ANNUAL REPORT
TO SHAREHOLDERS
TABLE OF CONTENTS
Page
Letter to Shareholders 2
Selected Consolidated Financial Data 3
Management's Discussion and Analysis 4
Report of Independent Auditors 16
Consolidated Balance Sheets 17
Consolidated Statements of Income 18
Consolidated Statements of Shareholders' Equity . 19
Consolidated Statements of Cash Flows 21
Notes to Consolidated Financial Statements 23
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 MFB Financial, formerly known as
Mishawaka Federal Savings (the "Bank") from a federal mutual savings and loan
association to a federal stock savings bank in March 1994. MFB Corp. is the sole
shareholder of the Bank. MFB Corp. and the Bank (collectively referred to as the
"Company") conduct business from their main office in Mishawaka, Indiana, and
five branch locations in St. Joseph and Elkhart Counties of Indiana. The Bank
offers a variety of lending, deposit and other financial services to its retail
and commercial customers. The Bank's wholly-owned subsidiary, Mishawaka
Financial Services, Inc. ("Mishawaka Financial"), is engaged in the sale of
credit life, general fire and accident, car, home, and life insurance as agent
for the Bank's customers and the general public.
TO OUR SHAREHOLDERS:
On behalf of our employees, the Board of Directors and myself, it is a
pleasure to provide you with the 1997 Annual Report of MFB Corp. (the
"Company"), the holding company for MFB Financial (the "Bank"). In March of
1994, after the formation of MFB Corp., the Bank converted to a federal stock
savings bank and this report summarizes our third full year of operation as a
stock company.
This past year has been one of continued growth and change for our Company.
We remain committed to bringing state-of-the-art products and unparalleled
service to both consumers and small businesses in our community. The goals of
growth and diversification were the primary impetus for the first major change
that took place this year. In November, 1996 we changed the name of the Bank
from Mishawaka Federal Savings to MFB Financial. We believe our new name more
accurately describes our Bank as a full service institution offering the wide
variety of products and services necessary to grow and remain competitive. We
added investment and brokerage services, broadened commercial deposit product
offerings, established a corporate lending department and opened a new full
service facility. As we look at the financial highlights of the past year, I
believe you will agree that these changes continue to move the Company and the
Bank forward toward the achievement of our strategic goals.
1997 again saw solid balance sheet growth for our Company. The Bank's loan
portfolio grew by $48.9 million, the greatest single year of such growth in our
107 year history. Substantial contributions to this increase were made by both
the residential lending and corporate lending divisions. Our reputation as a
fast, courteous and knowledgeable lender, has allowed residential loan growth to
carry on at record levels. At the same time, the development of our small
business banking division has attracted local businesses desiring a level of
personal service that is fast disappearing in our market. We will continue to
focus attention on the small business community in an effort to further
diversify our asset mix and improve earnings.
Deposit based product offerings were enhanced as well. The emphasis on core
relationships, competitive pricing and the highest quality service to customers
has resulted in an increase in our deposit base of $12.9 million during the
year. Non-interest bearing demand accounts increased significantly as did our
certificate of deposit account base.
In addition to the notable balance sheet growth, we experienced improved
net interest income as well. Our average interest rate spread increased from
2.13% to 2.49% in just one year, contributing to an increase in net interest
income of $1.4 million for the year.
Additionally, the Company repurchased over 330,000 shares of its common
stock. This activity resulted in a reduction of the total shares outstanding,
improved the book value of the remaining outstanding shares and positively
impacted our return on equity. In addition, I am sure you are aware that our
quarterly dividend was increased to $.08 per outstanding share as well. These
events are all part of our systematic approach to enhancing the long term value
of your investment in our Company.
The following pages of this report provide more details about the past
year's performance. Management remains committed to identifying additional
opportunities to serve the financial needs of our community effectively and
profitably. These efforts will continue to grow the long term value of your
investment in a prudent, intelligent fashion. We appreciate the confidence you
have shown in MFB Corp. and will mindfully operate the Company in an effort to
reward that confidence.
Charles J. Viater
President and Chief Executive Officer
MFB CORP. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of MFB Corp. and its
subsidiary is qualified in its entirety by, and should be read in conjunction
with, the consolidated financial statements, including notes thereto, included
elsewhere in this Annual Report.
