year history. Substantial contributions to this increase were made by both
the residential lending and corporate lending divisions. Our reputation as a
fast, courteous and knowledgeable lender, has allowed residential loan growth to
carry on at record levels. At the same time, the development of our small
business banking division has attracted local businesses desiring a level of
personal service that is fast disappearing in our market. We will continue to
focus attention on the small business community in an effort to further
diversify our asset mix and improve earnings.
Deposit based product offerings were enhanced as well. The emphasis on core
relationships, competitive pricing and the highest quality service to customers
has resulted in an increase in our deposit base of $12.9 million during the
year. Non-interest bearing demand accounts increased significantly as did our
certificate of deposit account base.
In addition to the notable balance sheet growth, we experienced improved
net interest income as well. Our average interest rate spread increased from
2.13% to 2.49% in just one year, contributing to an increase in net interest
income of $1.4 million for the year.
Additionally, the Company repurchased over 330,000 shares of its common
stock. This activity resulted in a reduction of the total shares outstanding,
improved the book value of the remaining outstanding shares and positively
impacted our return on equity. In addition, I am sure you are aware that our
quarterly dividend was increased to $.08 per outstanding share as well. These
events are all part of our systematic approach to enhancing the long term value
of your investment in our Company.
The following pages of this report provide more details about the past
year's performance. Management remains committed to identifying additional
opportunities to serve the financial needs of our community effectively and
profitably. These efforts will continue to grow the long term value of your
investment in a prudent, intelligent fashion. We appreciate the confidence you
have shown in MFB Corp. and will mindfully operate the Company in an effort to
reward that confidence.
Charles J. Viater
President and Chief Executive Officer
<PAGE>
MFB CORP. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
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)
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Summary of Financial Condition:
<S> <C> <C> <C> <C> <C>
Total assets $255,921 $225,809 $187,065 $183,753 $168,581
Loans receivable, net,
including loans held for sale 200,935 152,052 121,181 115,297 108,212
Cash and cash equivalents 9,482 1,734 7,454 6,153 20,820
Securities, including FHLB stock 42,028 68,099 53,293 56,107 16,624
Interest-bearing time deposits in other
financial institutions -- 495 1,880 3,365 20,469
Deposits 171,887 158,964 144,552 143,604 149,220
Securities sold under agreements to repurchase 389 -- -- -- --
FHLB advances 47,500 24,500 -- -- --
Shareholders' equity 33,550 37,599 37,999 37,705 16,964
</TABLE>
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------------------------
(In Thousands)
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Summary of Operating Results:
<S> <C> <C> <C> <C> <C>
Interest income $ 17,685 $ 14,182 $ 12,383 $ 11,545 $ 11,931
Interest expense 10,157 8,057 6,788 6,019 6,559
-------- -------- -------- -------- --------
Net interest income 7,528 6,125 5,595 5,526 5,372
Provision for loan losses 30 30 30 30 192
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 7,498 6,095 5,565 5,496 5,180
Noninterest income
Insurance commissions 134 127 128 127 126
Brokerage commissions 24 -- -- -- --
Net gain from sales of securities 6 3 -- -- 10
Other 261 232 189 151 159
-------- -------- -------- -------- --------
Total noninterest income 425 362 317 278 295
Noninterest expense
Salaries and employee benefits 2,772 2,153 2,336 1,969 1,600
Occupancy and equipment expense 580 422 406 379 378
SAIF deposit insurance premium 147 1,291 332 341 280
Other expense 1,100 969 753 666 621
-------- -------- -------- -------- --------
Total noninterest expense 4,599 4,835 3,827 3,355 2,879
Income before income taxes and cumulative
effect of change in accounting principles 3,324 1,622 2,055 2,419 2,596
Income tax expense 1,322 647 819 887 1,121
-------- -------- -------- -------- --------
Income before cumulative effect of change
in accounting principles 2,002 975 1,236 1,532 1,475
-------- -------- -------- -------- --------
Cumulative effect of change in
accounting for income taxes -- -- -- -- (188)
Net income $ 2,002 $ 975 $ 1,236 $ 1,532 $ 1,287
======== ======== ======== ======== ========
Supplemental Data:
Return on assets (1) .84% .49% .67% .86% .77%
Return on equity (2) 6.02 2.61 3.25 5.60 7.75
Interest rate spread (3) 2.49 2.13 2.12 2.57 2.85
Net yield on average
interest-earning assets (4) 3.24 3.11 3.10 3.18 3.28
Dividend pay-out ratio (5) 27.59 12.24 -- -- --
Net interest income to
operating expenses (6) 163.70 126.67 146.20 164.71 186.59
Equity-to-assets (7) 13.11 16.65 20.31 20.52 10.06
Average interest-earning assets to
average interest-bearing
liabilities 117.14 123.81 126.12 117.61 110.73
Non-performing assets to total assets .10 .09 .17 .07 .16
Non-performing loans to total loans .13 .13 .25 .09 .21
Allowance for loan losses to total loans, net,
including loans held for sale .18 .22 .26 .24 .23
Allowance for loan losses to
non-performing loans 141.76 171.72 100.65 261.68 112.11
Earnings per share (8) $ 1.16 $ .49 $ .59 $ .43 $--
Earnings per share fully diluted (8) $ 1.14 $ .48 $ .59 $ .43 $--
Dividends declared per share $ .32 $ .06 $-- $-- $--
Book value per share $ 20.33 $ 19.05 $ 18.29 $ 17.24 $ --
Number of offices 6 5 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, fee structures, and level of
personal income and savings. Lending activities are influenced by the demand for
and supply of housing lenders, the availability and cost of funds and various
other issues. 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 managing 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 150.48% and a
positive 9.14% at the end of each year from September 30, 1993, to September 30,
1997. This assumes that deposit accounts reprice based on assumptions provided
after the following table. The Company's one year interest rate gap was a
negative 150.48% as of September 30, 1997. 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.
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, 1997, (the most recently available data),
after a 200 basis point rate change, the Bank's NPV ratio was 10.49%. Management
and the Board of Directors review the OTS measurements on a quarterly basis to
determine whether the Company's interest rate exposure is within the limits
established by the Board of Directors in the Company's interest rate risk
policy.
<PAGE>
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, 1997. Maturity and repricing dates have been projected by applying
the assumptions, set forth after the table, 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, 1997
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 $ 8,427 $ 6,764 $ 28,737 $ 47,866 $ 24,645 $ 22,925
Fixed rate mortgages 1,452 2,278 972 711 1,284 1,516
Equity Loans 260 -- -- 5 989 5,798
Financing leases -- -- -- -- -- 325
Commercial loans 2,466 -- 50 1,899 3,821 476
Consumer loans 47 34 12 -- -- --
Securites 1,832 1,359 1,346 3,615 12,523 3,374
Mortgage-backed securities -- -- -- 3,508 -- --
Interest-earning time deposits 6,576 -- -- -- -- --
Stock in FHLB of Indianapolis -- -- -- -- -- --
Deferred loan fees (15) (16) (44) (9) (10) (16)
Loans in process (33) -- (1) (25) (51) (6)
21,012 10,419 31,072 57,570 43,201 34,392
Interest-bearing Liabiliites
Certificates of deposit 35,706 19,917 40,413 33,508 1,886 279
Savings acoounts 11,257 -- -- -- -- --
NOW and money market accounts 26,872 -- -- -- -- --
FHLB advances 2,000 6,000 14,000 14,500 17,000 --
389 -- -- -- -- --
76,226 25,917 54,413 48,008 12,886 279
Excess (deficiency) of interest-earning
assets over interest bearing liabilities $(55,214) $(15,498) $(23,341) $ 9,562 $ 30,315 $ 34,113
-------- -------- -------- -------- -------- --------
Cumulative excess (deficiency) of
interest-earning assets over interest
bearing liabilities $(55,214) $(70,712) $(94,053) $(84,491) $(54,176) $(20,063)
-------- -------- -------- -------- -------- --------
Cumulative interest rate gap to total
interest-earning assets -262.77% -224.98% -150.48% -70.37% $ 33.18% -10.15%
Off balance sheet assets (1) $ 23,840 $ 6,352 $ 218 $ 25 $ 126 $ 6
</TABLE>
(1) Includes loan committments and loans in process.
