FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended September 30, 1997
or
[] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _____________
Commission file number: 0-23374
MFB CORP.
(Exact name of registrant as specified in its charter)
Indiana 35-1907258
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
121 South Church Street, P.O. Box 528, Mishawaka, Indiana 46546
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code:
(219) 255-3146
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, without par value
Common Share Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No
-----
(2) Yes X No
-----
Indicate by check mark if disclosure of delinquent filers persuant to Item 405,
Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ___
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of December 1, 1997, was $29,070,655.00.
The number of shares of the registrant's common stock, without par value,
outstanding as of December 1, 1997, was 1,627,767 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Annual Report to Shareholders for the fiscal year ended
September 30, 1997 are incorporated by reference into Part II.
Portions of the Proxy Statement for the 1998 Annual Meeting of the Shareholders
are incorporated into Part I and Part III.
Exhibit Index on Page 51
Page one of 122 Pages
<PAGE>
MFB CORP.
Form 10-K
INDEX
PART I
Item 1. Business 1
Item 2. Properties 42
Item 3. Legal Proceedings 43
Item 4. Submission of Matters to a Vote of Security Holders 43
Item 4.5 Executive Officers of MFB 43
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 44
Item 6. Selected Financial Data 45
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 46
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data 47
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 47
PART III
Item 10. Directors and Executive Officers of the Registrant 47
Item 11. Executive Compensation 48
Item 12. Security Ownership of Certain Beneficial Owners
and Management 48
Item 13. Certain Relationships and Related Transactions 48
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 48
Signatures 50
Item 15. Exhibit List 51
<PAGE>
PART 1
Item 1. Business.
General
MFB Corp. ("MFB" or the "Holding Company") is an Indiana corporation
organized in December, 1993 to become a unitary savings and loan holding
company. MFB became a unitary savings and loan holding company upon the
conversion of MFB Financial (formerly named Mishawaka Federal Savings, the
"Bank", and together with MFB, the "Company") from a federal mutual savings and
loan association to a federal stock savings bank on March 24, 1994.The principal
asset of MFB consists of 100% of the issued and outstanding shares of common
stock, $0.01 par value per share, of the Bank. The Bank began operations in
Mishawaka, Indiana in 1889 under the name Mishawaka Building and Loan
Association.
MFB Financial directly, and indirectly through its service corporation
subsidiary, offers a number of consumer and commercial financial services. These
services include: (i) residential real estate loans; (ii) home equity and second
mortgage loans; (iii) construction loans; (iv) commercial loans; (v) loans
secured by deposits; (vi) NOW accounts; (vii) passbook savings accounts; (viii)
certificates of deposit; (ix) consumer and commercial demand deposit accounts;
(x) individual retirement accounts; and (xi) a variety of insurance products and
brokerage services through its service corporation subsidiary, Mishawaka
Financial Services, Inc. MFB Financial provides these services through its five
offices, three in Mishawaka, one in South Bend, and one in Goshen, Indiana. MFB
Financial also operates a mortgage origination office in Elkhart, Indiana. MFB
Financial's market area for loans and deposits primarily consists of St. Joseph
and Elkhart counties.
The Company's principal source of revenue is interest income from lending
activities, primarily residential mortgage loans, and, to a lesser extent,
residential construction loans. At September 30, 1997, $177.3 million, or 87.7%
of the Company's total loan portfolio, including loans held for sale, consisted
of mortgage loans on one-to four-family residential real property which are
generally secured by first mortgages on the property. A large majority of the
residential real estate loans originated by MFB Financial are secured by
properties located in St. Joseph County.
MFB Financial also makes commercial loans, consumer loans, and multi-family
mortgage loans. Consumer loans include loans secured by deposits and home equity
and second mortgage loans. Commercial loans include term loans and commercial
lines of credit.
A significant portion of MFB Financial's loan portfolio consists of
adjustable rate loans. Adjustable rate loans permit MFB Financial to better
match the interest it earns on loans with the interest it pays on deposits.
Additionally, MFB Financial attempts to lengthen liability repricing by
aggressively pricing longer term certificates of deposit during periods of
relatively low interest rates.
<PAGE>
Lending Activities
General. MFB Financial historically has concentrated its lending activities
on the origination of loans secured by first mortgage liens for the purchase,
construction or refinancing of one-to four-family residential real property.
These loans continue to be the major focus of MFB Financial's loan origination
activities. MFB also offers home equity lines of credit and commercial loans.
Management is currently evaluating other loan programs which may be added as
business plans warrant.
Residential Loans. Residential loans consist of one-to four-family loans.
Pursuant to federal regulations, such loans must require at least semi-annual
payments and be for a term of not more than 40 years, and, if the interest rate
is adjustable, it must be correlated with changes in a readily verifiable index.
A majority of the loans made by MFB Financial feature adjustable rates. A
variety of programs are offered to borrowers. Some loans adjust monthly, a
majority adjust on an annual basis after initial terms of one to ten years and
others adjust each three years. Initial offering rates, adjustment caps and
margins are adjusted periodically to reflect market conditions and provide
diversity of the loan portfolio.
MFB Financial also offers fixed-rate loans with a maximum term of thirty
years. They are available for a variety of loan types, including first and
second mortgages and purchases of residential building sites.
MFB Financial normally requires private mortgage insurance on all
conventional residential single-family mortgage loans with loan-to-value ratios
in excess of 80%. The private mortgage insurance obligation may be eliminated
when the principal balance of the loan is reduced below 75% of the original
cost. MFB Financial generally will not lend more than 95% of the lesser of
current cost or appraised value of a residential single-family property. Some
equity lines of credit are originated at up to 100% loan-to-value with higher
yields to compensate for potentially higher risk.
Substantially all of the residential mortgage loans that MFB Financial
originates include "due-on-sale" clauses, which give MFB Financial the right to
declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid.
Residential mortgage loans in excess of $250,000 must be approved by a
majority of the members of MFB Financial's Board of Directors. Loans under that
amount are approved by any two members of MFB Financial's Loan Committee.
<PAGE>
Construction Loans. MFB Financial offers construction loans with respect to
owner-occupied residential real estate, to builders or developers constructing
such properties and to owners who are to occupy the premises.
Generally, construction loans are 12-month adjustable rate mortgage loans
with interest calculated on the amount disbursed under the loan and payable on a
monthly basis. Interest rates for such loans are generally tied to the National
Prime Rate. A construction loan fee is also charged for these loans. MFB
Financial normally requires a 80% loan-to-value ratio for its construction
loans. Inspections are made in conjunction with disbursements under a
construction loan, and the construction phase is generally limited to six
months.
Commercial Loans. Commercial real estate loans originated by federal
savings associations are limited to 40% of their capital, and commercial loans
unsecured by real estate may be made in amounts up to 20% of the savings
association's total assets, provided that amounts in excess of 10% of total
assets may be used only for small business loans. MFB Financial has established
a commercial lending department focused on meeting the borrowing needs of small
local businesses. Loans may be secured by real estate, equipment, inventory,
receivables or other appropriate collateral. Terms vary and adjustable rate
loans are generally indexed to the Wall Street Journal prime rate. Loans with
longer amortization periods generally contain balloon payment provisions.
Personal guarantees by business principals are generally required in order to
manage risk on these loans. Commercial lending activity has allowed MFB
Financial to diversify its balance sheet, increase market penetration and
improve earnings.
Consumer Loans. Federal laws and regulations permit federally chartered
savings associations to make secured and unsecured consumer loans in an
aggregate amount of up to 35% of the association's total assets. In addition, a
federally chartered savings association has lending authority above the 35%
limit for certain consumer loans, such as property improvement loans and deposit
account secured loans. However, the Qualified Thrift Lender test places
additional limitations on a savings association's ability to make consumer
loans.
As a general rule, consumer loans made by most financial institutions
involve a higher level of risk than one-to four-family residential mortgage
loans because consumer loans are generally made based upon the borrower's
ability to repay the loan, which is subject to change, rather than the value of
the underlying collateral, if any. However, the relatively higher yields and
shorter terms to maturity of consumer loans are believed to be helpful in
reducing interest-rate risk. MFB Financial makes only secured consumer loans for
amounts specifically tied to the value of the collateral, and, therefore, has
been successful in managing consumer loan risk.
Origination, Purchase and Sale of Loans. MFB Financial currently originates
its loans pursuant to its own underwriting standards and forms of documentation
which are not in conformity with the standard criteria of the Federal Home Loan
Mortgage Corporation ("FHLMC") or Federal National Mortgage Association
("FNMA"). If it desired to sell its loans, MFB Financial might therefore
experience some difficulty selling such loans quickly in the secondary market.
MFB Financial's adjustable rate mortgages vary from secondary market criteria
<PAGE>
because, among other things, MFB Financial does not use the standard loan form,
does not require current property surveys in most cases, permits borrowers to
make repayments which reduce subsequent payment obligations on loans and does
not permit the conversion of those loans to fixed rate loans. However, steps
have been taken to upgrade the loan origination system to allow new loans to
more closely conform to secondary market documentation standards. This upgrade
was completed in September 1997. In order to limit interest rate risk, build a
servicing fee base and manage liquidity, MFB Financial intends to be in a
position to sell loans in the future. Such sales will be on a service retained
basis.
MFB Financial confines its loan origination activities primarily in St.
Joseph County and the surrounding area. A loan origination office was opened in
Elkhart County in the fall of 1996. MFB's loan originations are generated from
referrals from builders, developers, real estate brokers and existing customers,
and limited newspaper and periodical advertising. All loan applications are
processed and underwritten at MFB Financial's main office.
A savings association generally may not make any loan to a borrower or its
related entities if the total of all such loans exceeds 15% of its capital (plus
up to an additional 10% of capital in the case of loans fully collateralized by
readily marketable collateral); provided, however, that loans up to $500,000
regardless of the percentage limitations may be made and certain housing
development loans of up to $30 million or 30% of capital, whichever is less, are
permitted. MFB Financial's portfolio of loans currently contains no loans that
exceed the 15% of capital limitation.
MFB Financial's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. To assess the borrower's
ability to repay, MFB Financial studies the employment and credit history and
information on the historical and projected income and expenses of its
mortgagors.
MFB Financial generally requires appraisals on all property securing its
loans and requires title insurance and a valid lien on its mortgaged real
estate. Appraisals for residential real property are generally performed by an
in-house appraiser who is a state-certified residential appraiser. From time to
time, MFB Financial also uses the services of other certified residential
appraisers who are not in-house. MFB Financial requires fire and extended
coverage insurance in amounts at least equal to the principal amount of the
loan. It also requires flood insurance to protect the property securing its
interest if the property is in a flood plain. Tax and insurance payments are
typically required to be escrowed by MFB Financial on new loans.
Origination and Other Fees. MFB Financial realizes income from late
charges, checking account service charges, safety deposit box rental fees, and
fees for other miscellaneous services. MFB Financial charges application fees
for most loan applications, but such are generally credited back to the customer
upon the closing of the loan. If the loan is denied, MFB Financial retains a
portion of the application fee. In order to attract adjustable rate mortgages,
MFB Financial has originated most of its adjustable rate mortgages without
charging points. However, borrowers from time to time wish to pay points and
management negotiates rates on an individual basis. Late charges are generally
assessed if payment is not received within a specified number of days after it
is due. The grace period depends on the individual loan documents.
<PAGE>
Non-Performing and Problem Assets
All loans are reviewed by the Company on a regular basis and may be placed
on a non-accrual status when the loans become contractually past due ninety days
or more, depending on a case by case evaluation of the circumstances surrounding
each loan. At the end of each month, delinquency notices are sent to all
borrowers from whom payments have not been received. Contact by phone or in
person is made, if feasible, to all such borrowers.
When loans are sixty days in default, personal contact is made with the
borrower to establish an acceptable repayment schedule. When loans are ninety
days in default, contact is made with the borrower by an employee of MFB
Financial after consultation with a Senior Loan Officer who attempts to
establish an acceptable repayment schedule. Management is authorized to commence
foreclosure proceedings for any loan upon making a determination that it is
prudent to do so. All loans on which foreclosure proceedings have been commenced
are placed on non-accrual status.
Non-performing assets. At September 30, 1997, $261,000 or .10% of the
Company's total assets, were non-performing assets (loans delinquent more than
90 days, non-accrual loans, real estate owned (REO") and troubled debt
restructurings). At September 30, 1997, the Company had no impaired loans and
there was no real estate acquired as a result of foreclosure, voluntary deed, or
other means. Such real estate is classified by the Company as "real estate
owned" or "REO" until it is sold. When property is so acquired, the value of the
asset is recorded on the books of the Company at fair value. Interest accrual
ceases when the collection of interest becomes doubtful. All costs incurred from
the date of acquisition in maintaining the property are expensed.
Classified assets. Federal regulations and MFB Financial's Classification
of Assets policy provide for the classification of loans and other assets such
as debt and equity securities considered by the Office of Thrift Supervision
("OTS") to be of lesser quality as "substandard," "doubtful" or "loss" assets.
An asset is considered "substandard" if it is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the association will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to sufficient risk to
warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "special mention" by management.
<PAGE>
An insured institution is required to establish general allowances for loan
and lease losses in an amount deemed prudent by management for loans classified
substandard, doubtful or impaired, as well as for other problem loans. General
allowances represent loss allowances which have been established to recognize
the inherent risk associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. When an
insured institution classifies problem assets as "loss", it is required either
to establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the establishment of
additional general or specific loss allowances.
MFB Financial regularly reviews its loan portfolio to determine whether any
loans require classification in accordance with applicable regulations. For
reasons such as low loan-to-value ratios, not all of the Company's
non-performing assets constitute classified assets.
Allowance for Loan Losses
The allowance for loan and lease losses is maintained through the provision
for loan losses, which is charged to earnings. The provision is determined in
conjunction with management's review and evaluation of current economic
conditions (including those of MFB Financial's lending area), changes in the
character and size of the loan and lease portfolio, delinquencies (current
status as well as past and anticipated trends) and adequacy of collateral
securing loan delinquencies, historical and estimated net charge-offs, and other
pertinent information derived from a review of the loan and lease portfolio. In
management's opinion, MFB Financial's allowance for loan and lease losses is
adequate to absorb anticipated future losses existing at September 30, 1997.
Investments
General. Federally chartered savings associations have the authority to
invest in various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds sold. Subject to various restrictions, federally
chartered savings associations may also invest a portion of their assets in
commercial paper, corporate debt securities and asset-backed securities. The
investment policy of MFB Financial, which is established and implemented by MFB
Financial's Investment Committee, is designed primarily to maximize the yield on
the investment portfolio subject to minimal liquidity risk, default risk,
interest rate risk, and prudent asset/liability management.
