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, 1999
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, 1999, was $19,374,107.
The number of shares of the registrant's common stock, without par value,
outstanding as of December 1, 1999, was 1,415,049 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Annual Report to Shareholders for the fiscal year ended
September 30, 1999 are incorporated by reference into Part II.
Portions of the Proxy Statement for the 2000 Annual Meeting of the Shareholders
are incorporated into Part I and Part III.
Exhibit Index on Page 50
Page one of 53 pages
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MFB CORP.
Form 10-K
INDEX
PART I
Item 1. Business 1
Item 2. Properties 39
Item 3. Legal Proceedings 40
Item 4. Submission of Matters to a Vote of Security Holders 40
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 41
Item 6. Selected Financial Data 42
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 42
Item 7a. Quantitative and Qualitative Disclosures
About Market Risk 42
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 46
Item 12. Security Ownership of Certain Beneficial Owners
and Management 46
Item 13. Certain Relationships and Related Transactions 46
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 47
Signatures 49
Exhibit List 50
<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; (xi) trust
services; and (xii) a variety of insurance products and brokerage services
through Mishawaka Financial Services, Inc., its service corporation subsidiary.
MFB Financial provides these services through its six offices, three in
Mishawaka, one in South Bend, one in Elkhart, 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 residential
mortgage loans, construction loans, commercial loans and consumer loans. At
September 30, 1999, $191.5 million, or 70.62% 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 and Elkhart Counties.
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.
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<PAGE>
At September 30, 1999, 17.48% of the Company's loan portfolio consist of
commercial loans and 6.56% of the loan portfolio consist of consumer loans.
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
for the purpose of purchasing or refinancing residential properties and building
sites. It is the Company's intent to document and underwrite these loans to
standards established by Freddie Mac to assure that they meet the investor
quality required for sale in the secondary markets.
MFB Financial normally requires private mortgage insurance on all conventional
residential first mortgages with loan-to-value ratios in excess of 80%. In
accordance with the Homeowners Protection Act of 1998, MFB has adopted policies
to assure complete compliance with automatic cancellation provisions, depending
on the date the loan was originated. On first mortgages, MFB will generally lend
up to 95% of the purchase price, or appraised property value, whichever is less.
MFB will also loan up to 97% when the applicants have successfully completed a
Home Buyers education course and earn less than the area median income. Second
mortgages and home equity loans may be originated with loan-to-values up to 100%
with higher yields to compensate for potentially higher risk.
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 $500,000 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 an 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.
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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 and Sale of Loans. Fixed-rate mortgages secured by single family
owner occupied dwellings are documented and underwritten to conform to the
standards for sale in the secondary market. This provides management with the
opportunity to deliver loans with the intent of increasing its servicing
portfolio and corresponding fee income and creates liquidity in order in order
to fund the acquisition of other assets for the Bank. As loans are originated
with the intent of sale in the secondary market, the Bank can choose to manage
and eliminate interest rate risk by committing forward sales utilizing a Best
Efforts program in which no penalties are incurred for non-delivery of a loan.
Adjustable rate mortgages continue to be originated by the Bank utilizing
standard industry notes and mortgages. They also can be sold to private
institutional investors should the Bank desire additional liquidity or held in
portfolio and provide yields that should better reflect changing market
conditions.
MFB Financial confines its loan origination activities primarily in St. Joseph
and Elkhart Counties and the surrounding area. A full service branch facility
was opened in Elkhart, Indiana in June 1999, and another full service office
will be opened in South Bend, Indiana in January 2000. MFB's loan originations
are generated from referrals from builders, developers, real estate brokers,
existing customers, and limited newspaper and periodical advertising. All loan
applications are underwritten at MFB Financial's main office.
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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.
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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, 1999, $196,000 or .06% 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, 1999, the Company had no impaired loans. At September 30, 1999,
the Bank has one real estate owned property with a value of $100,000. Such real
estate is classified by the Company as "real estate owned" or "REO" until it is
sold. When property is so acquired, the value of the asset is recorded on the
books of the Company at fair value. Interest accrual ceases when the collection
of interest becomes doubtful. All costs incurred from the date of acquisition in
maintaining the property are expensed.
Classified assets. Federal regulations and MFB Financial's Classification of
Assets policy provide for the classification of loans and other assets such as
debt and equity securities considered by the Office of Thrift Supervision
("OTS") to be of lesser quality as "substandard," "doubtful" or "loss" assets.
An asset is considered "substandard" if it is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the association will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to sufficient risk to
warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "special mention" by management. At
September 30, 1999, the Bank had classified $100,000 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.
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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 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 $120,000 during the period ended September
30, 1998 to $230,000 at September 30, 1999 due to the substantial increase in
the volumes of commercial and consumer loans. In management's opinion, MFB
Financial's allowance for loan losses is adequate to absorb anticipated future
losses existing at September 30, 1999.
Investments
General. Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds sold. Subject to various restrictions, federally
chartered savings institutions may also invest a portion of their assets in
commercial paper, corporate debt securities and asset-backed securities. The
investment policy of MFB Financial, which is established and implemented by MFB
Financial's 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, U.S. 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,
1999, the Bank had liquid assets of $34.9 million and a regulatory liquidity
ratio of 16.87%, well above the minimum regulatory requirements.
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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 addition, 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.
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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 and investment securities. 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, 1999, MFB
Financial had $104.2 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, 1999, the Bank had $6.6 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
1999, Mishawaka Financial received approximately $151,000 in commissions versus
approximately $162,000 in commissions received during fiscal year 1998. 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.
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Employees
As of September 30, 1999, MFB Financial employed 93 persons on a full-time basis
and 27 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.
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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>
1999 1998 1997
Average Average Average
Outstanding Outstanding Outstanding
Balance Balance Balance
------------- ------------ ------------
Assets: (In thousands)
Interest-earning assets:
<S> <C> <C> <C>
Interest-bearing deposits $ 11,983 $ 9,633 $ 1,856
Securities (1) 17,347 13,647 30,765
Mortgage-backed securities (1) 30,461 23,206 22,222
FHLB stock 5,453 3,446 1,783
Loans held for sale 15,571 2,401 35
Loans receivable (2) 244,132 220,244 175,726
------------- ------------ ------------
Total interest-earning assets 324,947 272,577 232,387
Non-interest earning assets, net
of allowance for loan losses 11,246 5,320 4,663
------------- ------------ ------------
Total assets $ 336,193 $ 277,897 $ 237,050
============= ============ ============
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts $ 12,277 $ 10,737 $ 10,359
NOW and money market accounts 36,422 30,065 26,770
Certificates of deposit 137,734 130,350 126,202
Repurchase agreements 3,892 1,647 97
FHLB advances 104,894 66,123 34,960
------------- ------------ ------------
Total interest-bearing liabilities 295,219 238,922 198,388
Other liabilities 9,351 5,571 4,316
------------- ------------ ------------
Total liabilities 304,570 244,493 202,704
Shareholders' equity
Common stock 12,933 12,921 14,015
Retained earnings 24,550 22,958 21,381
Net unrealized gain(loss) on securities
available for sale 213 56 (100)
Less common stock acquired by:
Employee stock ownership plan (352) (565) (790)
Recognition and retention plans (11) (80) (157)
Treasury stock (5,710) (1,886) (3)
-------------- ------------ ------------
Total shareholders' equity 31,623 33,404 34,346
------------- ------------ ------------
Total liabilities and shareholders' equity $ 336,193 $ 277,897 $ 237,050
============= ============ ============
</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.
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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, 1999-------
Average Average
Balance Interest Yield/Cost
(Dollars in thousands)
INTEREST-EARNING ASSETS
<S> <C> <C> <C>
Interest-bearing deposits $ 11,983 $ 613 5.12%
Securities (1) 17,593 1,048 5.96
Mortgage-backed securities (1) 30,572 1,831 5.99
FHLB stock 5,453 436 8.00
Loans held for sale 15,571 1,091 7.01
Loans receivable (2) 244,132 19,235 7.88
------------ ------------
Total interest-earning assets $ 325,304 24,254 7.46
============
INTEREST-BEARING LIABILITIES
Savings accounts $ 12,277 294 2.39%
NOW and money market accounts 36,422 1,001 2.75
Certificates of deposit 137,734 7,285 5.29
Repurchase agreements 3,892 148 3.80
FHLB advances 104,894 5,720 5.45
------------ ------------
Total interest-bearing liabilities $ 295,219 14,448 4.89
============ ------------
Net interest-earning assets $ 30,085
============
Net interest income $ 9,806
============
Interest rate spread (3) 2.57%
Net yield on average interest-earning assets (4) 3.01%
Average interest-earning assets to
average interest-bearing liabilities 110.19%
</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.
- 11 -
<PAGE>
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
<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 4.07
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.
- 12 -
<PAGE>
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
<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 2.87
Certificates of deposit 126,202 7,135 5.65
Repurchase agreements 97 4 4.12
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.
- 13 -
<PAGE>
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
C. The following tables describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities
have affected MFB Corp.'s consolidated interest income and expense
during the periods indicated. For each category of interest-earning
asset and interest-bearing liability, information is provided on changes
attributable to (1) changes in rate (i.e., changes in rate multiplied by
old volume) and (2) changes in volume (i.e., changes in volume
multiplied by old rate). Changes attributable to both rate and volume
have been allocated proportionally to the change due to volume and the
change due to rate.
<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, 1999 compared
to year ended September 30, 1998
Interest-earning assets
Interest-bearing deposits $ 53 $ (73) $ 126
Securities 148 (101) 249
Mortgage-backed securities 474 34 440
FHLB stock 160 - 160
Loans held for sale 913 (10) 923
Loans receivable 1,668 (216) 1,884
----------- ------------ ------------
Total 3,416 (366) 3,782
Interest-bearing liabilities
Savings accounts 23 (14) 37
NOW and money market accounts 149 (26) 175
Certificates of deposit 20 (380) 400
Repurchase agreements 81 (5) 86
FHLB advances 1,971 (148) 2,119
----------- ------------ ------------
Total 2,244 (573) 2,817
----------- ------------ ------------
Change in net interest income $ 1,172 $ 207 $ 965
=========== =========== ============
</TABLE>
- 14 -
<PAGE>
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
<TABLE>
<CAPTION>
Increase (Decrease) in
Net Interest Income
Total Net Due to Due to
Change Rate Volume
------ ---- ------
(In thousands)
<S> <C> <C> <C>
Year ended September 30, 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>
- 15 -
<PAGE>
II. INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
A. The following table sets forth the amortized cost and fair value of
securities available for sale:
At September 30,
1999 1998 1997
-------------------------- -------------------------- ----------------------------
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 $ 7,745 $ 7,563 $ 4,219 $ 4,254 $ 23,618 $ 23,720
Mortgage-
backed 27,112 26,450 22,259 22,267 15,589 15,579
Other securities - - 8,929 8,929 - -
Corporate notes 3,959 3,728 5,945 5,863 - -
----------- ------------ ----------- ---------- ---------- -----------
38,816 37,741 41,352 41,313 39,207 39,299
Marketable equity
securities 543 429 543 506 300 329
----------- ------------ ----------- ---------- ---------- -----------
$ 39,359 $ 38,170 $ 41,895 $ 41,819 $ 39,507 $ 39,628
=========== ============ =========== ========== ========== ===========
The following table sets forth the amortized cost and fair value of securities
held to maturity:
At September 30,
1999 1998 1997
-------------------------- -------------------------- -------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(In thousands)
Debt securities
Corporate notes $3,984 $3,709 $ - $ - $ - $ -
------ ------ ----- ----- ----- -----
$3,984 $3,709 $ - $ - $ - $ -
====== ====== ===== ===== ===== =====
The following table sets forth the amortized cost and estimated market value of
Federal Home Loan Bank (FHLB) stock:
At September 30,
1999 1998 1997
-------------------------- -------------------------- --------------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
(In thousands)
Other securities
FHLB stock, at
cost $ 5,511 $ 5,511 $ 4,636 $ 4,636 $ 2,400 $ 2,400
=========== ============ =========== ========== ========== ===========
</TABLE>
- 16 -
<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, 1999, which matures in
---------------------------------------------------------------------------------------------------------
One One to Over Five to Over 10
Year or Less Five Years Ten Years Years Totals
---------------- ------------------ ------------------ ------------------ -------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value Cost Value
---------------- --------- ----- --------- ----- --------- ----- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
and federal
agencies $501 $ 501 $2,498 $2,464 $4,000 $3,894 $ 746 $ 704 $ 7,745 $ 7,563
Corporate
notes - - - - - - 3,959 3,728 3,959 3,728
---- ------ ------ ------ ------ ------ ------ ------ ------- -------
$501 $ 501 $2,498 $2,464 $4,000 $3,894 $4,705 $4,432 $11,704 $11,291
==== ====== ====== ====== ====== ====== ====== ====== ======= =======
Weighted
average yield 5.41% 5.81% 6.69% 6.00% 6.17%
</TABLE>
The maturity distribution and weighted average interest rates of debt
securities held to maturity, excluding mortgage-backed securities, are as
follows:
<TABLE>
<CAPTION>
Amount at September 30, 1999, which matures in
--------------------------------------------------------------------------------------
One One to Over five to
Year or Less Five Years Ten Years Totals
-------------------- -------------------- -------------------- --------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value
--------- --------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate notes $ 501 $ 501 $ - $ - $ 3,483 $ 3,208 $ 3,984 $ 3,709
--------- --------- --------- --------- --------- --------- --------- ---------
$ 501 $ 501 $ - $ - $ 3,483 $ 3,208 $ 3,984 $ 3,709
========= ========= ========= ========= ========= ========= ========= =========
Weighted average yield 5.85% n/a 7.13% 6.97%
</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, 1999.
- 17 -
<PAGE>
III. LOAN PORTFOLIO
A. The following table sets for the composition of MFB Corp.'s
consolidated loan portfolio and mortgage-backed securities by
loan type as of the dates indicated, including a reconciliation
of gross loans receivable to net loans receivable after
consideration of the allowance for loan losses, deferred net loan
fees and loans in process:
<TABLE>
<CAPTION>
----------------------------------September 30,------------------------------
1999 1998 1997
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 $ 191,480 70.62% $ 183,151 78.49% $ 164,598 86.91%
Residential construction 11,158 4.12 8,233 3.53 8,245 4.35
Multi-family 3,299 1.22 120 .05 130 .07
Commercial and other loans
Commercial loans 47,399 17.48 30,775 13.19 8,833 4.66
Home equity and second
mortgage loans 13,308 4.91 9,067 3.89 7,177 3.79
Financing leases 17 .01 83 .03 325 .17
Other 4,461 1.64 1,914 .82 96 .05
----------- ------- ------------ ------- ------------ --------
Gross loans receivable 271,122 100.00% 233,343 100.00% 189,404 100.00%
======= ======= ========
Less
Allowance for loan losses (638) (454) (370)
Deferred net loan fees (933) (798) (653)
Loans in process (87) (485) (117)
------------ ------------ ------------
Net loans receivable $ 269,464 $ 231,606 $ 188,264
=========== ============ ============
Mortgage-backed securities
FHLMC certificates $ 868 $ 2,316 $ 3,508
CMO - REMIC 25,582 19,951 12,071
----------- ------------ ------------
Net mortgage-backed securities $ 26,450 $ 22,267 $ 15,579
=========== ============ ============
Mortgage loans
Adjustable rate $ 142,756 69.32% $ 153,897 80.36% $ 139,665 80.74%
Fixed rate 63,181 30.68 37,607 19.64 33,308 19.26
----------- ------- ------------ ------- ------------ --------
Total $ 205,937 100.00% $ 191,504 100.00% $ 172,973 100.00%
=========== ======= ============ ======= ============ ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
--------------------September 30,-------------------
1996 1995
Percent Percent
of of
Amount Total Amount Total
------ ----- ------ -----
Mortgage loans
<S> <C> <C> <C> <C>
Residential $ 143,751 92.87% $ 119,720 97.60%
Residential construction 5,005 3.23 2,106 1.72
Multi-family 163 .10 189 .15
Commercial and other loans
Commercial loans 876 .57 206 .17
Home equity and second
mortgage loans 3,790 2.45 375 .30
Financing leases 1,125 .73 - -
Other 83 .05 74 .06
------------ ------- ------------ ---------
Gross loans receivable 154,793 100.00% 122,670 100.00%
======= =========
Less
Allowance for loan losses (340) (310)
Deferred net loan fees (440) (370)
Loans in process (1,961) (809)
------------ ------------
Net loans receivable $ 152,052 $ 121,181
============ ============
Mortgage-backed securities
FHLMC certificates $ 5,013 $ 11,905
CMO - REMIC 19,061 -
------------ ------------
Net mortgage-backed securities $ 24,074 $ 11,905
============ ============
Mortgage loans
Adjustable rate $ 130,336 87.01% $ 113,394 92.78%
Fixed rate 19,459 12.99 8,827 7.22
------------ ------- ------------ ---------
Total $ 149,795 100.00% $ 122,221 100.00%
============ ======= ============ =========
</TABLE>
- 18 -
<PAGE>
III. LOAN PORTFOLIO (Continued)
B. Loan Maturity. The following table sets forth certain information at
September 30, 1999, 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 2003 2005 2010 2015
at September 30, and to to and
1999 2000 2001 2002 2004 2009 2014 Following
---- ---- ---- ---- ---- ---- ---- ---------
(In thousands)
Mortgage Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential $ 191,480 $ 29 $ 190 $ 264 $ 1,266 $ 10,809 $ 44,664 $ 134,258
Residential construction 11,158 10,752 406 - - - - -
Multi-family 3,299 80 40 1,132 1,906 71 70 -
Commercial and other Loans
Commercial loans 47,399 15,529 676 2,743 23,969 3,763 719 -
Home equity and
second mortgage 13,308 517 292 366 6,426 5,471 81 155
Financing leases 17 - - - - 17 - -
Other 4,461 290 341 781 2,755 215 - 79
--------- -------- ------- -------- -------- --------- -------- ---------
Total $ 271,122 $ 27,197 $ 1,945 $ 5,286 $ 36,322 $ 20,346 $ 45,534 $ 134,492
========= ======== ======= ======== ======== ========= ======== =========
</TABLE>
The following table sets forth, as September 30, 1999, 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, 2000
Variable
Fixed Rates Rates Total
(In thousands)
Mortgage loans
<S> <C> <C> <C>
Residential $ 49,093 $ 142,358 $ 191,451
Multi-family 3,126 93 3,219
Residential construction 169 237 406
Commercial and other loans
Commercial loans 31,290 580 31,870
Home equity and second mortgage 8,432 4,359 12,791
Financing leases 17 - 17
Other 4,092 79 4,171
------------ ----------- ----------
Total $ 96,219 $ 147,706 $ 243,925
============ =========== ==========
</TABLE>
- 19 -
<PAGE>
III. LOAN PORTFOLIO (Continued)
C. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans
The table below sets forth the amounts and categories of MFB
Corp.'s consolidated non-performing assets (accruing loans
delinquent more than 90 days, non-accrual loans, troubled debt
restructurings and real estate owned). It is the policy of MFB
Corp. that all earned but uncollected interest on all loans be
reviewed quarterly to determine if any portion thereof should
be classified as uncollectible for any loan past due in excess
of 90 days.
<TABLE>
<CAPTION>
At September 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Accruing loans delinquent
more than 90 days $ 96 $ 124 $ 261 $ 198 $ 308
Non-accruing loans (1) - - - - -
Troubled debt
restructurings - - - - -
---------- --------- ----------- ---------- -----------
Total non-performing
loans 96 124 261 198 308
Real estate owned, net 100 145 - - 18
---------- --------- ----------- ---------- -----------
Total non-performing
assets $ 196 $ 269 $ 261 $ 198 $ 326
========== ========= =========== ========== ===========
Non-performing loans to
total loans, net (2) .03% .05% .14% .13% .25%
Non-performing assets to
total assets .06% .09% .10% .09% .17%
</TABLE>
Management believes that the allowance for loan losses balance at September 30,
1999 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, 1999,
there were no loans on nonaccrual.