At September 30,
----------------------------------------------------
(In Thousands)
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Summary of Financial Condition:
Total assets $255,921 $225,809 $187,065 $183,753 $168,581
Loans receivable, net,
including loans held for sale 200,935 152,052 121,181 115,297 108,212
Cash and cash equivalents 9,482 1,734 7,454 6,153 20,820
Securities, including FHLB stock 42,028 68,099 53,293 56,107 16,624
Interest-bearing time deposits in other
financial institutions -- 495 1,880 3,365 20,469
Deposits 171,887 158,964 144,552 143,604 149,220
Securities sold under agreements to repurchase 389 -- -- -- --
FHLB advances 47,500 24,500 -- -- --
Shareholders' equity 33,550 37,599 37,999 37,705 16,964
Years Ended September 30,
--------------------------------------------------------
(In Thousands)
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Summary of Operating Results:
Interest income $ 17,685 $ 14,182 $ 12,383 $ 11,545 $ 11,931
Interest expense 10,157 8,057 6,788 6,019 6,559
-------- -------- -------- -------- --------
Net interest income 7,528 6,125 5,595 5,526 5,372
Provision for loan losses 30 30 30 30 192
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 7,498 6,095 5,565 5,496 5,180
Noninterest income
Insurance commissions 134 127 128 127 126
Brokerage commissions 24 -- -- -- --
Net gain from sales of securities 6 3 -- -- 10
Other 261 232 189 151 159
-------- -------- -------- -------- --------
Total noninterest income 425 362 317 278 295
Noninterest expense
Salaries and employee benefits 2,772 2,153 2,336 1,969 1,600
Occupancy and equipment expense 580 422 406 379 378
SAIF deposit insurance premium 147 1,291 332 341 280
Other expense 1,100 969 753 666 621
-------- -------- -------- -------- --------
Total noninterest expense 4,599 4,835 3,827 3,355 2,879
Income before income taxes and cumulative
effect of change in accounting principles 3,324 1,622 2,055 2,419 2,596
Income tax expense 1,322 647 819 887 1,121
-------- -------- -------- -------- --------
Income before cumulative effect of change
in accounting principles 2,002 975 1,236 1,532 1,475
-------- -------- -------- -------- --------
Cumulative effect of change in
accounting for income taxes -- -- -- -- (188)
Net income $ 2,002 $ 975 $ 1,236 $ 1,532 $ 1,287
======== ======== ======== ======== ========
Supplemental Data:
Return on assets (1) .84% .49% .67% .86% .77%
Return on equity (2) 6.02 2.61 3.25 5.60 7.75
Interest rate spread (3) 2.49 2.13 2.12 2.57 2.85
Net yield on average
interest-earning assets (4) 3.24 3.11 3.10 3.18 3.28
Dividend pay-out ratio (5) 27.59 12.24 -- -- --
Net interest income to
operating expenses (6) 163.70 126.67 146.20 164.71 186.59
Equity-to-assets (7) 13.11 16.65 20.31 20.52 10.06
Average interest-earning assets to
average interest-bearing
liabilities 117.14 123.81 126.12 117.61 110.73
Non-performing assets to total assets .10 .09 .17 .07 .16
Non-performing loans to total loans .13 .13 .25 .09 .21
Allowance for loan losses to total loans, net,
including loans held for sale .18 .22 .26 .24 .23
Allowance for loan losses to
non-performing loans 141.76 171.72 100.65 261.68 112.11
Earnings per share (8) $ 1.16 $ .49 $ .59 $ .43 $--
Earnings per share fully diluted (8) $ 1.14 $ .48 $ .59 $ .43 $--
Dividends declared per share $ .32 $ .06 $-- $-- $--
Book value per share $ 20.33 $ 19.05 $ 18.29 $ 17.24 $ --
Number of offices 6 5 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, fee structures, and level of
personal income and savings. Lending activities are influenced by the demand for
and supply of housing lenders, the availability and cost of funds and various
other issues. Sources of funds for lending activities of the Bank include
deposits, borrowings, payments on loans and income provided from operations. The
Company's earnings are primarily dependent upon the Bank's net interest income,
the difference between interest income and interest expense.
Interest income is a function of the balances of loans and investments
outstanding during a given period and the yield earned on such loans and
investments. Interest expense is a function of the amount of deposits and
borrowings outstanding during the same period and interest rates paid on such
deposits and borrowings. The Company's earnings are also affected by the Bank's
provisions for loan and real estate losses, service charges, income from
subsidiary activities, operating expenses and income taxes.
ASSET /LIABILITY MANAGEMENT
The Company is subject to interest rate risk to the degree that its
interest-bearing liabilities, primarily deposits with short and medium-term
maturities, mature or reprice at different rates than its interest-earning
assets. Although having liabilities that mature or reprice less frequently on
average than assets will be beneficial in times of rising interest rates, such
an asset/liability structure will result in lower net income during periods of
declining interest rates, unless offset by other factors such as noninterest
income.