The Company's investment portfolio consists of U.S. Treasury Bonds, U.S.
government agency securities, mortgage-backed securities, equity securities and
Federal Home Loan Bank ("FHLB") stock.
<PAGE>
Liquidity. Federal regulations require FHLB-member savings associations to
maintain an average daily balance of liquid assets equal to a quarterly average
of not less than a specified percentage of its net withdrawable savings deposits
plus short-term borrowings. Liquid assets include cash, certain time deposits,
certain bankers' acceptances, specified U.S. government, state or federal agency
obligations, certain corporate debt securities, commercial paper, certain mutual
funds, certain mortgage-related securities, and certain first lien residential
mortgage loans. This liquidity requirement may be changed from time-to-time by
the OTS to any amount within the range of 4% to 10%, and is currently 4%.
Monetary penalties may be imposed for failure to meet this liquidity
requirement. As of September 30, 1997, the Company had liquid assets of $33.6
million and a regulatory liquidity ratio of 17.0%.
Sources of Funds
General. Deposits have traditionally been MFB Financial's primary source of
funds for use in lending and investment activities. In addition to deposits, MFB
Financial derives funds from scheduled loan payments, loan prepayments, retained
earnings and income on earning assets. While scheduled loan payments and income
on earning assets are relatively stable sources of funds, deposit inflows and
outflows can vary widely and are influenced by prevailing interest rates, market
conditions and levels of competition. Borrowings from the FHLB of Indianapolis
may be used in the short-term to compensate for reductions in deposits or
deposit inflows at less than projected levels. Historically, MFB Financial has
rarely borrowed on a longer-term basis to support expanded activities or to
assist in its asset/liability management. However, in 1996, the Bank instituted
a capital leveraging strategy that involved the purchase of earning assets
funded primarily with FHLB borrowings. This strategy has contributed to net
earnings and helps improve the overall return on equity.
Deposits. Deposits are attracted, principally from within St. Joseph and
Elkhart counties, through the offering of a broad selection of deposit
instruments including NOW and other transaction accounts, fixed-rate
certificates of deposit, individual retirement accounts, and savings accounts.
MFB Financial does not actively solicit or advertise for deposits outside of
these counties. Substantially all of MFB Financial's depositors are residents of
these counties. Deposit account terms vary, with the principal differences being
the minimum balance required, the amount of time the funds remain on deposit and
the interest rate. MFB Financial does not pay a fee for any deposits it
receives.
Interest rates paid, maturity terms, service fees and withdrawal penalties
are established by MFB Financial on a periodic basis. Determination of rates and
terms are predicated on funds acquisition and liquidity requirements, rates paid
by competitors, growth goals, and federal regulations. MFB Financial relies, in
part, on customer service and long-standing relationships with customers to
attract and retain its deposits, but also prices its deposits in relation to
rates offered by its competitors.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts offered by MFB Financial has
allowed it to be competitive in obtaining funds and to respond with flexibility
to changes in consumer demand. MFB Financial has become more susceptible to
short-term fluctuations in deposit flows as customers have become more interest
rate conscious. MFB Financial manages the pricing of its deposits in keeping
with its asset/liability management and profitability objectives. Based on its
experience, MFB Financial believes that its passbook, NOW and
non-interest-bearing checking accounts are relatively stable sources of
deposits. However, the ability of MFB Financial to attract and maintain
certificates of deposit, and the rates paid on these deposits, has been and will
continue to be significantly affected by market conditions.
<PAGE>
Borrowings. MFB Financial focuses on generating high quality loans and then
seeks the best source of funding from deposits, investments or borrowings.
Although deposits are the Bank's primary source of funds, the Bank's policy has
been to utilize borrowings when they are a less costly source of funds, can be
invested at a positive interest rate spread or when the Bank desires additional
capacity to fund loan demand.
MFB Financial's borrowings consist mainly of advances from the FHLB of
Indianapolis upon the security of a blanket collateral agreement of a percentage
of unemcumbered loans. Such advances can be made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. There are regulatory restrictions on advances from the Federal Home
Loan Banks, See "Regulation--Federal Home Loan Bank System" and "--Qualified
Thrift Lender." At September 30, 1997, MFB Financial had $ 47.5 million in
Federal Home Loan Bank borrowings outstanding. MFB Financial does not anticipate
any difficulty in obtaining advances appropriate to meet its requirements in the
future.
With selected business entities, MFB Financial has entered into repurchase
agreements. These agreements are all one day retail repurchase agreements, are
accounted for as borrowings by the Bank, and are secured by certain investment
securities of the Bank. At September 30, 1997, the Bank had $389,000 in
repurchase agreements outstanding.
Service Corporation Subsidiary
OTS regulations permit federal savings associations to invest in the
capital stock, obligations, or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants in
an aggregate amount not exceeding 2% of an association's assets, plus an
additional 1% of assets if the amount over 2% is used for specified community or
inner-city development purposes. In addition, federal regulations permit
associations to make specified types of loans to such subsidiaries (other than
special-purpose finance subsidiaries), in which the association owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the association's
regulatory capital if the association's regulatory capital is in compliance with
applicable regulations. A savings association that acquires a non-savings
association subsidiary, or that elects to conduct a new activity within a
subsidiary, must give the Federal Deposit Insurance Corporation ("FDIC") and the
OTS at least 30 days advance written notice. The FDIC may, after consultation
with the OTS, prohibit specific activities if it determines such activities pose
a serious threat to the Savings Association Insurance Fund ("SAIF").
<PAGE>
MFB Financial's only subsidiary, Mishawaka Financial Services, Inc.
("Mishawaka Financial"), was organized in 1975 and currently is engaged in the
sale of credit life, general fire and accident, car, home and life insurance, as
agent to MFB Financial's customers and the general public. In addition, a range
of investment and insurance related products is offered to customers through a
contractual relationship established with Financial Network Investment
Corporation (FNIC), a full service securities brokerage firm. During fiscal year
1997, Mishawaka Financial received approximately $144,000 in commissions versus
approximately $113,000 in commissions received during fiscal year 1996. Since
Mishawaka Financial conducts all of its activities as agent for its customers,
MFB Financial is not required to deduct from its capital any portion of this
investment. The consolidated statements of income of MFB included elsewhere
herein include the operation of MFB Financial and Mishawaka Financial. All
significant intercompany balances and transactions have been eliminated in the
consolidation.
Employees
As of September 30, 1997, MFB Financial employed 63 persons on a full-time
basis and 23 persons on a part-time basis. None of MFB Financial's employees are
represented by a collective bargaining group. Management considers its employee
relations to be excellent.
<PAGE>
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
A. The following are the average balance sheets for the years ending
September 30:
<TABLE>
<CAPTION>
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
Noninterest 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
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 20,309 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)
Net 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>
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(1) Average outstanding balance reflects unrealized gain (loss) on securities
available for sale.
(2) Total loans, including loans held for sale, less deferred net loan fees and
loans in process.
10
<PAGE>
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
B. The following tables set forth, for the years indicated, the condensed
average balance of interest-earning assets and interest-bearing
liabilities, the interest earned or paid on such amounts, and the
average interest rates earned or paid thereon.
<TABLE>
<CAPTION>
--------Year Ended September 30, 1997-------
Average Average
Balance Interest Yield/Cost
(Dollars in thousands)
INTEREST-EARNING ASSETS
<S> <C> <C> <C>
Interest-bearing deposits $ 1,856 $ 96 5.17%
Securities (1) 30,808 2,112 6.86
Mortgage-backed securities (1) 22,246 1,436 6.46
Loans receivable (2) 175,761 13,897 7.91
Stock in FHLB of Indianapolis 1,783 144 8.08
-------- ------
Total interest-earning assets $232,454 17,685 7.61
--------
INTEREST-BEARING LIABILITIES
Savings accounts $ 10,359 278 2.68%
NOW and money market accounts 26,770 773 2.89
Certificates of deposit 126,202 7,134 5.65
Borrowings 35,057 1,972 5.63
-------- ------
Total interest-bearing liabilities $198,388 10,157 5.12
======== ------
Net interest earning assets $ 34,066
========
Net interest income $ 7,528
========
Interest rate spread (3) 2.49%
Net yield on average interest-earning assets (4) 3.24%
Average interest-earning assets to
average interest-bearing liabilities 117.17%
</TABLE>
- --------------------------------------------------------------------------------
(1) Average balance does not reflect unrealized gain (loss) on securities
available for sale and yield is based on amortized cost.
(2) Total loans, including loans held for sale, less deferred net loan fees and
loans in process.
(3) Interest rate spread is calculated by subtracting average interest rate
cost from average interest rate earned for the period indicated.
(4) The net yield on average interest-earning assets is calculated by dividing
net interest income by average interest-earning assets for the period
indicated.
11
<PAGE>
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
<TABLE>
<CAPTION>
--------Year Ended September 30, 1996-------
Average Average
Balance Interest Yield/Cost
(Dollars in thousands)
INTEREST-EARNING ASSETS
<S> <C> <C> <C>
Interest-bearing deposits $ 6,709 $ 422 6.29%
Securities (1) 35,410 2,186 6.17
Mortgage-backed securities (1) 19,920 1,225 6.15
Loans receivable (2) 133,670 10,246 7.67
Stock in FHLB of Indianapolis 1,303 103 7.90
------------ ------------
Total interest-earning assets $ 197,012 14,182 7.20
============
INTEREST-BEARING LIABILITIES
Savings accounts $ 9,746 270 2.77%
NOW and money market accounts 26,006 811 3.12
Certificates of deposit 113,570 6,447 5.68
Borrowings 9,625 529 5.50
------------ ------------
Total interest-bearing liabilities $ 158,947 8,057 5.07
============ ------------
Net interest earning assets $ 38,065
============
Net interest income $ 6,125
============
Interest rate spread (3) 2.13%
Net yield on average interest-earning assets (4) 3.11%
Average interest-earning assets to
average interest-bearing liabilities 123.95%
</TABLE>
- --------------------------------------------------------------------------------
(1) Average balance does not reflect unrealized gain (loss) on securities
available for sale and yield is based on amortized cost.
(2) Total loans, including loans held for sale, less deferred net loan fees and
loans in process.
(3) Interest rate spread is calculated by subtracting average interest rate
cost from average interest rate earned for the period indicated.
(4) The net yield on average interest-earning assets is calculated by dividing
net interest income by average interest-earning assets for the period
indicated.
12
<PAGE>
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
<TABLE>
<CAPTION>
--------Year Ended September 30, 1995-------
Average Average
Balance Interest Yield/Cost
(Dollars in thousands)
INTEREST-EARNING ASSETS
<S> <C> <C> <C>
Interest-bearing deposits $ 7,995 $ 482 6.03%
Securities 39,841 2,300 5.77
Mortgage-backed securities 12,558 692 5.51
Loans receivable (1) 118,735 8,816 7.42
Stock in FHLB of Indianapolis 1,223 93 7.60
------------ ------------
Total interest-earning assets $ 180,352 12,383 6.87
============
INTEREST-BEARING LIABILITIES
Savings accounts $ 9,774 274 2.80%
NOW and money market accounts 26,672 863 3.24
Certificates of deposit 106,556 5,651 5.30
------------ ------------
Total interest-bearing liabilities $ 143,002 6,788 4.75
============ ------------
Net interest earning assets $ 37,350
============
Net interest income $ 5,595
============
Interest rate spread (2) 2.12%
Net yield on average interest-earning assets (3) 3.10%
Average interest-earning assets to
average interest-bearing liabilities 126.12%
</TABLE>
- --------------------------------------------------------------------------------
(1) Average balance does not reflect unrealized gain (loss) on securities
available for sale and yield is based on amortized cost.
(2) Total loans, including loans held for sale, less deferred net loan fees and
loans in process.
(3) Interest rate spread is calculated by subtracting average interest rate
cost from average interest rate earned for the period indicated.
(4) The net yield on average interest-earning assets is calculated by dividing
net interest income by average interest-earning assets for the period
indicated.
13
<PAGE>
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
C. The following tables describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities
have affected MFB Corp.'s consolidated interest income and expense
during the periods indicated. For each category of interest-earning
asset and interest-bearing liability, information is provided on changes
attributable to (1) changes in rate (i.e., changes in rate multiplied by
old volume) and (2) changes in volume (i.e., changes in volume
multiplied by old rate). Changes attributable to both rate and volume
have been allocated proportionally to the change due to volume and the
change due to rate.
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
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
------- ------- -------
Total 3,503 564 2,939
Interest-bearing liabilities
Savings accounts 8 (9) 17
NOW and money market accounts (38) (61) 23
Certificates of deposit 687 (27) 714
Borrowings 1,443 15 1,428
------- ------- -------
Total 2,100 (82) 2,182
------- ------- -------
Change in net interest income $ 1,403 $ 646 $ 757
======= ======= =======
- --------------------------------------------------------------------------------
14
<PAGE>
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
<TABLE>
<CAPTION>
Increase (Decrease) in
Net Interest Income
--------------------------------------------------
Total Net Due to Due to
Change Rate Volume
(In thousands)
<S> <C> <C> <C>
Year ended September 30, 1996 compared
to year ended September 30, 1995
Interest-earning assets
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>
- --------------------------------------------------------------------------------
15
<PAGE>
II. INVESTMENT PORTFOLIO
A. The following table sets forth the amortized cost and fair value of
securities available for sale:
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- -------------------------- -------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt securities
U.S. Government
and federal
agencies $23,618 $23,720 $40,160 $40,207 $- $-
Mortgage-backed
securities 15,589 15,579 24,473 24,074 -- --
------- ------- ------- -------- ----
39,207 39,299 64,633 64,281 -- --
Marketable equity
securities 300 329 2,494 2,482 -- --
------- ------- ------- -------- -------- ----
$39,507 $39,628 $67,127 $66,763 $- $-
======= ======= ======= ======= ======== ====
</TABLE>
The following table sets forth the amortized cost and fair value of securities
held to maturity:
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- -------------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt securities
U.S. Government
and federal
agencies $- $-- $- $- $40,117 $40,180
Mortgage-backed
securities -- -- - - 11,905 11,524
--- --- -- -- ------- -------
$-- $-- $- $- $52,022 $51,704
=== === == == ======= =======
</TABLE>
16
<PAGE>
II. INVESTMENT PORTFOLIO (Continued)
A. The following table sets forth the amortized cost and estimated market
value of Federal Home Loan Bank (FHLB) stock:
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- -------------------------- --------------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Other securities
FHLB stock, at
cost $ 2,400 $ 2,400 $ 1,336 $ 1,336 $ 1,271 $1,271
========= ======== ======== ======= ======== ======
</TABLE>
B. The maturity distribution and weighted average interest rates of debt
securities available for sale, excluding mortgage-backed securities,
are as follows:
<TABLE>
<CAPTION>
Amount at September 30, 1997, which matures in
-------------------------------------------------------------------------------------------
One One to Five to
Year or Less Five Years Ten Years Totals
---------------------- ------------------------ ---------------- -------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value
--------- --------- ---------- ---------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and federal
agencies $ 4,190 $ 4,208 $ 16,081 $ 16,138 $ 3,347 $ 3,374 $23,618 $23,720
========= ========= ========== ========== ======= ======= ======= =======
Weighted average yield 6.68% 6.81% 7.24% 6.85%
</TABLE>
The weighted average interest rates are based upon coupon rates for
securities purchased at par value and on effective interest rates
considering amortization or accretion if the securities were purchased at a
premium or discount.
