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, 1998
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 pursuant to Item 405,
Regulation S-K (229.405 of this chapter) is not contained herein, and will not
be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of December 1, 1998, was $24,458,834.
The number of shares of the registrant's common stock, without par value,
outstanding as of December 1, 1998, was 1,463,917 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Annual Report to Shareholders for the fiscal year ended
September 30, 1998 are incorporated by reference into Part II.
Portions of the Proxy Statement for the 1999 Annual Meeting of the Shareholders
are incorporated into Part I and Part III.
Exhibit Index on Page E-1
Page one of 57 pages
<PAGE>
MFB CORP.
Form 10-K
INDEX
PART I
Item 1. Business 1
Item 2. Properties 40
Item 3. Legal Proceedings 41
Item 4. Submission of Matters to a Vote of Security Holders 41
Item 4.5 Executive Officers of MFB 41
PART II
Item 5. Market for Registrant' s Common Equity and Related
Stockholder Matters 42
Item 6. Selected Financial Data 43
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 43
Item 7a. Quantitative and Qualitative Disclosures
About Market Risks 43
Item 8. Financial Statements and Supplementary Data 44
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 44
PART III
Item 10. Directors and Executive Officers of the Registrant 45
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners
and Management 45
Item 13. Certain Relationships and Related Transactions 45
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 46
Signatures 48
Exhibit List E-1
<PAGE>
PART 1
Item 1. Business.
General
MFB Corp. ("MFB") is an Indiana corporation organized in December, 1993, to
become a unitary savings and loan holding company. MFB became a unitary savings
and loan holding company upon the conversion of Mishawaka Federal Savings (the
"Bank", and together with MFB, the "Company") from a federal mutual savings and
loan association to a federal stock savings bank on March 24, 1994. On November
1, 1996, Mishawaka Federal Savings officially changed its name to MFB Financial.
The principal asset of MFB consists of 100% of the issued and outstanding shares
of common stock, $0.01 par value per share, of the Bank. The Bank began
operations in Mishawaka, Indiana in 1889 under the name Mishawaka Building and
Loan Association.
MFB Financial directly, and indirectly through its service corporation
subsidiary, offers a number of consumer and commercial financial services. These
services include: (i) residential real estate loans; (ii) home equity and second
mortgage loans; (iii) construction loans; (iv) commercial loans; (v) loans
secured by deposits and other consumer loans; (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 Mishawaka Financial
Services, Inc., its service corporation subsidiary. MFB Financial provides these
services through its five offices, three in Mishawaka, one in South Bend, and
one in Goshen, Indiana. The Bank'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,
commercial loans and construction loans. At September 30, 1998, $183.2 million,
or 78.7% of the Company's total loan portfolio, consisted of mortgage loans on
one-to-four family residential real property which are generally secured by
first mortgages on the property. 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, home equity
and second mortgage loans, new and used car loans and personal loans. Commercial
loans include term loans and commercial lines of credit.
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. In
an effort to diversify the asset mix of the Bank and enhance loan yields, home
equity loan, commercial loan and consumer loan programs have been established.
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 significant number of the loans made by MFB Financial feature adjustable
rates. Adjustable rate loans permit the Bank to better match the interest it
earns on loans with the interest it pays on deposits. A variety of programs are
offered to borrowers. A majority of these loans adjust on an annual basis after
initial terms of one to five 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.
It is intended that most of these loans be sold in the secondary market. 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 one or more members of MFB Financial's Loan Committee.
Construction Loans. MFB Financial offers construction loans with respect to
owner-occupied residential real estate, to builders or developers constructing
such properties and to owners who are to occupy the premises.
Generally, construction loans are 12-month adjustable rate mortgage loans with
interest calculated on the amount disbursed under the loan and payable on a
monthly basis. Interest rates for such loans are generally 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. 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
institutions 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 institution has lending authority above the 35% limit for
certain consumer loans, such as property improvement loans and deposit account
secured loans. However, the Qualified Thrift Lender test places additional
limitations on a savings 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 secured consumer loans for amounts specifically tied
to the value of the collateral, and, smaller, unsecured loans with higher
interest rates. MFB Financial has been successful in managing consumer loan
risk.
Origination Purchase and Sale of Loans. During the 1997-98 fiscal year, MFB
Financial made significant changes to residential mortgage loan origination
documentation and procedures. A majority of currently originated, fixed rate
loans now meet secondary market requirements. Many of these loans will be sold
as they are originated which reduces interest rate risk, allowing the Bank to
build a fee based servicing portfolio and manage liquidity needs more
effectively. In addition, many of the older fixed rate non-conforming loans have
now been sold in the private market. Adjustable rate loans are now originated on
standard loan forms but are generally intended to be held in portfolio. This
allows flexibility to meet customer needs while providing yields which should
better reflect changing market conditions.
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, and will be replaced by a full service branch
facility in the spring of 1999. 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 institution 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. Fixed rate mortgage loans are
generally underwritten to FHLMC and FNMA standards. 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. Due to competitive issues, MFB Financial has originated
most of its mortgages without charging points. However, borrowers from time to
time wish to pay points and management negotiates rates on an individual basis.
Late charges are generally assessed if payment is not received within a
specified number of days after it is due. The grace period depends on the
individual loan documents.
Non-Performing and Problem Assets
All loans are reviewed by the Company on a regular basis and generally are
placed on a non-accrual status when the loans become contractually past due
ninety days or more. In cases where there is sufficient equity in the property
and/or the borrowers are willing and able to ultimately pay all accrued amounts
in full, the loan may be allowed to continue to earn interest. 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, 1998, $269,000 or .09% of the Company's
total assets, were non-performing assets (loans delinquent more than 90 days,
non-accrual loans, real estate owned ("REO") and troubled debt restructurings).
At September 30, 1998, the Company had no impaired loans. One hundred forty-five
thousand dollars in real estate has been 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
wan-ant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "special mention" by management. At
September 30, 1998, the Bank had classified $111,000 of its assets as
"substandard", $0 as "doubtful", and $0 as "loss".
An insured institution is required to establish general allowances for loan and
lease losses in an amount deemed prudent by management for loans classified
substandard, doubtful or impaired, as well as for other problem loans. General
allowances represent loss allowances which have been established to recognize
the inherent risk associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. When an
insured institution classifies problem assets as "loss", it is required either
to establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the establishment of
additional general or specific loss allowances.
MFB Financial regularly reviews it loan portfolio to determine whether any loans
require classification in accordance with applicable regulations. For reasons
such as low loan-to-value ratios, not all of the Company's non-performing assets
constitute classified assets.
Allowance for Loan Losses
The allowance for loan and lease losses is maintained through the provision for
loan losses, which is charged to earnings. The provision is determined in
conjunction with management's review and evaluation of current economic
conditions (including those of MFB Financial's lending area), changes in the
character and size of the loan and lease portfolio, delinquencies (current
status as well as past and anticipated trends) and adequacy of collateral
securing loan delinquencies, historical and estimated net charge-offs, and other
pertinent information derived from a review of the loan and lease portfolio. The
provision for loan losses was increased from $30,000 during the period ended
September 30, 1997 to $120,000 at September 30, 1998 due to the substantial
increase in the volumes of commercial and consumer loans. In management's
opinion, MFB, Financial's allowance for loan and lease losses is adequate to
absorb anticipated future losses existing at September 30, 1998.
Investments
General. Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds sold. Subject to various restrictions, federally
chartered savings institutions may also invest a portion of their assets in
commercial paper, corporate debt securities and asset-backed securities. The
investment policy of NEB 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, corporate securities,
equity securities and Federal Home Loan Bank ("FHLB") stock.
Liquidity. Federal regulations require FHLB-member savings institutions to
maintain an average daily balance of liquid assets equal to a monthly average of
not less than a specified percentage of its net withdrawable savings deposits
plus short-term borrowings. Liquid assets include cash, United States Treasury
obligations, certain certificates of deposit of insured banks and savings
institutions, certain bankers' acceptances and specified state or federal agency
obligations. Subject to various restrictions, FHLB-member savings institutions
may also invest in certain corporate debt securities, commercial paper, mutual
funds, mortgage-related securities, and first lien residential mortgage loans.
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%. As of September 30,
1998, the Bank had liquid assets of $59.7 million and a regulatory liquidity
ratio of 20.36%, well above the minimum regulatory requirements.
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 to compensate for reductions in deposits or deposit inflows at less
than projected levels. In addtion, the Bank has in place a capital leveraging
strategy that involves 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, business checking 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, the Bank believes that its passbook, NOW and non-interest-bearing
checking accounts are relatively stable sources of deposits. However, the
ability of the Bank to attract and maintain certificates of deposit, and the
rates paid on these deposits, has been and will continue to be significantly
affected by market conditions.
Borrowings. MFB Financial focuses on generating high quality loans and then
seeks the best source of funding from deposits, investments or borrowings.
Short-term borrowings or long term debt may be used to compensate for reduction
in other sources of funds such as deposits and to assist in asset/liability
management. The Bank's policy has been to utilize borrowings when they are a
less costly source of funds, 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 unencumbered 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, 1998, MFB Financial had $92.7 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, 1998, the Bank had $2.4 million in repurchase agreements
outstanding.
Service Corporation Subsidiary
OTS regulations permit federal savings institutions 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 institution'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 institutions to
make specified types of loans to such subsidiaries (other than special-purpose
finance subsidiaries), in which the institution owns more than 10% of the stock,
in an aggregate amount not exceeding 50% of the institution's regulatory capital
if the association's regulatory capital is in compliance with applicable
regulations. A savings institution that acquires a non-savings institution
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").
The Bank'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 the Bank's customers and the general public. In addition, a range of
investment and insurance related products are offered to customers through a
contractual relationship established with Financial Network Investment
Corporation (FNIC), a full service securities brokerage firm. During fiscal year
1998, Mishawaka Financial received approximately $162,000 in commissions versus
approximately $144,000 in commissions received during fiscal year 1997. Since
Mishawaka Financial conducts all of its activities as agent for its customers,
the Bank is not required to deduct from its capital any portion of this
investment. The consolidated statements of income of MFB Corp. included
elsewhere herein include the operation of the Bank and Mishawaka Financial. All
significant intercompany balances and transactions have been eliminated in the
consolidation.
Employees
As of September 30, 1998, MFB Financial employed 70 persons on a full-time basis
and 29 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>
1998 1997 1996
Average Average Average
Outstanding Outstanding Outstanding
Balance Balance Balance
Assets: (In thousands)
Interest-earning assets:
<S> <C> <C> <C>
Interest-bearing deposits $ 9,633 $ 1,856 $ 6,709
Securities (1) 13,647 30,765 35,392
Mortgage-backed securities (1) 23,206 22,222 19,717
FHLB stock 3,446 1,783 1,303
Loans held for sale 2,401 35 -
Loans receivable (2) 220,244 175,726 133,670
------------- ------------ ------------
Total interest-earning assets 272,577 232,387 196,791
Non-interest earning assets, net
of allowance for loan losses 5,320 4,663 3,792
------------- ------------ ------------
Total assets $ 277,897 $ 237,050 $ 200,583
============= ============ ============
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts $ 10,737 $ 10,359 $ 9,746
NOW and money market accounts 30,065 26,770 26,006
Certificates of deposit 130,350 126,202 113,570
Repurchase agreements 1,647 97 -
FHLB advances 66,123 34,960 9,625
------------- ------------ ------------
Total interest-bearing liabilities 238,922 198,388 158,947
Other liabilities 5,571 4,316 3,451
------------- ------------ ------------
Total liabilities 244,493 202,704 162,398
Shareholders' equity
Common stock 12,921 14,015 19,064
Net unrealized gain (loss) on securities
available for sale 56 (100) (133)
Retained earnings 22,958 21,381 20,496
Less common stock acquired by:
Employee stock ownership plan (565) (790) (1,007)
Recognition and retention plans (80) (157) (235)
Treasury stock (1,886) (3) -
------------- ------------ ------------
Total shareholders' equity 33,404 34,346 38,185
------------- ------------ ------------
Total liabilities and shareholders' equity $ 277,897 $ 237,050 $ 200,583
============= ============ ============
</TABLE>
(1) Average outstanding balance reflects unrealized gain (loss) on
securities available for sale.
(2) Total loans less deferred net loan fees and loans in process.
<PAGE>
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
B. The following tables set forth, for the years indicated, the condensed
average balance of interest-earning assets and interest-bearing
liabilities, the interest earned or paid on such amounts, and the
average interest rates earned or paid thereon.
<TABLE>
<CAPTION>
--------Year Ended September 30, 1998-------
Average Average
Balance Interest Yield/Cost
(Dollars in thousands)
INTEREST-EARNING ASSETS
<S> <C> <C> <C>
Interest-bearing deposits $ 9,633 $ 560 5.81%
Securities (1) 13,541 900 6.65
Mortgage-backed securities (1) 23,218 1,357 5.84
FHLB stock 3,446 276 8.01
Loans held for sale 2,401 178 7.41
Loans receivable (2) 220,244 17,567 7.98
------------ ------------
Total interest-earning assets $ 272,483 20,838 7.65
============
INTEREST-BEARING LIABILITIES
Savings accounts $ 10,737 271 2.52%
NOW and money market accounts 30,065 852 2.83
Certificates of deposit 130,350 7,265 5.57
Repurchase agreements 1,647 67 4.09
FHLB advances 66,123 3,749 5.67
------------ ------------
Total interest-bearing liabilities $ 238,922 12,204 5.11
============ ------------
Net interest earning assets $ 33,561
============
Net interest income $ 8,634
============
Interest rate spread (3) 2.54%
Net yield on average interest-earning assets (4) 3.17%
Average interest-earning assets to
average interest-bearing liabilities 114.05%
</TABLE>
(1) Average balance does not reflect unrealized gain (loss) on securities
available for sale and yield is based on amortized cost.
(2) Total loans less deferred net loan fees and loans in process.
(3) Interest rate spread is calculated by subtracting average interest rate
cost from average interest rate earned for the period indicated.
(4) The net yield on average interest-earning assets is calculated by
dividing net interest income by average interest-earning assets for the
period indicated.
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
FHLB stock 1,783 144 8.08
Loans held for sale 35 - -
Loans receivable (2) 175,726 13,897 7.91
------------ ------------
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 26,770 768 2.89
Certificates of deposit 126,202 7,135 5.65
Repurchase agreements 97 4 4.27
FHLB advances 34,960 1,972 5.64
------------ ------------
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 less deferred net loan fees and loans in process.
(3) Interest rate spread is calculated by subtracting average interest rate
cost from average interest rate earned for the period indicated.
(4) The net yield on average interest-earning assets is calculated by
dividing net interest income by average interest-earning assets for the
period indicated.
<PAGE>
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
<TABLE>
<CAPTION>
--------Year Ended September 30, 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
FHLB stock 1,303 103 7.90
Loans receivable (2) 133,670 10,246 7.67
------------ ------------
Total interest-earning assets $ 197,012 14,182 7.20
============
INTEREST-BEARING LIABILITIES
Savings accounts $ 9,746 270 2.77%
NOW and money market accounts 26,006 811 3.12
Certificates of deposit 113,570 6,447 5.68
FHLB advances 9,625 529 5.50
------------ ------------
Total interest-bearing liabilities $ 158,947 8,057 5.07
============ ------------
Net interest earning assets $ 38,065
============
Net interest income $ 6,125
============
Interest rate spread (3) 2.13%
Net yield on average interest-earning assets (4) 3.11%
Average interest-earning assets to
average interest-bearing liabilities 123.95%
</TABLE>
(1) Average balance does not reflect unrealized gain (loss) on securities
available for sale and yield is based on amortized cost.
(2) Total loans less deferred net loan fees and loans in process.
(3) Interest rate spread is calculated by subtracting average interest rate
cost from average interest rate earned for the period indicated.
(4) The net yield on average interest-earning assets is calculated by
dividing net interest income by average interest-earning assets for the
period indicated.
<PAGE>
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
C. The following tables describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities
have affected MFB Corp.'s consolidated interest income and expense
during the periods indicated. For each category of interest-earning
asset and interest-bearing liability, information is provided on changes
attributable to (1) changes in rate (i.e., changes in rate multiplied by
old volume) and (2) changes in volume (i.e., changes in volume
multiplied by old rate). Changes attributable to both rate and volume
have been allocated proportionally to the change due to volume and the
change due to rate.