(2) Total loans less deferred net loan fees and loans in process.
- 20 -
<PAGE>
III. LOAN PORTFOLIO (Continued)
C. Risk Elements (Continued)
2. Potential Problem Loans
As of September 30, 1999, 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
74.74% of MFB Corp.'s total loan portfolio at September
30, 1999.
D. Other Interest-Earning Assets
There are no other interest-earning assets, other than $100,000
in foreclosed real estate owned, as of September 30, 1999 which
would be required to be disclosed under Item III. C.1 or 2 if
such assets were loans.
- 21 -
<PAGE>
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The allowance for loan losses is maintained through the provision
for loan losses, which is charged to earnings. The provision for
loan losses is determined in conjunction with management's review
and evaluation of current economic conditions (including those of
MFB Corp.'s lending area), changes in the characteristic and size
of the loan portfolio, loan delinquencies (current status as well
as past and anticipated trends) and adequacy of collateral
securing loan delinquencies, historical and estimated net
charge-offs, and other pertinent information derived from a
review of the loan portfolio. In management's opinion, MFB
Corp.'s allowance for loan losses is adequate to absorb
anticipated future losses from loans at September 30, 1999.
The following table analyzes changes in the consolidated
allowance for loan losses during the past five years ended
September 30, 1999.
<TABLE>
<CAPTION>
Years Ended September 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Balance of allowance at
<S> <C> <C> <C> <C> <C>
beginning of period $ 454 $ 370 $ 340 $ 310 $ 280
Add
Recoveries of loans
previously charged-
off--residential real
estate loans - - - - -
Less charge offs
Residential real estate
loans - - - - -
Commercial real estate
loans 45 36 - - -
Consumer loans 1 - - - -
------------ ----------- ------------- ---------- ------------
Net charge-offs 46 36 - - -
Provisions for loan losses 230 120 30 30 30
------------ ----------- ------------- ---------- ------------
Balance of allowance at
end of period $ 638 $ 454 $ 370 $ 340 $ 310
============ =========== ============= ========== ============
Net charge-offs to total
average loans out-
standing for period *.02% *.02% -% -% -%
Allowance at end of
period to total loans, net
at end of period (1) *.24% *.20% .20% .22% .26%
Allowance to total non-
performing loans at
end of period 664.58% 366.13% 141.76% 171.72% 100.65%
</TABLE>
- --------------------------------------------------------------------------------
(1) Total loans less deferred net loan fees and loans in process.
* Not including loans held for sale
- 22 -
<PAGE>
IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued)
Allocation of Allowance for Loan Losses. The following table presents an
analysis of the allocation of MFB Corp.'s allowance for loan losses at
the dates indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ------------------- ---------------- ------------------ ----------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
to total to total to total to total to total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Balance at end of period
applicable to
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential $ 110 70.62% $ 181 78.49% $ 323 86.91% $ 311 92.87% $ 281 97.60%
Commercial 387 17.48 213 13.19 19 4.66 1 .57 1 .17
Multi-family 3 1.22 1 .05 1 .07 1 .10 1 .15
Residential construction 11 4.12 8 3.53 1 4.35 1 3.23 1 1.72
Consumer loans (1) 45 6.56 26 4.74 1 4.01 1 3.23 1 .36
Unallocated 82 - 25 - 25 - 25 - 25 -
----- ------ ----- ------- ----- ------- ----- ------ ----- ------
Total $ 638 100.00% $ 454 100.00% $ 370 100.00% $ 340 100.0% $ 310 100.00%
===== ======= ===== ======= ===== ====== ===== ===== ===== ======
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes home equity and second mortgage loans, financing leases, and other
loans including, education loans and loans secured by deposits.
- 23 -
<PAGE>
V. DEPOSITS
The average amount of deposits and average rates paid are summarized as
follows for the years ended September 30:
<TABLE>
<CAPTION>
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings accounts $ 12,277 2.39% $ 10,737 2.52% $ 10,359 2.68%
Now and money market accounts 36,422 2.75 30,065 2.83 26,770 2.89
Certificates of deposit 137,734 5.29 130,350 5.57 126,202 5.65
Demand deposits (noninterest-bearing) 6,763 3,554 1,274
------------ ------------ ------------
$ 193,196 $ 174,706 $ 164,605
============ ============ ============
</TABLE>
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at September 30, 1999 is summarized as follows:
Amount
(In thousands)
Three months or less $ 11,679
Over three months and through six months 6,349
Over six months and through twelve months 5,683
Over twelve months 6,541
------------
$ 30,252
============
- 24 -
<PAGE>
VI. RETURN ON EQUITY AND ASSETS
The ratio of net income to average total assets and average
shareholders' equity and certain other ratios are as follows:
<TABLE>
<CAPTION>
September 30,
1999 1998 1997
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Average total assets $ 336,193 $ 277,897 $ 237,050
============ ============ ===========
Average shareholders' equity $ 31,623 $ 33,404 $ 34,346
============ ============ ===========
Net income $ 2,204 $ 2,236 $ 2,002
============ ============ ===========
Return on average total assets .66% .80% .84%
============ ============ ===========
Return on average shareholders' equity 6.97% 6.69% 5.83%
============ ============ ===========
Dividend payout ratio (dividends
declared per share divided by net
income per share) 22.76% 23.26% 26.45%
============ ============ ===========
Average shareholders' equity
to average total assets 9.41% 12.02% 14.49%
============ ============ ===========
</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,
---------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Maximum Balance:
<S> <C> <C> <C>
FHLB advances............................................. $ 110,226 $ 92,726 $ 47,500
Securities sold under agreements to repurchase.. 7,079 3,882 389
Average Balance:
FHLB advances:............................................ 104,894 66,123 34,960
Securities sold under agreements to repurchase............ 3,892 1,647 97
Average Rate Paid On:
FHLB advances............................................. 5.45% 5.67% 5.64%
Securities sold under agreements to repurchase............ 3.80 4.07 4.12
The following table sets forth the Bank's borrowings at the dates indicated:
September 30,
----------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Amounts Outstanding:
FHLB advances............................................. $ 104,226 $ 92,726 $ 47,500
Securities sold under agreements to repurchase............ 6,566 2,366 389
Weighted Average Interest Rate:
FHLB Advances............................................. 5.37% 5.42% 5.66%
Securities sold under agreements to repurchase............ 3.52 4.02 4.25
</TABLE>
- 25 -
<PAGE>
COMPETITION
MFB Financial originates most of its loans to and accepts most of its deposits
from residents of St. Joseph and Elkhart counties in Indiana.
MFB Financial is subject to competition from various financial institutions,
including state and national banks, state and federal savings associations,
credit unions, certain non-banking consumer lenders, and other companies or
firms, including brokerage houses and mortgage brokers, that provide similar
services in St. Joseph and Elkhart Counties 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 six commercial banks, three savings banks and seven credit unions.
MFB Financial must also compete with banks and savings institutions in Elkhart
and South Bend since media advertising from these cities reaches the Mishawaka
community. MFB Financial also competes with money market and mutual funds with
respect to deposit accounts and with insurance companies with respect to
individual retirement accounts.
Under current federal law, bank holding companies may acquire savings
institutions and savings institutions may also acquire banks. Commercial
companies may not, however, acquire unitary savings and loan holding companies,
such as MFB Corp. Affiliations between banks and savings associations based in
Indiana may also increase the competition faced by the Company.
In addition, The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in
other states and, with state consent and subject to certain limitations, allows
banks to acquire out-of-state branches either through merger or de novo
expansion. The State of Indiana passed a law establishing interstate branching
provisions for Indiana state-chartered banks consistent with those established
by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana Branching Law
authorizes Indiana banks to branch interstate by merger or de novo expansion and
authorizes out-of-state banks meeting certain requirements to branch into
Indiana by merger or de novo expansion. This 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.
- 26 -
<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, 1999. 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, 1999, was
approximately $71,000.
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.
- 27 -
<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 of any merger or consolidation, issuance or retirements of its own
securities, and limitations upon other aspects of banking operations. In
addition, the activities and operations of the Bank are subject to a number of
additional detailed, complex and sometimes overlapping federal and state laws
and regulations, These include state usury and consumer credit laws, state laws
relating to fiduciaries, The Federal Truth-In-Lending; Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and anti-trust
laws.
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Financial Services Modernization Act of 1999, federal legislation which
modernizes the laws governing the financial services industry. The new law
establishes a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms and other financial service
providers. As a result of this legislation, bank holding companies will be
permitted to engage in a wider variety of financial activities than permitted
under prior law, particularly with respect to insurance and securities
activities. To the extent the law permits banks, securities firms and insurance
companies to affiliate, the financial services industry may experience further
consolidation. This could result in a growing number of larger financial
institutions that offer wider varieties of financial services than are currently
offered by MFB and that could aggressively compete in the markets currently
served by MFB. The legislation also prohibits the sale of unitary savings and
loan holding companies to commercial entities and, to that extent, reduces the
number of potential acquirors of MFB. The law also increases commercial banks'
access to loan funding by the Federal Home Loan Bank System, and includes new
provisions in the privacy area, restricting the ability of financial
institutions to share nonpublic personal customer information with third
parties.
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. At
September 30, 1999, the Bank's investment in stock of the FHLB of Indianapolis
was $5.5 million.
- 28 -
<PAGE>
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 60 days
delinquent or securities evidencing interests therein, securities (including
mortgage-backed securities) issued, insured or guaranteed by the federal
government or any agency thereof, FHLB deposits, certain small business and
agricultural loans of smaller institutions and real estate with readily
ascertainable value in which a perfected security interest may be obtained.
Other forms of collateral may be accepted as over collateralization or, under
certain circumstances, to renew outstanding advances. All long-term advances are
required to provide funds for residential home financing and the FHLB has
established standards of community service that members must meet to maintain
access to long-term advances.
Interest rates charged for advances vary depending upon maturity, the cost of
funds to the FHLB of Indianapolis and the purpose of the borrowing.
Insurance of Deposits
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 the OTS, conduct
examinations and generally supervise the operations of its insured members. This
supervision extends to a comprehensive regulatory scheme governing, among other
things, the form of deposit instruments issued by savings institutions, and
certain aspects of their lending activities, including appraisal requirements,
private mortgage insurance coverage and lending authority.
- 29 -
<PAGE>
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.
In addition to the assessment for deposit insurance, institutions are required
to pay on bonds issued in the late 1980s by the Financing Corporation to
recapitalize the predecessor to the SAIF. During 1998, Financial Corporation
payments for SAIF members approximated 6.10 basis points, while BIF members paid
1.22 basis points. By law, there will be equal sharing of Financing Corporation
payments between the members of both insurance funds January 1, 2000. The Bank's
annual deposit insurance premium for the year ended September 30, 1999,
including the Financial Corporation payments, was approximately $113,000 based
upon its current risk classification and the new assessment schedule for SAIF
insured institutions. These premiums are subject to change in future periods.
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.
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 4% 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,
- 30 -
<PAGE>
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, 1999, based on the capital
standards then in effect, the Bank was in compliance with its fully phased-in
capital requirements.
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. 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
- 31 -
<PAGE>
risk-based capital of 8%, core risk-based capital of 4% and a leverage ratio of
4%, but which are not well capitalized; (3) undercapitalized institutions are
those that do not meet the requirements for adequately capitalized institutions,
but that are not significantly undercapitalized; (4) significantly
undercapitalized institutions have total risk-based capital of less than 6%,
core risk-based capital of less than 3% and a leverage ratio of less than 3%;
and (5) critically undercapitalized institutions are those with tangible capital
of less than 2% of total assets. In addition, the OTS can downgrade an
institution's designation notwithstanding its capital level, based on less than
satisfactory examination ratings in areas other than capital or if the
institution is deemed to be in an unsafe or unsound condition. Each
undercapitalized institution must submit a capital restoration plan to the OTS
within 45 days after it becomes undercapitalized. Such institution will be
subject to increased monitoring and asset growth restrictions and will be
required to obtain prior approval for acquisitions, branching and engaging in
new lines of business. Significantly undercapitalized institutions must restrict
the payment of bonuses and raises to their senior executive officers.
Furthermore, a critically undercapitalized institution must be placed in
conservatorship or receivership within 90 days after reaching such
capitalization level, except under limited circumstances. It will also be
prohibited from making payments on any subordinate debt securities without the
prior approval of the FDIC and will be subject to significant additional
operating restrictions. The Bank's capital at September 30, 1999, meets the
standards for a well-capitalized institution.
Capital Distributions Regulation
An OTS regulation imposes limitations upon all "capital distributions" by
savings institutions, including cash dividends, payments by an institution to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The OTS regulations permit a savings institution to make a capital
distribution to its shareholders in a maximum amount that does not exceed the
institution's undistributed net income for the prior two years plus the amount
of its undistributed income from the current year. The rule requires a savings
institution , such as the Bank, that is a subsidiary of a savings and loan
holding company to file a notice with the OTS thirty days before making a
capital distribution up to the maximum amount described above. The proposed rule
would also require all savings institutions, whether a holding company or not,
to file an application with the OTS prior to making any capital distribution
where the association is not eligible for "expedited processing" under the OTS
"Expedited Processing Regulation," where the proposed distribution, together
with any other distributions made in the same year, would exceed the "maximum
amount" described above, where the institution would be under capitalized
following the distribution or where the distribution would otherwise be contrary
to a statute, regulation or agreement with the OTS.
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.
- 32 -
<PAGE>
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.
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%
- 33 -
<PAGE>
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.
- 34 -
<PAGE>
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. See-"Qualified Thrift Lender." At
September 30, 1999, 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.
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<PAGE>
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.
- 36 -
<PAGE>
Qualified Thrift Lender
Under current OTS regulations, the QTL test requires that a savings bank have at
least 65% of its portfolio assets invested in "qualified thrift investments" on
a monthly average basis in 9 out of every 12 months. Qualified thrift
investments under the QTL test consist primarily of housing related loans and
investments. Portfolio assets under the QTL test include all of an association's
assets less (i) goodwill and other intangibles, (ii) the value of property used
by the association to conduct its business, and (iii) its liquid assets as
required to be maintained under law up to 20% of total assets.
A savings bank which fails to meet the QTL test must either convert to a bank
(but its deposit insurance assessments and payments will be those of and paid to
SAIF) or be subject to the following penalties: (i) it may not enter into any
new activity except for those permissible for a national bank and for a savings
bank; (ii) its branching activities shall be limited to those of a national
bank; (iii) it shall not be eligible for any new FHLB advances; and (iv) it
shall be bound by regulations applicable to national banks respecting payment of
dividends. Three years after failing the QTL test the association must (i)
dispose of any investment or activity not permissible for a national bank and a
savings bank and (ii) repay all outstanding FHLB advances. If such a savings
bank is controlled by a savings and loan holding company, then such holding
company must, within a prescribed time period, become registered as a bank
holding company and become subject to all rules and regulations applicable to
bank holding companies.
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, 1999, 88.24% 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.
- 37 -
<PAGE>
TAXATION
Federal Taxation
Historically, savings institutions, such as the Bank, had been permitted to
compute bad debt deductions using either the bank experience method or the
percentage of taxable income method. However, in August, 1996, legislation was
enacted that repealed the reserve method of accounting for federal income tax
purposes. As a result, the Bank must recapture that portion of the reserve that
exceeds the amount that could have been taken under the experience method for
post-1987 tax years. The recapture is occuring over a six-year period, the
commencement of which began with the Bank's taxable year ending September 30,
1999, since the Bank met certain residential lending requirements. In addition,
the pre-1988 reserve, for which no deferred taxes have been recorded, will not
have to be recaptured into income unless (i) the Bank no longer qualifies as a
bank under the Code, or (ii) excess dividends or distributions are paid out by
the Bank. The total amount of bad debt to be recaptured 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 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.
- 38 -
<PAGE>
Item 2. Properties.
At September 30, 1999, MFB Financial conducted its business from its main office
at 121 South Church Street, Mishawaka, Indiana 46544, and five full service
branch offices. The main office and four branch offices in Mishawaka, South Bend
and Elkhart 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, 1999:
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
Branch Office
25990 County Road 6
Elkhart, In. 46514 1999 3,250
MFB Financial operates six automatic teller machines (ATMs), one at each office
listed above. 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 data processing services is
approximately $32,000 per month.
- 39 -
<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 30,1999.
- 40 -
<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 declared 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, 1997 $30.38 $22.50 $ .08/share
March 31, 1998 30.38 26.25 .085/share
June 30, 1998 27.75 24.00 .085/share
September 30, 1998 25.50 18.00 .085/share
December 31, 1998 23.00 18.00 .085/share
March 31, 1999 23.00 21.50 .09/share
June 30, 1999 22.25 21.25 .09/share
September 30, 1999 22.00 19.75 .09/share
As of September 30, 1999, there were approximately 608 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 "capital
distributions" is limited (See "Regulation - Capital Distributions Regulation.")
Prior notice of any dividend to be paid by the Bank will have to be given to the
OTS.
Under current federal income tax law, dividend distributions with respect to the
Common Stock, to the extent that such dividends paid are from the current or
accumulated earnings and profits of the Bank (as calculated for federal income
tax purposes), will be taxable as ordinary income to the recipient and will not
be deductible by the Bank. Any dividend distributions in excess of current or
accumulated earnings and profits will be treated for federal income tax purposes
as a distribution from the Bank's accumulated bad debt reserves, which could
result in increased federal income tax liability for the Bank.
Unlike the Bank, generally there is no restriction on the payment of dividends
by MFB, subject to the determination of the director of the OTS that there is
reasonable cause to believe that the payment of dividends constitutes a serious
risk to the financial safety, soundness or stability of the Bank. Indiana law,
however, would prohibit MFB from paying a dividend if, after giving effect to
the payment of that dividend, MFB would not be able to pay its debts as they
become due in the ordinary course of business, or if MFB's total assets would be
less than the sum of its total liabilities plus preferential rights of holders
of preferred stock, if any.
- 41 -
<PAGE>
Item 6. Selected Financial Data.
The information required by this item is incorporated by reference to the
material under the heading "Selected Consolidated Financial Data" on page 2 of
MFB's Annual Report to Shareholders for its fiscal year ended September 30, 1999
(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 16 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.
- 42 -
<PAGE>
Presented below, as of September 30, 1999, 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
300 basis points, in accordance with OTS regulations.
As illustrated in the June 30, 1999 table, the Bank 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.
As illustrated in the June 30, 1998 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.
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 June 30, 1999
(Dollars in thousands)
Change in
Interest Rates
(Basis Points) $ Change % Change
+300bp $(13,302) (34%)
+200 bp (8,254) (21%)
+100 bp (3,657) (9%)
0 bp
-100 bp 1,526 4%
-200 bp 1,525 4%
-300 bp 1,810 5%
At June 30, 1998
(Dollars in thousands)
Change in
Interest Rates
(Basis Points) $ Change % Change
+300bp $( 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%)
- 43 -
<PAGE>
Item 8. Financial Statements and Supplementary Data.
MFB's Consolidated Financial Statements and Notes thereto contained on pages 19
through 43 of the Annual Report are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
- 44 -
<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 4 of MFB's Proxy Statement for its 2000 Annual
Shareholder Meeting (the "Proxy Statement"). Information concerning MFB's
executive officers is included below. 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.