C. Excluding those holdings of the investment portfolio in U.S. Treasury
securities and other agencies of the U.S. Government, there were no
investments in securities of any one issuer which exceeded 10% of the
shareholders' equity of the Company at September 30, 1997.
17
<PAGE>
III. LOAN PORTFOLIO
A. The following table sets for the composition of MFB Corp.'s
consolidated loan portfolio and mortgage-backed securities by
loan type as of the dates indicated, including a reconciliation
of gross loans receivable to net loans receivable after
consideration of the allowance for loan losses, deferred net loan
fees and loans in process:
<TABLE>
<CAPTION>
-----------------------------September 30,----------------------------------
1997 1996 1995
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans
Residential(1) $ 177,269 87.73% $ 143,751 92.87% $ 119,720 97.60%
Multi-family 130 .06 163 .10 189 .15
Residential construction 8,245 4.08 5,005 3.23 2,106 1.72
Consumer and other loans
Home equity and second
mortgage loans 7,177 3.55 3,790 2.45 375 .30
Commercial loans 8,833 4.37 876 .57 206 .17
Financing leases 325 .16 1,125 .73 -- --
Other 96 .05 83 .05 74 .06
------- ------ ------- ------ ------- ------
Gross loans receivable(1) 202,075 100.00% 154,793 100.00% 122,670 100.00%
====== ====== ======
Less
Allowance for loan losses (370) (340) (310)
Deferred net loan fees (653) (440) (370)
Loans in process (117) (1,961) (809)
------ ------ ---------
Net loans receivable(1) $ 200,935 $ 152,052 $ 121,181
Mortgage-backed securities
FHLMC certificates $ 3,508 $ 5,013 $ 11,905
CMO - REMIC 12,071 19,061 --
------ ------ ---------
Net mortgage-backed securities $ 15,579 $ 24,074 $ 11,905
========= ========= =========
Mortgage loans
Adjustable rate $ 139,665 75.23% $ 130,336 87.01% $ 113,394 92.78%
Fixed rate(1) 45,980 24.77 19,459 12.99 8,827 7.22
------- ------ ------- ------ ------- ------
Total(1) $ 185,645 100.00% $ 149,795 100.00% $ 122,221 100.00%
========= ====== ========= ====== ========= ======
</TABLE>
(1) Includes loans held for sale
18
<PAGE>
<TABLE>
<CAPTION>
---------------------September 30,--------------------
1994 1993
Percent Percent
of of
Amount Total Amount Total
------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans
Residential(1) $ 113,770 97.25% $ 107,168 97.87%
Multi-family 192 .16 625 .57
Residential construction 2,213 1.89 848 .78
Consumer and other loans
Home equity and second
mortgage loans 298 .26 256 .24
Commercial loans 443 .38 496 .45
Financing leases -- -- -- --
Other 69 .06 106 .09
------- ------ ------- ------
Gross loans receivable(1) 116,985 100.00% 109,499 100.00%
====== ======
Less
Allowance for loan losses (280) (250)
Deferred net loan fees (447) (556)
Loans in process (961) (481)
---- ----
Net loans receivable(1) $ 115,297 $ 108,212
========= ==========
Mortgage-backed securities
FHLMC certificates $ 13,158 $-
CMO - REMIC -- --
--------- ----
Net mortgage-backed securities $ 13,158 $ -
========= ====
Mortgage loans
Adjustable rate $ 110,853 95.06% $ 102,837 94.23%
Fixed rate(1) 5,765 4.94 6,300 5.77
--------- ----- --------- -----
Total(1) $ 116,618 100.00% $ 109,137 100.00%
========= ====== ========= ======
(1) Includes loans held for sale
</TABLE>
18
<PAGE>
III. LOAN PORTFOLIO (Continued)
B. Loan Maturity. The following table sets forth certain information at
September 30, 1997, regarding the dollar amount of loans maturing in
MFB Corp.'s consolidated loan portfolio based on the date that final
payment is due under the terms of the loan. Demand loans having no
stated schedule of repayments and no stated maturity and overdrafts
are reported as due in one year or less. This schedule does not
reflect the effects of possible prepayments or enforcement of
due-on-sale clauses. Management expects prepayments will cause actual
maturities to be shorter.
<TABLE>
<CAPTION>
Balance Due during years ended September 30,
Outstanding 2001 2003 2008 2013
at September 30, and to to and
1997 1998 1999 2000 2002 2007 2012 Following
---- ---- ---- ---- ---- ---- ---- ---------
(In thousands)
Mortgage loans
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential (1) $177,269 $ 356 $180 $1,644 $ 4,567 $ 9,517 $36,082 $124,923
Multi-family 130 - - - - 88 42 -
Residential construction 8,245 6,886 - - - - 341 1,018
Consumer and other loans
Home equity
and second mortgage 7,177 27 105 5 1,007 5,947 30 56
Commercial loans 8,833 1,807 234 1,423 4,623 551 195 -
Financing leases 325 - - - - 325 - -
Other 96 81 - - - - - 15
-------- ------ ---- ------ ------- ------- ------- --------
Total (1) $202,075 $9,157 $519 $3,072 $10,197 $16,428 $36,690 $126,012
======== ====== ==== ====== ======= ======= ======= ========
</TABLE>
The following table sets forth, as September 30, 1997, the dollar amount of all
loans due after one year which have fixed interest rates and floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Due After September 30, 1997
Variable
Fixed Rates Rates Total
----------- ----------- ---------
(In thousands)
Mortgage loans
<S> <C> <C> <C>
Residential (1) $ 44,408 $ 132,505 $ 176,913
Multi-family 17 113 130
Residential construction 1,102 257 1,359
Consumer and other loans
Home equity and second mortgage 1,005 6,145 7,150
Commercial loans 6,317 709 7,026
Financing leases 325 - 325
Other - 15 15
----------- ----------- ---------
Total (1) $ 53,174 $ 139,744 $ 192,918
=========== =========== =========
</TABLE>
(1) Includes loans held for sale
19
<PAGE>
III. LOAN PORTFOLIO (Continued)
C. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans
The table below sets forth the amounts and categories of MFB
Corp.'s consolidated non-performing assets (accruing loans
delinquent more than 90 days, non-accrual loans, troubled debt
restructurings and real estate owned). It is the policy of MFB
Corp. that all earned but uncollected interest on all loans be
reviewed quarterly to determine if any portion thereof be
classified as uncollectible for any loan past due in excess of
90 days.
At September 30,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
Accruing loans delinquent
more than 90 days $261 $198 $308 $107 $223
Non-accruing loans(1) -- -- -- -- --
Troubled debt
restructurings -- -- -- -- --
---- ---- ---- ---- ----
Total non-performing
loans 261 198 308 107 223
Real estate owned, net -- -- 18 22 50
---- ---- ---- ---- ----
Total non-performing
assets $261 $198 $326 $129 $273
==== ==== ==== ==== ====
Non-performing loans to
total loans, net (2) .13% .13% .25% .09% .21%
Non-performing assets to
total assets .10% .09% .17% .07% .16%
Management believes that the allowance for loan losses balance at September 30,
1997 is adequate to absorb any losses on nonperforming loans, as the allowance
balance is maintained by management at a level considered adequate to cover
losses that are currently anticipated based on past loss experience, general
economic conditions, information about specific borrower situations including
their financial position and collateral values, and other factors and estimates
which are subject to change over time.
- --------------------------------------------------------------------------------
(1) MFB Corp. generally places mortgage loans on a nonaccrual status when
serious doubt exists as to their collectibility. At September 30, 1997,
there were no loans on nonaccrual.
(2) Total loans, including loans held for sale, less deferred net loan fees and
loans in process.
20
<PAGE>
III. LOAN PORTFOLIO (Continued)
C. Risk Elements (Continued)
2. Potential Problem Loans
As of September 30, 1997, there are no loans where there
are serious doubts as to the ability of the borrower to
comply with present loan repayment terms, which may result
in disclosure of such loans pursuant to Item III.C.1.
Consideration was given to loans classified for regulatory
purposes as loss, doubtful, substandard, or special
mention that have not been disclosed in Section 1 above.
Management believes that these loans do not represent or
result from trends or uncertainties which management
reasonably expects will materially impact future operating
results, liquidity, or capital resources, or management
believes that these loans do not represent material
credits about which management is aware of any information
which causes management to have serious doubts as to the
ability of such borrowers to comply with the loan
repayment terms.
3. Foreign Outstandings
None
4. Loan Concentrations
MFB Corp. historically has concentrated its lending
activities on the origination of loans secured by first
mortgage liens for the purchase, construction or
refinancing of one- to four-family residential real
property. These loans continue to be the major focus of
MFB Corp.'s loan origination activities, representing
91.81% of MFB Corp.'s total loan portfolio, including
loans held for sale, at September 30, 1997.
D. Other Interest-Earning Assets
There are no other interest-earning assets as of September 30,
1997 which would be required to be disclosed under Item III. C.1 or 2 if such
assets were loans.
21
<PAGE>
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The allowance for loan losses is maintained through the
provision for loan losses, which is charged to earnings. The
provision for loan losses is determined in conjunction with
management's review and evaluation of current economic
conditions (including those of MFB Corp.'s lending area),
changes in the characteristic and size of the loan portfolio,
loan delinquencies (current status as well as past and
anticipated trends) and adequacy of collateral securing loan
delinquencies, historical and estimated net charge-offs, and
other pertinent information derived from a review of the loan
portfolio. In management's opinion, MFB Corp.'s allowance for
loan losses is adequate to absorb anticipated future losses from
loans at September 30, 1997.
The following table analyzes changes in the consolidated
allowance for loan losses during the past five years ended September 30, 1997.
Years Ended September 30,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
Balance of allowance at
beginning of period $340 $310 $280 $250 $ 58
Add
Recoveries of loans
previously charged-
off--residential real
estate loans -- -- -- -- --
Less charge offs
Residential real estate
loans -- -- -- -- --
Commercial loans -- -- -- -- --
Consumer loans -- -- -- -- --
---- ---- ---- ---- ----
Net charge-offs -- -- -- -- --
Provisions for loan losses 30 30 30 30 192
---- ---- ---- ---- ----
Balance of allowance at
end of period $370 $340 $310 $280 $250
==== ==== ==== ==== ====
Net charge-offs to total
average loans out-
standing for period -% -% -% -% -%
Allowance at end of
period to total loans, net
at end of period (1) .18% .22% .26% .24% .23%
Allowance to total non-
performing loans at
end of period 141.76% 171.72% 100.65% 261.68% 112.11%
- --------------------------------------------------------------------------------
(1) Total loans, including loans held for sale, less deferred net loan fees and
loans in process.
22
<PAGE>
IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued)
Allocation of Allowance for Loan Losses. The following table presents
an analysis of the allocation of MFB Corp.'s allowance for loan losses
at the dates indicated.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- ------------------- ------------------ ------------------ --------------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
to total to total to total to total to total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to
Residential(1) $323 87.73% $311 92.87% $281 97.60% $251 97.25% $221 97.87%
Commercial loans 19 4.37 1 .57 1 .17 1 .38 1 .45
Multi-family 1 .06 1 .10 1 .15 1 .16 1 .57
Residential construction 1 4.08 1 3.23 1 1.72 1 1.89 1 .78
Consumer loans(2) 1 3.76 1 3.23 1 .36 1 .32 1 .33
Unallocated 25 -- 25 -- 25 -- 25 --
---- ------ ---- ------ ---- ------ ---- ------ ---- ------
Total $370 100.00% $340 100.00% $310 100.00% $280 100.00% $250 100.00%
==== ====== ==== ====== ==== ====== ==== ====== ==== ======
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes loans held for sale
(2) Includes home equity and second mortgage loans, financing leases, and other
loans including, education loans and loans secured by deposits.
23
<PAGE>
V. DEPOSITS
The average amount of deposits and average rates paid are summarized as
follows for the years ended September 30:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6 1 9 9 5
----------------------- --------------------------- -----------------------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings accounts $ 10,359 2.68% $ 9,746 2.77% $ 9,774 2.80%
Now and money market accounts 26,770 2.89 26,006 3.12 26,672 3.24
Certificates of deposit 126,202 5.65 113,570 5.68 106,556 5.30
Demand deposits (noninterest-bearing) 1,274 816 839
----------- ------- ---------
$ 164,605 $150,138 $ 143,841
=========== ======== =========
</TABLE>
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at September 30, 1997 is summarized as follows:
Amount
(In thousands)
Three months or less $ 1,980
Over three months and through six months 3,649
Over six months and through twelve months 7,485
Over twelve months 11,778
------------
$ 24,892
============
24
<PAGE>
VI. RETURN ON EQUITY AND ASSETS
The ratio of net income to average total assets and average
shareholders' equity and certain other ratios are as follows:
<TABLE>
<CAPTION>
September 30,
----------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Average total assets $237,050 $200,583 $183,869
======== ======== ========
Average shareholders' equity $ 33,274 $ 37,407 $ 38,029
======== ======== ========
Net income $ 2,002 $ 975 $ 1,236
======== ======== ========
Return on average total assets .84% .49% .67%
======== ======== ========
Return on average shareholders' equity 6.02% 2.61% 3.25%
======== ======== ========
Dividend payout ratio (dividends
declared per share divided by net
income per share) 27.59% 12.24% -%
======== ======== ========
Average shareholders' equity
to average total assets 14.04% 18.65% 20.68%
======== ======== ========
</TABLE>
VII. SHORT-TERM BORROWINGS
The following table sets forth the maximum month-end balance and
average balance of FHLB advances and securities sold under agreements
to repurchase at the dates indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------
1997 1996 1995
------------------------------------
(Dollars in Thousands)
Maximum Balance:
<S> <C> <C>
FHLB advances......................................... $47,500 $29,500 ---
Securities sold under agreements to repurchase........ 389 --- ---
Average Balance:
FHLB advances:........................................ 34,960 9,625 ---
Securities sold under agreements to repurchase........ 97 --- ---
Average Rate Paid On:
FHLB advances......................................... 5.64% 5.50% ---
Securities sold under agreements to repurchase........ 4.25% --- ---
</TABLE>
The following table sets forth the Bank's borrowings at the dates indicated:
Year Ended September 30,
----------------------------
1997 1996 1995
----------------------------
(Dollars in Thousands)
Amounts Outstanding
FHLB advances .................................... $47,500 $24,500 --
Securities sold under agreements to repurchase.... 389 -- --
Weighted Average Interest Rate
FHLB advances .................................... 5.66% 5.53% --
Securities sold under agreements to repurchase.... 4.25% -- --
25
<PAGE>
COMPETITION
MFB Financial originates most of its loans to and accepts most of its
deposits from residents of St. Joseph and Elkhart counties in Indiana.
