ANNUAL REPORT
TO SHAREHOLDERS
TABLE OF CONTENTS
Page
Letter to Shareholders ........................................ 2
Selected Consolidated Financial Data .......................... 4
Management's Discussion and Analysis .......................... 5
Report of Independent Auditors ................................ 16
Consolidated Balance Sheets ................................... 17
Consolidated Statements of Income ............................. 18
Consolidated Statements of Changes in Shareholders' Equity..... 19
Consolidated Statements of Cash Flows ......................... 20
Notes to Consolidated Financial Statements .................... 22
Directors and Officers ........................................ 47
Shareholder Information ....................................... 48
DESCRIPTION OF BUSINESS
MFB Corp. is an Indiana corporation organized in December, 1993, to
become a unitary savings and loan holding company. MFB Corp. became a unitary
savings and loan holding company upon the conversion of Mishawaka Federal
Savings (the "Bank") from a federal mutual savings and loan association to a
federal stock savings bank in March, 1994. MFB Corp. is the sole shareholder of
the Bank. MFB Corp. and the Bank (collectively referred to as the "Company")
conduct business from their main office in Mishawaka, Indiana, and three branch
locations in St. Joseph County, Indiana. The Bank offers a variety of lending,
deposit and other financial services to its retail and commercial customers. The
Bank's wholly-owned subsidiary, Mishawaka Financial Services, Inc., is engaged
in the sale of credit life, general fire and accident, car, home, and life
insurance as agent for the Bank's customers and the general public.
49
MFB CORP.
- --------------------------------------------------------------------------------
P.O. Box 528 Mishawaka, IN 46546-0528 219/255-3146 Fax 219/255-3044
TO OUR SHAREHOLDERS:
On behalf of myself and the entire Board of Directors, it is a pleasure
to provide you with the 1996 Annual Report of MFB Corp., the holding company for
Mishawaka Federal Savings (the "Bank"). In March of 1994, after the formation of
MFB Corp., the Bank converted to a federal stock savings bank and this report
depicts only the second full year of operations as a stock company.
This past year has been one of many changes for our company. The emphasis
has been on growth within our market that allows us to effectively utilize our
capital, generate improved returns on your investment and enhance the value of
the company's stock. We have improved our product and service offerings which
has created opportunities to attract new customers and secure our relationship
with existing customers. As we look at the financial highlights of the past
year, I believe you will agree that the changes we've instituted are propelling
the Company and the Bank forward toward the achievement of the above goals.
In 1996, the Company began offering a wider array of loan products to
meet the needs of the community we serve. These products, combined with a
concerted effort to increase the awareness level of the Bank in the marketplace,
resulted in net loan portfolio growth of $30.9 million, the greatest single year
of such growth in our 106 year history. At the same time, asset quality has not
just remained unchanged, but has improved over the prior year. The Bank also
began to develop a small business banking division that will allow us to attract
local businesses that desire to receive a level of personal service that is
critical to their success. Growth of this segment of our business in the coming
years will be an important focus.
Deposit based product offerings have also been enhanced. The emphasis on
core relationships, competitive terms and the highest quality service to
customers has resulted in an increase in our deposit base of $14.4 million
during the year. Non-interest bearing demand accounts increased significantly as
did our certificate of deposit account base.
In addition to the growth discussed above, the Company undertook a
leveraging strategy during this past year designed to further enhance earnings.
The success of this strategy contributed to net earnings and helped improve the
overall return on equity during the year.
A major legislative event effecting our Company took place on September 30,
1996. President Clinton signed into law a bill that included a provision to
recapitalize the Savings Association Insurance Fund ("SAIF"). This bill resulted
in a one time special assessment to all SAIF insured institutions equivalent to
.657% of total assessable deposits as of March 31, 1995. This one time
assessment amounted to $955,000 for our Company, or $577,000 on an after tax
basis. Had this assessment not been incurred, the net income for the year would
have been $l.5 million or $.76 per share. This assessment will result in a
reduction in future insurance premiums and is expected to result in a payback
period of approximately 3.6 years.
In April and May of 1996, the Company repurchased over 103,000 shares of
its common stock. This activity resulted in a reduction of the total shares
outstanding., an improvement in the book value of the remaining outstanding
shares and had a positive impact on our return on equity. In addition, I am sure
you are aware of the payment of our initial dividend in August, 1996 in the
amount of $.06 per outstanding share. These events are part of our systematic
approach to enhancing the long term value of your investment in our Company.
It has indeed been a year of change. The following pages of this report
provide more details about the past year's results. Management will remain
vigilant in our effort to identify additional opportunities to serve the
financial needs of our community effectively and profitably. We are committed to
growing the long term value of your investment in a prudent, intelligent
fashion. We appreciate the confidence you have shown in MFB Corp. and we will
continue to operate the Company in an effort to reward that confidence.
/s/ Charles J. Viater
Charles J. Viater
President and Chief Executive Officer
51
SELECTED CONSOLIDATED FINANCIAL DATA OF
MFB CORP. AND SUBSIDIARY
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)
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Summary of Financial Condition:
Total assets $225,809 $187,065 $183,753 $168,581 $164,554
Loans receivable, net 152,052 121,181 115,297 108,212 112,226
Cash and cash equivalents 1,734 7,454 6,153 20,820 7,888
Securities 68,099 53,293 56,107 16,624 21,714
Interest-bearing time deposits in other
financial institutions 495 1,880 3,365 20,469 20,108
Deposits 158,964 144,552 143,604 149,220 146,681
FHLB advances 24,500 -- -- -- --
Shareholders' equity 37,599 37,999 37,705 16,964 15,677
Years Ended September 30,
(In Thousands)
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Summary of Operating Results:
Interest income $ 14,182 $ 12,383 $ 11,545 $ 11,931 $ 13,684
Interest expense 8,057 6,788 6,019 6,559 8,445
-------- -------- -------- -------- --------
Net interest income 6,125 5,595 5,526 5,372 5,239
Provision for loan losses 30 30 30 192 27
-------- -------- -------- -------- --------
Net interest income after
provision for
loan losses 6,095 5,565 5,496 5,180 5,212
Noninterest income
Insurance commissions 127 128 127 126 133
Net gain from sales of securities 3 -- -- 10 --
Other 232 189 151 159 160
-------- -------- -------- -------- --------
Total noninterest income 362 317 278 295 293
Noninterest expense
Salaries and employee benefits 2,153 2,336 1,969 1,600 1,483
Occupancy and equipment expense 422 406 379 378 409
SAIF deposit insurance premium 1,291 332 341 280 321
Other expense 969 753 666 621 580
-------- -------- -------- -------- --------
Total noninterest expense 4,835 3,827 3,355 2,879 2,793
Income before income
taxes and cumulative
effect of change in
accounting principles 1,622 2,055 2,419 2,596 2,712
Income tax expense 647 819 887 1,121 1,011
-------- -------- -------- -------- --------
Income before cumulative effect
of change in accounting principles 975 1,236 1,532 1,475 1,701
Cumulative effect of change in
accounting for income taxes -- -- -- (188) --
-------- -------- -------- -------- --------
Net income $ 975 $ 1,236 $ 1,532 $ 1,287 $ 1,701
======== ======== ======== ======== ========
Supplemental Data:
Return on assets (1) .49% .67% .86% .77% 1.04%
Return on equity (2) 2.61 3.25 5.60 7.75 11.30
Interest rate spread (3) 2.13 2.12 2.57 2.85 2.74
Net yield on average interest-
earning assets (4) 3.11 3.10 3.18 3.28 3.26
Dividend pay-out ratio (5) 12.24 -- -- -- --
Net interest income to
operating expenses (6) 126.68 146.20 164.71 186.59 187.58
Equity-to-assets (7) 16.65 20.31 20.52 10.06 9.53
Average interest-earning assets to
average interest-bearing
liabilities 123.95 126.12 117.61 110.73 109.68
Non-performing assets to total assets .09 .17 .07 .16 .11
Non-performing loans to total loans .13 .25 .09 .21 .16
Allowance for loan losses to
total loans, net .22 .26 .24 .23 .05
Allowance for loan losses to
non-performing loans 171.72 100.65 261.68 112.11 32.77
Earnings per share (8) $ .49 $ .59 $ .43 $-- $--
Earnings per share fully diluted (8) $ .48 $ .59 $ .43 $-- $--
Dividends declared per share $ .06 $-- $-- $-- $--
Book value per share $ 19.05 $ 18.29 $ 17.24 $-- $--
Number of offices 4 4 4 4 4
- ------------------
(1) Net income divided by average total assets.
(2) Net income divided by average total equity.
(3) Interest rate spread is calculated by subtracting average
interest rate cost from average interest rate earned.
(4) Net interest income divided by average interest-earning
assets.
(5) Dividends declared per share divided by earnings per share.
(6) Operating expenses consist of other expenses less taxes.
(7) Total equity divided by total assets.
(8) Earnings per common and common equivalent share subsequent to
conversion.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The principal business of the Bank has historically consisted of
attracting deposits from the general public and making loans secured by
residential and other real estate. The Bank is significantly affected by
prevailing economic conditions as well as government policies and regulations
concerning, among other things, monetary and fiscal affairs, housing and
financial institutions. Deposit flows are influenced by a number of factors,
including interest rates paid on competing investments, account maturities and
level of personal income and savings. In addition, deposit growth is affected by
how customers perceive the stability of the financial services industry amid
various current events such as regulatory changes and financing of the deposit
insurance fund. Lending activities are influenced by the demand for and supply
of housing lenders, the availability and cost of funds and various other items.
Sources of funds for lending activities of the Bank include deposits,
borrowings, payments on loans and income provided from operations. The Company's
earnings are primarily dependent upon the Bank's net interest income, the
difference between interest income and interest expense.
Interest income is a function of the balances of loans and investments
outstanding during a given period and the yield earned on such loans and
investments. Interest expense is a function of the amount of deposits and
borrowings outstanding during the same period and interest rates paid on such
deposits and borrowings. The Company's earnings are also affected by the Bank's
provisions for loan and real estate losses, service charges, income from
subsidiary activities, operating expenses and income taxes.
ASSET/LIABILITY MANAGEMENT
The Company is subject to interest rate risk to the degree that its
interest-bearing liabilities, primarily deposits with short and medium-term
maturities, mature or reprice at different rates than its interest-earning
assets. Although having liabilities that mature or reprice less frequently on
average than assets will be beneficial in times of rising interest rates, such
an asset/liability structure will result in lower net income during periods of
declining interest rates, unless offset by other factors such as noninterest
income.
A key element of the Company's asset/liability plan is to protect net
earnings from changes in interest rates by reducing the maturity or repricing
mismatch between its interest-earning assets and rate-sensitive liabilities. The
Company's one year interest rate gap has been between a negative 36.01% and a
positive 9.14% at the end of each year from September 30, 1992, to September 30,
1996. This assumes that deposit accounts reprice based on assumptions indicated
below the following table. The Company's interest rate gap was a negative 36.01%
as of September 30, 1996. A negative interest rate gap leaves the Company's
earnings vulnerable to periods of rising interests rates because during such
periods the interest expense paid on liabilities will generally increase more
rapidly than the interest income earned on assets. Conversely, in a falling
interest rate environment, the total expense paid on liabilities will generally
decrease more rapidly than the interest income earned on assets. A positive
interest rate gap would have the opposite effect. The Company's management
believes that the Company's interest rate gap in recent periods has generally
been maintained within an acceptable range in view of the prevailing interest
rate environment.