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
Donald R. Kyle Executive Vice President and Chief Operating
Officer of MFB Financial
M. Gilbert Eberhart Secretary of MFB and MFB Financial
Timothy C. Boenne Vice President and Controller of MFB Financial
Michael J. Portolese Vice President of MFB Financial
William L. Stockton, Jr. Senior Vice President of MFB Financial
Charles J. Viater (age 45) 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.
Donald R. Kyle (age 52) has served as Executive Vice President and Chief
Operating Officer of MFB Financial since July, 1999. Previously, he served as
Regional President of a midwest money center bank.
M. Gilbert Eberhart (age 65) has served as Secretary of MFB Financial since 1987
and of MFB since its organization. He is also a dentist based in Mishawaka.
Timothy C. Boenne (age 53) has served as Vice President and Controller of MFB
Financial since 1992.
Michael J. Portolese (age 48) has served as Vice President of MFB Financial
since 1977. He also serves as MFB Financial's Support Services Group
Administrator, Security Director and Compliance Coordinator.
William L. Stockton, Jr. (age 52) serves as Senior Vice President of MFB
Financial and has been in charge of residential lending operations at MFB
Financial since 1992.
- 45 -
<PAGE>
Item 11. Executive Compensation
The information required by this item with respect to executive compensation is
incorporated by reference to pages 4 through 6 of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to pages 1
through 3 of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to pages 6
and 7 of the Proxy Statement.
- 46 -
<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, 1999 and 1997 19
Consolidated Statements of Income for the Years 20
Ended September 30, 1999,
1998 and 1997
Consolidated Statements of Shareholders' Equity 21
for the Years ended September 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the 22-23
Years ended September 30, 1999, 1998 and 1997
Notes to Consolidated Financial Statements 24-43
(b) MFB filed four Form 8-K reports during the year ended September 30, 1999.
Date of report: December 21, 1998
Item reported : News release dated October 21, 1998, regarding
the announcement of its fourth quarter earnings and
declaration of an $.085 per share cash dividend, payable
on November 17, 1998, to shareholders of record on
November 3, 1998.
Date of report: February 18, 1999
Item reported: News release dated January 20, 1999 regarding the
announcement of first quarter earnings and declaration of
a $.09 per share cash dividend payable on February 16,
1999, to holders of record on February 2, 1999.
Date of report: May 14, 1999
Item reported: News release dated April 21, 1999, regarding the
announcement of second quarter earnings and declaration
of a $.09 per share cash dividend payable on May 18, 1999
to holders of record on May 4, 1999.
- 47 -
<PAGE>
Date of report: August 13, 1999
Item reported : News release dated July 21, 1999 regarding the
announcement of third quarter earnings and declaration of
a $.09 per share cash dividend payable on August 17, 1999
to holders of record on August 3, 1999.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on page 50
(d) All schedules are omitted as the required information either is not
applicable or is included in the consolidated Financial Statements or
related notes.
- 48 -
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant had duly caused this report to be signed
on behalf of the undersigned, thereto duly authorized.
MFB CORP.
Date: December 29, 1999 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 29th day of December, 1999.
/s/ Charles J. Viater /s/ M. Gilbert Eberhart
- -------------------------------------- -----------------------------------
Charles J. Viater M. Gilbert Eberhart, Director
President, Chief Executive Officer
and Director
(Principal Executive Officer) /s/ Thomas F. Hums
-----------------------------------
Thomas F. Hums,
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
Officer) /s/ Christine A. Lauber
-----------------------------------
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
- 49 -
<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-1 (Registration No.
33-73098).
3(2) The Code of By-Laws of Registration is incorporated by
reference to Item 7-Exhibit 3 of the October 15, 1995
Securities and Exchange Commission Form 8K Report.
10(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
Registrants 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 is incorporated by
reference to Exhibit 10(4) to the Registrant's Form 10-K
filed for its fiscal year ended September 30, 1998. *
10(5) Employment Agreement between MFB Financial and Michael J.
Portolese dated December 1, 1998. *
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 is incorporated by reference to Exhibit
10(6) to the Registrant's Form 10-K filed for its fiscal
year ended September 30, 1998.
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. *
10(8) Employment Agreement between MFB Financial and Donald R.
Kyle dated July 1, 1999. *
11 Statement regarding computation of earnings per share (**)
13 Shareholder Annual Report.
21 Subsidiaries of the Registrant is incorporated by reference
to Exhibit 22 to the Registration Statement on Form S-1
(Registration No. 33-73098).
23 Consent of Crowe, Chizek and Company LLP.
27 Financial Data Schedule
* Management contracts and plans required to be filed as exhibits are
included as Exhibits 10(1) - 10(8).
** See Notes 1 and 2 of Notes to Consolidated Financial Statements,
included in the 1999 Shareholder Annual Report included as Exhibit
13.
- 50 -
EMPLOYMENT AGREEMENT
This Agreement, made and dated as of December 1, 1998, by and between
MFB Financial, a federal savings association ("Employer"), and Michael J.
Portolese, a resident of St. Joseph County, Indiana ("Employee").
W I T N E S S E T H
WHEREAS, Employee is employed by Employer as one of its Vice Presidents
and has made valuable contributions to the profitability and financial strength
of Employer;
WHEREAS, Employer desires to encourage Employee to continue to make
valuable contributions to Employer's business operations and not to seek or
accept employment elsewhere;
WHEREAS, Employee desires to be assured of a secure minimum
compensation from Employer for his services over a defined term;
WHEREAS, Employer desires to assure the continued services of Employee
on behalf of Employer on an objective and impartial basis and without
distraction or conflict of interest in the event of an attempt by any person to
obtain control of Employer or of MFB Corp., the sole shareholder of the Employer
(the "Holding Company");
WHEREAS, Employer recognizes that when faced with a proposal for a
change of control of Employer or the Holding Company, Employee will have a
significant role in helping the Boards of Directors assess the options and
advising the Boards of Directors on what is in the best interests of Employer,
the Holding Company, and its shareholders, and it is necessary for Employee to
be able to provide this advice and counsel without being influenced by the
uncertainties of his own situation;
WHEREAS, Employer desires to provide fair and reasonable benefits to
Employee on the terms and subject to the conditions set forth in this Agreement;
WHEREAS, Employer desires reasonable protection of its confidential
business and customer information which it has developed over the years at
substantial expense and assurance that Employee will not compete with Employer
for a reasonable period of time after termination of his employment with
Employer, except as otherwise provided herein.
NOW, THEREFORE, in consideration of these premises, the mutual
covenants and undertakings herein contained and the continued employment of
Employee by Employer as one of its Vice Presidents, Employer and Employee, each
intending to be legally bound, covenant and agree as follows:
1. Upon the terms and subject to the conditions set forth in this
Agreement, Employer employs Employee as one of Employer's Vice Presidents, and
Employee accepts such employment.
2. Employee agrees to serve as one of Employer's Vice Presidents and
to perform such duties in that office as may reasonably be assigned to him by
Employer's Board of Directors; provided, however that such duties shall be
performed in or from the offices of Employer currently located at Mishawaka,
Indiana. Employee shall not be required to be absent from the location of the
principal executive offices of Employer on travel status or otherwise more than
45 days in any calendar year. Employer shall not, without the written consent of
Employee, relocate or transfer Employee to a location more than 30 miles from
his principal residence. Although while employed by Employer, Employee shall
devote substantially all his business time and efforts to Employer's business
and shall not engage in any other related business, Employee may use his
discretion in fixing his hours and schedule of work consistent with the proper
discharge of his duties.
3. The term of this Agreement shall begin on December 1, 1998, (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 December 1, 1998, 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 so extend this Agreement in any given
month or if the Board does not determine to extend the Agreement prior to each
anniversary of the Effective Date, no further extension shall occur and the term
of this Agreement shall end three years subsequent to the first day of the month
in which such notice not to extend is given or three years subsequent to the
anniversary as of which the Board does not elect to continue extending this
Agreement (such term, including any extension thereof shall herein be referred
to as the "Term"). Notwithstanding the foregoing, this Agreement shall
automatically terminate (and the Term of this Agreement shall thereupon end)
without notice when Employee attains 65 years of age.
4. Employee shall receive an annual salary of $___________ ("Base
Compensation") payable at regular intervals in accordance with Employer's normal
payroll practices now or hereafter in effect. Employer may consider and declare
from time to time increases in the salary it pays Employee and thereby increases
in his Base Compensation. Prior to a Change of Control, Employer may also
declare decreases in the salary it pays Employee if the operating results of
Employer are significantly less favorable than those for the fiscal year ending
September 30, 1998, and Employer makes similar decreases in the salary it pays
to other executive officers of Employer. After a Change in Control, Employer
shall consider and declare salary increases based upon the following standards:
Inflation;
Adjustments to the salaries of other senior management personnel; and
Past performance of Employee and the contribution which Employee makes
to the business and profits of Employer during the Term.
Any and all increases or decreases in Employee's salary pursuant to this section
shall cause the level of Base Compensation to be increased or decreased by the
amount of each such increase or decrease for purposes of this Agreement. The
increased or decreased level of Base Compensation as provided in this section
shall become the level of Base Compensation for the remainder of the Term of
this Agreement until there is a further increase or decrease in Base
Compensation as provided herein.
5. So long as Employee is employed by Employer pursuant to this
Agreement, he shall be included as a participant in all present and future
employee benefit, retirement, and compensation plans generally available to
employees of Employer, consistent with his Base Compensation and his position as
one of Employer's Vice Presidents, including, without limitation, Employer's or
the Holding Company's pension plan, stock option plan, employee stock ownership
plan, Employer's recognition and retention plan and trust, and hospitalization,
major medical, disability, dental and group life insurance plans, each of which
Employer agrees to continue in effect on terms no less favorable than those
currently in effect as of the date hereof (as permitted by law) during the Term
of this Agreement unless prior to a Change of Control the operating results of
Employer are significantly less favorable than those for the fiscal year ending
September 30, 1998, and unless (either before or after a Change of Control)
changes in the accounting or tax treatment of such plans would adversely affect
Employer's operating results or financial condition in a material way, and the
Board of Directors of Employer or the Holding Company concludes that
modifications to such plans need to be made to avoid such adverse effects.
6. So long as Employee is employed by Employer pursuant to this
Agreement, Employee shall receive reimbursement from Employer for all reasonable
business expenses incurred in the course of his employment by Employer, upon
submission to Employer of written vouchers and statements for reimbursement. So
long as Employee is employed by Employer pursuant to the terms of this
Agreement, Employer shall continue in effect vacation policies applicable to
Employee no less favorable from his point of view than those written vacation
policies in effect on the date hereof. So long as Employee is employed by
Employer pursuant to this Agreement, Employee shall be entitled to office space
and working conditions no less favorable from his point of view than were in
effect for him on the date hereof.
7. Subject to the respective continuing obligations of the parties,
including but not limited to those set forth in subsections 9(A), 9(B), 9(C) and
9(D) hereof, Employee's employment by Employer may be terminated prior to the
expiration of the Term of this Agreement as follows:
(A) Employer, by action of its Board of Directors and upon written
notice to Employee, may terminate Employee's employment with
Employer immediately for cause. For purposes of this
subsection 7(A), "cause" shall be defined as (i) personal
dishonesty, (ii) incompetence, (iii) willful misconduct, (iv)
breach of fiduciary duty involving personal profit, (v)
intentional failure to perform stated duties, (vi) willful
violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist
order, or (vii) any material breach of any term, condition or
covenant of this Agreement.
(B) Employer, by action of its Board of Directors, may terminate
Employee's employment with Employer without cause at any time;
provided, however, that the "date of termination" for purposes
of determining benefits payable to Employee under subsection
8(B) hereof shall be the date which is 60 days after Employee
receives written notice of such termination.
(C) Employee, by written notice to Employer, may terminate his
employment with Employer immediately for cause. For purposes
of this subsection 7(C), "cause" shall be defined as (i) any
action by Employer's Board of Directors to remove the Employee
as one of Employer's Vice Presidents, except where the
Employer's Board of Directors properly acts to remove Employee
from such office for "cause" as defined in subsection 7(A)
hereof, (ii) any action by Employer's Board of Directors to
materially limit, increase, or modify Employee's duties and/or
authority as one of Employer's Vice Presidents (including his
authority, subject to corporate controls no more restrictive
than those in effect on the date hereof, to hire and discharge
employees who are not bona fide officers of Employer), (iii)
any failure of Employer to obtain the assumption of the
obligation to perform this Agreement by any successor or the
reaffirmation of such obligation by Employer, as contemplated
in section 20 hereof; or (iv) any material breach by Employer
of a term, condition or covenant of this Agreement.
(D) Employee, upon sixty (60) days written notice to Employer, may
terminate his employment with Employer without cause.
(E) Employee's employment with Employer shall terminate in the
event of Employee's death or disability. For purposes hereof,
"disability" shall be defined as Employee's inability by
reason of illness or other physical or mental incapacity to
perform the duties required by his employment for any
consecutive One Hundred Eighty (180) day period, provided that
notice of any termination by Employer because of Employee's
"disability" shall have been given to Employee prior to the
full resumption by him of the performance of such duties.
8. In the event of termination of Employee's employment with Employer
pursuant to section 7 hereof, compensation shall continue to be paid by Employer
to Employee as follows:
(A) In the event of termination pursuant to subsection 7(A) or
7(D), compensation provided for herein (including Base
Compensation) shall continue to be paid, and Employee shall
continue to participate in the employee benefit, retirement,
and compensation plans and other perquisites as provided in
sections 5 and 6 hereof, through the date of termination
specified in the notice of termination. Any benefits payable
under insurance, health, retirement and bonus plans as a
result of Employee's participation in such plans through such
date shall be paid when due under those plans. The date of
termination specified in any notice of termination pursuant to
Subsection 7(A) shall be no later than the last business day
of the month in which such notice is provided to Employee.
(B) In the event of termination pursuant to subsection 7(B) or
7(C), compensation provided for herein (including Base
Compensation) shall continue to be paid, and Employee shall
continue to participate in the employee benefit, retirement,
and compensation plans and other perquisites as provided in
sections 5 and 6 hereof, through the date of termination
specified in the notice of termination. Any benefits payable
under insurance, health, retirement and bonus plans as a
result of Employee's participation in such plans through such
date shall be paid when due under those plans. In addition,
Employee shall be entitled to continue to receive from
Employer his Base Compensation at the rates in effect at the
time of termination for three additional 12-month periods if
the termination follows a Change of Control. In addition,
during such period, if the termination follows a Change of
Control, Employer will maintain in full force and effect for
the continued benefit of Employee each employee welfare
benefit plan (as such term is defined in the Employee
Retirement Income Security Act of 1974, as amended) in which
Employee was entitled to participate immediately prior to the
date of his termination, unless an essentially equivalent and
no less favorable benefit is provided by a subsequent employer
of Employee. If the terms of any employee welfare benefit plan
of Employer or applicable laws do not permit continued
participation by Employee, Employer will arrange to provide to
Employee a benefit substantially similar to, and no less
favorable than, the benefit he was entitled to receive under
such plan at the end of the period of coverage. For purposes
of this Agreement, a "Change of Control" shall mean an
acquisition of "control" of the Holding Company or of Employer
within the meaning of 12 C.F.R.ss. 574.4(a) (other than a
change of control resulting from a trustee or other fiduciary
holding shares of Common Stock under an employee benefit plan
of the Holding Company or any of its subsidiaries).
(C) In the event of termination pursuant to subsection 7(E),
compensation provided for herein (including Base Compensation)
shall continue to be paid, and Employee shall continue to
participate in the employee benefit, retirement, and
compensation plans and other perquisites as provided in
sections 5 and 6 hereof, (i) in the event of Employee's death,
through the date of death, or (ii) in the event of Employee's
disability, through the date of proper notice of disability as
required by subsection 7(E). Any benefits payable under
insurance, health, retirement and bonus plans as a result of
Employer's participation in such plans through such date shall
be paid when due under those plans.
(D) Employer will permit Employee or his personal
representative(s) or heirs, during a period of three months
following Employee's termination of employment by Employer for
the reasons set forth in subsections 7(B) or (C), if such
termination follows a Change of Control, to require Employer,
upon written request, to purchase all outstanding stock
options previously granted to Employee under any Holding
Company stock option plan then in effect whether or not such
options are then exercisable or have terminated at a cash
purchase price equal to the amount by which the aggregate
"fair market value" of the shares subject to such options
exceeds the aggregate option price for such shares. For
purposes of this Agreement, the term "fair market value" shall
mean the higher of (1) the average of the highest asked prices
for Holding Company shares in the over-the-counter market as
reported on the NASDAQ system if the shares are traded on such
system for the 30 business days preceding such termination, or
(2) the average per share price actually paid for the most
highly priced 1% of the Holding Company shares acquired in
connection with the Change of Control of the Holding Company
by any person or group acquiring such control.
9. In order to induce Employer to enter into this Agreement, Employee
hereby agrees as follows:
(A) While Employee is employed by Employer and for a period of
three years after termination of such employment for reasons
other than those set forth in subsections 7(B) or (C) of this
Agreement, Employee shall not divulge or furnish any trade
secrets (as defined in IND. CODE ss. 24-2-3-2) of Employer or
any confidential information acquired by him while employed by
Employer concerning the policies, plans, procedures or
customers of Employer to any person, firm or corporation,
other than Employer or upon its written request, or use any
such trade secret or confidential information directly or
indirectly for Employee's own benefit or for the benefit of
any person, firm or corporation other than Employer, since
such trade secrets and confidential information are
confidential and shall at all times remain the property of
Employer.
(B) For a period of three years after termination of Employee's
employment by Employer for reasons other than those set forth
in subsections 7(B) or (C) of this Agreement, Employee shall
not directly or indirectly provide banking or bank-related
services to or solicit the banking or bank-related business of
any customer of Employer at the time of such provision of
services or solicitation which Employee served either alone or
with others while employed by Employer in any city, town,
borough, township, village or other place in which Employee
performed services for Employer during the last three years he
was employed by it, or assist any actual or potential
competitor of Employer to provide banking or bank-related
services to or solicit any such customer's banking or
bank-related business in any such place.
(C) While Employee is employed by Employer and for a period of one
year after termination of Employee's employment by Employer
for reasons other than those set forth in subsections 7(B) or
(C) of this Agreement, Employee shall not, directly or
indirectly, as principal, agent, or trustee, or through the
agency of any corporation, partnership, trade association,
agent or agency, engage in any banking or bank-related
business or venture which competes with the business of
Employer as conducted during Employee's employment by Employer
within St. Joseph County or within a radius of 25 miles of any
other office of Employer where Employee was employed for more
than six months in the three years next preceding termination.
(D) If Employee's employment by Employer is terminated for reasons
other than those set forth in subsections 7(B) or (C) of this
Agreement, Employee will turn over immediately thereafter to
Employer all business correspondence, letters, papers,
reports, customers' lists, financial statements, credit
reports or other confidential information or documents of
Employer or its affiliates in the possession or control of
Employee, all of which writings are and will continue to be
the sole and exclusive property of Employer or its affiliates.
If Employee's employment by Employer is terminated during the Term of this
Agreement for reasons set forth in subsections 7(B) or (C) of this Agreement,
Employee shall have no obligations to Employer with respect to trade secrets,
confidential information or noncompetition under this section 9.
10. Any termination of Employee's employment with Employer as
contemplated by section 7 hereof, except in the circumstances of Employee's
death, shall be communicated by written "Notice of Termination" by the
terminating party to the other party hereto. Any "Notice of Termination"
pursuant to subsections 7(A), 7(C) or 7(E) shall indicate the specific
provisions of this Agreement relied upon and shall set forth in reasonable
detail the facts and circumstances claimed to provide a basis for such
termination.
11. If Employee is suspended and/or temporarily prohibited from
participating in the conduct of Employer's affairs by a notice served under
section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. ss.