A key element of the Company's asset/liability plan is to protect net
earnings from changes in interest rates by managing the maturity or repricing
mismatch between its interest-earning assets and rate-sensitive liabilities. The
Company's one year interest rate gap has been between a negative 150.48% and a
positive 9.14% at the end of each year from September 30, 1993, to September 30,
1997. This assumes that deposit accounts reprice based on assumptions provided
after the following table. The Company's one year interest rate gap was a
negative 150.48% as of September 30, 1997. 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, 1997, (the most recently available data),
after a 200 basis point rate change, the Bank's NPV ratio was 10.49%. Management
and the Board of Directors review the OTS measurements on a quarterly basis to
determine whether the Company's interest rate exposure is within the limits
established by the Board of Directors in the Company's interest rate risk
policy.
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, 1997. Maturity and repricing dates have been projected by applying
the assumptions, set forth after the table, 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, 1997
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 $ 8,427 $ 6,764 $ 28,737 $ 47,866 $ 24,645 $ 22,925
Fixed rate mortgages 1,452 2,278 972 711 1,284 1,516
Equity Loans 260 -- -- 5 989 5,798
Financing leases -- -- -- -- -- 325
Commercial loans 2,466 -- 50 1,899 3,821 476
Consumer loans 47 34 12 -- -- --
Securites 1,832 1,359 1,346 3,615 12,523 3,374
Mortgage-backed securities -- -- -- 3,508 -- --
Interest-earning time deposits 6,576 -- -- -- -- --
Stock in FHLB of Indianapolis -- -- -- -- -- --
Deferred loan fees (15) (16) (44) (9) (10) (16)
Loans in process (33) -- (1) (25) (51) (6)
21,012 10,419 31,072 57,570 43,201 34,392
Interest-bearing Liabiliites
Certificates of deposit 35,706 19,917 40,413 33,508 1,886 279
Savings acoounts 11,257 -- -- -- -- --
NOW and money market accounts 26,872 -- -- -- -- --
FHLB advances 2,000 6,000 14,000 14,500 17,000 --
389 -- -- -- -- --
76,226 25,917 54,413 48,008 12,886 279
Excess (deficiency) of interest-earning
assets over interest bearing liabilities $(55,214) $(15,498) $(23,341) $ 9,562 $ 30,315 $ 34,113
-------- -------- -------- -------- -------- --------
Cumulative excess (deficiency) of
interest-earning assets over interest
bearing liabilities $(55,214) $(70,712) $(94,053) $(84,491) $(54,176) $(20,063)
-------- -------- -------- -------- -------- --------
Cumulative interest rate gap to total
interest-earning assets -262.77% -224.98% -150.48% -70.37% $ 33.18% -10.15%
Off balance sheet assets (1) $ 23,840 $ 6,352 $ 218 $ 25 $ 126 $ 6
(1) Includes loan committments and loans in process.
At September 30, 1997
maturing or Repricing Within
-------------------------------------
10 to
20 Over 20
Years Years Total
----- ----- -----
Adjustable rate mortgages $ 217 $ 84 $ 139,565
Fixed rate mortgages 22,943 14,824 45,980
Equity Loans 105 20 7,177
Financing leases -- -- 325
Commercial loans 121 -- 8,833
Consumer loans -- 3 96
Securites -- -- 24,049
Mortgage-backed securities 2,073 9,998 15,579
Interest-earning time deposits -- -- 6,576
Stock in FHLB of Indianapolis -- 2,400 2,400
Deferred loan fees (243) (303) (653)
Loans in process (1) -- (117)
25,215 27,029 249,920
Interest-bearing Liabiliites
Certificates of deposit -- -- 131,711
Savings acoounts -- -- 11,257
NOW and money market accounts -- -- 26,872
FHLB advances -- -- 47,500
-- -- 389
-- -- 217,729
Excess (deficiency) of interest-earning
assets over interest bearing liabilities $ 25,215 $ 27,029 $ 32,185
--------- --------- ---------
Cumulative excess (deficiency) of
interest-earning assets over interest
bearing liabilities $ 5,152 $ 32,181 $ 32,181
--------- --------- ---------
Cumulative interest rate gap to total
interest-earning assets 2.31% 12.88% 12.88%
Off balance sheet assets (1) $ 1 $-- $ 30,569
- -----------
(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
30,1997, these loans totaled $108.6 million, or 53.7% of the Bank's total loan
