MFB FINANCIAL
Table of Contents
Letter to Shareholders .................................................... 1
Selected Consolidated Financial Data ...................................... 2
Management's Discussion and Analysis ...................................... 3
Report of Independent Auditors ............................................ 17
Consolidated Balance Sheets ............................................... 18
Consolidated Statements of Income ......................................... 19
Consolidated Statements of Shareholders' Equity ........................... 20
Consolidated Statements of Cash Flows ..................................... 21
Notes to Consolidated Financial Statements ................................ 23
Directors and Officers .................................................... 43
Shareholder Information ................................................... 44
DESCRIPTION OF BUSINESS
MFB Corp. is an Indiana unitary savings and loan holding company organized in
1993, and parent company of its wholly owned bank subsidiary, MFB Financial (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., offers general property, casualty and life insurance
to customers in the Bank's market area.
Message To Our Shareholders
On behalf of the Board of Directors, our management team and all the
employees of MFB Corp. ("the Company") and it's subsidiary, MFB Financial ("the
Bank"), it is my pleasure to provide you with our Annual Report for the fiscal
year ended September 30, 2001.
This has been another significant year of progress for the Bank. We
continued to grow our core business and our presence in the community. The Bank
surpassed $400 million in total assets for the first time in our 112 year
history even as signs of an impending economic slowdown began to appear. Core
deposit relationships continued to grow and represented nearly $87 million or
35% of total deposits by year end, a level never before achieved. Non-interest
income grew $919,000 from last year--an impressive 50% increase. This increase
was driven by the success of two important elements of the Company's strategy.
First, the commitment to our mortgage banking operation that generated over $1
million in gains on the sale of loans during the year and secondly, our efforts
to grow fee income by providing additional and better quality services to all
the clients we service.
The Company generated net income of $1.9 million ($1.38 diluted earnings
per share) during the year despite absorbing an additional $1.8 million ($.79
diluted earnings per share after taxes) to the loan loss reserve necessitated by
the untimely bankruptcy filing of a commercial loan customer. Nonetheless, book
value per common share outstanding grew to $25.72, another all-time high and the
Company increased the annual dividend rate to 39.5 cents per share, the fifth
increase in as many years. The market value of the Company's shares increased
from $17.38 per share to $19.15 per share during the year. This was an
impressive increase of 10.2%, especially given the overall performance of
virtually every major market index during the same period.
By most accounts, our economy was on the brink of a recession by the middle
of the year. That was followed by the tragic events of September 11th. For the
first time since the early 1990's we were clearly in the throws of a significant
economic downturn. Many local businesses have been impacted by the slowdown. As
a result we redoubled our efforts to control and monitor asset quality as we
move into uncertain and uncharted economic waters. We will remain vigilant and
steadfast in our commitment to maintain asset quality that rivals our industry
peers.
Our core earnings capacity continues to improve and will result in enhanced
long term shareholder value--a cornerstone in the foundation of our company. We
invite you to review the pages that follow and reiterate our commitment to grow
the value of your investment.
/s/ Charles J. Viater
-------------------------------------
Charles J. Viater
President and Chief Executive Officer
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.
At September 30,
--------------------------------------------------------------------
(In Thousands)
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Summary of Financial Condition:
Total assets $ 413,084 $ 396,003 $ 346,454 $ 314,961 $ 255,921
Loans receivable 311,613 317,178 270,102 232,060 188,634
Allowance for loan losses 4,632 1,672 638 454 370
Loans held for sale, net 3,074 6,495 8,062 13,517 12,671
Cash and cash equivalents 34,223 14,544 12,062 17,904 9,482
Securities, including FHLB stock 54,167 47,930 47,666 46,456 42,028
Deposits 245,179 239,394 201,407 180,666 171,887
Securities sold under
agreements to repurchase 11,022 9,143 6,566 2,366 389
FHLB advances 119,685 112,152 104,226 92,726 47,500
Shareholders' equity 34,380 32,514 31,182 30,886 33,550
Years Ended September 30,
--------------------------------------------------------------------
(In Thousands)
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Summary of Operating Results:
Interest income $ 29,977 $ 28,514 $ 24,254 $ 20,838 $ 17,685
Interest expense 17,972 16,473 14,448 12,204 10,157
--------- --------- --------- --------- ---------
Net interest income 12,005 12,041 9,806 8,634 7,528
Provision for loan losses 3,097 1,106 230 120 30
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses 8,908 10,935 9,576 8,514 7,498
Noninterest income
Net gains from sales of loans 1,046 525 366 333 --
Service charges on deposit accounts 735 541 293 192 113
Trust fee income 213 146 29 -- --
Insurance commissions 140 149 148 143 134
Brokerage commissions 29 13 28 36 24
Net gain (loss) from sales
of securities (52) (41) 4 8 6
Loan servicing fees, net 32 82 54 12 --
Other 621 430 298 240 148
--------- --------- --------- --------- ---------
Total noninterest income 2,764 1,845 1,220 964 425
Noninterest expense
Salaries and employee benefits 4,944 4,668 3,847 3,414 2,772
Occupancy and equipment expense 1,278 1,081 883 720 580
Data processing expense 516 443 380 385 281
SAIF deposit insurance premium 47 62 109 108 147
Provision to adjust loans held
for sale to lower of cost
or market -- 123 489 -- --
Other expense 2,026 1,895 1,299 998 819
--------- --------- --------- --------- ---------
Total noninterest expense 8,811 8,272 7,007 5,625 4,599
--------- --------- --------- --------- ---------
Income before income taxes 2,861 4,508 3,789 3,853 3,324
--------- --------- --------- --------- ---------
Income tax expense 951 1,693 1,585 1,617 1,322
--------- --------- --------- --------- ---------
Net income $ 1,910 $ 2,815 $ 2,204 $ 2,236 $ 2,002
========= ========= ========= ========= =========
Supplemental Data:
Basic earnings per common share $ 1.42 $ 2.04 $ 1.56 $ 1.44 $ 1.21
Diluted earnings per common share $ 1.38 $ 2.00 $ 1.51 $ 1.37 $ 1.16
Dividends declared per common share $ .395 $ .375 $ .355 $ .335 $ .32
Book value per common share $ 25.72 $ 23.93 $ 21.96 $ 20.95 $ 20.33
Return on assets (1) .47% .75% .66% .80% .84%
Return on equity (2) 5.75 8.88 6.97 6.69 5.83
Interest rate spread (3) 2.64 2.88 2.57 2.54 2.49
Net yield on average
interest-earning assets (4) 3.07 3.33 3.01 3.17 3.24
Dividend pay-out ratio (5) 27.82 18.38 22.76 23.26 26.45
Equity-to-assets (6) 8.32 8.21 9.00 9.81 13.11
Non-performing assets
to total assets .67 .02 .06 .09 .10
Non-performing loans
to total loans .89 .02 .03 .05 .14
Allowance for loan
losses to total loans 1.49 .53 .24 .20 .20
(1) Net income divided by average total assets.
(2) Net income divided by average total equity.
(3) Interest rate spread is calculated by subtracting average interest rate
cost from average interest rate earned.
(4) Net interest income divided by average interest-earning assets.
(5) Dividends declared per share divided by basic earnings per share.
(6) Total equity divided by total assets.
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 losses, service charges, fee income, gains from sales of
loans, retained mortgage loan servicing fees, income from subsidiary activities,
operating expenses and income taxes.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 2001 AND 2000
Results Of Operation
Consolidated net income for the Company for the year ended September 30,
2001 was $1.9 million or $1.38 diluted net income per common share compared to
$2.8 million or $2.00 diluted net income per common share for the same period in
2000. The decline in net income for the comparable periods was primarily
attributable to a significantly larger provision for loan losses in 2001
partially offset by increased noninterest income.
[GRAPH OMITTED]
DILUTED EARNINGS PER SHARE
Diluted
EPS
--------
9/30/1997 $1.16
9/30/1998 $1.37
9/30/1999 $1.51
9/30/2000 $2.00
9/30/2001 $1.38 $2.17*
* Diluted Earnings per Share restated excluding the effect of an additional
$1.8 million provision to the Loan Loss Reserve during the first quarter,
2001
Net interest income totaled $12.00 million for the year ended September 30,
2001 compared to $12.04 million for the same period one year ago. The slight
decrease in net interest income from last year was due to average rate decreases
in interest-earning assets and average rate increases on interest-bearing
liabilities exceeding the increases to net interest income due to the net growth
in volume of those assets and liabilities. Due to overall interest rate
decreases throughout the year, the yield on interest-earning assets decreased 23
basis points from 7.89% in 2000 to 7.66% in 2001. The average interest rate paid
on interest-bearing liabilities increased one basis point to 5.02% during the
same period, and as a result, the interest rate spread decreased 24 basis points
from 2.88% to 2.64% in 2001. Interest income increased $1.46 million during the
year ended September 30, 2001 compared to the same period in 2000. The increase
was primarily due to increased volumes of loans receivable during the year,
particularly commercial and consumer loans, and additional earnings derived from
deposits in other financial institutions. Interest expense increased $1.50
million reflecting the growth in deposits and borrowed funds.