<PAGE>
<TABLE>
<CAPTION>
At September 30, 1997
maturing or Repricing Within
-------------------------------------
10 to
20 Over 20
Years Years Total
----- ----- -----
<S> <C> <C> <C>
Adjustable rate mortgages $ 217 $ 84 $ 139,565
Fixed rate mortgages 22,943 14,824 45,980
Equity Loans 105 20 7,177
Financing leases -- -- 325
Commercial loans 121 -- 8,833
Consumer loans -- 3 96
Securites -- -- 24,049
Mortgage-backed securities 2,073 9,998 15,579
Interest-earning time deposits -- -- 6,576
Stock in FHLB of Indianapolis -- 2,400 2,400
Deferred loan fees (243) (303) (653)
Loans in process (1) -- (117)
25,215 27,029 249,920
Interest-bearing Liabiliites
Certificates of deposit -- -- 131,711
Savings acoounts -- -- 11,257
NOW and money market accounts -- -- 26,872
FHLB advances -- -- 47,500
-- -- 389
-- -- 217,729
Excess (deficiency) of interest-earning
assets over interest bearing liabilities $ 25,215 $ 27,029 $ 32,185
--------- --------- ---------
Cumulative excess (deficiency) of
interest-earning assets over interest
bearing liabilities $ 5,152 $ 32,181 $ 32,181
--------- --------- ---------
Cumulative interest rate gap to total
interest-earning assets 2.31% 12.88% 12.88%
Off balance sheet assets (1) $ 1 $-- $ 30,569
</TABLE>
- -----------
(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.
<PAGE>
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
30,1997, these loans totaled $108.6 million, or 53.7% of the Bank's total loan
portfolio. In August 1996 the Bank began originating adjustable rate mortgage
loans using the One Year Treasury Index, and, at September 30, 1997, these loans
totaled $31.1 million, or 15.4% of the Bank's total loan portfolio. As a general
rule, market rate adjustments on loans indexed to the National Median Cost of
Funds lag 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.
<PAGE>
AVERAGE BALANCE SHEETS
The following are the average balance sheets for the years ended September 30:
<TABLE>
<CAPTION>
1997 1996 1995
Average Average Average
Outstanding Outstanding Outstanding
Balance Balance Balance
------- ------- -------
Assets: (In thousands)
Interest-earning assets:
<S> <C> <C> <C>
Interest-bearing deposits $ 1,856 $ 6,709 $ 7,995
Securities (1) $ 30,765 35,392 39,841
Mortgage-backed securities (1) 22,222 19,717 12,558
Loans receivable (2) 175,761 133,670 118,735
Stock in FHLB of Indianapolis 1,783 1,303 1,223
--------- --------- ---------
Total interest-earning assets 232,387 196,791 180,352
Non-interest earning assets, net
of allowance for loan losses 4,663 3,792 3,517
--------- --------- ---------
Total assets $ 237,050 $ 200,583 $ 183,869
========= ========= =========
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts $ 10,359 $ 9,746 $ 9,774
NOW and money market accounts 26,770 26,006 26,672
Certificates of deposit 126,202 113,570 106,556
FHLB borrowings 35,057 9,625 --
--------- --------- ---------
Total interest-bearing liabilities 198,388 158,947 143,002
Other liabilities 5,388 4,229 2,838
--------- --------- ---------
Total liabilities 203,776 163,176 145,840
Shareholders' equity
Common stock 14,015 19,064 20,527
Treasury stock (3)
Retained earnings 20,209 19,718 19,117
Less common stock acquired by:
Employee stock ownership plan (790) (1,007) (1,208)
Recognition and retention plans (157) (235) (407)
Unrealized gain (loss) on securities
available for sale (100) (133) --
--------- --------- ---------
Total shareholders' equity $ 33,274 37,407 38,029
--------- --------- ---------
Total liabilities and shareholders' equity $ 237,050 $ 200,583 $ 183,869
========= ========= =========
</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,
1997 1996 1995
---- ---- ----
Average interest rate earned on:
Interest-earning deposits 5.17% 6.29% 6.03%
Securities(l) 6.86% 6.17% 5.77%
Mortage-backed securities(l) 6.46% 6.15% 5.51%
Loans receivable 7.91% 7.67% 7.42%
Stock in FHLB of Indianapolis 8.08% 7.90% 7.60%
Total interest-earning assets 7.61% 7.20% 6.87%
Average interst rate of:
Savings accounts 2.68% 2.77% 2.80%
NOW and money market accounts 2.89% 3.12% 3.24%
Certificates of depoist 5.65% 5.68% 5.30%
FHLB advances 5.63% 5.50% ---
Total interst-bearing liabilities 5.12% 5.07% 4.75%
Interst rate spread (2) 2.49% 2.13% 2.12%
Net yield on interest-eaming assets (3) 3.24% 3.11% 3.10%
- ---------------
(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.
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.
<PAGE>
<TABLE>
<CAPTION>
Increase (Decrease) in
Net Interest Income
------------------------------------------------
Total Net Due to Due to
Change Rate Volume
----------- ----------- ------------
(In thousands)
Year ended September 30, 1997 compared
to year ended September 30, 1996
Interest-earning assets
<S> <C> <C> <C>
Interest-bearing deposits $ (326) $ (64) $ (262)
Securities (74) 230 (304)
Mortgage-backed securities 211 64 147
Loans receivable 3,651 332 3,319
Stock in FHLB of Indianapolis 41 2 39
3,503 564 2,939
Total
Interest-bearing liabilities
Savings accounts 8 (9) 17
NOW and money market accounts (38) (61) 23
Certificates of deposit 687 (27) 714
FHLB borrowings 1,443 15 1,428
Total 2,100 (82) 2,182
Change in net interest income $ 1,403 $ 646 $ 757
======= ======= =======
</TABLE>
<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>
<PAGE>
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30,1997 AND SEPTEMBER 30, 1996
Consolidated net income for the Company for the year ended September
30,1997 was $2.0 million compared to $975,000 for the same period in 1996. The
increase of $1.0 million resulted primarily from a $1.4 million increase in net
interest income and a $237,000 decrease in noninterest expense, partially offset
by a $675,000 increase in income tax expense. For the period ended September 30,
1996, income levels were significantly reduced as a result of a one time special
assessment to recapitalize the Savings Association Insurance Fund ("SAIF"). This
non-recurring expense was approximately $577,000 on an after tax basis, and net
income for the year ended September 30, 1996 would have amounted to $1,552,000
had this special assessment not been incurred.
<PAGE>
The increase in net interest income was due to increases in both the volume
of interest-earning assets and higher rates earned on those assets, partially
offset by increases in the volume of interest-bearing liabilities. First
mortgage loan receivables increased by approximately $38.6 million and
commercial and consumer loan receivables by approximately $10.6 million from
September 30, 1996 to September 30, 1997. The yield on total interest-earning
assets also increased from 7.20% to 7.61% in 1997 while the average rate paid on
interest-bearing liabilities increased from 5.07% to 5.12% during the same
period. As a result, the interest rate spread increased 36 basis points from
2.13% in 1996 to 2.49% in 1997.
As of September 30, 1997 net loans, including loans held for sale, were
$200.9 million, an increase of $48.9 million from the $152.1 million as of
September 30, 1996. Substantial marketing efforts were utilized in the past year
to capitalize on the Bank's reputation as a quality local residential lender
providing fast and knowledgeable service. This approach led to gross mortgage
loan increases of $38.6 million , an increase of 26.2% for the year ended
September 30, 1997. Also, although a limited number of small commercial loans
were made in 1996, substantial efforts were put forth during the past year to
fully develop the small business banking division in our community. As a result,
gross commercial loans increased $8.0 million from September 30, 1996 to
September 30, 1997.
Total deposits increased $12.9 million to $171.9 million as of September
30, 1997 from $159.0 million as of September 30, 1996. Federal Home Loan Bank
advances and other short term borrowings also increased from $24.5 million at
September 30, 1996 to $47.9 million as of September 30, 1997.
Cash and cash equivalents increased $7.7 million from $1.7 million as of
September 30, 1996 to $9.4 million as of September 30, 1997. Net cash provided
by financing activities and operating activities amounted to $29.4 million and
$1.3 million, respectively, and was partially offset by net cash used in
investing activities of $23.0 million.