<TABLE>
<CAPTION>
Increase (Decrease) in
Net Interest Income
Total Net Due to Due to
Change Rate Volume
(In thousands)
<S> <C> <C> <C>
Year ended September 30, 1998 compared
to year ended September 30, 1997
Interest-earning assets
Interest-bearing deposits $ 464 $ 13 $ 451
Securities (1,212) (62) (1,150)
Mortgage-backed securities (79) (140) 61
FHLB stock 132 (1) 133
Loans held for sale 178 - 178
Loans receivable 3,670 120 3,550
----------- ----------- ------------
Total 3,153 (70) 3,223
Interest-bearing liabilities
Savings accounts (7) (17) 10
NOW and money market accounts 84 (9) 93
Certificates of deposit 130 (102) 232
Repurchase agreements 63 - 63
FHLB advances 1,777 10 1,767
----------- ----------- ------------
Total 2,047 (118) 2,165
----------- ----------- ------------
Change in net interest income $ 1,106 $ 48 $ 1,058
=========== =========== ============
</TABLE>
<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, 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
FHLB stock 41 2 39
Loans receivable 3,651 332 3,319
----------- ----------- ------------
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 683 (27) 710
Repurchase agreements 4 - 4
FHLB advances 1,443 15 1,428
----------- ----------- ------------
Total 2,100 (82) 2,182
----------- ----------- ------------
Change in net interest income $ 1,403 $ 646 $ 757
=========== =========== ============
</TABLE>
<PAGE>
II. INVESTMENT PORTFOLIO
A. The following table sets forth the amortized cost and fair value of
securities available for sale:
<TABLE>
<CAPTION>
At September 30,
1998 1997 1996
-------------------------- -------------------------- ---------------------------
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 $ 4,219 $ 4,254 $ 23,618 $ 23,720 $ 40,160 $ 40,207
Mortgage-
backed 22,259 22,267 15,589 15,579 24,473 24,074
Other securities 8,929 8,929 - - - -
Corporate notes 5,945 5,863 - - - -
----------- ------------ ----------- ---------- ---------- -----------
41,352 41,313 39,207 39,299 64,633 64,281
Marketable equity
securities 543 506 300 329 2,494 2,482
----------- ------------ ----------- ---------- ---------- -----------
$ 41,895 $ 41,819 $ 39,507 $ 39,628 $ 67,127 $ 66,763
=========== ============ =========== ========== ========== ===========
</TABLE>
The following table sets forth the amortized cost and estimated market value of
Federal Home Loan Bank (FHLB) Stock:
<TABLE>
<CAPTION>
At September 30,
1998 1997 1996
-------------------------- -------------------------- --------------------------
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 $ 4,636 $ 4,636 $ 2,400 $ 2,400 $ 1,336 $ 1,336
=========== ============ =========== ========== ========== ===========
</TABLE>
<PAGE>
II. INVESTMENT PORTFOLIO (Continued)
B. The maturity distribution and weighted average interest rates of debt
securities available for sale, excluding mortgage-backed securities,
are as follows:
<TABLE>
<CAPTION>
Amount at September 30, 1998, which matures in
One One to Over
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 $ 2,712 $ 2,740 $ 1,507 $ 1,514 $ - $ - $ 4,219 $ 4,254
Other securities 8,929 8,929 - - - - 8,929 8,929
Corporate notes - - - - 5,945 5,863 5,945 5,863
--------- --------- --------- --------- --------- --------- --------- ---------
$ 11,641 $ 11,669 $ 1,507 $ 1,514 $ 5,945 $ 5,863 $ 19,093 $ 19,046
========= ========= ========= ========= ========= ========= ========= =========
Weighted average yield 6.00% 6.73% 6.37% 6.17%
</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, 1998.
<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,--------------------------------
1998 1997 1996
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Mortgage loans
<S> <C> <C> <C> <C> <C> <C>
Residential $ 183,151 78.08% $ 164,598 86.91% $ 143,751 92.87%
Multi-family 120 .05 130 .07 163 .10
Residential construction 8,233 3.51 8,245 4.35 5,005 3.23
Commercial and other loans
Commercial loans 32,001 13.64 8,833 4.66 876 .57
Home equity and second
mortgage loans 9,067 3.87 7,177 3.79 3,790 2.45
Financing leases 83 .03 325 .17 1,125 .73
Other 1,914 .82 96 .05 83 .05
----------- ------- ------------ ------- ------------ --------
Gross loans receivable 234,569 100.00% 189,404 100.00% 154,793 100.00%
======= ======= ========
Less
Allowance for loan losses (454) (370) (340)
Deferred net loan fees (798) (653) (440)
Loans in process (485) (117) (1,961)
----------- ------------ ------------
Net loans receivable $ 232,832 $ 188,264 $ 152,052
=========== ============ ============
Mortgage-backed securities
FHLMC certificates $ 2,316 $ 3,508 $ 5,013
CMO - REMIC 19,951 12,071 19,061
----------- ------------ ------------
Net mortgage-backed securities $ 22,267 $ 15,579 $ 24,074
=========== ============ ============
Mortgage loans
Adjustable rate $ 153,897 80.36% $ 139,665 80.74% $ 130,336 87.01%
Fixed rate 37,607 19.64 33,308 19.26 19,459 12.99
----------- ------- ------------ ------- ------------ --------
Total $ 191,504 100.00% $ 172,973 100.00% $ 149,795 100.00%
=========== ======= ============ ======= ============ ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
--------------------September 30,--------------------
1995 1994
Percent Percent
of of
Amount Total Amount Total
------ ----- ------ -----
Mortgage loans
<S> <C> <C> <C> <C>
Residential $ 119,720 97.60% $ 113,770 97.25%
Multi-family 189 .15 192 .16
Residential construction 2,106 1.72 2,213 1.89
Commercial and other loans
Commercial loans 206 .17 443 .38
Home equity and second
mortgage loans 375 .30 298 .26
Financing leases - - - -
Other 74 .06 69 .06
------------ ------- ------------ ---------
Gross loans receivable 122,670 100.00% 116,985 100.00%
======= =========
Less
Allowance for loan losses (310) (280)
Deferred net loan fees (370) (447)
Loans in process (809) (961)
------------ ------------
Net loans receivable $ 121,181 $ 115,297
============ ============
Mortgage-backed securities
FHLMC certificates $ 11,905 $ 13,158
CMO - REMIC - -
----------- ------------
Net mortgage-backed securities $ 11,905 $ 13,158
============ ============
Mortgage loans
Adjustable rate $ 113,394 92.78% $ 110,853 95.06%
Fixed rate 8,827 7.22 5,765 4.94
------------ ------- ------------ ---------
Total $ 122,221 100.00% $ 116,618 100.00%
============ ======= ============ ======
</TABLE>
<PAGE>
III. LOAN PORTFOLIO (Continued)
B. Loan Maturity. The following table sets forth certain information at
September 30, 1998, 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 2002 2004 2009 2014
at September 30, and to to and
1998 1999 2000 2001 2003 2008 2013 Following
---- ---- ---- ---- ---- ---- ---- ---------
(In thousands)
Mortgage Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential $183,151 $ 19 $ 78 $ 333 $ 1,509 $ 11,509 $46,583 $ 123,120
Multi-family 120 - - - - 80 40 -
Residential construction 8,233 8,233 - - - - - -
Commercial and other Loans
Commercial loans 32,001 4,257 10,751 598 13,994 1,786 615 -
Home equity and second mortgage 9,067 - 4 188 2,663 5,866 192 154
Financing leases 83 - - - - 83 - -
Other 1,914 117 124 284 1,319 24 - 46
-------- ------- ------- ------ -------- --------- ------- ---------
Total $234,569 $12,626 $10,957 $1,403 $ 19,485 $ 19,348 $47,430 $ 123,320
======== ======= ======= ====== ======== ========= ======= =========
</TABLE>
The following table sets forth, as September 30, 1998, 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, 1999
Variable
Fixed Rates Rates Total
(In thousands)
Mortgage loans
<S> <C> <C> <C>
Residential $ 33,283 $ 149,849 $ 183,132
Multi-family 15 105 120
Residential construction - - -
Commercial and other loans
Commercial loans 16,962 10,782 27,744
Home equity and second mortgage 4,021 5,046 9,067
Financing leases 83 - 83
Other 1,751 46 1,797
------------ ----------- ----------
Total $ 56,115 $ 165,828 $ 221,943
============ =========== ==========
</TABLE>
<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 should
be classified as uncollectible for any loan past due in excess
of 90 days.
<TABLE>
<CAPTION>
At September 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
Accruing loans delinquent
<S> <C> <C> <C> <C> <C>
more than 90 days $ 124 $ 261 $ 198 $ 308 $ 107
Non-accruing loans (1) - - - - -
Troubled debt
restructurings - - - - -
---------- --------- ----------- ---------- -----------
Total non-performing
loans 124 261 198 308 107
Real estate owned, net 145 - - 18 22
---------- --------- ----------- ---------- -----------
Total non-performing
assets $ 269 $ 261 $ 198 $ 326 $ 129
========== ========= =========== ========== ===========
Non-performing loans to
total loans, net (2) .05% .14% .13% .25% .09%
Non-performing assets to
total assets .09% .10% .09% .17% .07%
</TABLE>
Management believes that the allowance for loan losses balance at September 30,
1998 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, 1998,
there were no loans on nonaccrual.
(2) Total loans less deferred net loan fees and loans in process.
<PAGE>
III. LOAN PORTFOLIO (Continued)
C. Risk Elements (Continued)
2. Potential Problem Loans
As of September 30, 1998, 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 81.59% of MFB Corp.'s
total loan portfolio at September 30, 1998.
D. Other Interest-Earning Assets
There are no other interest-earning assets, other than
$145,000 in foreclosed real estate owned as of September 30,
1998 which would be required to be disclosed under Item III.
C.1 or 2 if such assets were loans.
<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, 1998.
The following table analyzes changes in the consolidated allowance for
loan losses during the past five years ended September 30, 1998.
<TABLE>
<CAPTION>
Years Ended September 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance of allowance at
beginning of period $ 370 $ 340 $ 310 $ 280 $ 250
Add
Recoveries of loans
previously charged-
off--residential real
estate loans - - - - -
Less charge offs
Residential real estate
loans - - - - -
Commercial real estate
loans 36 - - - -
Consumer loans - - - - -
------------ ----------- ------------- ---------- ------------
Net charge-offs 36 - - - -
Provisions for loan losses 120 30 30 30 30
------------ ----------- ------------- ---------- ------------
Balance of allowance at
end of period $ 454 $ 370 $ 340 $ 310 $ 280
============ =========== ============= ========== ============
Net charge-offs to total
average loans out-
standing for period *.02% -% -% -% -%
Allowance at end of
period to total loans, net
at end of period (1) *.19% .20% .22% .26% .24%
Allowance to total non-
performing loans at
end of period 366.13% 141.76% 171.72% 100.65% 261.68%
</TABLE>
- --------------------------------------------------------------------------------
(1) Total loans less deferred net loan fees and loans in process.
* Not including loans held for sale
<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,
1998 1997 1996
----------------------------- -------------------------- ---------------------------
Percent Percent Percent
of loans of loans of loans
in each in each in each
category category category
to total to total to total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to
Residential $ 181 78.08% $ 323 86.91% $ 311 92.87%
Multi-family 1 .05 1 .07 1 .10
Residential construction 8 3.51 1 4.35 1 3.23
Commerical 213 13.64 19 4.66 1 .57
Consumer loans (1) 26 4.72 1 4.01 1 3.23
Unallocated 25 - 25 - 25 -
------------- ------ ----------- -------- ------------ --------
Total $ 454 100.00% $ 370 100.00% $ 340 100.0%
============= ======= =========== ======== ============ ======
</TABLE>
<TABLE>
<CAPTION>
1995 1994
-------------------------- -------------------------
Percent Percent
of loans of loans
in each in each
category category
to total to total
Amount Loans Amount Loans
------ ----- ------ -----
<S> <C> <C> <C> <C>
Balance at end of period
applicable to
Residential $ 281 97.60% $ 251 97.25%
Commerical 1 .17 1 .38
Multi-family 1 .15 1 .16
Residential construction 1 1.72 1 1.89
Consumer loans (1) 1 .36 1 .32
Unallocated 25 - 25 -
----------- --------- ------------ --------
Total $ 310 100.00% $ 280 100.00%
=========== ========= ============ ========
</TABLE>
(1) Includes home equity and second mortgage loans, financing leases, and
other loans including, education loans and loans secured by deposits.
<PAGE>
V. DEPOSITS
The average amount of deposits and average rates paid are summarized as
follows for the years ended September 30:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings accounts $ 10,737 2.52% $ 10,359 2.68% $ 9,746 2.77%
Now and money market accounts 30,065 2.83 26,770 2.89 26,006 3.12
Certificates of deposit 130,350 5.57 126,202 5.65 113,570 5.68
Demand deposits (noninterest-bearing) 3,554 1,274 816
------------ ------------ ------------
$ 174,706 $ 164,605 $ 150,138
============ ============ ============
</TABLE>
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at September 30, 1998 is summarized as follows:
Amount
(In thousands)
Three months or less $ 5,075
Over three months and through six months 2,765
Over six months and through twelve months 10,653
Over twelve months 9,075
------------
$ 27,568
============
<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,
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Average total assets $ 277,897 $ 237,050 $ 200,583
============ ============ ============
Average shareholders' equity $ 33,404 $ 34,346 $ 38,185
============ ============ ============
Net income $ 2,236 $ 2,002 $ 975
============ ============ ============
Return on average total assets .80% .84% .49%
=========== ========= ==========
Return on average shareholders' equity 6.69% 5.83% 2.55%
=========== ========= ==========
Dividend payout ratio (dividends
declared per share divided by net
income per share) 23.26% 26.45% 11.76%
=========== =========== ===========
Average shareholders' equity
to average total assets 12.02% 14.49% 19.04%
=========== ========= ==========
</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>
September 30,
------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances............................................. $ 92,726 $ 47,500 $ 29,500
Securities sold under agreements to repurchase.. 3,882 389 -
Average Balance:
FHLB advances:............................................ 66,123 34,960 9,625
Securities sold under agreements to repurchase............ 1,647 97 -
Average Rate Paid On:
FHLB advances............................................. 5.67% 5.64% 5.50%
Securities sold under agreements to repurchase............ 4.09 4.27 -
</TABLE>
The following table sets forth the Bank's borrowings at the dates indicated:
<TABLE>
<CAPTION>
September 30,
------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Amounts Outstanding:
FHLB advances............................................. $ 92,726 $ 47,500 $ 24,500
Securities sold under agreements to repurchase............ 2,366 389 -
Weighted Average Interest Rate:
FHLB Advances............................................. 5.42% 5.66% 5.53%
Securities sold under agreements to repurchase............ 4.02 4.25 -
</TABLE>
<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 16 financial institutions located in Mishawaka,
Indiana, including MFB Financial. These financial institutions consist of seven
commercial banks, three savings banks and six 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 and mutual 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 institutions.
Savings institutions may also acquire banks under federal law. Affiliations
between banks and savings associations based in Indiana may also increase the
competition faced by the Company.
In addition, The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in
other states and, with state consent and subject to certain limitations, allows
banks to acquire out-of-state branches either through merger or de novo
expansion. The State of Indiana passed a law establishing interstate branching
provisions for Indiana state-chartered banks consistent with those established
by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana Branching Law
authorizes Indiana banks to branch interstate by merger or de novo expansion and
authorizes out-of-state banks meeting certain requirements to branch into
Indiana by merger de novo expansion. 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, Realtors and the small business community through
interest rates and loan fees it charges. Competition is affected by, among other
things, the general availability of lendable funds, general and local economic
conditions, current interest rate levels, and other factors that are not readily
predictable.
<PAGE>
REGULATION
General
The Bank is a federally chartered savings bank, the deposits of which are
federally insured and backed by the full faith and credit of the United States
Government. Accordingly, the Bank is subject to broad federal regulation and
oversight extending to all its operations. The Bank is a member of the FHLB of
Indianapolis and is subject to certain limited regulation by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board"). As the
savings and loan holding company of the Bank, the Company also is subject to
federal regulation and oversight. The purpose of the regulation of the Company
and other holding companies is to protect subsidiary savings associations. The
Bank is a member of the Savings Association Insurance Fund ("SAIF") which
together with the Bank Insurance Fund (the "BIF") are the two deposit insurance
funds administered by the FDIC, and the deposits of the Bank are insured by the
FDIC. As a result, the FDIC has certain regulatory and examination authority
over the Bank. Certain of these regulatory requirements and restrictions are
discussed below or elsewhere in this document.
The OTS has extensive authority over the operations of savings institutions. As
part of this authority, the Bank is required to file periodic reports with the
OTS and is subject to periodic examinations by the OTS and the FDIC. The last
regular OTS examination of the Bank was as of January 5, 1998 . When these
examinations are conducted by the OTS, the examiners may require the Company to
provide for higher general or specific loan loss reserves. To fund the
operations of the OTS, all savings institutions are subject to a semi-annual
assessment, based on the total assets, condition, and complexity of operations.
The Bank's OTS assessment for the fiscal year ended September 30, 1998, was
approximately $73,000.
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 nonresidential
real property may not exceed 400% of total capital, except with approval of the
OTS. The Bank is in compliance with the noted restrictions.
<PAGE>
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 or 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 consolidate the
supervision and regulation of all U.S. financial institutions into one or two
administrative bodies, would expand the powers of financial institutions, and
would provide regulatory relief to financial institutions ("the legislation").
It cannot be predicted whatever or when the legislation will be enacted or the
extent to which the Bank or the Holding Company would be affected thereby.