1818(e)(3) and (g)(1)), Employer's obligations under this Agreement shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, Employer shall (i) pay Employee all
or part of the compensation withheld while its obligations under this Agreement
were suspended and (ii) reinstate (in whole or in part) any of its obligations
which were suspended.
12. If Employee is removed and/or permanently prohibited from
participating in the conduct of Employer's affairs by an order issued under
section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. ss.
1818(e)(4) or (g)(1)), all obligations of Employer under this Agreement shall
terminate as of the effective date of the order, but vested rights of the
parties to the Agreement shall not be affected.
13. If Employer is in default (as defined in section 3(x)(1) of the
Federal Deposit Insurance Act), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of Employer or Employee.
14. All obligations under this Agreement may be terminated except to
the extent determined that the continuation of the Agreement is necessary for
the continued operation of Employer: (i) by the Director of the Office of Thrift
Supervision, or his or her designee (the "Director"), at the time the Federal
Deposit Insurance Corporation or Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of Employer under the authority
contained in Section 13(c) of the Federal Deposit Insurance Act; or (ii) by the
Director at the time the Director approves a supervisory merger to resolve
problems related to operation of Employer or when Employer is determined by the
Director to be in an unsafe and unsound condition. Any rights of the parties
that have already vested, however, shall not be affected by such action.
15. Anything in this Agreement to the contrary notwithstanding, in the
event that the Employer's independent public accountants determine that any
payment by the Employer to or for the benefit of the Employee, whether paid or
payable pursuant to the terms of this Agreement, would be non-deductible by the
Employer for federal income tax purposes because of Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), then the amount payable to or for
the benefit of the Employee pursuant to this Agreement shall be reduced (but not
below zero) to the Reduced Amount. For purposes of this section 15, the "Reduced
Amount" shall be the amount which maximizes the amount payable without causing
the payment to be non-deductible by the Employer because of Section 280G of the
Code. Any payments made to Employee pursuant to this Agreement, or otherwise,
are subject to and conditioned upon their compliance with 12 U.S.C. ss.1828(k)
and any regulations promulgated thereunder, to the extent applicable to such
payments.
16. If a dispute arises regarding the termination of Employee pursuant
to section 7 hereof or as to the interpretation or enforcement of this Agreement
said dispute shall be resolved by binding arbitration determined in accordance
with the rules of the American Arbitration Association and if Employee obtains a
final award in his favor or his claim is settled by Employer prior to the
rendering of an award by such arbitration, all reasonable legal fees and
expenses incurred by Employee in contesting or disputing any such termination or
seeking to obtain or enforce any right or benefit provided for in this Agreement
or otherwise pursuing his claim shall be paid by Employer, to the extent
permitted by law.
17. Should Employee die after termination of his employment with
Employer while any amounts are payable to him hereunder, this Agreement shall
inure to the benefit of and be enforceable by Employee's executors,
administrators, heirs, distributees, devisees and legatees and all amounts
payable hereunder shall be paid in accordance with the terms of this Agreement
to Employee's devisee, legatee or other designee or, if there is no such
designee, to his estate.
18. For purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been given when delivered or mailed by United States registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to Employee: Michael J. Portolese
50690 King Richards Way
Granger, Indiana 46530
If to Employer: MFB Financial
121 South Church Street
P.O. Box 528
Mishawaka, Indiana 46546
or to such address as either party hereto may have furnished to the other party
in writing in accordance herewith, except that notices of change of address
shall be effective only upon receipt.
19. The validity, interpretation, and performance of this Agreement
shall be governed by the laws of the State of Indiana.
20. Employer shall require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business or assets of Employer, by agreement in form and substance
satisfactory to Employee to expressly assume and agree to perform this Agreement
in the same manner and same extent that Employer would be required to perform it
if no such succession had taken place. Failure of Employer to obtain such
agreement prior to the effectiveness of any such succession shall be a material
intentional breach of this Agreement and shall entitle Employee to terminate his
employment with Employer pursuant to subsection 7(C) hereof. As used in this
Agreement, "Employer" shall mean Employer as hereinbefore defined and any
successor to its business or assets as aforesaid.
21. This Agreement supersedes the Employment Agreement dated March 24,
1994, as amended as of March 31, 1997, between Mishawaka Federal Savings (now
named MFB Financial) and Michael J. Portolese, which Agreement is terminated as
of the date hereof and without further force and effect. No provision of this
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing signed by Employee and Employer. No waiver
by either party hereto at any time of any breach by the other party hereto of,
or compliance with, any condition or provision of this Agreement to be performed
by such other party shall be deemed a waiver of dissimilar provisions or
conditions at the same or any prior subsequent time. No agreements or
representation, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement.
22. The invalidity or unenforceability of any provisions of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement which shall remain in full force and effect.
23. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same agreement.
24. This Agreement is personal in nature and neither party hereto
shall, without consent of the other, assign or transfer this Agreement or any
rights or obligations hereunder except as provided in section 17 and section 20
above. Without limiting the foregoing, Employee's right to receive compensation
hereunder shall not be assignable or transferable, whether by pledge, creation
of a security interest or otherwise, other than a transfer by his will or by the
laws of descent or distribution as set forth in section 17 hereof, and in the
event of any attempted assignment or transfer contrary to this paragraph,
Employer shall have no liability to pay any amounts so attempted to be assigned
or transferred.
25. If any of the provisions in this Agreement shall conflict with 12
C.F.R. ss. 563.39(b), as it may be amended from time to time, the requirements
of such regulation shall supersede any contrary provisions herein and shall
prevail.
IN WITNESS WHEREOF, the parties have caused the Agreement to be
executed and delivered as of the day and year first above set forth.
MFB FINANCIAL
By:/s/ Charles J. Viater
---------------------------
Charles J. Viater
Its: President
"Employer"
/s/ Michael J. Portolese
---------------------------
Michael J. Portolese
"Employee"
<PAGE>
The undersigned, MFB Corp., sole shareholder of Employer, agrees that
if it shall be determined for any reason that any obligation on the part of
Employer to continue to make any payments due under this Agreement to Employee
is unenforceable for any reason, MFB Corp. agrees to honor the terms of this
Agreement and continue to make any such payments due hereunder to Employee
pursuant to the terms of this Agreement.
MFB CORP.
By:/s/ Charles J. Viater
---------------------------
Charles J. Viater, President
EMPLOYMENT AGREEMENT
This Agreement, made and dated as of July 1, 1999, by and between MFB
Financial (formerly Mishawaka Federal Savings), a federal savings bank
("Employer"), and Donald R. Kyle, a resident of St. Joseph County, Indiana
("Employee").
W I T N E S S E T H
WHEREAS, Employee is hereby employed by Employer as its Executive Vice
President and Chief Operating Officer, and is expected to make valuable
contributions to the profitability and financial strength of Employer;
WHEREAS, Employer desires to encourage Employee to make valuable
contributions to Employer's business operations and not to seek or accept
employment elsewhere;
WHEREAS, Employee desires to be assured of a secure minimum
compensation from Employer for his services over a defined term;
WHEREAS, Employer desires to assure the continued services of Employee
on behalf of Employer on an objective and impartial basis and without
distraction or conflict of interest in the event of an attempt by any person to
obtain control of Employer or of MFB Corp., the Indiana corporation which owns
all of the issued and outstanding capital stock of Employer (the "Holding
Company");
WHEREAS, Employer recognizes that when faced with a proposal for a
change of control of Employer or the Holding Company, Employee will have a
significant role in helping the Boards of Directors assess the options and
advising the Boards of Directors on what is in the best interests of Employer,
the Holding Company, and its shareholders, and it is necessary for Employee to
be able to provide this advice and counsel without being influenced by the
uncertainties of his own situation;
WHEREAS, Employer desires to provide fair and reasonable benefits to
Employee on the terms and subject to the conditions set forth in this Agreement;
WHEREAS, Employer desires reasonable protection of its confidential
business and customer information which it has developed over the years at
substantial expense and assurance that Employee will not compete with Employer
for a reasonable period of time after termination of his employment with
Employer, except as otherwise provided herein.
NOW, THEREFORE, in consideration of these premises, the mutual
covenants and undertakings herein contained and the continued employment of
Employee by Employer as its Executive Vice President and Chief Operating
Officer, Employer and Employee, each intending to be legally bound, covenant and
agree as follows:
<PAGE>
1. Upon the terms and subject to the conditions set forth in this
Agreement, Employer employs Employee as Employer's Executive Vice President and
Chief Operating Officer, and Employee accepts such employment.
2. Employee agrees to serve as Employer's Executive Vice President and
Chief Operating Officer and to perform such duties in that office as may
reasonably be assigned to him by Employer's Board of Directors; provided,
however that such duties shall be performed in or from the offices of Employer
currently located at Mishawaka, Indiana, and shall be of the same character as
those previously performed by Employee's predecessor and generally associated
with the office held by Employee. Employee shall not be required to be absent
from the location of the principal executive offices of Employer on travel
status or otherwise more than 45 days in any calendar year. Employer shall not,
without the written consent of Employee, relocate or transfer Employee to a
location more than 30 miles from his principal residence. Although while
employed by Employer, Employee shall devote substantially all his business time
and efforts to Employer's business and shall not engage in any other related
business, Employee may use his discretion in fixing his hours and schedule of
work consistent with the proper discharge of his duties.
3. The term of this Agreement shall begin July 1, 1999 (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 the Effective Date, so as to continue to
maintain a three-year term and shall continue to be so extended if Employer's
Board of Directors determines by resolution to extend this Agreement prior to
each anniversary of the Effective Date. If either party hereto gives written
notice to the other party not to extend this Agreement in any given month or if
the Board does not determine to extend the Agreement prior to each anniversary
of the Effective Date, no further extension shall occur and the term of this
Agreement shall end three years subsequent to the first day of the month in
which such notice not to extend is given or three years subsequent to the
anniversary as of which the Board does not elect to continue extending this
Agreement (such term, including any extension thereof shall herein be referred
to as the "Term"). Notwithstanding the foregoing, this Agreement shall
automatically terminate (and the Term of this Agreement shall thereupon end)
without notice when Employee attains 65 years of age.
4. Employee shall receive an annual salary of $_____________ ("Base
Compensation") payable at regular intervals in accordance with Employer's normal
payroll practices now or hereafter in effect. Employer may consider and declare
from time to time increases in the salary it pays Employee and thereby increases
in his Base Compensation. Employer may also declare incentive bonuses from time
to time to be paid to Employee in addition to his annual salary. During the Term
of this Agreement, but only until such time as a Change of Control occurs,
Employer may also declare decreases in the salary it pays Employee if the
operating results of Employer are significantly less favorable than those for
the fiscal year ending September 30, 1995, and Employer makes similar decreases
in the salary it pays to other executive officers of Employer. In addition,
immediately following the first twelve months of the term of this Agreement,
Employer may make a one-time reduction in Employee's Base Compensation if
Employee chooses to substitute incentive compensation for a portion of
Employee's previously established Base Compensation. After a Change in Control,
no such decreases in Base Compensation may be made, and Employer shall consider
and declare salary increases based upon the following standards:
Inflation;
Adjustments to the salaries of other senior management personnel; and
Past performance of Employee and the contribution which Employee makes
to the business and profits of Employer during the Term.
Any and all increases or decreases in Employee's salary pursuant to this section
shall cause the level of Base Compensation to be increased or decreased by the
amount of each such increase or decrease for purposes of this Agreement. The
increased or decreased level of Base Compensation as provided in this section
shall become the level of Base Compensation for the remainder of the Term of
this Agreement until there is a further increase or decrease in Base
Compensation as provided herein.
5. So long as Employee is employed by Employer pursuant to this
Agreement and subject to any waiting period requirements in such plans, he shall
be included as a participant in all present and future employee benefit,
retirement, and compensation plans generally available to employees of Employer
(other than Employee's recognition and retention plan and trust), consistent
with his Base Compensation and his position as Executive Vice President and
Chief Operating Officer of Employer, including, without limitation, Employer's
or the Holding Company's pension plan, stock option plan, employee stock
ownership plan, and hospitalization, major medical, disability, dental and group
life insurance plans, each of which Employer agrees to continue in effect on
terms no less favorable than those currently in effect as of the date hereof (as
permitted by law) during the Term of this Agreement unless prior to a Change of
Control the operating results of Employer are significantly less favorable than
those for the fiscal year ending September 30, 1998, and unless (either before
or after a Change of Control) changes in the accounting or tax treatment of such
plans would adversely affect Employer's operating results or financial condition
in a material way, and the Board of Directors of Employer or the Holding Company
concludes that modifications to such plans need to be made to avoid such adverse
effects.
6. So long as Employee is employed by Employer pursuant to this
Agreement, Employee shall receive reimbursement from Employer for all reasonable
business expenses incurred in the course of his employment by Employer, upon
submission to Employer of written vouchers and statements for reimbursement.
Employee shall attend, at his discretion, those professional meetings,
conventions, and/or similar functions that he deems appropriate and useful for
purposes of keeping abreast of current developments in the industry and/or
promoting the interests of Employer. So long as Employee is employed by Employer
pursuant to the terms of this Agreement, Employer shall continue in effect
vacation policies applicable to Employee no less favorable from his point of
view than those written vacation policies in effect on the date hereof. So long
as Employee is employed by Employer pursuant to this Agreement, Employee shall
be entitled to the use of a company car provided by the Employer.
7. Subject to the respective continuing obligations of the parties,
including but not limited to those set forth in subsections 9(A), 9(B), 9(C) and
9(D) hereof, Employee's employment by Employer may be terminated prior to the
expiration of the Term of this Agreement as follows:
(A) Employer, by action of its Board of Directors and upon written
notice to Employee, may terminate Employee's employment with
Employer immediately for cause. For purposes of this
subsection 7(A), "cause" shall be defined as (i) personal
dishonesty, (ii) incompetence, (iii) willful misconduct, (iv)
breach of fiduciary duty involving personal profit, (v)
intentional failure to perform stated duties, (vi) willful
violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist
order, (vii) any material breach of any term, condition or
covenant of this Agreement, or (viii) any breach by Employee
of any of the provisions contained in paragraphs 5, 6 or 7 of
Employee's Employment Agreement with National City Corporation
and the surviving corporation of the merger of Fort Wayne
National Corporation into National City, Valley American Bank
dated as of April ___, 1998 (the "National City Employment
Agreement").
(B) Employer, by action of its Board of Directors, may terminate
Employee's employment with Employer without cause at any time;
provided, however, that the "date of termination" for purposes
of determining benefits payable to Employee under subsection
8(B) hereof shall be the date which is 60 days after Employee
receives written notice of such termination.
(C) Employee, by written notice to Employer, may terminate his
employment with Employer immediately for cause. For purposes
of this subsection 7(B), "cause" shall be defined as (i) any
action by Employer's Board of Directors to remove the Employee
as Executive Vice President and Chief Operating Officer of
Employer, except where the Employer's Board of Directors
properly acts to remove Employee from such office for "cause"
as defined in subsection 7(A) hereof, (ii) any action by
Employer's Board of Directors which Employee reasonably
believes materially limits, increases, or modifies Employee's
duties and/or authority as Executive Vice President and Chief
Operating Officer of Employer (including his authority,
subject to corporate controls no more restrictive than those
in effect on the date hereof, to hire and discharge employees
who are not bona fide officers of Employer), (iii) any failure
of Employer to obtain the assumption of the obligation to
perform this Agreement by any successor or the reaffirmation
of such obligation by Employer, as contemplated in section 20
hereof; or (iv) any material breach by Employer of a term,
condition or covenant of this Agreement.
(D) Employee, upon sixty (60) days written notice to Employer, may
terminate his employment with Employer without cause.
(E) Employee's employment with Employer shall terminate in the
event of Employee's death or disability. For purposes hereof,
"disability" shall be defined as Employee's inability by
reason of illness or other physical or mental incapacity to
perform the duties required by his employment for any
consecutive One Hundred Eighty (180) day period, provided that
notice of any termination by Employer because of Employee's
"disability" shall have been given to Employee prior to the
full resumption by him of the performance of such duties.
8. In the event of termination of Employee's employment with Employer
pursuant to section 7 hereof, compensation shall continue to be paid by Employer
to Employee as follows:
(A) In the event of termination pursuant to subsection 7(A) or
7(D), compensation provided for herein (including Base
Compensation) shall continue to be paid, and Employee shall
continue to participate in the employee benefit, incentive
bonus, retirement, and compensation plans and other
perquisites as provided in sections 5 and 6 hereof, through
the date of termination specified in the notice of
termination. Any benefits payable under insurance, health,
retirement and bonus plans as a result of Employee's
participation in such plans through such date shall be paid
when due under those plans. The date of termination specified
in any notice of termination pursuant to Subsection 7(A) shall
be no later than the last business day of the month in which
such notice is provided to Employee.
(B) In the event of termination pursuant to subsection 7(B) or
7(C), compensation provided for herein (including Base
Compensation) shall continue to be paid, and Employee shall
continue to participate in the employee benefit, incentive
bonus, retirement, and compensation plans and other
perquisites as provided in sections 5 and 6 hereof, through
the date of termination specified in the notice of
termination. Any benefits payable under insurance, health,
retirement and bonus plans as a result of Employee's
participation in such plans through such date shall be paid
when due under those plans. In addition, Employee shall be
entitled to continue to receive from Employer his Base
Compensation at the rate in effect at the time of termination,
plus the incentive bonus he received for the tax year
preceding the date of termination (1) for three additional
12-month periods if the termination follows a Change of
Control or (2) for the remaining Term of the Agreement if the
termination does not follow a Change of Control. In addition,
during such period, Employer will maintain in full force and
effect for the continued benefit of Employee each employee
welfare benefit plan and each employee pension benefit plan
(as such terms are defined in the Employee Retirement Income
Security Act of 1974, as amended) in which Employee was
entitled to participate immediately prior to the date of his
termination, unless an essentially equivalent and no less
favorable benefit is provided by a subsequent employer of
Employee. If the terms of any employee welfare benefit plan or
employee pension benefit plan of Employer or applicable laws
do not permit continued participation by Employee, Employer
will arrange to provide to Employee a benefit substantially
similar to, and no less favorable than, the benefit he was
entitled to receive under such plan at the end of the period
of coverage. For purposes of this Agreement, a "Change of
Control" shall mean an acquisition of "control" of the Holding
Company or of Employer within the meaning of 12 C.F.R.ss.
574.4(a) (other than a change of control resulting from a
trustee or other fiduciary holding shares of Common Stock
under an employee benefit plan of the Holding Company or any
of its subsidiaries).
(C) In the event of termination pursuant to subsection 7(E),
compensation provided for herein (including Base Compensation)
shall continue to be paid, and Employee shall continue to
participate in the employee benefit, incentive bonus,
retirement, and compensation plans and other perquisites as
provided in sections 5 and 6 hereof, (i) in the event of
Employee's death, through the date of death, or (ii) in the
event of Employee's disability, through the date of proper
notice of disability as required by subsection 7(D). Any
benefits payable under insurance, health, retirement and bonus
plans as a result of Employer's participation in such plans
through such date shall be paid when due under those plans.
(D) Employer will permit Employee or his personal
representative(s) or heirs, during a period of three months
following Employee's termination of employment by Employer for
the reasons set forth in subsections 7(B) or 7(C), if such
termination follows a Change of Control, to require Employer,
upon written request, to purchase all outstanding stock
options previously granted to Employee under any Holding
Company stock option plan then in effect whether or not such
options are then exercisable or have terminated at a cash
purchase price equal to the amount by which the aggregate
"fair market value" of the shares subject to such options
exceeds the aggregate option price for such shares. For
purposes of this Agreement, the term "fair market value" shall
mean the higher of (1) the average of the highest asked prices
for Holding Company shares in the over-the-counter market as
reported on the NASDAQ system if the shares are traded on such
system for the 30 business days preceding such termination, or
(2) the average per share price actually paid for the most
highly priced 1% of the Holding Company shares acquired in
connection with the Change of Control of the Holding Company
by any person or group acquiring such control.
