ANNUAL REPORT
TO SHAREHOLDERS
TABLE OF CONTENTS
Page
----
Letter to Shareholders ................................................. 1
Selected Consolidated Financial Data ................................... 2
Management's Discussion and Analysis ................................... 3
Report of Independent Auditors ......................................... 18
Consolidated Balance Sheets ............................................ 19
Consolidated Statements of Income ...................................... 20
Consolidated Statements of Shareholders' Equity ........................ 21
Consolidated Statements of Cash Flows .................................. 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
six 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. , 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>
MESSAGE TO OUR SHAREHOLDERS:
On behalf of the Board of Directors, our management team and all the employees
of MFB Corp. and it's subsidiary, MFB Financial ("the Bank"), it is my pleasure
to provide you with our first Annual Report of the new millennium. Several
achievements of the past year are noteworthy in many respects and I would like
to share some thoughts about those achievements with you.
The century date change came and went with barely a whimper around the world.
But behind the scenes considerable effort and resources were expended to achieve
this "non-event". Our company worked diligently to assure uninterrupted service
for our customers and neither of us was disappointed. Although the New Year
celebrations were anything but routine, it was truly business as usual when we
opened our doors on the morning of January 3, 2000--much to the delight of
customers and employees alike.
In our continuing effort to bring our exceptional products and services to the
broader community, we established two new banking facility this past year. The
first was a traditional full service location in downtown South Bend that opened
in March, 2000. We created a state-of-the-art facility complete with a cyber
cafe that allows visitors to relax with a cup of their favorite gourmet coffee
while they "surf the net" and learn just how easy banking can be in the 21st
century. Which brings me to the second new and exciting facility we established
last year--a virtual branch. The Bank has developed a robust web site,
MFBBANK.COM, that allows people to view balances, transfer funds, pay bills,
check on their investments and open accounts all from the convenience of any
internet accessible computer. We invite you to visit both our new "brick and
mortar" branch and our "virtual" branch at your earliest opportunity.
All of the technological advances didn't keep us from remaining focused on the
core business at hand--that of continuing to grow shareholder value through
diversification and improved profitability. In fact we made considerable
progress in our efforts to diversify the Bank this year. Our loan portfolio
changed significantly as we continued to emphasize our commitment to small and
medium size businesses. Our growth was funded primarily by the acquisition of
new deposit relationships. Both loan and deposit growth are a tribute to the
focused effort of every employee to deliver the message to our community that
there is still a local bank that believes the customer comes first. We are
dedicated to understanding customer needs and providing the right financial
solutions.
Many people received an unwanted dose of reality this past year--the reality
that the stock market does not always go up. Many have looked at their year end
brokerage accounts or 401-K statements and seen unimpressive results. Could they
have done better? More than likely the answer is yes. By properly diversifying
their holdings to include bank deposits that carried guaranteed rates of return
the overall results could have been far more rewarding. We have seen many
customers come to the realization that traditional bank products are an
important part of a diversified investment strategy. It may not be cutting edge,
but you can't argue with the results.
And speaking of results, the Bank's results for the past year were outstanding.
In fact this year was the most profitable in our history. Net income was $2.8
million, a record, and a 28% improvement over the prior year. Even more
remarkable is the fact that this was achieved in the same year that the Bank set
aside a substantial addition to its loan loss reserves. Growth presents risks
that must be anticipated and managed. Even as asset quality remains well above
our peers, substantial loan growth demands prudent management, including the
establishment of appropriate reserves related to that growth.
Earnings per share increased by $.49 per share, a 32% increase. Core deposit
relationships grew $8.6 million or 14%. This growth has been planned and managed
to translate into improved long term shareholder value--a goal that is as
important to us as it is to you. We are proud of the detailed information you
will find on the pages that follow and reiterate our commitment to you to grow
the value of your investment. We firmly believe your confidence will be
rewarded.
\s\ Charles J. Viater
-------------------------------------
Charles J. Viater
President and Chief Executive Officer
<PAGE>
MFB CORP. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of MFB Corp. and its
subsidiary is qualified in its entirety by, and should be read in conjunction
with, the consolidated financial statements, including notes thereto, included
elsewhere in this Annual Report.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------
(In Thousands)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Summary of Financial Condition:
<S> <C> <C> <C> <C> <C>
Total assets $ 396,003 $ 346,454 $ 314,961 $ 255,921 $ 225,809
Loans held for sale, net 6,495 8,062 13,517 12,671 -
Loans receivable, net 315,506 269,464 231,606 188,264 152,052
Cash and cash equivalents 14,544 12,062 17,904 9,482 1,734
Securities, including FHLB stock 47,930 47,666 46,456 42,028 68,099
Interest-bearing time deposits in other
financial institutions - 1,000 - - 495
Deposits 239,394 201,407 180,666 171,887 158,964
Securities sold under agreements to repurchase 9,143 6,566 2,366 389 -
FHLB advances 112,152 104,226 92,726 47,500 24,500
Shareholders' equity 32,514 31,182 30,886 33,550 37,599
Years Ended September 30,
-------------------------------------------------------------------------
(In Thousands)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Summary of Operating Results:
Interest income $ 28,514 $ 24,254 $ 20,838 $ 17,685 $ 14,182
Interest expense 16,473 14,448 12,204 10,157 8,057
----------- ----------- ----------- ----------- ------------
Net interest income 12,041 9,806 8,634 7,528 6,125
Provision for loan losses 1,106 230 120 30 30
Net interest income after provision ----------- ----------- ----------- ----------- ------------
for loan losses 10,935 9,576 8,514 7,498 6,095
Noninterest income
Service charges on deposit accounts 541 293 192 113 86
Trust fee income 146 29 - - -
Insurance commissions 149 148 143 134 127
Brokerage commissions 13 28 36 24 --
Net gain (loss) from sales of securities (41) 4 8 6 3
Net gains from sales of loans 525 366 333 - --
Loan servicing fees, net 82 54 12 - --
Other 430 298 240 148 146
----------- ----------- ----------- ----------- ------------
Total noninterest income 1,845 1,220 964 425 362
Noninterest expense
Salaries and employee benefits 4,668 3,847 3,414 2,772 2,153
Occupancy and equipment expense 1,081 883 720 580 422
SAIF deposit insurance premium 62 109 108 147 1,291
Provision to adjust loans held for sale to lower
of cost or market 123 489 - - --
Other expense 2,338 1,679 1,383 1,100 969
----------- ----------- ----------- ----------- ------------
Total noninterest expense 8,272 7,007 5,625 4,599 4,835
----------- ----------- ----------- ----------- ------------
Income before income taxes 4,508 3,789 3,853 3,324 1,622
Income tax expense 1,693 1,585 1,617 1,322 647
----------- ----------- ----------- ----------- ------------
Net income $ 2,815 $ 2,204 $ 2,236 $ 2,002 $ 975
=========== =========== =========== =========== ============
Supplemental Data:
Return on assets (1) .75% .66% .80% .84% .49%
Return on equity (2) 8.88 6.97 6.69 5.83 2.55
Interest rate spread (3) 2.88 2.57 2.54 2.49 2.13
Net yield on average interest-earning assets (4) 3.33 3.01 3.17 3.24 3.11
Dividend pay-out ratio (5) 18.38 22.76 23.26 26.45 11.76
Net interest income to operating expenses (6) 145.56 139.96 153.48 163.70 126.67
Equity-to-assets (7) 8.21 9.00 9.81 13.11 16.65
Average interest-earning assets to average
interest-bearing liabilities 109.75 110.19 114.05 117.17 123.81
Non-performing assets to total assets .02 .06 .09 .10 .09
Non-performing loans to total loans .02 .04 .05 .14 .13
Allowance for loan losses to total loans, net .53 .24 .20 .20 .22
Allowance for loan losses to non-performing loans 2,533.33 665.63 366.13 141.76 171.72
Basic earnings per common share $ 2.04 $ 1.56 $ 1.44 $ 1.21 $ .51
Diluted earnings per common share $ 2.00 $ 1.51 $ 1.37 $ 1.16 $ .50
Dividends declared per share $ .375 $ .355 $ .335 $ .32 $ .06
Book value per share $ 23.93 $ 21.96 $ 20.95 $ 20.33 $ 19.05
--------------------------------------------------------------------------------------------------------------------------------
</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 common share divided by basic earnings per common
share.
(6) Operating expenses consist of other expenses less taxes.
(7) Total equity divided by total assets.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The principal business of the Bank has historically consisted of attracting
deposits from the general public and the 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, fee income, gains
from sales of loans, 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 and Federal Home Loan Bank
advances with short and medium-term maturities, mature or reprice at different
rates than its interest-earning assets.
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, 2000, (the most recently available data), after a 200 basis point rate
decrease, the Company's NPV ratio was 10.95%. In the event of a 200 basis point
increase in rates, the Company's NPV ratio was 7.62%. 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, 2000 and 1999, 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.