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 $22.7 million of the total securities available
for sale at September 30, 1997 compared to $26.6 million at September 30, 1996.
As of September 30, 1997, the total securities portfolio amounted to $39.6
million, a decrease of $27.2 million from $66.8 million at September 30, 1996.
The total securities portfolio decrease consisted of a decrease in the
leveraging portfolio of $3.9 million and a decrease in the remainder of the
securities portfolio of $23.3 million, and was the result of securities maturing
totaling $27.9 million and principal payments of mortgage-backed securities of
$2.9 million offset by net purchases of securities available for sale of $3.4
million.
The $12.9 million increase in deposits, the $23.0 million increase in FHLB
advances, and the $27.2 million decrease in the securities portfolio were
primarily used to fund the $48.9 million increase in net loans and the $7.7
million increase in cash and cash equivalents.
Total liabilities increased $34.2 million from $188.2 million as of
September 30, 1996 to $222.4 million as of September 30, 1997. This increase was
primarily due to the $12.9 million increase in deposits and the $23.0 million
increase in FHLB advances.
Total shareholders' equity decreased $4.0 million from $37.6 million as of
September 30, 1996 to $33.6 million as of September 30, 1997. This decrease was
primarily attributable to the repurchase of the Company's common stock during
the year in the amount of $6.4 million and the payment of $554,000 in cash
dividends during the year, partially offset by net income of $2.0 million for
the year ended September 30, 1997.
<PAGE>
The book value of MFB Corp. Common stock, based on the actual number of
shares outstanding at each period, increased from $19.05 as of September 30,
1996 to $20.33 as of September 30, 1997.
Interest income increased $3.5 million during the year ended September 30,
1997 compared to the same period one year ago. The increase was primarily
related to increased volumes of loans receivable and an increase in the average
rate earned on these assets. Interest expense increased $2.1 million during the
most recent twelve month period primarily as a result of increased volumes of
certificates of deposit and FHLB advances. Net interest income increased $1.4
million for the year ended September 30, 1997 compared to the year ended
September 30, 1996.
Noninterest income increased from $362,000 for the year ended September 30,
1996 to $425,000 for the twelve months ended September 30, 1997. The increase
was primarily due to increased fee income related to demand deposit accounts and
brokerage commissions.
Noninterest expense decreased to $4.6 million for the year ended September
30, 1997 from $4.8 million for the same period last year. This decrease is
primarily related to the one time special assessment of $955,000 incurred in the
prior year to recapitalize the SAIF, offset by increased compensation expenses,
expenses related to the Bank's name change which took effect November 1, 1996,
and expenses incurred with the opening of a new full service branch facility on
June 6, 1997. To operate the new full service branch facility and attain the
substantial loan growth in 1997, the Bank's staff increased by 15 employees
during the year. This is the primary reason for the 29% increase in salaries and
employee benefit expense from $2.2 million for the year ended September 30, 1996
to $2.8 million for the year ended September 30, 1997.
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 demand 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
<PAGE>
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 million increase in deposits and a $24.5 million increase in FHLB
advances 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 in 1995. 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 1996 fiscal year, as compared
to 1995, primarily as a result of increased volumes of certificates of deposit
and FHLB advances. Increased rates paid on certificates of deposit also
contributed to the interest expense increase. Net interest income increased
$530,000 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.
Noninterest 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.
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.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
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 and securities, excluding FHLB stock. These assets are
commonly referred to as liquid assets.
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 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, 1997, the Bank's liquidity ratio was 16.98% and the short-term
liquidity ratio was 7.06%. 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, 1997, 1996 and 1995.
Liquid assets totaled $49.1 million as of September 30, 1997 compared to
$69.0 million as of September 30, 1996 and $61.4 million as of September 30,
1995. The $19.9 million decrease in liquidity from September 30, 1996 to
September 30, 1997 was primarily due to a $27.1 million decrease in securities,
offset by a $7.7 million increase in cash and interest-bearing deposits in other
financial institutions. Management believes the liquidity level of $49.1 million
as of September 30, 1997 is sufficient to meet anticipated liquidity needs.
Liquidity levels increased $7.6 million from September 30, 1995 to
September 30, 1996 due primarily to a $14.7 million increase in securities,
partially offset by a $5.4 million decrease in interest-bearing demand deposits
in other financial institutions.
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 advances. As of September 30, 1997, total FHLB borrowings
amounted to $47.5 million, $23.5 million of which were used as part of this
strategy. The remaining $24 million was used primarily to fund loan portfolio
growth. The Bank had commitments to fund loan originations with borrowers
totaling $30.6 million at September 30, 1997. In the opinion of management, the
Company has sufficient cash flow and other cash resources 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, 1997, 1996 and 1995 follows.
During the year ended September 30, 1997, net cash and cash equivalents
increased $7.7 million from $1.7 million at September 30, 1996 to $9.4 million
at September 30, 1997.
The Company experienced a net increase in cash from operating activities of
$1.3 million during the year that was primarily attributable to net income as
adjusted for accrual basis accounting. The $23.0 million net decrease in cash
from investing activities for the year ended September 30, 1997 was primarily
related to the $48.9 million increase in net loans and the $29.7 million
purchase of securities and FHLB stock, offset by sales and maturities of
securities totaling $53.1 million and $2.9 million of mortgage-backed securities
principal payments.
<PAGE>
Financing activities generated net cash of $29.4 million for the year ended
September 30, 1997. The net cash was provided primarily from $23.0 million in
net new FHLB advances and net deposit increases of $12.9 million, partially
offset by the use of $6.4 million to repurchase the Company's stock and $554,000
in cash dividend payments during the year.
For 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. Net
cash from operating activities totaled $2.2 million.
The Company experienced a $44.9 million net decrease in cash from investing
activities for the year ended September 30, 1996. This decrease in cash 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, 1997 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
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities," was issued in 1996. It revises the
accounting for transfers of financial assets, such as loans and securities, and
for distinguishing between sales and secured borrowings. It became effective for
some transactions occurring after December 31, 1996, and will be effective for
others in 1998. The impact of partial adoption in 1997 was not material to the
1997 consolidated financial statements and the impact of the complete adoption
in 1998 is also not expected to be material to the consolidated financial
statements.
Also, in March 1997, the accounting requirements for calculating earnings
per share were revised by SFAS No. 128, "Earnings Per Share." Basic earnings per
share for the quarter ending December 31, 1997 and later will be calculated
solely on average common shares outstanding. Diluted earnings per share will
reflect the potential dilution of stock options and other common stock
equivalents. All prior calculations will be restated to be comparable to the new
methods. As the Company has dilution from stock options, the new calculation
methods will increase basic earnings per share over what otherwise would have
been reported as primary earnings per share, while there will be little effect
on fully diluted earnings per share.
<PAGE>
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income". This Statement establishes standards
for reporting and display of comprehensive income and its components (revenue,
expenses, gains and losses) in a full set of general-purpose financial
statements. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Income tax effects must also be shown. This
Statement is effective for fiscal years beginning after December 15, 1997. The
adoption of SFAS No. 130 is not expected to have a material impact on the
results of operations or financial condition of the Company.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This Statement is effective for financial statements for periods beginning after
December 15, 1997. The adoption of SFAS No. 131 is not expected to have a
material impact on the results of operations or financial condition of the
Company.
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 and loans held for sale which are reported at the
lower of cost or estimated market value in the aggregate), 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, 1997 and 1996 and the related consolidated statements of
income, shareholders' equity and cash flows for the years ended September 30,
1997, 1996 and 1995. 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, 1997 and 1996, and the results of its operations and its cash
flows for the years ended September 30, 1997, 1996 and 1995 in conformity with
generally accepted accounting principles.