9. In order to induce Employer to enter into this Agreement, Employee
hereby agrees as follows:
(A) While Employee is employed by Employer and for a period of
three years after termination of such employment for reasons
other than those set forth in subsections 7(B) or 7(C) of this
Agreement, Employee shall not divulge or furnish any trade
secrets (as defined in IND. CODE ss. 24-2-3-2) of Employer or
any confidential information acquired by him while employed by
Employer concerning the policies, plans, procedures or
customers of Employer to any person, firm or corporation,
other than Employer or upon its written request, or use any
such trade secret or confidential information directly or
indirectly for Employee's own benefit or for the benefit of
any person, firm or corporation other than Employer, since
such trade secrets and confidential information are
confidential and shall at all times remain the property of
Employer.
(B) For a period of three years after termination of Employee's
employment by Employer for reasons other than those set forth
in subsections 7(B) or 7(C) of this Agreement, Employee shall
not directly or indirectly provide banking or bank-related
services to or solicit the banking or bank-related business of
any customer of Employer at the time of such provision of
services or solicitation which Employee served either alone or
with others while employed by Employer in any city, town,
borough, township, village or other place in which Employee
performed services for Employer during the last three years
(or such shorter period) he was employed by it, or assist any
actual or potential competitor of Employer to provide banking
or bank-related services to or solicit any such customer's
banking or bank-related business in any such place.
(C) While Employee is employed by Employer and for a period of one
year after termination of Employee's employment by Employer
for reasons other than those set forth in subsections 7(B) or
7(C) of this Agreement, Employee shall not, directly or
indirectly, as principal, agent, or trustee, or through the
agency of any corporation, partnership, trade association,
agent or agency, engage in any banking or bank-related
business or venture which competes with the business of
Employer as conducted during Employee's employment by Employer
within St. Joseph County or within a radius of 25 miles of any
other office of Employer where Employee was employed for more
than six months in the three years next preceding termination.
(D) If Employee's employment by Employer is terminated for any
reason, Employee will turn over immediately thereafter to
Employer all business correspondence, letters, papers,
reports, customers' lists, financial statements, credit
reports or other confidential information or documents of
Employer or its affiliates in the possession or control of
Employee, all of which writings are and will continue to be
the sole and exclusive property of Employer or its affiliates.
(E) Employee agrees to comply with the terms of, and the
restrictions imposed on his conduct by, paragraphs 5, 6 and 7
of the National City Employment Agreement.
If Employee's employment by Employer is terminated during the Term of this
Agreement for reasons set forth in subsections 7(B) or 7(C) of this Agreement,
Employee shall have no obligations to Employer with respect to noncompetition
under sections 9(A) through (C) hereof.
10. Any termination of Employee's employment with Employer as
contemplated by section 7 hereof, except in the circumstances of Employee's
death, shall be communicated by written "Notice of Termination" by the
terminating party to the other party hereto. Any "Notice of Termination"
pursuant to subsections 7(A), 7(C) or 7(E) shall indicate the specific
provisions of this Agreement relied upon and shall set forth in reasonable
detail the facts and circumstances claimed to provide a basis for such
termination.
11. If Employee is suspended and/or temporarily prohibited from
participating in the conduct of Employer's affairs by a notice served under
section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. ss.
1818(e)(3) and (g)(1)), Employer's obligations under this Agreement shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, Employer shall (i) pay Employee all
or part of the compensation withheld while its obligations under this Agreement
were suspended and (ii) reinstate (in whole or in part) any of its obligations
which were suspended.
12. If Employee is removed and/or permanently prohibited from
participating in the conduct of Employer's affairs by an order issued under
section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. ss.
1818(e)(4) or (g)(1)), all obligations of Employer under this Agreement shall
terminate as of the effective date of the order, but vested rights of the
parties to the Agreement shall not be affected.
13. If Employer is in default (as defined in section 3(x)(1) of the
Federal Deposit Insurance Act), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of Employer or Employee.
14. All obligations under this Agreement may be terminated except to
the extent determined that the continuation of the Agreement is necessary for
the continued operation of Employer: (i) by the Director of the Office of Thrift
Supervision, or his or her designee (the "Director"), at the time the Federal
Deposit Insurance Corporation or Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of Employer under the authority
contained in Section 13(c) of the Federal Deposit Insurance Act; or (ii) by the
Director at the time the Director approves a supervisory merger to resolve
problems related to operation of Employer or when Employer is determined by the
Director to be in an unsafe and unsound condition. Any rights of the parties
that have already vested, however, shall not be affected by such action.
15. Anything in this Agreement to the contrary notwithstanding, in the
event that the Employer's independent public accountants determine that any
payment by the Employer to or for the benefit of the Employee, whether paid or
payable pursuant to the terms of this Agreement, would be non-deductible by the
Employer for federal income tax purposes because of Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), then the amount payable to or for
the benefit of the Employee pursuant to this Agreement shall be reduced (but not
below zero) to the Reduced Amount. For purposes of this section 15, the "Reduced
Amount" shall be the amount which maximizes the amount payable without causing
the payment to be non-deductible by the Employer because of Section 280G of the
Code. Any payments made to Employee pursuant to this Agreement, or otherwise,
are subject to and conditional upon their compliance with 12 U.S.C. ss.1828(k)
and any regulations promulgated thereunder, to the extent applicable to such
payments.
16. If a dispute arises regarding the termination of Employee pursuant
to section 7 hereof or as to the interpretation or enforcement of this Agreement
said dispute shall be resolved by binding arbitration determined in accordance
with the rules of the American Arbitration Association and if Employee obtains a
final award in his favor or his claim is settled by Employer prior to the
rendering of an award by such arbitration, all reasonable legal fees and
expenses incurred by Employee in contesting or disputing any such termination or
seeking to obtain or enforce any right or benefit provided for in this Agreement
or otherwise pursuing his claim shall be paid by Employer, to the extent
permitted by law.
17. Should Employee die after termination of his employment with
Employer while any amounts are payable to him hereunder, this Agreement shall
inure to the benefit of and be enforceable by Employee's executors,
administrators, heirs, distributees, devisees and legatees and all amounts
payable hereunder shall be paid in accordance with the terms of this Agreement
to Employee's devisee, legatee or other designee or, if there is no such
designee, to his estate.
18. For purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been given when delivered or mailed by United States registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to Employee: Donald R. Kyle
51364 Lake Pointe Court
Granger, Indiana 46530
If to Employer: MFB Financial
121 South Church Street
P.O. Box 528
Mishawaka, Indiana 46546
or to such address as either party hereto may have furnished to the other party
in writing in accordance herewith, except that notices of change of address
shall be effective only upon receipt.
19. This Agreement supersedes and replaces any pre-existing employment
agreement between the Employer and the Employee. The validity, interpretation,
and performance of this Agreement shall be governed by the laws of the State of
Indiana, exist as otherwise required by mandatory operation of federal law.
20. Employer shall require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business or assets of Employer, by agreement in form and substance
satisfactory to Employee to expressly assume and agree to perform this Agreement
in the same manner and same extent that Employer would be required to perform it
if no such succession had taken place. Failure of Employer to obtain such
agreement prior to the effectiveness of any such succession shall be a material
intentional breach of this Agreement and shall entitle Employee to terminate his
employment with Employer pursuant to subsection 7(C) hereof. As used in this
Agreement, "Employer" shall mean Employer as hereinbefore defined and any
successor to its business or assets as aforesaid.
21. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
signed by Employee and Employer. No waiver by either party hereto at any time of
any breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of dissimilar provisions or conditions at the same or any prior
subsequent time. No agreements or representation, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not set forth expressly in this Agreement.
22. The invalidity or unenforceability of any provisions of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement which shall remain in full force and effect.
23. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same agreement.
24. This Agreement is personal in nature and neither party hereto
shall, without consent of the other, assign or transfer this Agreement or any
rights or obligations hereunder except as provided in section 17 and section 20
above. Without limiting the foregoing, Employee's right to receive compensation
hereunder shall not be assignable or transferable, whether by pledge, creation
of a security interest or otherwise, other than a transfer by his will or by the
laws of descent or distribution as set forth in section 17 hereof, and in the
event of any attempted assignment or transfer contrary to this paragraph,
Employer shall have no liability to pay any amounts so attempted to be assigned
or transferred.
25. If any of the provisions in this Agreement shall conflict with 12
C.F.R.ss. 563.39(b), as it may be amended from time to time, the requirements of
such regulation shall supersede any contrary provisions herein and shall
prevail.
IN WITNESS WHEREOF, the parties have caused the Agreement to be
executed and delivered as of the day and year first above set forth.
MFB FINANCIAL
By:
------------------------------------
Name:
------------------------------------
Title:
------------------------------------
"Employer"
Donald R. Kyle
"Employee"
The undersigned, MFB Corp., sole shareholder of Employer, agrees that
if it shall be determined for any reason that any obligation on the part of
Employer to continue to make any payments due under this Agreement to Employee
is unenforceable for any reason, MFB Corp. agrees to honor the terms of this
Agreement and continue to make any such payments due hereunder to Employee
pursuant to the terms of this Agreement.
MFB CORP.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
Table of Contents
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 22
Notes to Consolidated Financial Statements 24
Directors and Officers 44
Shareholder Information 45
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, trust 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>
BLANK PAGE
<PAGE>
Message To Our Shareholders
MFB Corp. has just completed another year of growth and prosperity. We have
continued to enhance our ability to fulfill our stated mission - to deliver the
highest quality financial services to our community that result in ever
improving market share, profitability and shareholder value. Our wholly-owned
subsidiary, MFB Financial ("the Bank"), has further positioned itself to compete
by adding products and services that provide new evidence of our commitment to
being a full service, locally owned bank meeting the financial needs of
consumers and businesses in the Michiana area.
The Bank established a trust department in March that is dedicated to delivering
a full range of personal trust and employee benefit plan services. This new
operation has been extremely well received and has exceeded expectations in
these first few months - a clear sign that the Bank understands the needs of its
community and the desire of customers to have these sensitive and valuable
services provided by their local banker. The Bank's growth strategy includes
creating a broader physical presence in and around our established market area.
To that end the Bank opened its first full service facility in Elkhart County in
June. The activity level is well above our projections and this expanded
presence is expected to generate significant new opportunities for growth. Our
plans call for another full service facility to open in downtown South Bend
early next year. The Bank also recognizes the value of an effective management
team and strives to constantly improve that team. We have been able to add
several outstanding banking professionals this past year including a new Chief
Operating Officer who is a lifetime resident of our community and has over 25
years of local banking knowledge and experience.
Our technological advances this past year included a complete analysis of Year
2000 issues and the renovation of all systems. This project not only allowed the
Bank to address Y2K challenges but to enhance system capabilities to serve
customers more effectively. We are confident that we will provide uninterrupted,
quality service to every customer in the Year 2000 and beyond.
All of the above activities will put pressure on earnings in the near term.
However, the long-term benefits of sound infrastructure and a strong management
team are substantial. Our formula for success has been a simple yet highly
effective one. By using technology to its fullest and adding highly skilled and
experienced banking specialists to support product and service offerings, we
continually enhance our creditability in the community we serve. We convey the
message that MFB Financial is serious about delivering quality financial
services through professional decision makers that are readily accessible to our
clients.
Some important financial trends have emerged as a result of our commitment and
focus on these principles. Total assets have grown from just $226 million three
years ago to over $346 million today. Our core deposit base that includes
checking, demand deposits and savings accounts has increased from $36.7 million
to $59.8 million during the same three year period. Net interest income has
steadily improved. Return on shareholders' equity has almost tripled. Diluted
earnings per common share have gone from $.50 at September 30, 1996 to $1.51 at
September 30, 1999. Each of these statistics provide evidence that our mission
is being achieved and that our goals are being realized.
More consumers and local businesses than ever before can call MFB Financial,
Michiana's Finest Bank, their bank. We are proud of that but not content. There
are many members of this community that have not yet experienced the difference
of working with a bank that puts their interests first. They have only
experienced the indifference of working with mega banks that make arbitrary
decisions in offices and by people far away. The pages that follow provide
additional information about the past year's performance and we are proud to
present this 1999 Annual Report to you. Be assured that we remain committed to
growing long term shareholder value while meeting the financial needs of our
expanding community.
/s/ Charles J. Viater
Charles J. Viater
President and Chief Executive Officer
Selected Consolidated Financial Data
- 1 -
<PAGE>
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)
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Summary of Financial Condition:
<S> <C> <C> <C> <C> <C>
Total assets $346,454 $314,961 $255,921 $225,809 $187,065
Loans held for sale, net 8,062 13,517 12,671 -- --
Loans receivable, net 269,464 231,606 188,264 152,052 121,181
Cash and cash equivalents 12,062 17,904 9,482 1,734 7,454
Securities, including FHLB stock 47,666 46,456 42,028 68,099 53,293
Interest-bearing time deposits in
other financial institutions 1,000 -- -- 495 1,880
Deposits 201,407 180,666 171,887 158,964 144,552
Securities sold under agreements
to repurchase 6,566 2,366 389 -- --
FHLB advances 104,226 92,726 47,500 24,500 --
Shareholders' equity 31,182 30,886 33,550 37,599 37,999
Years Ended September 30,
-----------------------------------------------------------
(In Thousands)
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Summary of Operating Results:
Interest income $24,254 $20,838 $17,685 $14,182 $12,383
Interest expense 14,448 12,204 10,157 8,057 6,788
------- ------- ------- ------- -------
Net interest income 9,806 8,634 7,528 6,125 5,595
Provision for loan losses 230 120 30 30 30
------- ------- ------- ------- -------
Net interest income after
provision for loan losses 9,576 8,514 7,498 6,095 5,565
Noninterest income
Insurance commissions 148 143 134 127 128
Brokerage commissions 28 36 24 -- --
Net gain from sales of securities 4 8 6 3 --
Net gains from sales of loans 366 333 -- -- --
Loan servicing fees, net 54 12 -- -- --
Other 620 432 261 232 189
------- ------- ------- ------- -------
Total noninterest income 1,220 964 425 362 317
Noninterest expense
Salaries and employee benefits 3,847 3,414 2,772 2,153 2,336
Occupancy and equipment expense 883 720 580 422 406
SAIF deposit insurance premium 109 108 147 1,291 332
Provision to adjust loans held
for sale to lower of cost or market 489 -- -- -- --
Other expense 1,679 1,383 1,100 969 753
------- ------- ------- ------- -------
Total noninterest expense 7,007 5,625 4,599 4,835 3,827
------- ------- ------- ------- -------
Income before income taxes 3,789 3,853 3,324 1,622 2,055
Income tax expense 1,585 1,617 1,322 647 819
------- ------- ------- ------- -------
Net income $ 2,204 $ 2,236 $ 2,002 $ 975 $ 1,236
======= ======= ======= ======= =======
Supplemental Data:
Return on assets (1) .66% .80% .84% .49% .67%
Return on equity (2) 6.97 6.69 5.83 2.55 3.25
Interest rate spread (3) 2.57 2.54 2.49 2.13 2.12
Net yield on average interest-earning assets (4) 3.01 3.17 3.24 3.11 3.10
Dividend pay-out ratio (5) 22.76 23.26 26.45 11.76 --
Net interest income to operating expenses (6) 139.96 153.48 163.70 126.67 146.20
Equity-to-assets (7) 9.00 9.81 13.11 16.65 20.31
Average interest-earning assets to
average interest-bearing liabilities 110.19 114.05 117.14 123.81 126.12
Non-performing assets to total assets .06 .09 .10 .09 .17
Non-performing loans to total loans .03 .05 .14 .13 .25
Allowance for loan losses to total loans, net .24 .20 .20 .22 .26
Allowance for loan losses to non-performing loans 664.58 366.13 141.76 171.72 100.65
Basic earnings per common share $ 1.56 $ 1.44 $ 1.21 $ .51 $ .62
Diluted earnings per common share $ 1.51 $ 1.37 $ 1.16 $ .50 $ .61
Dividends declared per share $ .355 $ .335 $ .32 $ .06 $ --
Book value per share $ 21.96 $ 20.95 $ 20.33 $ 19.05 $ 18.29
</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.
- 2 -
<PAGE>
Management 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 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
funds, the number and quality of lenders, and regional economic cycles. 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, 1999, (the most recently available data), after a 200 basis
point rate decrease, the Company's NPV ratio was 11.41%. In the event of a 200
basis point increase in rates, the Company's NPV ratio was 9.24%. 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.
The Company's asset/liability management strategy dictates acceptable
limits on the amounts of change in NPV given certain changes in interest rates.
The tables presented here, as of June 30, 1999 and 1998, are 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 300 basis points.
- 3 -
<PAGE>
June 30, 1999
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)
+ 300 $ 25,505 $(13,202) (34)% 7.93% (332) bp
+ 200 30,453 (8,254) (21) 9.24 (201) bp
+ 100 35,050 (3,657) (9) 10.39 (86) bp
0 38,707 11.25
- 100 40,233 1,526 4 11.53 28 bp
- 200 40,232 1,525 4 11.41 16 bp
- 300 40,517 1,810 5 11.36 11 bp
(1) Expressed in basis points
As illustrated in the June 30, 1999 table, the Company's interest
rate risk is more sensitive to rising rates than declining rates. This
occurs primarily because, as rates rise, the market value of
fixed-rate loans declines due to both the rate increases and slowing
prepayments. When rates decline, the Company does not experience a
significant rise in market value for these loans because borrower
prepayments increase. The value of the Bank's deposits and borrowings
change in approximately the same proportion in rising and falling rate
scenarios. Specifically, the table indicates that, at June 30, 1999,
the Company's NPV was $38.7 million or 11.25% 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
$8.3 million or 21% decline in the Company's NPV and would result in a
201 basis point or 17.9% decline in the Company's NPV ratio to 9.24%.
Conversely, an immediate 200 basis point decrease in market interest
rates would result in a $1.5 million or 4% increase in the Company's
NPV, and a 16 basis point or 1.4% increase in the Company's NPV ratio
to 11.41%. The percentage change in the Company's NPV at June 30, 1999
were within the limit in the Company's Board-approved guidelines.