June 30, 2000
-------------
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)
$ $ % % bp
+300 $ 23,139 $ (15,799) (41)% 6.31% (361) bp
+200 28,608 (10,330) (27) 7.62 (230) bp
+100 34,016 (4,922) (13) 8.86 (106) bp
0 38,938 9.92
-100 42,796 3,858 10 10.70 78 bp
-200 44,350 5,412 14 10.95 103 bp
-300 45,337 6,399 16 11.06 114 bp
(1) Expressed in basis points
As illustrated in the June 30, 2000 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, 2000, the
Company's NPV was $38.9 million or 9.92% 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 $10.3 million or 27% decline
in the Company's NPV and would result in a 230 basis point or 23.2% decline in
the Company's NPV ratio to 7.62%. Conversely, an immediate 200 basis point
decrease in market interest rates would result in a $5.4 million or 14% increase
in the Company's NPV, and a 103 basis point or 10.4% increase in the Company's
NPV ratio to 10.95%. The percentage change in the Company's NPV at June 30, 2000
was within the limit in the Company's Board-approved guidelines.
<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 was
within the limit in the Company's Board-approved guidelines.
<PAGE>
In addition to monitoring selected measures of NPV, management also monitors
effects on net interest income resulting from increases or decreases in rates.
This measure is used in conjunction with NPV measures to identify excessive
interest rate risk. In managing its asset/liability mix, the Company, depending
on the relationship between long and short term interest rates, market
conditions and consumer preference, may place somewhat greater emphasis on
maximizing its net interest margin than on strictly matching the interest rate
sensitivity of its assets and liabilities. Management believes that the
increased net income which may result from an acceptable mismatch in the actual
maturity or repricing of its asset and liability portfolios can, during periods
of declining or stable interest rates, provide sufficient returns to justify the
increased exposure to sudden and unexpected increases in interest rates which
may result from such a mismatch. Management believes that the Company's level of
interest rate risk is acceptable under this approach as well.
In evaluating the Company's exposure to interest rate movements, certain
shortcomings inherent in the method of analysis presented in the foregoing table
must be considered. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
interest rates. Additionally, certain assets, such as ARM's, have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. Further, in the event of a significant change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed above. Finally, the ability of many borrowers to service their
debt may decrease in the event of an interest rate increase. The Company
considers all of these factors in monitoring its exposure to interest rate risk.
The Board of Directors and management of the Company believe that certain
factors afford the Company the ability to operate successfully despite its
exposure to interest rate risk. The Company manages its interest rate risk by
originating adjustable rate loans and by selling a portion of its fixed rate
one-to-four family real estate loans. While the Company generally originates
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, 2000
totaled $6.5 million. The Company retains the servicing on loans sold in the
secondary market and, at September 30, 2000, $56.8 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
strategy involves the acquisition of assets funded through sources other than
retail deposits, such as FHLB advances. The goal is to create interest rate
spreads between asset yields and funding costs within acceptable risk parameters
while improving return on equity.
The Company's cost of funds responds to changes in interest rates due to the
relatively short-term nature of its deposit portfolio. The Company offers a
range of maturities on its deposit products at competitive rates and monitors
the maturities on an ongoing basis.
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS
The following are the average balance sheets for the years ended September 30:
2000 1999 1998
Average Average Average
Outstanding Outstanding Outstanding
Assets: Balance Balance Balance
------- ------- -------
Interest earning assets: (In Thousands)
<S> <C> <C> <C>
Interest-bearing deposits $ 4,536 $ 11,983 $ 9,633
Securities (1) 25,576 17,347 13,647
Mortgage-backed securities (1) 19,191 30,461 23,206
FHLB stock 5,853 5,453 3,446
Loans held for sale (2) 3,837 15,571 2,401
Loans receivable (3) 300,717 244,132 220,244
--------- --------- ---------
Total interest-earning assets 359,710 324,947 272,577
Noninterest-earning assets, net
of allowance for loan losses 17,335 11,246 5,320
--------- --------- ---------
Total assets $ 377,045 $ 336,193 $ 277,897
========= ========= =========
Liabilities and shareholder's equity:
Interest-bearing liabilities:
Savings accounts $ 15,218 $ 12,277 $ 10,737
NOW and money market accounts 40,583 36,422 30,065
Certificates of deposit 156,855 137,734 130,350
Repurchase agreements 7,718 3,892 1,647
FHLB advances 108,759 104,894 66,123
--------- --------- ---------
Total interest-bearing liabilities 329,133 295,219 238,922
Other liabilities 16,222 9,351 5,571
--------- --------- ---------
Total liabilities 345,355 304,570 244,493
Shareholders' equity:
Common stock 13,065 12,933 12,921
Retained earnings 26,541 24,550 22,958
Net unrealized gain (loss) on
securities available for sale (921) 213 56
Less common stock acquired by:
Employee stock ownership plan (131) (352) (565)
Recognition and retention plan - (11) (80)
Treasury stock (6,864) (5,710) (1,886)
--------- --------- ---------
Total shareholders' equity 31,690 31,623 33,404
--------- --------- ---------
Total liabilities and
shareholders' equity $ 377,045 $ 336,193 $ 277,897
========= ========= =========
</TABLE>
(1) Average outstanding balances reflect unrealized gain (loss) on securities
available for sale.
(2) Average outstanding balances reflect unrealized gain (loss) on loans held
for sale.
(3) Total loans less deferred net loan fees and loans in process.
<PAGE>
INTEREST RATE SPREAD
The following table sets forth the average effective interest rate earned by the
Company on its consolidated loan and investment portfolios, the average
effective cost of the Company's consolidated deposits and FHLB borrowings, the
interest rate spread of the Company, and the net yield on average
interest-earning assets for the periods presented. Average balances are based on
daily average balances.
Year ended September 30,
2000 1999 1998
---- ---- ----
Average interest rate earned on:
Interest-bearing deposits 6.39% 5.12% 5.81%
Securities (1) 6.71 5.96 6.65
Mortgage-backed securities (1) 6.60 5.99 5.84
FHLB stock 8.13 8.00 8.01
Loans held for sale 7.48 7.01 7.41
Loans receivable 8.11 7.88 7.98
Total interest-earning assets 7.89 7.46 7.65
Average interest rate of:
Savings accounts 2.44 2.39 2.52
NOW and money market accounts 2.60 2.75 2.83
Certificates of deposit 5.48 5.29 5.57
Repurchase agreements 3.89 3.80 4.07
FHLB advances 5.65 5.45 5.67
Total interest-bearing
liabilities 5.01 4.89 5.11
Interest rate spread (2) 2.88 2.57 2.54
Net yield on interest-earning assets (3) 3.33 3.01 3.17
--------------------------------------------------------------------------------
(1) Yield is based on amortized cost without adjustment for unrealized gain
(loss) on securities available for sale.
(2) Interest rate spread is calculated by subtracting the average interest rate
cost from the average interest rate earned for the period indicated.
(3) The net yield on average interest-earning assets is calculated by dividing
net interest income by the average interest-earning assets for the period
indicated.
<PAGE>
The following table describes the extent to which changes in interest rates and
changes in volume of interest-related assets and liabilities have affected the
Company's consolidated interest income and expense during the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (1) changes in rate (i.e.,
changes in rate multiplied by old volume) and (2) changes in volume (i.e.,
changes in volume multiplied by old rate). Changes attributable to both rate and
volume have been allocated proportionally to the change due to volume and the
change due to rate.
Year ending September 30, 2000
compared to year ended Total Net Due to Due to
September 30, 1999 Change Rate Volume
Interest-earning assets: ------ ---- ------
(In Thousands)
Interest-bearing deposits $ (323) $ 126 $ (449)
Securities 713 146 567
Mortgage-backed securities (508) 171 (679)
FHLB stock 40 8 32
Loans held for sale (804) 18 (822)
Loans receivable 5,142 551 4,591
------- ------- --------
Total 4,260 1,020 3,240
Interest-bearing liabilities:
Savings accounts 77 5 72
NOW and money market accounts 54 (56) 110
Certificates of deposit 1,315 274 1,041
Repurchase agreements 152 3 149
FHLB advances 427 212 215
------- ------- --------
Total 2,025 438 1,587
------- ------- --------
Change in net interest income $ 2,235 $ 582 $ 1,653
======= ======= ========
Year ending September 30, 1999
compared to year ended Total Net Due to Due to
September 30, 1998 Change Rate Volume
Interest-earning assets: ------ ---- ------
(In Thousands)
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
======= ======= ========
<PAGE>
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
Consolidated net income for the Company for the year ended September 30, 2000
was $2,815,000 or $2.00 diluted net income per common share compared to
$2,204,000 or $1.51 diluted net income per common share for the same period in
1999. Net interest income after provision for loan losses totaled $10.9 million
for the year ended September 30, 2000 compared to $9.6 million for the same
period one year ago.
The increase in net interest income was due to increases in both the volume and
rates of interest-earning assets which was offset by increases in the volume of
interest-bearing liabilities and rates paid on those liabilities. The Bank
continues to place increased emphasis on growing the small business lending
portfolio and developing the consumer lending portfolio within the areas
serviced by its branches. Commercial and consumer loan receivables, including
home equity and second mortgage loans, increased by $50.9 million from September
30, 1999 to September 30, 2000. At the same time, total deposits increased by
$38.0 million, securities sold under agreements to repurchase increased by $2.6
million, and Federal Home Loan Bank borrowings increased by $7.9 million. The
yield on interest-earning assets increased 43 basis points from 7.46% in 1999 to
7.89% in 2000, while the average rate paid on interest-bearing liabilities
increased 12 basis points from 4.89% to 5.01% during the same period. As a
result, the interest rate spread increased 31 basis points from 2.57% in 1999 to
2.88% in 2000.