The Office of Thrift Supervision (the "OTS") also provides a Net
Portfolio Value ("NPV") approach to the measurement of interest rate risk. In
essence, this approach calculates the difference between the present value of
expected cash flows from assets and the present value of expected cash flows
from liabilities, as well as cash flows from off-balance sheet contracts. The
difference is the NPV. As of June 30, 1996, (the most recently available data),
after a 200 basis point rate change, the Bank's NPV ratio was 13.34%. Management
reviews the quarterly OTS measurements on a quarterly basis as the
implementation of the Company's interest rate risk policy is done within limits
established by the Board of Directors on the amount of change in NPV which is
acceptable given certain interest rate changes.
In addition to monitoring selected measures on NPV, management also
monitors effects on net interest income resulting from increases or decreases in
rates. This measure is used in conjunction with NPV measures to identify
excessive interest rate risk. In managing its asset/liability mix, the Company,
depending on the relationship between long and short term interest rates, market
conditions and consumer preference, may place somewhat greater emphasis on
maximizing its net interest margin than on strictly matching the interest rate
sensitivity of its assets and liabilities. Management believes that the
increased net income which may result from an acceptable mismatch in the actual
maturity or repricing of its asset and liability portfolios can, during periods
of declining or stable interest rates, provide sufficient returns to justify the
increased exposure to sudden and unexpected increases in interest rates which
may result from such a mismatch. Management believes that the Company's level of
interest rate risk is acceptable under this approach as well.
The following table illustrates the projected maturities and repricing
of the major consolidated asset and liability categories of the Company as of
September 30,1996. Maturity and repricing dates have been projected by applying
the assumptions set forth below to contractual maturity, call dates and
repricing dates. The information presented in the following table is derived
from data maintained by the Company and is not adjusted for prepayments. Since
most of the loans are adjustable rate loans which are due to reprice within five
years or less, management feels that loan prepayments will not have a
significant impact on the results of the table below.
At September 30, 1996
maturing or Repricing Within
---------------------------------------------------------------------------------
Less 6 Months 5 to
Than 3 3 to 6 to 1 to 3 3 to 5 10
Months Months 1 Year Years Years Years
------ ------ ------ ----- ----- -----
Adjustable rate mortgages $ 16,671 $ 12,613 $ 35,427 $ 33,223 $ 16,551 $ 15,851
Fixed rate mortgages 4 11 10 202 625 1,787
Equity Loans 3,522 -- -- -- 91 177
Financing leases -- -- 37 -- 190 898
Consumer loans 22 17 35 9 -- --
Securities 15,509 6,038 5,789 13,515 1,838 --
Mortgage-backed securities 4,537 -- -- 5,013 -- --
Interest -earning time deposits 297 198
Stock in FHLB of Indianapolis
Deferred loan fees (16) (14) (22) (9) (15) (21)
Loans in process (441) (12) (9) (402) (420) (269)
40,105 18,851 41,267 51,551 18,860 18,423
------ ------ ------ ------ ------ ------
Interest-bearing Liabiliites
Certificates of deposit 25,426 20,163 39,940 32,923 3,466 325
Savings acoounts 9,695 -- -- -- -- --
NOW and money market accounts 25,085 -- -- -- -- --
FHLB advances 15,000 1,000 -- 8,500 -- --
------ ------ ------ ------ ----- ---
75,206 21,163 39,940 41,423 3,466 325
------ ------ ------ ------ ----- ---
Excess (deficiency) of interest-earning
assets over interest bearing liabilities (35,101) (2,312) 1,327 10,128 15,394 18,098
======= ====== ===== ====== ====== ======
Cumulative excess (deficiency) of
interest-earning assets over interest
bearing liabilities (35,101) (37,413) (36,086) (25,958) (10,564) 7,534
Cumulative interest rate gap to total
interest-earning assets -87.52% -63.46% -36.01% -17.10% -6.19% 3.99%
Off balance sheet assets (1) 2,771 7,303 2,994 402 727 6,625
At September 30, 1996
maturing or Repricing Within
-------------------------------------
10 to
20 Over 20
Years Years Total
----- ----- -----
Adjustable rate mortgages $--- $--- $130,336
Fixed rate mortgages 13,448 3,372 19,459
Equity Loans -- -- 3,790
Financing leases -- -- 1,125
Consumer loans -- -- 83
Securities -- -- 42,689
Mortgage-backed securities 5,007 9,517 24,074
Interest -earning time deposits 495
Stock in FHLB of Indianapolis 1,336 1,336
Deferred loan fees (180) (163) (440)
Loans in process (408) -- (1,961)
17,867 14,062 220,986
------ ------ -------
Interest-bearing Liabiliites
Certificates of deposit -- -- 122,243
Savings acoounts -- -- 9,695
NOW and money market accounts -- -- 25,085
FHLB advances -- -- 24,500
------ ------ -------
-- -- 181,523
------ ------ -------
Excess (deficiency) of interest-earning
assets over interest bearing liabilities 17,867 14.062 39,463
====== ====== ======
Cumulative excess (deficiency) of
interest-earning assets over interest
bearing liabilities 25,401 39,463 39,463
Cumulative interest rate gap to total
interest-earning assets 12.28% 17.86% 17.86%
Off balance sheet assets (1) 408 -- 21,230
- -----------
(1) Includes loan commitments and loans in process
It is assumed that fixed maturity deposits are not withdrawn prior to
maturity, that other deposits are withdrawn or reprice in three months or less
due to the likelihood that such deposits will reprice in the event of
significant changes in the overall level of interest rates available in the
marketplace and that callable securities are repricing at the call date.
In evaluating the Company's exposure to interest rate movements,
certain shortcomings inherent in the method of analysis presented in the
foregoing table must be considered. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in interest rates. Additionally, certain assets, such as ARM's,
have features which restrict changes in interest rates on a short-term basis and
over the life of the asset. Further, in the event of a significant change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed above. Finally, the ability of many borrowers
to service their debt may decrease in the event of an interest rate increase.
The Company considers all of these factors in monitoring its exposure to
interest rate risk.
The adjustable rate first mortgage loans the Bank holds in its
portfolio are primarily indexed to the National Median Cost of Funds and
interest rate adjustments on these loans may lag behind changes in market rates.
At September 30,1996, these loans totaled $130.3 million, or 84.2% of the Bank's
total loan portfolio. In August, 1996 the Bank began originating adjustable rate
mortgage loans using the One Year Treasury Index. As a general rule, market rate
adjustments on loans indexed to the National Median Cost of Funds lag
behind changes in market rates due to the fact that the index is tied to
variables that may not reprice on a basis as quickly as market rates (e. g., the
One Year Treasury). In a period of rising interest rates, the Bank's adjustable
rate residential loans may not adjust upward as quickly as market rates thereby
adversely affecting the Company's net interest income. Conversely, in a period
of declining interest rates, the Bank's adjustable rate residential loans may
not adjust downward as quickly as market rates thereby positively affecting the
Company's net interest income. In any case, such adjustments may be limited by
loan terms which restrict changes in interest rates on a short-term basis and
over the life of the loan.
AVERAGE BALANCE SHEETS
The following are the average balance sheets for the years ended
September 30:
1996 1995 1994
Average Average Average
Outstanding Outstanding Outstanding
Balance Balance Balance
------- ------- -------
Assets: (In thousands)
Interest-earning assets:
Interest-bearing deposits $ 6,709 $ 7,995 $ 24,117
Securities (1) 35,392 39,841 27,093
Mortgage-backed securities (1) 19,717 12,558 10,698
Loans receivable (2) 133,670 118,735 110,540
Stock in FHLB of Indianapolis 1,303 1,223 1,149
------------- ------------ ------------
Total interest-earning assets 196,791 180,352 173,597
Non-interest earning assets, net
of allowance for loan losses 3,792 3,517 3,546
------------- ------------ ------------
Total assets $ 200,583 $ 183,869 $ 177,143
============= ============ ============
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts $ 9,746 $ 9,774 $ 9,646
NOW and money market accounts 26,006 26,672 30,662
Certificates of deposit 113,570 106,556 107,294
FHLB borrowings 9,625 - -
------------- ------------ ------------
Total interest-bearing liabilities 158,947 143,002 147,602
Other liabilities 4,229 2,838 2,200
------------- ------------ ------------
Total liabilities 163,176 145,840 149,802
Shareholders' equity
Common stock 19,064 20,527 10,524
Retained earnings 19,718 19,117 17,802
Less common stock acquired by:
Employee stock ownership plan (1,007) (1,208) (675)
Recognition and retention plans (235) (407) (310)
Unrealized gain (loss) on securities
available for sale (133) - -
------------- ------------ ------------
Total shareholders' equity 37,407 38,029 27,341
------------- ------------ ------------
Total liabilities and shareholders' equity $ 200,583 $ 183,869 $ 177,143
============= ============ ============
- ------------
(1) Average outstanding balance reflects unrealized gain (loss) on securities
available for sale.
(2) Total loans less deferred net loan fees and loans in process.
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,
1996 1995 1994
---- ---- ----
Average interest rate earned on:
Interest-earning deposits 6.29% 6.03% 3.82%
Securities(l) 6.17% 5.77% 5.53%
Mortage-backed securities(l) 6.15% 5.51% 5.48%
Loans receivable 7.67% 7.42% 7.67%
Stock in FHLB of Indianapolis 7.90% 7.60% 5.22%
Total interest-earning assets 7.20% 6.87% 6.65%
Average interst rate of:
Savings accounts 2.77% 2.80% 2.75%
NOW and money market accounts 3.12% 3.24% 2.65%
Certificates of depoist 5.68% 5.30% 4.61%
FHLB advances 5.50% --- ---
Total interst-bearing liabilities 5.07% 4.75% 4.08%
Interst rate spread (2) 2.13% 2.12% 2.57%
Net yield on interest-eaming assets (3) 3.11% 3.10% 3.18%
- ---------------
(1) Yield is based on amortized cost without adjustment for unrealized gain
(loss) on securities available for sale
(2) Interest rate spread is calculated by subtracting the average interest
rate cost from the average interest rate earned for the period
indicated.
(3) The net yield on average interest-earning assets is calculated by
dividing net interest income by the average interest-earning assets for
the period indicated.
The following table describes the extent to which changes in interest rates and
changes in volume of interest-related assets and liabilities have affected the
Company's consolidated interest income and expense during the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (1) changes in rate (i.e.,
changes in rate multiplied by old volume) and (2) changes in volume (i.e.,
changes in volume multiplied by old rate). Changes attributable to both rate and
volume have been allocated proportionally to the change due to volume and the
change due to rate.