Crowe, Chizek and Company LLP
South Bend, Indiana
November 3, 1997
<PAGE>
MFB CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
ASSETS
<S> <C> <C>
Cash and due from financial institutions $ 2,905,849 $ 1,734,388
Interest-bearing deposits in other financial
institutions - short-term 6,576,499 --
------------- -------------
Total cash and cash equivalents 9,482,348 1,734,388
Interest - bearing time deposits in
other financial institutions -- 495,000
Securities available for sale 39,628,414 66,762,558
Federal Home Loan Bank (FHLB) stock, at cost 2,400,000 1,336,100
Loans held for sale, net of
unrealized losses of $-0- in 1997 12,671,186 --
Loans receivable, net of allowance for loan losses
of $370,000 in 1997 and $340,000 in 1996 188,264,198 152,052,092
Accrued interest receivable 718,427 818,014
Premises and equipment, net 2,612,793 1,969,264
Other assets 143,445 641,707
------------- -------------
Total assets $ 255,920,811 $ 225,809,123
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand deposits $ 2,046,702 $ 1,942,145
Savings, NOW and MMDA deposits 38,130,008 34,779,548
Other time deposits 131,710,557 122,242,796
------------- -------------
Total deposits 171,887,267 158,964,489
Securities sold under agreements to repurchase 388,920 --
FHLB advances 47,500,000 24,500,000
Advances from borrowers for taxes and insurance 1,854,248 1,864,427
Accrued expenses and other liabilities 740,360 2,880,838
------------- -------------
Total liabilities 222,370,795 188,209,754
Shareholders' equity
Common stock, no par value, 5,000,000 shares authorized;
shares issued: 1,689,417 - 1997, 1,973,980 - 1996;
shares outstanding: 1,650,567 - 1997, 1,973,980 - 1996 13,108,171 18,316,651
Retained earnings - substantially restricted 22,037,441 20,588,797
Net unrealized appreciation (depreciation) on
securities available for sale, net of tax of $48,017 in
1997 and $(144,252) in 1996 73,208 (219,928)
Unearned Employee Stock Ownership Plan (ESOP) shares (664,610) (893,651)
Unearned Recognition and Retention Plan (RRP) shares (115,500) (192,500)
Treasury Stock, 38,850 common shares, at cost (888,694) --
------------- -------------
Total shareholders' equity 33,550,016 37,599,369
------------- -------------
Total liabilities and shareholders' equity $ 255,920,811 $ 225,809,123
============= =============
</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, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
Interest income
Loans receivable, including fees
<S> <C> <C> <C>
Mortgage loans $12,945,694 $ 9,956,394 $ 8,780,654
Consumer and other loans 550,905 182,177 35,433
Financing leases and commercial loans 400,120 107,321 --
Securities - taxable 3,692,136 3,514,380 3,085,427
Other interest-earning assets 95,971 421,984 482,044
----------- ----------- -----------
Total interest income 17,684,826 14,182,256 12,383,558
Interest expense
Deposits 8,181,489 7,528,321 6,788,376
Securities sold under agreements
to repurchase 4,138 -- --
FHLB advances 1,971,537 529,025 --
----------- ----------- -----------
Total interest expense 10,157,164 8,057,346 6,788,376
Net interest income 7,527,662 6,124,910 5,595,182
Provision for loan losses 30,000 30,000 30,000
----------- ----------- -----------
Net interest income after provision
for loan losses 7,497,662 6,094,910 5,565,182
Noninterest income
Insurance commissions 133,870 126,819 127,766
Brokerage Commissions 23,604 -- --
Net realized gains from sales of securities
available for sale 6,098 3,731 --
Other income 261,171 231,766 189,648
----------- ----------- -----------
Total noninterest income 424,743 362,316 317,414
Noninterest expense
Salaries and employee benefits 2,772,154 2,152,656 2,336,230
Occupancy and equipment expense 579,327 422,388 405,998
SAIF deposit insurance premium 147,121 1,291,288 332,175
Other expense 1,099,972 968,951 752,635
----------- ----------- -----------
Total noninterest expense 4,598,574 4,835,283 3,827,038
----------- ----------- -----------
Income before income taxes 3,323,831 1,621,943 2,055,558
Income tax expense 1,321,630 646,793 819,452
----------- ----------- -----------
Net income $ 2,002,201 $ 975,150 $ 1,236,106
=========== =========== ===========
Net income per common and common
equivalent shares
Primary $ 1.16 $ .49 $ .59
Fully diluted 1.14 .48 .59
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
(Depreciation)
on Securities
Available
Retained For Sale, Unearned Unearned
Common Stock Earnings Net of Tax ESOP Shares RRP Shares
------------ -------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994 $21,048,740 $ 18,495,980 $- $ (1,300,000) $ (540,052)
Purchase and retirement of 109,361
shares of common stock (1,530,486) -- -- -- --
Effect of contribution to fund ESOP -- -- -- 200,000 --
Market adjustment of 22,516 ESOP shares
committed to be released 99,592 -- -- -- --
Amortization of RRP contribution -- -- -- -- 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 19,656,664 19,732,086 -- (1,100,000) (290,152)
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) -- 6,349 --
Effect of contribution to fund ESOP -- -- -- 200,000 --
Market adjustment of 21,515 ESOP
shares committed to be released 117,247 -- -- -- --
Amortization of RRP contribution -- -- -- -- 97,652
Tax benefit related to employee stock plans 41,764 -- -- -- --
Net change in unrealized appreciation (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) (893,651) (192,500)
</TABLE>
<PAGE>
Total
Treasury Shareholders'
Stock Equity
----- ------
Balance at September 30, 1994 $- $ 37,704,668
Purchase and retirement of 109,361
shares of common stock - (1,530,486)
Effect of contribution to fund ESOP - 200,000
Market adjustment of 22,516 ESOP shares
committed to be released - 99,592
Amortization of RRP contribution - 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 - 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 - (112,090)
Effect of contribution to fund ESOP - 200,000
Market adjustment of 21,515 ESOP
shares committed to be released - 117,247
Amortization of RRP contribution - 97,652
Tax benefit related to employee stock plans - 41,764
Net change in unrealized appreciation (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 - 37,599,369
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
(Depreciation)
on Securities
Available
Retained For Sale, Unearned
Common Stock Earnings Net of Tax ESOP Shares
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at September 30, 1996 $ 18,316,651 $ 20,588,797 $ (219,928) $ (893,651)
Purchase and retirement of 288,063 shares of common stock (5,381,427) -- -- --
Purchase of 45,000 shares of treasury stock -- -- -- --
Stock option exercise-issuance of 3,500 common shares 35,000 -- -- --
Stock option exercise-issuance of 6,150 shares of treasury stock (79,181) -- -- --
Cash dividends declared - $ .32 per share -- (553,557) -- 29,041
Effect of contribution to fund ESOP -- -- -- 200,000
Market adjustment of 23,276 ESOP shares committed to be released 188,153 -- -- --
Amortization of RRP contribution -- -- -- --
Tax benefit related to employee stock plans 28,975 -- -- --
Net change in unrealized appreciation (depreciation) on securities
available for sale, net of tax of $192,269 -- -- 293,136 --
Net income for the year ended September 30, 1997 -- 2,002,201 -- --
------------ ------------ ------------ ------------
Balance at September 30, 1997 $ 13,108,171 $ 22,037,441 $ 73,208 $ (664,610)
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Total
Unearned Treasury Shareholders'
RRP Shares Stock Equity
------------ ------------ ------------
<S> <C> <C> <C>
Balance at September 30, 1996 $ (192,500) $- $ 37,599,369
Purchase and retirement of 288,063 shares of common stock -- -- (5,381,427)
Purchase of 45,000 shares of treasury stock -- (1,029,375) (1,029,375)
Stock option exercise-issuance of 3,500 common shares -- -- 35,000
Stock option exercise-issuance of 6,150 shares of treasury stock -- 140,681 61,500
Cash dividends declared - $ .32 per share -- -- (524,516)
Effect of contribution to fund ESOP -- -- 200,000
Market adjustment of 23,276 ESOP shares committed to be released -- -- 188,153
Amortization of RRP contribution 77,000 -- 77,000
Tax benefit related to employee stock plans -- -- 28,975
Net change in unrealized appreciation (depreciation) on securities
available for sale, net of tax of $192,269 -- -- 293,136
Net income for the year ended September 30, 1997 -- -- 2,002,201
------------ ------------ ------------
Balance at September 30, 1997 $ (115,500) $ (888,694) $ 33,550,016
============ ============ ============
</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, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities
<S> <C> <C> <C>
Net income $ 2,002,201 $ 975,150 $ 1,236,106
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization, net of
accretion 473,203 272,595 315,899
Amortization of RRP contribution 77,000 97,652 249,900
Provision for loan losses 30,000 30,000 30,000
Net realized gains from sales of
securities available for sale (6,098) (3,731) --
Market adjustment of ESOP shares
committed to be released 188,153 117,247 99,592
ESOP expense 200,000 200,000 200,000
Net change in:
Accrued interest receivable 99,587 94 (70,836)
Other assets 498,262 (44,501) (301,900)
Accrued expenses and other liabilities (2,303,772) 586,591 2,050,282
------------ ------------ ------------
Net cash from operating activities 1,258,536 2,231,097 3,809,043
Cash flows from investing activities
Net change in interest-bearing time
deposits in other financial institutions 495,000 1,385,000 1,485,000