Interest income increased $4.3 million during the year ended September 30, 2000
compared to the same period in 1999. The increase was primarily due to increased
volumes of loans receivable, particularly commercial and consumer loans.
Interest expense increased $2.0 million reflecting the growth in deposits and
borrowed funds.
[Graph Omitted]
Diluted EPS
1997 1998 1999 2000
---- ---- ---- ----
$1.16 $1.37 $1.51 $2.00
Noninterest income increased from $1.2 for the year ended September 30, 1999 to
$1.8 million for the twelve months ended September 30, 2000. The noninterest
income increases are primarily due to fees generated from the growing number of
core deposit relationships, income generated from the Bank's trust department,
net gains from loan sales and the servicing fees retained on these sold loans.
Noninterest expense increased from $7.0 million to $8.3 million for the
comparable twelve month periods ending September 30. These noninterest expense
increases are primarily attributable to staffing increases, renovated facilities
to support lending operations, expenses associated with the opening of a full
service office during the first quarter of 2000, and expenses incurred in the
offering of additional services to the Bank's customers.
The provision for loan losses is determined in conjunction with management's
review and evaluation of current economic conditions, 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
delinquencies, historical and estimated net charge-offs and other pertinent
information. During the fiscal year ended September 30, 2000 the Bank
experienced significant growth in the commercial loan portfolio. Total
commercial loans at September 30, 2000 were $91.1 million compared to $47.4
million at September 30, 1999, a 92.2% increase. In addition, the Bank continued
to improve its loan review and risk assessment procedures. Based on these
factors, management increased the provision for loan and lease losses from
$230,000 for the year ended September 30, 1999 to $1.1 million for the year
ended September 30, 2000. A substantial portion of this increase was recorded in
the quarter ended September 30, 2000 as management expanded its procedures to
evaluate the adequacy of the allowance for loan losses, giving stronger
consideration to the commercial loan loss experience of its peer group, as the
Company does not yet have an established loss history of its own. Management
gave particular consideration to the loss risks related to the growing loan
portfolio and the risk of loss for $1.7 million of loans classified as impaired
during the quarter.
<PAGE>
Cash and cash equivalents increased $2.4 million from $12.1 million as of
September 30, 1999 to $14.5 million as of September 30, 2000. Net cash provided
by operating activities and financing activities amounted to $7.6 million and
$46.8 million, respectively, and was partially offset by net cash used in
investing activities of $52.0 million.
[Graph Omitted]
<TABLE>
<CAPTION>
Asset Mix
Home Equity and Cash and
Second Mortgages Mortgage Commercial Investments Construction Consumer Other Assets
---------------- -------- ---------- ----------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
5% 49% 23% 16% 3% 1% 3%
</TABLE>
As of September 30, 2000, the total securities portfolio amounted to $41.6
million, a decrease of $.6 million from $42.2 million at September 30, 1999. The
securities portfolio activity included net security purchases of $7.0 million,
security maturities totaling $1.6 million, principal payments on mortgage-backed
and related securities of $5.6 million and a $329,000 decrease in the market
value of securities available for sale.
As of September 30, 2000, net loans receivable were $315.5 million, an increase
of $46.0 million from the $269.5 million as of September 30, 1999. Commercial
loans outstanding increased by $43.7 million from $47.4 million at September 30,
1999 to $91.1 million at September 30, 2000. Residential mortgage loans and home
equity loans outstanding increased by $1.7 million during the year ended
September 30, 2000 net of secondary market sales totaling $24.9 million during
the year. Consumer loans outstanding also increased by $1.6 million from $4.5
million at September 30, 1999 to $6.1 million at September 30, 2000. Management
believes the growth in all lending categories is partly attributed to the
Company's reputation as a quality local lender satisfying the market's desire
for local service and local decision making.
<PAGE>
During the year ended September 30, 2000, the Company completed secondary market
mortgage loan sales totaling $24.7 million and the net gains realized on these
loan sales were $525,000, including $235,000 related to recording mortgage loan
servicing rights. At September 30, 2000, $6.5 million of loans were classified
as loans held for sale.
[Graph Omitted]
Demand, Now, Savings and MMDA
(Core Deposits)
(in millions)
1997 1998 1999 2000
---- ---- ---- ----
$40,177 $45,134 $59,768 $68,371
The loans sold during the year ended September 30, 2000 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 $82,000, net of $36,000 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.
Total deposits increased $38.0 million to $239.4 million as of September 30,
2000 from $201.4 million as of September 30, 1999, and securities sold under
agreements to repurchase increased from $6.6 million to $9.1 million during the
comparable periods. Federal Home Loan Bank ("FHLB") advances also increased from
$104.2 million as of September 30, 1999 to $112.2 million as of September 30,
2000. These increases in deposits, repurchase agreements and other borrowings
primarily funded the loan growth during the year.
Total liabilities increased from $315.3 million as of September 30, 1999 to
$363.5 million as of September 30, 2000. This increase was primarily due to the
$38.0 million increase in deposits, a $7.9 million increase in FHLB advances
during the year and a $2.6 million increase in securities sold under agreements
to repurchase.
Total shareholders' equity increased from $31.2 million as of September 30, 1999
to $32.5 million as of September 30, 2000. The change to shareholders' equity
resulted mainly from $2.8 million of net income for the year offset by the
repurchases of 61,600 shares of outstanding common stock during this period at a
cost of $1.1 million along with the payment of cash dividends of $516,000. The
book value of MFB Corp. common stock, based on the actual number of shares
outstanding, increased from $21.96 at September 30, 1999 to $23.93 at September
30, 2000.
<PAGE>
[Graph Omitted]
<TABLE>
<CAPTION>
Liability and Equity Mix
Other Time FHLB Savings, DDA & Stockholders' Non-Interest Repurchase Other
Deposits Advances MMDA Deposits Equity Bearing Deposits Agreements Liabilities
---------- -------- -------------- ------------ ---------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
44% 28% 14% 8% 3% 2% 1%
</TABLE>
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.
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
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. Management
believes the growth in all lending categories is partly attributed to the
Company's reputation as a quality local lender satisfying the market's desire
for local service and local decision making.
<PAGE>
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.
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
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 $501,000 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.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity relates primarily to the Company's ability to fund loan demand, meet
deposit customers' withdrawal requirements and provide for operating expenses.
Assets used to satisfy these needs consist of cash, deposits with other
financial institutions, overnight interest-bearing deposits in other financial
institutions and securities 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 4.0%. At September 30, 2000, the Bank's liquidity ratio was
8.18%. 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, 2000, 1999 and 1998.
Liquid assets totaled $56.2 million as of September 30, 2000 compared to $51.2
million as of September 30, 1999 and $59.7 million as of September 30, 1998. The
$5.0 million increase in liquidity from September 30, 1999 to September 30, 2000
was primarily due to a $3.5 million increase in cash and cash equivalents and a
$2.5 million increase in securities available for sale offset by a $1.0 million
decrease in interest-bearing time deposits in other financial institutions.
Management believes the liquidity level of $56.2 million as of September 30,
2000 is sufficient to meet anticipated liquidity needs.
Liquidity levels decreased $8.5 million from September 30, 1998 to September 30,
1999 due primarily 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.
As of September 30, 2000, total FHLB borrowings amounted to $112.2 million
compared to $104.2 million at September 30, 1999. The $8.0 million increase was
used primarily to fund loan portfolio growth. The Bank had commitments to fund
loan originations with borrowers totaling $63.9 million at September 30, 2000.
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,
1999, total FHLB borrowings amounted to $104.2 million, $20.8 million of which
were used as part of the capital leveraging strategy. The remaining $83.4
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, 2000, 1999 and 1998 follows.
<PAGE>
During the year ended September 30, 2000, net cash and cash equivalents
increased $2.5 million from $12.0 million at September 30, 1999 to $14.5 million
at September 30, 2000.
The Company experienced a net increase in cash from operating activities of $7.6
million during the year that was primarily attributable to the net income of
$2.8 million and proceeds of $24.7 million realized from the sale of mortgage
loans, offset by the origination of $20.3 million of loans held for sale.
Beginning in the quarter ended September 30, 1999, the Bank adopted a strategy
of originating, selling and delivering fixed rate, owner-occupied residential
mortgage loans on a "Best Efforts" delivery program basis. This program allows
the Bank to commit loans for delivery to investors at prices that are determined
prior to loan approval. In the event that loans are not closed and therefore not
delivered, the Bank incurs no penalty. The strategy reduces interest rate risk
exposure by minimizing the volume of loans closed and carried in the held for
sale loan portfolio.
The $52.0 million decrease in cash from investing activities for the year ended
September 30, 2000 was primarily related to the $49.8 million increase in loan
originations exceeding principal payments, investment security purchases of
$18.2 million, and a $1.9 million low income housing limited partnership
investment offset by sales and maturities of securities totaling $12.8 million
and $5.6 million of mortgage-backed and related securities principal payments.
Financing activities generated net cash of $46.9 million for the year ended
September 30, 2000. The net cash was provided primarily from net deposit
increases of $38.0 million, $7.9 million in net new borrowed funds, and
increases of $2.6 million in repurchase agreements, partially offset by the use
of $1.1 million to repurchase the Company's stock and $516,000 in cash dividends
paid during the year.
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 .