Increase (Decrease) in
Net Interest Income
------------------------------------------------
Total Net Due to Due to
Change Rate Volume
----------- ----------- ------------
(In thousands)
Year ended September 30, 1996 compared
to year ended September 30, 1995
Interest-earning assets
Interest-bearing deposits $ (60) $ 20 $ (80)
Securities (114) 154 (268)
Mortgage-backed securities 533 97 436
Loans receivable 1,430 293 1,137
Stock in FHLB of Indianapolis 10 4 6
----------- ----------- ------------
Total 1,799 568 1,231
Interest-bearing liabilities
Savings accounts (4) (3) (1)
NOW and money market accounts (52) (31) (21)
Certificates of deposit 796 411 385
FHLB borrowings 529 - 529
----------- ----------- ------------
Total 1,269 377 892
----------- ----------- ------------
Change in net interest income $ 530 $ 191 $ 339
=========== =========== ============
Increase (Decrease) in
Net Interest Income
Total Net Due to Due to
Change Rate Volume
----------- ----------- ------------
(In thousands)
Year ended September 30, 1995 compared
to year ended September 30, 1994
Interest-earning assets
Interest-bearing deposits $ (440) $ 367 $ (807)
Securities 802 69 733
Mortgage-backed securities 106 4 102
Loans receivable 337 (278) 615
Stock in FHLB of Indianapolis 33 29 4
----------- ----------- ------------
Total 838 191 647
Interest-bearing liabilities
Savings accounts 9 5 4
NOW and money market accounts 50 164 (114)
Certificates of deposit 710 744 (34)
----------- ----------- ------------
Total 769 913 (144)
----------- ----------- -------------
Change in net interest income $ 69 $ (722) $ 791
=========== =========== ============
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30,1996 AND SEPTEMBER
30, 1995.
Consolidated net income for the Company for the year ended September
30,1996 was $975,000 compared to $1.2 million for the same period in 1995. The
decrease of $261,000 resulted primarily from a one time special assessment to
recapitalize the Savings Association Insurance Fund ("SAIF") of $955,000,
partially offset by a $530,000 increase in net interest income from $5.6 million
in 1995 to $6.1 million in 1996 and a $172,000 decrease in income tax expense.
Had the special assessment not been incurred, net income for the year ended
September 30, 1996 would have amounted to $1.6 million.
The increase in net interest income was due to increases in both the
volume of interest-earning assets and higher rates earned which was partially
offset by increases in the volume of interest-bearing liabilities and rates
paid. The average rate paid on interest-bearing liabilities increased 32 basis
points from 4.75% in 1995 to 5.07% in 1996, while the yield on interest-earning
assets increased 33 basis points from 6.87% in 1995 to 7.20% in 1996. As a
result, the interest rate spread increased one basis point from 2.12% in 1995 to
2.13% in 1996.
As of September 30, 1996 net loans were $152.1 million, $30.9 million
more than net loans of $121.2 million as of September 30, 1995. Deposits
increased $14.4 million to $159.0 million as of September 30, 1996 from $144.6
million as of September 30, 1995.
Cash and cash equivalents decreased $5.8 million from $7.5 million as
of September 30, 1995 to $1.7 million as of September 30, 1996 primarily as a
result of a $5.4 million decrease in interest-bearing time deposits in other
financial institutions.
The securities portfolio consists of government, government agency and
mortgage-related securities. Several changes occurred in this portfolio during
the year ended September 30,1996. In November, 1995, the Financial Accounting
Standards Board ("FASB") issued a special report, A Guide to Implementation of
SFAS No.115 on Accounting for Certain Investments in Debt and Equity Securities
("Guide"). As permitted by the Guide, on November 30, 1995, the Company made a
one-time reassessment and transferred securities from the held-to-maturity
portfolio to the available-for-sale portfolio. At the date of transfer, these
securities had an amortized cost of $47.9 million, and the transfer increased
the unrealized appreciation on securities available-for-sale by $196,000 and
increased shareholders' equity by $119,000 net of tax of $77,000. In addition,
during the year ended September 30, 1996, the Company adopted a capital
leveraging strategy that involved the purchase of mortgage related and other
securities funded primarily with Federal Home Loan Bank ("FHLB") advances. This
leveraging portfolio represented $26.6 million of the total securities portfolio
at September 30, 1996. As of September 30, 1996 the total securities portfolio
amounted to $66.8 million, an increase of $14.8 million from $52.0 million at
September 30, 1995. This increase is primarily related to the $26.6 million
increase in the leveraging portfolio, partially offset by net sales and
maturities of other securities of $11.8 million during the year.
The $30.9 million increase in net loans was funded primarily from the
$14.4 million increase in deposits, the $5.8 million decrease in cash and cash
equivalents and the $11.8 million decrease in securities discussed above.
Total liabilities increased $39.1 million from $149.1 million as of
September 30, 1995 to $188.2 million as of September 30, 1996 primarily due to
the $14.4
million increase in deposits and a $24.5 million increase in FHLB borrowings
used to fund the leveraged securities portfolio.
Total shareholders' equity decreased $400,000 from $38.0 million as of
September 30, 1995 to $37.6 million as of September 30, 1996. The decrease was
primarily attributable to the repurchase of the Company's common stock during
the year in the amount of $1.5 million, partially offset by net income of
$975,000 for the year ended September 30, 1996.
The book value of MFB Corp. Common stock, based on the actual number of
shares outstanding at each period, increased from $18.29 as of September 30,
1995 to $19.05 as of September 30, 1996.
Interest income increased $1.8 million during the year ended September
30, 1996 compared to the same period one year ago. The increase was primarily
related to increased volumes of loans receivable and mortgage-backed securities
partially offset by a decrease in the volume of lower yielding interest-bearing
deposits and securities. A general increase in rates also contributed to the
increase. Interest expense increased $1.3 million during the most recently
reported twelve month period primarily as a result of increased volumes of
certificates of deposit and FHLB borrowings. Increased rates paid on
certificates of deposit also contributed to the interest expense increase. Net
interest income increased $530,00 for the year ended September 30, 1996 compared
to the year ended September 30, 1995.
Noninterest income increased from $317,000 for the year ended September
30, 1995 to $362,000 for the twelve months ended September 30, 1996. The
increase was primarily due to increased fee income related to demand deposit
accounts. Non-interest expense increased to $4.8 million for the year ended
September 30, 1996 from $3.8 million for the same period last year. This
increase is primarily related to the one time special assessment to recapitalize
the SAIF of $955,000.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30,1995 AND SEPTEMBER
30,1994.
Consolidated net income for the Company for the year ended September
30, 1995 was $1.2 million compared to $1.5 million for the same period in 1994.
The decrease of $296,000 resulted primarily from a $472,000 increase in
noninterest expense from $3.4 million to $3.8 million for the comparative twelve
month periods, which was partially offset by a $69,000 increase in net interest
income and a $68,000 decrease in income tax expense.
As of September 30, 1995, net loans receivable were $121.2 million,
$5.9 million more than net loans of $115.3 million as of September 30, 1994.
Deposits increased $947,000 to $144.6 million as of September 30, 1995 from
$143.6 million as of September 30, 1994.
Cash and cash equivalents increased $1.3 million from $6.2 million as
of September 30, 1994 to $7.5 million as of September 30, 1995 as a result of
increasing the interest-bearing deposits in other financial institutions from
$4.3 million to $5.4 million during the same period.
Total liabilities increased $3.1 million from $146.0 million as of
September 30, 1994 to $149.1 million as of September 30, 1995 primarily due to
the September, 1995 commitments to purchase $2.0 million in securities with
settlement dates in
October, 1995. As a result of these security transactions, accrued expenses and
other liabilities increased from $244,000 as of September 30, 1994 to $2.3
million as of September 30, 1995.
Total shareholders' equity increased from $37.7 million as of September
30, 1994 to $38.0 million as of September 30, 1995. This increase was primarily
attributable to the $1.2 million in net income for the year ended September 30,
1995, along with the amortization of $250,000 relative to the recognition and
retention plans contra equity account and $300,000 relative to the contribution
to fund the Employee Stock Ownership Plan (ESOP) and market adjustment of ESOP
shares. Offsetting these increases was the purchase and retirement of 109,361
shares of common stock for $1.5 million.
The book value of MFB Corp. Common stock, based on the actual number of
shares outstanding at each period, increased from $17.24 as of September 30,
1994 to $18.29 as of September 30, 1995.
As the $20.3 million in net proceeds from the March, 1994 stock
conversion was used primarily to purchase securities, $2.3 million in interest
income was generated from securities, excluding mortgage-backed securities, for
the year ended September 30, 1995 versus $1.6 million for the year ended
September 30, 1994, an $802,000 increase for the comparative periods. Also
contributing to the $838,000 total interest income increase from $11.5 million
for the year ended September 30, 1994 to $12.4 million for the year ended
September 30, 1995 was the increase in the volume of loans receivable and
decrease in the volume of lower yielding interest-bearing deposits in other
financial institutions.
Total noninterest expense increased $472,000 from $3.4 million for the
year ended September 30, 1994 to $3.8 million for the year ended September 30,
1995. The increase was primarily due to a $367,000 increase in salaries and
employee benefits. Higher legal and auditing fees associated with the conversion
to a stock savings bank, and costs incurred in the search for a successor CEO,
also contributed to increasing noninterest expense for the comparable periods.
BIF/SAIF FUND RESOLUTION
On September 30, 1996, the president signed into law a bill that
included a measure to recapitalize the Savings Association Insurance Fund
("SAIF") with a one-time special assessment. The Company accrued the expense for
this one-time assessment as of September 30, 1996 in the amount of $955,000, or
65.7 basis points of the Bank's deposits at March 31, 1995. Beginning January 1,
1997 the regular insurance premium decreases from 23 basis points to 6.4 basis
points. Based on deposits at September 30, 1996 annualized insurance premiums
will decreases approximately $264,000 from $366,000 to $102,000, resulting in a
3.6 year recovery period for the special assessment.
LIQUIDITY AND CAPITAL RESOURCES
A standard measure of liquidity for savings associations is the ratio
of cash and eligible investments to a certain percentage of net withdrawable
savings and
borrowings due within one year. The minimum required ratio is currently set by
OTS regulation at 5%, of which at least 1% must be comprised of short-term
investments (i.e., generally with a term of less than one year). At September
30, 1996, the Bank's liquidity ratio was 26.3% and the short-term liquidity
ratio was 5.3%. Therefore, the Bank's liquidity is well above the minimum
regulatory requirements.
Changes in the Bank's liquidity occur as a result of its operating,
investing and financing activities. These activities are discussed below for the
years ended September 30, 1996, 1995 and 1994.
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, interest-bearing time deposits in other financial
institutions and securities, excluding FHLB stock. These assets are commonly
referred to as liquid assets. Liquid assets totaled $69.0 million as of
September 30, 1996 compared to $61.4 million as of September 30, 1995 and $64.4
million as of September 30, 1994. The $7.6 million increase in liquidity from
September 30, 1995 to September 30, 1996 was primarily due to a $14.7 million
increase in securities, partially offset by a $5.4 million decrease in short
term interest-bearing deposits in other financial institutions. Management
believes the liquidity level of $69.0 million as of September 30, 1996 is
sufficient to meet anticipated future loan growth.
Liquidity levels decreased $3.0 million from September 30, 1994 to
September 30, 1995 due to a $1.5 million decrease in interest-bearing time
deposits in other financial institutions, a $1.6 million decrease in securities,
a $1.2 million decrease in mortgage-backed securities and a $1.3 million
increase in cash and cash equivalents. This decrease in liquidity, along with
increased customer deposits, was primarily used to fund a $5.9 million increase
in net loans during that year.