June 30, 1998
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)
+300 $31,202 $(7,027) (18)% 11.21% (169) bp
+200 34,428 (3,801) (10) 12.08 (82) bp
+100 37,104 (1,125) (3) 12.74 (16) bp
0 38,229 - - 12.90 -
- 100 37,408 (821) (2) 12.47 (43) bp
- 200 35,339 (2,890) (8) 11.67 (123) bp
- 300 33,382 (4,847) (13) 10.91 (199) bp
(1) Expressed in basis points
- 4 -
<PAGE>
As illustrated in the June 30, 1998 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 10% 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
12.08%. Similarly, an immediate 200 basis point decrease in market interest
rates would result in a $2.9 million or 8% decline in the Company's NPV, and a
123 basis point or 9.5% decline in the Company's NPV ratio to 11.67%. 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 of NPV, management also
monitors effects on net interest income resulting from increases or decreases in
rates. These measures are used 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 certain 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, 1999
totaled $8.1 million. The Company retains the servicing on loans sold in the
secondary market and, at September 30, 1999, $41.6 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 balances the goals of minimizing interest rate and
credit risks while striving to maximize investment return and 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
- 5 -
<PAGE>
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. Average Balance Sheets
The following are the average balance sheets for the years ended September 30:
<TABLE>
<CAPTION>
1999 1998 1997
Average Average Average
Outstanding Outstanding Outstanding
Balance Balance Balance
Assets: (In Thousands)
Interest earning assets:
<S> <C> <C> <C>
Interest-bearing deposits $ 11,983 $ 9,633 $ 1,856
Securities (1) 17,593 13,541 30,765
Mortgage-backed securities (1) 30,572 23,218 22,222
FHLB stock 5,453 3,446 1,783
Loans held for sale 15,571 2,401 35
Loans receivable (2) 244,132 220,244 175,726
--------- --------- ---------
Total interest-earning assets 325,304 272,483 232,387
Noninterest-earning assets, net
of allowance for loan losses 10,889 5,414 4,663
--------- --------- ---------
Total assets $ 336,193 $ 277,897 $ 237,050
========= ========= =========
Liabilities and equity:
Interest-bearing liabilities:
Savings accounts $ 12,277 $ 10,737 $ 10,359
NOW and money market accounts 36,422 30,065 26,770
Certificates of deposit 137,734 130,350 126,202
Repurchase agreements 3,892 1,647 97
FHLB advance 104,894 66,123 34,960
--------- --------- ---------
Total interest-bearing liabilities 295,219 238,922 198,388
Other liabilities 9,351 5,571 4,316
--------- --------- ---------
Total liabilities 304,570 244,493 202,704
Shareholders' equity:
Common stock 12,933 12,921 14,015
Retained earnings 24,550 22,958 21,381
Net unrealized gain (loss) on
securities available for sale 213 56 (100)
Less common stock acquired by:
Employee stock ownership plan (352) (565) (790)
Recognition and retention plan (11) (80) (157)
Treasury stock (5,710) (1,886) (3)
--------- --------- ---------
Total shareholders' equity 31,623 33,404 34,346
--------- --------- ---------
Total liabilities and shareholders' equity $ 336,193 $ 277,897 $ 237,050
========= ========= =========
</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.
- 6 -
<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,
------------------------------
1999 1998 1997
---- ---- ----
Average interest rate earned on:
<S> <C> <C> <C>
Interest-bearing deposits 5.12% 5.81% 5.17%
Securities (1) 5.96 6.65 6.86
Mortgage-backed securities (1) 5.99 5.84 6.46
FHLB stock 8.00 8.01 8.08
Loans held for sale 7.01 7.41 --
Loans receivable 7.88 7.98 7.91
Total interest-earning assets 7.46 7.65 7.61
Average interest rate of:
Savings accounts 2.39 2.52 2.68
NOW and money market accounts 2.75 2.83 2.89
Certificates of deposit 5.29 5.57 5.65
Repurchase agreements 3.79 4.09 4.27
FHLB advances 5.45 5.67 5.64
Total interest-bearing liabilities 4.89 5.11 5.12
Interest rate spread (2) 2.57 2.54 2.49
Net yield on interest-earning assets (3) 3.01 3.17 3.24
</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.
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.
- 7 -
<PAGE>
<TABLE>
<CAPTION>
Year ending September 30, 1999
compared to year ended Total Net Due to Due to
September 30, 1998 Change Rate Volume
------- ------- -------
(In Thousands)
Interest-earning assets:
<S> <C> <C> <C>
Interest-bearing deposits $ 53 $ (73) $ 126
Securities 148 (101) 249
Mortgage-backed securities 474 34 440
FHLB stock 160 -- 160
Loans held for sale 913 (10) 923
Loans receivable 1,668 (216) 1,884
------- ------- -------
Total 3,416 (366) 3,782
Interest-bearing liabilities:
Savings accounts 23 (14) 37
NOW and money market accounts 149 (26) 175
Certificates of deposit 20 (380) 400
Repurchase agreements 80 (5) 85
FHLB Advances 1,972 (148) 2,120
------- ------- -------
Total 2,244 (573) 2,817
------- ------- -------
Change in net interest income $ 1,172 $ 207 $ 965
======= ======= =======
Year ended September 30, 1998
compared to year ended
September 30, 1997
Interest-earning assets:
Interest-bearing deposits $ 464 $ 13 $ 451
Securities (1,212) (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>
- 8 -
<PAGE>
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1999
AND SEPTEMBER 30, 1998
Consolidated net income for the Company for the year ended September 30,
1999 was $2,204,000 or $1.51 diluted net income per common share compared to
$2,236,000 or $1.37 diluted net income per common share for the same period in
1998. Net interest income after provision for loan losses totaled $9.6 million
for the year ended September 30, 1999 compared to $8.5 million for the same
period one year ago.
The increase in net interest income was primarily due to increases in the
interest income on increases in volume of interest-earning assets which more
than offset the increase in interest expense on increases in the volume of
interest-bearing liabilities. First mortgage loan receivables increased by $14.8
million and commercial and consumer loan receivables by approximately $23.3
million from September 30, 1998 to September 30, 1999. At the same time, total
deposits increased by $20.7 million and Federal Home Loan Bank borrowings
increased by $11.5 million. The asset and liability growth was partially offset
by a decrease in the yield on interest-earning assets from 7.65% in 1998 to
7.46% in 1999. The Company also experienced a decrease in interest paid on
interest-bearing liabilities from 5.11% in 1998 to 4.89% in 1999. As a result,
the interest rate spread increased three basis points from 2.54% in 1998 to
2.57% in 1999.
Interest income increased $3.4 million during the year ended September 30,
1999 compared to the same period in 1998. The increase was primarily due to
increased volumes of loans receivable, particularly commercial and consumer
loans. Interest expense increased $2.2 million reflecting the growth in deposits
and borrowed funds.
[graph omitted]
DILUTED EPS
1996 $0.50
1997 $1.16
1998 $1.37
1999 $1.51
Noninterest income increased from $964,000 for the year ended September 30,
1998 to $1.2 million for the twelve months ended September 30, 1999. The
noninterest income increases are primarily due to fees generated from the
growing number of core deposit relationships, recognition of mortgage servicing
rights, net gains from loan sales and the servicing fees retained on these sold
loans.
Noninterest expense increased from $5.6 million to $7.0 million for the
comparable twelve month periods ending September 30. These noninterest expense
increases are primarily attributable to staffing increases, facility upgrades,
expenses incurred in the offering of additional services to the Bank's customers
and the recognition of a $489,000 provision to adjust loans held for sale to the
lower of cost or market at September 30, 1999.
The provision for loan losses was increased from $120,000 during the period
ended September 30, 1998 to $230,000 for the period ended September 30, 1999 due
to the substantial increase in commercial and consumer loan portfolios during
the 1999 fiscal year.
As of September 30, 1999, net loans were $269.5 million, an increase of
$37.9 million from the $231.6 million as of September 30, 1998. Commercial loans
outstanding increased by $16.6 million from $30.8 million at September 30, 1998
to $47.4 million at September 30, 1999. Residential mortgage loans and home
- 9 -
<PAGE>
equity loans outstanding increased by $18.7 million during the year ended
September 30, 1999 net of secondary market sales totaling $20.7 million during
the year. Consumer loans outstanding also increased by $2.6 million from $1.9
million at September 30, 1998 to $4.5 million at September 30, 1999. The growth
in all lending divisions is primarily attributed to the Company's reputation as
a quality local lender satisfying the market's desire for local service and
local decision making.
[PIE CHART OMITTED]
Asset Mix
Mortgage 58%
Cash and Investments 18%
Commercial 14%
Home Equity and Second Mortgages 4%
Construction 3%
Other Assets 2%
Consumer 1%
During the year ended September 30, 1999, the Company completed secondary
market mortgage loan sales totaling $20.7 million and the net gains realized on
these loan sales were $366,000, including $258,000 related to recording mortgage
loan servicing rights. At September 30, 1999, $8.1 million of loans were
classified as loans held for sale.
The loans sold during the year ended September 30, 1999 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 $54,000, net of $37,000 in amortization of mortgage loan
servicing rights. Management, in order to meet consumer demand, anticipates that
the Company will continue to deliver fixed rate loans to the secondary market to
manage interest rate risk and to diversify the asset mix of the Company.
[BAR GRAPH OMITTED]
Demand, NOW, Savings and MMDA
(Core Deposits)
(In millions)
1996 $36,722
1997 $40,177
1998 $45,134
1999 $59,768
Total deposits increased $20.7 million to $201.4 million as of September
30, 1999 from $180.7 million as of September 30, 1998, and securities sold under
agreements to repurchase increased from $2.4 million to $6.6 million during the
- 10 -
<PAGE>
comparable periods. Federal Home Loan Bank ("FHLB") advances and other short
term borrowings also increased from $100.0 million as of September 30, 1998 to
$106.3 million as of September 30, 1999. These increases in deposits, repurchase
agreements and other borrowings primarily funded the loan and investment growth
during the year.
Cash and cash equivalents decreased $5.8 million from $17.9 million as of
September 30, 1998 to $12.1 million as of September 30, 1999. Net cash used in
investing activities totaled $38.0 million and was partially offset by net cash
provided by operating and financing activities amounting to $2.6 million and
$29.6 million, respectively.
The Company's capital leveraging strategy involves the purchase of mortgage
related and other securities funded primarily with FHLB advances. This
leveraging portfolio represented $20.8 million of the total securities available
for sale at September 30, 1999 compared to $15.7 million at September 30, 1998.
As of September 30, 1999, the total securities portfolio amounted to $42.2
million, an increase of $400,000 from $41.8 million at September 30, 1998. The
securities portfolio activity included net security purchases of $65.3 million,
security maturities totaling $42.4 million, principal payments on
mortgage-backed and related securities of $21.5 million and a $1.1 million
decrease in the market value of securities available for sale.
Total liabilities increased from $284.1 million as of September 30, 1998 to
$315.3 million as of September 30, 1999. This increase was primarily due to the
$20.7 million increase in deposits, a $6.3 million increase in FHLB advances and
other borrowings during the year and a $4.2 million increase in securities sold
under agreements to repurchase.
Total shareholders' equity increased from $30.9 million as of September 30,
1998 to $31.2 million as of September 30, 1999. The change to shareholders'
equity resulted mainly from the repurchases of 56,668 shares of outstanding
common stock during this period at a cost of $1.2 million along with the payment
of cash dividends of $515,000 and a $672,000 adjustment to reflect the decrease
in the market value of securities available for sale, net of tax. These
decreases were offset by $2.2 million in net income. The book value of MFB Corp.
common stock, based on the actual number of shares outstanding, increased from
$20.95 at September 30, 1998 to $21.96 at September 30, 1999.
[PIE CHART OMITTED]
Liability and Equity Mix
Other Time Deposits 41%
FHLB Advances 30%
Savings, DDA, NOW &
MMDA Deposits 15%
Stockholders' Equity 9%
Non-Interest
Bearing Deposits 2%
Repurchase Agreements 2%
Other Liabilities 1%
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.
- 11 -
<PAGE>
The increase in net interest income was primarily due to increases in
interest income on increases in the volume of interest-earning assets which more
than offset the increases in interest expense on 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 $25.4
million from September 30, 1997 to September 30, 1998. The yield on total
interest-earning assets also increased from 7.61% in 1997 to 7.65% in 1998,
while the average rate paid on interest-bearing liabilities decreased from 5.12%
in 1997 to 5.11% in 1998. 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 in 1997. 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 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 gains 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 for the period ended September 30, 1998 due
to the substantial increase in the volumes of commercial and consumer loans
during the 1998 fiscal year.
As of September 30, 1998, net loans were $231.6 million, an increase of
$43.3 million from the $188.3 million as of September 30, 1997. Commercial loans
outstanding increased from $8.8 million at September 30, 1997 to $30.8 million
at September 30, 1998 as a result of substantial efforts to grow the small
business banking division. Gross residential mortgage loans and home 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.
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.
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 $49.4 million as of
- 12 -
<PAGE>
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, increased from $20.33 at September 30, 1997 to $20.95 at
September 30, 1998.
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 available for sale. 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, 1999, the Bank's
liquidity ratio was 16.87%. 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, 1999, 1998 and 1997.
Liquid assets totaled $51.2 million as of September 30, 1999 compared to
$59.7 million as of September 30, 1998 and $49.1 million as of September 30,
1997. The $8.5 million decrease in liquidity from September 30, 1998 to
September 30, 1999 was primarily due to a $5.8 million decrease in cash and cash
equivalents and a $2.7 million decrease in securities available for sale and
interest-bearing time deposits in other financial institutions. Management
believes the liquidity level of $51.2 million as of September 30, 1999 is
sufficient to meet anticipated liquidity needs.
Liquidity levels increased $10.6 million from September 30, 1997 to
September 30, 1998 due primarily to a $8.4 million increase in cash and cash
equivalents and a $2.2 million increase in securities available for sale.
- 13 -
<PAGE>
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, 1999, total FHLB
borrowings amounted to $104.2 million, $20.8 million of which were used as part
of this strategy. The remaining $83.4 million was used primarily to fund loan
portfolio growth. The Bank had commitments to fund loan originations with
borrowers totaling $65.0 million at September 30, 1999. 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, 1998, total
FHLB borrowings amounted to $92.7 million, $15.7 million of which were used as
part of the capital leveraging strategy. The remaining $77.0 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, 1999, 1998 and 1997 follows.
During the year ended September 30, 1999, net cash and cash equivalents
decreased $5.8 million from $17.9 million at September 30, 1998 to $12.1 million
at September 30, 1999.
The Company experienced a net increase in cash from operating activities of
$2.6 million during the year that was primarily attributable to the net income
of $2.2 million and proceeds of $20.7 million realized from the sale of mortgage
loans, offset by the origination of $20.9 million of loans held for sale.
The $38.0 million decrease in cash from investing activities for the year
ended September 30, 1999 was primarily related to the purchase of securities,
FHLB stock and interest-bearing time deposits totaling $69.1 million, a $32.8
million increase in net loans, and the $2.0 million net increase of premises and
equipment, offset by sales and maturities of securities totaling $44.4 million
and $21.5 million of mortgage-backed securities principal payments.
Financing activities generated net cash of $29.6 million for the year ended
September 30, 1999. The net cash was provided primarily from net deposits of
$20.7 million, $6.6 million in net new borrowed funds, and increases of $4.2
million in repurchase agreements, partially offset by the use of $1.2 million to
repurchase the Company's stock.
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 $43.5 million increase in
net loans and the $49.7 purchase of securities and FHLB stock, offset by sale
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.
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 $9.5 million
at September 30, 1997.
- 14 -
<PAGE>
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 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.
As of September 30, 1999 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.
NEW ACCOUNTING PRONOUNCEMENT
SFAS No. 133 on derivatives will, beginning with the quarter ended December
31, 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.
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 that involves the proper
recognition of date sensitive information when the year changes to 2000. Systems
- 15 -
<PAGE>
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. The Company has performed tests of the data
processing provider's system for year 2000 readiness and encountered no material
difficulties during the testing process.
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 were completed concurrently with the third party vendor
system upgrades that were implemented in June, 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 received certification letters from these vendors
that their systems will be year 2000 ready on a timely basis. Testing has been
performed with the service providers to determine their year 2000 readiness.
The Company has followed the FFIEC guidance, as published in a series of
interagency statements, on requirements on year 2000 readiness and has completed
the five phases identified: awareness, assessment, renovation, validation and
implementation for mission critical systems including third-party providers.
Extensive testing of the critical processes in a year 2000 environment has
revealed no material year 2000 problems.
However, there is no assurance that the systems of other companies on which
the Company's systems rely will be timely converted. If such modifications and
conversions are not made, or are not completed timely, the year 2000 issue could
have an adverse impact on operations of the Company. 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.
Contingency planning is one of the most important steps in year 2000
readiness. It provides a systematic basis for addressing an unexpected business
interruption due to a year 2000 issue triggered by internal or third party
system failures or by external infrastructure failures. A thorough contingency
plan is prudent to reduce risk and potential impact of year 2000 induced
interruptions or failures of critical business functions. The Company's
contingency plan facilitates the identification of potential problems,
dissemination of information, resolution of issues and decision-making process
during the identified year 2000 timeframe. Our management team will be fully
deployed during this time period and should a year 2000 issue be detected, the
contingency plan will be immediately enacted to address the problem.
The Company's significant suppliers are an online computer services firm
(provides data processing services), the Federal Home Loan Bank of Indianapolis
and utility services. The representations from these suppliers are that they
have been making efforts to become year 2000 ready and to test and validate
their systems during 1999. The Company continues to monitor the progress of
these suppliers by requesting regular updates of the suppliers' progress and
believes that these suppliers will be year 2000 ready before December 31, 1999.
Management does not know of alternative suppliers for the services provided by
these entities, but believes a conversion to these suppliers of the Company's
data processing capabilities would be very difficult to accomplish before the
year 2000.
The Company could incur losses if loan payments are delayed due to year
2000 problems affecting significant borrowers. The Company has communicated with
such parties to assess their progress in evaluating and implementing any
- 16 -
<PAGE>
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.
The Company, as with all financial institutions, has reviewed the
possibility of some level of reduction in deposits during the later part of
1999. Based on its review, the Company has determined that alternative sources
of funds should be available to maintain adequate funding throughout the period.
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 replaced many of its computers
and associated equipment as a result of third party vendor upgrades. These cost
and time estimates are based on management's best estimates and could differ
from those actually incurred.
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.