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 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, 2001 the Bank
experienced significant growth in the commercial loan portfolio. The Bank
recorded an additional $1.8 million ($1.1 million after tax) to the loan loss
reserves in the quarter ended December 31, 2000 as a result of a chapter 11
bankruptcy filing by a commercial borrower. Based on these factors, the
provision for loan losses increased from $1.1 million for the year ended
September 30, 2000 to $3.1 million for the year ended September 30, 2001. The
Bank continues to improve its loan review and risk assessment procedures giving
particular consideration to the loss risks related to the growing commercial
loan portfolio, and the risk of loss for $8.9 million of loans classified as
impaired at the end of the year.
Noninterest income increased from $1.8 for the year ended September 30,
2000 to $2.8 million for the twelve months ended September 30, 2001. The
noninterest income increases are primarily due to fees generated from the
increasing number of core deposit relationships, income generated from the
Bank's trust department and net realized gains from loan sales. The decline in
the overall interest rate environment resulted in a significant increase in loan
originations and subsequent loan sales.
Noninterest expense increased from $8.3 million to $8.8 million for the
comparable twelve month periods ending September 30. These noninterest expense
increases are primarily attributable to staffing increases and expenses incurred
in the offering of additional services to the Bank's customers.
Balance Sheet Composition
Cash and cash equivalents increased $19.7 million from $14.5 million as of
September 30, 2000 to $34.2 million as of September 30, 2001. The increase was
attributable to the investment of excess cash in interest-bearing deposits with
other financial institutions totaling $27.0 million at September 30, 2001. Net
cash provided by operating activities and financing activities amounted to $7.6
million and $13.6 million, respectively, and was partially offset by net cash
used in investing activities of $1.5 million.
As of September 30, 2001, the total securities portfolio amounted to $47.9
million, an increase of $6.3 million from $41.6 million at September 30, 2000.
The securities portfolio activity included security purchases of $75.4 million,
security maturities and sales totaling $63.5 million, principal payments on
mortgage-backed and related securities of $7.5 million and a $1.6 million
increase in the market value of securities available for sale.
[GRAPH OMITTED]
ASSET MIX
Cash and Investments 89891 21.76%
Other Assets 13138 3.18%
Mortgage 163642 39.61%
Construction 18659 4.52%
Home Equiity and Second Mortgages 20275 4.91%
Commercial 100942 24.44%
Consumer and Other 6536 1.58%
------
413083
As of September 30, 2001, net loans receivable were $307.0 million, a
decrease of $8.5 million from $315.5 million as of September 30, 2000.
Commercial loans outstanding increased by $14.5 million from $91.1 million at
September 30, 2000 to $105.6 million at September 30, 2001. Consumer loan
receivables, which include home equity term loans and lines of credit, increased
$1.8 million to $26.8 million while residential mortgage loans receivables
decreased $21.9 million to $180.2 million at September 30, 2001. However, loans
originated for sale for the year ended September 30, 2001 grew to $53.9 million
from $20.3 million in the prior year. Diversification of the asset mix in the
balance sheet will continue to be a focus to improve profit margins, control
margin volatility and to appeal to a broader range of customers and potential
customers. The Company continues to build on its reputation as a quality local
lender satisfying the market's desire for local service and local decision
making.
During the year ended September 30, 2001, the Company completed secondary
market mortgage loan sales totaling $57.7 million and the net gains realized on
these loan sales were $1.05 million, including $604,000 related to recording
mortgage loan servicing rights. At September 30, 2001, $3.1 million of loans
were classified as loans held for sale. The loans sold during the year ended
September 30, 2001 were fixed rate mortgage loans with maturities of fifteen
years or longer. The sale of loan production serves as a source of additional
liquidity and management anticipates that the Company will continue to deliver
fixed rate loans to the secondary market to meet consumer demand, manage
interest rate risk, and diversify the asset mix of the Company. Adjustable rate
loans often provide rates of return that are generally superior to other
investments that carry similar terms to repricing. These loans will continue to
be marketed and retained in the Bank's portfolio.
[GRAPH OMITTED]
DEMAND, NOW, SAVING AND MMDA
(Core Deposits)
(in millions)
Growth
------
9/30/1997 $40.2
9/30/1998 $45.1
9/30/1999 $59.8
9/30/2000 $68.4
9/30/2001 $87.0
Total deposits increased $5.8 million to $245.2 million as of September 30,
2001 from $239.4 million as of September 30, 2000. Core deposits consisting of
demand, NOW, savings and MMDA accounts increased from $68.4 million to $87.0
million from September 30, 2000 to September 30, 2001. Securities sold under
agreements to repurchase increased from $9.1 million to $11.0 million during the
comparable periods. Federal Home Loan Bank ("FHLB") advances also increased from
$112.2 million as of September 30, 2000 to $119.7 million as of September 30,
2001. The growth in deposits, repurchase agreements and FHLB borrowings
primarily funded the increase in securities and interest-bearing deposits held
in other financial institutions during the year.
Total shareholders' equity increased from $32.5 million as of September 30,
2000 to $34.4 million as of September 30, 2001. The increases to equity resulted
mainly from $1.9 million in net income and a $961,000 adjustment to reflect the
increase in the market value of securities available for sale, net of tax,
offset by treasury stock transactions at a cost of $517,000 and cash dividend
payments of $533,000. The book value of MFB Corp. common stock, based on the
actual number of shares outstanding, increased from $23.93 at September 30, 2000
to $25.72 at September 30, 2001.
[GRAPH OMITTED]
LIABILITY AND EQUITY MIX
Non-Interest Bearing Deposits 13895 3.36%
Savings, DDA & MMDA Deposits 73082 17.69%
Other Time Deposits 158202 38.30%
Repurchase Agreements 11021 2.67%
FHLB Advances 119685 28.97%
Other Liabilities 2818 0.68%
Stockholders' Equity 34380 8.32%
------
413083
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 2000 AND 1999
Results Of Operation
Consolidated net income for the Company for the year ended September 30,
2000 was $2.8 million or $2.00 diluted net income per common share compared to
$2.2 million or $1.51 diluted net income per common share for the same period in
1999.
Net interest income totaled $12.0 million for the year ended September 30,
2000 compared to $9.8 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 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.
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 loss experience of its peer group, as the
Company did not yet have an established loss history is its own. Management gave
particular consideration to the loss risks related to the growing commercial
loan portfolio, and the risk of loss for $1.7 million of loans classified as
impaired during the quarter. Total commercial loans at September 30, 2000 were
$91.1 million compared to $47.4 million at September 30, 1999, a 92.2% increase.
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.
Balance Sheet Composition
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.
As of September 30, 2000, the total securities portfolio amounted to $41.6
million, a decrease of $0.6 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. In
addition to the increase in commercial loans outstanding, residential mortgage
loans and home equity loans outstanding increased by $1.7 million during the
year ended September 30, 2000. 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.
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. The loans sold during the year ended
September 30, 2000 were fixed rate mortgage loans with maturities of fifteen
years or longer. Management, in order to meet consumer demand, anticipates that
the Company will continue to deliver fixed rate loans to the secondary market
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 FHLB borrowings
primarily funded the loan growth during the year. The Bank will continue to
focus on growth of core deposit account relationships. FHLB advances can be a
less expensive alternative than a like term certificate of deposit, can improve
the bank's interest rate risk profile, and will be utilized as necessary to fund
loan demand.
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.
ASSET/LIABILITY MANAGEMENT
The Company is subject to interest rate risk to the extent that its
interest-bearing liabilities, primarily deposits and Federal Home Loan Bank
(FHLB) advances with short and medium-term maturities, reprice more rapidly, or
at different rates than its interest-earning assets.
A key element of the Company's asset/liability plan is to protect net
earnings 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 which was 8.83% as of June 30, 2001, (the most recently available data).
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, 2001 and 2000, 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, 2001
Change in ------------- NPV as % of Portfolio
Interest Rates Value of Assets
In Basis Net Portfolio Value ----------------------
Points ------------------- NPV
(Rate Shock) (1) $ Amount $ Change % Change Ratio Change (1)
- ----------------------------------------------------------------------------------------------
(Dollars in Thousands)
+300 $ 23,394 $(14,281) (38)% 5.77% (306)bp
+200 29,361 (8,315) (22) 7.11 (172)bp
+100 34,180 (3,496) (9) 8.13 (70)bp
0 37,676 8.83
(100) 38,299 623 2 8.88 5 bp
(200) 36,818 (858) (2) 8.46 (37)bp
(300) 34,298 (3,378) (9) 7.81 (102)bp
(1) Expressed in basis points
As illustrated in the June 30, 2001 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, 2001, the
Company's NPV was $37.7 million or 8.83% 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 22% decline
in the Company's NPV and would result in a 172 basis point or 19.5% decline in
the Company's NPV ratio to 7.11%. Conversely, an immediate 200 basis point
decrease in market interest rates would result in only a $858,000 or 2% decrease
in the Company's NPV, and only a 37 basis point or 4.2% decrease in the
Company's NPV ratio to 8.46%.