Short-term borrowings or long-term debt may be used to compensate for
reduction in other sources of funds such as deposits and to assist in
asset/liability management. The Bank has historically not borrowed significant
amounts. However, during the year ended September 30, 1996 the Bank instituted a
capital leveraging strategy that involved the purchase of earning assets funded
primarily with FHLB borrowings. As of September 30, 1996, total FHLB borrowings
amounted to $24.5 million, all of which were used as part of this strategy. The
Bank has commitments to fund loan originations with borrowers totaling $21.2
million at September 30, 1996. In the opinion of management, the Company has
sufficient cash flow to meet current and anticipated loan funding commitments,
deposit customer withdrawal requirements and operating expenses. There were no
short-term borrowings or long-term debt as of September 30, 1995.
The cash flow statements provide an indication of the Company's sources
and uses of cash as well as an indication of the ability of the Company to
maintain an adequate level of liquidity. A discussion of the changes in the cash
flow statements for the years ended September 30, 1996, 1995 and 1994 follows.
During the year ended September 30, 1996, net cash decreased $5.8
million from $7.5 million at September 30, 1995 to $1.7 million at September 30,
1996.
The Company experienced a net increase in cash from operating
activities of $2.2 million during the year that was primarily attributable to
net income as adjusted
for accrual basis accounting. The $44.9 million net decrease in cash from
investing activities for the year ended September 30, 1996 was primarily related
to the net increase in loans of $30.9 million and net purchases of securities of
$15.2 million.
Financing activities generated net cash of $37.0 million for the year
ended September 30, 1996. The net cash was provided primarily from $24.5 million
in new FHLB borrowings and a $14.4 million increase in net deposits, partially
offset by the use of $1.5 million to repurchase the Company's stock during the
year.
For the year ended September 30, 1995, net cash increased $1.3 million
from $6.2 million at September 30, 1994 to $7.5 million at September 30, 1995.
Net cash from operating activities totaled $3.8 million. Of this amount, $2.0
million was related to the September, 1995 commitment to purchase securities
(settlement October, 1995), thereby increasing accrued expenses and other
liabilities for 1995. The remaining $1.8 million increase for the year ended
September 30, 1995 was a result of net income as adjusted for accrual basis
accounting.
The Company experienced a $2.0 million net decrease in cash from
investing activities for the year ended September 30, 1995. This decrease in
cash resulted primarily from the net increase in loans exceeding the net
decrease in securities and interest-bearing time deposits in other financial
institutions.
The Company also experienced a $461,000 net decrease in cash from
financing activities for the year ended September 30, 1995, as the purchases and
retirement of $1.5 million of MFB Corp. common stock exceeded the net increases
in deposits and advance payments by borrowers for taxes and insurance.
As of September 30, 1996 management is not aware of any current
recommendations by regulatory authorities which, if they were to be implemented,
would have, or are reasonably likely to have, a material adverse effect on the
Company's liquidity, capital resources or operations.
CURRENT ACCOUNTING ISSUES
Several new accounting standards have been issued by the FASB that will
apply for the year ending September 30, 1997. SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of,
requires a review of long-term assets for impairment of recorded value and
resulting write-downs if the value is impaired. SFAS No. 122, Accounting for
Mortgage Servicing Rights, requires recognition of an asset when servicing
rights are retained on in-house originated loans that are sold. SFAS No. 123,
Accounting for Stock- Based Compensation, encourages, but does not require,
entities to use "fair value based methods to account for stock-based
compensation plans and requires disclosure of the pro forma effect on the net
income and on earnings per share had the accounting been adopted. SFAS No. 125,
Accounting for Transfer and Servicing of Financial Assets and Extinguishment of
Liabilities, provides accounting and reporting standard for transfers and
servicing of financial assets and extinguishments of liabilities when
extinguished. SFAS No. 125 also supersedes SFAS No. 122, and requires that
servicing assets and liabilities be subsequently measured by amortization in
proportion to and over the period of estimated net servicing income or loss and
requires assessment for asset impairment or increased obligation based on their
fair values. SFAS No. 125 applies to transfers and extinguishments occurring
after December 31, 1996, and early or retroactive application is not permitted.
These
statements are not expected to have a material effect on the Company's
consolidated financial position or results of operation.
IMPACT OF INFLATION
The audited consolidated financial statements presented herein have
been prepared in accordance with generally accepted accounting principles. These
principles require measurement of financial position and operating results in
terms of historical dollars (except for securities available for sale which are
reported at fair market value), without considering changes in the relative
purchasing power of money over time due to inflation.
The primary assets and liabilities of the Bank are monetary in nature.
As a result, interest rates have a more significant impact on the Company's
performance than the effects of general levels of inflation. Interest rates,
however, do not necessarily move in the same direction or with the same
magnitude as the price of good and services, since such prices are affected by
inflation.
In periods of rapidly rising interest rates, the liquidity and maturity
structures of the Company's assets and liabilities are critical to the
maintenance of acceptable performance levels. For a discussion of the Company's
continuing efforts to reduce its vulnerability to changes in interest rates, see
"Asset/Liability Management".
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of noninterest expense. Such expense items as
employee compensation employee benefits, and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans made by the Bank. Management is unable to determine the extent,
if any, to which properties securing the Bank's loans have appreciated in dollar
value due to inflation.
REPORT OF INDEPENDENT AUDITORS
Board of Directors
MFB Corp.
Mishawaka, Indiana
We have audited the accompanying consolidated balance sheets of MFB Corp. as of
September 30, 1996 and 1995 and the related consolidated statements of income,
changes in shareholders' equity and cash flows for the years ended September 30,
1996, 1995 and 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MFB Corp. as of
September 30, 1996 and 1995, and the results of its operations and its cash
flows for the years ended September 30, 1996, 1995 and 1994 in conformity with
generally accepted accounting principles.
As discussed in Note 1, effective October 1, 1994, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 115 and changed
its method of accounting for its Employee Stock Ownership Plan to conform to new
accounting guidance.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
South Bend, Indiana
November 4, 1996
MFB CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and 1995
1996 1995
---- ----
ASSETS
Cash and due from financial institutions $ 1,734,388 $ 2,063,229
Interest-bearing deposits in other financial
institutions - short-term - 5,390,822
----------------- -----------------
Cash and cash equivalents 1,734,388 7,454,051
Interest- bearing time deposits in other financial institutions 495,000 1,880,000
Securities available for sale 66,762,558 -
Securities held to maturity (fair value: 1995 - $51,704,000) - 52,022,355
Federal Home Loan Bank (FHLB) stock, at cost 1,336,100 1,270,800
Loans receivable, net of allowance for loan losses of
$340,000 in 1996 and $310,000 in 1995 152,052,092 121,181,162
Accrued interest receivable 818,014 818,108
Premises and equipment, net 1,969,264 1,976,527
Other assets 641,707 462,236
----------------- -----------------
Total assets $ $ 225,809,123 $ 187,065,239
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing demand deposits $ 1,942,145 $ 743,000
Savings, NOW and MMDA deposits 34,779,548 34,687,208
Other time deposits 122,242,796 109,121,562
----------------- -----------------
Total deposits 158,964,489 144,551,770
FHLB advances 24,500,000 -
Advances from borrowers for taxes and insurance 1,864,427 2,169,578
Accrued expenses and other liabilities 2,880,838 2,345,293
----------------- -----------------
Total liabilities 188,209,754 149,066,641
Shareholders' equity
Common stock, no par value, 5,000,000
shares authorized; shares issued
and outstanding: 1996 - 1,973,980; 1995 - 2,077,873 18,316,651 19,656,664
Retained earnings - substantially restricted 20,588,797 19,732,086
Net unrealized depreciation on securities available
for sale, net of tax benefit of $144,252 in 1996 (219,928) -
Unearned Employee Stock Ownership Plan (ESOP) Shares (893,651) (1,100,000)
Unearned Recognition and Retention Plan (RRP) Shares (192,500) (290,152)
----------------- -----------------
Total shareholders' equity 37,599,369 37,998,598
----------------- -----------------
Total liabilities and shareholders' equity $ 225,809,123 $ 187,065,239
================= =================
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Interest income
Loans receivable
Mortgage loans $ 9,956,394 $ 8,780,654 $ 8,452,229
Consumer and other loans 182,177 35,433 26,506
Financing leases and commercial loans 107,321 - -
Securities - taxable 3,514,380 3,085,427 2,143,983
Other interest-earning assets 421,984 482,044 922,372
--------------- --------------- ----------------
14,182,256 12,383,558 11,545,090
Interest expense
Deposits 7,528,321 6,788,376 6,019,113
FHLB advances 529,025 - -
--------------- --------------- ----------------
8,057,346 6,788,376 6,019,113
Net interest income 6,124,910 5,595,182 5,525,977
Provision for loan losses 30,000 30,000 30,000
--------------- --------------- ----------------
Net interest income after provision
for loan losses 6,094,910 5,565,182 5,495,977
Noninterest income
Insurance commissions 126,819 127,766 126,420
Net realized gains from sales of securities
available for sale 3,731 - -
Other income 231,766 189,648 151,349
--------------- --------------- ----------------
362,316 317,414 277,769
Noninterest expense
Salaries and employee benefits 2,152,656 2,336,230 1,969,110
Occupancy and equipment expense 422,388 405,998 378,972
SAIF deposit insurance premium 1,291,288 332,175 340,511
Other expense 968,951 752,635 666,135
--------------- --------------- ----------------
4,835,283 3,827,038 3,354,728
--------------- --------------- ----------------
Income before income taxes 1,621,943 2,055,558 2,419,018
Income tax expense 646,793 819,452 887,452
--------------- --------------- ----------------
Net income $ 975,150 $ 1,236,106 $ 1,531,566
=============== =============== ================
Earnings per common and common equiva-
lent share subsequent to conversion $ .49 $ .59 $ .43
Earning per share-assuming full dilution-
subsequent to conversion .48 .59 .43
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY Years ended
September 30, 1996, 1995 and 1994
Net Unrealized
Depreciation
on Securities
Available
Retained For Sale,
Common Stock Earnings Net of Tax
------------ -------- ----------
Balances at September 30, 1993 $ - $ 16,964,414 $ -
Issuance of 2,302,351 shares of common stock 22,426,665 -
Purchase and retirement of 115,117 shares of common stock (1,377,925) -
Common stock acquired by ESOP - 140,000 shares - -
Common stock acquired by RRP - 70,000 shares - -
Effect of contribution to fund ESOP - -
Amortization of RRP contribution - -
Net income for the year ended September 30, 1994 - 1,531,566
---------------- ---------------- --------------
Balance at September 30, 1994 21,048,740 18,495,980
Purchase and retirement of 109,361 shares of common stock (1,530,486) -
Effect of contribution to fund ESOP - -
Market adjustment of 22,516 ESOP shares committed to be released 99,592 -
Amortization of RRP contribution - -
Tax benefit related to employee stock plans 38,818 -
Net income for the year ended September 30, 1995 - 1,236,106
---------------- ---------------- --------------
Balance at September 30, 1995 19,656,664 19,732,086
Purchase and retirement of 103,893 shares of common stock (1,499,024) - -
Net unrealized appreciation on securities available for
sale, net of tax $77,821 from transfer of securities - - 118,648
Cash dividends declared - $.06 per share - (118,439) -
Effect of contribution to fund ESOP - - -
Market adjustment of 21,515 ESOP shares committed to be released 117,247 - -
Amortization of RRP contribution - - -
Tax benefit related to employee stock plans 41,764 - -
Net change in unrealized depreciation on securities
available for sale, net of tax of ($222,073) - - (338,576)
Net income for the year ended September 30, 1996 - 975,150 -
---------------- ---------------- --------------
Balance at September 30, 1996 $ 18,316,651 $ 20,588,797 $ (219,928)
================ ================ ==============
Total
Unearned Unearned Shareholders'
ESOP Shares RRP Shares Equity