portfolio. In August 1996 the Bank began originating adjustable rate mortgage
loans using the One Year Treasury Index, and, at September 30, 1997, these loans
totaled $31.1 million, or 15.4% of the Bank's total loan portfolio. 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:
1997 1996 1995
Average Average Average
Outstanding Outstanding Outstanding
Balance Balance Balance
------- ------- -------
Assets: (In thousands)
Interest-earning assets:
Interest-bearing deposits $ 1,856 $ 6,709 $ 7,995
Securities (1) $ 30,765 35,392 39,841
Mortgage-backed securities (1) 22,222 19,717 12,558
Loans receivable (2) 175,761 133,670 118,735
Stock in FHLB of Indianapolis 1,783 1,303 1,223
--------- --------- ---------
Total interest-earning assets 232,387 196,791 180,352
Non-interest earning assets, net
of allowance for loan losses 4,663 3,792 3,517
--------- --------- ---------
Total assets $ 237,050 $ 200,583 $ 183,869
========= ========= =========
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts $ 10,359 $ 9,746 $ 9,774
NOW and money market accounts 26,770 26,006 26,672
Certificates of deposit 126,202 113,570 106,556
FHLB borrowings 35,057 9,625 --
--------- --------- ---------
Total interest-bearing liabilities 198,388 158,947 143,002
Other liabilities 5,388 4,229 2,838
--------- --------- ---------
Total liabilities 203,776 163,176 145,840
Shareholders' equity
Common stock 14,015 19,064 20,527
Treasury stock (3)
Retained earnings 20,209 19,718 19,117
Less common stock acquired by:
Employee stock ownership plan (790) (1,007) (1,208)
Recognition and retention plans (157) (235) (407)
Unrealized gain (loss) on securities
available for sale (100) (133) --
--------- --------- ---------
Total shareholders' equity $ 33,274 37,407 38,029
--------- --------- ---------
Total liabilities and shareholders' equity $ 237,050 $ 200,583 $ 183,869
========= ========= =========
- ------------
(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,
1997 1996 1995
---- ---- ----
Average interest rate earned on:
Interest-earning deposits 5.17% 6.29% 6.03%
Securities(l) 6.86% 6.17% 5.77%
Mortage-backed securities(l) 6.46% 6.15% 5.51%
Loans receivable 7.91% 7.67% 7.42%
Stock in FHLB of Indianapolis 8.08% 7.90% 7.60%
Total interest-earning assets 7.61% 7.20% 6.87%
Average interst rate of:
Savings accounts 2.68% 2.77% 2.80%
NOW and money market accounts 2.89% 3.12% 3.24%
Certificates of depoist 5.65% 5.68% 5.30%
FHLB advances 5.63% 5.50% ---
Total interst-bearing liabilities 5.12% 5.07% 4.75%
Interst rate spread (2) 2.49% 2.13% 2.12%
Net yield on interest-eaming assets (3) 3.24% 3.11% 3.10%
- ---------------
(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, 1997 compared
to year ended September 30, 1996
Interest-earning assets
Interest-bearing deposits $ (326) $ (64) $ (262)
Securities (74) 230 (304)
Mortgage-backed securities 211 64 147
Loans receivable 3,651 332 3,319
Stock in FHLB of Indianapolis 41 2 39
3,503 564 2,939
Total
Interest-bearing liabilities
Savings accounts 8 (9) 17
NOW and money market accounts (38) (61) 23
Certificates of deposit 687 (27) 714
FHLB borrowings 1,443 15 1,428
Total 2,100 (82) 2,182
Change in net interest income $ 1,403 $ 646 $ 757
======= ======= =======
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
=========== =========== ============
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30,1997 AND SEPTEMBER 30, 1996
Consolidated net income for the Company for the year ended September
30,1997 was $2.0 million compared to $975,000 for the same period in 1996. The
increase of $1.0 million resulted primarily from a $1.4 million increase in net
interest income and a $237,000 decrease in noninterest expense, partially offset
by a $675,000 increase in income tax expense. For the period ended September 30,
1996, income levels were significantly reduced as a result of a one time special
assessment to recapitalize the Savings Association Insurance Fund ("SAIF"). This
non-recurring expense was approximately $577,000 on an after tax basis, and net
income for the year ended September 30, 1996 would have amounted to $1,552,000
had this special assessment not been incurred.