Safety and Soundness Standards
The OTS, as well as the other federal banking agencies, has adopted guidelines
establishing safety and soundness standards on such matters as loan underwriting
and documentation, asset quality, earnings standards, internal controls and
audit systems, interest rate risk exposure and compensation and other employee
benefits. In general the standards are designed to assist the federal banking
agencies in identifying and addressing problems at insured institutions before
capital becomes impaired. Any institution which fails to comply with these
standards must submit a compliance plan. Failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action.
Federal Home Loan Bank System
The Bank is a member of the FHLB system, which consists of 12 regional banks.
The Federal Housing Finance Board ("FHFB"), an independent agency, controls the
FHLB System including the FHLB of Indianapolis. The FHLB System provides a
central credit facility primarily for member 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, 1998, the Bank's investment
in stock of the FHLB of Indianapolis was $4.6 million.
In past years, the Bank received substantial dividends on its FHLB stock. All 12
FHLB's are required to provide funds to establish affordable housing programs
through direct loans or interest subsidies on advances to members to be used for
lending at subsidized interest rates for low-and moderate-income, owner-occupied
housing projects, affordable rental housing, and certain other community
projects. These contributions and obligations could adversely affect the value
of FHLB stock in the future. A reduction in value of such stock may result in a
corresponding reduction in the Bank's capital.
The FHLB of Indianapolis serves as a reserve or central bank for member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHLB and the Board of Directors of the FHLB of Indianapolis.
All FHLB advances must be fully secured by sufficient collateral as determined
by the FHLB. Eligible collateral includes first mortgage loans less than 90 days
delinquent or securities 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 institutions 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 institutions, the FDIC determines whether to grant insurance to
newly-chartered savings institutions, has authority to prohibit unsafe or
unsound activities and has enforcement powers over savings institutions (usually
in conjunction with the OTS or on its own if the OTS does not undertake
enforcement action).
Deposit accounts in the Bank are generally insured by the SAIF to a maximum of
$100,000 for each insured depositor. As a condition to such insurance, the FDIC
is authorized to issue regulations and, in conjunction with OTS, conduct
examinations and generally supervise the operations of its insured members. This
supervision extends to a comprehensive regulatory scheme governing, among other
things, the form of deposit instruments issued by savings institutions, and
certain aspects of their lending activities, including appraisal requirements,
private mortgage insurance coverage and lending authority.
The FDIC's deposit insurance premiums are assessed through a risk-based system
under which all insured depository institutions are placed into one of nine
categories and assessed insurance premiums based upon their level of capital and
supervisory evaluation. Under the system, institutions classified as
well-capitalized (i.e. a core capital ratio of at least 5%, a ratio of Tier 1 or
core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least
6% and a total 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 total 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 .3 1 % 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 institutions 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. As a
result of the special assessment, the Bank's annual deposit insurance premium
for the year ended September 30, 1998 was approximately $108,000 based upon its
current risk classification and the new assessment schedule for SAIF insured
institutions. These premiums are subject to change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF assessment
imposed on savings institutions 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 institution continues to exist, thereby imposing a greater
burden on SAW 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 points assessment
on SAIF deposits and 1.26 basis points assessment on BIF deposits until BIF
insured institutions participate fully in the assessment.
Regulatory Capital
Currently, savings institutions are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations 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 total
risk-based capital requirement requires a savings bank to maintain capital
(defined generally for these purposes as core capital plus general valuation
allowances and permanent or maturing capital instruments such as preferred stock
and subordinated debt less assets required to be deducted) equal to 8.0% of
risk-weighted assets. Assets are ranked as to risk in one of four categories
(0-100%) with a credit risk-free asset such as cash requiring no risk-based
capital and an asset with a significant credit risk such as a non-accrual loan
being assigned a factor of 100%. At September 30, 1998, based on the capital
standards then in effect, the Bank was in compliance with its fully phased-in
capital requirements.
The Comptroller of the Currency requires minimum leverage ratio of 3% Tier 1
capital-to-total assets for the highest rated national banks, with an additional
requirement of 100 to 200 basis points for all other national banks. Current law
requires that the capital standards for savings institutions 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 institutions, with an additional requirement
of 100 to 200 basis points for all other savings institutions. 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 institutions 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 total 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. The OTS recently updated its
standards regarding the management of interest rate risk to include summary
guidelines to assist savings institutions in determining their exposure to
interest rate risk.
If an institution is not in compliance with its capital requirements, the OTS is
required to prohibit asset growth and to impose a capital directive that may
restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings bank that fails to meet its capital
requirements, which actions may include restrictions on operations and banking
activities, the imposition of a capital directive, a cease and desist order,
civil money penalties or harsher measures such as the appointment of a receiver
or conservator or a forced merger into another institution.
Prompt Corrective Action
Certain regulatory action is mandated or recommended for savings institutions
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 institutions must have total risk-based
capital of at least 10%, core risk-based capital (consisting only of items that
qualify for inclusion in core capital) of at least 6% and a leverage ratio of at
least 5% and are not subject to any order or written directive of the OTS to
maintain a specific capital level for any capital measure; (2) adequately
capitalized associations are those that meet the regulatory minimum of total
risk-based capital of 8%, core risk-based capital of 4% and a leverage ratio of
4% (except for institutions receiving the highest examination rating, in which
case the requirement is 3%), but which are not well capitalized; (3)
undercapitalized institutions are those that do not meet the requirements for
adequately capitalized institutions, but that are not significantly
undercapitalized; (4) significantly undercapitalized institutions have total
risk-based capital of less than 6%, core risk-based capital of less than 3% and
a leverage ratio of less than 3%; and (5) critically undercapitalized
institutions are those with tangible capital of less than 2% of total assets. In
addition, the OTS can downgrade an institution's designation notwithstanding its
capital level, based on less than satisfactory examination ratings in areas
other than capital or if the institution is deemed to be in an unsafe or unsound
condition. Each undercapitalized institution must submit a capital restoration
plan to the OTS within 45 days after it becomes undercapitalized. Such
institution will be subject to increased monitoring and asset growth
restrictions and will be required to obtain prior approval for acquisitions,
branching and engaging in new lines of business. Significantly undercapitalized
institutions must restrict the payment of bonuses and raises to their senior
executive officers. Furthermore, a critically undercapitalized institution must
be placed in conservatorship or receivership within 90 days after reaching such
capitalization level, except under limited circumstances. It will also be
prohibited from making payments on any subordinate debt securities without the
prior approval of the FDIC and will be subject to significant additional
operating restrictions. The Bank's capital at September 30, 1998, meets the
standards for a well-capitalized institution.
Capital Distributions Regulation
An OTS regulation imposes limitations upon all "capital distributions" by
savings institutions, including cash dividends, payments by an institution to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The 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 I 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 I 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 I institution may be designated by the OTS as a Tier 2 or Tier 3
institution if the OTS determines that the institution is "in need of more than
normal supervision." The Bank is currently a Tier 1 Institution.
A Tier 1 Institution could, after prior notice but without the approval of the
OTS, make capital distributions during a calendar year up to 100% of its net
income to date during the calendar year plus an amount that would reduce by
one-half its "surplus capital ratio" (the excess over its Fully Phased-in
Capital Requirements) at the beginning of the calendar year. Any additional
amount of capital distributions would require prior regulatory approval.
The OTS has proposed revisions to these regulations which would permit a savings
institution, without filing a prior notice or application with the OTS, to make
a capital distribution to its shareholders in a maximum amount that does not
exceed the institution's undistributed net income for the prior two years plus
the amount of its undistributed income from the current year. The proposed rule
would require a savings institution, such as the Bank, that is a subsidiary of a
savings and loan holding company to file a notice with the OTS 30 days before
making a capital distribution up to the "maximum amount" described above. The
proposed rule would also require all savings institutions, whether under a
holding company or not, to file an application with the OTS prior to making any
capital distribution where the association is not eligible for "expedited
processing" under the OTS "Expedited Processing Regulation," or where the
proposed distribution, together with any other distributions made in the same
year, would exceed the "maximum amount" described above.
Real Estate Lending Standards
OTS regulations require savings institutions to establish and maintain written
internal real estate lending policies. Each institution's lending policies must
be consistent with safe and sound banking practices and appropriate to the size
of the institution 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 institution's real
estate portfolio; and establish documentation approval, and reporting
requirements to monitor compliance with the institution's real estate lending
policies.
The institution's written real estate lending policies must be reviewed and
approved by the institution's board of directors at least annually. Further,
each institution is expected to monitor conditions in its real estate market to
ensure that its lending policies continue to be appropriate for current market
conditions.
Federal Reserve System
Under FRB regulations, the Bank is required to maintain reserves against its
transaction accounts (primarily checking and NOW accounts) and non-personal
money market deposit accounts. The effect of these reserve requirements is to
increase the Bank's cost of funds. The Bank is in compliance with its reserve
requirements.
A federal savings bank, like other depository institutions maintaining
reservable accounts, may borrow from the Federal Reserve Bank "discount window,"
but the FRB's regulations require the savings bank to exhaust other reasonable
alternative sources, including borrowing from its regional FHLB, before
borrowing from the Federal Reserve Bank. Certain limitations are imposed on the
ability of undercapitalized depository institutions to borrow from Federal
Reserve Banks.
Transactions with Affiliates
Transactions between savings associations and any affiliate are governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings bank
is any company or entity which controls, is controlled by or is under common
control with the savings bank. In a holding company context the parent holding
company of a savings bank (such as MFB) and any companies controlled by such
parent holding company are affiliates of the savings bank. The subsidiaries of a
savings bank, however, are not deemed affiliates under Section 23A and 23B;
however, transactions between a subsidiary of a savings bank and any of the
affiliates of a savings bank are subject to the requirements and limitations of
Sections 23A and 23B.
Generally, Sections 23A and 23B (i) limit the extent to which the savings bank
or its subsidiaries may engage in "covered transactions" with any one affiliate
to an amount equal to 10% of such institution's capital stock and surplus, and
contain an aggregate limit on all such transactions with all affiliates to an
amount equal to 20% of such capital stock and surplus and (ii) require that all
such transactions be on terms substantially the same, or at least as favorable,
to the institution or subsidiary as those provided to a non-affiliate. The term
"covered transaction" 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 then 30,000 in population), and
certain affiliated entities of either, may not exceed together with all other
outstanding loans to such person and affiliated entities the association's
loan-to-one-borrower limit (generally equal to 15% of the institution's
unimpaired capital and surplus and an additional 10% of such capital and surplus
for loans fully secured by certain readily marketable collateral). Section 22(h)
also prohibits certain loans, above amounts prescribed by the appropriate
federal banking agency, to directors, executive officers and greater than 10%
shareholders of a savings bank, and their respective affiliates, unless such
loan is approved in advance by a majority of the board of directors of the
institution with any "interested" director not participating in the voting.
Currently, the FRB requires board of director approval for certain loans to
directors, officers, and 10% shareholders (including all other outstanding loans
to such persons) above the greater of $25,000 or 5% of capital and surplus (up
to $500,000). Further, the FRB requires that loans to directors, executive
officers and principal shareholders be made on terms substantially the same as
offered in comparable transactions to other unaffiliated parties. Section 22(g)
of the Federal Reserve Act, which imposes limitations on loans made to executive
officers, also applies to savings institutions.
Holding Company Regulation
Under current law, MFB is regulated as a "non-diversified unitary savings and
loan holding company" within the meaning of the Home Owners' Loan Act, as
amended ("HOLA"), and subject to regulatory oversight of the Director of the
OTS. As such, MFB is registered with the OTS and thereby subject to OTS
regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, the Bank is subject to certain
restrictions in its dealings with MFB and with other companies affiliated with
MFB.
HOLA generally prohibits a savings and loan holding company, without prior
approval of the Director of the OTS, from (i) acquiring control of any other
savings bank or savings and loan holding company or controlling the assets
thereof or (ii) acquiring or retaining more than 5 percent of the voting shares
of a savings bank or holding company thereof which is not a subsidiary.
Additionally, under certain circumstances a savings and loan holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15
percent of previously unissued voting shares of an under-capitalized savings
bank for cash without that savings bank being deemed controlled by the holding
company. Except with the prior approval of the Director of the OTS, no director
or officer of a savings and loan holding company or person owning or controlling
by proxy or otherwise more than 25% of such company's stock, may also acquire
control of any savings institution, other than a subsidiary institution, or any
other savings and loan holding company.
The Company's Board of Directors presently intends to operate MFB as a unitary
savings and loan holding company. Under current law, 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. Moreover,
Congress has been considering a bill which includes provisions that would
generally limit the activities and powers of certain savings and loan holding
companies. It cannot be predicted with certainty whether or in what form the
legislation will be enacted and what impact it might have on the powers of MFB
and the 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, 1998, the Bank's asset composition was in excess of that required to qualify
the Bank as a Qualified Thrift Lender.
If MFB were to acquire control of another savings institution other than through
a merger or other business combination with the Bank, MFB would thereupon become
a multiple savings and loan holding company. Except where such acquisition is
pursuant to the authority to approve emergency thrift acquisitions and where
each subsidiary savings bank meets the QTL test, the activities of MFB and any
of its subsidiaries (other than the Bank or other subsidiary savings
associations) would thereafter be subject to further restrictions. HOLA provides
that, among other things, no multiple savings and loan holding company or
subsidiary thereof which is not a savings bank shall commence or continue for a
limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof, any business activity other than (i) furnishing
or performing management services for a subsidiary savings bank, (ii) conducting
an insurance agency or escrow business, (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings institution, (iv) holding
or managing properties used or occupied by a subsidiary savings institution, (v)
acting as trustee under deeds of trust, (vi) those activities previously
directly authorized by the FSLIC by regulation as of March 5, 1987, to be
engaged in by multiple holding companies or (vii) those activities authorized by
the FRB as permissible for bank holding companies, unless the Director of the
OTS by regulation prohibits or limits such activities for savings and loan
holding companies. Those activities described in (vii) above must also be
approved by the Director of the OTS prior to being engaged in by a multiple
holding company.
The Director of the OTS may also approve acquisitions resulting in the formation
of a multiple savings and loan holding company which controls savings
institutions 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 institution 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
institutions in more than one state in the case of certain emergency thrift
acquisitions.
No subsidiary savings bank of a savings and loan holding company may declare or
pay a dividend on its permanent or nonwithdrawable stock unless it first gives
the Director of the OTS 30 days advance notice of such declaration and payment.
Any dividend declared during such period or without the giving of such notice
shall be invalid.
Branching
The OTS has adopted regulations which permit nationwide branching to the extent
permitted by federal statute. Federal statutes permit federal savings
institutions to branch outside of their home state if the institution meets the
domestic building and loan test in Section 7701 (a)(l 9) of the Internal Revenue
Code of 1986, as amended (the "Code") or the asset composition test of Section
770 1 (c) of the Code. Branching that would result in the formation of a
multiple savings and loan holding company controlling savings institutions in
more than one state is permitted if the law of the state in which the savings
bank to be acquired is located specifically authorizes acquisition of its
state-chartered institutions by state-chartered institutions or their holding
companies in the state where the acquiring institution or holding company is
located.
Federal Securities Law
The shares of Common Stock of MFB are registered with the SEC under the 1934
Act. MFB is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the 1934 Act and the rules of the SEC
thereunder.
If MFB has 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 would be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of (i) 1% of the outstanding shares of MFB or (ii) the
average weekly volume of trading in such shares during the preceding four
calendar weeks.
Qualified Thrift Lender
Under current OTS regulations, the QTL test requires that a savings bank have at
least 65% of its portfolio assets invested in "qualified thrift investments" on
a monthly average basis in 9 out of every 12 months. Qualified thrift
investments under the QTL test 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, 1998, 82.5% 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.
<PAGE>
TAXATION
Federal Taxation
Historically, savings institutions, 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 have not been audited in the last
five years.
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.
<PAGE>
Item 2. Properties.
At September 30, 1998, MFB Financial conducted its business from its main office
at 121 South Church Street, Mishawaka, Indiana 46544, and four full service
branch offices. The main office and three branch offices in Mishawaka and South
Bend are owned by MFB Financial, while the Goshen branch office is leased.
The following table provides certain information with respect to MFB Financial's
offices as of September 30, 1998:
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
Branch Office
Wal*Mart Super Store
2304 Lincolnway East
Goshen, In. 46526 1997 500
MFB Financial operates four automatic teller machines (ATMs), one at its Main
Office, 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.
MFB Financial also has contracted for the date processing and reporting services
of BISYS, Inc. in Houston, Texas. The cost of these date processing services is
approximately $32,000 per month.
<PAGE>
Item 3. Legal Proceedings.
The Bank is involved in various legal actions arising in the normal course of
its business. In the opinion of management, the resolutions of these legal
actions are in the aggregate not expected to have a material adverse effect on
the Company's results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of MFB's shareholders during the quarter ended
September 30,1998.
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 44) 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 64) has served as Secretary of MFB Financial since 1987
and of MFB since its organization. He is also a dentist based in Mishawaka.
Steven F. Rathka (age 56) 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 51) 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 52) 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 47) 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.
<PAGE>
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, 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
December 31, 1997 30.378 22.50 .08/share
March 31, 1998 30.378 26.25 .085/share
June 30, 1998 27.75 24.00 .085/share
September 30, 1998 25.50 18.00 .085/share
As of September 30, 1998, there were approximately 632 shareholders of record of
MFB's Common Stock.