June 30, 2000
Change in ------------- NPV as % of Portfolio
Interest Rates Value of Assets
In Basis Net Portfolio Value ----------------------
Points ------------------- NPV
(Rate Shock) (1) $ Amount $ Change % Change Ratio Change (1)
- ----------------------------------------------------------------------------------------------
(Dollars in Thousands)
+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 had greater interest
rate sensitivity to rising rates over declining rates than for the period ended
June 30, 2001. 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%.
In addition to monitoring selected measures of NPV, management also
monitors effects on net interest income resulting from increases or decreases in
rates. This process 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 repricing periods, 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 adjustable rate mortgages
(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, 2001
totaled $3.1 million. The Company retains the servicing on loans sold in the
secondary market and, at September 30, 2001, $91.7 million in such loans were
being serviced for others.
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.
AVERAGE BALANCE SHEETS
The following are the average balance sheets for the years ended September 30:
2001 2000 1999
- --------------------------------------------------------------------------------
Average Average Average
Outstanding Outstanding Outstanding
Balance Balance Balance
- --------------------------------------------------------------------------------
(In Thousands)
Assets:
Interest earning assets:
Interest-bearing deposits $ 18,422 $ 4,536 $ 11,983
Securities (1) 28,589 25,576 17,347
Mortgage-backed securities (1) 19,707 19,191 30,461
FHLB stock 6,308 5,853 5,453
Loans held for sale (2) 293 3,837 15,571
Loans receivable (3) 317,217 300,717 244,132
--------- --------- ---------
Total interest-earning assets 390,536 359,710 324,947
Noninterest-earning assets, net
of allowance for loan losses 17,354 17,335 11,246
--------- --------- ---------
Total assets $ 407,890 $ 377,045 $ 336,193
========= ========= =========
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts $ 15,946 $ 15,218 $ 12,277
NOW and money market accounts 51,520 40,583 36,422
Certificates of deposit 167,519 156,855 137,734
Repurchase agreements 8,416 7,718 3,892
FHLB advances 114,903 108,759 104,894
--------- --------- ---------
Total interest-bearing
liabilities 358,304 329,133 295,219
Other liabilities 16,333 16,222 9,351
--------- --------- ---------
Total liabilities 374,637 345,355 304,570
Shareholders' equity:
Common stock 13,077 13,065 12,933
Retained earnings 28,227 26,541 24,550
Net unrealized gain (loss) on
securities available for sale (434) (921) 213
Less common stock acquired by:
Employee stock ownership plan -- (131) (352)
Recognition and retention plan -- -- (11)
Treasury stock (7,617) (6,864) (5,710)
--------- --------- ---------
Total shareholders' equity 33,253 31,690 31,623
--------- --------- ---------
Total liabilities and
shareholders' equity $ 407,890 $ 377,045 $ 336,193
========= ========= =========
(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.
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,
------------------------
2001 2000 1999
------------------------
Average interest rate earned on:
Interest-bearing deposits 5.03% 6.39% 5.12%
Securities (1) 6.11 6.71 5.96
Mortgage-backed securities (1) 6.26 6.60 5.99
FHLB stock 7.86 8.13 8.00
Loans held for sale 7.17 7.48 7.01
Loans receivable 8.04 8.11 7.88
Total interest-earning assets 7.66 7.89 7.46
Average interest rate of:
Savings accounts 2.25 2.44 2.39
NOW and money market accounts 2.42 2.60 2.75
Certificates of deposit 5.65 5.48 5.29
Repurchase agreements 3.47 3.89 3.80
FHLB advances 5.75 5.65 5.45
Total interest-bearing
liabilities 5.02 5.01 4.89
Interest rate spread (2) 2.64 2.88 2.57
Net yield on interest-earning
assets (3) 3.07 3.33 3.01
(1) Yield is based on amortized cost without adjustment for unrealized gain
(loss) on securities available for sale.
(2) Interest rate spread is calculated by subtracting the average interest rate
cost from the average interest rate earned for the period indicated.
(3) The net yield on average interest-earning assets is calculated by dividing
net interest income by the average interest-earning assets for the period
indicated.
The following table describes the extent to which changes in interest rates
and changes in volume of interest-related assets and liabilities have affected
the Company's consolidated interest income and expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, 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).
Year ending September 30, 2001
compared to year ended Total Net Due to Due to
September 30, 2000 Change Rate Volume
--------- ------- ------
(In Thousands)
Interest-earning assets:
Interest-bearing deposits $ 637 $ (74) $ 711
Securities 20 (166) 186
Mortgage-backed securities (81) (66) (15)
FHLB stock 20 (16) 36
Loans held for sale (266) (12) (254)
Loans receivable 1,133 (195) 1,328
--------- ------- ------
Total 1,463 (529) 1,992
Interest-bearing liabilities:
Savings accounts (13) (30) 17
NOW and money market accounts 192 (77) 269
Certificates of deposit 866 269 597
Repurchase agreements (8) (34) 26
FHLB advances 462 110 352
--------- ------- ------
Total 1,499 238 1,261
--------- ------- ------
Change in net interest income $ (36) $ (767) $ 731
========= ======= =======
Year ending September 30, 2000
compared to year ended Total Net Due to Due to
September 30, 1999 Change Rate Volume
--------- ------- ------
(In Thousands)
Interest-earning assets:
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
========= ======= =======
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.
Liquid assets were $83.6 million as of September 30, 2001 compared to $56.2
million as of September 30, 2000. This $27.4 million increase was due to a $19.7
million increase in cash and cash equivalents, a $1.5 million increase in time
deposits held in other financial institutions, and a $6.2 million increase in
securities available for sale. The sale of fixed rate loan production throughout
the year, along with the growth in deposits, FHLB advances and other borrowings
has provided the source of additional liquidity. Management believes the
liquidity level as of September 30, 2001 is sufficient to meet anticipated
liquidity needs.
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, 2001, 2000 and 1999 follows.
During the year ended September 30, 2001, net cash and cash equivalents
increased $19.7 million from $14.5 million at September 30, 2000 to $34.2
million at September 30, 2001.
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 $1.9 million and proceeds of $57.7 million realized from the sale of mortgage
loans, offset by the origination of $53.9 million of loans held for sale. The
Bank continues to originate, sell and deliver all 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 $1.5 million decrease in cash from investing activities for the year
ended September 30, 2001 was primarily related to investment security purchases
exceeding maturities and sales by $11.9 million, $1.5 million of time deposit
purchases, and $1.0 million of fixed asset purchases, offset by principal loan
payments exceeding loan originations of $5.4 million and $7.5 million of
mortgage-backed securities principal payments.
Financing activities generated net cash of $13.6 million for the year ended
September 30, 2001. The net cash was provided primarily from net deposit
increases of $5.8 million, $7.5 million in net new borrowed funds, and increases
of $1.9 million in repurchase agreements, partially offset by the use of
$647,000 to repurchase the Company's stock and $533,000 in cash dividends paid
during the year.
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.
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.
As of September 30, 2001 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
On October 1, 2000, the Company adopted Statement of Financial Accounting
Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and
Hedging Activities", as amended. SFAS 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities and requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on the intended use of
the derivative and its resulting designation. The adoption is not significant to
the consolidated financial statements of the Company during the year and at
September 30, 2001.
IMPACT OF INFLATION
The audited consolidated financial statements presented herein have been
prepared in accordance with accounting principles generally accepted in the
United States of America. 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 can
be affected by inflation, however, do not necessarily move in the same direction
or with the same magnitude as the indexes that measure inflation.
In periods of rapidly changing 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. Although difficult to measure,
an additional effect of inflation is the possible increase in the dollar value
of the collateral securing loans made by the Bank.
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..
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, 2001 and 2000 and the related consolidated
statements of income, shareholders' equity and cash flows for the years ended
September 30, 2001, 2000 and 1999. 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 auditing standards generally
accepted in the United States of America. 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, 2001 and 2000, and the results of their
operations and their cash flows for the years ended September 30, 2001, 2000 and
1999 in conformity with accounting principles generally accepted in the United
States of America.