As of September 30, 2000 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. The Company adopted this
new accounting standard on October 1, 2000. The adoption had no impact on the
consolidated financial statements as the Company had no derivative instruments
on October 1, 2000.
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.
FORWARD LOOKING STATEMENTS
When used in this filing and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases, "anticipate,"
"would be," "will allow," "intends to," "will likely result," "are expected to,"
will continue," "is anticipated," "estimated," "project," or similar expressions
are intended to identify, "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
risks and uncertainties, including but not limited to changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area, and competition, all or some of which could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and advise
readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investing activities, and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
MFB Corp.
Mishawaka, Indiana
We have audited the accompanying consolidated balance sheets of MFB Corp. and
Subsidiary as of September 30, 2000 and 1999 and the related consolidated
statements of income, shareholders' equity and cash flows for the years ended
September 30, 2000, 1999 and 1998. 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, 2000 and 1999, and the results of its operations
and its cash flows for the years ended September 30, 2000, 1999 and 1998 in
conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
South Bend, Indiana
November 16, 2000
<PAGE>
<TABLE>
<CAPTION>
MFB CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 2000 and 1999
-----------------------------------------------------------------------------------------------------
2000 1999
---- ----
ASSETS
<S> <C> <C>
Cash and due from financial institutions $ 9,692,995 $ 6,315,747
Interest-bearing deposits in other financial
institutions - short-term 4,850,957 5,746,195
------------- -------------
Total cash and cash equivalents 14,543,952 12,061,942
Interest-bearing time deposits in other financial institutions - 1,000,000
Securities available for sale (amortized cost of $42,140 in 2000
and $39,359 in 1999 41,662,790 38,170,143
Securities held to maturity (fair value of $-0- in 2000
and $3,709,205 in 1999) - 3,984,338
Federal Home Loan Bank (FHLB) stock, at cost 6,307,600 5,511,300
Loans held for sale, net of unrealized losses
of $131,618 in 2000 and $489,152 in 1999 6,494,568 8,061,951
Loans receivable, net of allowance for loan losses
of $1,672,000 in 2000 and $638,465 in 1999 315,505,699 269,464,085
Accrued interest receivable 1,894,602 1,363,318
Premises and equipment, net 4,687,662 4,413,409
Mortgage servicing rights, net of accumulated amortization
of $92,954in 2000 and $56,571 in 1999 611,013 412,390
Investment in limited partnership 2,948,463 1,213,430
Other assets 1,387,030 797,380
------------- -------------
Total assets $ 396,003,379 $ 346,453,686
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand deposits $ 11,802,027 $ 7,357,944
Savings, NOW and MMDA deposits 56,568,936 52,409,560
Other time deposits 171,023,260 141,639,885
------------- -------------
Total deposits 239,394,223 201,407,389
Securities sold under agreements to repurchase 9,143,345 6,566,395
Other borrowings 112,151,525 104,225,750
Advances from borrowers for taxes and insurance 2,115,832 2,111,183
Accrued expenses and other liabilities 684,027 961,339
------------- -------------
Total liabilities 363,488,952 315,272,056
Shareholders' equity
Common stock, no par value, 5,000,000 shares authorized;
shares issued: 1,689,417- 2000 and 1999; shares
outstanding: 1,358,449 - 2000, 1,420,049 - 1999 13,136,003 13,016,302
Retained earnings - substantially restricted 27,711,396 25,419,722
Accumulated other comprehensive income (loss),
net of tax of $(601,096) in 2000 and $(470,824) in 1999 (916,439) (717,823)
Unearned Employee Stock Ownership Plan (ESOP) shares - (222,963)
Treasury Stock, 330,968 common shares - 2000;
269,368 common shares - 1999, at cost (7,416,533) (6,313,608)
------------- -------------
Total shareholders' equity 32,514,427 31,181,630
------------- -------------
Total liabilities and shareholders' equity $ 396,003,379 $ 346,453,686
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 2000, 1999 and 1998
-------------------------------------------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
Interest income
Loans receivable, including fees
<S> <C> <C> <C>
Mortgage loans $ 14,966,575 $ 14,997,969 $ 15,071,514
Consumer and other loans 1,948,952 1,267,455 858,670
Financing leases and commercial loans 7,748,432 4,060,194 1,815,178
Securities - taxable 3,559,796 3,315,190 2,532,974
Other interest-earning assets 290,012 612,977 559,547
--------------- --------------- ----------------
Total interest income 28,513,767 24,253,785 20,837,883
Interest expense
Deposits 10,025,303 8,580,571 8,388,360
Securities sold under agreements
to repurchase 300,358 147,675 67,352
FHLB advances 6,147,365 5,719,852 3,748,087
--------------- --------------- ----------------
Total interest expense 16,473,026 14,448,098 12,203,799
--------------- --------------- ----------------
Net interest income 12,040,741 9,805,687 8,634,084
Provision for loan losses 1,106,393 230,000 120,000
--------------- --------------- ----------------
Net interest income after provision
for loan losses 10,934,348 9,575,687 8,514,084
Noninterest income
Service charges of deposit accounts 540,877 293,202 191,673
Trust fee income 145,594 29,398 -
Insurance Commissions 149,357 147,521 143,201
Brokerage commissions 13,230 28,157 35,834
Net realized gains (losses) from sales
of securities available for sale (38,552) 3,803 7,673
Net realized losses from sales of securities
held to maturity (2,245) -- --
Net realized gains from sales of loans 524,969 366,320 333,171
Loan servicing fees, net of amortization of
$36,383 in 2000 and $37,195 in 1999 and $19,376
in 1998 81,846 54,025 12,038
Other income 429,577 297,640 240,603
--------------- --------------- ----------------
Total noninterest income 1,844,653 1,220,066 964,193
Noninterest expense
Salaries and employee benefits 4,668,011 3,846,889 3,413,558
Occupancy and equipment expense 1,080,785 882,698 720,305
Data processing expense 442,983 379,715 384,629
SAIF deposit insurance premium 62,117 109,208 107,503
Provision to adjust loans held for sale
to lower of cost or market 122,896 489,152 -
Other expense 2,338,012 1,678,134 1,384,023
--------------- --------------- ----------------
Total noninterest expense 8,271,821 7,006,081 5,625,389
--------------- --------------- ----------------
Income before income taxes 4,507,180 3,789,672 3,852,888
Income tax expense 1,692,623 1,585,374 1,616,605
--------------- --------------- ----------------
Net income $ 2,814,557 $ 2,204,298 $ 2,236,283
=============== =============== ================
Basic earnings per common share $ 2.04 $ 1.56 $ 1.44
Diluted earnings per common share 2.00 1.51 1.37
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended September 30, 2000, 1999 and 1998
------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive
Income Total
Retained (Loss), Unearned Unearned Treasury Shareholders'
Common Stock Earnings Net of Tax ESOP Shares RRP Shares Stock Equity
------------ -------- ---------- ----------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997 $13,108,171 $22,037,441 $ 73,208 $(664,610) $(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 (968,611) - - - - 1,657,111 688,500
Cash dividends declared - $ .335 per share - (543,557) - 20,053 - - (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 - - - - - 286,919
Amortization of RRP contribution - - - - 77,000 - 77,000
Tax benefit related to employee stock plans 420,500 - - - - - 420,500
Comprehensive income:
Net income for the year end
September 30, 1998 - 2,236,283 - - - - 2,236,283
Other comprehensive income (loss) - - (118,625) - - - (118,625)
-----------
Total comprehensive income - - - - - - 2,117,658
----------- ----------- -------- --------- --------- --------- -----------
Balance at September 30, 1998 12,846,979 23,730,167 (45,417) (444,557) (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 (33,906) - - - - 58,906 25,000
Cash dividends declared - $ .355 per share - (514,743) - 13,961 - - (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 - - - - - 203,229
Amortization of RRP contribution - - - - 38,500 - 38,500
Comprehensive income:
Net income for the year end
September 30, 1999 - 2,204,298 - - - - 2,204,298
Other comprehensive income (loss) - - (672,406) - - - (672,406)
-----------
Total comprehensive income - - - - - - 1,531,892
----------- ----------- -------- --------- --------- --------- -----------
Balance at September 30, 1999 13,016,302 25,419,722 (717,823) (222,963) - (6,313,608) 31,181,630
</TABLE>
(Continued)
<PAGE>
<TABLE>
<CAPTION>
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended September 30, 2000, 1999 and 1998
-----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive
Income Total
Retained (Loss), Unearned Unearned Treasury Shareholders'
Common Stock Earnings Net of Tax ESOP Shares RRP Shares Stock Equity
------------ -------- ---------- ----------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1999 $13,016,302 $25,419,722 $(717,823) $(222,963) $ - $(6,313,608) $31,181,630
Purchase of 61,600 shares of treasury stock - - - - - (1,102,925) (1,102,925)
Cash dividends declared - $ .375 per share - (522,883) - 7,269 - - (515,614)
Effect of contribution to fund ESOP - - - 215,694 - - 215,694
Market adjustment of 19,383 ESOP shares
committed to be released 119,701 - - - - - 119,701
Comprehensive income:
Net income for the year end
September 30, 2000 - 2,814,557 - - - - 2,814,557
Other comprehensive income (loss) - - (198,616) - - - (174,460)
-
Total comprehensive income - - - - - - 2,640,097
----------- ----------- ---------- --------- ------- ------------ -----------
Balance at September 30, 2000 $13,136,003 $27,711,396 $(892,283) $ - $ - $(7,416,533) $32,538,583
=========== =========== ========== ========= ======= ============ ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 2000, 1999 and 1998