Net change in loans receivable (48,913,292) (30,900,930) (5,914,327)
Proceeds from:
Sales of securities available for sale 25,186,766 10,212,124 --
Principal payments of mortgage-backed
and related securities 2,938,521 2,280,597 1,283,272
Maturities of securities available for sale 27,877,752 16,697,252 --
Maturities of securities held to maturity -- 4,300,000 14,350,000
Purchase of:
Securities available for sale (28,634,913) (48,218,517) --
Securities held to maturity -- (500,000) (12,910,926)
FHLB stock (1,063,900) (65,300) (95,300)
Premises and equipment, net (859,211) (137,440) (244,856)
------------ ------------ ------------
Net cash from investing activities (22,973,277) (44,947,214) (2,047,137)
</TABLE>
<PAGE>
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
Cash flows from financing activities
<S> <C> <C> <C>
Purchase of MFB Corp. common stock $ (6,410,802) $ (1,499,024) $ (1,530,486)
Net change in deposits 12,922,778 14,412,719 947,319
Net change in securities sold under
agreements to repurchase 388,920 -- --
Proceeds from FHLB advances 66,735,000 24,500,000 --
Repayment of FHLB advances (43,735,000) -- --
Proceeds from exercise of stock options 96,500 -- --
Net change in advances from
borrowers for taxes and insurance (10,179) (305,151) 122,579
Cash dividends paid (524,516) (112,090) --
------------ ------------ ------------
Net cash from financing activities 29,462,701 36,996,454 (460,588)
------------ ------------ ------------
Net change in cash and cash equivalents 7,747,960 (5,719,663) 1,301,318
Cash and cash equivalents at beginning of year 1,734,388 7,454,051 6,152,733
------------ ------------ ------------
Cash and cash equivalents at end of year $ 9,482,348 $ 1,734,388 $ 7,454,051
============ ============ ============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 10,113,767 $ 7,988,256 $ 6,786,274
Income taxes 868,000 974,755 883,000
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 --
Loans receivable to loans held for sale 12,671,186 -- --
</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, 1997, 1996 and 1995
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"), MFB Financial (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.
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 96% of the loan portfolio at September 30, 1997
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 loans held for sale, determination and carrying value of
impaired loans, the value of mortgage servicing rights, the value of stock
options, 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, short term borrowings having an original maturity of 90
days or less, 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, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported separately in shareholders'
equity, net of tax. Securities are classified as trading when held for short
term periods in anticipation of market gains, and are carried at fair value.
Securities are written down to fair value when a decline in fair value is not
temporary.
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 Held for Sale: Mortgage loans intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to income.
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.
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.
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
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.
There were no properties held as foreclosed real estate at September 30, 1997 or
1996.
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. A valuation allowance, if needed, reduces deferred
tax assets to the amount expected to be realized.
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. These assets are reviewed for impairment
when events indicate the carrying amount may not be recoverable.
Servicing Rights: Prior to adopting Statement of Financial Accounting Standards
(SFAS) No. 122 on October 1, 1996, servicing right assets were recorded only for
purchased rights to service mortgage loans. Subsequent to adopting this
standard, servicing rights represent both purchased rights and the allocated
value of servicing rights retained on loans sold. Servicing rights are expensed
in proportion to, and over the period of, estimated net servicing revenues.
Impairment is evaluated based on the fair value of the rights, using groupings
of the underlying loans as to interest rates and then, secondarily, as to
geographic and prepayment characteristics. Any impairment of a grouping is
reported as a valuation allowance. The effect of adopting this standard was not
material.
Excess servicing receivable is reported when a loan sale results in servicing
income in excess of normal amounts, and is expensed over the life of the
servicing on the interest method.
Employee Stock Ownership Plan (ESOP): The Company accounts 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.
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 12.
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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:
1997 1996 1995
--------- --------- ---------
Primary 1,732,528 2,008,323 2,083,528
Fully diluted 1,752,687 2,035,087 2,106,785
Stock Compensation: Expense for employee compensation under stock option plans
is based on Accounting Principles Board (APB) Opinion 25, with expense reported
only if options are granted below market price at grant date. If applicable,
disclosures of net income and earnings per share are provided as if the fair
value method of SFAS No. 123 were used for stock-based compensation.
Reclassifications: Certain amounts in the 1996 and 1995 consolidated financial
statements were reclassified to conform with the 1997 presentation.
NOTE 2 - SECURITIES AVAILABLE FOR SALE
The amortized cost and fair value of securities available for sale are as
follows:
<TABLE>
<CAPTION>
September 30, 1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities
U.S. Government
<S> <C> <C> <C> <C>
and federal agencies $ 23,617,973 $ 109,623 $ (7,877) $ 23,719,719
Mortgage-backed 15,588,866 26,506 (36,077) 15,579,295
------------ ------------ ------------ ------------
39,206,839 136,129 (43,954) 39,299,014
Marketable equity securities 300,350 29,050 -- 329,400
------------ ------------ ------------ ------------
$ 39,507,189 $ 165,179 $ (43,954) $ 39,628,414
============ ============ ============ ============
</TABLE>
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 2 - SECURITIES AVAILABLE FOR SALE (Continued)
<TABLE>
<CAPTION>
September 30, 1996
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Debt securities
U.S. Government and
<S> <C> <C> <C> <C>
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>
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.
September 30, 1997
-------------------------
Amortized Fair
Cost Value
----------- -----------
Due in one year or less $ 4,189,883 $ 4,207,833
Due after one year through five years 16,080,773 16,137,593
Due after five years through ten years 3,347,317 3,374,293
----------- -----------
23,617,973 23,719,719
Mortgage-backed securities 15,588,866 15,579,295
----------- -----------
$39,206,839 $39,299,014
=========== ===========
Proceeds from sales of securities available for sale were $25,186,766 during the
year ended September 30, 1997. Gross gains of $59,828 and gross losses of
$53,730 were realized on these sales. During the year ended September 30, 1996,
proceeds from the sales of securities available for sale were $10,212,124 with
gross gains of $25,154 and gross losses of $21,423 realized on these sales. The
Company did not sell any securities during the year ended September 30, 1995.
On November 30, 1995, securities with an amortized cost of $47,898,025 were
reclassified from held to maturity to available for sale based on
interpretations issued for SFAS No. 115. The transfer increased the unrealized
appreciation on securities available for sale by $196,469 and shareholders'
equity by $118,648, net of tax of $77,821.
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 3 - LOANS RECEIVABLE, NET
Loans receivable, net at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
First mortgage loans (principally conventional)
Principal balances
<S> <C> <C>
Secured by one-to-four family residences $ 164,598,210 $ 143,750,857
Construction loans 8,245,274 5,004,730
Other 130,800 162,643
------------- -------------
172,974,284 148,918,230
Less undisbursed portion of construction and
other mortgage loans (117,394) (1,961,107)
------------- -------------
Total first mortgage loans 172,856,890 146,957,123
Consumer and other loans:
Principal balances
Home equity and second mortgage 7,176,832 3,790,075
Commercial 8,832,629 876,348
Financing leases 325,048 1,124,624
Other 96,079 83,843
------------- -------------
Total consumer and other loans 16,430,588 5,874,890
Allowance for loan losses (370,000) (340,000)
Net deferred loan origination fees (653,280) (439,921)
------------- -------------
$ 188,264,198 $ 152,052,092
============= =============
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the years
ended September 30:
1997 1996 1995
-------- -------- --------
Balance at beginning of year $340,000 $310,000 $280,000
Provision for loan losses 30,000 30,000 30,000
Charge-offs -- -- --
Recoveries -- -- --
-------- -------- --------
Balance at end of year $370,000 $340,000 $310,000
======== ======== ========
At September 30, 1997 and 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 years ended September 30, 1997 and 1996.