/s/ Crowe, Chizek and Company LLP
- ---------------------------------
Crowe, Chizek and Company LLP
South Bend, Indiana
November 8, 2001
MFB CORP. AND SUBSIDIARY
Consolidated Balance Sheets
September 30,
------------------------------
2001 2000
------ ------
ASSETS
Cash and due from financial institutions $ 7,229,130 $ 9,692,995
Interest-bearing deposits in other financial
institutions - short-term 26,994,158 4,850,957
------------- -------------
Total cash and cash equivalents 34,223,298 14,543,952
------------- -------------
Interest-bearing time deposits
in other financial institutions 1,500,000 --
Securities available for sale 47,859,663 41,622,790
Federal Home Loan Bank (FHLB) stock,
at cost 6,307,600 6,307,600
Loans held for sale, net of unrealized losses
of $-0- in 2001 and $131,618 in 2000 3,073,700 6,494,568
Loans receivable 311,613,196 317,177,699
Less: allowance for loan losses (4,631,981) (1,672,000)
------------- -------------
Loans receivable, net 306,981,215 315,505,699
------------- -------------
Accrued interest receivable 1,774,284 1,894,602
Premises and equipment, net 5,100,144 4,687,662
Mortgage servicing rights, net of accumulated
amortization of $239,451 in 2001 and
$92,954 in 2000 1,068,801 611,013
Investment in limited partnership 2,877,088 2,948,463
Other assets 2,318,389 1,387,030
------------- -------------
Total assets $ 413,084,172 $ 396,003,379
============= =============
Liabilities
Deposits
Noninterest-bearing demand deposits $ 13,894,743 $ 11,802,027
Savings, NOW and MMDA deposits 73,082,351 56,568,936
Other time deposits 158,202,159 171,023,260
------------- -------------
Total deposits 245,179,253 239,394,223
------------- -------------
Securities sold under agreements
to repurchase 11,021,511 9,143,345
Federal Home Loan Bank advances 119,684,985 112,151,525
Advances from borrowers for taxes
and insurance 1,599,356 2,115,832
Accrued expenses and other liabilities 1,219,052 684,027
------------- -------------
Total liabilities 378,704,157 363,488,952
Shareholders' equity
Common stock, no par value, 5,000,000
shares authorized; shares issued:
1,689,417 - 2001 and 2000; shares
outstanding: 1,336,539 - 2001,
1,358,449 - 2000 13,023,255 13,136,003
Retained earnings - substantially
restricted 29,088,683 27,711,396
Accumulated other comprehensive
income (loss), net of tax of
$83,004 in 2001 and $(601,096)
in 2000 45,036 (916,439)
Treasury stock, 352,878 common
shares - 2001; 330,968 common
shares - 2000, at cost (7,776,959) (7,416,533)
------------- -------------
Total shareholders' equity 34,380,015 32,514,427
------------- -------------
Total liabilities and
shareholders' equity $ 413,084,172 $ 396,003,379
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
MFB CORP. AND SUBSIDIARY
Consolidated Statements of Income
Years ended September 30,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Interest income
Loans receivable, including fees
Mortgage loans $ 13,674,238 $ 14,966,575 $ 14,997,969
Consumer and other loans 2,416,480 1,948,952 1,267,455
Commercial loans 9,439,644 7,748,432 4,060,194
Securities 3,519,155 3,559,796 3,315,190
Other interest-earning assets 927,363 290,012 612,977
------------ ------------ ------------
Total interest income 29,976,880 28,513,767 24,253,785
Interest expense
Deposits 11,070,863 10,025,303 8,580,571
Securities sold under agreements
to repurchase 292,318 300,358 147,675
FHLB advances 6,608,615 6,147,365 5,719,852
------------ ------------ ------------
Total interest expense 17,971,796 16,473,026 14,448,098
------------ ------------ ------------
Net interest income 12,005,084 12,040,741 9,805,687
Provision for loan losses 3,096,594 1,106,393 230,000
------------ ------------ ------------
Net interest income after provision
for loan losses 8,908,490 10,934,348 9,575,687
Noninterest income
Service charges on deposit accounts 735,344 540,877 293,202
Trust fee income 212,535 145,594 29,398
Insurance commissions 140,084 149,357 147,521
Brokerage commissions 29,370 13,230 28,157
Net realized gains (losses) from
sales of securities available
for sale (51,570) (38,552) 3,803
Net realized losses from sales
of securities held to maturity -- (2,245) --
Net realized gains from sales
of loans 1,046,147 524,969 366,320
Loan servicing fees, net of
amortization of $146,497 in 2001,
$36,383 in 2000 and
$37,195 in 1999 31,662 81,846 54,025
Other income 620,848 429,577 297,640
------------ ------------ ------------
Total noninterest income 2,764,420 1,844,653 1,220,066
Noninterest expense
Salaries and employee benefits 4,943,774 4,668,011 3,846,889
Occupancy and equipment expense 1,278,395 1,080,785 882,698
Data processing expense 516,504 442,983 379,715
SAIF deposit insurance premium 46,692 62,117 109,208
Provision to adjust loans held
for saleo lower of cost
or market -- 122,896 489,152
Other expense 2,025,890 1,895,029 1,298,419
------------ ------------ ------------
Total noninterest expense 8,811,255 8,271,821 7,006,081
------------ ------------ ------------
Income before income taxes 2,861,655 4,507,180 3,789,672
Income tax expense 951,283 1,692,623 1,585,374
------------ ------------ ------------
Net income $ 1,910,372 $ 2,814,557 $ 2,204,298
============ ============ ============
Basic earnings per common share $ 1.42 $ 2.04 $ 1.56
Diluted earnings per common share 1.38 2.00 1.51
The accompanying notes are an integral part of these consolidated financial
statements.
MFB CORP. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
Years ended September 30, 2001, 2000 and 1999
Accumulated
Other
Comprehensive Total
Common Retained Income (Loss), Unearned Unearned Treasury Shareholders'
Stock Earnings Net of Tax ESOP Shares RRP Shares Stock Equity
----------- ----------- ------------- ----------- ---------- ----------- -------------
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
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 20,857 ESOP shares
committed to be released 119,701 -- -- -- -- -- 119,701
Net income for the year end
September 30, 2000 -- 2,814,557 -- -- -- -- 2,814,557
Other comprehensive income (loss) -- -- (198,616) -- -- -- (198,616)
Total comprehensive income -- -- -- -- -- -- 2,615,941
----------- ----------- --------- ----------- ---------- ----------- ------------
Balance at September 30, 2000 13,136,003 27,711,396 (916,439) -- -- (7,416,533) 32,514,427
Purchase of 34,760 shares of
treasury stock -- -- -- -- -- (647,398) (647,398)
Stock option exercise-issuance of
12,850 shares of
treasury stock (156,893) -- -- -- -- 286,972 130,079
Tax benefit related to employee
stock plan 44,145 -- -- -- -- -- 44,145
Cash dividends declared -
$ .395 per share -- (533,085) -- -- -- -- (533,085)
Comprehensive income:
Net income for the year end
September 30, 2001 -- 1,910,372 -- -- -- -- 1,910,372
Other comprehensive income (loss) -- -- 961,475 -- -- -- 961,475
Total comprehensive income -- -- -- -- -- -- 2,871,847
----------- ----------- --------- ----------- ---------- ----------- ------------
Balance at September 30, 2001 $13,023,255 $29,088,683 $ 45,036 $ -- $ -- $(7,776,959) $34,380,015
=========== =========== ========= ========= ========== =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
MFB CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended September 30, 2001, 2000 and 1999
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities
Net income $ 1,910,372 $ 2,814,557 $ 2,204,298
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization, net of accretion 391,333 493,800 298,862
Amortization of RRP contribution -- -- 38,500
Provision for loan losses 3,096,594 1,106,393 230,000
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 51,570 38,552 (3,803)
Net realized losses from sales of
securities held to maturity -- 2,245 --
Net realized gains from sales of loans (1,046,147) (524,969) (366,320)
Amortization of mortgage servicing rights 146,497 36,383 37,195
Origination of loans held for sale (53,858,737) (20,311,571) (20,948,828)
Proceeds from sales of loans held for sale 57,721,467 24,651,870 20,728,574
Equity in loss of investment in limited partnership 71,375 132,578 8,084
Market adjustment of ESOP shares
committed to be released -- 119,701 203,229
ESOP expense -- 215,694 207,633
Net change in:
Accrued interest receivable 120,318 (531,284) (395,323)
Other assets (1,571,314) (459,378) (24,475)
Accrued expenses and other liabilities 535,025 (277,312) (138,798)
------------ ------------ ------------
Net cash from operating activities 7,568,353 7,630,155 2,567,980
Cash flows from investing activities
Net change in interest-bearing time
deposits in other financial institutions (1,500,000) 1,000,000 (1,000,000)
Net change in loans receivable 5,427,890 (49,753,856) (32,793,948)
Proceeds from:
Sales of securities available for sale 190,930 9,632,387 1,989,992
Sales of securities held to maturity -- 1,602,755 --
Principal payments of mortgage-backed
and related securities 7,451,031 5,550,697 21,505,020
Maturities and calls of securities
available for sale 63,297,820 1,104,095 42,410,326
Maturities of securities held to maturity -- 500,000 --
Purchase of:
Securities available for sale (75,417,941) (3,000,000) (63,280,952)
Securities held to maturity -- (15,243,229) (3,984,360)
FHLB stock -- (796,300) (875,000)
Premises and equipment, net (968,523) (752,752) (2,001,153)
Investment in limited partnership -- (1,867,611) --
------------ ------------ ------------
Net cash from investing activities (1,518,793) (52,023,814) (38,030,075)
The accompanying notes are an integral part of these consolidated financial
statements.