-------------------------------------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
Cash flows from operating activities
<S> <C> <C> <C>
Net income $ 2,814,557 $ 2,204,298 $ 2,236,283
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization, net of
accretion 493,800 298,862 314,688
Amortization of RRP contribution - 38,500 77,000
Provision for loan losses 1,106,393 230,000 120,000
Provision to adjust loans held for sale
to lower of cost or market 122,896 489,152 -
Net realized (gains) losses from sales of
securities available for sale 38,552 (3,803) (7,673)
Net realized losses from sales of
securities held to maturity 2,245 - -
Net realized gains from sales of loans (524,969) (366,320) (333,171)
Amortization of mortgage servicing rights 36,383 37,195 19,376
Origination of loans held for sale (20,311,571) (20,948,828) (28,866,583)
Proceeds from sales of loans held for sale 24,651,870 20,728,574 28,143,363
Equity in loss of investment in limited
partnership 132,578 8,084 4,236
Market adjustment of ESOP shares
committed to be released 119,701 203,229 286,919
ESOP expense 215,694 207,633 200,000
Net change in:
Accrued interest receivable (531,284) (395,323) (249,568)
Other assets (459,378) (24,475) (80,831)
Accrued expenses and other liabilities (277,312) (138,798) 750,489
-------------- -------------- --------------
Net cash from operating activities 7,630,155 2,567,980 2,614,528
Cash flows from investing activities
Net change in interest-bearing time
deposits in other financial institutions 1,000,000 (1,000,000) -
Net change in loans receivable (49,753,856) (32,793,948) (43,461,852)
Proceeds from:
Sales of securities available for sale 9,632,387 1,989,992 2,926,206
Sales of securities held to maturity 1,602,755 - -
Principal payments of mortgage-backed
and related securities 5,550,697 21,505,020 19,343,270
Maturities of securities available for sale 1,104,095 42,410,326 22,738,565
Maturities of securities held to maturity 500,000 - -
Purchase of:
Securities available for sale (3,000,000) (63,280,952) (47,461,878)
Securities held to maturity (15,243,229) (3,984,360) -
FHLB stock (796,300) (875,000) (2,236,300)
Premises and equipment, net (752,752) (2,001,153) (423,665)
Investment in limited partnership (1,867,611) - (1,225,750)
-------------- -------------- --------------
Net cash from investing activities (52,023,814) (38,030,075) (49,801,404)
(Continued)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 2000, 1999 and 1998
-------------------------------------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
Cash flows from financing activities
<S> <C> <C> <C>
Purchase of MFB Corp. common stock $ (1,102,925) $ (1,209,619) $ (5,931,312)
Net change in deposits 37,986,834 20,741,414 8,778,708
Net change in securities sold under
agreements to repurchase 2,576,950 4,200,679 1,976,796
Proceeds from other borrowings 91,000,000 23,000,000 72,156,964
Repayment of other borrowings (83,074,225) (16,431,214) (22,000,000)
Proceeds from exercise of stock options - 25,000 688,500
Net change in advances from
borrowers for taxes and insurance 4,649 (205,134) 462,069
Cash dividends paid (515,614) (500,782) (523,504)
-------------- -------------- ---------------
Net cash from financing activities 46,875,669 29,620,344 55,608,221
-------------- -------------- ---------------
Net change in cash and cash equivalents 2,482,010 (5,841,751) 8,421,345
Cash and cash equivalents at beginning of year 12,061,942 17,903,693 9,482,348
-------------- -------------- ---------------
Cash and cash equivalents at end of year $ 14,543,952 $ 12,061,942 $ 17,903,693
============== ============== ===============
Supplemental disclosures of cash flow
information
Cash paid during the year for:
Interest $ 16,422,424 $ 14,403,181 $ 12,305,287
Income taxes 2,192,981 1,627,895 1,182,448
Supplemental schedule of noncash investing activities:
Transfer from:
Loans receivable to loans held for sale $ 6,626,186 $ - $ -
Loans held for sale to loans receivable 4,020,337 5,294,087 -
Securities held to maturity to securities
available for sale 17,163,545 - -
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, 1999 and 1998
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 St. Joseph and Elkhart Counties and the
surrounding area. Loans secured by real estate mortgages comprise approximately
70% of the loan portfolio at September 30, 2000 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.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported separately 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 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.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Because some loans may not be repaid in full, an allowance for loan losses is
recorded. The allowance for loan losses is increased by a provision for loan
losses charged to expense and decreased by charge-offs (net of recoveries).
Estimating the risk of loss and the amount of loss on any loan is necessarily
subjective. Accordingly, the allowance is maintained by management at a level
considered adequate to cover losses that are currently anticipated. Management's
periodic evaluation of the adequacy of the allowance is based on the Company's
past loan loss experience, known and inherent risks in the portfolio, periodic,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, and current economic conditions.
While management may periodically allocate portions of the allowance for
specific problem loan situations, the whole allowance is available for any loan
charge-offs that occur.
Loans are considered impaired if full principal or interest payments are not
anticipated in accordance with the contractual loan terms. Impaired loans are
carried at the present value of expected future cash flows discounted at the
loan's effective interest rate or at the fair value of the collateral if the
loan is collateral dependent. A portion of the allowance for loan losses is
allocated to impaired loans if the value of such loans is deemed to be less than
the unpaid balance. If these allocations cause the allowance for loan losses to
require increase, such increase is reported as a component of the provision for
loan losses.
Smaller-balance homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by one-to-four family
residences, residential construction loans, automobile, manufactured homes, home
equity and second mortgage loans. Commercial loans and mortgage loans secured by
other properties are evaluated individually for impairment. When analysis of
borrower operating results and financial condition indicates that underlying
cash flows of the borrower's business are not adequate to meet its debt service
requirements, the loan is evaluated for impairment. Often this is associated
with a delay or shortfall in payments of 30 days or more. Nonaccrual loans are
often also considered impaired. Impaired loans, or portions thereof, are charged
off when deemed uncollectible. The nature of disclosures for impaired loans is
considered generally comparable to prior nonaccrual and renegotiated loans and
non-performing and past due asset disclosures.
Interest income on loans is accrued over the term of the loans based upon the
principal outstanding. The accrual of interest on impaired loans in discontinued
when, in management's opinion, the borrower may be unable to meet payments as
they become due. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to the
extent that cash payments are received until, in management's judgment, the
borrower has the ability to make contractual interest and principal payments, in
which case the loan is returned to accrual status.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreclosed Real Estate: Real estate properties acquired through, or in lieu of,
loan foreclosure are initially recorded at fair value at the date of
acquisition, establishing a new cost basis. Any reduction to fair value from the
carrying value of the related loan at the time of acquisition is accounted for
as a loan loss and charged against the allowance for loan losses. Valuations are
periodically performed by management and valuation allowances are adjusted
through a charge to income for changes in fair value or estimated selling costs.
Foreclosed real estate at September 30, 2000 and 1999 amounted to $-0- and
$100,000.
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.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
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 (loss)
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.
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; insurance; trust
and other financial services. 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.
<PAGE>
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,
2000 1999 1998
---- ---- ----
Basic Earnings Per Common Share
Numerator
<S> <C> <C> <C>
Net income $ 2,814,557 $ 2,204,298 $ 2,236,283
============ ============= ==============
Denominator
Weighted average common shares
outstanding 1,389,274 1,448,790 1,611,492
Less: Average unallocated ESOP shares (10,428) (30,450) (50,538)
Less: Average nonvested RRP shares - (1,925) (7,700)
------------ ------------- --------------
Weighted average common shares
outstanding for basic earnings per
common share 1,378,846 1,416,415 1,553,254
============ ============= ==============
Basic earnings per common share $ 2.04 $ 1.56 $ 1.44
============ ============= ==============
Diluted Earnings Per Common Share
Numerator
Net income $ 2,814,557 $ 2,204,298 $ 2,236,283
============ ============= ==============
Denominator
Weighted average common shares
outstanding for basic earnings per
common share 1,378,846 1,416,415 1,553,254
Add: Dilutive effects of average
nonvested RRP shares - 448 3,166
Add: Dilutive effects of assumed
exercises of stock options 31,715 44,793 75,417
------------ ------------- --------------
Weighted average common shares
and dilutive potential common
shares outstanding 1,410,561 1,461,656 1,631,837
============ ============= ==============
Diluted earnings per common share $ 2.00 $ 1.51 $ 1.37
============ ============= ==============
</TABLE>
Stock options for 80,750 and 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, 2000 and 1999 and 1998 because they were antidilutive.