Since MFB has no independent operations or other subsidiaries to generate
income, its ability to accumulate earnings for the payment of cash dividends to
its shareholders is directly dependent upon the earnings on its investment
securities and ability of the Bank to pay dividends to MFB.
Under OTS regulations, a converted savings bank may not declare or pay a cash
dividend if the effect would be to reduce net worth below the amount required
for the liquidation account created at the time it converted. In addition, under
OTS regulations, the extent to which a savings bank may make a "capital
distribution," which includes, among other things, cash dividends, will depend
upon which one of three categories, based upon levels of capital, that savings
bank is classified. The Bank is now and expects to continue to be a "tier one
institution" and therefore would be able to pay cash dividends to MFB during any
calendar year up to 100% of its net income during that calendar year plus the
amount that would reduce by one-half its "surplus capital ratio" (the excess
over its fully phased-end capital requirements) at the beginning of the calendar
year. Prior notice of any dividend to be paid by the Bank will have to be given
to the OTS.
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 am the sum of its total liabilities plus preferential rights of holders of
preferred stock, if any.
Item 6. Selected Financial Data.
The information required by this item is incorporated by reference to the
material under the heading "Selected Consolidated Financial Data of MFB Corp.
and Subsidiary" on page 2 of MFB's Annual Report to Shareholders for its fiscal
year ended September 30, 1998 (the "Annual Report").
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required by this item is incorporated by reference to pages 3
through 17 of the Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
The Office of Thrift Supervision ("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 increase 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.
Presented below, as of September 30, 1998, 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 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 increase 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, 1998
(Dollars in thousands)
Change in
Interest Rates
(Basis Points) $ Change % Change
+400bp $ (10,601) (28)%
+300 bp (7,027) (18)
+200 bp (3,801) (10)
+100 bp (1,125) (3)
0 bp - -
-100 bp (821) (2)
-200 bp (2,890) (8)
-300 bp (4,847) (13)
-400 bp (67,11) (18)
Item 8. Financial Statements and Supplementary Data.
MFB's Consolidated Financial Statements and Notes thereto contained on pages 19
through 50 of the Annual Report are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is incorporated
by reference to pages 2 through 3 of MFB's Proxy Statement for its 1999 Annual
Shareholder Meeting (the "Proxy Statement"). Information concerning MFB's
executive officers is included in Item 4.5 in Part I of this report. Information
concerning compliance by such persons with Section 16(a) of the 1934 Act is
incorporated by reference to page 7 of the Proxy Statement.
Item 11. Executive Compensation
The information required by this item with respect to executive compensation is
incorporated by reference to pages 4 and 5 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 pages 6
and 7 of the Proxy Statement.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following financial statements are incorporated by
reference as part of this report:
Pages in the Annual
Report to Shareholders
Financial Statements
Report of Independent Auditors 18
Consolidated Balance Sheets at September 30, 1998 and 1997 19
Consolidated Statements of Income for the Years Ended 20
September 30, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity 21-22
for the Years ended September 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years ended 23-24
September 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements 25-50
(b) MFB filed four Form 8-K reports during the year ended September 30, 1998.
Date of report: July 30, 1998
Item reported : News release dated July 22, 1998 regarding the announcement
of its third quarter earnings and declaration of an $.085
per share cash dividend, payable on August 18, 1998 to
shareholders of record on August 4, 1998.
Date of report: May 8, 1998
Item reported: News release dated April 23, 1998 regarding the
announcement of second quarter earnings and declaration of
a $.085 per share cash dividend payable on May 19, 1998 to
holders of record on May 5, 1998.
Date of report: February 10, 1998
Item reported: News release dated January 26, 1998 regarding the
announcement of first quarter earnings and declaration of a
$.085 per share cash dividend payable on February 17, 1998
to holders of record on February 3, 1998.
<PAGE>
Date of report: November 14, 1997
Item reported : News release dated October 20, 1997 regarding the
announcement of fourth quarter earnings.
News release dated October 22, 1997 declaring an $.08 per
share cash dividend payable on November 18, 1997 to holders
of record on November 4, 1997.
(c) The exhibits filed herewith or incorporated by reference
herein are set forth on the Exhibit Index on page E- I
(d) All schedules are omitted as the required information either
is not applicable or is included in the consolidated Financial
Statements or related notes.
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act 9f 1934, as amended, the Registrant had duly caused this report to be signed
on behalf of the undersigned, thereto duly authorized.
MFB CORP.
Date: December 26, 1998 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 26th day of December, 1998.
/s/ Chrles J. Viater /s/ M. Gilbert Eberhart
- --------------------------------------- ------------------------------------
Charles J. Viater M. Gilbert Eberhart, Director
President, Chief Executive Officer
and Director /s/ Thomas F. Hums
(Principal Executive Officer) ------------------------------------
Thomas F. Hums,
Chairman of the Board
/s/ Timothy C. Boenne /s/ Jonathan E. Kintner
- --------------------------------------- ------------------------------------
Timothy C. Boenne Jonathan E. Kintner, Director
Vice President and Controller
(Principal Financial and Accounting /s/ Christine A. Lauber
Officer) ------------------------------------
Christine A. Lauber, Director
/s/ Michael J. Marien
------------------------------------
Michael J. Marien, Director
/s/ Marian K. Torian
------------------------------------
Marian K. Torian, Director
/s/ Reginald H. Wagle
------------------------------------
Reginald H. Wagle, Director
<PAGE>
EXHIBIT LIST
Exhibit Index Page
3(l) The Articles of Incorporation of the Registrant is incorporated
by Reference to Exhibit 3(l) to the Registration Statement on
Form S- I (Registration No. 33-73098).
3(2) The Code of By-Laws of Registration is incorporated by reference
to Item 7-Exhibit 3 of the October 15, 1995 Securities and
Exchange Commission Form 8K Report.
10(l) 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) MFB Financial 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 MFB Financial and Charles J. Viater
is incorporated by reference to Exhibit 10(3) to the
Registrant's Form 10-K filed for its fiscal year ended September
30, 1997.
10(4) Employment Agreement between MFB Financial and Timothy C. Boenne
is incorporated by reference to Exhibit 10(8) to the
Registration on Form S-1 (Registration No. 33-73098); First
Amendment thereto dated March 31, 1997.*
10(5) Employment Agreement between MFB Financial and Michael J.
Portolese is incorporated by reference to Exhibit 10(10) to the
Registration Statement on Form S-1 (Registration No. 33-73098);
First Amendment thereto dated March 31, 1997.*
10(6) Employment Agreement between MFB Financial 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); First Amendment thereto dated March 31, 1997.*
10(7) The MFB Corp. 1997 Stock Option Plan is incorporated by
reference to Exhibit A to the Registrant's definitive Proxy
Statement in respect of its 1997 Annual Shareholder Meeting. *
11 Statement regarding computation of earnings per share (**)
13 Shareholder Annual Report, incorporated by reference.
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(l)-10(7).
** See Notes 1 and 2 of Notes to Consolidated Financial Statements,
included in the 1998 Shareholder Annual Report included as
Exhibit 13.
E-1
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement, made and dated as of
March 31, 1997, by and between MFB Financial (formerly Mishawaka Federal
Savings), a federal savings bank ("Employer"), and Timothy C. Boenne, a resident
of St. Joseph County, Indiana ("Employee"), amends the Employment Agreement
entered into by and between the Employer and Employee dated as of March 24, 1994
(the "Employment Agreement") as follows:
1. Paragraph 3 of the Employment Agreement is amended to provide:
"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."
2. All other terms of the Employment Agreement remain in full force and
effect and are unchanged by this Amendment to Employment Agreement.
IN WITNESS WHEREOF, the parties have caused this Amendment to
Employment Agreement to be executed and delivered as of the day and year first
above set forth.
MFB FINANCIAL
By: /s/ Charles J. Viater
------------------------------
Charles J. Viater, President
"Employer"
/s/ Timothy C. Boenne
------------------------------
Timothy C. Boenne
"Employee"
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement, made and dated as of
March 31, 1997, by and between MFB Financial (formerly Mishawaka Federal
Savings), a federal savings bank ("Employer"), and Michael J. Portolese, a
resident of St. Joseph County, Indiana ("Employee"), amends the Employment
Agreement entered into by and between the Employer and Employee dated as of
March 24, 1994 (the "Employment Agreement") as follows:
1. Paragraph 3 of the Employment Agreement is amended to provide:
"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."
2. All other terms of the Employment Agreement remain in full force and
effect and are unchanged by this Amendment to Employment Agreement.
IN WITNESS WHEREOF, the parties have caused this Amendment to
Employment Agreement to be executed and delivered as of the day and year first
above set forth.
MFB FINANCIAL
By: /s/ Charles J. Viater
------------------------------
Charles J. Viater, President
"Employer"
/s/ Michael J. Portolese
------------------------------
Michael J. Portolese
"Employee"
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement, made and dated as of
March 31, 1997, by and between MFB Financial (formerly Mishawaka Federal
Savings), a federal savings bank ("Employer"), and William L. Stockton, Jr., a
resident of St. Joseph County, Indiana ("Employee"), amends the Employment
Agreement entered into by and between the Employer and Employee dated as of
March 24, 1994 (the "Employment Agreement") as follows:
1. Paragraph 3 of the Employment Agreement is amended to provide:
"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."
2. All other terms of the Employment Agreement remain in full force and
effect and are unchanged by this Amendment to Employment Agreement.
IN WITNESS WHEREOF, the parties have caused this Amendment to
Employment Agreement to be executed and delivered as of the day and year first
above set forth.
MFB FINANCIAL
By: /s/ Charles J. Viater
------------------------------
Charles J. Viater, President
"Employer"
/s/ William L. Stockton, Jr.
------------------------------
William L. Stockton, Jr.
"Employee"
ANNUAL REPORT
TO SHAREHOLDERS
TABLE OF CONTENTS
Page
Letter to Shareholders .................................................... 1
Selected Consolidated Financial Data ...................................... 2
Management's Discussion and Analysis ...................................... 3
Report of Independent Auditors ............................................ 18
Consolidated Balance Sheets ............................................... 19
Consolidated Statements of Income ......................................... 20
Consolidated Statements of Shareholders' Equity ........................... 21
Consolidated Statements of Cash Flows ..................................... 23
Notes to Consolidated Financial Statements ................................ 25
Directors and Officers .................................................... 51
Shareholder Information ................................................... 52
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>
1
TO OUR SHAREHOLDERS
On behalf of our employees, the Board of Directors and myself, it is my pleasure
to provide you with the 1998 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 fourth full year of operation as a stock company.
I am pleased to report that a number of milestones were achieved this past year
and that we have further positioned the Company to compete successfully in the
fiercely competitive financial services industry. We have developed an
infrastructure to support the delivery of quality products and services to such
an extent that we can aggressively market ourselves to the consumer and small
business segments of our community with renewed confidence. By increasing our
Company-wide commitment to the development of new customer relationships, the
strategic goals of growth and diversification continue to be realized. MFB
Financial is a full service banking organization offering the wide variety of
products, services and delivery systems necessary to grow and remain
competitive. As we look at the financial highlights of the past year, I believe
you will agree that the Company and the Bank have taken another important step
forward.
Total assets of the Company grew by more than $59 million during the past year,
representing the largest growth ever achieved by the Company in a single year.
The Bank's loan portfolio grew by more than $44 million, which ranks second only
to last year's increase. A strategic emphasis on increasing both the residential
and small business lending allowed growth of this magnitude to occur. The small
business banking division continues to mature and attract local businesses. The
desire for local service and local decision making has clearly had a positive
influence on the growth we have experienced. We will continue to focus attention
on the small business community in an effort to further diversify our asset mix
and improve earnings.
Continued emphasis on core deposit relationships resulted in an increase in our
deposit base of almost $9 million during the year. Non-interest demand accounts
increased significantly as did other deposit base categories. The bulk of the
asset growth was funded through increased usage of Federal Home Loan Bank
borrowings, a valuable alternative to often higher cost certificate of deposit
accounts.
The Company experienced improved net interest income as well. In fact, net
interest income for the year amounted to over $8.6 million, an all time high for
the Company. In addition and as a result of increased emphasis on the sale of
longer term, fixed rate loans, non-interest income more than doubled from the
levels of the previous year. Even with the $1.0 million increase in general and
administrative expenses incurred as a direct result of the Bank's growth,
diluted earnings per share increased over 18% to $1.37 per share from $1.16 per
share.
The Company reduced the number of outstanding common shares by over 176,000
during the year. In addition, our quarterly dividend was increased again this
year to $.085 per outstanding share. These events have all contributed to the
generation of long term shareholder value.
The pages that follow provide additional information about the past year's
performance. Management remains committed to serving the financial needs of our
community effectively and profitably. These efforts will continue to grow the
value of your investment in a prudent, intelligent fashion. We appreciate the
continued confidence you have displayed in MFB Corp. and will continue to
operate the Company in an effort to reward that confidence.
/s/ Charles J. Viater
Charles J. Viater
President and Chief Executive Officer
<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)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Summary of Financial Condition:
Total assets $ 314,961 $ 255,921 $ 225,809 $ 187,065 $ 183,753
Loans held for sale, net 13,517 12,671 - - -
Loans receivable, net 232,832 188,264 152,052 121,181 115,297
Cash and cash equivalents 17,904 9,482 1,734 7,454 6,153
Securities, including FHLB stock 46,456 42,028 68,099 53,293 56,107
Interest-bearing time deposits in
other financial institutions - - 495 1,880 3,365
Deposits 180,666 171,887 158,964 144,552 143,604
Securities sold under agreements to repurchase 2,366 389 - - -
FHLB advances 92,726 47,500 24,500 - -
Shareholders' equity 30,886 33,550 37,599 37,999 37,705
Years Ended September 30,
(In Thousands)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Summary of Operating Results:
Interest income $ 20,838 $ 17,685 $ 14,182 $ 12,383 $ 11,545
Interest expense 12,204 10,157 8,057 6,788 6,019
----------- ----------- ----------- ----------- -----------
Net interest income 8,634 7,528 6,125 5,595 5,526
Provision for loan losses 120 30 30 30 30
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 8,514 7,498 6,095 5,565 5,496
Noninterest income
Insurance commissions 143 134 127 128 127
Brokerage commissions 36 24 - - -
Net gain from sales of securities 8 6 3 - -
Net gains from sales of loans 333 - - - -
Loan servicing fees, net 12 - - - -
Other 432 261 232 189 151
----------- ----------- ----------- ----------- -----------
Total noninterest income 964 425 362 317 278
Noninterest expense
Salaries and employee benefits 3,414 2,772 2,153 2,336 1,969
Occupancy and equipment expense 720 580 422 406 379
SAIF deposit insurance premium 108 147 1,291 332 341
Other expense 1,383 1,100 969 753 666
----------- ----------- ----------- ----------- -----------
Total noninterest expense 5,625 4,599 4,835 3,827 3,355
Income before income taxes 3,853 3,324 1,622 2,055 2,419
Income tax expense 1,617 1,322 647 819 887
----------- ----------- ----------- ----------- -----------
Net income $ 2,236 $ 2,002 $ 975 $ 1,236 $ 1,532
=========== =========== =========== =========== ===========
Supplemental Data:
Return on assets (1) .80% .84% .49% .67% .86%
Return on equity (2) 6.69 5.83 2.55 3.25 5.60
Interest rate spread (3) 2.54 2.49 2.13 2.12 2.57
Net yield on average interest-earning assets (4) 3.17 3.24 3.11 3.10 3.18
Dividend pay-out ratio (5) 23.26 26.45 11.32 - -
Net interest income to operating expenses (6) 153.48 163.70 126.67 146.20 164.71
Equity-to-assets (7) 9.81 13.11 16.65 20.31 20.52
Average interest-earning assets to average interest-bearing
liabilities 114.05 117.14 123.81 126.12 117.61
Non-performing assets to total assets .09 .10 .09 .17 .07
Non-performing loans to total loans .05 .14 .13 .25 .09
Allowance for loan losses to total loans, net .19 .20 .22 .26 .24
Allowance for loan losses to non-performing loans 365.78 141.76 171.72 100.65 261.68
Basic earnings per common share (8) $ 1.44 $ 1.21 $ .51 $ .62 $ .48
Diluted earnings per common share (8) $ 1.37 $ 1.16 $ .50 $ .61 $ .47
Dividends declared per share $ .335 $ .32 $ .06 $ - $ -
Book value per share $ 20.95 $ 20.33 $ 19.05 $ 18.29 $ 17.24
</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 basic 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 the small business community and making
loans secured by various types of collateral, including real estate and general
business assets. 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, retained mortgage
loan servicing fees, 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
has sought to reduce exposure to its earnings through the use of adjustable rate
loans and through the sale of fixed rate loans in the secondary market, and by
extending funding maturities through the use of FHLB advances.