- 17 -
<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, 1999 and 1998 and the related consolidated
statements of income, shareholders' equity and cash flows for the years ended
September 30, 1999, 1998 and 1997. 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, 1999 and 1998, and the results of its
operations and its cash flows for the years ended September 30, 1999, 1998 and
1997 in conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
South Bend, Indiana
November 10, 1999
- 18 -
<PAGE>
MFB CORP. AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30,
-------------------------------
1999 1998
------------- -------------
ASSETS
<S> <C> <C>
Cash and due from financial institutions $ 6,315,747 $ 3,018,404
Interest-bearing deposits in other financial institutions - short-term 5,746,195 14,885,289
Total cash and cash equivalents 12,061,942 17,903,693
------------- -------------
Interest-bearing time deposits in other financial institutions 1,000,000 --
Securities available for sale 38,170,143 41,819,768
Securities held to maturity (fair value of $3,709,205
in 1999 and $-0- in 1998) 3,984,338 --
Federal Home Loan Bank (FHLB) stock, at cost 5,511,300 4,636,300
Loans held for sale, net of unrealized losses
of $489,152 in 1999 and $-0- in 1998 8,061,951 13,516,502
Loans receivable, net of allowance for loan losses of
$638,465 in 1999 and $453,567 in 1998 269,464,085 231,606,050
Accrued interest receivable 1,363,318 967,995
Premises and equipment, net 4,413,409 2,795,496
Mortgage servicing rights, net of accumulated amortization
of $56,571 in 1999 and $19,376 in 1998 412,390 191,699
Investment in limited partnership 1,213,430 1,221,514
Other assets 797,380 302,081
------------- -------------
Total assets $ 346,453,686 $ 314,961,098
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand deposits $ 7,357,944 $ 4,298,516
Savings, NOW and MMDA deposits 52,409,560 40,835,161
Other time deposits 141,639,885 135,532,298
Total deposits 201,407,389 180,665,975
Securities sold under agreements to repurchase 6,566,395 2,365,716
Other borrowings 104,225,750 97,656,964
Advances from borrowers for taxes and insurance 2,111,183 2,316,317
Accrued expenses and other liabilities 961,339 1,070,349
------------- -------------
Total liabilities 315,272,056 284,075,321
Shareholders' equity
Common stock, no par value, 5,000,000 shares authorized;
shares issued: 1,689,417 - 1999 and 1998; shares
outstanding: 1,420,049- 1999, 1,474,217 - 1998 13,016,302 12,846,979
Retained earnings - substantially restricted 25,419,722 23,730,167
Accumulated other comprehensive income (loss), net of
tax of $(470,824) in 1999 and $(29,788) in 1998 (717,823) (45,417)
Unearned Employee Stock Ownership Plan (ESOP) shares (222,963) (444,557)
Unearned Recognition and Retention Plan (RRP) shares -- (38,500)
Treasury Stock, 269,368 common shares - 1999;
215,200 common shares - 1998, at cost (6,313,608) (5,162,895)
------------- -------------
Total shareholders' equity 31,181,630 30,885,777
------------- -------------
Total liabilities and shareholders' equity $ 346,453,686 $ 314,961,098
============= =============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
- 19 -
<PAGE>
MFB CORP. AND SUBSIDIARY
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Interest income
Loans receivable, including fees
Mortgage loans $14,997,969 $15,071,514 $12,945,694
Consumer and other loans 1,267,455 858,670 550,905
Financing leases and commercial loans 4,060,194 1,815,178 400,120
Securities - taxable 3,315,190 2,532,974 3,692,136
Other interest-earning assets 612,977 559,547 95,971
----------- ----------- -----------
Total interest income 24,253,785 20,837,883 17,684,826
Interest expense
Deposits 8,580,571 8,388,360 8,181,489
Securities sold under agreements to repurchase 147,675 67,352 4,138
FHLB advances 5,719,852 3,748,087 1,971,537
----------- ----------- -----------
Total interest expense 14,448,098 12,203,799 10,157,164
Net interest income 9,805,687 8,634,084 7,527,662
Provision for loan losses 230,000 120,000 30,000
----------- ----------- -----------
Net interest income after provision
for loan losses 9,575,687 8,514,084 7,497,662
Noninterest income
Insurance commissions 147,521 143,201 133,870
Brokerage commissions 28,157 35,834 23,604
Net realized gains from sales of securities
available for sale 3,803 7,673 6,098
Net realized gains from sales of loans 366,320 333,171 -
Loan servicing fees, net of amortization
of $37,195 in 1999 and $19,376 in 1998 54,025 12,038 --
Other income 620,240 432,276 261,171
----------- ----------- -----------
Total noninterest income 1,220,066 964,193 424,743
Noninterest expense
Salaries and employee benefits 3,846,889 3,413,558 2,772,154
Occupancy and equipment expense 882,698 720,305 579,327
SAIF deposit insurance premium 109,208 107,503 147,121
Provision to adjust loans held for sale
to lower of cost or market 489,152 -- --
Other expense 1,678,134 1,384,023 1,099,972
----------- ----------- -----------
Total noninterest expense 7,006,081 5,625,389 4,598,574
----------- ----------- -----------
Income before income taxes 3,789,672 3,852,888 3,323,831
Income tax expense 1,585,374 1,616,605 1,321,630
----------- ----------- -----------
Net income $ 2,204,298 $ 2,236,283 $ 2,002,201
=========== =========== ===========
Basic earnings per common share $ 1.56 $ 1.44 $ 1.21
Diluted earnings per common share 1.51 1.37 1.16
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
- 20 -
<PAGE>
MFB CORP. AND SUBSIDIARY
Consolidated Statements of Shareholder Equity
Years ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Common Retained Income (Loss), Unearned
Stock Earnings Net of Tax ESOP Shares
----- -------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at September 30, 1996 $ 18,316,651 $ 20,588,797 $ (219,928) $ (893,651)
Purchase and retirement of 288,063 shares
of common stock (5,381,427) -- -- --
Purchase of 45,000 shares of treasury stock -- -- -- --
Stock option exercise-issuance of 3,500 common shares 35,000 -- -- --
Stock option exercise-issuance of 6,150 shares
of treasury stock (79,181) -- -- --
Cash dividends declared - $ .32 per share -- (553,557) -- 29,041
Effect of contribution to fund ESOP -- -- --
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 -- -- --
Comprehensive income:
Net income for the year end September 30, 1997 -- 2,002,201 -- --
Net change in net unrealized gains and losses on
securities available for sale, net of reclassification
adjustments and tax effects -- -- 293,136 -
Total comprehensive income -- -- -- --
------------ ------------ ------------ ------------
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 -- -- --
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 - -- --
Comprehensive income:
Net income for the year end September 30, 1998 -- 2,236,283 -- --
Net change in net unrealized gains and losses on
securities available for sale, net of reclassification
adjustments and tax effects -- -- (118,625) --
Total comprehensive income -- -- -- --
------------ ------------ ------------ ------------
Balance at September 30, 1998 $ 12,846,979 $ 23,730,167 $ (45,417) $ (444,557)
Purchase of 56,668 shares of treasury stock -- -- -- --
Stock option exercise-issuance of 2,500 shares
of treasury stock (33,906) -- -- --
Cash dividends declared - $ .355 per share -- (514,743) -- 13,961
Effect of contribution to fund ESOP -- -- --
Market adjustment of 19,186 ESOP shares
committed to be released 203,229 - -- --
Amortization of RRP contribution -- -- -- --
Comprehensive income:
Net income for the year end September 30, 1999 -- 2,204,298 -- --
Net change in net unrealized gains and losses
on securities available for sale, net of
reclassification adjustments and tax effects -- -- (672,406) --
Total comprehensive income -- -- -- --
------------ ------------ ------------ ------------
Balance at September 30, 1999 $ 13,016,302 $ 25,419,722 $ (717,823) $ (222,963)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Total
Unearned Treasury Shareholders'
RRP Shares Stock Equity
---------- ----- ------
<S> <C> <C> <C>
Balance at September 30, 1996 $ (192,500) $- $ 37,599,369
Purchase and retirement of 288,063 shares
of common stock -- -- (5,381,427)
Purchase of 45,000 shares of treasury stock -- (1,029,375) (1,029,375)
Stock option exercise-issuance of 3,500 common shares -- -- 35,000
Stock option exercise-issuance of 6,150 shares
of treasury stock -- 140,681 61,500
Cash dividends declared - $ .32 per share -- -- (524,516)
Effect of contribution to fund ESOP 200,000 - -- 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
Comprehensive income:
Net income for the year end September 30, 1997 -- -- 2,002,201
Net change in net unrealized gains and losses on
securities available for sale, net of reclassification
adjustments and tax effects -- -- 293,136
Total comprehensive income -- -- 2,295,337
------------ ------------ ------------
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 - -- 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
Comprehensive income:
Net income for the year end September 30, 1998 -- -- 2,236,283
Net change in net unrealized gains and losses on
securities available for sale, net of reclassification
adjustments and tax effects -- -- (118,625)
Total comprehensive income -- -- 2,117,658
------------ ------------ ------------
Balance at September 30, 1998 $ (38,500) $ (5,162,895) $ 30,885,777
Purchase of 56,668 shares of treasury stock -- (1,209,619) (1,209,619)
Stock option exercise-issuance of 2,500 shares
of treasury stock -- 58,906 25,000
Cash dividends declared - $ .355 per share -- -- (500,782)
Effect of contribution to fund ESOP 207,633 - -- 207,633
Market adjustment of 19,186 ESOP shares
committed to be released -- -- 203,229
Amortization of RRP contribution 38,500 -- 38,500
Comprehensive income:
Net income for the year end September 30, 1999 -- -- 2,204,298
Net change in net unrealized gains and losses
on securities available for sale, net of
reclassification adjustments and tax effects -- -- (672,406)
Total comprehensive income -- -- 1,531,892
------------ ------------ ------------
Balance at September 30, 1999 $ -- $ (6,313,608) $ 31,181,630
============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
- 21 -
<PAGE>
MFB CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities
<S> <C> <C> <C>
Net income $ 2,204,298 $ 2,236,283 $ 2,002,201
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization, net of accretion 298,862 314,688 473,203
Amortization of RRP contribution 38,500 77,000 77,000
Provision for loan losses 230,000 120,000 30,000
Provision to adjust loans held for sale
to lower of cost or market 489,152 -- --
Net realized gains from sales of
securities available for sale (3,803) (7,673) (6,098)
Net realized gains from sales of loans (366,320) (333,171) --
Amortization of mortgage servicing rights 37,195 19,376 --
Origination of loans held for sale (20,948,828) (28,866,583) --
Proceeds from sales of loans held for sale 20,728,574 28,143,363 --
Equity in loss of investment in
limited partnership 8,084 4,236 --
Market adjustment of ESOP shares
committed to be released 203,229 286,919 188,153
ESOP expense 207,633 200,000 200,000
Net change in:
Accrued interest receivable (395,323) (249,568) 99,587
Other assets (24,475) (80,831) 498,262
Accrued expenses and other liabilities (138,798) 750,489 (2,303,772)
----------- ----------- -----------
Net cash from operating activities 2,567,980 2,614,528 1,258,536
Cash flows from investing activities
Net change in interest-bearing time
deposits in other financial institutions (1,000,000) -- 495,000
Net change in loans receivable (32,793,948) (43,461,852) (48,913,292)
Proceeds from:
Sales of securities available for sale 1,989,992 2,926,206 25,186,766
Principal payments of mortgage-backed
and related securities 21,505,020 19,343,270 2,938,521
Maturities of securities available for sale 42,410,326 22,738,565 27,877,752
Purchase of:
Securities available for sale (63,280,952) (47,461,878) (28,634,913)
Securities held to maturity (3,984,360) -- --
FHLB stock (875,000) (2,236,300) (1,063,900)
Premises and equipment, net (2,001,153) (423,665) (859,211)
Investment in limited partnership -- (1,225,750) --
----------- ----------- -----------
Net cash from investing activities (38,030,075) (49,801,404) (22,973,277)
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
(Continued)
- 22 -
<PAGE>
Consolidated Statements of Cash Flows
Years ended September 30, 1999, 1998 and 1997 (continued)
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
Cash flows from financing activities
<S> <C> <C> <C>
Purchase of MFB Corp. common stock $ (1,209,619) $ (5,931,312) $ (6,410,802)
Net change in deposits 20,741,414 8,778,708 12,922,778
Net change in securities sold under
agreements to repurchase 4,200,679 1,976,796 388,920
Proceeds from other borrowings 23,000,000 72,156,964 66,735,000
Repayment of other borrowings (16,431,214) (22,000,000) (43,735,000)
Proceeds from exercise of stock options 25,000 688,500 96,500
Net change in advances from
borrowers for taxes and insurance (205,134) 462,069 (10,179)
Cash dividends paid (500,782) (523,504) (524,516)
------------ ------------ ------------
Net cash from financing activities 29,620,344 55,608,221 29,462,701
------------ ------------ ------------
Net change in cash and cash equivalents (5,841,751) 8,421,345 7,747,960
Cash and cash equivalents at beginning of year 17,903,693 9,482,348 1,734,388
------------ ------------ ------------
Cash and cash equivalents at end of year $ 12,061,942 $ 17,903,693 $ 9,482,348
============ ============ ============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 14,403,181 $ 12,305,287 $ 10,113,767
Income taxes 1,627,895 1,182,448 868,000
Supplemental schedule of noncash investing
activities
Transfer from:
Loans receivable to loans held for sale $ -- $- $ 12,671,186
Loans held for sale to loans receivable 5,294,087 -- --
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
- 23 -
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial
statements include the accounts of MFB Corp., 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, consumer and
residential real estate loans in Mishawaka and the surrounding area. Loans
secured by real estate mortgages comprise approximately 81% of the loan
portfolio at September 30, 1999 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 investments
in limited partnerships, 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.
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 as other
comprehensive income or loss and 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
- 24 -
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 securitizes
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.
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
- 25 -
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
that underlying cash flows of the borrower's business are not adequate to meet
its debt service requirements, the loan is evaluated for impairment. Often this
is associated with a delay or shortfall in payments of 30 days or more.
Nonaccrual loans are often also considered impaired. Impaired loans, or portions
thereof, are charged off when deemed uncollectible. The nature of disclosures
for impaired loans is considered generally comparable to prior nonaccrual and
renegotiated loans and non-performing and past due asset disclosures.
Interest income on loans is accrued over the term of the loans based upon
the principal outstanding. The accrual of interest on impaired loans in
discontinued when, in management's opinion, the borrower may be unable to meet
payments as they become due. When interest accrual is discontinued, all unpaid
accrued interest is reversed. Interest income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment, the
borrower has the ability to make contractual interest and principal payments, in
which case the loan is returned to accrual status.
Foreclosed Real Estate: Real estate properties acquired through, or in lieu
of, loan foreclosure are initially recorded at fair value at the date of
acquisition, establishing a new cost basis. Any reduction to fair value from the
carrying value of the related loan at the time of acquisition is accounted for
as a loan loss and charged against the allowance for loan losses. Valuations are
periodically performed by management and valuation allowances are adjusted
through a charge to income for changes in fair value or estimated selling costs.
Foreclosed real estate at September 30, 1999 and 1998 amounted to $100,000 and
$145,000.
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.
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.
Earnings Per Common Share: 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
- 26 -
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Comprehensive Income (Loss): Comprehensive income (loss) consists of net
income and other comprehensive income (loss). Other comprehensive income
includes the net change in net unrealized gains and losses on securities
available for sale, net of reclassification adjustments and tax effects, and is
also recognized as a separate component of shareholders' equity. The accounting
standard that requires reporting comprehensive income (loss) first applies for
1999, with prior information restated to be comparable.
Segments: MFB Corp. and its subsidiary, MFB Financial and its subsidiary
Mishawaka Financial Services, Inc. provide a broad range of financial services
to individuals and companies in Mishawaka and the surrounding area. These
services include demand, time and savings deposits; lending; and insurance.
While the Company's chief decision makers monitor the revenue streams of the
various Company products and services, operations are managed and financial
performance is evaluated on a Company-wide basis. Accordingly, all of the
Company's banking operations are considered by management to be aggregated in
one reportable operating segment.
New Accounting Pronouncement: SFAS No. 133 on derivatives will, beginning
with the quarter ended December 31, 2000, require all derivatives to be recorded
at fair value in the balance sheet. Unless designated as hedges, changes in
these fair values will be recorded in the income statement. If derivatives are
documented and effective as hedges, the change in the derivative fair value will
generally be offset by an equal change in the fair value of the hedged item.
Reclassifications: Some items in the prior consolidated financial
statements have been reclassified to conform with the current presentation.
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,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Basic Earnings Per Common Share
Numerator
Net income $ 2,204,298 $ 2,236,283 $ 2,002,201
=========== =========== ===========
Denominator
Weighted average common shares
outstanding 1,448,790 1,611,492 1,742,329
Less: Average unallocated ESOP shares (30,450) (50,538) (72,670)
Less: Average nonvested RRP shares (1,925) (7,700) (15,400)
----------- ----------- -----------
Weighted average common shares
outstanding for basic earnings per
common share 1,416,415 1,553,254 1,654,259
=========== =========== ===========
Basic earnings per common share $ 1.56 $ 1.44 $ 1.21
=========== =========== ===========
</TABLE>
- 27 -
<PAGE>
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Diluted Earnings Per Common Share
Numerator
Net income $2,204,298 $2,236,283 $2,002,201
========== ========== ==========
Denominator
Weighted average common shares
outstanding for basic earnings per
common share 1,416,415 1,553,254 1,654,259
Add: Dilutive effects of average
nonvested RRP shares 448 3,166 --
Add: Dilutive effects of assumed
exercises of stock options 44,793 75,417 71,916
---------- ---------- ----------
Weighted average common shares
and dilutive potential common
shares outstanding 1,461,656 1,631,837 1,726,175
---------- ---------- ----------
Diluted earnings per common share $ 1.51 $ 1.37 $ 1.16
========== ========== ==========
</TABLE>
Stock options for 78,250 and 45,000 shares of common stock were not
considered in computing diluted earnings per common share for the years ended
September 30, 1999 and 1998 because they were antidilutive.
NOTE 3 - SECURITIES
The amortized cost and fair value of securities available for sale and held
to maturity are as follows:
<TABLE>
<CAPTION>
Available for Sale
September 30, 1999
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Debt securities
U.S. Government and
federal agencies $ 7,745,193 $- $ (182,510) $ 7,562,683
Mortgage-backed 27,112,085 56,085 (718,350) 26,449,820
Corporate notes 3,958,662 -- (230,232) 3,728,430
------------ ------------ ------------ ------------
38,815,940 56,085 (1,131,092) 37,740,933
Marketable equity securities 542,850 -- (113,640) 429,210
------------ ------------ ------------ ------------
$ 39,358,790 $ 56,085 $ (1,244,732) $ 38,170,143
============ ============ ============ ============
Held to Maturity
September 30, 1999
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Corporate notes $ 3,984,338 $ - $(275,133) $ 3,709,205
============ ============ ============ ============
</TABLE>
- 28 -
<PAGE>
<TABLE>
<CAPTION>
Available for Sale
September 30, 1998
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Debt securities
U.S. Government
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>
There were no securities held to maturity at September 30, 1998.
The amortized cost and fair value of debt securities by contractual
maturity are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------------------------------
Available for Sale Held for Maturity
-------------------------- --------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ 501,371 $ 501,250 $ 501,286 $ 501,145
Due after one year through
five years 2,498,157 2,464,075 -- --
Due after five years through
ten years 4,000,000 3,893,760 3,483,052 3,208,060
Due after ten years 4,704,327 4,432,028 -- --
----------- ----------- ----------- -----------
11,703,885 11,291,113 3,984,338 3,709,205
Mortgage-backed securities 27,112,085 26,449,820 -- --
----------- ----------- ----------- -----------
$38,815,940 $37,740,933 $ 3,984,338 $ 3,709,205
=========== =========== =========== ===========
</TABLE>
Proceeds from sales of securities available for sale were $1,989,992 during
the year ended September 30, 1999. Gross gains of $5,026 and gross losses of
$1,223 were realized on these sales. During the year ended September 30, 1998,
proceeds from the sales of securities available for sale were $2,926,206 with
gross gains of $10,534 and gross losses of $2,861 realized on these sales.
During the year ended September 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 those losses.
- 29 -
<PAGE>
NOTE 4 - LOANS RECEIVABLE, NET
Loans receivable, net at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
First mortgage loans (principally conventional)
Principal balances
Secured by one-to-four family residences $ 191,479,582 $ 183,150,539
Construction loans 11,157,731 8,233,468
Other 3,298,833 120,188
------------- -------------
205,936,146 191,504,195
Less undisbursed portion of construction
and other mortgage loans (87,153) (485,444)
------------- -------------
Total first mortgage loans 205,848,993 191,018,751
Commercial and consumer loans:
Principal balances
Home equity and second mortgage $13,308,441 $ 9,067,504
Commercial 47,399,290 30,774,778
Financing leases 16,969 83,026
Other 4,461,096 1,913,564
Total commercial and consumer loans 65,185,796 41,838,872
Allowance for loan losses (638,465) (453,567)
Net deferred loan origination fees (932,239) (798,006)
------------- -------------
$ 269,464,085 $ 231,606,050
============= =============
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the
years ended September 30:
1999 1998 1997
--------- --------- ---------
Balance at beginning of year $ 453,567 $ 370,000 $ 340,000
Provision for loan losses 230,000 120,000 30,000
Charge-offs (45,102) (36,433) --
Recoveries -- -- --
--------- --------- ---------
Balance at end of year $ 638,465 $ 453,567 $ 370,000
========= ========= =========
At September 30, 1999, 1998 and 1997, 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, 1999, 1998 and 1997.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans at
September 30, are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
Mortgage loan portfolios serviced for:
<S> <C> <C>
Telebank $ 7,597,059 $ 9,943,910
Hanover Capital Mortgage Holdings, Inc. 6,785,972 7,629,859
LaSalle Bank, FSB 7,222,714 8,036,000
Citizens Bank 6,250,822 --
Federal Home Loan Mortgage Corporation 13,709,321 --
----------- -----------
$41,565,888 $25,609,769
=========== ===========
</TABLE>
- 30 -
<PAGE>
Custodial escrow balances maintained in connection with the foregoing
serviced loans were $209,000 and $62,000 at September 30, 1999 and 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:
1999 1998
----------- -----------
Balance - beginning of year $ 1,513,829 $ 927,721
New loans 443,980 896,705
Repayments (375,307) (117,579)
Effect of changes in related parties -- (193,018)
----------- -----------
Balance - end of year $ 1,582,502 $ 1,513,829
=========== ===========
NOTE 5 - PREMISES AND EQUIPMENT, NET
Premises and equipment at September 30 are summarized as follows:
1999 1998
----------- -----------
Land $ 834,895 $ 581,956
Buildings and improvements 3,571,734 2,544,588
Furniture and equipment 2,052,425 1,441,967
----------- -----------
Total cost 6,459,054 4,568,511
Accumulated depreciation and amortization (2,045,645) (1,773,015)
----------- -----------
$ 4,413,409 $ 2,795,496
=========== ===========
Depreciation and amortization of premises and equipment, included in
occupancy and equipment expense was approximately $383,000, $241,000 and
$216,000 for the years ended September 30, 1999, 1998 and 1997, respectively.