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 3 - LOANS RECEIVABLE, NET (Continued)
Certain directors and executive officers of the Company and its subsidiary,
including associates of such persons, are loan customers. A summary of the
related party loan activity, for loans aggregating $60,000 or more to any one
related party, is as follows:
1997 1996
----------- -----------
Balance - beginning of year $ 1,032,494 $ 592,367
New loans -- 494,208
Repayments (104,773) (54,081)
----------- -----------
Balance - end of year $ 927,721 $ 1,032,494
=========== ===========
NOTE 4 - PREMISES AND EQUIPMENT, NET
Premises and equipment at September 30 are summarized as follows:
1997 1996
----------- -----------
Land $ 558,681 $ 558,681
Buildings and improvements 2,165,843 1,729,332
Real estate held for future expansion 128,885 128,885
Furniture and equipment 1,291,437 868,737
----------- -----------
Total cost 4,144,846 3,285,635
Accumulated depreciation and amortization (1,532,053) (1,316,371)
----------- -----------
$ 2,612,793 $ 1,969,264
=========== ===========
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
Depreciation and amortization of premises and equipment, included in occupancy
and equipment expense was approximately $216,000, $145,000 and $129,000 for the
years ended September 30, 1997, 1996 and 1995, respectively.
NOTE 5 - DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit in denomination
of $100,000 or more was approximately $24,892,000 and $24,488,000 at September
30, 1997 and 1996.
At September 30, 1997, the scheduled maturities of certificates of deposit are
as follows for the years ended September 30:
1998 $96,037,352
1999 28,099,054
2000 5,409,231
2001 1,620,700
2002 and thereafter 544,220
------------
$131,710,557
============
NOTE 6 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase consist of obligations of the
Company to other parties. These arrangements are all one-day retail repurchase
agreements and are secured by investment securities. Such collateral is held by
safekeeping agents of the Company. Information concerning securities sold under
agreements to repurchase as of September 30, 1997, is summarized as follows:
Average daily balance during the year $97,365
Average interest rate during the year 4.25%
Maximum month end balance during the year $388,920
Securities underlying these agreements at year end were as follows:
Carrying value of securities $3,530,000
Fair value $3,508,000
There were no securities sold under agreements to repurchase at September 30,
1996.
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
At September 30, 1997, advances from the Federal Home Loan Bank of Indianapolis
with fixed and variable rates ranging from 5.01% to 5.95% mature in the year
ending September 30 as follows:
1998 $22,000,000
1999 8,500,000
2000 6,000,000
2002 11,000,000
-----------
$47,500,000
===========
FHLB advances are secured by all FHLB stock, qualifying first mortgage loans,
government agency and mortgage backed securities. At September 30, 1997,
collateral of approximately $216,365,000 is pledged to the FHLB to secure
advances outstanding.
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 8 - 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, 1997, 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, 1997, 1996 and 1995 was
approximately $1,500, $3,000 and $179,000, respectively. Pension plan expense
for the year ended September 30, 1997 and 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) plan for the years ended
September 30, 1997 and 1996 was approximately $42,000 and $5,000, respectively.
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 age twenty-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 $388,000, $317,000 and $300,000 for the years
ended September 30, 1997, 1996 and 1995. Contributions to the ESOP, including
dividends on unearned ESOP shares, was approximately $229,000, $206,000 and
$200,000 during the years ended September 30, 1997, 1996 and 1995.
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.
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 8 - EMPLOYEE BENEFITS (Continued)
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, 1997, 1996 and 1995, 23,276, 21,515 and 22,516 shares with an
average fair value of $17.92, $15.04 and $13.31 per share, were committed to be
released.
The ESOP shares as of September 30 were as follows:
1997 1996
----------- -----------
Allocated shares 78,968 55,692
Unearned shares 61,032 84,308
Shares withdrawn from the plan by participants (5,601) (2,347)
Total ESOP shares held in the plan 134,399 137,653
----------- -----------
Fair value of unearned shares $ 1,419,000 $ 1,560,000
=========== ===========
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, 1997, 1996 and 1995 was approximately $77,000, $98,000 and
$250,000, 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. As of September
30, 1997, all options granted have an exercise price of at least 100% of the
market value of the common stock on the date of grant and no compensation
expense was recognized for stock options for the years ended September 30, 1997,
1996 and 1995.
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NNOTE 8 - EMPLOYEE BENEFITS (Continued)
SFAS No. 123, which became effective for the year ended September 30, 1997,
requires pro forma disclosures for companies that do not adopt its fair value
accounting method for stock-based employee compensation. The effects on the
Company's net income and earnings per share under the provisions of SFAS No. 123
were not material for the years ended September 30, 1997 and 1996. In future
years, the pro forma effect of not applying this standard is expected to
increase as additional options are granted.
Activity in the Option Plan for the years ended is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Available Options Exercise Exercise
For Grant Outstanding Price Price
--------- ----------- ----- -----
<S> <C> <C> <C> <C>
Balance at September30,1994 30,000 170,000 $ 10.00 $ 10.00
Granted (20,000) 20,000 $ 15.00 $ 15.00
Exercised -- -- $- $-
Forfeited -- -- $- $-
------ ------- ------ ------ ---------
Balanced at September 30, 1995 10,000 190,000 $10.00-$15.00 $ 10.53
Granted (10,000) 10,000 $ 15.25 $ 15.25
Exercised -- -- $- $-
Forfeited -- -- $- $-
------ ------- ------ ------ ---------
Balance at September 30, 1996 -- 200,000 $10.00-$15.25 $ 10.76
Granted -- -- $- $-
Exercised -- (9,650) $ 10.00 $ 10.00
Forfeited -- -- $- $-
------ ------- ------ ------ ---------
Balance at September 30, 1997 -- 190,350 $10.00-$15.25 $ 10.80
======= ======= ============= =========
</TABLE>
Options exercisable at September 30 are as follows:
Weighted
Number Average
of Options Exercise Price
---------- --------------
1995 170,000 $10.00
1996 174,000 $10.11
1997 180,000 $10.28
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 9 - INCOME TAXES
The Company files consolidated income tax returns. Prior to fiscal 1997, if
certain conditions were met in determining taxable income, the Bank was allowed
a special bad debt deduction based on a percentage of taxable income (8% for
fiscal 1996 and 1995) or on specified experience formulas. The Bank used the
percentage-of-taxable-income method for the tax year ended September 30, 1995,
but was unable to use this method for the tax year ended September 30, 1996. Tax
legislation passed in August 1996 now requires the Bank to deduct a provision
for bad debts for tax purposes based on actual loss experience and recapture the
excess bad debt reserve accumulated in tax years after September 30, 1987. The
related amount of deferred tax liability which must be recaptured is
approximately $446,000 and is payable over a six year period beginning no later
than the tax year ending September 30, 1999.
Income tax expense for the years ended September 30 are summarized as follows:
1997 1996 1995
Federal
Current $ 765,810 $725,920 $622,992
Deferred 264,314 (225,467) 12,487
1,030,124 500,453 635,479
State
Current 223,225 225,213 176,270
Deferred 68,281 (78,873) 7,703
291,506 146,340 183,973
Total income tax expense $1,321,630 $ 646,793 $ 819,452
Total income tax expense differed from the amounts computed by applying the
federal income tax rate of 34% in all periods presented to income before income
taxes as a result of the following for the years ended September 30:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Income taxes at statutory rate $ 1,130,103 $ 551,461 $ 698,890
Tax effect of:
State tax, net of federal income
tax effect 192,394 96,584 121,422
Excess of fair value of ESOP
shares released over cost 63,972 39,864 33,861
Other items, net (64,839) (41,116) (34,721)
----------- ----------- -----------
Total income tax expense $ 1,321,630 $ 646,793 $ 819,452
=========== =========== ===========
</TABLE>
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 9 - INCOME TAXES (Continued)
The components of the net deferred tax asset (liability) recorded in the
consolidated balance sheets as of September 30 are as follows:
1997 1996
--------- ---------
Deferred tax assets
RRP expense $ 16,363 $ 16,363
Net deferred loan fees 277,644 186,966
Net unrealized depreciation
on securities available for sale -- 144,252
SAIF assessment -- 405,235
Other 18,652 --
--------- ---------
312,659 752,816
Deferred tax liabilities
Accretion (59,882) (28,817)
Depreciation (48,685) (42,807)
Bad debt deduction (288,825) (300,895)
Net unrealized appreciation on
securities available for sale (48,017) --
Other (39,171) (27,354)
--------- ---------
(484,580) (399,873)
Valuation allowance -- --
--------- ---------
Net deferred tax asset (liability) $(171,921) $ 352,943
========= =========
Federal income tax laws provided savings banks with additional bad debt
deductions through the tax year ended September 30, 1987, totaling $4,596,000
for the Bank. Accounting standards do not require a deferred tax liability to be
recorded on this amount, which liability would otherwise total $1,563,000 at
September 30, 1997 and 1996. If the Bank were liquidated or otherwise ceases to
be a bank or if tax laws change, the $1,563,000 would be recorded as expense.