MFB Financial is subject to competition from various financial
institutions, including state and national banks, state and federal savings
associations, credit unions, certain non-banking consumer lenders, and other
companies or firms, including brokerage houses and mortgage brokers, that
provide similar services in St.. Joseph County with significantly larger
resources than MFB Financial. In total, there are 15 financial institutions
located in Mishawaka, Indiana, including MFB Financial. These financial
institutions consist of five commercial banks, three savings banks and seven
credit unions. MFB Financial must also compete with banks and savings
institutions in Elkhart and South Bend since media advertising from these cities
reaches the Mishawaka community. MFB Financial also competes with money market
funds with respect to deposit accounts and with insurance companies with respect
to individual retirement accounts.
Under current law, bank holding companies may acquire savings associations.
Savings associations may also acquire banks and other savings associations under
federal law and state law. To date, several bank holding company acquisitions of
healthy savings associations in Indiana have been completed. Continued
consolidation of financial institutions based in Indiana may also increase the
competition faced by the Company.
In addition, The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire
banks in other states and, with state consent and subject to certain
limitations, allows banks to acquire out-of-state branches either through merger
or de novo expansion. The State of Indiana passed a law establishing interstate
branching provisions for Indiana state-chartered banks consistent with those
established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana
Branching Law authorizes Indiana banks to branch interstate by merger or de novo
expansion and authorizes out-of-state banks meeting certain requirements to
branch into Indiana by merger de novo expansion. The Indiana Branching Law
became effective March 15, 1996 and provided that interstate mergers and de novo
branches are not permitted to out-of-state banks unless the laws of their home
states permit Indiana banks to merge or establish de novo branches on a
reciprocal basis. This new legislation may also result in increased competition
for the Holding Company and the Bank.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. MFB Financial competes for
loan originations primarily through the efficiency and quality of services it
provides borrowers, builders and Realtors and through interest rates and loan
fees it charges. Competition is affected by, among other things, the general
availability of lendable funds, general and local economic conditions, current
interest rate levels, and other factors that are not readily predictable.
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REGULATION
General
The Bank is a federally chartered savings bank, the deposits of which are
federally insured and backed by the full faith and credit of the United States
Government. Accordingly, the Bank is subject to broad federal regulation and
oversight extending to all its operations. The Bank is a member of the FHLB of
Indianapolis and is subject to certain limited regulation by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board"). As the
savings and loan holding company of the Bank, the Company also is subject to
federal regulation and oversight. The purpose of the regulation of the Company
and other holding companies is to protect subsidiary savings associations. The
Bank is a member of the Savings Association Insurance Fund ("SAIF") which
together with the Bank Insurance Fund (the "BIF") are the two deposit insurance
funds administered by the FDIC, and the deposits of the Bank are insured by the
FDIC. As a result, the FDIC has certain regulatory and examination authority
over the Bank. Certain of these regulatory requirements and restrictions are
discussed below or elsewhere in this document.
The OTS has extensive authority over the operations of savings
associations. As part of this authority, the Bank is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. The last regular OTS examination of the Bank was as of June 10, 1996 .
When these examinations are conducted by the OTS, the examiners may require the
Company to provide for higher general or specific loan loss reserves. All
savings associations are subject to a semi-annual assessment, based upon the
savings association's total assets, to fund the operations of the OTS.
Currently, the assessment rates range from .0172761% of assets for associations
with assets of $67 million or less to .0045864% for associations with assets in
excess of $35 billion. The Bank's OTS assessment for the fiscal year ended
September 30, 1997, was approximately $66,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws and it is prohibited from engaging in any activities
not permitted by such laws. For instance, no savings institution may invest in
non-investment grade corporate debt securities. In addition, the permissable
level of investment by federal associations in loans secured by non-residential
real property may not exceed 400% of total capital, except with approval of the
OTS. The Bank is in compliance with the noted restrictions.
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The Bank is also subject to federal and state regulation as to such matters
as loans to officers, directors, or principal shareholders, required reserves,
limitations as to the nature and amount of its loans and investments, regulatory
approval of any merger or consolidation, issuance or retirements of its own
securities, and limitations upon other aspects of banking operations. In
addition, the activities and operations of the Bank are subject to a number of
additional detailed, complex and sometimes overlapping federal and state laws
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and anti-trust
laws.
The United States Congress is considering legislation that would require all
federal savings associations, such as the Bank, to either convert to a national
bank or a state-chartered financial institution by a specified date to be
determined. In addition, under the legislation, the Holding Company likely would
not be regulated as a savings and loan holding company, but rather as a bank
holding company. The OTS would also be abolished and its functions transferred
among the other federal banking regulators. Certain aspects of the legislation
remain to be resolved and therefore no assurance can be given as to whether or
in what form the legislation will be enacted or its effect on the Holding
Company and the Bank.
Safety and Soundness Standards
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. In general the standards are designed to assist the
federal banking agencies in identifying and addressing problems at insured
institutions before capital becomes impaired. Any institution which fails to
comply with these standards must submit a compliance plan. Failure to submit a
plan or to comply with an approved plan will subject the institution to further
enforcement action.
Federal Home Loan Bank System
The Bank is a member of the FHLB system, which consists of 12 regional
banks. The federal Housing Finance Board ("FHFB"), an independent agency,
controls the FHLB System including the FHLB of Indianapolis. The FHLB System
provides a central credit facility primarily for member savings associations and
other member financial institutions. The Bank is required to hold shares of
capital stock in the FHLB of Indianapolis in an amount at least equal to the
greater of 1% of the aggregate principal amount of its unpaid residential
mortgage loans, home purchase contracts and similar obligations at the end of
each calendar year, .3% of its assets or 1/20 (or such greater fraction
established by the FHLB) of outstanding FHLB advances, commitments, lines of
credit and letters of credit. The Bank is currently in compliance with this
requirement. At September 30, 1997, the Bank's investment in stock of the FHLB
of Indianapolis was $2.4 million.
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In past years, the Bank received substantial dividends on its FHLB stock.
All 12 FHLB's are required to provide funds for the resolution of troubled
savings associations and to establish affordable housing programs through direct
loans or interest subsidies on advances to members to be used for lending at
subsidized interest rates for low-and moderate-income, owner-occupied housing
projects, affordable rental housing, and certain other community projects. These
contributions and obligations could adversely affect the value of FHLB stock in
the future. A reduction in value of such stock may result in a corresponding
reduction in the Bank's capital.
The FHLB of Indianapolis serves as a reserve or central bank for member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHLB and the Board of Directors of the FHLB of Indianapolis.
All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. Eligible collateral includes first mortgage loans less
than 60 days delinquent or securities evidencing interests therein, securities
(including mortgage-backed securities) issued, insured or guaranteed by the
federal government or any agency thereof, FHLB deposits and, to a limited
extent, real estate with readily ascertainable value in which a perfected
security interest may be obtained. Other forms of collateral may be accepted as
over collateralization or, under certain circumstances, to renew outstanding
advances. All long-term advances are required to provide funds for residential
home financing and the FHLB has established standards of community service that
members must meet to maintain access to long-term advances.
Interest rates charged for advances vary depending upon maturity, the cost
of funds to the FHLB of Indianapolis and the purpose of the borrowing. Under
current law, savings associations which cease to be Qualified Thrift Lenders are
ineligible to receive advances from their FHLB.
Insurance of Deposits
The FDIC administers two separate insurance funds, which are not commingled:
one primarily for federally insured banks ("BIF") and one primarily for
federally insured savings associations ("SAIF"). As the federal insurer of
deposits of savings associations, the FDIC determines whether to grant insurance
to newly-chartered savings associations, has authority to prohibit unsafe or
unsound activities and has enforcement powers over savings associations (usually
in conjunction with the OTS or on its own if the OTS does not undertake
enforcement action).
Deposit accounts in the Bank are generally insured by the SAIF to a maximum
of $100,000 for each insured depositor. As a condition to such insurance, the
FDIC is authorized to issue regulations and, in conjunction with the OTS,
conduct examinations and generally supervise the operations of its insured
members. This supervision extends to a comprehensive regulatory scheme
governing, among other things, the form of deposit instruments issued by savings
associations, and certain aspects of their lending activities, including
appraisal requirements, private mortgage insurance coverage and lending
authority.
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The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well-capitalized (i.e. a core capital ratio of at least 5%, a ratio of Tier 1 or
core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least
6% and a risk-based capital ratio of at least 10%) pay the lowest premium while
institutions that are less than adequately capitalized (i.e. core or Tier 1
risk-based capital ratio of less than 4% or a risk-based capital ratio of less
than 8%) and considered of substantial supervisory concern pay the highest
premium. Risk classification of all insured institutions is made by the FDIC
semi-annually.
The FDIC is authorized to increase assessment rates, on a semiannual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
For the first six months of 1995, the assessment schedule for BIF members
and SAIF members ranged from .23% to .31% of deposits. As is the case with the
SAIF, the FDIC is authorized to adjust the insurance premium rates for banks
that are insured by the BIF of the FDIC in order to maintain the reserve ratio
of the BIF at 1.25% of BIF insured deposits. As a result of the BIF reaching its
statutory reserve ratio, the FDIC revised the premium schedule for BIF insured
institutions to provide a range of .04% to .31% of deposits. The revisions
became effective in the third quarter of 1995. In addition BIF rates were
further revised, effective January 1996, to provide a range of .0% to .27%. The
SAIF rates, however, were not adjusted. At the time the FDIC revised the BIF
premium schedule, it noted that, absent legislative action (as discussed below)
, the SAIF would not attain its designated reserve ratio until the year 2002. As
a result, SAIF insured members would continue to be generally subject to higher
deposit insurance premiums than BIF insured institutions until, all things being
equal, the SAIF attained its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September, 1996.
The legislation provided for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate was
established at .657% of assessable deposits by the FDIC and the resulting
assessment on the Bank of $955,000 was paid in November, 1996. This special
assessment significantly increased noninterest expense and adversely affected
the Company's results of operations for the year ended September 30, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations. " As a result of the special assessment, the Bank's annual deposit
insurance premium for the year ended September 30, 1997 was reduced to
approximately $147,000 based upon its current risk classification and the new
assessment schedule for SAIF insured institutions. These premiums are subject to
change in future periods.
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Prior to the enactment of the legislation, a portion of the SAIF assessment
imposed on savings associations was used to repay obligations issued by a
federally chartered corporation to provide financing ("FICO") for resolving the
thrift crisis in the 1980's. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective, October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment will be limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999 or
when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as the Bank. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as
SAIF-member institutions. The rates established by the FDIC to implement this
requirement for all FDIC-insured institutions are a 6.3 basis point assessment
on SAIF deposits and a 1.26 basis points assessment on BIF deposits until BIF
insured institutions participate fully in the assessment.
Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common stockholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, purchased mortgage
servicing rights and purchased credit card relationships (subject to certain
limits), less nonqualifying intangibles. Under the tangible capital requirement,
a savings bank must maintain tangible capital (core capital less all intangible
assets except purchased mortgage servicing rights and purchased credit card
relationships which may be included subject to certain limits) of at least 1.5%
of total assets. Under the risk-based capital requirements, a minimum amount of
capital must be maintained by a savings bank to account for the relative risks
inherent in the type and amount of assets held by the savings bank. The
risk-based capital requirement requires a savings bank to maintain capital
(defined generally for these purposes as core capital plus general valuation
allowances and permanent or maturing capital instruments such as preferred stock
and subordinated debt less assets required to be deducted) equal to 8.0% of
risk-weighted assets. Assets are ranked as to risk in one of four categories
(0-100%) with a credit risk-free asset such as cash requiring no risk-based
capital and an asset with a significant credit risk such as a non-accrual loan
being assigned a factor of 100%. At September 30, 1997, based on the capital
standards then in effect, the Bank was in compliance with its fully phased-in
capital requirements.
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The Comptroller of the Currency requires a minimum leverage ratio of 3% Tier
1 capital-to-total assets for the highest rated national banks, with an
additional requirement of 100 to 200 basis points for all other national banks.
Current law requires that the capital standards for savings associations be no
less stringent than those applicable to national banks. Accordingly, the OTS has
proposed revised capital regulations imposing a minimum core capital requirement
of 3% for the highest rated savings associations, with an additional requirement
of 100 to 200 basis points for all other savings associations. These regulations
have not become effective and there can be no assurance as to whether, or in
what form, such regulations will be adopted.
The OTS has delayed indefinitely implementation of a final rule which sets
forth the methodology for calculating an interest rate risk component to be
incorporated into the OTS regulatory capital rule. Under the new rule, only
savings associations with "above normal" interest rate risk (institutions whose
portfolio equity would decline in value by more than 2% of assets in the event
of a hypothetical 200-basis-point move in interest rates) will be required to
maintain additional capital for interest rate risk under the risk-based capital
framework. In addition, most institutions with less than $300 million in assets
and a risk-based capital ratio in excess of 12%, such as the Bank, are subject
to less stringent reporting requirements and are exempt from the new interest
rate component of the new rule. Although the OTS has decided to delay
implementation of this rule, it will continue to monitor the level of interest
rate risk at individual institutions and it retains the authority, on a
case-by-case basis, to impose additional capital requirements for individual
institutions with significant interest rate risk.
If an association is not in compliance with its capital requirements, the
OTS is required to prohibit asset growth and to impose a capital directive that
may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings bank that fails to meet its capital
requirements, which actions may include restrictions on operations and banking
activities, the imposition of a capital directive, a cease and desist order,
civil money penalties or harsher measures such as the appointment of a receiver
or conservator or a forced merger into another institution.