<PAGE>
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, 2000--------------------------
------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Debt securities
U.S. Government
<S> <C> <C> <C> <C>
and federal agencies $ 17,944,537 $ 5,868 $ (212,198) $ 17,738,207
Mortgage-backed 14,833,896 - (621,714) 14,212,182
Corporate notes 9,924,042 2,493 (571,820) 9,354,715
---------------- ------------ -------------- ---------------
42,702,475 8,361 (1,405,732) 41,305,104
Marketable equity securities 437,850 - 120,164 317,686
---------------- ------------ -------------- ---------------
$ 43,140,325 $ 8,361 $ 1,525,896 $ 41,662,790
================ ============ ============== ===============
Available for Sale
-------------------------September 30, 1999--------------------------
------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
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
================ ============ ============== ===============
NOTE 3 - SECURITIES (continued)
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>
<PAGE>
The amortized cost and fair value of debt securities by contractual maturity are
shown below. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
September 30, 2000
------------------
--------Available for Sale-------
Amortized Fair
Cost Value
---- -----
Due in one year or less $ 1,993,045 $ 1,984,700
Due after one year through
five years 13,683,939 13,652,997
Due after five years through
ten years 7,485,499 7,059,690
Due after ten years 4,706,096 4,395,535
-------------- ---------------
27,868,579 27,092,922
Mortgage-backed securities 14,833,896 14,212,182
-------------- ---------------
$ 42,702,475 $ 41,305,104
============== ===============
Proceeds from sales of securities available for sale were $9,677,559 during the
year ended September 30, 2000. Gross gains of $11,602 and gross losses of
$63,794 were realized on these sales. Proceeds from sales of securities
available for sale were $2,008,177 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.
In September, 2000, a held to maturity security was sold. Proceeds from the sale
of the security were $1,602,755 and a gross loss of $2,245 was realized on the
sale. As a result of this sale, all remaining held-to-maturity securities with a
carrying value of $17,163,545 and a market value of $16,843,467 were transferred
to available-for-sale.
<PAGE>
NOTE 4 - LOANS RECEIVABLE, NET
Loans receivable, net at September 30 are summarized as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
First mortgage loans (principally conventional)
Principal balances
<S> <C> <C>
Secured by one-to-four family residences $ 185,266,466 $ 191,479,582
Construction loans 13,146,237 11,157,731
Other 3,630,897 3,298,833
------------------ ------------------
202,043,600 205,936,146
Less undisbursed portion of construction and
other mortgage loans (54,156) (87,153)
------------------ ------------------
Total first mortgage loans 201,989,444 205,848,993
2000 1999
---- ----
Commercial and consumer loans:
Principal balances
Home equity and second mortgage $ 18,916,792 $ 13,308,441
Commercial 91,105,033 47,399,290
Financing leases - 16,969
Other 6,089,133 4,461,096
------------------ ------------------
Total commercial and consumer loans 116,110,958 65,185,796
Allowance for loan losses (1,672,000) (638,465)
Net deferred loan origination fees (922,703) (932,239)
------------------ ------------------
$ 315,505,699 $ 269,464,085
================== =================
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the years
ended September 30:
2000 1999 1998
---- ---- ----
Balance at beginning of year $ 638,465 $ 453,567 $ 370,000
Provision for loan losses 1,106,393 230,000 120,000
Charge-offs (72,858) (45,102) (36,433)
Recoveries - -
----------- ---------- ----------
Balance at end of year $ 1,672,000 $ 638,465 $ 453,567
=========== ========== ==========
<PAGE>
NOTE 4 - LOANS RECEIVABLE, NET (continued)
Impaired loans were as follows:
2000 1999 1998
---- ---- ----
Year-end balances with no allocated allowance
for loan losses $ 60,000 $ - $ -
Year-end loans with allocated allowance
for loan losses 1,591,000 - -
---------- ----- -----
Total $1,651,000 $ - $ -
========== ===== =====
Amount of the allowance for loan losses
allocated $ 150,000 $ - $ -
Average of impaired loans during the year $ 12,000 $ - $ -
Interest income recognized during impairment $ 1,000 $ - $ -
Cash-basis interest income recognized during
impairment $ - $ - $ -
Nonperforming loans were as follows at year end:
2000 1999
---- ----
Loans past due over 90 days still on
accrual status $ 60,000 $ 96,000
Nonaccrual loans 6,000 -
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The Company is subject to certain recourse
obligations on the loans serviced by Telebank. The unpaid principal balances of
these loans at September 30, are summarized as follows:
2000 1999
---- ----
Mortgage loan portfolios serviced for:
Telebank $ 6,699,963 $ 7,597,059
Hanover Capital Mortgage Holdings, Inc. 6,376,675 6,785,972
LaSalle Bank, FSB 6,740,764 7,222,714
Citizens Bank 5,698,176 6,250,822
Federal Home Loan Mortgage Corporation 31,292,424 13,709,321
------------- --------------
$ 56,808,002 $ 41,565,888
============= ==============
Custodial escrow balances maintained in connection with the foregoing serviced
loans were $345,000 and $209,000 at September 30, 2000 and 1999.
<PAGE>
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:
2000 1999
---- ----
Balance - beginning of year $ 1,582,502 $ 1,513,829
New loans 40,496 443,980
Repayments (47,918) (375,307)
Effect of changes in related parties 108,434 -
-------------- --------------
Balance - end of year $ 1,683,514 $ 1,582,502
============== ==============
NOTE 5 - PREMISES AND EQUIPMENT, NET
Premises and equipment at September 30 are summarized as follows:
2000 1999
Land $ 834,895 $ 834,895
Buildings and improvements 3,810,621 3,571,734
Furniture and equipment 2,507,489 2,052,425
-------------- --------------
Total cost 7,153,005 6,459,054
Accumulated depreciation and amortization (2,465,343) (2,045,645)
-------------- --------------
$ 4,687,662 $ 4,413,409
============== ==============
Depreciation and amortization of premises and equipment, included in occupancy
and equipment expense was approximately $478,000, $383,000 and $241,000 for the
years ended September 30, 2000, 1999 and 1998, respectively.
NOTE 6 - DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit in denomination
of $100,000 or more was approximately $39,609,000 and $30,252,000 at September
30, 2000 and 1999.
At September 30, 2000, the scheduled maturities of certificates of deposit are
as follows for the years ended September 30:
2001 $132,462,809
2002 33,531,570
2003 3,017,406
2004 1,533,503
2005 343,087
Thereafter 134,885
------------
$171,023,260
============
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.
NOTE 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
(continued)
Information concerning securities sold under agreements to repurchase as of
September 30 is summarized as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Average daily balance during the year $ 7,718,000 $ 3,892,000 $ 1,647,000
Average interest rate during the year 3.89% 3.80% 4.07%
Maximum month end balance
during the year $ 10,201,000 $ 7,079,000 $ 3,882,000
Balance at end of year $ 9,143,345 $ 6,566,395 $ 2,365,716
Securities underlying these agreements at year end were as follows:
Carrying value of securities $ 12,000,000 $ 9,892,000 $ 8,385,000
Fair value $ 11,921,000 $ 9,310,000 $ 8,387,000
</TABLE>
<PAGE>
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
At September 30, 2000, advances from the Federal Home Loan Bank of Indianapolis
with fixed and variable rates ranging from 4.79% to 6.82% are required to be
repaid in the year ending September 30 as follows:
2001 $ 2,350,000
2002 350,000
2003 20,300,000
2004 800,000
2005 15,200,000
Thereafter 73,151,525
------------
$112,151,525
============
FHLB advances are secured by all FHLB stock, qualifying first mortgage loans,
government agency and mortgage backed securities. At September 30, 2000 and
1999, in addition to $6,307,600 and $5,511,000 in FHLB stock, collateral of
approximately $207,941,000 and $225,715,000 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,
2000, 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, 2000, 1999 and 1998 was approximately $4,400, $6,900
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, 2000, 1999 and 1998 was approximately $69,000, $60,000 and
$52,000.
Employee Stock Ownership Plan (ESOP): In conjunction with its stock conversion,
the Company established an ESOP for eligible employees. Employees with at least
one year of employment and who have attained age twenty-one are eligible to
participate. The ESOP borrowed $1,400,000 from the Company to purchase 140,000
shares of common stock issued in the conversion at $10 per share. Collateral for
the loan is the unearned shares of common stock purchased by the ESOP with the
loan proceeds. The loan will be repaid principally from the Company's
discretionary contributions to the ESOP over a period of seven years. The
interest rate for the loan is 6.25%. Shares purchased by the ESOP will be held
in suspense until allocated among ESOP participants as the loan is repaid.
ESOP expense was approximately $335,000, $411,000 and $487,000 for the years
ended September 30, 2000, 1999 and 1998. Contributions to the ESOP, including
dividends on unearned ESOP shares, was approximately $223,000, $222,000 and
$220,000 during the years ended September 30, 2000, 1999 and 1998.
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.
For the years ended September 30, 2000, 1999 and 1998, 20,857, 19,186 and 20,989
shares with an average fair value of $16.08, $21.41 and $23.20 per share, were
committed to be released.
The ESOP shares as of September 30 were as follows:
2000 1999 1998
---- ---- ----
Allocated shares 140,000 120,617 100,674
Unearned shares - 19,383 39,326
Shares withdrawn from the plan by
participants (14,571) (14,571) (5,601)
-------- -------- --------
Total ESOP shares held in the plan 125,429 125,429 134,399
======== ======== ========
Fair value of unearned shares $ - $383,000 $1,003,000
<PAGE>
NOTE 9 - EMPLOYEE BENEFITS (Continued)
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, 2000, 1999 and 1998 was approximately $-0-, $38,500 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 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, 2000, 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, 2000,
1999 and 1998. As of September 30, 2000, 63,750 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:
2000 1999
---- ----
Risk-free interest rate 6.62% 4.74%
Expected dividend rate 2.17% 1.71%
Stock price volatility 16.25% 12.20%
There were no options granted for the year ended September 30, 1997.