----------- ---------- ------
Balances at September 30, 1993 $ - $ - $16,964,414
Issuance of 2,302,351 shares of common stock - - 22,426,665
Purchase and retirement of 115,117 shares of common stock - - (1,377,925)
Common stock acquired by ESOP - 140,000 shares (1,400,000) - (1,400,000)
Common stock acquired by RRP - 70,000 shares - (700,000) (700,000)
Effect of contribution to fund ESOP 100,000 - 100,000
Amortization of RRP contribution - 159,948 159,948
Net income for the year ended September 30, 1994 - - 1,531,566
-------------- ------------ -----------
Balance at September 30, 1994 (1,300,000) (540,052) 37,704,668
Purchase and retirement of 109,361 shares of common stock - - (1,530,486)
Effect of contribution to fund ESOP 200,000 - 200,000
Market adjustment of 22,516 ESOP shares committed to be released - - 99,592
Amortization of RRP contribution - 249,900 249,900
Tax benefit related to employee stock plans - - 38,818
Net income for the year ended September 30, 1995 - - 1,236,106
-------------- ------------ -----------
Balance at September 30, 1995 (1,100,000) (290,152) 37,998,598
Purchase and retirement of 103,893 shares of common stock - - (1,499,024)
Net unrealized appreciation on securities available for
sale, net of tax $77,821 from transfer of securities - - 118,648
Cash dividends declared - $.06 per share - - (118,439)
Effect of contribution to fund ESOP 206,349 - 206,349
Market adjustment of 21,515 ESOP shares committed to be released - - 117,247
Amortization of RRP contribution - 97,652 97,652
Tax benefit related to employee stock plans - - 41,764
Net change in unrealized depreciation on securities
available for sale, net of tax of ($222,073) - - (338,576)
Net income for the year ended September 30, 1996 - - 975,150
-------------- ------------ ----------
Balance at September 30, 1996 $ (893,651) $ (192,500) $37,599,369
============== ============ ===========
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Cash flows from operating activities
Net income $ 975,150 $ 1,236,106 $ 1,531,566
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization, net of
accretion 272,595 315,899 330,675
Amortization of RRP contribution 97,652 249,900 159,948
Provision for loan losses 30,000 30,000 30,000
Net realized gains from sales of
securities available for sale (3,731) - -
Market adjustment of ESOP shares committed
to be released 117,247 99,592 -
ESOP expense 206,349 200,000 100,000
Net change in:
Accrued interest receivable 94 (70,836) (365,179)
Other assets (44,501) (301,900) 100,176
Accrued expenses and other liabilities 586,591 2,050,282 (65,551)
--------------- --------------- ---------------
Total adjustments 1,262,296 2,572,937 290,069
--------------- --------------- ---------------
Net cash provided by operating
activities 2,237,446 3,809,043 1,821,635
Cash flows from investing activities
Net change in interest-bearing time
deposits in other financial institutions 1,385,000 1,485,000 17,104,126
Net change in loans receivable (30,900,930) (5,914,327) (7,114,736)
Proceeds from:
Sales of securities available for sale 10,212,124 - -
Principal payments of mortgage-backed
and related securities 2,280,597 1,283,272 474,928
Maturities of securities available for sale 16,697,252 - -
Maturities of securities held to maturity 4,300,000 14,350,000 -
Maturities of investment securities - - 16,300,000
Purchase of:
Securities available for sale (48,218,517) - -
Securities held to maturity (500,000) (12,910,926) -
Investment securities - - (56,479,171)
FHLB stock (65,300) (95,300) -
Premises and equipment, net (137,440) (244,856) (170,745)
--------------- --------------- ---------------
Net cash used in investing activities (44,947,214) (2,047,137) (29,885,598)
- --------------------------------------------------------------------------------
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, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Cash flows from financing activities
Proceeds from stock issue, net of conversion
costs and stock acquired by ESOP and RRP $ - $ - 20,326,665
Purchase of MFB Corp. common stock (1,499,024) (1,530,486) (1,377,925)
Net change in deposits 14,412,719 947,319 (5,615,081)
Proceeds from FHLB advances 24,500,000 - -
Net change in advances from
borrowers for taxes and insurance (305,151) 122,579 63,005
Cash dividends paid (118,439) - -
--------------- --------------- ---------------
Net cash provided by (used in) financing
activities 36,990,105 (460,588) 13,396,664
--------------- --------------- ---------------
Net change in cash and cash equivalents (5,719,663) 1,301,318 (14,667,299)
Cash and cash equivalents at beginning of period 7,454,051 6,152,733 20,820,032
--------------- --------------- ---------------
Cash and cash equivalents at end of period $ 1,734,388 $ 7,454,051 $ 6,152,733
=============== =============== ===============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 7,459,231 $ 6,786,274 $ 6,019,588
Income taxes 974,755 883,000
837,119
Supplemental schedule of noncash investing activities Transfer from:
Investment securities to securities
held to maturity $ - $ 54,931,715 $ -
Securities held to maturity to securities
available for sale 47,898,025 - -
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial statements
include the accounts of MFB Corp., Inc. and its wholly-owned subsidiary
(together referred to as "the Company"), Mishawaka Federal Savings (the "Bank"),
a federal stock savings bank, and Mishawaka Financial Services, Inc., a
wholly-owned subsidiary of the Bank. Mishawaka Financial Services, Inc. is
engaged in the sale of credit life, general fire and accident, car, home and
life insurance as agent for the Bank's customers and the general public. All
significant intercompany transactions and balances are eliminated in
consolidation.
On November 1, 1996, the Bank changed its name to MFB Financial.
Nature of Business and Concentrations of Credit Risk: The primary source of
income for the Company results from granting commercial and residential real
estate loans in Mishawaka and the surrounding area. Loans secured by real estate
mortgages comprise approximately 99% of the loan portfolio at September 30, 1996
and are primarily secured by residential mortgages. The Company operates
primarily in the banking industry which accounts for more than 90% of its
revenues, operating income and assets.
Use of Estimates In Preparing Financial Statements: The preparation of
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period, as well as the
disclosures provided. Areas involving the use of estimates and assumptions in
the accompanying financial statements include the allowance for loan losses,
fair values of securities and other financial instruments, determination and
carrying value of impaired loans, 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, advances from borrowers for taxes and insurance, and
interest-bearing time deposits in other financial institutions.
- --------------------------------------------------------------------------------
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities: On October 1, 1994, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company now classifies
securities into held to maturity, available for sale and trading categories.
Held to maturity securities are those which the Company has the positive intent
and ability to hold to maturity, and are reported at amortized cost. Available
for sale securities are those the Company may decide to sell if needed for
liquidity, asset-liability management or other reasons. Available for sale
securities are reported at fair value, with unrealized gains and losses included
as a separate component of shareholders' equity, net of tax. Trading securities
are bought principally for sale in the near term, and are reported at fair value
with unrealized gains and losses included in earnings. Adoption of SFAS No. 115
had no impact on the equity of the Company because all investment securities
held by the Company were classified as securities held to maturity as of October
1, 1994.
The Financial Accounting Standards Board ("FASB") issued a Special Report, "A
Guide to Implementation of SFAS No. 115 on Accounting for Certain Investments in
Debt and Equity Securities ("Guide")." As permitted by the Guide, on November
30, 1995, the Company made a one-time reassessment and transferred securities
from the held to maturity portfolio to the available for sale portfolio. At the
date of transfer, these securities had an amortized cost of $47,898,025, and the
transfer increased the unrealized appreciation on securities available for sale
by $196,469 and increased shareholders' equity by $118,648, net of tax of
$77,821.
Gains and losses on the sale of securities are determined using the specific
identification method based on amortized cost and are reflected in results of
operations at the time of sale. Interest and dividend income, adjusted by
amortization of purchase premium or discount over the estimated life of the
security using the level yield method, is included in earnings.
Loans 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.
- --------------------------------------------------------------------------------
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Because some loans may not be repaid in full, an allowance for loan losses is
recorded. The allowance for loan losses is increased by a provision for loan
losses charged to expense and decreased by charge-offs (net of recoveries).
Estimating the risk of loss and the amount of loss on any loan is necessarily
subjective. Accordingly, the allowance is maintained by management at a level
considered adequate to cover losses that are currently anticipated. Management's
periodic evaluation of the adequacy of the allowance is based on the Company's
past loan loss experience, known and inherent risks in the portfolio, periodic,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, and current economic conditions.
While management may periodically allocate portions of the allowance for
specific problem loan situations, the whole allowance is available for any loan
charge-offs that occur.
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by
SFAS No. 118, was adopted effective October 1, 1995 and requires recognition of
loan impairment. 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. The effect of adopting these standards was not
material to the consolidated financial statements.
Smaller-balance homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by one-to-four family
residences, residential construction loans, automobile, manufactured homes, home
equity and second mortgage loans. Commercial loans and mortgage loans secured by
other properties are evaluated individually for impairment. When analysis of
borrower operating results and financial condition indicates that underlying
cash flows of the borrower's business are not adequate to meet its debt service
requirements, the loan is evaluated for impairment. Often this is associated
with a delay or shortfall in payments of 30 days or more. Nonaccrual loans are
often also considered impaired. Impaired loans, or portions thereof, are charged
off when deemed uncollectible. The nature of disclosures for impaired loans is
considered generally comparable to prior nonaccrual and renegotiated loans and
non-performing and past due asset disclosures.
- --------------------------------------------------------------------------------
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interest income on loans is accrued over the term of the loans based upon the
principal outstanding. The accrual of interest on impaired loans in discontinued
when, in management's opinion, the borrower may be unable to meet payments as
they become due. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to the
extent that cash payments are received until, in management's judgment, the
borrower has the ability to make contractual interest and principal payments, in
which case the loan is returned to accrual status.
Foreclosed Real Estate: Real estate properties acquired through, or in lieu of,
loan foreclosure are initially recorded at fair value at the date of
acquisition, establishing a new cost basis. Any reduction to fair value from the
carrying value of the related loan at the time of acquisition is accounted for
as a loan loss and charged against the allowance for loan losses. Valuations are
periodically performed by management and valuation allowances are adjusted
through a charge to income for changes in fair value or estimated selling costs.
Foreclosed real estate amounted to approximately $-0- and $18,000 at September
30, 1996 and 1995, respectively, and is included in other assets in the
consolidated balance sheets.
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.
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.
Employee Stock Ownership Plan (ESOP): Effective October 1, 1994, the Company
began to account for its ESOP under AICPA Statement of Position (SOP) 93-6. The
cost of shares issued to the ESOP, but not yet allocated to participants, are
presented as a reduction of shareholders' equity. Compensation expense is
recorded based on the average market price of the shares committed to be
released for allocation to participant accounts. The difference between the
market price and the cost of shares committed to be released is recorded as an
adjustment to common stock. Dividends on allocated ESOP shares are recorded as a
reduction of retained earnings; dividends on unearned ESOP shares are reflected
as a reduction of debt and accrued interest.