As part of its efforts to monitor and manage interest rate risk, the Company
uses the Net Portfolio Value ("NPV") methodology adopted by the Office of Thrift
Supervision as part of its capital regulations. 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, 1998, (the most recently available data), after a 200 basis point rate
decrease, the Company's NPV ratio was 11.67%. In the event of a 200 basis point
increase in rates, the Company's NPV ratio was 12.08%. 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>
The Company's asset/liability management strategy dictates acceptable limits on
the amounts of change in NPV given certain changes in interest rates. The table
presented here, as of June 30, 1998, is an analysis of the Company's interest
rate risk as measured by changes in NPV for instantaneous and sustained parallel
shifts in the yield curve, in 100 basis point increments, up and down 400 basis
points.
Change in
Interest Rates NPV as % of Portfolio
In Basis Net Portfolio Value Value of Assets
Points NPV
(Rate Shock) (1) $ Amount $ Change % Change Ratio Change (1)
- ---------------- -------- -------- -------- ----- ----------
(Dollars in Thousands)
+400 $27,628 $(10,601) (28)% 10.17% (273)
+300 31,202 (7,027) (18) 11.21 (169)
+200 34,428 (3,801) (10) 12.08 (82)
+100 37,104 (1,125) (3) 12.74 (16)
0 38,229 - - 12.90 -
- 100 37,408 (821) (2) 12.47 (43)
- 200 35,339 (2,890) (8) 11.67 (123)
- 300 33,382 (4,847) (13) 10.91 (199)
- 400 31,518 (6,711) (18) 10.18 (272)
(1) Expressed in basis points
As illustrated in the table, the Company's NPV declines both in rising and
falling interest rate environments. This phenomenon occurs primarily as a
result of the historically low interest rate environment that existed at
June 30, 1998, the heavy concentration of adjustable rate loans in the loan
portfolio and the related prepayment assumption used in the OTS model.
Specifically, the table indicates that, at June 30, 1998, the Company's NPV
was $38.2 million or 12.9% of the market value of portfolio assets. Based
upon the assumptions utilized, an immediate 200 basis point increase in
market interest rates would result in a $3.8 million or 9.9% decline in the
Company's NPV and would result in a 82 basis point or 6.4% decline in the
Company's NPV ratio to 12.0%. Similarly, an immediate 200 basis point
decrease in market interest rates would result in a $2.9 million or 7.6%
decline in the Company's NPV, and a 123 basis point or 9.5% decline in the
Company's NPV ratio to 11.7%. Both percentage declines in the Company's NPV
at June 30, 1998 were within the limit in the Company's Board-approved
guidelines.
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.
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 Board of Directors and management of the Company believe that certain
factors afford the Company the ability to operate successfully despite its
exposure to interest rate risk. The Company manages its interest rate risk by
originating adjustable rate loans and by selling a portion of its fixed rate
one-to-four family real estate loans. While the Company generally originates
mortgage loans for its own portfolio, sales of fixed rate first mortgage loans
with maturities of 15 years or greater are currently undertaken to manage
interest rate risk. Loans classified as held for sale as of September 30, 1998
are $13.5 million. The Company retains the servicing on loans sold in the
secondary market and, at September 30, 1998, $25.6 million in such loans were
being serviced for others. The Company also maintains capital well in excess of
regulatory requirements.
The Company's investment strategy is to maintain a diversified portfolio of high
quality investments that minimize interest rate and credit risks while
maximizing investment return and to provide liquidity necessary to meet funding
needs. Wholesale banking activities are conducted as a means to supplement net
income and to achieve desired growth targets. This strategy involves the
acquisition of assets funded through sources other than retail deposits, such as
FHLB advances. The goal is to create interest rate spreads between asset yields
and funding costs within acceptable risk parameters while improving return on
equity.
The Company's cost of funds responds to changes in interest rates due to the
relatively short-term nature of its deposit portfolio. The Company offers a
range of maturities on its deposit products at competitive rates and monitors
the maturities on an ongoing basis.
<PAGE>
AVERAGE BALANCE SHEETS
The following are the average balance sheets for the years ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
Average Average Average
Outstanding Outstanding Outstanding
Assets: Balance Balance Balance
Interest earning assets: (In Thousands)
<S> <C> <C> <C>
Interest-bearing deposits $ 9,633 $ 1,856 $ 6,709
Securities (1) 13,541 30,765 35,392
Mortgage-backed securities (1) 23,218 22,222 19,717
FHLB stock 3,446 7,783 1,303
Loans held for sale 2,401 35 -
Loans receivable (2) 220,244 175,726 133,670
------------ ------------ ------------
Total interest-earning assets 272,483 232,387 196,791
Noninterest-earning assets, net
of allowance for loan losses 5,414 4,663 3,792
------------ ------------ ------------
Total assets $ 277,897 $ 237,050 $ 200,583
============ ============ ============
Liabilities and equity:
Interest-bearing liabilities:
Savings accounts $ 10,737 $ 10,359 $ 9,746
NOW and money market accounts 30,065 26,770 26,006
Certificates of deposit 130,350 126,202 113,570
Repurchase agreements 1,647 97 -
FHLB advances 66,123 34,960 9,625
------------ ------------ ------------
Total interest-bearing liabilities 238,922 198,388 158,947
Other liabilities 5,571 4,316 3,451
------------ ------------ ------------
Total liabilities 244,493 202,704 162,398
Shareholders' equity:
Common stock 12,921 14,015 19,064
Retained earnings 22,958 21,381 20,496
Net unrealized gain (loss) on
securities available for sale 56 (100) (133)
Less common stock acquired by:
Employee stock ownership plan (565) (790) (1,007)
Recognition and retention plan (80) (157) (235)
Treasury stock (1,886) (3) -
------------ ------------ ------------
Total shareholders' equity 33,404 34,346 38,185
------------ ------------ ------------
Total liabilities and
shareholders' equity $ 277,897 $ 237,050 $ 200,583
============ ============ ============
</TABLE>
(1) Average outstanding balances reflect unrealized gain (loss) on securities
available for sale.
(2) Total loans less deferred net loan fees and loans in process.
<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.
<TABLE>
<CAPTION>
Year ended September 30,
1998 1997 1996
Average interest rate earned on:
<S> <C> <C> <C>
Interest-bearing deposits 5.81% 5.17% 6.29%
Securities (1) 6.65 6.86 6.17
Mortgage-backed securities (1) 5.84 6.46 6.15
FHLB stock 8.01 8.08 7.90
Loans held for sale 7.41 - -
Loans receivable 7.98 7.91 7.67
Total interest-earning assets 7.65 7.61 7.20
Average interest rate of:
Savings accounts 2.52 2.68 2.77
NOW and money market accounts 2.83 2.89 3.12
Certificates of deposit 5.57 5.65 5.68
Repurchase agreements 4.09 4.27 -
FHLB advances 5.67 5.64 5.50
Total interest-bearing liabilities 5.11 5.12 5.07
Interest rate spread (2) 2.54 2.49 2.13
Net yield on interest-earning assets (3) 3.17 3.24 3.11
</TABLE>
- --------------------------------------------------------------------------------
(1) Yield is based on amortized cost without adjustment for unrealized gain
(loss) on securities available for sale.
(2) Interest rate spread is calculated by subtracting the average interest rate
cost from the average interest rate earned for the period indicated.
(3) The net yield on average interest-earning assets is calculated by dividing
net interest income by the average interest-earning assets for the period
indicated.
<PAGE>
The following table describes the extent to which changes in interest rates and
changes in volume of interest-related assets and liabilities have affected the
Company's consolidated interest income and expense during the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (1) changes in rate (i.e.,
changes in rate multiplied by old volume) and (2) changes in volume (i.e.,
changes in volume multiplied by old rate). Changes attributable to both rate and
volume have been allocated proportionally to the change due to volume and the
change due to rate.
Year ended September 30, 1998 Increase (Decrease) in Net Increase Income
<TABLE>
<CAPTION>
Year ending September 30, 1998
compared to year ended Total Net Due to Due to
September 30, 1997 Change Rate Volume
Interest-earning assets: (In Thousands)
<S> <C> <C> <C>
Interest-bearing deposits $ 464 $ 13 $ 451
Securities (1,212) (62) (1,150)
Mortgage-backed securities (79) (140) 61
FHLB stock 132 (1) 133
Loans held for sale 178 - 178
Loans receivable 3,670 120 3,550
----------- ----------- -----------
Total 3,153 (70) 3,223
Interest-bearing liabilities:
Savings accounts (7) (17) 10
NOW and money market accounts 84 (9) 93
Certificates of deposit 130 (102) 232
Repurchase agreements 63 - 63
FHLB Advances 1,777 10 1,767
----------- ----------- ----------
Total 2,047 (118) 2,165
----------- ----------- -----------
Change in net interest income $ 1,106 $ 48 $ 1,058
=========== =========== ===========
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
FHLB stock 41 2 39
Loans receivable 3,651 332 3,319
----------- ----------- -----------
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 683 (27) 710
Repurchase agreements 4 - 4
FHLB Advances 1,443 15 1,428
----------- ----------- -----------
Total 2,100 (82) 2,182
----------- ----------- -----------
Change in net interest income $ 1,403 $ 646 $ 757
=========== =========== ===========
</TABLE>
<PAGE>
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
Consolidated net income for the Company for the year ended September 30, 1998
was $2.2 million compared to $2.0 million for the same period in 1997. The
increase of $234,000 resulted primarily from a $1.1 million increase in net
interest income and $539,000 increase in non-interest income, offset by a $1.0
million increase in non-interest expense and a $295,000 increase in income tax
expense.
The increase in net interest income was primarily due to volume increases of
interest-earning assets exceeding the increases in the volume of
interest-bearing liabilities. First mortgage loan receivables increased by $18.2
million and commercial and consumer loan receivables by approximately $26.6
million from September 30, 1997 to September 30, 1998. The yield on total
interest-earning assets also increased from 7.61% to 7.65% in 1998, while the
average rate paid on interest-bearing liabilities decreased from 5.12% to 5.11%
during the same period. As a result, the interest rate spread increased five
basis points from 2.49% in 1997 to 2.54% in 1998.
Interest income increased $3.2 million during the year ended September 30, 1998
compared to the same period one year ago. The increase was primarily due to
increased volumes of loans receivable and an increase in the average rate earned
on these assets. Interest expense increased $2.0 million reflecting the growth
in savings account deposits and borrowed funds. Net interest income increased
$1.1 million for the year ended September 30, 1998 compared to the year ended
September 30, 1997.
Noninterest income increased from $425,000 for the year ended September 30, 1997
to $964,000 for the twelve months ended September 30, 1998. The noninterest
income increases are primarily due to income from the recognition of mortgage
servicing rights from loans sold, net premiums from loan sales, servicing fees
related to sold loans, and fees generated from the growing number of core
deposit account relationships.
Noninterest expense increased from $4.6 million to $5.6 million for the
comparable twelve month periods ending September 30. These noninterest expense
increases are primarily attributable to staffing increases and renovated
facilities to support lending operations, along with expenses incurred in the
offering of additional services to the Bank's customers.
The provision for loan losses was increased from $30,000 during the period ended
September 30, 1997 to $120,000 at September 30, 1998 due to the substantial
increase in the volumes of commercial and consumer loans.
As of September 30, 1998, net loans were $232.8 million, an increase of $44.6
million from the $188.2 million as of September 30, 1997. Commercial loans
outstanding increased from $8.8 million at September 30, 1997 to $32.0 million
at September 30, 1998 as a result of substantial efforts to grow the small
business banking division. Gross residential mortgage loans and equity loans
outstanding increased by $20.4 million during the year ended September 30, 1998
net of secondary market sales totaling $28.1 million during the year. Consumer
loans outstanding also increased from $96,000 at September 30, 1997 to $1.9
million at September 30, 1998. The significant growth in all lending divisions
can be credited to the Company's reputation as a quality local lender providing
fast and knowledgeable service.
At September 30, 1997, $12.7 million of real estate mortgage loans were
reclassified from portfolio loans to loans held for sale in the secondary
market. During the year ended September 30, 1998, the Company completed four
secondary market mortgage loan sales totaling $28.1 million and the net gains
realized on these loan sales were $333,000, including $211,000 related to
recording mortgage loan servicing rights. At September 30, 1998, $13.5 million
of loans were classified as loans held for sale in the secondary market.
The loans sold during the year ended September 30, 1998 were fixed rate mortgage
loans with maturities of fifteen years or longer. Servicing of the sold loans
has been retained by the Company and the fees generated during this period were
approximately $12,000, net of $19,000 in amortization of mortgage loan servicing
rights. Management anticipates further growth in the volume of loans sold in the
secondary market as a result of the growing number of fixed rate loans being
originated in this period of relatively low interest rates.
Total deposits increased $8.8 million to $180.7 million as of September 30, 1998
from $171.9 as of September 30, 1997. Federal Home Loan Bank ("FHLB") advances
and other short term borrowings also increased from $47.9 million as of
September 30, 1997 to $100.0 million as of September 30, 1998. These increases
in deposits and other borrowings primarily funded the loan growth during the
year and the $8.4 million increase in cash and cash equivalents.
Cash and cash equivalents increased $8.4 million from $9.5 million as of
September 30, 1997 to $17.9 million as of September 30, 1998. Net cash provided
by operating activities and financing activities amounted to $2.6 million and
$55.6 million, respectively, and was partially offset by net cash used in
investing activities of $49.8 million.
The Company's capital leveraging strategy involves the purchase of mortgage
related and other securities funded primarily with FHLB advances. This
leveraging portfolio represented $15.7 million of the total securities available
for sale at September 30, 1998 compared to $22.7 million at September 30, 1997.
As of September 30, 1998, the total securities portfolio amounted to $41.8
million, an increase of $2.2 million from $39.6 million at September 30, 1997.
The securities portfolio increase was primarily the result of net security
purchases of $44.5 million exceeding matured securities totaling $22.7 million
and principal payments of mortgage-backed and related securities of $19.3
million.
Total liabilities increased from $222.4 million as of September 30, 1997 to
$284.1 million as of September 30, 1998. This increase was primarily due to the
$8.8 million increase in deposits and the $52.1 million increase in FHLB
advances and other borrowings during the year.
Total shareholders' equity decreased from $33.6 million as of September 30, 1997
to $30.9 million as of September 30, 1998. The decreases to equity resulted
mainly from the repurchases of 245,200 shares of outstanding common stock during
this period at a cost of $5.9 million along with the payment of cash dividends
of $544,000. These decreases were offset by $2.2 million in net income and $1.1
million generated from the exercise of stock options.
The book value of MFB Corp. common stock, based on the actual number of shares
outstanding at each period, increased from $20.33 at September 30, 1997 to
$20.95 at September 30, 1998.
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.
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.
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 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.
As of September 30, 1997 net loans were $188.3 million, an increase of $36.2
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 $25.9 million, an increase
of 17.6% 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 1997 fiscal 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.
<PAGE>
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 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 $36.2 million increase in net loans, the $12.7
million increase in loans held for sale, 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.
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.
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 4%. At September 30, 1998, the Bank's liquidity ratio was
20.36% and the short-term liquidity ratio was 13.53%. 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, 1998, 1997 and 1996.
Liquid assets totaled $59.7 million as of September 30, 1998 compared to $49.1
million as of September 30, 1997 and $69.0 million as of September 30, 1996. The
$10.6 million increase in liquidity from September 30, 1997 to September 30,
1998 was primarily due to an $8.4 million increase in cash and cash equivalents
and a $2.2 million increase in securities. Management believes the liquidity
level of $59.7 million as of September 30, 1998 is sufficient to meet
anticipated liquidity needs.
Liquidity levels decreased $19.9 million from September 30, 1996 to September
30, 1997 due primarily to a $27.1 million decrease in securities, partially
offset by a $7.7 million increase in cash and cash equivalents.
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. 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, 1998, total FHLB borrowings
amounted to $92.7 million, $24.5 million of which were used as part of this
strategy. The remaining $68.2 million was used primarily to fund loan portfolio
growth. The Bank had commitments to fund loan originations with borrowers
totaling $37.2 million at September 30, 1998. 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. As of September 30, 1997, total FHLB borrowings amounted
to $47.5 million, $23.5 million of which were used as part of the capital
leveraging strategy. The remaining $24 million was used primarily to fund loan
portfolio growth.
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, 1998, 1997 and 1996 follows.
During the year ended September 30, 1998, net cash and cash equivalents
increased $8.4 million from $9.5 million at September 30, 1997 to $17.9 million
at September 30, 1998.
The Company experienced a net increase in cash from operating activities of $2.6
million during the year that was primarily attributable to the origination of
$28.9 million of loans held for sale and $28.1 million of proceeds realized from
the sale of mortgage loans and net income of $2.2 million.
The $49.8 million decrease in cash from investing activities for the year ended
September 30, 1998 was primarily related to the $44.7 million increase in net
loans and the $49.7 million purchase of securities and FHLB stock, offset by
sales and maturities of securities totaling $25.7 million and $19.3 million of
mortgage-backed securities principal payments.
Financing activities generated net cash of $55.6 million for the year ended
September 30, 1998. The net cash was provided primarily from $45.2 million in
net new FHLB advances, net deposits of $8.8 million, a $4.9 million commitment
to purchase securities and increases of $2.0 million in repurchase agreements,
partially offset by the use of $5.9 million to repurchase the Company's stock.