Prompt Corrective Action
Certain regulatory action is mandated or recommended for savings
associations that are deemed to be well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. At each successively lower capital category, an institution is
subject to more restrictive and numerous mandatory or discretionary regulatory
actions or limits, and the OTS has less flexibility in determining how to
resolve the problems of the institution. OTS regulations define these capital
levels as follows: (1) well-capitalized associations must have total risk-based
capital of at least 10%, core risk-based capital (consisting only of items that
qualify for inclusion in core capital) of at least 6% and a leverage ratio of at
least 5% and are not subject to any order or written directive of the OTS to
maintain a specific capital level for any capital measure; (2) adequately
capitalized associations are those that meet the regulatory minimum of total
risk-based capital of 8%, core risk-based capital of 4% and a leverage ratio of
4% (except for institutions receiving the highest examination rating, in which
case the requirement is 3%), but which are not well capitalized; (3)
undercapitalized associations are those that do not meet the requirements for
adequately capitalized associations, but that are not significantly
undercapitalized; (4) significantly undercapitalized associations have total
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risk-based capital of less than 6%, core risk-based capital of less than 3% and
a leverage ratio of less than 3%; and (5) critically undercapitalized
associations are those with tangible capital of less than 2% of total assets. In
addition, the OTS can downgrade an association's designation notwithstanding its
capital level, based on less than satisfactory examination ratings in areas
other than capital or if the institution is deemed to be in an unsafe or unsound
condition. Each undercapitalized association must submit a capital restoration
plan to the OTS within 45 days after it becomes undercapitalized. Such
institution will be subject to increased monitoring and asset growth
restrictions and will be required to obtain prior approval for acquisitions,
branching and engaging in new lines of business. Significantly undercapitalized
institutions must restrict the payment of bonuses and raises to their senior
executive officers. Furthermore, a critically undercapitalized institution must
be placed in conservatorship or receivership within 90 days after reaching such
capitalization level, except under limited circumstances. It will also be
prohibited from making payments on any subordinated debt securities without the
prior approval of the FDIC and will be subject to significant additional
operating restrictions. The Bank's capital at September 30, 1997, meets the
standards for a well-capitalized association.
Federal law prohibits an insured institution from making a capital
distribution to anyone or paying management fees to any person having control of
the institution if, after such distribution or payment, the institution would be
undercapitalized. In addition, each company controlling an undercapitalized
institution must guarantee that the institution will comply with its capital
plan until the institution has been adequately capitalized on an average during
each of four consecutive calendar quarters and must provide adequate assurances
of performance. The aggregate liability pursuant to such guarantee is limited to
the lesser of (a) an amount equal to 5% of the institution's total assets at the
time the institution became undercapitalized, or (b) the amount which is
necessary to bring the institution into compliance with all capital standards
applicable to such institution at the time the institution fails to comply with
its capital restoration plan.
Capital Distributions Regulation
An OTS regulation imposes limitations upon all "capital distributions" by
savings associations, including cash dividends, payments by an institution to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system of regulation, with
the greatest flexibility being afforded to well-capitalized institutions. A
savings bank which has total capital (immediately prior to and after giving
effect to the capital distribution) that is a least equal to its fully phased-in
capital requirements would be a Tier 1 institution ("Tier 1 Institution"). An
institution that has total capital at least equal to its minimum capital
requirements, but less than its fully phased-in capital requirements, would be a
Tier 2 institution ("Tier 1 Institution"). An institution having total capital
that is less than its minimum capital requirements would be a Tier 3 institution
("Tier 3 Institution"). However, an institution which otherwise qualifies as a
Tier 1 institution may be designated by the OTS as a Tier 2 or Tier 3
institution if the OTS determines that the institution is "in need of more than
normal supervision." The Bank is currently a Tier 1 Institution.
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A Tier 1 Institution could, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year up to the greater of
(a) 100% of its net income to date during the calendar year plus an amount that
would reduce by one-half its "surplus capital ratio" at the beginning of the
calendar year (the smallest excess over its capital requirements), or (b) 75% of
its net income over the most recent four-quarter period. Any additional amount
of capital distributions would require prior regulatory approval.
The OTS has proposed revisions to these regulations which would permit
savings associations to declare dividends in amounts which would assure that
they remain adequately capitalized following the dividend declaration. Savings
associations in a holding company system which are rated Camel 1 or 2 and which
are not in troubled condition would need to file a prior notice with the OTS
concerning such dividend declaration.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies.
The association's written real estate lending policies must be reviewed and
approved by the association's board of directors at least annually. Further,
each association is expected to monitor conditions in its real estate market to
ensure that its lending policies continue to be appropriate for current market
conditions.
Federal Reserve System
Under FRB regulations, the Bank is required to maintain reserves against
its transaction accounts (primarily checking and NOW accounts) and non-personal
money market deposit accounts. The effect of these reserve requirements is to
increase the Bank's cost of funds. The Bank is in compliance with its reserve
requirements.
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A federal savings bank, like other depository institutions maintaining
reservable accounts, may borrow from the Federal Reserve Bank "discount window,"
but the FRB's regulations require the savings bank to exhaust other reasonable
alternative sources, including borrowing from its regional FHLB, before
borrowing from the Federal Reserve Bank. Certain limitations are imposed on the
ability of undercapitalized depository institutions to borrow from Federal
Reserve Banks.
Transactions with Affiliates
Transactions between savings associations and any affiliate are governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings bank
is any company or entity which controls, is controlled by or is under common
control with the savings bank. In a holding company context, the parent holding
company of a savings bank (such as MFB) and any companies controlled by such
parent holding company are affiliates of the savings bank. The subsidiaries of a
savings bank, however, are not deemed affiliates under Section 23A and 23B;
however, transactions between a subsidiary of a savings bank and any of the
affiliates of a savings bank are subject to the requirements and limitations of
Sections 23A and 23B.
Generally, Sections 23A and 23B (i) limit the extent to which the savings
bank or its subsidiaries may engage in "covered transactions" with any one
affiliate to an amount equal to 10% of such association's capital stock and
surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable, to the association or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar types of transactions.
In addition to the restrictions imposed by Sections 23A and 23B, no savings
bank may (i) loan or otherwise extend credit to an affiliate, except for any
affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes, or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings bank.
The restrictions contained in Section 22(h) of the Federal Reserve Act on
loans to executive officers, directors and principal shareholders also apply to
savings associations. Under Section 22(h), loans to an executive officer and to
a greater than 10% shareholder of a savings bank (18% in the case of
institutions located in an area with less than 30,000 in population), and
certain affiliated entities of either, may not exceed together with all other
outstanding loans to such person and affiliated entities the association's
loan-to-one-borrower limit (generally equal to 15% of the institution's
unimpaired capital and surplus and an additional 10% of such capital and surplus
for loans fully secured by certain readily marketable collateral). Section 22(h)
also prohibits certain loans, above amounts prescribed by the appropriate
federal banking agency, to directors, executive officers and greater than 10%
shareholders of a savings bank, and their respective affiliates, unless such
loan is approved in advance by a majority of the board of directors of the
association with any "interested" director not participating in the voting.
Currently, the FRB requires board of director approval for certain loans to
directors, officers, and 10% shareholders (including all other outstanding loans
to such persons) above the greater of $25,000 or 5% of capital and surplus (up
to $500,000). Further, the FRB requires that loans to directors, executive
officers and principal shareholders be made on terms substantially the same as
offered in comparable transactions to other unaffiliated parties. Section 22(g)
of the Federal Reserve Act, which imposes limitations on loans made to executive
officers, also applies to savings associations.
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Holding Company Regulation
MFB is regulated as a "non-diversified unitary savings and loan holding
company" within the meaning of the Home Owners' Loan Act, as amended ("HOLA"),
and subject to regulatory oversight of the Director of the OTS. As such, MFB is
registered with the OTS and thereby subject to OTS regulations, examinations,
supervision and reporting requirements. As a subsidiary of a savings and loan
holding company, the Bank is subject to certain restrictions in its dealings
with MFB and with other companies affiliated with MFB.
HOLA generally prohibits a savings and loan holding company from (i)
acquiring control of any other savings bank or savings and loan holding company
or controlling the assets thereof without prior approval of the Director of the
OTS, or from (ii) acquiring or retaining more than 5 percent of the voting
shares of a savings bank or holding company thereof which is not a subsidiary.
Additionally, under certain circumstances a savings and loan holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15
percent of previously unissued voting shares of an under-capitalized savings
bank for cash without that savings bank being deemed controlled by the holding
company. Except with the prior approval of the Director of the OTS, no director
or officer of a savings and loan holding company or person owning or controlling
by proxy or otherwise more than 25% of such company's stock, may also acquire
control of any savings institution, other than a subsidiary institution, or any
other savings and loan holding company.
MFB's Board of Directors presently intends to operate MFB as a unitary
savings and loan holding company. There are generally no restrictions on the
permissible business activities of a unitary savings and loan holding company.
However, if the Director of OTS determines that there is reasonable cause to
believe that the continuation by a savings and loan holding company of an
activity constitutes a serious risk to the financial safety, soundness, or
stability of its subsidiary savings bank, the Director of the OTS may impose
such restrictions as deemed necessary to address such risk and limiting (i)
payment of dividends by the savings bank, (ii) transactions between the savings
bank and its affiliates, and (iii) any activities of the savings bank that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings bank.
Notwithstanding the above rules as to permissible business activities of
unitary savings and loan holding companies, if the savings bank subsidiary of
such a holding company fails to meet the Qualified Thrift Lender ("QTL") test,
then such unitary holding company would become subject to the activities
restrictions applicable to multiple holding companies. (Additional restrictions
on securing advances from the FHLB also apply). See "--Qualified Thrift Lender."
At September 30, 1997, the Bank's asset composition was in excess of that
required to qualify the Bank as a Qualified Thrift Lender.
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If MFB were to acquire control of another savings institution other than
through a merger or other business combination with the Bank, MFB would
thereupon become a multiple savings and loan holding company. Except where such
acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings bank meets the QTL test, the
activities of MFB and any of its subsidiaries (other than the Bank or other
subsidiary savings associations) would thereafter be subject to further
restrictions. HOLA provides that, among other things, no multiple savings and
loan holding company or subsidiary thereof which is not a savings bank shall
commence or continue for a limited period of time after becoming a multiple
savings and loan holding company or subsidiary thereof, any business activity
other than (i) furnishing or performing management services for a subsidiary
savings bank, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings institution, (iv) holding or managing properties used or occupied by a
subsidiary savings institution, (v) acting as trustee under deeds of trust, (vi)
those activities previously directly authorized by the FSLIC by regulation as of
March 5, 1987, to be engaged in by multiple holding companies or (vii) those
activities authorized by the FRB as permissible for bank holding companies,
unless the Director of the OTS by regulation prohibits or limits such activities
for savings and loan holding companies. Those activities described in (vii)
above must also be approved by the Director of the OTS prior to being engaged in
by a multiple holding company.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings bank which operated a home or branch office
in the state of the association to be acquired as of March 5, 1987, or if the
laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state-chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
Indiana law permits acquisitions of certain federal and state SAIF-insured
savings banks and their holding companies ("Savings Banks") located in Indiana,
Ohio, Kentucky, Illinois, and Michigan (the "Region") by other savings banks
located in the Region. Savings Banks with their principal place of business in
one of the states in the Region (other than Indiana) may acquire Savings Banks
with their principal place of business in Indiana if, subject to certain other
conditions, the state of the acquiring Savings Bank has reciprocal legislation
permitting the acquisition of savings banks and their holding companies in that
state by Indiana Savings Banks. Each of the states in the Region has, at least
to a certain degree, reciprocal legislation. The Indiana statute also authorizes
Indiana Savings Banks to acquire other Savings Banks in the Region. Following
the acquisition, an acquired Indiana Savings Bank and any other Indiana Savings
Bank subsidiary owned by the acquirer must hold no more than 15% of the total
Savings Bank deposits in Indiana.
37
<PAGE>
No subsidiary savings bank of a savings and loan holding company may
declare or pay a dividend on its permanent or nonwithdrawable stock unless it
first gives the Director of the OTS 30 days advance notice of such declaration
and payment. Any dividend declared during such period or without the giving of
such notice shall be invalid.
Branching
The OTS has adopted regulations which permit nationwide branching to the
extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in Section 7701(a)(19) of the Internal Revenue
Code of 1986, as amended (the "Code") or the asset composition test of Section
7701(c) of the Code. Branching that would result in the formation of a multiple
savings and loan holding company controlling savings associations in more than
one state is permitted if the law of the state in which the savings bank to be
acquired is located specifically authorizes acquisition of its state-chartered
associations by state-chartered associations or their holding companies in the
state where the acquiring association or holding company is located.
Federal Securities Law
The shares of Common Stock of MFB are registered with the SEC under the
1934 Act. MFB is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the 1934 Act and the rules of the SEC
thereunder.
If MFB has fewer than 300 shareholders, it may deregister its shares under
the 1934 Act and cease to be subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of MFB may not be
resold without registration or unless sold in accordance with the resale
restrictions of Rule 144 under the 1933 Act. If MFB meets the current public
information requirements under Rule 144, each affiliate of MFB who complies with
the other conditions of Rule 144 (including the two-year holding period and
those that require the affiliate's sale to be aggregated with those of certain
other persons) would be able to sell in the public market, without registration,
a number of shares not to exceed, in any three-month period, the greater of (i)
1% of the outstanding shares of MFB or (ii) the average weekly volume of trading
in such shares during the preceding four calendar weeks.
38
<PAGE>
Qualified Thrift Lender
Under current OTS regulations, the QTL test requires that a savings bank
have at least 65 % of its portfolio assets invested in "qualified thrift
investments" on a monthly average basis in 9 out of every 12 months. Qualified
thrift investments under the QTL test consist primarily of housing related loans
and investments. Portfolio assets under the QTL test include all of an
association's assets less (i) goodwill and other intangibles, (ii) the value of
property used by the association to conduct its business, and (iii) its liquid
assets as required to be maintained under law up to 20% of total assets.
A savings bank which fails to meet the QTL test must either convert to a
bank (but its deposit insurance assessments and payments will be those of and
paid to SAIF) or be subject to the following penalties: (i) it may not enter
into any new activity except for those permissible for a national bank and for a
savings bank; (ii) its branching activities shall be limited to those of a
national bank; (iii) it shall not be eligible for any new FHLB advances; and
(iv) it shall be bound by regulations applicable to national banks respecting
payment of dividends. Three years after failing the QTL test the association
must (i) dispose of any investment or activity not permissible for a national
bank and a savings bank and (ii) repay all outstanding FHLB advances. If such a
savings bank is controlled by a savings and loan holding company, then such
holding company must, within a prescribed time period, become registered as a
bank holding company and become subject to all rules and regulations applicable
to bank holding companies (including restrictions as to the scope of permissible
business activities).