NOTE 6 - DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit in
denomination of $100,000 or more was approximately $30,252,000 and $27,568,000
at September 30, 1999 and 1998. At September 30, 1999, the scheduled maturities
of certificates of deposit are as follows for the years ended September 30:
2000 $110,416,081
2001 22,227,730
2002 6,873,015
2003 1,467,270
2004 70,271
Thereafter 285,518
------------
$141,639,885
============
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:
- 31 -
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Average daily balance during the year $3,892,000 $1,647,000 $ 97,000
Average interest rate during the year 3.79% 4.09% 4.27%
Maximum month end balance
during the year $7,079,000 $3,882,000 $ 389,000
Balance at end of year $6,566,395 $2,365,716 $ 388,920
Securities underlying these agreements
at year end were as follows:
Carrying value of securities $9,892,000 $8,385,000 $3,530,000
Fair value $9,310,000 $8,387,000 $3,508,000
</TABLE>
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
At September 30, 1999, advances from the Federal Home Loan Bank of
Indianapolis with fixed and variable rates ranging from 4.76% to 5.93% are
required to be repaid in the year ending September 30 as follows:
2000 $8,000,000
2001 2,350,000
2002 11,350,000
2003 15,300,000
2004 800,000
Thereafter 66,425,750
------------
$104,225,750
============
FHLB advances are secured by all FHLB stock, qualifying first mortgage
loans, government agency and mortgage backed securities. At September 30, 1999
and 1998, in addition to $5,511,000 and $4,636,000 in FHLB stock, collateral of
approximately $225,715,000 and $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,
1999, 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, 1999, 1998 and 1997 was approximately $6,900, $1,500
and $1,500, 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, 1999, 1998 and 1997 was approximately $60,000, $52,000 and
$42,000.
- 32 -
<PAGE>
NOTE 9 - EMPLOYEE BENEFITS (continued)
Employee Stock Ownership Plan (ESOP): In conjunction with its stock
conversion, the Company established an ESOP for eligible employees. Employees
with at least one year of employment and who have attained age twenty-one are
eligible to participate. The ESOP borrowed $1,400,000 from the Company to
purchase 140,000 shares of common stock issued in the conversion at $10 per
share. Collateral for the loan is the unearned shares of common stock purchased
by the ESOP with the loan proceeds. The loan will be repaid principally from the
Company's discretionary contributions to the ESOP over a period of seven years.
The interest rate for the loan is 6.25%. Shares purchased by the ESOP will be
held in suspense until allocated among ESOP participants as the loan is repaid.
ESOP expense was approximately $411,000, $487,000 and $388,000 for the
years ended September 30, 1999, 1998 and 1997. Contributions to the ESOP,
including dividends on unearned ESOP shares, was approximately $222,000,
$220,000 and $229,000 during the years ended September 30, 1999, 1998 and 1997.
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, 1999, 1998 and 1997, 19,186, 20,989 and 23,276 shares with
an average fair value of $21.41, $23.20 and $16.68 per share, were committed to
be released.
The ESOP shares as of September 30 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Allocated shares 119,143 99,957 78,968
Unearned shares 20,857 40,043 61,032
Shares withdrawn from the plan by participants (14,571) (5,601)
Total ESOP shares held in the plan 125,429 134,399 134,399
----------- ----------- -----------
Fair value of unearned shares $ 412,000 $ 1,021,000 $ 1,419,000
=========== =========== ===========
</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, 1999, 1998 and 1997 was approximately $38,500, $77,000 and
$77,000, respectively.
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
- 33 -
<PAGE>
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, 1999, 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, 1999,
1998 and 1997. As of September 30, 1999, 69,250 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 for the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:
1999 1998
---- ----
Risk-free interest rate 4.74% 6.00
Expected dividend rate 1.71% 1.21%
Stock price volatility 12.20% 12.45%
There were no options granted
for the year ended September 30, 1997.
1999 1998 1997
---- ---- ----
Net income as reported $ 2,204,298 $ 2,236,283 $ 2,002,201
Proforma net income 2,054,921 2,069,443 1,981,761
Reported earnings per
common and common
equivalent share
Basic $ 1.56 $ 1.44 $ 1.21
Diluted $ 1.51 $ 1.37 $ 1.16
Proforma earnings per
common and common
equivalent share
Basic $ 1.45 $ 1.33 $ 1.20
Diluted $ 1.41 $ 1.27 $ 1.15
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>
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
Granted 35,750 $18.25-$21.875 $ 21.37 $ 5.30
Exercised (2,500) $ 10.00 $ 10.00
Balance at September 30, 1999 199,750 $10.00-$26.75 $ 16.58
</TABLE>
- 34 -
<PAGE>
Options exercisable at September 30 are as follows:
Weighted
Number Average
of Options Exercise Price
---------- --------------
1997 176,350 $10.46
1998 122,500 $12.14
1999 155,750 $14.29
At September 30, 1999, options outstanding had a weighted-average remaining
life of 7.65 years.
NOTE 10 - INCOME TAXES
The Company files consolidated income tax returns. Prior to fiscal 1997, if
certain conditions were met in determining taxable income as reported on the
consolidated federal income tax return, 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 with the tax year ending September 30,
1999.
Income tax expense for the years ended September 30 are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Federal
Current $ 1,535,497 $ 1,301,834 $ 765,810
Deferred (284,395) (2,359) 264,314
----------- ----------- -----------
1,251,102 1,299,475 1,030,124
State
Current 397,363 317,774 223,225
Deferred (63,091) (644) 68,281
----------- ----------- -----------
334,272 317,130 291,506
----------- ----------- -----------
Total income tax expense $ 1,585,374 $ 1,616,605 $ 1,321,630
=========== =========== ===========
</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>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income taxes at statutory rate $ 1,288,488 $ 1,309,982 $ 1,130,103
Tax effect of:
State tax, net of federal income
tax effect 220,620 209,306 192,394
Excess of fair value of ESOP
shares released over cost 69,098 97,552 63,972
Other items, net 7,168 (235) (64,839)
----------- ----------- -----------
Total income tax expense $ 1,585,374 $ 1,616,605 $ 1,321,630
=========== =========== ===========
</TABLE>
- 35 -
<PAGE>
The components of the net deferred tax asset (liability) recorded in the
consolidated balance sheets as of September 30 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets
RRP expense $ -- $ 16,363
Net deferred loan fees 396,202 339,153
Valuation adjustment on loans held for sale 207,890 --
Net unrealized depreciation
on securities available for sale 470,824 29,788
Other 14,764 1,249
----------- -----------
1,089,680 386,553
Deferred tax liabilities
Accretion (20,445) (57,364)
Depreciation (52,057) (60,442)
Bad debt deduction (100,382) (253,309)
Mortgage servicing rights (175,266) (81,472)
Other (44,121) (25,079)
----------- -----------
(392,271) (477,666)
Valuation allowance -- --
----------- -----------
Net deferred tax asset (liability) $ 697,409 $ (91,113)
=========== ===========
</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, 1999 and 1998. 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.
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.
- 36 -
<PAGE>
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, 1999
Total capital (to risk
weighted assets) $31,268 15.23% $16,428 8.00% $20,536 10.00%
Tier 1 (core) capital
(to risk weighted assets) 30,630 14.92 8,214 4.00 12,321 6.00
Tier 1 (core) capital (to
adjusted total assets) 30,630 8.83 13,868 4.00 17,335 5.00
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 12,388 4.00 15,485 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 retained net income for the calendar year-to-date
plus retained net income for the previous two calendar years (less any dividends
previously paid as long as the Bank would remain "well-capitalized", following
the proposed distribution. Accordingly, at September 30, 1999 none of the Bank's
retained earnings was potentially available for distribution to the Company,
without obtaining prior regulatory approval.
- 37 -
<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>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Other noninterest income
Service charges and fees $ 510,980 $ 318,636 $ 200,759
Other 109,260 113,640 60,412
----------- ----------- -----------
$ 620,240 $ 432,276 $ 261,171
=========== =========== ===========
Other noninterest expense
Advertising and promotion $ 206,254 $ 186,257 $ 179,423
Data processing 379,715 384,629 281,171
Professional fees 170,429 166,652 143,550
Printing, postage, stationery,
and supplies 219,267 162,794 192,514
Direct loan origination costs deferred (202,349) (262,686) (245,981)
Other 904,818 746,377 549,295
----------- ----------- -----------
$ 1,678,134 $ 1,384,023 $ 1,099,972
=========== =========== ===========
</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>
1999 1998
---------------------------------------- ----------------------------------------
Fixed Variable Fixed Variable
Rate Loans Rate Loans Total Rate Loans Rate Loans Total
---------- ---------- ----- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
First mortgage loans $ 1,534,750 $ 1,100,350 $ 2,635,100 $ 3,398,489 $ 3,441,451 $ 6,839,940
Commercial loans 9,984,354 8,866,800 18,851,154 3,739,220 5,440,747 9,179,967
Unused lines of credit 7,953,681 7,812,361 15,766,042 3,268,364 8,998,528 12,266,892
Unused commercial loan
lines of credit -- 22,206,913 22,206,913 -- 7,649,903 7,649,903
Unused construction loan
lines of credit -- 5,574,641 5,574,641 -- 1,219,604 1,219,604
----------- ----------- ----------- ----------- ----------- -----------
$19,472,785 $45,561,065 $65,033,850 $10,406,073 $26,750,233 $37,156,306
=========== =========== =========== =========== =========== ===========
</TABLE>
Fixed rate mortgage loan commitments at September 30, 1999 are at rates
primarily ranging from 7.50% to 9.50%. 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 6.875% to 9.25% 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.
- 38 -
<PAGE>
Under employment agreements with certain executives, officers, certain
events leading to separation from the Company could result in cash payments
totaling $1,379,000 as of September 30, 1999.
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, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 384,044 $ 552,454
Equity securities available for sale 429,210 506,380
Securities held to maturity 1,000,000 --
Investment in Bank subsidiary 29,980,712 29,064,393
Loan receivable from ESOP 222,963 444,557
Other assets 20,138 388,917
----------- -----------
Total assets $32,037,067 $30,956,701
LIABILITIES
Loan payable to Bank subsidiary $ 750,000 $ --
Accrued expenses and other liabilities 105,437 70,924
----------- -----------
Total liabilities 855,437 70,924
SHAREHOLDERS' EQUITY 31,181,630 30,885,777
----------- -----------
Total liabilities and shareholders' equity $32,037,067 $30,956,701
=========== ===========
</TABLE>
CONDENSED STATEMENTS OF INCOME
Years ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Dividends from Bank subsidiary - cash $ 1,125,000 $ 5,650,000 $ 2,000,000
Interest income 57,205 48,748 57,723
Other income -- 919 --
Interest expense 17,062 1,346 3,319
Other expenses 110,790 107,359 107,243
----------- ----------- -----------
Income before income taxes and
equity in undistributed net income
of Bank subsidiary 1,054,353 5,590,962 1,947,161
Income tax benefit 29,857 25,014 22,803
----------- ----------- -----------
Income before equity in undistributed
net income of Bank subsidiary 1,084,210 5,615,976 1,969,964
(Distributions in excess of) equity in
undistributed net income of Bank subsidiary 1,120,088 (3,379,693) 32,237
----------- ----------- -----------
Net income $ 2,204,298 $ 2,236,283 $ 2,002,201
=========== =========== ===========
</TABLE>
- 39 -
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
Years ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities
<S> <C> <C> <C>
Net income $ 2,204,298 $ 2,236,283 $ 2,002,201
Adjustments to reconcile net income to
net cash from operating activities
Distributions in excess of (equity in
undistributed) net income of
Bank subsidiary (1,120,088) 3,379,693 (32,237)
Net change in other assets 353,863 30,063
Net change in accrued expenses and
other liabilities 121,285 310,634 97,747
----------- ----------- -----------
Net cash from operating activities 1,559,358 5,565,084 2,097,774
Cash flows from investing activities
Principal repayments on loan receivable
from ESOP 221,594 220,053 229,041
Principal repayments on note receivable
from Bank subsidiary -- -- 4,750,000
Purchase of securities available for sale -- (242,500) (300,350)
Purchase of securities held to maturity (1,000,000) -- --
----------- ----------- -----------
Net cash from investing activities (778,406) (22,447) 4,678,691
Cash flows from financing activities
Proceeds from loan payable to Bank
subsidiary 750,000 -- --
Purchase of MFB Corp. common stock (1,209,619) (5,931,312) (6,410,802)
Proceeds from exercise of stock options 25,000 688,500 96,500
Cash dividends paid (514,743) (543,557) (553,557)
----------- ----------- -----------
Net cash from financing activities (949,362) (5,786,369) (6,867,859)
----------- ----------- -----------
Net change in cash and cash equivalents (168,410) (243,732) (91,394)
Cash and cash equivalents at beginning
of year 552,454 796,186 887,580
----------- ----------- -----------
Cash and cash equivalents at end of year $ 384,044 $ 552,454 $ 796,186
=========== =========== ===========
</TABLE>
- 40 -
<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, 1999
and 1998. Items which are not financial instruments are not included.
<TABLE>
<CAPTION>
1999 1998
------------------------------- -------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 12,061,942 $ 12,062,000 $ 17,903,693 $ 17,904,000
Interest-bearing time
deposits in other financial
institutions 1,000,000 1,000,000 -- --
Securities available for sale 38,170,143 38,170,000 41,819,768 41,820,000
Securities held to maturity 3,984,338 3,709,000 -- --
FHLB stock 5,511,300 5,511,000 4,636,300 4,636,000
Loans held for sale, net 8,061,951 8,062,000 13,516,502 13,517,000
Loans receivable, net of
allowance for loan losses 269,464,085 269,707,000 232,606,050 234,324,000
Accrued interest receivable 1,363,318 1,363,000 967,995 968,000
Mortgage servicing rights, net 412,390 412,000 191,699 192,000
Investment in limited
partnership 1,213,430 1,213,000 1,221,514 1,222,000
Noninterest bearing demand
deposits (7,357,944) (7,358,000) (4,298,516) (4,299,000)
Savings, NOW and MMDA
deposits (52,409,560) (52,410,000) (40,835,161) (40,835,000)
Other time deposits (141,639,885) (141,314,000) (135,532,298) (135,573,000)
Securities sold under
agreements to repurchase (6,566,395) (6,566,000) (2,365,716) (2,366,000)
FHLB advances (104,225,750) (101,370,000) (92,725,750) (90,333,000)
Advances from borrowers
for taxes and insurance (2,111,183) (2,111,000) (2,316,317) (2,316,000)
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, 1999 and 1998. The estimated
fair value for cash and cash equivalents and interest-bearing time deposits in
other financial institutions are considered to approximate cost. The estimated
fair value for securities available for sale and securities held to maturity, is
based upon quoted market values for the individual securities or for equivalent
securities. The estimated fair value for loans held for sale, net, is based on
the price offered in the secondary market on September 30, 1999 and 1998 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, 1999 and 1998, 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
- 41 -
<PAGE>
issues. The estimated fair value for FHLB stock, accrued interest receivable,
mortgage servicing rights, investment in limited partnership, noninterest
bearing demand deposits, savings, NOW and MMDA deposits, other borrowings and
advances from borrowers for taxes and insurance 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,
1999 and 1998, 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.
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, 1999 and 1998, 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, 1999 and 1998 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 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net change in net unrealized gains and losses
on securities available for sale
Unrealized gains (losses) arising during
the year $(1,109,639) $ (188,757) $ 491,503
Reclassification adjustment for gains
included in net income (3,803) (7,673) (6,098)
Net change in net unrealized gains
and losses on securities available
for sale (1,113,442) (196,430) 485,405
Tax effects (441,036) (77,805) 192,269
----------- ----------- -----------
Total other comprehensive income (loss) $ (672,406) $ (118,625) $ 293,136
=========== =========== ===========
</TABLE>
- 42 -
<PAGE>
NOTE 17 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended September 30, 1999
-----------------------------------------------
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
-----------------------------------------------
<S> <C> <C> <C> <C>
Interest income $5,960 $5,957 $6,075 $6,262
Interest expense 3,626 3,589 3,608 3,625
-----------------------------------------------
Net interest income 2,334 2,368 2,467 2,637
Provision for loan losses 45 45 65 75
-----------------------------------------------
Net interest income after provision
for loan losses 2,289 2,323 2,402 2,562
Noninterest income 304 286 258 372
Noninterest expense 1,467 1,594 2,023 1,923
-----------------------------------------------
Income before income taxes 1,126 1,015 637 1,011
Income tax expense 463 421 272 429
===============================================
Net income $ 663 $ 594 $ 365 $ 582
Basic earnings per common share $ .46 $ .42 $ .26 $ .42
Diluted earnings per common share $ .45 $ .40 $ .25 $ .41
Year Ended September 30, 1998
-----------------------------------------------
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
-----------------------------------------------
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 losses 1,986 2,181 2,210 2,137
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>
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference and use of our report, dated
November 10, 1999, 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, 1999, in MFB Corp.'s Registration Statement on Form S-8
(Registration No. 33-84340).
Crowe, Chizek and Company LLP
South Bend, Indiana
December 27, 1999
<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-30-1999
<PERIOD-START> OCT-1-1998
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 6,316
<INT-BEARING-DEPOSITS> 5,746
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 38,170
<INVESTMENTS-CARRYING> 3,984
<INVESTMENTS-MARKET> 3,709
<LOANS> 278,165
<ALLOWANCE> 638
<TOTAL-ASSETS> 346,454
<DEPOSITS> 201,407
<SHORT-TERM> 14,566
<LIABILITIES-OTHER> 3,073
<LONG-TERM> 96,226
<COMMON> 13,016
0
0
<OTHER-SE> 18,166
<TOTAL-LIABILITIES-AND-EQUITY> 346,454
<INTEREST-LOAN> 20,326
<INTEREST-INVEST> 3,315
<INTEREST-OTHER> 613
<INTEREST-TOTAL> 24,254
<INTEREST-DEPOSIT> 8,581
<INTEREST-EXPENSE> 14,448
<INTEREST-INCOME-NET> 9,806
<LOAN-LOSSES> 230
<SECURITIES-GAINS> 4
<EXPENSE-OTHER> 7,006
<INCOME-PRETAX> 3,790
<INCOME-PRE-EXTRAORDINARY> 2,204
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,204
<EPS-BASIC> 1.56
<EPS-DILUTED> 1.51
<YIELD-ACTUAL> 3.01
<LOANS-NON> 0
<LOANS-PAST> 96
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 454
<CHARGE-OFFS> 46
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 638
<ALLOWANCE-DOMESTIC> 556
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 82
</TABLE>