NOTE 10 - REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings, and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the financial statements.
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 10 - REGULATORY MATTERS (Continued)
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If only adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
The Bank's actual capital and required capital amounts and ratios are presented
below:
<TABLE>
<CAPTION>
Minimum
Requirement
Minimum To Be Well
Requirement Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
As of September 30, 1997
Total capital (to risk
<S> <C> <C> <C> <C> <C> <C>
weighted assets) $32,184 25.40% $10,139 8.00% $12,673 10.00%
Tier I (core) capital
(to risk weighted assets) 31,814 25.10 5,069 4.00 7,604 6.00
Tier I (core) capital (to
adjusted total assets) 31,814 12.43 7,676 3.00 N/A N/A
Tangible capital (to
adjusted total assets) 31,814 12.43 3,838 1.50 N/A N/A
Tier I (core) capital (to
average assets) 31,814 13.42 9,482 4.00 11,853 5.00
As of September 30, 1996
Total capital (to risk
weighted assets) $31,668 32.69% $ 7,749 8.00% $ 9,686 10.00%
Tier I (core) capital
(to risk weighted assets) 31,328 32.34 3,874 4.00 5,812 6.00
Tier I (core) capital
(to adjusted total assets) 31,328 13.85 6,785 3.00 N/A N/A
Tangible capital (to
adjusted total assets) 31,328 13.85 3,392 1.50 N/A N/A
Tier I (core) capital (to
average assets) 31,328 15.62 8,023 4.00 10,029 5.00
</TABLE>
Regulations of the Office of Thrift Supervision limit the dividends that may be
paid without prior approval of the Office of Thrift Supervision. The Bank is
currently a "well-capitalized" Tier 1 institution and can make distributions
during a year of 100% of its net income to date during the year plus one-half
its "surplus capital ratio" (the excess over its capital requirements) at the
beginning of the calendar year. Accordingly, at September 30, 1997 approximately
$11,548,000 of the Bank's retained earnings is available for distribution to the
Company.
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 11 - OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income and expense amounts are summarized as follows for the
years ended September 30:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
Other noninterest income
<S> <C> <C> <C>
Service charges and fees $ 200,759 $ 174,315 $ 124,232
Other 60,412 57,451 65,416
----------- ----------- -----------
$ 261,171 $ 231,766 $ 189,648
=========== =========== ===========
Other noninterest expense
Advertising and promotion $ 179,423 $ 190,614 $ 15,000
Data processing 281,171 200,940 175,734
Professional fees 143,550 175,341 116,008
Printing, postage, stationery,
and supplies 192,514 123,215 87,229
Direct loan origination costs deferred (245,981) (203,332) (99,228)
Other 549,295 482,173 457,892
----------- ----------- -----------
$ 1,099,972 $ 968,951 $ 752,635
=========== =========== ===========
</TABLE>
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
AND CONTINGENCIES
Various outstanding commitments and contingent liabilities are not reflected in
the financial statements. Commitments to make loans at September 30 are as
follows:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6
Fixed Variable Fixed Variable
Rate Loans Rate Loans Total Rate Loans Rate Loans Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
First mortgage loans $ 4,784,788 $ 3,816,543 $ 8,601,331 $ 1,680,256 $ 7,500,852 $ 9,181,108
Commercial loans 2,029,260 6,964,446 8,993,706 -- -- --
Unused lines of credit 717,622 8,931,973 9,649,595 307,028 7,059,117 7,366,145
Unused commercial loan
line of credit -- 1,825,409 1,825,409 -- -- --
Unused construction loan
lines of credit -- 1,380,909 1,380,909 -- 2,721,545 2,721,545
----------- ----------- ----------- ----------- ----------- -----------
$ 7,531,670 $22,919,280 $30,450,950 $ 1,987,284 $17,281,514 $19,268,798
=========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
AND CONTINGENCIES (Continued)
Fixed rate loan commitments at September 30, 1997 are at rates primarily ranging
from 7.125% to 10.75%. 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 9.25% and are tied primarily to the National Monthly Median Cost of Funds
Ratio to SAIF - Insured Institutions.
Since commitments to make loans and to fund unused lines of credit and loans in
process may expire without being used, the amounts do not necessarily represent
future cash commitments. In addition, commitments are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. The maximum exposure to credit loss in the event of nonperformance by
the other party is the contractual amount of these instruments. The same credit
policy is used to make such commitments as is used for loans receivable.
Under employment agreements with certain executives, officers, certain events
leading to separation from the Company could result in cash payments totaling
$1,018,000 as of September 30, 1997.
The Company and the Bank are subject to certain claims and 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 or results of operation of the Company.
NOTE 13 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed financial statements for the parent company,
MFB Corp.
CONDENSED BALANCE SHEETS
September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 796,186 $ 887,580
Equity securities available for sale 329,400 --
Investment in Bank subsidiary 31,939,172 31,108,173
Note receivable from Bank subsidiary -- 4,750,000
Loan receivable from ESOP 664,610 893,651
Other assets 1,438 31,501
----------- -----------
Total assets $33,730,806 $37,670,905
=========== ===========
LIABILITIES
Accrued expenses and other liabilities $ 180,790 $ 71,536
SHAREHOLDERS' EQUITY 33,550,016 37,599,369
----------- -----------
Total liabilities and shareholders' equity $33,730,806 $37,670,905
=========== ===========
</TABLE>
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 13 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME
Years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Dividends from bank - cash $ 2,000,000 $-- $--
Interest income 57,723 74,390 85,212
Interest expense 3,319 -- --
Other expenses 107,243 153,973 132,605
----------- ----------- -----------
Income (loss) before income taxes
and equity in undistributed net income
of Bank subsidiary 1,947,161 (79,583) (47,393)
Income tax benefit 22,803 32,887 19,326
----------- ----------- -----------
Income (loss) before equity in
undistributed net income of Bank subsidiary 1,969,964 (46,696) (28,067)
Equity in undistributed net income
of Bank subsidiary 32,237 1,021,846 1,264,173
----------- ----------- -----------
Net income $ 2,002,201 $ 975,150 $ 1,236,106
=========== =========== ===========
</TABLE>
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 13 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
Cash flows from operating activities
<S> <C> <C> <C>
Net income $ 2,002,201 $ 975,150 $ 1,236,106
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
Bank (32,237) (1,021,846) (1,264,173)
Net change in other assets 30,063 287,659 (317,424)
Net change in accrued expenses and
other liabilities 97,747 40,417 27,738
----------- ----------- -----------
Net cash from operating activities 2,097,774 281,380 (321,990)
Cash flows from investing activities
Net change in interest-bearing deposits
in other financial institutions -- 948,366 --
Principal repayments on loan receivable
from ESOP 229,041 206,349 200,000
Principal repayments on note receivable
from Bank subsidiary 4,750,000 1,000,000 1,000,000
Purchase of securities available for sale (300,350) -- (4,945,231)
Proceeds from maturities of securities -- -- 5,400,000
----------- ----------- -----------
Net cash from investing activities 4,678,691 2,154,715 1,654,769
Cash flows from financing activities
Purchase of MFB Corp. common stock (6,410,802) (1,499,024) (1,530,486)
Proceeds from exercise of stock options 96,500 -- --
Cash dividends paid (553,557) (118,439) --
----------- ----------- -----------
Net cash from financing activities (6,867,859) (1,617,463) (1,530,486)
----------- ----------- -----------
Net change in cash and cash equivalents (91,394) 818,632 (197,707)
Cash and cash equivalents at beginning
of year 887,580 68,948 266,655
----------- ----------- -----------
Cash and cash equivalents at end of year $ 796,186 $ 887,580 $ 68,948
=========== =========== ===========
</TABLE>
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 14 - 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, 1997 and 1996.