ESOP shares are outstanding for earnings per share calculations as they are
committed to be released; unearned shares are not considered outstanding.
Prior to the adoption of SOP 93-6, the expense was limited to the principal
repayment on the loan and the earnings per share calculation included as
outstanding all 140,000 ESOP shares.
- --------------------------------------------------------------------------------
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 11.
Earnings Per Share: Earnings per common share is computed by dividing net income
by the weighted average number of common shares outstanding and common share
equivalents which would arise from considering dilutive stock options. The
weighted average number of shares for calculating earnings per common share is:
1996 1995 1994
---- ---- ----
Primary 2,008,323 2,083,528 2,232,132
Fully diluted 2,035,087 2,106,785 2,229,058
Reclassifications: Certain amounts in the 1995 and 1994 consolidated financial
statements were reclassified to conform with the 1996 presentation.
NOTE 2 - SECURITIES
The amortized cost and fair value of securities available for sale are as
follows:
.........................September 30, 1996..........................
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------ ------------- --------------
Debt securities
U.S. Government and
federal agencies $ 40,159,602 $ 142,886 $ (95,325) $40,207,163
Mortgage-backed 24,473,181 - (399,246) 24,073,935
64,632,783 142,886 (494,571) 64,281,098
Marketable equity securities 2,493,955 - (12,495) 2,481,460
--------------- ------------ ------------- ---------------
$ 67,126,738 $ 142,886 $ (507,066) $ 66,762,558
============== ============ ============= ===============
- --------------------------------------------------------------------------------
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 2 - SECURITIES (Continued)
The amortized cost and fair value of securities held to maturity are as follows:
.........................September 30, 1995..........................
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- ------------ ------------- ---------------
Debt securities
U.S. Government and
federal agencies $ 40,116,970 $ 216,334 $ (153,304) $ 40,180,000
Mortgage-backed 11,905,385 - (381,385) 11,524,000
--------------- ------------ ------------- ---------------
$ 52,022,355 $ 216,334 $ (534,689) $ 51,704,000
============== ============ ============= ============
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, 1996........
Amortized Fair
Cost Value
Due in one year or less $ 6,836,633 $ 6,849,522
Due after one year through five years 32,972,969 33,019,125
Due after five years through ten years 350,000 338,516
---------------- ---------------
40,159,602 40,207,163
Mortgage-backed securities 24,473,181 24,073,935
---------------- ---------------
$ 64,632,783 $ 64,281,098
================ ===============
Proceeds from sales of securities available for sale were $10,212,124 during the
year ended September 30, 1996. Gross gains of $25,154 and gross losses of
$21,423 were realized on these sales. The Company did not sell any securities
during the years ended September 30, 1995 and 1994.
- --------------------------------------------------------------------------------
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 3 - LOANS RECEIVABLE, NET
Loans receivable, net at September 30 are summarized as follows:
1996 1995
---- ----
First mortgage loans (principally conventional)
Principal balances
Secured by one-to-four family residences $ 143,750,857 $ 119,719,473
Construction loans 5,004,730 2,106,358
Commercial 876,348 206,363
Other 162,643 189,189
----------------- -----------------
149,794,578 122,221,383
Less undisbursed portion of construction and
other mortgage loans (1,961,107) (809,280)
Net deferred loan-origination fees (439,921) (369,870)
----------------- -----------------
Total first mortgage loans 147,393,550 121,042,233
Consumer and other loans:
Principal balances
Home equity and second mortgage 3,790,075 375,102
Financing leases 1,124,624 -
Other 83,843 73,827
----------------- -----------------
Total consumer and other loans 4,998,542 448,929
Allowance for loan losses (340,000) (310,000)
----------------- -----------------
$ 152,052,092 $ 121,181,162
================= =================
Activity in the allowance for loan losses is summarized as follows for the years
ended September 30:
1996 1995 1994
---- ---- ----
Balance at beginning of year $ 310,000 $ 280,000 $ 250,000
Provision for loan losses 30,000 30,000 30,000
Charge-offs - - -
Recoveries - - -
------------- ------------ ------------
Balance at end of year $ 340,000 $ 310,000 $ 280,000
============= ============ ============
- --------------------------------------------------------------------------------
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 3 - LOANS RECEIVABLE, NET (Continued)
At September 30, 1996, no portion of the allowance for loan losses was allocated
to impaired loan balances as there were no loans considered impaired loans as
of, or for the year ended September 30, 1996.
Certain directors and executive officers of the Company and its subsidiary,
including associates of such persons, were loan customers during the year ended
September 30, 1996. A summary of the related party loan activity, for loans
aggregating $60,000 or more to any one related party, is as follows for the year
ended September 30, 1996:
Balance - October 1, 1995 $ 592,367
===========
New loans 494,208
Repayments (54,081)
--------------
Balance - September 30, 1996 $ 1,032,494
==============
NOTE 4 - PREMISES AND EQUIPMENT, NET
Premises and equipment at September 30 are summarized as follows:
1996 1995
---- ----
Land $ 558,681 $ 558,681
Buildings and improvements 1,618,722 1,729,322
Real estate held for future expansion 128,885 128,885
Furniture and equipment 868,737 731,307
--------------- --------------
Total cost 3,175,025 3,148,195
Accumulated depreciation and amortization (1,205,761) (1,171,668)
--------------- --------------
$ 1,969,264 $ 1,976,527
=============== ==============
Depreciation and amortization of premises and equipment, included in occupancy
and equipment expense was approximately $145,000, $129,000 and $110,000 for the
years ended September 30, 1996, 1995 and 1994, respectively.
- --------------------------------------------------------------------------------
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 5 - DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit in denomination
of $100,000 or more was approximately $24,488,000 and $20,333,000 at September
30, 1996 and 1995, respectively.
At September 30, 1996, the scheduled maturities of certificates of deposit are
as follows for the years ended September 30:
1997 $ 85,529,043
1998 27,132,879
1999 5,789,996
2000 3,233,687
2001 and thereafter 557,191
---------------
$ 122,242,796
===============
NOTE 6 - FEDERAL HOME LOAN BANK ADVANCES
At September 30, 1996, advances from the Federal Home Loan Bank of Indianapolis
with fixed and variable rates ranging from 5.01% to 5.74% mature in the year
ending September 30 as follows:
1997 $ 15,000,000
1998 3,000,000
1999 6,500,000
--------------
$ 24,500,000
==============
FHLB advances are secured by all FHLB stock, qualifying first mortgage loans,
government agency and mortgage backed securities. At September 30, 1996,
collateral of approximately $206,000,000 is pledged to the FHLB to secure
advances outstanding.
NOTE 7 - EMPLOYEE BENEFITS
Employee Pension Plan: The Bank is part of a qualified noncontributory
multiple-employer defined benefit pension plan covering substantially all of its
employees. The plan is administered by the trustees of the Financial
Institutions Retirement Fund (Retirement Fund). There is no separate valuation
of plan benefits nor segregation of plan assets specifically for the Bank
because the plan is a multiple-employer plan and separate actuarial valuations
are not made with respect to each employer nor are the plan assets so
segregated. As of July 1, 1996, 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, 1996, 1995 and 1994 was
approximately $3,000, $179,000 and $140,000, respectively. Pension plan expense
for the year ended September 30, 1996 was reduced due to a change in the benefit
formula from 2% of high 5 year average salary for each year of benefit service
to 1.5%
401(k) Plan: On July 1, 1996, the Company adopted a retirement savings 401(k)
plan which covers all full time employees who are 21 or older and have completed
one year of service. Beginning August 1, 1996, participants may defer up to 15%
of compensation. The Company matches 50% of elective deferrals on 6% of the
participants' compensation. Expense for the 401(k) was approximately $5,000 for
the year ended September 30, 1996.
- --------------------------------------------------------------------------------
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
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 agetwenty-one are eligible to
participate. The ESOP borrowed $1,400,000 from the Company to purchase 140,000
shares of common stock issued in the conversion at $10 per share. Collateral for
the loan is the unearned shares of common stock purchased by the ESOP with the
loan proceeds. The loan will be repaid principally from the Company's
discretionary contributions to the ESOP over a period of seven years. The
interest rate for the loan is 6.25%. Shares purchased by the ESOP will be held
in suspense until allocated among ESOP participants as the loan is repaid.
ESOP expense was approximately $324,000, $300,000 and $100,000 for the years
ended September 30, 1996, 1995 and 1994, respectively. Contributions to the ESOP
was approximately $206,000, $200,000 and $100,000 during the years ended
September 30, 1996, 1995 and 1994, respectively.
Company contributions to the ESOP and shares released from suspense proportional
to the repayment of the ESOP loan are allocated among ESOP participants on the
basis of compensation in the year of allocation. Benefits generally become 100%
vested after five years of credited service. A participant who terminates
employment for reasons other than death, normal retirement (or early
retirement), or disability prior to the completion of five years of credited
service does not receive any benefits under the ESOP. Forfeitures are
reallocated among the remaining participating employees, in the same proportion
as contributions. Benefits are payable in the form of stock except for
fractional shares which are paid in cash upon termination of employment. The
Company's contributions to the ESOP are not fixed, so benefits payable under the
ESOP cannot be estimated.
ESOP participants receive distributions from their ESOP accounts only upon
termination of service.
At September 30, 1996 and 1995, 21,515 and 22,516 shares with an average fair
value of $15.04 and $13.31 per share, respectively, were committed to be
released.
- --------------------------------------------------------------------------------
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 7 - EMPLOYEE BENEFITS PLANS (Continued)
The ESOP shares as of September 30 were as follows:
1996 1995
------------ ------------
Allocated shares 55,692 34,177
Unearned shares 84,308 105,823
------------ ------------
Total ESOP shares 140,000 140,000
============ ============
Fair value of unearned
shares at September 30 $ 1,560,000 $ 1,720,000
============ ============
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, 1996, 1995 and 1994 was approximately $98,000, $250,000 and
$160,000, respectively.
Stock Option Plan: The Board of Directors of the Company adopted the MFB Corp.
Stock Option Plan (the "Option Plan"). The number of options authorized under
the Plan is 200,000 shares of common stock. Officers, employees and outside
directors of the Company and its subsidiary are eligible to participate in the
Option Plan. The option exercise price must be no less than 85% of the fair
market value of common stock on the date of the grant, and the option term
cannot exceed ten years and one day from the date of the grant.
- --------------------------------------------------------------------------------
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 7 - EMPLOYEE BENEFITS PLANS (Continued)
Activity in the Option Plan for the years ended September 30 is summarized as
follows:
Number of
Options Number of Option
Available Options Exercise
For Grant Outstanding Price
Balance at September 30, 1994 30,000 170,000 $10
Options granted during the year (20,000) 20,000 $15
------------- -------------
Balance at September 30, 1995 10,000 190,000 $10-$15
Options granted during the year (10,000) 10,000 $15.25
------------- -------------
Balance at September 30, 1996 - 200,000 $10-$15.25
============= =============
NOTE 8 - INCOME TAXES
The Company files consolidated federal income tax returns. If certain conditions
are met in determining taxable income as reported on the consolidated federal
income tax return, the Bank is allowed a special bad debt deduction based on a
percentage of taxable income (presently 8%) or on specified experience formulas.