<PAGE>
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 at September 30, 1997. 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.
Financing activities generated net cash of $29.5 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 $5.7 million from $7.4
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.
As of September 30, 1998 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
In the future, several new accounting pronouncements will be implemented.
Statement No. 130 requires "other comprehensive income" and "comprehensive
income" to be displayed along with net income. Other comprehensive income
includes changes in unrealized gains and losses on available for sale
securities, the offset of some pension liabilities currently recorded as
reductions in equity, foreign currency translation, and in the future will also
include deferred hedging gains and losses. Comprehensive income is net income
plus other comprehensive income.
Statement No. 131 for public companies redefines segment reporting to follow how
each company's chief operating decision maker gets information about business
segments to make operating decisions.
Statement No. 132 increases and revises pension plan disclosures for public
companies, and simplifies such disclosures for nonpublic companies.
<PAGE>
Statement No. 133 on derivatives will, in 2000, require all derivatives to be
recorded at fair value in the balance sheet, with changes in fair value run
through income. If derivatives are documented and effective as hedges, the
change in the derivative fair value will be offset by an equal change in the
fair value of the hedged item.
Statement No. 134 on mortgage banking will, in 1999, allow mortgage loans that
are securitized to be classified as trading, available for sale, or in certain
circumstances held to maturity. Currently these must be classified as trading.
Implementation guidance on Statement No. 125 will clarify the requirement for
loan participations to contain the right for the purchaser to resell the
participation, to avoid classifying the participation as a secured borrowing
instead of a reduction of loans.
Proposals will require that purchased loans, including those acquired in the
purchase of an entire bank, be recorded net of estimated uncollectible loans.
This means that no allowance for loan losses will carry over or be recorded
except through subsequent expense, although subsequent losses equal to the
amount estimated at purchase will not be shown as charge-offs.
The AICPA guidance for financial institutions in its accounting guide will be
revised to conform to current literature, make a few changes, and combine the
banking/savings guide, credit union, and finance company guides, eliminating
some differences therein. Some changes will be to disclose loans past due 90
days or more that are still on accrual and to disclose the policy for
charging-off loans.
The FASB continues to study several issues, including recording all financial
instruments at fair value and abolishing pooling of interests accounting. Also,
it is likely that APB 25's measurement for stock option plans will be limited to
employees and not to nonemployees such as directors, thereby causing
compensation expense for stock options to directors.
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 goods 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.
YEAR 2000 READINESS
The Company is aware of the issues associated with programming code in existing
computer systems as the year 2000 approaches. The issue is whether computer
systems will properly recognize date sensitive information when the year changes
to 2000. Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail. The Company is heavily dependent on
computer processing in its business activities and the year 2000 issue creates
risk for the Company from unforseen problems in the Company's computer system
and from third parties whom the Company uses to process information. Such
failure of the Company's computer system and/or third parties computer systems
could have a material impact on the Company's ability to conduct its business.
A major third party vendor provides the Company's primary data processing. This
provider has advised the Company that is has completed the renovation of its
system to be year 2000 ready, and is currently in the process of providing users
of the system the opportunity to test the system for readiness. The Company is
currently performing tests of the data processing provider's system for year
2000 readiness and anticipates completion of the testing by January31, 1999.
The Company's ten year contract with its current data processing provider
expires during 1999. The Company hired a consultant to assist with the search
for its future data processing provider. The Company has received responses from
select vendors, called client references, and viewed on-site demonstrations of
the vendor's products. The Company anticipates selecting a final vendor and
executing a contract with that vendor prior to January 31, 1999.
The Company has performed an assessment of its computer hardware and software,
and has determined those systems that require upgrade to be year 2000 ready.
Such upgrades have either been completed or will be completed concurrent with
the conversion to the Company's new data processing provider, which is expected
to be completed by June 30, 1999. In addition, the Company has reviewed other
external third party vendors that provide services to the Company (i.e., utility
companies, electronic funds transfer providers, and software companies) and has
requested or already received certification letters from these vendors that
their systems will be year 2000 ready on a timely basis. Testing will be
performed with the service providers, if possible, to determine their year 2000
readiness.
The Company could incur losses if loan payments are delayed due to year 2000
problems affecting significant borrowers. The Company is communicating with such
parties to assess their progress in evaluating and implementing any corrective
measures required by them to be year 2000 ready. To date, the Company has not
been advised by such parties that they do not have plans in place to address and
correct the issues associated with the year 2000 problem; however, no assurance
can be given as to the adequacy of such plans or to the timeliness of their
implementation. As part of the current credit approval process, new and renewed
loans are evaluated as to the borrower's year 2000 readiness.
<PAGE>
Based on the Company's review of its computer systems, management believes the
cost of the remediation effort to make its systems year 2000 ready will not have
an adverse impact on the Company's financial condition, results of operations or
liquidity. The Company had already planned to replace many of its computers and
associated equipment as a result of the conversion to a new data services
provider. These cost and time estimates are based on management's best estimates
and could differ from those actually incurred.
The Company has developed a year 2000 contingency plan that addresses, among
other issues, critical operations and potential failures thereof, and strategies
for business continuation.
Although management believes the Company's computer systems and service
providers will be year 2000 ready, there can be no assurance that these systems,
or those systems of other companies on which the Company's systems rely, will be
fully functional in the year 2000. Such failure could have a significant adverse
impact on the financial condition and results of operations of the Company.
FORWARD LOOKING STATEMENTS
When used in this filing and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases, "anticipate,"
"would be," "will allow," "intends to," "will likely result," "are expected to,"
will continue," "is anticipated," "estimated," "project," or similar expressions
are intended to identify, "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
risks and uncertainties, including but not limited to changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area, and competition, all or some of which could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and advise
readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investing activities, and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
MFB Corp.
Mishawaka, Indiana
We have audited the accompanying consolidated balance sheets of MFB Corp. and
Subsidiary as of September 30, 1998 and 1997 and the related consolidated
statements of income, shareholders' equity and cash flows for the years ended
September 30, 1998, 1997 and 1996. 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. and
Subsidiary as of September 30, 1998 and 1997, and the results of its operations
and its cash flows for the years ended September 30, 1998, 1997 and 1996 in
conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
South Bend, Indiana
November 5, 1998, except for Note 2
as to which the date is November 13, 1998
<PAGE>
MFB CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------- -------------
ASSETS
<S> <C> <C>
Cash and due from financial institutions $ 3,018,404 $ 2,905,849
Interest-bearing deposits in other financial
institutions - short-term 14,885,289 6,576,499
------------- -------------
Total cash and cash equivalents 17,903,693 9,482,348
Securities available for sale 41,819,768 39,628,414
Federal Home Loan Bank (FHLB) stock, at cost 4,636,300 2,400,000
Loans held for sale, net of unrealized losses of $-0- in 1998
and $-0- in 1997 13,516,502 12,671,186
Loans receivable, net of allowance for loan losses
of $453,567 in 1998 and $370,000 in 1997 232,831,800 188,264,198
Accrued interest receivable 967,995 718,427
Premises and equipment, net 2,795,496 2,612,793
Mortgage servicing rights, net 191,699 --
Other assets 297,845 143,445
------------- -------------
Total assets $ 314,961,098 $ 255,920,811
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand deposits $ 4,298,516 $ 2,046,702
Savings, NOW and MMDA deposits 40,835,161 38,130,008
Other time deposits 135,532,298 131,710,557
------------- -------------
Total deposits 180,665,975 171,887,267
Securities sold under agreements to repurchase 2,365,716 388,920
Other borrowings 97,656,964 47,500,000
Advances from borrowers for taxes and insurance 2,316,317 1,854,248
Accrued expenses and other liabilities 1,070,349 740,360
------------- -------------
Total liabilities 284,075,321 222,370,795
Shareholders' equity
Common stock, no par value, 5,000,000 shares authorized;
shares issued: 1,689,417 - 1998, 1,689,417 - 1997;
shares outstanding: 1,474,217 - 1998, 1,650,567 - 1997 12,846,979 13,108,171
Retained earnings - substantially restricted 23,730,167 22,037,441
Net unrealized appreciation (depreciation) on securities
available for sale, net of tax of $(29,788) in 1998
and $48,017 in 1997 (45,417) 73,208
Unearned Employee Stock Ownership Plan (ESOP) shares (444,557) (664,610)
Unearned Recognition and Retention Plan (RRP) shares (38,500) (115,500)
Treasury Stock, 215,200 common shares - 1998;
38,850 common shares - 1997, at cost (5,162,895) (888,694)
------------- -------------
Total shareholders' equity 30,885,777 33,550,016
------------- -------------
Total liabilities and shareholders' equity $ 314,961,098 $ 255,920,811
============= =============
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
Interest income
Loans receivable, including fees
<S> <C> <C> <C>
Mortgage loans $15,071,514 $12,945,694 $ 9,956,394
Consumer and other loans 858,670 550,905 182,177
Financing leases and commercial loans 1,815,178 400,120 107,321
Securities - taxable 2,532,974 3,692,136 3,514,380
Other interest-earning assets 559,547 95,971 421,984
----------- ----------- -----------
Total interest income 20,837,883 17,684,826 14,182,256
Interest expense
Deposits 8,388,360 8,181,489 7,528,321
Securities sold under agreements
to repurchase 67,352 4,138 --
FHLB advances 3,748,087 1,971,537 529,025
----------- ----------- -----------
Total interest expense 12,203,799 10,157,164 8,057,346
Net interest income 8,634,084 7,527,662 6,124,910
Provision for loan losses 120,000 30,000 30,000
----------- ----------- -----------
Net interest income after provision
for loan losses 8,514,084 7,497,662 6,094,910
Noninterest income
Insurance commissions 143,201 133,870 126,819
Brokerage commissions 35,834 23,604 --
Net realized gains from sales of securities
available for sale 7,673 6,098 3,731
Net realized gains from sales of loans 333,171 -- --
Loan servicing fees, net of
amortization of $19,376 in 1998 12,038 -- --
Other income 432,276 261,171 231,766
----------- ----------- -----------
Total noninterest income 964,193 424,743 362,316
Noninterest expense
Salaries and employee benefits 3,413,558 2,772,154 2,152,656
Occupancy and equipment expense 720,305 579,327 422,388
SAIF deposit insurance premium 107,503 147,121 1,291,288
Other expense 1,384,023 1,099,972 968,951
----------- ----------- -----------
Total noninterest expense 5,625,389 4,598,574 4,835,283
----------- ----------- -----------
Income before income taxes 3,852,888 3,323,831 1,621,943
Income tax expense 1,616,605 1,321,630 646,793
----------- ----------- -----------
Net income $ 2,236,283 $ 2,002,201 $ 975,150
=========== =========== ===========
Basic earnings per common share $ 1.44 $ 1.21 $ .51
Diluted earnings per common share 1.37 1.16 .50
</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, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock Earnings Net of Tax ESOP Shares
------------ -------- ---------- -----------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1995 $ 19,656,664 $ 19,732,086 $ - $ (1,100,000)
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 - - - -
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)
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>
<PAGE>
<TABLE>
<CAPTION>
RRP Shares Stock Equity
---------- ----- ------
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at September 30, 1995 $ (290,152) $ - $ 37,998,598
Purchase and retirement of 103,893 shares of common stock - - (1,499,024)
Net unrealized appreciation on securities available for sale,
net of tax $77,821 from transfer of securities - - 118,648
Cash dividends declared - $.06 per share - - (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 - 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 (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>
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended September 30, 1998, 1997 and 1996
<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, 1997 $ 13,108,171 $ 22,037,441 $ 73,208 $ (664,610)
Purchase of 245,200 shares of treasury stock - - - -
Stock option exercise-issuance of 68,850 shares of treasury stock (968,611) - - -
Cash dividends declared - $ .335 per share - (543,557) - 20,053
Effect of contribution to fund ESOP - - - 200,000
Market adjustment of 20,989 ESOP shares committed to be released 286,919 - - -
Amortization of RRP contribution - - - -
Tax benefit related to employee stock plans 420,500 - - -
Net change in unrealized appreciation (depreciation) on securities
available for sale, net of tax of $(77,805) - - (118,625) -
Net income for the year ended September 30, 1998 - 2,236,283 - -
------------- ------------- -------------- -------------
Balance at September 30, 1998 $ 12,846,979 $ 23,730,167 $ (45,417) $ (444,557)
============= ============= ============== =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total
Unearned Treasury Shareholders'
RRP Shares Stock Equity
---------- ----- ------
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at September 30, 1997 $ (115,500) $ (888,694) $ 33,550,016
Purchase of 245,200 shares of treasury stock - (5,931,312) (5,931,312)
Stock option exercise-issuance of 68,850 shares of treasury stock - 1,657,111 688,500
Cash dividends declared - $ .335 per share - - (523,504)
Effect of contribution to fund ESOP - - 200,000
Market adjustment of 20,989 ESOP shares committed to be released - - 286,919
Amortization of RRP contribution 77,000 - 77,000
Tax benefit related to employee stock plans - - 420,500
Net change in unrealized appreciation (depreciation) on securities
available for sale, net of tax of $(77,805) - - (118,625)
Net income for the year ended September 30, 1998 - - 2,236,283
------------- ------------- -------------
Balance at September 30, 1998 $ (38,500) $ (5,162,895) $ 30,885,777
============= ============= =============
</TABLE>
<PAGE>
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
Cash flows from operating activities
<S> <C> <C> <C>
Net income $ 2,236,283 $ 2,002,201 $ 975,150
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization, net of
accretion 314,688 473,203 272,595
Amortization of RRP contribution 77,000 77,000 97,652
Provision for loan losses 120,000 30,000 30,000
Net realized gains from sales of
securities available for sale (7,673) (6,098) (3,731)
Net realized gains from sales of loans (333,171) -- --
Amortization of mortgage servicing rights 19,376 -- --
Origination of loans held for sale (28,866,583) -- --
Proceeds from sales of loans held for sale 28,143,363 -- --
Market adjustment of ESOP shares
committed to be released 286,919 188,153 117,247
ESOP expense 200,000 200,000 200,000
Net change in:
Accrued interest receivable (249,568) 99,587 94
Other assets (76,595) 498,262 (44,501)
Accrued expenses and other liabilities 750,489 (2,303,772) 586,591
------------ ------------ ------------
Net cash from operating activities 2,614,528 1,258,536 2,231,097
Cash flows from investing activities
Net change in interest-bearing time
deposits in other financial institutions -- 495,000 1,385,000
Net change in loans receivable (44,687,602) (48,913,292) (30,900,930)
Proceeds from:
Sales of securities available for sale 2,926,206 25,186,766 10,212,124
Principal payments of mortgage-backed
and related securities 19,343,270 2,938,521 2,280,597
Maturities of securities available for sale 22,738,565 27,877,752 16,697,252
Maturities of securities held to maturity -- -- 4,300,000
Purchase of:
Securities available for sale (47,461,878) (28,634,913) (48,218,517)
Securities held to maturity -- -- (500,000)
FHLB stock (2,236,300) (1,063,900) (65,300)
Premises and equipment, net (423,665) (859,211) (137,440)
------------ ------------ ------------
Net cash from investing activities (49,801,404) (22,973,277) (44,947,214)
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
Cash flows from financing activities
<S> <C> <C> <C>
Purchase of MFB Corp. common stock $ (5,931,312) $ (6,410,802) $ (1,499,024)
Net change in deposits 8,778,708 12,922,778 14,412,719
Net change in securities sold under
agreements to repurchase 1,976,796 388,920 --
Proceeds from other borrowings 72,156,964 66,735,000 24,500,000
Repayment of other borrowings (22,000,000) (43,735,000) --
Proceeds from exercise of stock options 688,500 96,500 --
Net change in advances from
borrowers for taxes and insurance 462,069 (10,179) (305,151)
Cash dividends paid (523,504) (524,516) (112,090)
------------ ------------ ------------
Net cash from financing activities 55,608,221 29,462,701 36,996,454
------------ ------------ ------------
Net change in cash and cash equivalents 8,421,345 7,747,960 (5,719,663)
Cash and cash equivalents at beginning of year 9,482,348 1,734,388 7,454,051
------------ ------------ ------------
Cash and cash equivalents at end of year $ 17,903,693 $ 9,482,348 $ 1,734,388
============ ============ ============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 12,305,287 $ 10,113,767 $ 7,988,256
Income taxes 1,182,448 868,000 974,755
Supplemental schedule of noncash investing activities Transfer from:
Securities held to maturity to securities
available for sale $ -- $ -- $ 47,898,025
Loans receivable to loans held for sale -- 12,671,186 --
</TABLE>
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
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 86% of the loan portfolio at September 30, 1998
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.
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
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.
Mortgage Banking Activities: Mortgage loans originated and intended for sale in
the secondary market are reported on the statements of financial condition as
loans held for sale and are carried at the lower cost or estimated market value
in the aggregate. Net unrealized losses are recognized in a valuation allowance
by charges to income.