(Continued)
MFB CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows (continued)
Years ended September 30, 2001, 2000 and 1999
2001 2000 1999
------------ ------------ ------------
Cash flows from financing activities
Purchase of MFB Corp. common stock $ (647,398) $ (1,102,925) $ (1,209,619)
Net change in deposits 5,785,030 37,986,834 20,741,414
Net change in securities sold under
agreements to repurchase 1,878,166 2,576,950 4,200,679
Proceeds from FHLB borrowings 20,000,000 91,000,000 23,000,000
Repayment of FHLB borrowings (12,466,540) (83,074,225) (16,431,214)
Proceeds from exercise of stock options 130,079 -- 25,000
Net change in advances from
borrowers for taxes and insurance (516,476) 4,649 (205,134)
Cash dividends paid (533,085) (515,614) (500,782)
------------ ------------ ------------
Net cash from financing activities 13,629,776 46,875,669 29,620,344
------------ ------------ ------------
Net change in cash and cash equivalents 19,679,336 2,482,010 (5,841,751)
Cash and cash equivalents at beginning of year 14,543,952 12,061,942 17,903,693
------------ ------------ ------------
Cash and cash equivalents at end of year $ 34,223,288 $ 14,543,952 $ 12,061,942
============ ============ ============
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 17,975,287 $ 16,422,424 $ 14,403,181
Income taxes 2,190,000 2,192,981 1,627,895
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 --
The accompanying notes are an integral part of these consolidated financial
statements.
Notes to Consolidated Financial Statements
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
MFB Financial (the "Bank"), a federal stock savings bank, and Mishawaka
Financial Services, Inc., a wholly-owned subsidiary of the Bank (together
referred to as "the Company"). Mishawaka Financial Services, Inc. is engaged in
the sale of general property, casualty, and life insurance to customers in the
Bank's market area. 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
59% of the loan portfolio at September 30, 2001 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 accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period, as well as the disclosures provided. Areas involving the
use of estimates and assumptions in the accompanying financial statements
include the allowance for loan losses, fair values of securities and other
financial instruments, determination and carrying value of loans held for sale,
determination and carrying value of impaired loans, the value of mortgage
servicing rights, the value of investments in limited partnerships, the value of
stock options, the realization of deferred tax assets, and the determination of
depreciation of premises and equipment recognized in the Company's financial
statements. Actual results could differ from those estimates. Estimates
associated with the allowance for loan losses and the fair values of securities
and other financial instruments are particularly susceptible to material change
in the near term.
Cash and Cash Equivalents: For purposes of reporting cash flows, cash and
cash equivalents is defined to include the Company's cash on hand, due from
financial institutions and short-term interest-bearing deposits in other
financial institutions. The Company reports net cash flows for customer loan
transactions, deposit transactions, short term borrowings having an original
maturity of 90 days or less, advances from borrowers for taxes and insurance,
and interest-bearing time deposits in other financial institutions.
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported separately as other
comprehensive income or loss and in shareholders' equity, net of tax. Securities
are classified as trading when held for short term periods in anticipation of
market gains, and are carried at fair value. Securities are written down to fair
value when a decline in fair value is not temporary.
Gains and losses on the sale of securities are determined using the
specific identification method based on amortized cost and are reflected in
results of operations at the time of sale. Interest and dividend income,
adjusted by amortization of purchase premium or discount over the estimated life
of the security using the level yield method, is included in earnings.
Mortgage Banking Activities: Mortgage loans originated and intended for
sale in the secondary market are reported on the statements of financial
condition as loans held for sale and are carried at the lower of cost or
estimated market value in the aggregate. Net unrealized losses are recognized in
a valuation allowance by charges to income.
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.
Servicing rights are recognized as assets for purchased rights and for the
allocated value of retained servicing rights on loans sold. Servicing rights are
expensed in proportion to, and over the period of, estimated net servicing
revenues. Impairment is evaluated based on the fair value of the rights, using
groupings of the underlying loans as to interest rates and then, secondarily, as
to geographic and prepayment characteristics. Fair value is determined using
prices for similar assets with similar characteristics, when available, or based
upon discounted cash flows using market-based assumptions. Any impairment of a
grouping is reported as a valuation allowance.
Loans Receivable: Loans receivable that management has the intent and
ability to hold for the foreseeable future or until maturity or pay-off are
reported at their outstanding principal balances adjusted for any charge-offs,
the allowance for loan losses, and any deferred fees or costs on originated
loans, and unamortized premiums or discounts on purchased loans.
Premiums or discounts on mortgage loans are amortized to income using the
level yield method over the remaining period to contractual maturity, adjusted
for anticipated prepayments. Loan fees and certain direct loan origination costs
are deferred, and the net fee or cost is recognized as an adjustment to interest
income using the interest method.
Because some loans may not be repaid in full, an allowance for loan losses
is recorded. An allowance for loan losses is a valuation allowance for probable
incurred credit losses. 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. Loan losses are charged against the
allowance when management believes the uncollectibility of a loan balance is
confirmed.
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.
Interest income on loans is accrued over the term of the loans based upon
the principal outstanding. The accrual of interest on impaired loans is
discontinued when, in management's opinion, the borrower may be unable to meet
payments as they become due. When interest accrual is discontinued, all unpaid
accrued interest is reversed. Interest income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment, the
borrower has the ability to make contractual interest and principal payments, in
which case the loan is returned to accrual status.
Foreclosed Real Estate: Real estate properties acquired through, or in lieu
of, loan foreclosure are initially recorded at fair value at the date of
acquisition, establishing a new cost basis. Any reduction to fair value from the
carrying value of the related loan at the time of acquisition is accounted for
as a loan loss and charged against the allowance for loan losses. Valuations are
periodically performed by management and valuation allowances are adjusted
through a charge to income for changes in fair value or estimated selling costs.
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 is significantly less than the fair
value.
Employee Stock Ownership Plan (ESOP): The Company accounts for its ESOP
under AICPA Statement of Position (SOP) 93-6. The cost of shares issued to the
ESOP, but not yet allocated to participants, are presented as a reduction of
shareholders' equity. Compensation expense is recorded based on the average
market price of the shares committed to be released for allocation to
participant accounts. The difference between the market price and the cost of
shares committed to be released is recorded as an adjustment to common stock.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings; dividends on unearned ESOP shares are reflected as a reduction of debt
and accrued interest.
Financial Instruments with Off-Balance-Sheet Risk: The Company, in the
normal course of business, makes commitments to make loans which are not
reflected in the consolidated financial statements. A summary of these
commitments is disclosed in Note 13.
Earnings Per Common Share: Basic earnings per common share is based on the
net income divided by the weighted average number of common shares outstanding
during the period. ESOP shares are considered outstanding for earnings per
common share calculations as they are committed to be released; unearned shares
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 management monitors 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.
Reclassifications: Some items in the prior consolidated financial
statements have been reclassified to conform with the current presentation
NOTE 2 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
A reconciliation of the numerators and denominators used in the computation of
the basic earnings per common share and diluted earnings per common share is
presented below:
Year ended September 30,
----------------------------------------
2001 2000 1999
----------- ----------- -----------
Basic Earnings Per Common Share
Numerator
Net income $ 1,910,372 $ 2,814,557 $ 2,204,298
=========== =========== ===========
Denominator
Weighted average common shares
outstanding 1,345,904 1,389,274 1,448,790
Less: Average unallocated ESOP shares -- (10,428) (30,450)
Less: Average nonvested RRP shares -- -- (1,925)
----------- ----------- -----------
Weighted average common shares
outstanding for basic earnings per
common share 1,345,904 1,378,846 1,416,415
=========== =========== ===========
Basic earnings per common share $ 1.42 $ 2.04 $ 1.56
=========== =========== ===========
Year ended September 30,
------------------------------------
2001 2000 1999
---------- ---------- ----------
Diluted Earnings Per Common Share
Numerator
Net income $1,910,372 $2,814,557 $2,204,298
========== ========== ==========
Denominator
Weighted average common shares
outstanding for basic earnings per
common share 1,345,904 1,378,846 1,416,415
Add: Dilutive effects of average
nonvested RRP shares -- -- 448
Add: Dilutive effects of assumed
exercises of stock options 34,838 31,715 44,793
---------- ---------- ----------
Weighted average common shares
and dilutive potential common
shares outstanding $1,380,742 $1,410,561 $1,461,656
========== ========== ==========
Diluted earnings per common share $ 1.38 $ 2.00 $ 1.51
========== ========== ==========
Stock options for 75,750, 80,750 and 78,250 shares of common stock were not
considered in computing diluted earnings per common share for the years ended
September 30, 2001, 2000 and 1999 because they were antidilutive.
NOTE 3 - SECURITIES
The amortized cost and fair value of securities available for sale and held to
maturity are as follows:
Available for Sale
September 30, 2001
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------- ------------
Debt securities
U.S. Government and
federal agencies $ 2,919,520 $ 102,082 $ -- $ 3,021,602
Municipal bonds 145,000 357 -- 145,357
Mortgage-backed 20,090,566 244,565 (14,950) 20,320,181
Commercial paper 4,994,828 4 -- 4,994,832
Corporate notes 15,329,446 402,319 (524,824) 15,206,941
------------ ------------ ------------- ------------
43,479,360 749,327 (539,774) 43,688,913
Marketable equity securities 4,252,263 -- (81,513) 4,170,750
------------ ------------ ------------- ------------
$ 47,731,623 $ 749,327 $ (621,287) $ 47,859,663
============ ============ ============= ============
Available for Sale
September 30, 2000
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Debt securities
U.S. Government 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) $ 41,622,790
============ ============ ============= ============
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, 2001
Available for Sale
-------------------------
Amortized Fair
Cost Value
----------- -----------
Due in one year or less $ 5,441,189 $ 5,441,815
Due after one year through
five years 12,700,403 13,068,697
Due after five years through
ten years 1,288,180 1,349,600
Due after ten years 3,959,022 3,508,620
----------- -----------
23,388,794 23,368,732
Mortgage-backed securities 20,090,566 20,320,181
----------- -----------
$43,479,360 $43,688,913
=========== ===========
Proceeds from sales and liquidation of securities available for sale were
$190,930 during the year ended September 30, 2001. Gross gains of $-0- and gross
losses of $51,570 were realized on these sales. Proceeds from sales of
securities available for sale were $9,632,387 during the year ended September
30, 2000. Gross gains of $18,750 and gross losses of $57,302 were realized on
these sales. During the year ended September 30, 1999, proceeds from the sales
of securities available for sale were $1,989,992 with gross gains of $5,026 and
gross losses of $1,223 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.