A savings bank failing to meet the QTL test may re-qualify as a QTL if it
thereafter meets the QTL test. In the event of such re-qualification it shall
not be subject to the penalties described above. A savings bank which
subsequently again fails to qualify under the QTL test shall become subject to
all of the described penalties without application of any waiting period.
At September 30, 1997, 88.71% of the Bank's portfolio assets (as defined on
that date) were invested in qualified thrift investment (as defined on that
date), and therefore the Bank's asset composition was in excess of that required
to qualify the Bank as a QTL. Also, the Bank does not expect to significantly
change its lending or investment activities in the near future, and therefore
expects to continue to qualify as a QTL, although there can be no such
assurance.
Community Reinvestment Act Matters
Under current law, ratings of depository institutions under the Community
Reinvestment Act of 1977 ("CRA") must be disclosed. The disclosure includes both
a four-unit descriptive rating--using terms such as satisfactory and
unsatisfactory--and a written evaluation of each institution's performance. Each
FHLB is required to establish standards of community investment or service that
its members must maintain for continued access to long-term advances from the
FHLBs. The standards take into account a member's performance under the
Community Reinvestment Act and its record of lending to first-time home buyers.
The FHLBs have established an "Affordable Housing Program" to subsidize the
interest rate of advances to member associations engaged in lending for
long-term, low-and moderate-income, owner-occupied and affordable rental housing
at subsidized rates. The Bank is participating in this program. The examiners
have determined that the Bank has a satisfactory record of meeting community
credit needs governing the classification of assets of insured institutions
consistent with the requirements.
39
<PAGE>
TAXATION
Federal Taxation
Historically, savings associations, such as the Bank, have been permitted
to compute bad debt deductions using either the bank experience method or the
percentage of taxable income method.
However, in future years, only the specified experience formula method will be
allowed as, in August, 1996, legislation was enacted that repealed the reserve
method of accounting for federal income tax purposes. As a result, the Bank must
recapture that portion of the reserve that exceeds the amount that could have
been taken under the experience method for post-1987 tax years. The recapture
will occur over a six-year period, the commencement of which will be delayed
until the first taxable year beginning after December 31, 1997, provided the
institution meets certain residential lending requirements. In addition, the
pre-1988 reserve, for which no deferred taxes have been recorded, will not have
to be recaptured into income unless (i) the Bank no longer qualifies as a bank
under the Code, or (ii) excess dividends or distributions are paid out by the
Bank. The total amount of bad debt to be recaptured is approximately $1,310,000.
Depending on the composition of its items of income and expense, a savings
bank may be subject to the alternative minimum tax. A savings bank must pay an
alternative minimum tax equal to the amount (if any) by which 20% of alternative
minimum taxable income ("AMTI"), as reduced by an exemption varying with AMTI,
exceeds the regular tax due. AMTI equals regular taxable income increased or
decreased by certain tax preferences and adjustments, including depreciation
deductions in excess of that allowable for alternative minimum tax purposes,
tax-exempt interest on most private activity bonds issued after August 7, 1986
(reduced by any related interest expense disallowed for regular tax purposes),
the amount of the bad debt reserve deduction claimed in excess of the deduction
based on the experience method and 75% of the excess of adjusted current
earnings over AMTI (before this adjustment and before any alternative tax net
operating loss). AMTI may be reduced only up to 90% by net operating loss
carryovers, but alternative minimum tax paid can be credited against regular tax
due in later years.
For federal income tax purposes, MFB reports its income and expenses on the
accrual method of accounting. MFB, the Bank and Mishawaka Financial file a
consolidated federal income tax return for each fiscal year ending September 30.
The federal income tax returns filed by MFB (or previously by the Bank) have not
been audited in the last five years.
40
<PAGE>
The consolidated federal income tax return filed by MFB has the effect of
eliminating intercompany distributions, including dividends, in the computation
of consolidated taxable income. Income of MFB generally would not be taken into
account in determining the bad debt deduction allowed to the Bank, regardless of
whether a consolidated tax return is filed. However, certain "functionally
related" losses of MFB would be required to be taken into account in determining
the permitted bad debt deduction, which, depending upon the particular
circumstances, could reduce the bad debt deduction.
State Taxation
The Bank is subject to Indiana's new Financial Institutions Tax ("FIT"),
which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted
gross income," for purposes of FIT, begins with taxable income as defined by
Section 63 of the Code and, thus, incorporates federal tax law to the extent
that it affects the computation of taxable income. Federal taxable income is
then adjusted by several Indiana modifications. Other applicable state taxes
include generally applicable sales and use taxes plus real and personal property
taxes.
MFB's state income tax returns have not been audited in the last five
years.
41
<PAGE>
Item 2. Properties.
At September 30, 1997, MFB Financial conducted its business from its main
office at 121 South Church Street, Mishawaka, Indiana 46544, four full service
branch offices and an additional loan origination office The main office and
three branch offices in Mishawaka and South Bend are owned by MFB Financial,
while the loan origination office in Elkhart and the Goshen branch office are
leased.
The following table provides certain information with respect to MFB
Financial's offices as of September 30, 1997:
Year Approximate
Description and Address Opened Square Footage
Main Office
121 S. Church Street
Mishawaka, IN 46544 1961 13,738
Branch Office
411 W. McKinley Ave.
Mishawaka, IN 46545 1975 4,800
Branch Office
402 W. Cleveland Rd.
Mishawaka, IN 46545 1977 2,540
Branch Office
2427 Mishawaka Ave.
South Bend, IN 46615 1978 2,600
Loan Origination Office
227 S. Main St.
Suite 110
Elkhart, In. 46516 1996 600
Branch Office
Wal*Mart Super Store
2304 Lincolnway East
Goshen, In. 46526 1997 500
MFB Financial operates three automatic teller machines (ATMs), one at its
McKinley branch, one at its Cleveland Road branch and the other at the Goshen
branch. MFB Financial's ATMs participate in the nationwide CIRRUS ATM network.
MFB Financial owns computer and data processing equipment which is used for
transaction processing and accounting.
42
<PAGE>
MFB Financial also has contracted for the date processing and reporting
services of BISYS, Inc. in Houston, Texas. The cost of these data processing
services is approximately $24,000 per month.
Item 3. Legal Proceedings.
The Bank is involved in various legal actions arising in the normal course
of its business. In the opinion of management, the resolutions of these legal
actions are in the aggregate not expected to have a material adverse effect on
the Company's results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of MFB's shareholders during the quarter
ended September 30, 1997.
Item 4.5. Executive Officers of MFB.
Presented below is certain information regarding the executive officers of
MFB and MFB Financial:
Name Position
------------------------ ----------------------------------------------
Charles J. Viater President and Chief Executive Officer of MFB
and MFB Financial
M. Gilbert Eberhart Secretary of MFB and MFB Financial
Steven F. Rathka Senior Vice President of MFB Financial
William L. Stockton, Jr. Senior Vice President of MFB Financial
Timothy C. Boenne Vice President and Controller of MFB Financial
Michael J. Portolese Vice President of MFB Financial
Charles J. Viater (age 43) has served as President and Chief Executive
Officer of MFB Financial since September 1, 1995. Previously, he served as Chief
Financial Officer of Amity Bancshares and Executive Vice President of Amity
Federal Savings in Tinley Park, Illinois.
M. Gilbert Eberhart (age 63) has served as Secretary of MFB Financial since
1987 and of MFB since its organization. He is also a dentist based in Mishawaka.
43
<PAGE>
Steven F. Rathka (age 55) has been in the banking business since 1964. He
joined MFB Financial in February, 1997, as Senior Vice President in charge of
commercial lending.
William L. Stockton, Jr. (age 50) serves as Senior Vice President of MFB
Financial and has been in charge of residential lending operations at MFB
Financial since 1992.
Timothy C. Boenne (age 51) has served as Vice President and Controller of
MFB Financial since 1992. Until 1992, he also served as Branch Manager for MFB
Financial's McKinley Branch.
Michael J. Portolese (age 46) has served as Vice President of MFB
Financial since 1977. He also serves as MFB Financial's Retail Banking
Administrator, Security Director and Compliance Coordinator.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Bank converted from a federally-chartered mutual savings and loan
association to a federally-chartered stock savings bank effective March 24, 1994
(the "Conversion") and simultaneously formed a savings and loan holding company,
MFB. MFB's common stock, without par value ("Common Stock"), is quoted on the
National Association of Security Dealers Automated Quotation System ("NASDAQ"),
National Market System, under the symbol "MFBC." The following table sets forth
the high and low bid prices as reported by NASDAQ, and dividends paid per share
for Common Stock for the quarters indicated. Such over-the-counter quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not necessarily represent actual transactions.
Quarter Dividends
Ended High Trade Low Trade Declared
- ------------------- ---------- --------- -----------
December 31, 1995 $16.25 $14.75 None
March 31, 1996 15.25 13.75 None
June 30, 1996 14.75 13.75 None
September 30, 1996 19.00 13.75 $ .06/share
December 31, 1996 19.25 15.50 $ .08/share
March 31, 1997 19.75 16.63 $ .08/share
June 30, 1997 19.75 18.75 $ .08/share
September 30, 1997 23.50 19.13 $ .08/share
As of September 30, 1997, there were approximately 667 shareholders of
record of MFB's Common Stock.
44
<PAGE>
Since MFB has no independent operations or other subsidiaries to generate
income, its ability to accumulate earnings for the payment of cash dividends to
its shareholders is directly dependent upon the earnings on its investment
securities and ability of the Bank to pay dividends to MFB.
Under OTS regulations, a converted savings bank may not declare or pay a
cash dividend if the effect would be to reduce net worth below the amount
required for the liquidation account created at the time it converted. In
addition, under OTS regulations, the extent to which a savings bank may make a
"capital distribution," which includes, among other things, cash dividends, will
depend upon which one of three categories, based upon levels of capital, that a
savings bank is classified. The Bank is now and expects to continue to be a
"tier one institution" and therefore would be able to pay cash dividends to MFB
during any calendar year up to 100% of its net income during that calendar year
plus the amount that would reduce by one-half its "surplus capital ratio" (the
excess over its fully phased-end capital requirements) at the beginning of the
calendar year. Prior notice of any dividend to be paid by the Bank will have to
be given to the OTS.
Under current federal income tax law, dividend distributions with respect
to the Common Stock, to the extent that such dividends paid are from the current
or accumulated earnings and profits of the Bank (as calculated for federal
income tax purposes), will be taxable as ordinary income to the recipient and
will not be deductible by the Bank. Any dividend distributions in excess of
current or accumulated earnings and profits will be treated for federal income
tax purposes as a distribution from the Bank's accumulated bad debt reserves,
which could result in increased federal income tax liability for the Bank.
Unlike the Bank, generally there is no restriction on the payment of
dividends by MFB, subject to the determination of the director of the OTS that
there is reasonable cause to believe that the payment of dividends constitutes a
serious risk to the financial safety, soundness or stability of the Bank.
Indiana law, however, would prohibit MFB from paying a dividend if, after giving
effect to the payment of that dividend, MFB would not be able to pay its debts
as they become due in the ordinary course of business, or if MFB's total assets
would be less than the sum of its total liabilities plus preferential rights of
holders of preferred stock, if any.
On October 1, 1996, the Board of Directors of the Holding Company
declared a dividend of one common share purchase right (a "Right" or "Rights")
for each outstanding share of Common Stock. The dividend was paid to
shareholders of record as of October 21, 1996. If and when the Rights become
exercisable, each Right will entitle the registered holder to purchase from the
Holding Company one share of Common Stock at a purchase price of $46.00 (the
"Purchase Price"), subject to adjustment as described in the Rights Agreement
between the Holding Company and Registrar and Transfer Company (the "Rights
Agreement") which specifies the terms of the Rights. The Rights will be
represented by the outstanding Common Stock certificates and the Rights cannot
be bought, sold or otherwise traded separately from the Common Stock until the
"Distribution Date," which is the earliest to occur of (i) 10 calendar days
following a public announcement that a person or group (an "Acquiring Person")
has (a) acquired beneficial ownership of 12% or more of the outstanding Common
Stock or (b) become the beneficial owner of an amount of the outstanding Common
Stock (but not less than 10%) which the Board of Directors determines to be
substantial and which ownership the Board of Directors determines is intended or
may be reasonably anticipated, in general, to cause the Holding Company to take
actions determined by the Board of Directors to be not in the Holding Company's
best long-term interests (an "Adverse Person"), or (ii) 10 business days
following the commencement or announcement of an intention to make a tender
offer or exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 30% or more of such outstanding Common Stock.
45
<PAGE>
The Rights have certain anti-takeover effects. The Rights may cause
substantial dilution to a person or group that attempts to acquire the Holding
Company or over 15% of the outstanding shares of the Company on terms not
approved by the Board of Directors or the Holding Company, except pursuant to an
offer conditioned on a substantial number of Rights being acquired. The Rights
should not interfere with any merger or other business combination approved by
the Board of Directors since the Rights may be redeemed by the Holding Company
at $.01 per Right prior to the time that a person or group has acquired
beneficial ownership of 12% or more of the Common Shares.
Item 6. Selected Financial Data.
The information required by this item is incorporated by reference to the
material under the heading "Selected Consolidated Financial Data of MFB Corp.
and Subsidiary" on page 2 of MFB's Annual Report to Shareholders for its fiscal
year ended September 30, 1997 (the "Annual Report").
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
of Operations.
The information required by this item is incorporated by reference to pages
3 through 14 of the Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
The OTS provides a Net Portfolio Value ("NPV") approach to the
quantification of interest rate risk for thrift institutions such as MFB
Financial, (the "Bank"). 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
sheets contracts.
The OTS issued a regulation which uses a net market value methodology to
measure the interest rate risk exposure of thrift institutions. Under OTS
regulations, an institution's "normal" level of interest rate risk in the event
of an assumed 200 basis point change in interest rates is a decrease in the
institution's NPV in an amount not to exceed two percent of the present value of
its assets. Thrift institutions with greater than "normal" interest rate risk
exposure must take a deduction from their total capital available to meet their
risk-based capital requirement. The amount of that deduction is one half of the
difference between (a) the institution's actual calculated exposure to a 200
basis point interest rate or decrease (whichever results in the greater pro
forma decrease in NPV) and (b) its "normal' level of exposure which is 2.00% of
the present value of its assets. The regulation, however, will not become
effective until the OTS evaluates the process by which thrift institutions may
appeal an interest rate risk deduction determination. It is uncertain as to when
this evaluation may be completed.