The Bank used the percentage of taxable income method for its tax return as of
September 1994. For its tax return as of September 30, 1995, the Bank did not
use the percentage of taxable income method. The Bank is not expected to be able
to use the percentage of taxable income method for the tax year ended September
30, 1996. In future years, only the specified experience formula method will be
allowed as, in August 1996, legislation was enacted that repealed the reserve
method of accounting for federal income tax purposes. As a result, the Bank must
recapture that portion of the reserve that exceeds the amount that could have
been taken under the experience method for post-1987 tax years. The recapture
will occur over a six-year period, the commencement of which will be delayed
until the first taxable year beginning after December 31, 1997, provided the
institution meets certain residential lending requirements. The total amount of
bad debt to be recaptured is approximately $1,310,000.
- --------------------------------------------------------------------------------
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 8 - INCOME TAXES (Continued)
Income tax expense for the years ended September 30 are summarized as follows:
1996 1995 1994
---- ---- ----
Federal
Current $ 725,920 $ 622,992 $ 630,399
Deferred (225,467) 12,487 67,652
------------- ------------ ------------
500,453 635,479 698,051
State
Current 225,213 176,270 195,220
Deferred (78,873) 7,703 (5,819)
------------- ------------ ------------
146,340 183,973 189,401
------------- ------------ ------------
Total income tax expense $ 646,793 $ 819,452 $ 887,452
============= ============ ============
Total income tax expense differed from the amounts computed by applying the U.S.
Federal income tax rate of 34% to income before income taxes for the years ended
September 30 as a result of the following:
1996 1995 1994
---- ---- ----
Expected income tax expense at federal tax rate $ 551,461 $ 698,890 $ 822,466
State taxes based on income, net of federal
tax benefit 96,584 121,422 125,005
Excess of fair value of ESOP shares released over cost 39,864 33,861 -
Other (41,116) (34,721) (60,019)
------------- ------------ -------------
Total income tax expense $ 646,793 $ 819,452 $ 887,452
============= ============ ===============
The components of the net deferred tax asset (liability) recorded in the
consolidated balance sheets as of September 30 are as follows:
1996 1995
---- ----
Deferred tax assets
RRP expense $ 16,363 $ 78,985
Net deferred loan fees 186,966 157,195
Net unrealized depreciation on securities available for sale 144,252 -
SAIF assessment 405,235 -
Other - 24,596
------------ ------------
752,816 260,776
Deferred tax liabilities
Accretion (28,817) (48,161)
Depreciation (42,807) (39,288)
Bad debt deduction (300,895) (248,232)
Other (27,354) (20,744)
------------ ------------
(399,873) (356,425)
Valuation allowance - -
------------ ------------
Net deferred tax asset (liability) $ 352,943 $ (95,649)
============ ============
- --------------------------------------------------------------------------------
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 8 - INCOME TAXES (Continued)
Retained earnings at September 30, 1996 and 1995 includes approximately
$4,596,000, for which no deferred federal income tax liability has been
recognized as it represents bad debt deductions for tax purposes only for
pre-1987 tax years. Reduction of amounts so allocated for purposes other than
tax bad debt losses would create tax return income, which would be taxed at
current income tax rates. The unrecorded deferred income tax liability on the
above amount was approximately $1,563,000 at September 30, 1996 and 1995.
NOTE 9 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
The Bank is subject to various regulatory capital requirements. Failure to meet
minimum capital requirements can initiate certain mandatory or discretionary
actions by regulators that could have a direct material effect on the Bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific quantitative
capital guidelines using the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's requirements are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth below) of
tangible capital, leverage capital, and risk-based capital. Management believes,
as of September 30, 1996, that the Bank meets the capital adequacy requirements.
The following is a reconciliation of the Bank's capital under generally accepted
accounting principles (GAAP) to regulatory capital at September 30, 1996 and
1995.
- --------------------------------------------------------------------------------
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 9 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED
EARNINGS (Continued)
Tangible Leverage Risk-Based
Capital Capital Capital
------- ------- -------
(Dollars in thousands)
GAAP capital at September 30, 1996 $ 31,108 $ 31,108 $ 31,108
Additional capital items and capital adjustments
Net unrealized depreciation on securities
available for sale 220 220 220
Includable allowance for loan losses - - 340
------------ ------------ ------------
Regulatory capital at September 30, 1996 $ 31,328 $ 31,328 $ 31,668
============ ============ ============
GAAP capital at September 30, 1995 $ 29,844 $ 29,844 $ 29,844
Additional capital items
Includable allowance for loan losses - - 306
------------ ------------ ------------
Regulatory capital at September 30, 1995 $ 29,844 $ 29,844 $ 30,150
============ ============ ============
The Bank's actual capital and required capital amounts and ratios are presented
below:
Requirement to be
Well Capitalized Under
Requirement for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
As of September 30, 1996
Tangible Capital $ 31,328 13.85% $ 3,392 1.50% $ 6,785 3.00%
Leverage Capital 31,328 13.85 6,785 3.00 13,570 6.00
Risk-Based Capital 31,668 32.69 7,749 8.00 9,686 10.00
As of September 30, 1995
Tangible Capital 29,844 16.06 2,787 1.50 5,574 3.00
Leverage Capital 29,844 16.06 5,574 3.00 11,148 6.00
Risk-Based Capital 30,150 40.77 5,916 8.00 7,395 10.00
- --------------------------------------------------------------------------------
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 9 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED
EARNINGS (Continued)
Regulations of the Office of Thrift Supervision limit the amount of dividends
and other capital distributions that may be paid by a savings institution
without prior approval of the Office of Thrift Supervision. The regulatory
restriction is based on a three-tiered system with the greatest flexibility
being afforded to well-capitalized (Tier 1) institutions. The Bank is currently
a Tier 1 institution. Accordingly, the Bank can make, without prior regulatory
approval, distributions during a calendar year up to 100% of its net income to
date during the calendar year plus an amount that would reduce by one-half its
"surplus capital ratio" (the excess over its capital requirements) at the
beginning of the calendar year. Accordingly, at September 30, 1996 approximately
$12,000,000 of the Bank's retained earnings is potentially available for
distribution to the Company under this calculation. See also Note 15.
NOTE 10 - OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income and expense amounts are summarized as follows for the
years ended September 30:
1996 1995 1994
------------ ------------ ------------
Other noninterest income
Service charges and fees $ 174,315 $ 124,232 $ 87,835
Loan late charges 3,808 4,762 5,282
Rental income 32,989 39,725 35,975
Other 20,654 20,929 22,257
------------ ------------ ------------
$ 231,766 $ 189,648 $ 151,349
============ ============ ============
Other noninterest expense
Advertising and promotion $ 190,614 $ 15,000 $ 59,000
Data processing 200,940 175,734 163,918
Professional fees 175,341 116,008 76,030
Printing, postage, stationery,
and supplies 123,215 87,229 95,563
Telephone 33,110 24,433 23,142
Directors fees 70,186 56,940 57,411
Direct loan origination costs deferred (203,332) (99,228) (104,034)
Other 378,877 376,519 295,105
------------ ------------ ------------
$ 968,951 $ 752,635 $ 666,135
============ ============ ============
- --------------------------------------------------------------------------------
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 11 - COMMITMENTS AND CONTINGENCIES AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company is
involved in 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 of the Company and Subsidiary. The
principal commitments of the Company are as follows:
Loan Commitments
At September 30, 1996, excluding loans in process, the Company had outstanding
firm commitments to originate loans as follows:
Fixed Variable
Rate Loans Rate Loans Total
---------------- --------------- ---------------
First mortgage loans $ 1,680,256 $ 7,500,852 $ 9,181,108
Unused lines of credit 307,028 7,059,117 7,366,145
Unused construction loan lines of credit - 2,721,545 2,721,545
---------------- --------------- ---------------
$ 1,987,284 $ 17,281,514 $ 19,268,798
================ =============== ===============
Fixed rate loan commitments at September 30, 1996 are at rates primarily ranging
from 7.625% to 10.95%. These fixed rate loan commitments are primarily for terms
ranging from 15 to 30 year terms. Rates on variable rate loans range from 6.50%
to 10.75% and are tied primarily to the National Monthly Median Cost of Funds
Ratio to SAIF - Insured Institutions.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since commitments to make loans and fund lines of
credit may expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if it is deemed necessary by the Company upon extension of credit, is
based on management's credit evaluation of the counterparty. The Company uses
the same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments. The Company's exposure to credit loss in
the event of nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual amount of those
instruments. No losses are anticipated as a result of these transactions.
- --------------------------------------------------------------------------------
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 11 - COMMITMENTS AND CONTINGENCIES AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK (Continued)
The deposits of savings associations such as the Bank are presently insured by
the Savings Association Insurance Fund (SAIF). A recapitalization plan
formulated by the Treasury Department, the FDIC, the OTS and the Congress in
September 1996 required a one-time assessment of approximately $955,000 which
has been accrued for as of September 30, 1996 and is included in the Company's
noninterest expense for the year ended September 30, 1996.
Under employment agreements with certain executive officers, certain events
leading to separation from the Company could result in cash payments totaling
approximately $969,000 as of September 30, 1996.
NOTE 12 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed financial statements for the parent company,
MFB Corp.
CONDENSED BALANCE SHEETS
September 30,
-------------------------------------
1996 1995
ASSETS ---------------- -----------------
Cash and cash equivalents $ 887,580 $ 68,948
Interest-bearing deposits in other financial institutions - 948,366
Investment in Bank subsidiary 31,108,173 29,843,715
Note receivable from Bank subsidiary 4,750,000 5,750,000
Loan receivable from ESOP 893,651 1,100,000
Other assets 31,501 319,160
---------------- -----------------
Total assets $ 37,670,905 $ 38,030,189
================ =================
LIABILITIES
Accrued expenses and other liabilities $ 71,536 $ 31,591
SHAREHOLDERS' EQUITY 37,599,369 37,998,598
---------------- -----------------
Total liabilities and shareholders' equity $ 37,670,905 $ 38,030,189
================ =================
- --------------------------------------------------------------------------------
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 12 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME
Period From
Year Ended Year Ended March 24 to
September 30, September 30, September 30,
1996 1995 1994
---- ---- ----
Interest income $ 74,390 $ 85,212 $ 53,924
Other expenses 153,973 132,605 68,230
---------------- ---------------- -----------------
Loss before income taxes and equity
in undistributed net income of Bank
subsidiary (79,583) (47,393) (14,306)
Income tax benefit 32,887 19,326 5,667
---------------- ---------------- -----------------
Loss before equity in undistributed net
income of Bank subsidiary (46,696) (28,067) (8,639)
Equity in undistributed net income of Bank
subsidiary 1,021,846 1,264,173 971,161
---------------- ---------------- -----------------
Net income $ 975,150 $ 1,236,106 $ 962,522
================ ================ =================
- --------------------------------------------------------------------------------
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 12 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Period From
Year Ended Year Ended March 24 to
September 30, September 30, September 30,
1996 1995 1994
---- ---- ----
Cash flows from operating activities
Net income $ 975,150 $ 1,236,106 $ 962,522
Adjustments to reconcile net income to
net cash from operating activities
Amortization, net of accretion - (4,237) -
Equity in undistributed net income of
Bank subsidiary (1,021,846) (1,264,173) (971,161)
Net change in other assets 287,659 (317,424) (1,736)
Net change in accrued expenses and
other liabilities 40,417 27,738 3,853
--------------- --------------- ----------------
Net cash provided by (used in)
operating activities 281,380 (321,990) (6,522)
Cash flows from investing activities
Net change in interest-bearing deposits
in other financial institutions 948,366 - -
Loan to ESOP - - (1,400,000)
Principal repayments on loan receivable
from ESOP 206,349 200,000
100,000
Loan to Bank subsidiary - - (6,750,000)
Principal repayments on note receivable
from Bank subsidiary 1,000,000 1,000,000 -
Investment in Bank subsidiary - - (9,226,665)
Purchase of securities - (4,945,231) (12,490,918)
Proceeds from maturities of securities - 5,400,000 11,092,020
--------------- --------------- ----------------
Net cash provided by (used in) investing
activities 2,154,715 1,654,769 (18,675,563)
Cash flows from financing activities
Proceeds from stock issue, net of conversion
costs and stock acquired by ESOP and RRP - - 20,326,665
Purchase of MFB Corp. common stock (1,499,024) (1,530,486) (1,377,925)
Cash dividends paid (118,439) - -
--------------- --------------- ----------------
Net cash provided by (used in)
financing activities (1,617,463) (1,530,486) 18,948,740
--------------- --------------- ----------------
Net change in cash and cash equivalents 818,632 (197,707) 266,655
Cash and cash equivalents at beginning
of period 68,948 266,655 -
--------------- --------------- ----------------
Cash and cash equivalents at end of period $ 887,580 $ 68,948 $ 266,655
=============== =============== ================
- --------------------------------------------------------------------------------
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair values and the related carrying
amounts of the Company's financial instruments at September 30, 1996 and 1995.