NOTE 4 - LOANS RECEIVABLE, NET
Loans receivable, net at September 30 are summarized as follows:
2001 2000
------------- -------------
First mortgage loans (principally conventional)
Principal balances
Secured by one-to-four family residences $ 157,186,968 $ 185,266,466
Construction loans 18,658,571 13,146,237
Other 4,330,573 3,630,897
------------- -------------
180,176,112 202,043,600
Less undisbursed portion of construction
and other mortgage loans 142,734) (54,156)
------------- -------------
Total first mortgage loans 180,033,378 201,989,444
Commercial and consumer loans:
Principal balances
Home equity and second mortgage 20,275,377 18,916,792
Commercial 105,555,466 91,105,033
Municipal 19,289 --
Other 6,536,466 6,089,133
------------- -------------
Total commercial and consumer loans 132,386,598 116,110,958
Net deferred loan origination fees (806,780) (922,703)
------------- -------------
$ 311,613,196 $ 317,177,699
============= =============
Activity in the allowance for loan losses is summarized as follows for the years
ended September 30:
2001 2000 1999
----------- ----------- -----------
Balance at beginning of year $ 1,672,000 $ 638,465 $ 453,567
Provision for loan losses 3,096,594 1,106,393 230,000
Charge-offs (140,483) (72,858) (45,102)
Recoveries 3,870 -- --
----------- ----------- -----------
Balance at end of year $ 4,631,981 $ 1,672,000 $ 638,465
=========== =========== ===========
Impaired loans were as follows.
2001 2000
---------- ----------
Year-end loans with no allocated allowance
for loan losses $1,290,000 $ 60,000
Year-end loans with allocated allowance
for loan losses 7,641,000 1,591,000
---------- ----------
Total $8,931,000 $1,651,000
========== ==========
Amount of the allowance for loan
losses allocated $2,700,000 $ 150,000
Average of impaired loans during the year $2,274,000 $ 12,000
Interest income recognized during impairment $ -- $ 1,000
Cash-basis interest income recognized
during impairment $ -- $ --
There were no impaired loans during 1999.
Nonperforming loans were as follows at year-end:
2001 2000
---------- ----------
Loans past due over 90 days still on accrual status $ 152,000 $ 60,000
Nonaccrual loans 2,632,000 6,000
---------- ----------
Total nonperforming loans $2,784,000 $ 66,000
========== ==========
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 for Telebank. The unpaid principal balances of
these loans at September 30, are summarized as follows:
2001 2000
---------- ----------
Mortgage loan portfolios serviced for:
Telebank $ 5,036,074 $ 6,699,963
Hanover Capital Mortgage Holdings, Inc. 5,239,120 6,376,675
LaSalle Bank, FSB 5,158,242 6,740,764
Citizens Bank 4,930,591 5,698,176
Federal Home Loan Mortgage Corporation 71,313,412 31,292,424
----------- -----------
$91,677,439 $56,808,002
=========== ===========
Custodial escrow balances maintained in connection with the foregoing
serviced loans were $758,000 and $345,000 at September 30, 2001 and 2000.
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:
2001 2000
----------- -----------
Balance - beginning of year $ 1,683,514 $ 1,582,502
New loans 723,404 40,496
Repayments (457,504) (47,918)
Effect of changes in related parties -- 108,434
----------- -----------
Balance - end of year $ 1,949,414 $ 1,683,514
=========== ===========
NOTE 5 - PREMISES AND EQUIPMENT, NET
Premises and equipment at September 30 are summarized as follows:
2001 2000
----------- -----------
Land $ 1,214,895 $ 834,895
Buildings and improvements 3,889,303 3,810,621
Furniture and equipment 3,017,330 2,507,489
----------- -----------
Total cost 8,121,528 7,153,005
Accumulated depreciation and amortization (3,021,384) (2,465,343)
----------- -----------
$ 5,100,144 $ 4,687,662
=========== ===========
Depreciation and amortization of premises and equipment included in
occupancy and equipment expense was approximately $556,000, $478,000 and
$383,000 for the years ended September 30, 2001, 2000 and 1999, respectively.
NOTE 6 - DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit in
denominations of $100,000 or more was approximately $34,841,000 and $39,609,000
at September 30, 2001 and 2000.
At September 30, 2001, the scheduled maturities of certificates of deposit
are as follows:
2002 $128,886,499
2003 19,829,859
2004 8,410,701
2005 636,019
2006 389,720
Thereafter 49,361
------------
$158,202,159
============
NOTE 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase consist of obligations of
the Company to other parties. These arrangements are all one-day retail
repurchase agreements and are secured by investment securities. Such collateral
is held by safekeeping agents of the Company.
Information concerning securities sold under agreements to repurchase as of
September 30 is summarized as follows:
2001 2000 1999
----------- ----------- -----------
Average daily balance during the year $ 8,416,000 $ 7,718,000 $ 3,892,000
Average interest rate during the year 3.47% 3.89% 3.80%
Maximum month end balance
during the year $11,021,511 $10,201,000 $ 7,079,000
Balance at end of year $11,021,511 $ 9,143,345 $ 6,566,395
Fair value of securities underlying
these agreements at year end $11,898,887 $11,921,000 $ 9,310,000
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
At September 30, 2001, advances from the Federal Home Loan Bank of
Indianapolis with fixed and variable rates ranging from 3.60% to 6.82% are
required to be repaid in the year ending September 30 as follows:
2002 $ 350,000
2003 20,300,000
2004 800,000
2005 5,200,000
2006 10,500,000
Thereafter 82,534,985
------------
$119,684,985
============
FHLB advances are secured by all FHLB stock, qualifying first mortgage
loans, and government agency securities. At September 30, 2001, $6,308,000 of
FHLB stock, $165,111,000 of eligible mortgage loan collateral and $1,000,000 of
government securities are pledged to the FHLB to secure advances outstanding.
In addition, $104,000,000 of the advances outstanding at September 30, 2001
contained put options with put dates ranging from December 2001 to December
2003, whereby the advance can be called by the FHLB prior to maturity.
Seventy-four million of these advances with put options are for maturities after
September 30, 2006.
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,
2001, 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, 2001, 2000 and 1999 was approximately $6,600, $4,400
and $6,900, respectively.
401(k) Plan: The Company maintains a retirement savings 401(k) plan which
covers all full time employees who are 21 or older and have completed one year
of service. Participants may defer up to 15% of compensation, and 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, 2001, 2000 and
1999 was approximately $122,000, $69,000 and $60,000.
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 was the unearned shares of common stock purchased
by the ESOP with the loan proceeds. The loan was repaid principally from the
Company's discretionary contributions to the ESOP over a period of seven years.
The interest rate for the loan was 6.25%. Shares purchased by the ESOP were held
in suspense until allocated among ESOP participants as the loan was repaid. As
of September 30, 2000, the loan was paid in full and the remaining unearned
shares were allocated to participants. During the year ended September 30, 2001,
an additional 7,500 shares were purchased by the ESOP and allocated to
participants.
ESOP expense was approximately $-0-, $335,000 and $411,000 for the years
ended September 30, 2001, 2000 and 1999. Contributions to the ESOP, including
dividends on unearned ESOP shares, were approximately $-0-, $223,000 and
$222,000 during the years ended September 30, 2001, 2000 and 1999.
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, 2001, 2000 and 1999,
- -0-, 20,857 and 19,186 shares with an average fair value of $-0-, $16.08 and
$21.41 per share, were committed to be released.
NOTE 9 - EMPLOYEE BENEFITS (continued) The ESOP shares as of September 30 were
as follows:
2001 2000 1999
--------- --------- ---------
Allocated shares 147,500 140,000 119,143
Unearned shares -- -- 20,857
Shares withdrawn from the
plan by participants (16,198) (14,571) (14,571)
--------- --------- ---------
Total ESOP shares held
in the plan 131,302 125,429 125,429
========= ========= =========
Fair value of unearned shares $ -- $ -- $ 412,000
========= ========= =========
Recognition and Retention Plans (RRPs): In conjunction with its stock
conversion, the Company established RRPs as a method of providing directors,
officers and other key employees of the Company with a proprietary interest in
the Company in a manner designed to encourage such persons to remain with the
Company. Eligible directors, officers and other key employees of the Company
become vested in awarded shares of common stock at a rate of 20% per year
commencing March 24, 1994. The RRPs acquired, in the aggregate, 70,000 shares of
common stock issued in the conversion at $10 per share and 70,000 shares were
awarded to RRP participants at no cost to them. RRP expense for the years ended
September 30, 2001, 2000 and 1999 was approximately $-0-, $-0- and $38,500,
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, 2001, 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, 2001,
2000 and 1999. As of September 30, 2001, 67,500 options remain available for
future grants.