<PAGE>
NOTE 9 - EMPLOYEE BENEFITS (Continued)
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net income as reported $ 2,814,557 $ 2,204,298 $ 2,236,283
Proforma net income $ 2,687,837 2,054,921 2,069,443
Reported earnings per common and common
equivalent share
Basic $ 2.04 $1.56 $1.44
Diluted $ 2.00 $1.51 $1.37
Proforma earnings per common and common
equivalent share
Basic $ 1.95 $1.45 $1.33
Diluted $ 1.91 $1.41 $1.27
</TABLE>
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, 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
Granted 5,500 $ 16.3125-$17.25 $ 17.05 $5.52
Exercised -
Balance at September 30, 2000 205,250 $ 10.00-26.75 $ 16.59
</TABLE>
<PAGE>
NOTE 9 - EMPLOYEE BENEFITS (Continued)
Options exercisable at September 30 are as follows:
Weighted
Number Average
of Options Exercise Price
---------- --------------
1998 122,500 $ 12.14
1999 142,150 $ 13.69
2000 161,400 $ 14.80
At September 30, 2000, options outstanding had a weighted-average remaining life
of 4.98 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:
2000 1999 1998
---- ---- ----
Federal
Current $ 1,530,984 1,535,497 $ 1,301,834
Deferred (239,781) (284,395) (2,359)
------------- ------------- -------------
1,291,203 1,251,102 1,299,475
State
Current 439,792 397,363 317,774
Deferred (38,372) (63,091) (644)
------------- ------------- -------------
401,420 334,272 317,130
------------- ------------- -------------
Total income tax expense $ 1,692,623 $ 1,585,374 $ 1,616,605
============= ============= =============
<PAGE>
NOTE 10 - INCOME TAXES (Continued)
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>
2000 1999 1998
<S> <C> <C> <C>
Income taxes at statutory rate $ 1,532,441 $ 1,288,488 $ 1,309,982
Tax effect of:
State tax, net of federal income
tax effect 264,937 220,620 209,306
Excess of fair value of ESOP
shares released over cost 40,698 69,098 97,552
Low income housing credits (155,000) - -
Other items, net 9,547 7,168 (235)
---------------- --------------- --------------
Total income tax expense $ 1,692,623 $ 1,585,374 $ 1,616,605
================ =============== ==============
</TABLE>
The components of the net deferred tax asset (liability) recorded in the
consolidated balance sheets as of September 30 are as follows:
2000 1999
---- ----
Deferred tax assets
Bad debt deduction $ 413,217 $ -
Net deferred loan fees 392,148 396,202
Valuation adjustment on loans held for sale 55,938 207,890
Net unrealized depreciation
on securities available for sale 601,096 470,824
Other 41,843 14,764
----------- ------------
1,504,242 1,089,680
Deferred tax liabilities
Accretion (31,852) (20,445)
Depreciation (48,351) (52,057)
Bad debt deduction - (100,382)
Mortgage servicing rights (259,681) (175,266)
Other (58,524) (44,121)
------------ ------------
(398,408) (392,271)
Valuation allowance - -
Net deferred tax asset (liability) $ 1,105,834 $ 697,409
=========== ============
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, 2000 and 1999. 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.
<PAGE>
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.
The Bank's actual capital and required capital amounts and ratios are presented
below:
<TABLE>
<CAPTION>
Minimum
Requirement
Minimum To Be Well
Requirement Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
As of September 30, 2000
Total capital (to risk
<S> <C> <C> <C> <C> <C> <C>
weighted assets) $ 33,810 13.25% $ 20,416 8.00% $ 25,520 10.00%
Tier 1 (core) capital
(to risk weighted assets) 32,288 12.65 10,208 4.00 15,312 6.00
Tier 1 (core) capital (to
adjusted total assets) 32,288 8.14 15,869 4.00 19,836 5.00
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
</TABLE>
<PAGE>
NOTE 11 - REGULATORY MATTERS (Continued)
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, 2000 none of the Bank's
retained earnings was potentially available for distribution to the Company,
without obtaining prior regulatory approval.
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>
2000 1999 1998
Other noninterest income ---- ---- ----
<S> <C> <C> <C>
Other service charges and fees $ 360,698 $ 510,980 $ 318,636
Other 68,879 109,260 113,640
----------- ----------- -----------
$ 429,577 $ 620,240 $ 432,276
=========== =========== ===========
Other noninterest expense
Advertising and promotion $ 208,274 $ 206,254 $ 186,257
Professional fees 197,819 170,429 166,652
Printing, postage, stationery,
and supplies 278,928 219,267 162,794
Direct loan origination costs deferred (135,694) (202,349) (262,686)
Other 1,345,702 904,818 746,377
----------- ----------- -----------
$ 1,895,029 $ 1,298,419 $ 999,394
=========== =========== ===========
</TABLE>
<PAGE>
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>
-------------------2 0 0 0---------------- -------------------1 9 9 9----------------
Fixed Variable Fixed Variable
Rate Loans Rate Loans Total Rate Loans Rate Loans Total
<S> <C> <C> <C> <C> <C> <C>
First mortgage loans $ 3,023,124 $ 1,454,250 $ 4,477,374 $ 1,534,750 $ 1,100,350 $ 2,635,100
Commercial loans 677,750 5,880,332 6,558,082 9,984,354 8,866,800 18,851,154
Unused lines of credit 8,656,675 8,204,191 16,860,866 7,953,681 7,812,361 15,766,042
Unused commercial loan
lines and credit - 29,085,625 29,085,625 - 22,206,913 22,206,913
Unused construction loan
lines of credit 1,691,061 5,207,279 6,898,340 - 5,574,641 5,574,641
------------- ----------- ----------- ----------- ----------- -----------
$ 14,048,610 $49,831,677 $63,880,287 $19,472,785 $45,561,065 $65,033,850
============= =========== =========== =========== =========== ===========
</TABLE>
Fixed rate mortgage loan commitments at September 30, 2000 are at rates
primarily ranging from 7.375% to 10.00%. 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 7.625% to 10.00% and are tied to the one year treasury
bill rate. Rates on variable commercial loan commitments are tied to the
national prime rate.
Since commitments to make loans and to fund unused lines of credit and loans in
process may expire without being used, the amounts do not necessarily represent
future cash commitments. In addition, commitments are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. The maximum exposure to credit loss in the event of nonperformance by
the other party is the contractual amount of these instruments. The same credit
policy is used to make such commitments as is used for loans receivable.
Under employment agreements with certain executives, officers, certain events
leading to separation from the Company could result in cash payments totaling
$1,480,000 as of September 30, 2000.
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.
<PAGE>
NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed financial statements for the parent company,
MFB Corp.
CONDENSED BALANCE SHEETS
September 30, 2000 and 1999
2000 1999
---- ----
ASSETS
Cash and cash equivalents $ 552.249 $ 384,044
Securities available for sale 1,277,686 429,210
Securities held to maturity - 1,000,000
Investment in Bank subsidiary 31,468,005 29,980,712
Loan receivable from ESOP - 222,963
Other assets 21,960 20,138
------------ ------------
Total assets $ 33,319,900 $ 32,037,067
============ ============
LIABILITIES
Loan payable to Bank subsidiary $ 750,000 $ 750,000
Accrued expenses and other liabilities 55,473 105,437
------------ ------------
Total liabilities 805,473 855,437
SHAREHOLDERS' EQUITY 32,514,427 31,181,630
------------ ------------
Total liabilities and shareholders' equity $ 33,319,900 $ 32,037,067
============ ============
<PAGE>
NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
Years ended September 30, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Dividends from Bank subsidiary - cash $ 1,544,000 $ 1,125,000 $ 5,650,000
Interest income 109,608 57,205 48,748
Other income - - 919
Interest expense 66,187 17,062 1,346
Other expenses 120,362 110,790 107,359
------------ ------------ ------------
Income before income taxes and
equity in undistributed net income
of Bank subsidiary 1,467,059 1,054,353 5,590,962
Income tax benefit 32,350 29,857 25,014
------------ ------------ ------------
Income before equity in undistributed
net income of Bank subsidiary 1,499,409 1,084,210 5,615,976
(Distributions in excess of) equity in
undistributed net income of Bank subsidiary 1,315,148 1,120,088 (3,379,693)
------------ ------------ ------------
Net income $ 2,814,557 $ 2,204,298 $ 2,236,283
============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS Years
ended September 30, 2000, 1999 and 1998
1999 1998 1997
Cash flows from operating activities
<S> <C> <C> <C>
Net income $ 2,814,557 $ 2,204,298 $ 2,236,283
Adjustments to reconcile net income to
net cash from operating activities
Distributions in excess of (equity in
undistributed) net income of
Bank subsidiary (1,315,148) (1,120,088) 3,379,693
Net realized losses from sales
of securities available for sale 5,110 - -
Net change in other assets 16,605 353,863 (361,526)
Net change in accrued expenses and
other liabilities (49,964) 121,285 310,634
------------ ------------ ------------
Net cash from operating activities 1,471,160 1,559,358 5,565,084
Cash flows from investing activities
Principal repayments on loan receivable
from ESOP 222,963 221,594 220,053
Purchase of securities available for sale - - (242,500)
Purchase of securities held to maturity - (1,000,000) -
Proceeds from sales of securities
available for sale 99,890 - -
------------ ------------ ------------
Net cash from investing activities 322,853 (778,406) (22,447)
Cash flows from financing activities
Proceeds from loan payable to Bank
subsidiary - 750,000 -
Purchase of MFB Corp. common stock (1,102,925) (1,209,619) (5,931,312)
Proceeds from exercise of stock options - 25,000 688,500
Cash dividends paid (522,883) (514,743) (543,557)
------------ ------------ ------------
Net cash from financing activities (1,625,808) (949,362) (5,786,369)
------------ ------------ ------------
Net change in cash and cash equivalents 168,205 (168,410) (243,732)
Cash and cash equivalents at beginning
of year 384,044 552,454 796,186
------------ ------------ ------------
Cash and cash equivalents at end of year $ 552,249 $ 384,044 $ 552,454
============ ============ ============
</TABLE>
<PAGE>
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair values and the related carrying
amounts of the Company's financial instruments at September 30, 2000 and 1999.