Loan servicing fees are recognized when received and the related costs are
recognized when incurred. The Bank sells mortgages into the secondary market at
market prices, which includes consideration for normal servicing fees.
Effective October 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights. This
Statement changed the accounting for mortgage servicing rights retained by a
loan originator. Under this standard, if the originator sells or securities
mortgage loans and retains the related servicing rights, the total cost of the
mortgage loan is allocated between the loan (without the servicing rights) and
the servicing rights, based on their relative fair values. Prior to adopting
SFAS No. 122 on October 1, 1996, servicing right assets were recorded only for
purchased rights to service mortgage loans. The costs allocated to mortgage
servicing rights are now recorded as a separate asset and are amortized in
proportion to, and over the life of, the net servicing income. The carrying
value of the mortgage servicing rights are periodically evaluated for
impairment.
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.
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Because some loans may not be repaid in full, an allowance for loan losses is
recorded. The allowance for loan losses is increased by a provision for loan
losses charged to expense and decreased by charge-offs (net of recoveries).
Estimating the risk of loss and the amount of loss on any loan is necessarily
subjective. Accordingly, the allowance is maintained by management at a level
considered adequate to cover losses that are currently anticipated. Management's
periodic evaluation of the adequacy of the allowance is based on the Company's
past loan loss experience, known and inherent risks in the portfolio, periodic,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, and current economic conditions.
While management may periodically allocate portions of the allowance for
specific problem loan situations, the whole allowance is available for any loan
charge-offs that occur.
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.
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreclosed Real Estate: Real estate properties acquired through, or in lieu of,
loan foreclosure are initially recorded at fair value at the date of
acquisition, establishing a new cost basis. Any reduction to fair value from the
carrying value of the related loan at the time of acquisition is accounted for
as a loan loss and charged against the allowance for loan losses. Valuations are
periodically performed by management and valuation allowances are adjusted
through a charge to income for changes in fair value or estimated selling costs.
Foreclosed real estate at September 30, 1998 amounted to $145,000. There were no
properties held as foreclosed real estate at September 30, 1997.
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.
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.
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 13.
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Common Share: Basic and diluted earnings per common share are
computed under a new accounting standard effective beginning with the quarter
ended December 31, 1997. All prior earnings per common share amounts have been
restated to be comparable. Basic earnings per common share is based on the net
income divided by the weighted average number of common shares outstanding
during the period. ESOP shares are considered outstanding for earnings per
common share calculations as they are committed to be released; unearned shares
are not considered outstanding. Recognition and retention plan ("RRP") shares
are considered outstanding for earnings per common share calculations as they
become vested. Diluted earnings per common share shows the dilutive effective of
additional potential common shares issuable under stock options and nonvested
shares issued under the RRP.
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. Disclosures of net
income and earnings per common share are provided as if the fair value method of
SFAS No. 123 were used for stock-based compensation.
NOTE 2 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
A reconciliation of the numerators and denominators used in the computation of
the basic earnings per common share and diluted earnings per common share is
presented below:
<TABLE>
<CAPTION>
Year ended September 30,
1998 1997 1996
----------- ----------- -----------
Basic Earnings Per Common Share
Numerator
<S> <C> <C> <C>
Net income $ 2,236,283 $ 2,002,201 $ 975,150
=========== =========== ===========
Denominator
Weighted average common shares
outstanding 1,611,492 1,742,329 2,037,540
Less: Average unallocated ESOP shares (50,538) (72,670) (95,066)
Less: Average nonvested RRP shares (7,700) (15,400) (23,615)
----------- ----------- -----------
Weighted average common shares
outstanding for basic earnings per
common share 1,553,254 1,654,259 1,918,859
=========== =========== ===========
Basic earnings per common share $ 1.44 $ 1.21 $ .51
=========== =========== ===========
</TABLE>
<PAGE>
NOTE 2 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended September 30,
1998 1997 1996
---------- ---------- ----------
Diluted Earnings Per Common Share
Numerator
<S> <C> <C> <C>
Net income $2,236,283 $2,002,201 $ 975,150
========== ========== ==========
Denominator
Weighted average common shares
outstanding for basic earnings per
common share 1,553,254 1,654,259 1,918,859
Add: Dilutive effects of average
novested RRP shares 3,166 -- --
Add: Dilutive effects of assumed
exercises of stock options 75,417 71,916 49,946
---------- ---------- ----------
Weighted average common shares
and dilutive potential common
shares outstanding 1,631,837 1,726,175 1,968,805
---------- ---------- ----------
Diluted earnings per common share $ 1.37 $ 1.16 $ .50
========== ========== ==========
</TABLE>
Stock options for 45,000 shares of common stock, granted during the year ended
September 30, 1998, were not considered in computing diluted earnings per common
share for the year ended September 30, 1998 because they were antidilutive.
Additionally subsequent to September 30, 1998, additional stock options were
granted on October 20, 1998 and November 13, 1998, totaling 26,500 options which
may impact future diluted earnings per common share calculations.
NOTE 3 - SECURITIES AVAILABLE FOR SALE
The amortized cost and fair value of securities available for sale are as
follows:
<TABLE>
<CAPTION>
-------------------------September 30, 1998--------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities
U.S. Government
<S> <C> <C> <C> <C>
and federal agencies $ 4,218,461 $ 35,228 $ - $ 4,253,689
Mortgage-backed 22,259,552 33,404 (25,879) 22,267,077
Other securities 8,929,482 - - 8,929,482
Corporate notes 5,944,628 - (81,488) 5,863,140
---------------- ------------ ------------- ---------------
41,352,123 68,632 (107,367) 41,313,388
Marketable equity securities 542,850 - (36,470) 506,380
---------------- ------------ ------------- ---------------
$ 41,894,973 $ 68,632 $ (143,837) $ 41,819,768
================ ============ ============= ===============
</TABLE>
<PAGE>
NOTE 3 - SECURITIES AVAILABLE FOR SALE (Continued)
- --------------------------------------------------------------------------------
<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>
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, 1998--------
Amortized Fair
Cost Value
Due in one year or less $ 11,641,206 $ 11,668,749
Due after one year through five years 1,506,737 1,514,422
Due after five years through ten years - -
Due after ten years 5,944,628 5,863,140
---------------- ---------------
19,092,571 19,046,311
Mortgage-backed securities 22,259,552 22,267,077
---------------- ---------------
$ 41,352,123 $ 41,313,388
================ ===============
Proceeds from sales of securities available for sale were $2,926,206 during the
year ended September 30, 1998. Gross gains of $10,534 and gross losses of $2,861
were realized on these sales. During the year ended September 30, 1997, proceeds
from the sales of securities available for sale were $25,186,766 with gross
gains of $59,828 and gross losses of $53,730 realized on these sales. During the
year ended September 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 those losses.
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>
NOTE 4 - LOANS RECEIVABLE, NET
Loans receivable, net at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
First mortgage loans (principally conventional)
Principal balances
<S> <C> <C>
Secured by one-to-four family residences $ 183,150,539 $ 164,598,210
Construction loans 8,233,468 8,245,274
Other 120,188 130,800
------------- -------------
191,504,195 172,974,284
Less undisbursed portion of construction and
other mortgage loans (485,444) (117,394)
------------- -------------
Total first mortgage loans 191,018,751 172,856,890
Commercial and consumer loans:
Principal balances
Home equity and second mortgage 9,067,504 7,176,832
Commercial 32,000,528 8,832,629
Financing leases 83,026 325,048
Other 1,913,564 96,079
------------- -------------
Total commercial and consumer loans 43,064,622 16,430,588
Allowance for loan losses (453,567) (370,000)
Net deferred loan origination fees (798,006) (653,280)
------------- -------------
$ 232,831,800 $ 188,264,198
============= =============
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the years
ended September 30:
1998 1997 1996
---- ---- ----
Balance at beginning of year $ 370,000 $ 340,000 $ 310,000
Provision for loan losses 120,000 30,000 30,000
Charge-offs (36,433) - -
Recoveries - - -
------------- ------------ ------------
Balance at end of year $ 453,567 $ 370,000 $ 340,000
============= ============ ============
At September 30, 1998, 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, 1998, 1997 and 1996.
<PAGE>
NOTE 4 - LOANS RECEIVABLE, NET (Continued)
- --------------------------------------------------------------------------------
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans at September 30, 1998 are summarized as follows:
Mortgage loan portfolios serviced for:
Telebank $ 9,943,910
Hanover Capital Mortgage Holdings, Inc. 7,629,859
LaSalle Bank, FSB 8,036,000
--------------
$ 25,609,769
==============
Custodial escrow balances maintained in connection with the foregoing serviced
loans were $62,000 at September 30, 1998.
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:
1998 1997
---- ----
Balance - beginning of year $ 927,721 $ 1,032,494
New loans 1,039,174 -
Repayments (207,859) (104,773)
Effect of changes in related parties 40,798 -
-------------- --------------
Balance - end of year $ 1,799,834 $ 927,721
============== ==============
NOTE 5 - PREMISES AND EQUIPMENT, NET
Premises and equipment at September 30 are summarized as follows:
1998 1997
---- ----
Land $ 581,956 $ 558,681
Buildings and improvements 2,544,588 2,165,843
Real estate held for future expansion - 128,885
Furniture and equipment 1,441,967 1,291,437
------------- ------------
Total cost 4,568,511 4,144,846
Accumulated depreciation and amortization (1,773,015) (1,532,053)
------------- ------------
$ 2,795,496 $ 2,612,793
============= ============
Depreciation and amortization of premises and equipment, included in occupancy
and equipment expense was approximately $241,000, $216,000 and $145,000 for the
years ended September 30, 1998, 1997 and 1996, respectively.
<PAGE>
NOTE 6 - DEPOSITS
- --------------------------------------------------------------------------------
The aggregate amount of short-term jumbo certificates of deposit in denomination
of $100,000 or more was approximately $27,568,000 and $24,892,000 at September
30, 1998 and 1997.
At September 30, 1998, the scheduled maturities of certificates of deposit are
as follows for the years ended September 30:
1999 $ 95,769,516
2000 33,655,354
2001 4,645,028
2002 411,458
2003 749,499
Thereafter 301,443
-----------------
$ 135,532,298
=================
NOTE 7 - 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 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Average daily balance during the year $ 1,647,000 $ 97,000
Average interest rate during the year 4.09% 4.27%
Maximum month end balance during the year $ 3,882,000 $ 389,000
Securities underlying these agreements at year end were as follows:
Carrying value of securities $ 8,385,000 $ 3,530,000
Fair value $ 8,387,000 $ 3,508,000
</TABLE>
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
At September 30, 1998, advances from the Federal Home Loan Bank of Indianapolis
with fixed and variable rates ranging from 4.88% to 5.93% mature in the year
ending September 30 as follows:
1999 $ 8,500,000
2000 6,000,000
2001 -
2002 11,000,000
2003 18,000,000
Thereafter 49,225,750
-----------------
$ 92,725,750
=================
<PAGE>
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES (Continued)
- --------------------------------------------------------------------------------
FHLB advances are secured by all FHLB stock, qualifying first mortgage loans,
government agency and mortgage backed securities. At September 30, 1998, in
addition to $4,636,000 in FHLB stock, collateral of approximately $194,477,000
is pledged to the FHLB to secure advances outstanding.
At September 30, 1998, the Bank had a due to broker for $4.9 million for a
security purchase which settled October 5, 1998.
NOTE 9 - 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. 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,
1998, 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, 1998, 1997 and 1996 was approximately $1,500, $1,500
and $3,000, respectively.
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, 1998, 1997 and 1996 was approximately $52,000, $42,000 and $5,000.
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.
<PAGE>
NOTE 9 - EMPLOYEE BENEFITS (Continued)
ESOP expense was approximately $487,000, $388,000 and $317,000 for the years
ended September 30, 1998, 1997 and 1996. Contributions to the ESOP, including
dividends on unearned ESOP shares, was approximately $220,000, $229,000 and
$206,000 during the years ended September 30, 1998, 1997 and 1996.
Company contributions to the ESOP and shares released from suspense proportional
to the repayment of the ESOP loan are allocated among ESOP participants on the
basis of compensation in the year of allocation. Benefits generally become 100%
vested after five years of credited service. A participant who terminates
employment for reasons other than death, normal retirement (or early
retirement), or disability prior to the completion of five years of credited
service does not receive any benefits under the ESOP. Forfeitures are
reallocated among the remaining participating employees, in the same proportion
as contributions.
Benefits are payable in the form of stock except for fractional shares which are
paid in cash upon termination of employment. The Company's contributions to the
ESOP are not fixed, so benefits payable under the ESOP cannot be estimated.
ESOP participants receive distributions from their ESOP accounts only upon
termination of service.
At September 30, 1998, 1997 and 1996, 20,989, 23,276 and 21,515 shares with an
average fair value of $23.20, $16.68 and $14.75 per share, were committed to be
released.
The ESOP shares as of September 30 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Allocated shares $ 99,957 $ 78,968 $ 55,692
Unearned shares 40,043 61,032 84,308
Shares withdrawn from the plan by participants (5,601) (5,601) (2,347)
-------------- ------------- ---------------
Total ESOP shares held in the plan 134,399 134,399 $ 137,653
============== ============= ===============
Fair value of unearned shares $ 1,021,000 $ 1,419,000 $ 1,560,000
============== ============= ===============
</TABLE>
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, 1998, 1997 and 1996 was approximately $77,000, $77,000 and
$98,000, respectively.
<PAGE>
NOTE 9 - EMPLOYEE BENEFITS (Continued)
- --------------------------------------------------------------------------------
Stock Option Plan: The Board of Directors of the Company adopted the MFB Corp.
Stock Option Plans (the "Option Plans"). The number of options authorized under
the Plans totals 350,000 shares of common stock. Officers, employees and outside
directors of the Company and its subsidiary are eligible to participate in the
Option Plans. 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, 1998, 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, 1998,
1997 and 1996. As of September 30, 1998, 105,000 options remain available for
future grants.
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. Accordingly, the
following proforma information presents net income and earnings per common share
had the fair value method been used to measure compensation cost for stock
option plans. The exercise price of options granted is equivalent to the market
value of underlying stock at the grant date.
The fair value of options granted during the years ended September 30, 1998 and
1996 is estimated using the following weighted-average information: risk-free
interest rate of 6% and 6.2%, expected life of 10 years, expected dividends of
1.21% and .30% per year and expected stock price volatility of 6% per year.
There were no options granted for the year ended September 30, 1997.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income as reported $ 2,236,283 $ 2,002,201 $ 975,150
Proforma net income 2,069,443 1,981,761 951,304
Reported earnings per common and common
equivalent share
Basic $1.44 $1.21 $.51
Diluted $1.37 $1.16 $.50
Proforma earnings per common and common
equivalent share
Basic $1.33 $1.20 $.50
Diluted $1.27 $1.15 $.48
</TABLE>
<PAGE>
NOTE 9 - EMPLOYEE BENEFITS (Continued)
- --------------------------------------------------------------------------------
Activity in the Option Plan for the years ended is summarized as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Number of Average Average
Outstanding Exercise Exercise Fair Value
Options Price Price of Grants
<S> <C> <C> <C> <C>
Balanced at September 30, 1995 190,000 $ 10.00-$15.00 $ 10.53
Granted 10,000 $ 15.25 $ 15.25 $ 10.22
------------
Balance at September 30, 1996 200,000 $ 10.00-$15.25 $ 10.76
Exercised (9,650) $ 10.00 $ 10.00
------------
Balance at September 30, 1997 190,350 $ 10.00-$15.25 $ 10.80
Granted 45,000 $ 26.75 $ 26.75 $9.76
Exercised (68,850) $ 10.00 $ 10.00
------------
Balance at September 30, 1998 166,500 $ 10.00-$26.75 $ 15.45
</TABLE>
Options exercisable at September 30 are as follows:
Weighted
Number Average
of Options Exercise Price
1996 180,000 $ 10.28
1997 176,350 $ 10.46
1998 122,500 $ 12.14
At September 30, 1998, options outstanding had a weighted-average remaining life
of 7.4 years.