Items which are not financial instruments are not included.
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 9,482,348 $ 9,482,000 $ 1,734,388 $ 1,734,000
Interest-bearing time deposits
in other financial institutions -- -- 495,000 495,000
Securities available for sale 39,628,414 39,628,000 66,762,558 66,763,000
FHLB stock 2,400,000 2,400,000 1,336,100 1,336,000
Loans held for sale, net 12,671,186 12,671,000 -- --
Loans receivable, net of
allowance for loan losses 188,264,198 191,855,000 152,052,092 152,341,000
Accrued interest receivable 718,427 718,000 818,014 818,000
Noninterest bearing demand
deposits (2,046,702) (2,047,000) (1,942,145) (1,942,000)
Savings, NOW and MMDA
deposits (38,130,008) (38,130,000) (34,779,548) (34,780,000)
Other time deposits (131,710,557) (131,975,000) (122,242,796) (122,579,000)
Securities sold under
agreements to repurchase (388,920) (389,000) -- --
FHLB advances (47,500,000) (47,092,000) (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, 1997 and 1996. 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, 1997 and 1996, applied for the time period until
maturity. The estimated fair value for securities available for sale, is based
upon quoted market values for the individual securities or for equivalent
securities. The estimated fair value for loans held for sale, net, is based on
the price offered in the secondary market on September 30, 1997 for loans having
similar interest rates and maturities. 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, 1997 and 1996, 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 securities sold under agreements to repurchase and FHLB advances is
based upon estimates of the rate the Company would pay on such deposits or
borrowings at September 30, 1997 and 1996, 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, 1997, 1996 and 1995
NOTE 14 - 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, 1997 and 1996, 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, 1997 and 1996 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 15 - SAIF DEPOSIT INSURANCE PREMIUM
The deposits of savings associations such as the Bank are insured by the Savings
Association Insurance Fund (SAIF). A recapitalization plan signed into law on
September 30, 1996 provided for a one-time assessment of 65.7 basis points
applied to all SAIF deposits as of March 31, 1995. Based on the Bank's deposits
as of this date, a one-time assessment of approximately $955,000 was paid and
recorded as SAIF deposit insurance premium expense for the year ended September
30, 1996.
NOTE 16 - IMPACT OF NEW ACCOUNTING STANDARDS
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," was issued in 1996. It revises the accounting
for transfers of financial assets, such as loans and securities, and for
distinguishing between sales and secured borrowings. It became effective for
some transactions occurring after December 31, 1996, and will be effective for
others in 1998. The impact of partial adoption in 1997 was not material to the
1997 consolidated financial statements and the impact of the complete adoption
in 1998 is also not expected to be material to the consolidated financial
statements.
Also, in March 1997, the accounting requirements for calculating earnings per
share were revised by SFAS No. 128, "Earnings Per Share." Basic earnings per
share for the quarter ending December 31, 1997 and later will be calculated
solely on average common shares outstanding. Diluted earnings per share will
reflect the potential dilution of stock options and other common stock
equivalents. All prior calculations will be restated to be comparable to the new
methods. As the Company has dilution from stock options, the new calculation
methods will increase basic earnings per share over what otherwise would have
been reported as primary earnings per share, while there will be little effect
on fully diluted earnings per share.
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 16 - IMPACT OF NEW ACCOUNTING STANDARDS (Continued)
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income". This Statement establishes standards for
reporting and display of comprehensive income and its components (revenue,
expenses, gains and losses) in a full set of general-purpose financial
statements. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Income tax effects must also be shown. This
Statement is effective for fiscal years beginning after December 15, 1997. The
adoption of SFAS No. 130 is not expected to have a material impact on the
results of operations or financial condition of the Company.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
Statement is effective for financial statements for periods beginning after
December 15, 1997. The adoption of SFAS No. 131 is not expected to have a
material impact on the results of operations or financial condition of the
Company.
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 17 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Year Ended September 30, 1997
---------------------------------
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income $4,107 $4,270 $4,511 $4,797
Interest expense 2,339 2,428 2,612 2,778
------ ------ ------ ------
Net interest income 1,768 1,842 1,899 2,019
Provision for loan losses 7 8 7 8
------ ------ ------ ------
Net interest income after provision for loan 1,761 1,834 1,892 2,011
losses
Noninterest income 113 86 108 118
Noninterest expense 1,084 1,055 1,156 1,304
------ ------ ------ ------
Income before income taxes 790 865 844 825
Income tax expense 314 343 336 329
------ ------ ------ ------
Net income $ 476 $ 522 $ 508 $ 496
====== ====== ====== ======
Earnings per common and common
equivalent share $ .26 $ .30 $ .30 $ .29
====== ====== ====== ======
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 17 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)
Year Ended September 30, 1996
(In thousands, 1st 2nd 3rd 4th
except per share data) Quarter Quarter Quarter Quarter
------- ------- ------- -------
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 (loss) before income taxes 585 658 703 (324)
Income tax expense 233 262 279 (127)
------- ------- ------- -------
Net income (loss) $ 352 $ 396 $ 424 $ (197)
======= ======= ======= =======
Earnings (loss) per common and
common equivalent share $ .17 $ .20 $ .22 $ (.10)
======= ======= ======= =======
<PAGE>
MFB CORP. AND SUBSIDIARY
DIRECTORS AND OFFICERS
September 30, 1997
MFB CORP. AND MFB FINANCIAL DIRECTORS
M. Gilbert Eberhart (age 63) has served as Secretary of the Bank since 1987. He
is also a dentist based in Mishawaka.
Thomas F. Hums (age 64) 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 54) is an optometrist based in Mishawaka.
Michael J. Marien (age 50) is a Sales Representative with Signode Corporation, a
division of ITW.
Marian K. Torian (age 76) 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 42) 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 55) 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.
In addition, Christine A. Lauber has served as a non-voting advisory member
since January 21, 1997. She is a Certified Public Accountant in private practice
in South Bend, Indiana.
MFB FINANCIAL OFFICERS
Charles J. Viater Timothy C. Boenne
President and Chief Executive Officer* Vice President and Controller
Stephen F. Rathka Thomas A. Smith
Senior Vice President Vice President
William L. Stockton, Jr. Michael J. Portolese
Senior Vice President Vice President
M. Gilbert Eberhart
Secretary*
* Holds same position with MFB Corp.
<PAGE>
MFB CORP. AND SUBSIDIARY
SHAREHOLDER INFORMATION
September 30, 1997
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, 1997, there were approximately 670
shareholders of record. The following table sets forth market price and dividend
information for the Company's common stock for the periods indicated.
Dividend
Fiscal Quarters Ended High Trade Low Trade Declared
- --------------------- ---------- --------- --------
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 .06
December 31, 1996 19.25 15.50 .08
March 31, 1997 19.75 16.63 .08
June 30, 1997 19.75 18.75 .08
September 30, 1997 23.50 19.13 .08
Transfer Agent and Registrar Special Counsel
Registrar and Transfer Co. Barnes & Thornburg
10 Commerce Drive 1313 Merchants Company Building
Cranford, NJ 07016 11 South Meridan Street
Indianapolis, IN 46204
Independent Auditors
Crowe, Chizek and Company LLP
330 East Jefferson Blvd.
South Bend, IN 46601
Shareholder and General Inquiries
The Company is required to file an Annual Report on Form 10-K for its fiscal
year ended September 30, 1997 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
PO Box 528
Mishawaka, IN 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 Branch Office
402 W. Cleveland Rd. 2427 Mishawaka Ave. 2304 Lincolnway East
Mishawaka, IN 46545 South Bend, IN 46615 Goshen, IN 46526