Items which are not financial instruments are not included.
<TABLE>
<CAPTION>
2000 1999
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 14,543,952 $ 14,544,000 $ 12,062,942 $ 12,061,000
Interest-bearing time
deposits in other financial
institutions - - 1,000,000 1,000,000
Securities available for sale 41,662,790 41,623,000 38,170,143 38,170,000
Securities held to maturity - - 3,984,338 3,709,000
FHLB stock 6,307,600 6,308,000 5,511,300 5,511,000
Loans held for sale, net 6,494,568 6,495,000 8,061,951 8,062,000
Loans receivable, net of
allowance for loan losses 315,505,699 309,494,000 269,464,085 269,707,000
Accrued interest receivable 1,894,602 1,895,000 1,363,318 1,363,000
Mortgage servicing rights, net 611,013 611,000 412,000 412,000
Investment in limited
partnership 2,948,463 2,948,000 1,213,000 1,213,000
Noninterest bearing demand
deposits (11,802,027) (11,802,000) (7,357,944) (7,358,000)
Savings, NOW and MMDA
deposits (56,568,936) (56,569,000) (52,409,560) (52,410,000)
Other time deposits (171,023,260) (171,023,000) (141,639,885) (141,314,000)
Securities sold under
agreements to repurchase (9,143,345) (9,143,000) (6,566,395) (6,566,000)
FHLB advances (112,151,525) (108,300,000) (104,225,750) (101,370,000)
Advances from borrowers
for taxes and insurance (2,115,832) (2,116,000) (2,111,183) (2,111,000)
</TABLE>
<PAGE>
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of September 30, 2000 and 1999. 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, 2000 and 1999 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, 2000 and 1999, applied for an estimated time
period until the loan is assumed to reprice or be paid. In addition, when
computing the estimated fair value for loans receivable, the allowance for loan
losses was subtracted from the calculated fair value for consideration of credit
issues. The estimated fair value for FHLB stock, accrued interest receivable,
mortgage servicing rights, investment in limited partnership, noninterest
bearing demand deposits, savings, NOW and MMDA deposits 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, 2000 and
1999, 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, 2000 and 1999, 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, 2000 and 1999 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.
<PAGE>
NOTE 16 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
Net change in net unrealized gains and losses
on securities available for sale
Unrealized gains (losses) arising during
<S> <C> <C> <C>
the year $ (47,362) $ (1,109,639) $ (188,757)
Reclassification adjustment for transfer
of securities from held-to-maturity to
available-for-sale (320,078) - -
Reclassification adjustment for gains
included in net income 38,552 (3,803) (7,673)
Net change in net unrealized gains
and losses on securities available
for sale (328,888) (1,113,442) (196,430)
Tax benefit (130,272) (441,036) (77,805)
Total other comprehensive income (loss) $ (198,616) $ (672,406) $ (118,625)
</TABLE>
<TABLE>
<CAPTION>
NOTE 17 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
--------------Year Ended September 30, 2000--------------
-----------------------------
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $ 6,520 $ 6,894 $ 7,405 $ 7,695
Interest expense 3,685 3,972 4,279 4,537
----------- ----------- ----------- -----------
Net interest income 2,835 2,922 3,126 3,158
Provision for loan losses 75 80 190 761
----------- ----------- ----------- -----------
Net interest income after provision for loan
losses 2,760 2,842 2,936 2,397
Noninterest income 358 295 569 623
Noninterest expense 2,010 1,978 2,160 2,124
----------- ----------- ----------- -----------
Income before income taxes 1,108 1,159 1,345 896
Income tax expense 419 435 501 338
----------- ----------- ----------- -----------
Net income $ 689 $ 724 $ 844 $ 558
=========== =========== =========== ===========
Basic earnings per common share $ .49 $ .52 $ .62 $ .41
=========== =========== =========== ===========
Diluted earnings per common share $ .48 $ .51 $ .61 $ .40
=========== =========== =========== ===========
</TABLE>
<PAGE>
NOTE 17 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)
<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
=========== =========== =========== ===========
</TABLE>
<PAGE>
MFB CORP. AND SUBSIDIARY
DIRECTORS AND OFFICERS
September 30, 2000
--------------------------------------------------------------------------------
MFB CORP. AND MFB FINANCIAL DIRECTORS
M. Gilbert Eberhart (age 66) has served as Secretary of MFB Financial since 1987
and of MFB Corp. since inception. He is also a dentist based in Mishawaka.
Thomas F. Hums (age 67) served as President and Chief Executive Officer of MFB
Financial from 1972 until September 1995. He also served as President and Chief
Executive Officer of Mishawaka Financial Services, Inc. from 1975 until
September 1995. He also served as President and Chief Executive Officer of MFB
Corp. from inception until September 1995. He is the current Chairman of MFB
Corp. and MFB Financial.
Jonathan E. Kintner (age 57) is an optometrist based in Mishawaka.
Michael J. Marien (age 53) is a Sales Representative with Signode Corporation, a
division of ITW.
Marian K. Torian (age 79) is a past Chairman of MFB Corp. and of MFB Financial.
She is a retired teacher from the School City of Mishawaka.
Charles J. Viater (age 46) has served as President and Chief Executive Officer
of MFB Corp., MFB Financial and Mishawaka Financial Services, Inc. since
September 1995. He previously served as Executive Vice President for Amity
Federal Savings Bank and Chief Financial Officer of Amity Bancshares, Inc.
beginning in December 1990.
Reginald H. Wagle (age 58) has served as Vice President of Memorial Health
Foundation since 1992. Until 1992, he was a free-lance political consultant and
until 1991, he also served as District Director for the Office of United States
Representative John P. Hiler, Third Congressional District of Indiana.
Christine A. Lauber (age 55) is a Certified Public Accountant in private
practice in South Bend, Indiana.
MFB FINANCIAL EXECUTIVE OFFICERS
Charles J. Viater Timothy C. Boenne
President and Chief Executive Officer* Vice President and Controller
Donald R. Kyle M. Gilbert Eberhart
Executive Vice President and Secretary*
Chief Operating Officer
* Holds same position with MFB Corp.
<PAGE>
MFB CORP. AND SUBSIDIARY
SHAREHOLDER INFORMATION
September 30, 2000
--------------------------------------------------------------------------------
Market Information
The common stock of MFB Corp. is traded on the National Association of
Securities Dealers Automated Quotation System, National Market System, under the
symbol "MFBC." As of September 30, 2000, there were approximately 560
shareholders of record. The following table sets forth market price (based on
daily closing prices) and dividend information for the Company's common stock
for the periods indicated.
Dividend
Fiscal Quarters Ended High Trade Low Trade Declared
--------------------- ---------- --------- --------
December 31, 1998 $ 23.00 $ 18.00 $ .085
March 31, 1999 23.00 21.50 .09
June 30, 1999 22.25 21.25 .09
September 30, 1999 22.00 19.75 .09
December 31, 1999 20.00 15.50 .09
March 31, 2000 17.625 15.25 .095
June 30, 2000 17.00 16.00 .095
September 30, 2000 19.75 15.75 .095
Transfer Agent and Registrar
Registrar and Transfer Co.
10 Commerce Drive
Cranford, NJ 07016
Special Counsel
Barnes & Thornburg
1313 Merchants Company Building
11 South Meridian Street
Indianapolis, IN. 46204
Independent Auditors
Crowe, Chizek and Company LLP
330 East Jefferson Blvd.
South Bend, IN 46601
Shareholder and General Inquiries
The Company is required to file an Annual Report on Form 10-K for its fiscal
year ended September 30, 2000 with the Securities and Exchange Commission.
Copies of this annual report may be obtained without charge upon written request
to:
Charles J. Viater
President and Chief Executive Officer
MFB Corp.
121 South Church Street
PO Box 528
Mishawaka, IN 46546
Office Locations
Main Office Branch Office Branch Office
121 S. Church St. 411 W. McKinley Ave. 25990 County Road 6
Mishawaka, IN 46544 Mishawaka, IN 46545 Elkhart, IN 46514
Branch Office Branch Office Branch Office
402 W. Cleveland Rd. 2427 Mishawaka Ave. 2304 Lincolnway East
Mishawaka, IN 46545 South Bend, IN 46615 Goshen, IN 46526
Branch Office
100 E. Wayne Street
Suite 150
South Bend, IN. 46601