Items which are not financial instruments are not included.
1 9 9 6 1 9 9 5
------- -------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Cash and cash equivalents $ 1,734,388 $ 1,734,000 $ 7,454,051 $ 7,454,000
Interest-bearing time deposits
in other financial institutions 495,000 495,000 1,880,000 1,882,000
Securities available for sale 66,762,558 66,763,000 - -
Securities held to maturity - - 52,022,355 51,704,000
FHLB stock 1,336,100 1,336,000 1,270,800 1,271,000
Loans receivable, net of
allowance for loan losses 152,052,092 152,341,000 121,181,162 121,857,000
Accrued interest receivable 818,014 818,000 818,108 818,000
Noninterest bearing demand
deposits (1,942,145) (1,942,000) (743,000) (743,000)
Savings, NOW and MMDA
deposits (34,779,548) (34,780,000) (34,687,208) (34,687,000)
Other time deposits (122,242,796) (122,579,000) (109,121,562) (109,607,000)
FHLB advances (24,500,000) (24,337,000) - -
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of September 30, 1996 and 1995. The estimated fair
value for cash and cash equivalents is considered to approximate cost. The
estimated fair value of interest-bearing time deposits in other financial
institutions is based upon estimates of the rate the Company would receive on
such deposits at September 30, 1996 and 1995, applied for the time period until
maturity. 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 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, 1996 and 1995, applied for an estimated time
period until the loan is assumed to reprice or be paid. In addition, when
computing the estimated fair value for loans receivable, the allowance for loan
losses was subtracted from the calculated fair value for consideration of credit
issues. The estimated fair value for FHLB stock, accrued interest receivable,
noninterest bearing demand deposits, savings, NOW and MMDA deposits is based
upon their carrying value. The estimated fair value for other time deposits as
well as FHLB advances is based upon estimates of the rate the Company would pay
on such deposits or borrowings at September 30, 1996 and 1995, 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.
- --------------------------------------------------------------------------------
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were the Company to have
disposed of such items at September 30, 1996 and 1995, 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, 1996 and 1995 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 14 - IMPACT OF NEW ACCOUNTING STANDARDS
Several new accounting standards have been issued by the FASB that will apply
for the year ending September 30, 1997. SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of,"
requires a review of long-term assets for impairment of recorded value and
resulting write-downs if the value is impaired. SFAS No. 122, "Accounting for
Mortgage Servicing Rights," requires recognition of an asset when servicing
rights are retained on in-house originated loans that are sold. SFAS No. 123,
"Accounting for Stock-Based Compensation," encourages, but does not require,
entities to use a "fair value based method" to account for stock-based
compensation plans and requires disclosure of the pro forma effect on net income
and on earnings per share had the accounting been adopted. SFAS No. 125,
"Accounting for Transfer and Servicing of Financial Assets and Extinguishment of
Liabilities," provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities and requires a
consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred and derecognizes liabilities when extinguished. SFAS No. 125 also
supersedes SFAS No. 122, and requires that servicing assets and liabilities be
subsequently measured by amortization in proportion to and over the period of
estimated net servicing income or loss and requires assessment for asset
impairment or increased obligation based on their fair values. SFAS No. 125
applies to transfers and extinguishments occurring after December 31, 1996, and
early or retroactive application is not permitted. Upon adoption, these
statements are not expected to have a material effect on the Company's
consolidated financial position or results of operations.
- --------------------------------------------------------------------------------
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 15 - ADOPTION OF PLAN OF CONVERSION
The Bank completed a conversion from a mutual to a stock savings bank on March
24, 1994. Simultaneous with the conversion was the formation of the Company,
incorporated in the State of Indiana. The initial issuance of shares of common
stock in the Company on March 24, 1994 was 2,302,351 shares at $10 per share,
resulting in proceeds net of costs of $22,426,665, and was accomplished through
an offering to the Bank's tax-qualified ESOP, RRPs, eligible account holders of
record, and other members of the Bank. Costs associated with the conversion and
stock offering amounted to $596,845, and were accounted for as a reduction of
the proceeds from the issuance of common stock of the Company. Upon closing of
the stock offering, the Company purchased all common shares issued by the Bank.
At the time of the conversion, the Company established a liquidation account in
an amount equal to its net worth as of the date of the latest consolidated
financial statements contained in the final offering circular used to sell the
common stock ($16,964,414 at September 30, 1993). The liquidation account will
be maintained for the benefit of eligible depositors, with deposits of at least
$50 as of the December 31, 1992 eligibility record date, who continue to
maintain their deposits in the Bank after the conversion. In the event of a
complete liquidation (and only in such an event), each eligible depositor will
be entitled to receive a liquidation distribution from the liquidation account,
in the proportionate amount of the then current adjusted balance of deposits
then held, before any liquidation distribution may be made with respect to the
stockholders. Except for the repurchase of stock and payment of dividends by the
Bank, the existence of the liquidation account will not restrict the use or
application of net worth. The Bank has not recalculated the liquidation account
balance which would currently be less than the initial $16,964,414 amount. If
the liquidation account balance was unchanged from the initial amount, the Bank
would be subject to a divided limitation of approximately $3,800,000 as of
September 30, 1996.
- --------------------------------------------------------------------------------
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 16 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
..............Year Ended September 30, 1996..............
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income $ 3,215 $ 3,400 $ 3,633 $ 3,934
Interest expense 1,834 1,932 2,050 2,241
----------- ----------- ----------- -----------
Net interest income 1,381 1,468 1,583 1,693
Provision for loan losses 8 7 8 7
----------- ----------- ----------- -----------
Net interest income after provision for loan
losses 1,373 1,461 1,575 1,686
Noninterest income 83 121 91 67
Noninterest expense 871 924 963 2,077
----------- ----------- ----------- -----------
Income before income taxes 585 658 703 (324)
Income tax expense 233 262 279 (127)
----------- ----------- ----------- ----------
Net income $ 352 $ 396 $ 424 $ (197)
=========== =========== =========== ==========
Earnings per common and common
equivalent share $ .17 $ .20 $ .22 $ (.10)
========== =========== =========== ==========
- --------------------------------------------------------------------------------
NOTE 16 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)
..............Year Ended September 30, 1995..............
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income $ 3,051 $ 3,063 $ 3,125 $ 3,145
Interest expense 1,590 1,636 1,743 1,820
----------- ----------- ----------- -----------
Net interest income 1,461 1,427 1,382 1,325
Provision for loan losses 8 8 7 7
----------- ----------- ----------- -----------
Net interest income after provision for loan
losses 1,453 1,419 1,375 1,318
Noninterest income 75 81 80 82
Noninterest expense 936 956 935 1,000
----------- ----------- ----------- -----------
Income before income taxes 592 544 520 400
Income tax expense 235 217 207 161
----------- ----------- ----------- -----------
Net income $ 357 $ 327 $ 313 $ 239
=========== =========== =========== ===========
Earnings per common and common
equivalent share $ .17 $ .16 $ .15 $ .11
========== =========== =========== ==========
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
MFB Corp. and Mishawaka Federal Savings Directors
M. Gilbert Eberhart (age 62) has served as Secretary of the Bank since
1987. He is also a dentist based in Mishawaka.
Thomas F. Hums (age 63) served as President and Chief Executive Officer
of the Bank from 1972 until September, 1995. He also served as President and
Chief Executive Officer of Mishawaka Financial from 1975 until September, 1995.
Jonathan E. Kintner (Age 53) is an optometrist based in Mishawaka.
Michael J. Marien (Age 49) is a Sales Representative with Signode
Corporation, a division of ITW.
Marian K. Torian (age 75) has served as Chairman of the Bank and of
Mishawaka Financial since 1977. She also served as a teacher with School City of
Mishawaka.
Charles J. Viater (age 41) has served as President and Chief Executive
Officer of the Bank and Mishawaka Financial since September, 1995. He previously
served as Executive Vice President for Amity Federal Bank and Chief Financial
Officer of Amity Bancshares, Inc. beginning in December, 1990.
Reginald H. Wagle (age 54) 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.
MISHAWAKA FEDERAL SAVINGS OFFICERS
Charles J. Viater Timothy C. Boenne
President and Chief Executive Officer* Vice President and
Controller
M. Gilbert Eberhart Michael J. Portolese
Secretary* Vice President
William L. Stockton, Jr.
Vice President
* Holds same position with MFB Corp.
95
SHAREHOLDER INFORMATION
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, 1996, there were approximately 900
shareholders of record and the Company estimates that, as of that date, there
were an additional 811 beneficial shareholders in "street" name. The following
table sets forth market price information for the Company's common stock for the
periods indicated.
High Low
Fiscal Quarters Ended Bid Bid
December 31, 1995 16.25 14.75
March 31, 1996 15.25 13.75
June 30, 1996 14.75 13.75
September 30, 1996 19.00 13.75
Transfer Agent and Registrar Special Counsel
Registrar and Transfer Co. Barnes & Thornburg
10 Commerce Drive 1313 Merchants Building
Cranford, New Jersey 07016 11 South Meridian Street
Indianapolis, Indiana 46204
Independent Auditors
Crowe, Chizek & Co.
330 E. Jefferson Boulevard
South Bend, Indiana 46624
Shareholder and General Inquiries
The Company is required to file an Annual Report on Form 10-K
for its fiscal year ended September 30, 1996 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
P.O. Box 528
Mishawaka, Indiana 46546
Office Locations
Main Office Branch Office Mortgage Office
121 S. Church St. 411 W. McKinley Ave. 227 S. Main St. Suite 110
Mishawaka, IN 46544 Mishawaka, IN 46545 Elkhart, IN 46516
Branch Office Branch Office
402 W. Cleveland Rd. 2427 Mishawaka Ave.
Mishawaka, IN 46545 South Bend, IN 46615
96