46
<PAGE>
Presented below, as of September 30, 1997, is an analysis of the Bank's
interest rate risk as measured by changes in NPV for an instantaneous and
sustained parallel shift in the yield curve, in 100 basis point increments, up
and down 400 basis points, in accordance with OTS regulations. As illustrated in
the table, the Bank's interest rate risk is more sensitive to rising rate
changes than declining rates. This occurs primarily because, as rates rise, the
market value of fixed-rate loans declines due to both the rate increases and
slowing prepayments. When rates decline, the Bank does not experience a
significant rise in market value for these loans because borrowers prepay at
relatively higher rates. The value of the Bank's deposits and borrowings change
in approximately the same proportion in rising and falling rate scenarios.
Management reviews the OTS measurements and related peer reports on a
quarterly basis. In addition to monitoring selected measures of NPV, management
also monitors effects on net interest income resulting from increases or
decreases in interest rates. This measure is used in conjunction with NPV
measures to identify excessive interest rate risk.
At September 30, 1997
(Dollars in thousands)
Change in
Interest Rates
(Basis Points) $ Change % Change
+ 400 bp $ (20,637) (54)%
+ 300 bp (15,081) (40)
+ 200 bp (9,528) (25)
+ 100 bp (4,321) (11)
0 bp - -
- 100 bp 2,638 7
- 200 bp 3,971 10
- 300 bp 5,424 14
- 400 bp 7,454 20
Item 8. Financial Statements and Supplementary Data.
MFB's Consolidated Financial Statements and Notes thereto contained on
pages 15 through 45 of the Annual Report are incorporated by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is
incorporated by reference to pages 2 through 4 of MFB's Proxy Statement for its
1998 Annual Shareholder Meeting (the "Proxy Statement"). Information concerning
MFB's executive officers is included in Item 4.5 in Part 1 of this report.
Information concerning compliance by such persons with Section 16(a) of the 1934
Act is incorporated by reference to page 11 of the Proxy Statement.
47
<PAGE>
Item 11. Executive Compensation
The information required by this item with respect to executive
compensation is incorporated by reference to pages 5 through 6 of the Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to pages
1 through 3 of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to page
6 of the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following financial statements are incorporated by reference as part of
this report:
Pages in the
Annual Report
to Shareholders
Financial Statements
Report of Independent Auditors 15
Consolidated Balance Sheets at September 30, 1997 and 1996 17
Consolidated Statements of Income for the years ended 18
September 30, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity 19
for the years ended September 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended 20
September 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements 22
48
<PAGE>
(b) MFB filed five Form 8-K reports during the year ended September 30, 1997.
Date of report: June 16, 1997
Item reported : News release dated June 16, 1997 regarding the
announcement of its third quarter earnings and declaration
of an $ .08 per share cash dividend, payable on August 12,
1997 to shareholders of record on July 29, 1997.
Date of report: April 18, 1997
Item reported : News release dated April 18, 1997 regarding second quarter
earnings and the declaration of a $ .08 per share cash
dividend payable on May 13, 1997 to holders of record on
April 29, 1997.
Date of report: January 17, 1997
Item reported : News release dated January 17, 1997 regarding the
announcement of first quarter earnings.
Date of report: October 15, 1996
Item reported : News release dated October 15, 1996, announcing fourth
quarter earnings and dividend declaration.
Date of report: October 8, 1996
Item reported: The Corporation's 5% stock repurchase program, adoption of
a shareholders rights plan and SAIF assessment.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on page 51.
(d) All schedules are omitted as the required information either is not
applicable or is included in the consolidated Financial Statements or
related notes.
49
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant had duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
MFB CORP.
Date: December 23, 1997 By: /s/ Charles J. Viater
---------------------------------
Charles J. Viater, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 23rd day of December,
1997.
/s/ Charles J. Viater /s/ M. Gilbert Eberhart
- -------------------------- --------------------------
Charles J. Viater M. Gilbert Eberhart, Director
President, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ Thomas F. Hums
--------------------------
Thomas F. Hums, Director
/s/ Timothy C. Boenne /s/ Jonathan E. Kintner
- -------------------------- --------------------------
Timothy C. Boenne Jonathan E. Kintner, Director
Vice President and Controller
(Principal Financial and Accounting
Officer)
/s/ Michael J. Marien
--------------------------
Michael J. Marien, Director
/s/ Marian K. Torian
--------------------------
Marian K. Torian,
Chairman of the Board
/s/ Reginald H. Wagle
--------------------------
Reginald H. Wagle, Director
50
<PAGE>
EXHIBIT LIST
Exhibit
Index
Page
3(1) The Articles of Incorporation of the Registrant is incorporated by
Reference to Exhibit 3(1) to the Registration Statement on Form S-1
(Registration No. 33-73098).
3(2) The Code of By-Laws of Registration is incorporated by reference to
Item 7-Exhibit 3 of the October 15, 1995 Securities and Exchange
Commission Form 8-K Report.
10(1) MFB Corp. Stock Option Plan is incorporated by reference to Exhibit A
to the Registrant's definitive Proxy Statement in respect of its 1996
Annual Shareholder Meeting.*
10(2) Mishawaka Federal Savings Recognition and Retention Plans and Trusts
are incorporated by reference to Exhibit B to the Registrant's
definitive Proxy Statement in respect of its 1996 Annual Shareholder
Meeting.*
10(3) Employment Agreement between Mishawaka Federal Savings and
Charles J. Viater is attached hereto.
10(4) Employment Agreement between Mishawaka Federal Savings and Timothy C.
Boenne is incorporated by reference to Exhibit 10(8) to the
Registration on Form S-1 (Registration No. 33-73098).*
10(5) Employment Agreement between Mishawaka Federal Savings and Michael J.
Portolese is incorporated by reference to Exhibit 10(10) to the
Registration Statement on Form S-1 (Registration No. 33-73098).*
10(6) Employment Agreement between Mishawaka Federal Savings and William L.
Stockton, Jr. is incorporated by reference to Exhibit 10(11) to the
Registration Statement on Form S-1 (Registration No. 33-73098).*
10(7) MFB Corp. 1997 Stock Option Plan is incorporated by reference to
Exhibit A to the Registrant's definitive Proxy Statement in respect of
its January, 1998 Annual Shareholder Meeting.*
11 Statement regarding computation of earnings per share (**)
13 Shareholder Annual Report, incorporated by reference.
51
<PAGE>
Page
21 Subsidiaries of the Registrant is incorporated by reference to Exhibit
22 to the Registration Statement on Form S-1 (Registration No.
33-73098).
23 Consent of Crowe, Chizek and Company LLP.
27 Financial Data Schedule
* Management contracts and plans required to be filed as exhibits are
included as Exhibits 10(1)-10(6).
** See Note 1 of Notes to Consolidated Financial Statements, incorporated by
reference. Shareholder Annual Report, included as Exhibit 13.
52
EMPLOYMENT AGREEMENT
This Agreement, made and dated as of March 31, 1997, by and between MFB
Financial (formerly Mishawaka Federal Savings), a federal savings bank
("Employer"), and Charles J. Viater, a resident of St. Joseph County, Indiana
("Employee").
W I T N E S S E T H
WHEREAS, Employee is hereby employed by Employer as its President and
chief executive officer and is expected to make valuable contributions to the
profitability and financial strength of Employer;
WHEREAS, Employer desires to encourage Employee to make valuable
contributions to Employer's business operations and not to seek or accept
employment elsewhere;
WHEREAS, Employee desires to be assured of a secure minimum
compensation from Employer for his services over a defined term;
WHEREAS, Employer desires to assure the continued services of Employee
on behalf of Employer on an objective and impartial basis and without
distraction or conflict of interest in the event of an attempt by any person to
obtain control of Employer or of MFB Corp., the Indiana corporation which owns
all of the issued and outstanding capital stock of Employer (the "Holding
Company");
WHEREAS, Employer recognizes that when faced with a proposal for a
change of control of Employer or the Holding Company, Employee will have a
significant role in helping the Boards of Directors assess the options and
advising the Boards of Directors on what is in the best interests of Employer,
the Holding Company, and its shareholders, and it is necessary for Employee to
be able to provide this advice and counsel without being influenced by the
uncertainties of his own situation;
WHEREAS, Employer desires to provide fair and reasonable benefits to
Employee on the terms and subject to the conditions set forth in this Agreement;
WHEREAS, Employer desires reasonable protection of its confidential
business and customer information which it has developed over the years at
substantial expense and assurance that Employee will not compete with Employer
for a reasonable period of time after termination of his employment with
Employer, except as otherwise provided herein.
NOW, THEREFORE, in consideration of these premises, the mutual
covenants and undertakings herein contained and the continued employment of
Employee by Employer as its President and chief executive officer, Employer and
Employee, each intending to be legally bound, covenant and agree as follows:
1
<PAGE>
1. Upon the terms and subject to the conditions set forth in this
Agreement, Employer employs Employee as Employer's President and chief executive
officer, and Employee accepts such employment.
2. Employee agrees to serve as Employer's President and chief
executive officer and to perform such duties in that office as may reasonably be
assigned to him by Employer's Board of Directors; provided, however that such
duties shall be performed in or from the offices of Employer currently located
at Mishawaka, Indiana, and shall be of the same character as those previously
performed by Employee's predecessor and generally associated with the office
held by Employee. Employee shall not be required to be absent from the location
of the principal executive offices of Employer on travel status or otherwise
more than 45 days in any calendar year. Employer shall not, without the written
consent of Employee, relocate or transfer Employee to a location more than 30
miles from his principal residence. Employee shall render services to Employer
as President and chief executive officer in substantially the same manner and to
substantially the same extent as Employee's predecessor rendered his services to
Employer before the date hereof. Although while employed by Employer, Employee
shall devote substantially all his business time and efforts to Employer's
business and shall not engage in any other related business, Employee may use
his discretion in fixing his hours and schedule of work consistent with the
proper discharge of his duties. Employer shall nominate the Employee to
successive terms as a member of Employer's Board of Directors and shall use its
best efforts to elect and re-elect Employee as a member of such Board.
3. The term of this Agreement shall begin April 1, 1997 (the
"Effective Date") and shall end on the date which is three years following such
date; provided, however, that such term shall be extended for an additional
month on the first day of each month succeeding April 1, 1997, so as to continue
to maintain a three-year term and shall continue to be so extended if Employer's
Board of Directors determines by resolution to extend this Agreement prior to
each anniversary of the Effective Date. If either party hereto gives written
notice to the other party not to extend this Agreement in any given month or if
the Board does not determine to extend the Agreement prior to each anniversary
of the Effective Date, no further extension shall occur and the term of this
Agreement shall end three years subsequent to the first day of the month in
which such notice not to extend is given or three years subsequent to the
anniversary as of which the Board does not elect to continue extending this
Agreement (such term, including any extension thereof shall herein be referred
to as the "Term"). Notwithstanding the foregoing, this Agreement shall
automatically terminate (and the Term of this Agreement shall thereupon end)
without notice when Employee attains 65 years of age.
4. Employee shall receive an annual salary of $130,000 ("Base
Compensation") payable at regular intervals in accordance with Employer's normal
payroll practices now or hereafter in effect. Employer may consider and declare
from time to time increases in the salary it pays Employee and thereby increases
in his Base Compensation. During the Term of this Agreement, but only until such
time as a Change of Control occurs, Employer may also declare decreases in the
salary it pays Employee if the operating results of Employer are significantly
less favorable than those for the fiscal year ending September 30, 1995, and
Employer makes similar decreases in the salary it pays to other executive
officers of Employer. After a Change in Control, no such decreases in Base
Compensation
2
<PAGE>
may be made, and Employer shall consider and declare salary increases based upon
the following standards:
Inflation;
Adjustments to the salaries of other senior management personnel; and
Past performance of Employee and the contribution which Employee makes
to the business and profits of Employer during the Term.
Any and all increases or decreases in Employee's salary pursuant to this section
shall cause the level of Base Compensation to be increased or decreased by the
amount of each such increase or decrease for purposes of this Agreement. The
increased or decreased level of Base Compensation as provided in this section
shall become the level of Base Compensation for the remainder of the Term of
this Agreement until there is a further increase or decrease in Base
Compensation as provided herein.
5. So long as Employee is employed by Employer pursuant to this
Agreement and subject to any waiting period requirements in such plans, he shall
be included as a participant in all present and future employee benefit,
retirement, and compensation plans generally available to employees of Employer
(other than Employee's recognition and retention plan and trust), consistent
with his Base Compensation and his position as President and chief executive
officer of Employer, including, without limitation, Employer's or the Holding
Company's pension plan, stock option plan, employee stock ownership plan, and
hospitalization, major medical, disability, dental and group life insurance
plans, each of which Employer agrees to continue in effect on terms no less
favorable than those currently in effect as of the date hereof (as permitted by
law) during the Term of this Agreement unless prior to a Change of Control the
operating results of Employer are significantly less favorable than those for
the fiscal year ending September 30, 1995, and unless (either before or after a
Change of Control) changes in the accounting or tax treatment of such plans
would adversely affect Employer's operating results or financial condition in a
material way, and the Board of Directors of Employer or the Holding Company
concludes that modifications to such plans need to be made to avoid such adverse
effects.
6. So long as Employee is employed by Employer pursuant to this
Agreement, Employee shall receive reimbursement from Employer for all reasonable
business expenses incurred in the course of his employment by Employer, upon
submission to Employer of written vouchers and statements for reimbursement.
Employee shall attend, at his discretion, those professional meetings,
conventions, and/or similar functions that he deems appropriate and useful for
purposes of keeping abreast of current developments in the industry and/or
promoting the interests of Employer. So long as Employee is employed by Employer
pursuant to the terms of this Agreement, Employer shall continue in effect
vacation policies applicable to Employee no less favorable from his point of
view than those written vacation policies in effect on the date hereof. So long
as Employee is employed by Employer pursuant to this Agreement, Employee shall
be entitled to office space and working conditions no less favorable from his
point of view than were in effect for his predecessor immediately
3
<PAGE>
prior to the date hereof. So long as Employee is employed by Employer pursuant
to this Agreement, Employee shall be entitled to the use of a company car
provided by the Employer.
7. Subject to the respective continuing obligations of the parties,
including but not limited to those set forth in subsections 9(A), 9(B), 9(C) and
9(D) hereof, Employee's employment by Employer may be terminated prior to the
expiration of the Term of this Agreement as follows:
(A) Employer, by action of its Board of Directors and upon written
notice to Employee, may terminate Employee's employment with
Employer immediately for cause. For purposes of this
subsection 7(A), "cause" shall be defined as (i) personal
dishonesty, (ii) incompetence, (iii) willful misconduct, (iv)
breach of fiduciary duty involving personal profit, (v)
intentional failure to perform stated duties, (vi) willful
violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist
order, or (vii) any material breach of any term, condition or
covenant of this Agreement.