The fair value for the options granted during the year 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%
Had compensation cost for stock options been measured using FASB Statement
No 123, net income and earnings per share would have been the proforma amounts
indicated below. The proforma effect may increase in the future if more options
are granted.
2001 2000 1999
------------- ------------- ---------
Net income as reported $ 1,910,372 $ 2,814,557 2,204,298
Proforma net income 1,783,652 2,687,837 2,054,921
Reported earnings per common and
common equivalent share
Basic $1.42 $2.04 $1.56
Diluted $1.38 $2.00 $1.51
Proforma earnings per common and common
equivalent share
Basic $1.33 $1.95 $1.45
Diluted $1.29 $1.91 $1.41
Activity in the Option Plan for the years ended is summarized as follows:
Weighted Weighted
Number of Average Average
Outstanding Exercise Exercise Fair Value
Options Price Price of Grants
----------- -------------- -------- ----------
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 $16.31-$17.25 $ 17.05 $5.52
Exercised --
-----------
Balance at September 30, 2000 205,250 $10.00-$26.75 $ 16.59
Granted -- --
Forfeited (3,750) $16.3125-$26.75
Exercised (12,850) $10.00-$16.3125
-----------
Balance at September 30, 2001 188,650 $10.00-$26.75 $ 16.68
Options exercisable at September 30 are as follows:
Weighted
Number Average
of Options Exercise Price
---------- --------------
1999 120,000 $12.19
2000 141,758 $13.67
2001 146,415 $15.05
At September 30, 2001, options outstanding were summarized as follows:
Outstanding Exercisable
----------------------- -----------------------
Weighted Average Weighted
Range of Remaining Average
Exercise Contractual Exercise
Price Number Life Number Price
- -------- ------- ---------------- ------- ---------
$10-$15 96,400 2.78 years 96,400 $ 11.04
$15-$20 16,500 6.05 years 12,667 15.80
$20-$26.75 75,750 6.75 years 37,348 25.15
- -------- ------- ---------------- ------- ---------
Outstanding at year end 188,650 4.66 years 146,415 $ 15.05
======= ================ ======= =========
NOTE 10 - INCOME TAXES
The Company files consolidated income tax returns. Tax legislation passed
in August 1996 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:
2001 2000 1999
----------- ----------- ------------
Federal
Current $ 1,456,063 $ 1,530,984 $ 1,535,497
Deferred (765,324) (239,781) (284,395)
----------- ----------- ------------
690,739 1,291,203 1,251,102
State
Current 400,201 439,792 397,363
Deferred (139,657) (38,372) (63,091)
----------- ----------- ------------
260,544 401,420 334,272
----------- ----------- ------------
Total income tax expense $ 951,283 $ 1,692,623 $ 1,585,374
=========== =========== ===========
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:
2001 2000 1999
----------- ----------- -----------
Income taxes at statutory rate $ 972,963 $ 1,532,441 $ 1,288,488
Tax effect of:
State tax, net of federal income
tax effect 171,960 264,937 220,620
Excess of fair value of ESOP shares
released over cost -- 40,698 69,098
Low income housing credits (174,401) (155,000) --
Other items, net (19,239) 9,547 7,168
----------- ----------- -----------
Total income tax expense $ 951,283 $ 1,692,623 $ 1,585,374
=========== =========== ===========
The components of the net deferred tax asset (liability) recorded in the
consolidated balance sheets as of September 30 are as follows:
2001 2000
----------- -----------
Deferred tax assets
Bad debt deduction $ 1,745,555 $ 413,217
Net deferred loan fees 342,882 392,148
Valuation adjustment on loans held for sale -- 55,938
Net unrealized depreciation
on securities available for sale -- 601,096
Other 10,798 41,843
----------- -----------
2,099,235 1,504,242
Deferred tax liabilities
Accretion (56,370) (31,852)
Depreciation (49,889) (48,351)
Net unrealized appreciation
on securities available for sale (83,004) --
Mortgage servicing rights (454,240) (259,681)
Other (129,017) (58,524)
----------- -----------
(772,520) (398,408)
----------- -----------
Net deferred tax asset (liability) $ 1,326,715 $ 1,105,834
=========== ===========
NOTE 10 - INCOME TAXES (continued)
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, 2001 and 2000. If the Bank were liquidated or otherwise ceases to
be a bank or if tax laws change, the $1,563,000 would be recorded as expense.
NOTE 11 - REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by
federal banking agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings, and other factors,
and the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If only adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
The Bank's actual capital and required capital amounts and ratios are
presented below:
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, 2001
Total capital (to risk
weighted assets) $35,454 13.11% $21,627 8.00% $27,033 10.00%
Tier 1 (core) capital
(to risk weighted assets) 33,522 12.40 10,813 4.00 16,220 6.00
Tier 1 (core) capital (to
adjusted total assets) 33,522 8.12 16,509 4.00 20,636 5.00
As of September 30, 2000
Total capital (to risk
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 8.141 5,869 4.00 19,836 5.00
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, 2001 $3,669,000 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:
2001 2000 1999
----------- ----------- -----------
Other noninterest income
Loan fee income $ 90,052 $ 46,463 $ 37,386
ATM/debit card income 228,819 138,004 68,627
Other service charges and fees 245,647 176,231 111,765
Other 56,330 68,879 79,862
----------- ----------- -----------
$ 620,848 $ 429,577 $ 297,640
=========== =========== ===========
Other noninterest expense
Advertising and promotion $ 155,138 $ 208,274 $ 206,254
Professional fees 311,154 197,819 170,429
Printing, postage, stationery,
and supplies 308,749 278,928 219,267
Direct loan origination costs deferred (218,450) (135,694) (202,349)
Other 1,469,299 1,345,702 904,818
----------- ----------- -----------
$ 2,025,890 $ 1,895,029 $ 1,298,419
=========== =========== ===========
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:
2001 2000
--------------------------------------- ---------------------------------------
Fixed Variable Fixed Variable
Rate Loans Rate Loans Total Rate Loans Rate Loans Total
----------- ----------- ----------- ----------- ----------- -----------
First mortgage loans $15,728,800 $ 4,764,935 $20,493,735 $ 3,023,124 $ 1,454,250 $ 4,477,374
Commercial loans 3,500,427 4,949,239 8,449,666 677,750 5,880,332 6,558,082
Unused lines of credit 2,909,796 17,269,033 20,178,829 8,656,675 8,204,191 16,860,866
Unused commercial loan
lines and letters of credit -- 30,839,623 30,839,623 -- 29,085,625 29,085,625
Unused construction loan
lines of credit 2,217,851 8,376,783 10,594,634 1,691,061 5,207,279 6,898,340
----------- ----------- ----------- ----------- ----------- -----------
$24,356,874 $66,199,613 $90,556,487 $14,048,610 $49,831,677 $63,880,287
=========== =========== =========== =========== =========== ===========
Fixed rate mortgage loan commitments at September 30, 2001 are at rates
primarily ranging from 6.125% to 10.25%. Mortgage loan fixed rate commitments
are primarily for terms ranging from 15 to 30 years, while commercial loan fixed
rate commitments are primarily for five year terms. Rates on variable rate
mortgage loans range from 5.75% to 8.875% and are tied to the one year treasury
bill rate. Rates on variable commercial loan commitments are tied to the
national prime rate.
Since commitments to make loans and to fund unused lines of credit and
loans in process may expire without being used, the amounts do not necessarily
represent future cash commitments. In addition, commitments are agreements to
lend to a customer as long as there is no violation of any condition established
in the contract. The maximum exposure to credit loss in the event of
nonperformance by the other party is the contractual amount of these
instruments. The same credit policy is used to make such commitments as is used
for loans receivable.
Under employment agreements with certain executives, officers, certain
events leading to separation from the Company could result in cash payments
totaling $1,531,500 as of September 30, 2001.
The Company and the Bank are subject to certain claims and legal actions
arising in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material adverse effect on the consolidated financial
position or results of operation of the Company.
NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed financial statements for the parent company,
MFB Corp.