<PAGE>
NOTE 10 - 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) or on specified experience formulas. The Bank used the
percentage-of-taxable-income 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:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal
Current $ 1,301,834 $ 765,810 $ 725,920
Deferred (2,359) 264,314 (225,467)
--------------- --------------- -------------
1,299,475 1,030,124 500,453
State
Current 317,774 223,225 225,213
Deferred (644) 68,281 (78,873)
--------------- --------------- -------------
317,130 291,506 146,340
--------------- --------------- -------------
Total income tax expense $ 1,616,605 $ 1,321,630 $ 646,793
=============== =============== =============
</TABLE>
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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income taxes at statutory rate $ 1,309,982 $ 1,130,103 $ 551,461
Tax effect of:
State tax, net of federal income
tax effect 209,306 192,394 96,584
Excess of fair value of ESOP
shares released over cost 97,552 63,972 39,864
Other items, net (235) (64,839) (41,116)
--------------- --------------- -------------
Total income tax expense $ 1,616,605 $ 1,321,630 $ 646,793
=============== =============== =============
</TABLE>
<PAGE>
NOTE 10 - 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:
<TABLE>
<CAPTION>
1998 1997
Deferred tax assets
<S> <C> <C>
RRP expense $ 16,363 $ 16,363
Net deferred loan fees 339,153 277,644
Net unrealized depreciation
on securities available for sale 29,788 -
Other 1,249 18,652
--------------- -------------
386,553 312,659
Deferred tax liabilities
Accretion (57,364) (59,882)
Depreciation (60,442) (48,685)
Bad debt deduction (253,309) (288,825)
Mortgage servicing rights (81,472) -
Net unrealized appreciation on
securities available for sale - (48,017)
Other (25,079) (39,171)
--------------- -------------
(477,666) (484,580)
Valuation allowance - -
--------------- -------------
Net deferred tax asset (liability) $ (91,113) $ (171,921)
=============== =============
</TABLE>
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, 1998 and 1997. 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 11 - 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>
NOTE 11 - 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)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1998
Total capital (to risk
weighted assets) $ 29,489 16.28% $ 14,493 8.00% $ 18,116 10.00%
Tier 1 (core) capital
(to risk weighted assets) 29,046 16.03 7,246 4.00 10,869 6.00
Tier 1 (core) capital (to
adjusted total assets) 29,046 9.38 9,291 3.00 N/A N/A
Tangible capital (to
adjusted total assets) 29,046 9.38 4,646 1.50 N/A N/A
Tier 1 (core) capital (to
average assets) 29,046 10.43 11,136 4.00 13,920 5.00
As of September 30, 1997
Total capital (to risk
weighted assets) $ 32,184 25.40% $ 10,139 8.00% $ 12,673 10.00%
Tier 1 (core) capital
(to risk weighted assets) 31,814 25.10 5,069 4.00 7,604 6.00
Tier 1 (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 1 (core) capital (to
average assets) 31,814 13.42 9,482 4.00 11,853 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, 1998 approximately
$7,222,000 of the Bank's retained earnings is available for distribution to the
Company.
<PAGE>
NOTE 12 - OTHER NONINTEREST INCOME AND EXPENSE
- --------------------------------------------------------------------------------
Other noninterest income and expense amounts are summarized as follows for the
years ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Other noninterest income
<S> <C> <C> <C>
Service charges and fees $ 318,636 $ 200,759 $ 174,315
Other 113,640 60,412 57,451
-------------- -------------- --------------
$ 432,276 $ 261,171 $ 231,766
============== ============== ==============
Other noninterest expense
Advertising and promotion $ 186,257 $ 179,423 $ 190,614
Data processing 384,629 281,171 200,940
Professional fees 166,652 143,550 175,341
Printing, postage, stationery,
and supplies 162,794 192,514 123,215
Direct loan origination costs deferred (262,686) (245,981) (203,332)
Other 746,377 549,295 482,173
-------------- -------------- --------------
$ 1,384,023 $ 1,099,972 $ 968,951
============== ============== ==============
</TABLE>
NOTE 13 - 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 8---------------- -------------------1 9 9 7----------------
Fixed Variable Fixed Variable
Rate Loans Rate Loans Total Rate Loans Rate Loans Total
<S> <C> <C> <C> <C> <C> <C>
First mortgage loans $ 3,398,489 $ 3,441,451 $ 6,839,940 $ 4,784,788 $ 3,816,543 $ 8,601,331
Commercial loans 3,739,220 5,440,747 9,179,967 2,029,260 6,964,446 8,993,706
Unused lines of credit 3,268,364 8,998,528 12,266,892 717,622 8,931,973 9,649,595
Unused commercial loan
lines of credit - 7,649,903 7,649,903 - 1,825,409 1,825,409
Unused construction loan
lines of credit - 1,219,604 1,219,604 - 1,380,909 1,380,909
------------- -------------- ------------- ------------- ------------- --------------
$ 10,406,073 $ 26,750,233 $ 37,156,306 $ 7,531,670 $ 22,919,280 $ 30,450,950
============= ============== ============= ============= ============= ==============
</TABLE>
<PAGE>
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONTINGENCIES
(Continued)
Fixed rate loan commitments at September 30, 1998 are at rates primarily ranging
from 6.75% to 9.25%. Mortgage loan fixed rate commitments are primarily for
terms ranging from 15 to 30 years, while commercial loan fixed rate commitments
are primarily for five year terms. Rates on variable rate mortgage loans range
from 5.875% to 8.875% and are tied to the one year treasury bill rate. Rates on
variable commercial loan commitments are tied to the national prime rate.
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
$1,058,000 as of September 30, 1998.
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 14 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed financial statements for the parent company,
MFB Corp.
CONDENSED BALANCE SHEETS
September 30, 1998 and 1997
1998 1997
----------- -----------
ASSETS
Cash and cash equivalents $ 552,454 $ 796,186
Equity securities available for sale 506,380 329,400
Investment in Bank subsidiary 29,064,393 31,939,172
Loan receivable from ESOP 444,557 664,610
Other assets 388,917 1,438
----------- -----------
Total assets $30,956,701 $33,730,806
=========== ===========
LIABILITIES
Accrued expenses and other liabilities $ 70,924 $ 180,790
SHAREHOLDERS' EQUITY 30,885,777 33,550,016
----------- -----------
Total liabilities and shareholders' equity $30,956,701 $33,730,806
=========== ===========
<PAGE>
NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME
Years ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Dividends from Bank subsidiary - cash $ 5,650,000 $ 2,000,000 $ --
Interest income 48,748 57,723 74,390
Other income 919 -- --
Interest expense 1,346 3,319 --
Other expenses 107,359 107,243 153,973
----------- ----------- -----------
Income (loss) before income taxes
and equity in undistributed net income
of Bank subsidiary 5,590,962 1,947,161 (79,583)
Income tax benefit 25,014 22,803 32,887
----------- ----------- -----------
Income (loss) before equity in
undistributed net income of Bank subsidiary 5,615,976 1,969,964 (46,696)
(Distributions in excess of) equity in
undistributed net income of Bank subsidiary (3,379,693) 32,237 1,021,846
----------- ----------- -----------
Net income $ 2,236,283 $ 2,002,201 $ 975,150
=========== =========== ===========
</TABLE>
<PAGE>
NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
Years ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
Cash flows from operating activities
<S> <C> <C> <C>
Net income $ 2,236,283 $ 2,002,201 $ 975,150
Adjustments to reconcile net income to
net cash from operating activities
Distributions in excess of (equity in
undistributed) net income of
Bank subsidiary 3,379,693 (32,237) (1,021,846)
Net change in other assets (361,526) 30,063 287,659
Net change in accrued expenses and
other liabilities 310,634 97,747 40,417
----------- ----------- -----------
Net cash from operating activities 5,565,084 2,097,774 281,380
Cash flows from investing activities
Net change in interest-bearing deposits
in other financial institutions -- -- 948,366
Principal repayments on loan receivable
from ESOP 220,053 229,041 206,349
Principal repayments on note receivable
from Bank subsidiary -- 4,750,000 1,000,000
Purchase of securities available for sale (242,500) (300,350) --
----------- ----------- -----------
Net cash from investing activities (22,447) 4,678,691 2,154,715
Cash flows from financing activities
Purchase of MFB Corp. common stock (5,931,312) (6,410,802) (1,499,024)
Proceeds from exercise of stock options 688,500 96,500 --
Cash dividends paid (543,557) (553,557) (118,439)
----------- ----------- -----------
Net cash from financing activities (5,786,369) (6,867,859) (1,617,463)
----------- ----------- -----------
Net change in cash and cash equivalents (243,732) (91,394) 818,632
Cash and cash equivalents at beginning
of year 796,186 887,580 68,948
----------- ----------- -----------
Cash and cash equivalents at end of year $ 552,454 $ 796,186 $ 887,580
=========== =========== ===========
</TABLE>
<PAGE>
NOTE 15 - FAIR VALUES 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, 1998 and 1997.
Items which are not financial instruments are not included.
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7
------- -------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 17,903,693 $ 17,904,000 $ 9,482,348 $ 9,482,000
Securities available for sale 41,819,768 41,820,000 39,628,414 39,628,000
FHLB stock 4,636,300 4,636,000 2,400,000 2,400,000
Loans held for sale, net 13,516,502 13,517,000 12,671,186 12,671,000
Loans receivable, net of
allowance for loan losses 232,831,800 235,550,000 188,264,198 191,855,000
Accrued interest receivable 967,995 968,000 718,427 718,000
Mortgage servicing rights, net 191,699 192,000 -- --
Noninterest bearing demand
deposits (4,298,516) (4,299,000) (2,046,702) (2,047,000)
Savings, NOW and MMDA
deposits (40,835,161) (40,835,000) (38,130,008) (38,130,000)
Other time deposits (135,532,298) (135,573,000) (131,710,557) (131,975,000)
Securities sold under
agreements to repurchase (2,365,716) (2,366,000) (388,920) (389,000)
FHLB advances (92,725,750) (90,333,000) (47,500,000) (47,092,000)
Other borrowings (4,931,214) (4,931,000) -- --
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of September 30, 1998 and 1997. The estimated fair
value for cash and cash equivalents is considered to approximate cost. 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, 1998 and 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, 1998 and 1997, 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, mortgage servicing rights,
noninterest bearing demand deposits, savings, NOW and MMDA deposits and other
borrowings 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, 1998 and 1997, 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>
NOTE 15 - FAIR VALUES 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, 1998 and 1997, 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, 1998 and 1997 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 16 - 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 17 - IMPACT OF NEW ACCOUNTING STANDARDS
In the future, several new accounting pronouncements will be implemented.
Statement No. 130 requires "other comprehensive income" and "comprehensive
income" to be displayed along with net income. Other comprehensive income
includes changes in unrealized gains and losses on available for sale
securities, the offset of some pension liabilities currently recorded as
reductions in equity, foreign currency translation, and in the future will also
include deferred hedging gains and losses. Comprehensive income is net income
plus other comprehensive income.
Statement No. 131 for public companies redefines segment reporting to follow how
each company's chief operating decision maker gets information about business
segments to make operating decisions.
Statement No. 132 increases and revises pension plan disclosures for public
companies, and simplifies such disclosures for nonpublic companies.
<PAGE>
NOTE 17 - IMPACT OF NEW ACCOUNTING STANDARDS (Continued)
- --------------------------------------------------------------------------------
Statement No. 133 on derivatives will, in 2000, require all derivatives to be
recorded at fair value in the balance sheet, with changes in fair value run
through income. If derivatives are documented and effective as hedges, the
change in the derivative fair value will be offset by an equal change in the
fair value of the hedged item.
Statement No. 134 on mortgage banking will, in 1999, allow mortgage loans that
are securitized to be classified as trading, available for sale, or in certain
circumstances held to maturity. Currently these must be classified as trading.
Implementation guidance on Statement No. 125 will clarify the requirement for
loan participations to contain the right for the purchaser to resell the
participation, to avoid classifying the participation as a secured borrowing
instead of a reduction of loans.
Proposals will require that purchased loans, including those acquired in the
purchase of an entire bank, be recorded net of estimated uncollectible loans.
This means that no allowance for loan losses will carry over or be recorded
except through subsequent expense, although subsequent losses equal to the
amount estimated at purchase will not be shown as charge-offs.
The AICPA guidance for financial institutions in its accounting guide will be
revised to conform to current literature, make a few changes, and combine the
banking/savings guide, credit union, and finance company guides, eliminating
some differences therein. Some changes will be to disclose loans past due 90
days or more that are still on accrual and to disclose the policy for
charging-off loans.
The FASB continues to study several issues, including recording all financial
instruments at fair value and abolishing pooling of interests accounting. Also,
it is likely that APB 25's measurement for stock option plans will be limited to
employees and not to nonemployees such as directors, thereby causing
compensation expense for stock options to directors.
<PAGE>
NOTE 18 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
--------------Year Ended September 30, 1998--------------
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $ 4,819 $ 5,154 $ 5,391 $ 5,474
Interest expense 2,818 2,958 3,161 3,267
----------- ----------- ----------- -----------
Net interest income 2,001 2,196 2,230 2,207
Provision for loan losses 15 15 20 70
----------- ----------- ----------- -----------
Net interest income after provision for loan 1,986 2,181 2,210 2,137
losses
Noninterest income 165 162 182 455
Noninterest expense 1,279 1,461 1,396 1,489
----------- ----------- ----------- -----------
Income before income taxes 872 882 996 1,103
Income tax expense 370 216 508 523
----------- ----------- ----------- -----------
Net income $ 502 $ 666 $ 488 $ 580
=========== =========== =========== ===========
Basic earnings per common share $ .32 $ .43 $ .31 $ .38
=========== =========== =========== ===========
Diluted earnings per common share $ .30 $ .40 $ .30 $ .37
=========== =========== =========== ===========
</TABLE>
<PAGE>
NOTE 18 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)
<TABLE>
<CAPTION>
--------------Year Ended September 30, 1998--------------
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $ 4,107 $ 4,270 $ 4,511 $ 4,797
Interest expense 2,339 2,427 2,612 2,779
----------- ----------- ----------- -----------
Net interest income 1,768 1,843 1,899 2,018
Provision for loan losses 7 8 7 8
----------- ----------- ----------- -----------
Net interest income after provision for loan 1,761 1,835 1,892 2,010
losses
Noninterest income 113 85 108 119
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
=========== =========== =========== ===========
Basic earnings per common share $ .27 $ .32 $ .32 $ .30
=========== =========== =========== ===========
Diluted earnings per common share $ .26 $ .30 $ .30 $ .29
=========== =========== =========== ===========
</TABLE>
<PAGE>
MFB CORP. AND SUBSIDIARY
DIRECTORS AND OFFICERS
September 30, 1998
MFB CORP. AND MFB FINANCIAL DIRECTORS
M. Gilbert Eberhart (age 64) has served as Secretary of the Bank since 1987. He
is also a dentist based in Mishawaka.
Thomas F. Hums (age 65) 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 55) is an optometrist based in Mishawaka.
Michael J. Marien (age 51) is a Sales Representative with Signode Corporation, a
division of ITW.
Marian K. Torian (age 77) 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 43) 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 56) has served as Vice President of Memorial Health
Foundation since 1992. Until 1992, he was a free-lance political consultant and
until 1991, he also served as District Director for the Office of United States
Representative John P. Hiler, Third Congressional District of Indiana.
Christine A. Lauber (age 53) is a Certified Public Accountant in private
practice in South Bend, Indiana.
<TABLE>
<CAPTION>
MFB FINANCIAL OFFICERS
<S> <C> <C>
Charles J. Viater Timothy C. Boenne Michael J. Portolese
President and Chief Executive Officer* Vice President and Controller Vice President
Steven F. Rathka Gretchen L. Cook Thomas A. Smith
Senior Vice President Vice President Vice President
William L. Stockton, Jr. Joseph P. DeKever Daniel R. Thomas
Senior Vice President Vice President Vice President
M. Gilbert Eberhart Eric C. Edmond
Secretary* Vice President
</TABLE>
* Holds same position with MFB Corp.
- --------------------------------------------------------------------------------
<PAGE>
MFB CORP. AND SUBSIDIARY
SHAREHOLDER INFORMATION
September 30, 1998
- --------------------------------------------------------------------------------
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, 1998, there were approximately 632
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, 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
December 31, 1997 30.38 22.50 .08
March 31, 1998 30.38 26.25 .085
June 30, 1998 27.75 24.00 .085
September 30, 1998 25.50 18.00 .085
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, 1998 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 and use of our report, dated
November 5, 1998, except for Note 2 as to which the date is November 13, 1998,
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, 1998, in MFB Corp.'s Registration Statement on Form S-8 (Registration No.
333-47891).
/s/ Crowe, Chizek and Company LLP
South Bend, Indiana
December 26, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000916396
<NAME> MFB CORP.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-1-1997
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 3,018
<INT-BEARING-DEPOSITS> 14,885
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,820
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 233,286
<ALLOWANCE> 454
<TOTAL-ASSETS> 314,961
<DEPOSITS> 180,666
<SHORT-TERM> 7,297
<LIABILITIES-OTHER> 3,386
<LONG-TERM> 92,726
<COMMON> 12,847
0
0
<OTHER-SE> 18,039
<TOTAL-LIABILITIES-AND-EQUITY> 314,961
<INTEREST-LOAN> 17,745
<INTEREST-INVEST> 2,533
<INTEREST-OTHER> 560
<INTEREST-TOTAL> 20,838
<INTEREST-DEPOSIT> 8,388
<INTEREST-EXPENSE> 12,204
<INTEREST-INCOME-NET> 8,634
<LOAN-LOSSES> 120
<SECURITIES-GAINS> 8
<EXPENSE-OTHER> 5,625
<INCOME-PRETAX> 3,853
<INCOME-PRE-EXTRAORDINARY> 2,236
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,236
<EPS-PRIMARY> 1.44
<EPS-DILUTED> 1.37
<YIELD-ACTUAL> 3.17
<LOANS-NON> 0
<LOANS-PAST> 124
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 370
<CHARGE-OFFS> 36
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 454
<ALLOWANCE-DOMESTIC> 429
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 25
</TABLE>