(B) Employee, by written notice to Employer, may terminate his
employment with Employer immediately for cause. For purposes
of this subsection 7(B), "cause" shall be defined as (i) any
action by Employer's Board of Directors to remove the Employee
as President and chief executive officer of Employer, except
where the Employer's Board of Directors properly acts to
remove Employee from such office for "cause" as defined in
subsection 7(A) hereof, (ii) any action by Employer's Board of
Directors to materially limit, increase, or modify Employee's
duties and/or authority as President and chief executive
officer of Employer (including his authority, subject to
corporate controls no more restrictive than those in effect on
the date hereof, to hire and discharge employees who are not
bona fide officers of Employer), (iii) any failure of Employer
to obtain the assumption of the obligation to perform this
Agreement by any successor or the reaffirmation of such
obligation by Employer, as contemplated in section 20 hereof;
or (iv) any material breach by Employer of a term, condition
or covenant of this Agreement.
(C) Employee, upon sixty (60) days written notice to Employer, may
terminate his employment with Employer without cause.
(D) Employee's employment with Employer shall terminate in the
event of Employee's death or disability. For purposes hereof,
"disability" shall be defined as Employee's inability by
reason of illness or other physical or mental incapacity to
perform the duties required by his employment for any
consecutive One Hundred Eighty (180) day period, provided that
notice of any termination by Employer because of Employee's
"disability" shall have been given to Employee prior to the
full resumption by him of the performance of such duties.
4
<PAGE>
8. In the event of termination of Employee's employment with Employer
pursuant to section 7 hereof, compensation shall continue to be paid by Employer
to Employee as follows:
(A) In the event of termination pursuant to subsection 7(A) or
7(C) (provided that in the case of Section 7(C) such
termination does not occur within 12 months following a Change
of Control), compensation provided for herein (including Base
Compensation) shall continue to be paid, and Employee shall
continue to participate in the employee benefit, retirement,
and compensation plans and other perquisites as provided in
sections 5 and 6 hereof, through the date of termination
specified in the notice of termination. Any benefits payable
under insurance, health, retirement and bonus plans as a
result of Employee's participation in such plans through such
date shall be paid when due under those plans. The date of
termination specified in any notice of termination pursuant to
Subsection 7(A) shall be no later than the last business day
of the month in which such notice is provided to Employee.
(B) In the event of termination pursuant to subsection 7(B) or
termination by Employee pursuant to subsection 7(C) within a
period which begins with a Change of Control and ends 12
months thereafter, compensation provided for herein (including
Base Compensation) shall continue to be paid, and Employee
shall continue to participate in the employee benefit,
retirement, and compensation plans and other perquisites as
provided in sections 5 and 6 hereof, through the date of
termination specified in the notice of termination. Any
benefits payable under insurance, health, retirement and bonus
plans as a result of Employee's participation in such plans
through such date shall be paid when due under those plans. In
addition, Employee shall be entitled to continue to receive
from Employer his Base Compensation at the rates in effect at
the time of termination (1) for three additional 12-month
periods if the termination follows a Change of Control or (2)
for the remaining Term of the Agreement if the termination
does not follow a Change of Control. In addition, during such
period, Employer will maintain in full force and effect for
the continued benefit of Employee each employee welfare
benefit plan (as such term is defined in the Employee
Retirement Income Security Act of 1974, as amended) in which
Employee was entitled to participate immediately prior to the
date of his termination, unless an essentially equivalent and
no less favorable benefit is provided by a subsequent employer
of Employee. If the terms of any employee welfare benefit plan
of Employer or applicable laws do not permit continued
participation by Employee, Employer will arrange to provide to
Employee a benefit substantially similar to, and no less
favorable than, the benefit he was entitled to receive under
such plan at the end of the period of coverage. For purposes
of this Agreement, a "Change of Control" shall mean an
acquisition of "control" of the Holding Company or of Employer
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).
5
<PAGE>
(C) In the event of termination pursuant to subsection 7(D),
compensation provided for herein (including Base Compensation)
shall continue to be paid, and Employee shall continue to
participate in the employee benefit, retirement, and
compensation plans and other perquisites as provided in
sections 5 and 6 hereof, (i) in the event of Employee's death,
through the date of death, or (ii) in the event of Employee's
disability, through the date of proper notice of disability as
required by subsection 7(D). Any benefits payable under
insurance, health, retirement and bonus plans as a result of
Employer's participation in such plans through such date shall
be paid when due under those plans.
(D) Employer will permit Employee or his personal
representative(s) or heirs, during a period of three months
following Employee's termination of employment by Employer for
the reasons set forth in subsections 7(B), if such termination
follows a Change of Control, to require Employer, upon written
request, to purchase all outstanding stock options previously
granted to Employee under any Holding Company stock option
plan then in effect whether or not such options are then
exercisable or have terminated at a cash purchase price equal
to the amount by which the aggregate "fair market value" of
the shares subject to such options exceeds the aggregate
option price for such shares. For purposes of this Agreement,
the term "fair market value" shall mean the higher of (1) the
average of the highest asked prices for Holding Company shares
in the over-the-counter market as reported on the NASDAQ
system if the shares are traded on such system for the 30
business days preceding such termination, or (2) the average
per share price actually paid for the most highly priced 1% of
the Holding Company shares acquired in connection with the
Change of Control of the Holding Company by any person or
group acquiring such control.
9. In order to induce Employer to enter into this Agreement, Employee
hereby agrees as follows:
(A) While Employee is employed by Employer and for a period of
three years after termination of such employment for reasons
other than those set forth in subsections 7(B) of this
Agreement, Employee shall not divulge or furnish any trade
secrets (as defined in IND. CODEss. 24-2-3-2) of Employer or
any confidential information acquired by him while employed by
Employer concerning the policies, plans, procedures or
customers of Employer to any person, firm or corporation,
other than Employer or upon its written request, or use any
such trade secret or confidential information directly or
indirectly for Employee's own benefit or for the benefit of
any person, firm or corporation other than Employer, since
such trade secrets and confidential information are
confidential and shall at all times remain the property of
Employer.
(B) For a period of three years after termination of Employee's
employment by Employer for reasons other than those set forth
in subsections 7(B) of this Agreement,
6
<PAGE>
Employee shall not directly or indirectly provide banking or
bank-related services to or solicit the banking or
bank-related business of any customer of Employer at the time
of such provision of services or solicitation which Employee
served either alone or with others while employed by Employer
in any city, town, borough, township, village or other place
in which Employee performed services for Employer during the
last three years (or such shorter period) he was employed by
it, or assist any actual or potential competitor of Employer
to provide banking or bank-related services to or solicit any
such customer's banking or bank-related business in any such
place.
(C) While Employee is employed by Employer and for a period of one
year after termination of Employee's employment by Employer
for reasons other than those set forth in subsections 7(B) of
this Agreement, Employee shall not, directly or indirectly, as
principal, agent, or trustee, or through the agency of any
corporation, partnership, trade association, agent or agency,
engage in any banking or bank-related business or venture
which competes with the business of Employer as conducted
during Employee's employment by Employer within St. Joseph
County or within a radius of 25 miles of any other office of
Employer where Employee was employed for more than six months
in the three years next preceding termination.
(D) If Employee's employment by Employer is terminated for reasons
other than those set forth in subsections 7(B) of this
Agreement, Employee will turn over immediately thereafter to
Employer all business correspondence, letters, papers,
reports, customers' lists, financial statements, credit
reports or other confidential information or documents of
Employer or its affiliates in the possession or control of
Employee, all of which writings are and will continue to be
the sole and exclusive property of Employer or its affiliates.
If Employee's employment by Employer is terminated during the Term of this
Agreement for reasons set forth in subsections 7(B) of this Agreement, Employee
shall have no obligations to Employer with respect to trade secrets,
confidential information or noncompetition under this section 9.
10. Any termination of Employee's employment with Employer as
contemplated by section 7 hereof, except in the circumstances of Employee's
death, shall be communicated by written "Notice of Termination" by the
terminating party to the other party hereto. Any "Notice of Termination"
pursuant to subsections 7(A), 7(B) or 7(D) shall indicate the specific
provisions of this Agreement relied upon and shall set forth in reasonable
detail the facts and circumstances claimed to provide a basis for such
termination.
11. If Employee is suspended and/or temporarily prohibited from
participating in the conduct of Employer's affairs by a notice served under
section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. ss.
1818(e)(3) and (g)(1)), Employer's obligations under this Agreement shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, Employer shall (i) pay Employee all
or part of the
7
<PAGE>
compensation withheld while its obligations under this Agreement were suspended
and (ii) reinstate (in whole or in part) any of its obligations which were
suspended.
12. If Employee is removed and/or permanently prohibited from
participating in the conduct of Employer's affairs by an order issued under
section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. ss.
1818(e)(4) or (g)(1)), all obligations of Employer under this Agreement shall
terminate as of the effective date of the order, but vested rights of the
parties to the Agreement shall not be affected.
13. If Employer is in default (as defined in section 3(x)(1) of the
Federal Deposit Insurance Act), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of Employer or Employee.
14. All obligations under this Agreement may be terminated except to
the extent determined that the continuation of the Agreement is necessary for
the continued operation of Employer: (i) by the Director of the Office of Thrift
Supervision, or his or her designee (the "Director"), at the time the Federal
Deposit Insurance Corporation or Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of Employer under the authority
contained in Section 13(c) of the Federal Deposit Insurance Act; or (ii) by the
Director at the time the Director approves a supervisory merger to resolve
problems related to operation of Employer or when Employer is determined by the
Director to be in an unsafe and unsound condition. Any rights of the parties
that have already vested, however, shall not be affected by such action.
15. Anything in this Agreement to the contrary notwithstanding, in the
event that the Employer's independent public accountants determine that any
payment by the Employer to or for the benefit of the Employee, whether paid or
payable pursuant to the terms of this Agreement, would be non-deductible by the
Employer for federal income tax purposes because of Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), then the amount payable to or for
the benefit of the Employee pursuant to this Agreement shall be reduced (but not
below zero) to the Reduced Amount. For purposes of this section 15, the "Reduced
Amount" shall be the amount which maximizes the amount payable without causing
the payment to be non-deductible by the Employer because of Section 280G of the
Code. Any payments made to Employee pursuant to this Agreement, or otherwise,
are subject to and conditional upon their compliance with 12 U.S.C. ss.1828(k)
and any regulations promulgated thereunder, to the extent applicable to such
payments.
16. If a dispute arises regarding the termination of Employee pursuant
to section 7 hereof or as to the interpretation or enforcement of this Agreement
said dispute shall be resolved by binding arbitration determined in accordance
with the rules of the American Arbitration Association and if Employee obtains a
final award in his favor or his claim is settled by Employer prior to the
rendering of an award by such arbitration, all reasonable legal fees and
expenses incurred by Employee in contesting or disputing any such termination or
seeking to obtain or enforce any right or benefit provided for in this Agreement
or otherwise pursuing his claim shall be paid by Employer, to the extent
permitted by law.
8
<PAGE>
17. Should Employee die after termination of his employment with
Employer while any amounts are payable to him hereunder, this Agreement shall
inure to the benefit of and be enforceable by Employee's executors,
administrators, heirs, distributees, devisees and legatees and all amounts
payable hereunder shall be paid in accordance with the terms of this Agreement
to Employee's devisee, legatee or other designee or, if there is no such
designee, to his estate.
18. For purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been given when delivered or mailed by United States registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to Employee: Charles J. Viater
15141 Clifden Drive
Granger, Indiana 46530
If to Employer: Mishawaka Federal Savings
121 South Church Street
P.O. Box 528
Mishawaka, Indiana 46546
or to such address as either party hereto may have furnished to the other party
in writing in accordance herewith, except that notices of change of address
shall be effective only upon receipt.
19. The validity, interpretation, and performance of this Agreement
shall be governed by the laws of the State of Indiana, exist as otherwise
required by mandatory operation of federal law.
20. Employer shall require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business or assets of Employer, by agreement in form and substance
satisfactory to Employee to expressly assume and agree to perform this Agreement
in the same manner and same extent that Employer would be required to perform it
if no such succession had taken place. Failure of Employer to obtain such
agreement prior to the effectiveness of any such succession shall be a material
intentional breach of this Agreement and shall entitle Employee to terminate his
employment with Employer pursuant to subsection 7(B) hereof. As used in this
Agreement, "Employer" shall mean Employer as hereinbefore defined and any
successor to its business or assets as aforesaid.
21. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
signed by Employee and Employer. No waiver by either party hereto at any time of
any breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of dissimilar provisions or conditions at the same or any prior
subsequent time. No agreements or representation, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not set forth expressly in this Agreement.
9
<PAGE>
22. The invalidity or unenforceability of any provisions of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement which shall remain in full force and effect.
23. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same agreement.
24. This Agreement is personal in nature and neither party hereto
shall, without consent of the other, assign or transfer this Agreement or any
rights or obligations hereunder except as provided in section 17 and section 20
above. Without limiting the foregoing, Employee's right to receive compensation
hereunder shall not be assignable or transferable, whether by pledge, creation
of a security interest or otherwise, other than a transfer by his will or by the
laws of descent or distribution as set forth in section 17 hereof, and in the
event of any attempted assignment or transfer contrary to this paragraph,
Employer shall have no liability to pay any amounts so attempted to be assigned
or transferred.
25. If any of the provisions in this Agreement shall conflict with 12
C.F.R. ss. 563.39(b), as it may be amended from time to time, the requirements
of such regulation shall supersede any contrary provisions herein and shall
prevail.
IN WITNESS WHEREOF, the parties have caused the Agreement to be
executed and delivered as of the day and year first above set forth.
MFB FINANCIAL
By: /s/ Timothy C. Boenne
------------------------------------
Name: Timothy C. Boenne
Title:Vice President and Controller
"Employer"
/s/ Charles J. Viater
------------------------------------
Charles J. Viater
"Employee"
10
<PAGE>
The undersigned, MFB Corp., sole shareholder of Employer, agrees that
if it shall be determined for any reason that any obligation on the part of
Employer to continue to make any payments due under this Agreement to Employee
is unenforceable for any reason, MFB Corp. agrees to honor the terms of this
Agreement and continue to make any such payments due hereunder to Employee
pursuant to the terms of this Agreement.
MFB CORP.
By:/s/ Timothy C. Boenne
------------------------------------
Name: Timothy C. Boenne
Title: Vice President and Controller
11
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
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference of our report dated November
3, 1997, on the consolidated financial statements of MFB Corp. which is
incorporated by reference in MFB Corp.'s Annual Report on Form 10-K for the year
ended September 30, 1997, in MFB Corp.'s Registration Statements on Form S-8
(Registration No. 33-84340) and Registration No. (333-13051).
Crowe, Chizek and Company LLP
South Bend, Indiana
December 23, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> MFB CORP.
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