CONDENSED BALANCE SHEETS
September 30, 2001 and 2000
2001 2000
----------- -----------
ASSETS
Cash and cash equivalents $ 364,766 $ 552,249
Securities available for sale 1,213,540 1,277,686
Investment in Bank subsidiary 33,586,359 31,468,005
Other assets 14,893 21,960
----------- -----------
Total assets $35,179,558 $33,319,900
=========== ===========
LIABILITIES
Loan payable to Bank subsidiary $ 750,000 $ 750,000
Accrued expenses and other liabilities 49,543 55,473
----------- -----------
Total liabilities 799,543 805,473
SHAREHOLDERS' EQUITY 34,380,015 32,514,427
----------- -----------
Total liabilities and shareholders' equity $35,179,558 $33,319,900
=========== ===========
CONDENSED STATEMENTS OF INCOME
Years ended September 30, 2001, 2000 and 1999
2001 2000 1999
---------- ---------- ----------
INCOME
Dividends from Bank subsidiary - cash $ 790,000 $1,544,000 $1,125,000
Interest income 87,021 109,608 57,205
---------- ---------- ----------
Total 877,021 1,653,608 1,182,205
EXPENSES
Interest expense 60,567 66,187 17,062
Other expenses 217,154 120,362 110,790
---------- ---------- ----------
Total 277,721 186,549 127,852
Income before income taxes and
equity in undistributed net income
of Bank subsidiary 599,300 1,467,059 1,054,353
Income tax benefit 77,410 32,350 29,857
---------- ---------- ----------
Income before equity in undistributed
net income of Bank subsidiary 676,710 1,499,409 1,084,210
Equity in undistributed net income of
Bank subsidiary 1,233,662 1,315,148 1,120,088
---------- ---------- ----------
Net income $1,910,372 $2,814,557 $2,204,298
========== ========== ==========
CONDENSED STATEMENTS OF CASH FLOWS
Years ended September 30, 2001, 2000 and 1999
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities
Net income $ 1,910,372 $ 2,814,557 $ 2,204,298
Adjustments to reconcile net income to
net cash from operating activities
Equity in undistributed net income of
Bank subsidiary (1,233,662) (1,315,148) (1,120,088)
Net realized losses from sales
of securities available for sale 51,570 5,110 --
Net change in other assets (29,798) 16,605 353,863
Net change in accrued expenses and
other liabilities 15,287 (49,964) 121,285
----------- ----------- -----------
Net cash from operating activities 713,769 1,471,160 1,559,358
Cash flows from investing activities
Principal repayments on loan receivable
from ESOP -- 222,963 221,594
Purchase of securities available for sale (41,778) -- --
Purchase of securities held to maturity -- -- (1,000,000)
Proceeds from sales of securities
available for sale 190,930 99,890 --
----------- ----------- -----------
Net cash from investing activities 149,152 322,853 (778,406)
Cash flows from financing activities
Proceeds from loan payable to Bank
subsidiary -- -- 750,000
Purchase of MFB Corp. common stock (647,398) (1,102,925) (1,209,619)
Proceeds from exercise of stock options 130,079 -- 25,000
Cash dividends paid (533,085) (522,883) (514,743)
----------- ----------- -----------
Net cash from financing activities (1,050,404) (1,625,808) (949,362)
----------- ----------- -----------
Net change in cash and cash equivalents (187,483) 168,205 (168,410)
Cash and cash equivalents at beginning
of year 552,249 384,044 552,454
----------- ----------- -----------
Cash and cash equivalents at end of year $ 364,766 $ 552,249 $ 384,044
=========== =========== ===========
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, 2001 and 2000.
Items which are not financial instruments are not included.
2001 2000
------------------------------ ------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------- ------------- ------------- -------------
Cash and cash equivalents $ 34,223,288 $ 34,223,000 $ 14,543,952 $ 14,544,000
Interest-bearing time
deposits in other financial
institutions 1,500,000 1,500,000 -- --
Securities available for sale 47,859,663 47,860,000 41,622,790 41,623,000
FHLB stock 6,307,600 6,308,000 6,307,600 6,308,000
Loans held for sale, net 3,073,700 3,074,000 6,494,568 6,495,000
Loans receivable, net of
allowance for loan losses 306,981,215 311,930,000 315,505,699 309,494,000
Accrued interest receivable 1,774,284 1,774,000 1,894,602 1,895,000
Mortgage servicing rights, net 1,068,801 1,069,000 611,013 611,000
Investment in limited
partnership 2,877,088 2,877,000 2,948,463 2,948,000
Noninterest bearing demand
deposits (13,894,743) (13,895,000) (11,802,027) (11,802,000)
Savings, NOW and MMDA
deposits (73,082,351) (73,082,000) (56,568,936) (56,569,000)
Other time deposits (158,202,159) (159,388,000) (171,023,260) (169,977,000)
Securities sold under
agreements to repurchase (11,021,511) (11,022,000) (9,143,345) (9,143,000)
FHLB advances (119,684,985) (117,525,000) (112,151,525) (108,300,000)
Advances from borrowers
for taxes and insurance (1,599,356) (1,599,000) (2,115,832) (2,116,000)
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of September 30, 2001 and 2000. 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, 2001 and 2000 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, 2001 and 2000, 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, 2001 and
2000, 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, 2001 and 2000, 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, 2001 and 2000 should not necessarily be considered to apply at
subsequent dates.
In addition, other assets and liabilities of the Company that are not
defined as financial instruments are not included in the above disclosures, such
as property and equipment. Also, nonfinancial instruments typically not
recognized in financial statements nevertheless may have value but are not
included in the above disclosures. Excluded, among other items, are the
estimated earning power of core deposit accounts, the trained work force,
customer goodwill and similar items.
NOTE 16 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows:
2001 2000 1999
----------- ----------- -----------
Net change in net unrealized gains and losses
on securities available for sale
Unrealized gains (losses) arising during
the year $ 1,594,005 $ (47,362) $(1,109,639)
Reclassification adjustment for transfer
of securities from held-to-maturity to
available-for-sale -- (320,078) --
Reclassification adjustment for (gains)
losses included in net income 51,570 38,552 (3,803)
----------- ----------- -----------
Net change in net unrealized gains
and losses on securities available
for sale 1,645,575 (328,888) (1,113,442)
Tax benefit 684,100 (130,272) (441,036)
----------- ----------- -----------
Total other comprehensive income (loss) $ 961,475 $ (198,616) $ (672,406
=========== ============ ===========
NOTE 17 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Year Ended September 30, 2001
--------------------------------------
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income $ 7,744 $ 7,619 $ 7,398 $ 7,216
Interest expense 4,637 4,622 4,467 4,246
------- ------- ------- -------
Net interest income 3,107 2,997 2,931 2,970
Provision for loan losses 1,957 150 261 729
Net interest income after provision
for loan losses 1,150 2,847 2,670 2,241
Noninterest income 661 602 743 758
Noninterest expense 2,049 2,230 2,268 2,264
------- ------- ------- -------
Income before income taxes (238) 1,219 1,145 735
Income tax expense (103) 410 405 239
------- ------- ------- -------
Net income $ (135) $ 809 $ 740 $ 496
======== ======= ======= ========
Basic earnings per common share $ (.10) $ .60 $ .55 $ .37
======== ======= ======= ========
Diluted earnings per common share $ (.10) $ .59 $ .54 $ .35
======== ======= ======= ========
Year Ended September 30, 2000
----------------------------------
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
------- ------- ------- -------
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 2,92 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
====== ====== ====== ======
MFB Corp. and Subsidiary Directors and Officers
September 30, 2001
MFB CORP. AND MFB FINANCIAL DIRECTORS
M. Gilbert Eberhart (age 67) 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 68) 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 58) is an optometrist based in Mishawaka
Christine A. Lauber (age 56) is a Certified Public Accountant in private
practice in South Bend, Indiana.
Michael J. Marien (age 54) is a Sales Representative with Signode Corporation, a
division of ITW.
Charles J. Viater (age 47) 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 59) 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.
MFB FINANCIAL EXECUTIVE OFFICERS
Charles J. Viater Thomas J. Flournoy
President and Chief Executive Officer* Vice President and
Chief Financial Officer
Donald R. Kyle M. Gilbert Eberhart
Executive Vice President and Secretary*
Chief Operating Officer
* Holds same position with MFB Corp.
MFB Corp. and Subsidiary Shareholder Information
September 30, 2001
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, 2001, there were approximately 532
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, 1999 $20.00 $15.50 $.090
March 31, 2000 17.62 15.25 .095
June 30, 2000 17.00 16.00 .095
September 30, 2000 19.75 15.75 .095
December 31, 2000 17.87 16.00 .095
March 31, 2001 20.12 16.75 .100
June 30, 2001 20.50 18.39 .100
September 30, 2001 21.50 18.00 .100
Transfer Agent and Registrar
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Special Counsel
Barnes & Thornburg
1313 Merchants Company Building
11 South Meridan Street
Indianapolis, IN 46204
Independent Auditors
Crowe, Chizek and Company LLP
330 East Jefferson Blvd.
South Bend, IN 46624
MFB Corp. and Subsidiary Shareholder Information
September 30, 2001
Shareholder and General Inquiries
The Company is required to file an Annual Report on Form 10-K for its
fiscal year ended September 30, 2001 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
121 S. Church St.
Mishawaka, IN 46544
Branch Office
402 W. Cleveland Rd.
Mishawaka, IN 46545
Branch Office
100 E. Wayne Street
Suite 150
South Bend, IN 46601
Branch Office
411 W. McKinley Ave.
Mishawaka, IN 46545
Branch Office
2427 Mishawaka Ave.
South Bend, IN 46615
Branch Office
25990 County Road 6
Elkhart, IN 46514
Branch Office
2304 Lincolnway East
Goshen, IN 46526
MFB FINANCIAL