The increase in net interest income was due to increases in both the volume
of interest-earning assets and higher rates earned on those assets, partially
offset by increases in the volume of interest-bearing liabilities. First
mortgage loan receivables increased by approximately $38.6 million and
commercial and consumer loan receivables by approximately $10.6 million from
September 30, 1996 to September 30, 1997. The yield on total interest-earning
assets also increased from 7.20% to 7.61% in 1997 while the average rate paid on
interest-bearing liabilities increased from 5.07% to 5.12% during the same
period. As a result, the interest rate spread increased 36 basis points from
2.13% in 1996 to 2.49% in 1997.
As of September 30, 1997 net loans, including loans held for sale, were
$200.9 million, an increase of $48.9 million from the $152.1 million as of
September 30, 1996. Substantial marketing efforts were utilized in the past year
to capitalize on the Bank's reputation as a quality local residential lender
providing fast and knowledgeable service. This approach led to gross mortgage
loan increases of $38.6 million , an increase of 26.2% for the year ended
September 30, 1997. Also, although a limited number of small commercial loans
were made in 1996, substantial efforts were put forth during the past year to
fully develop the small business banking division in our community. As a result,
gross commercial loans increased $8.0 million from September 30, 1996 to
September 30, 1997.
Total deposits increased $12.9 million to $171.9 million as of September
30, 1997 from $159.0 million as of September 30, 1996. Federal Home Loan Bank
advances and other short term borrowings also increased from $24.5 million at
September 30, 1996 to $47.9 million as of September 30, 1997.
Cash and cash equivalents increased $7.7 million from $1.7 million as of
September 30, 1996 to $9.4 million as of September 30, 1997. Net cash provided
by financing activities and operating activities amounted to $29.4 million and
$1.3 million, respectively, and was partially offset by net cash used in
investing activities of $23.0 million.
During the year ended September 30, 1996, the Company adopted a capital
leveraging strategy that involved the purchase of mortgage related and other
securities funded primarily with Federal Home Loan Bank ("FHLB") advances. This
leveraging portfolio represented $22.7 million of the total securities available
for sale at September 30, 1997 compared to $26.6 million at September 30, 1996.
As of September 30, 1997, the total securities portfolio amounted to $39.6
million, a decrease of $27.2 million from $66.8 million at September 30, 1996.
The total securities portfolio decrease consisted of a decrease in the
leveraging portfolio of $3.9 million and a decrease in the remainder of the
securities portfolio of $23.3 million, and was the result of securities maturing
totaling $27.9 million and principal payments of mortgage-backed securities of
$2.9 million offset by net purchases of securities available for sale of $3.4
million.
The $12.9 million increase in deposits, the $23.0 million increase in FHLB
advances, and the $27.2 million decrease in the securities portfolio were
primarily used to fund the $48.9 million increase in net loans and the $7.7
million increase in cash and cash equivalents.
Total liabilities increased $34.2 million from $188.2 million as of
September 30, 1996 to $222.4 million as of September 30, 1997. This increase was
primarily due to the $12.9 million increase in deposits and the $23.0 million
increase in FHLB advances.
Total shareholders' equity decreased $4.0 million from $37.6 million as of
September 30, 1996 to $33.6 million as of September 30, 1997. This decrease was
primarily attributable to the repurchase of the Company's common stock during
the year in the amount of $6.4 million and the payment of $554,000 in cash
dividends during the year, partially offset by net income of $2.0 million for
the year ended September 30, 1997.
The book value of MFB Corp. Common stock, based on the actual number of
shares outstanding at each period, increased from $19.05 as of September 30,
1996 to $20.33 as of September 30, 1997.
Interest income increased $3.5 million during the year ended September 30,
1997 compared to the same period one year ago. The increase was primarily
related to increased volumes of loans receivable and an increase in the average
rate earned on these assets. Interest expense increased $2.1 million during the
most recent twelve month period primarily as a result of increased volumes of
certificates of deposit and FHLB advances. Net interest income increased $1.4
million for the year ended September 30, 1997 compared to the year ended
September 30, 1996.
Noninterest income increased from $362,000 for the year ended September 30,
1996 to $425,000 for the twelve months ended September 30, 1997. The increase
was primarily due to increased fee income related to demand deposit accounts and
brokerage commissions.
Noninterest expense decreased to $4.6 million for the year ended September
30, 1997 from $4.8 million for the same period last year. This decrease is
primarily related to the one time special assessment of $955,000 incurred in the
prior year to recapitalize the SAIF, offset by increased compensation expenses,
expenses related to the Bank's name change which took effect November 1, 1996,
and expenses incurred with the opening of a new full service branch facility on
June 6, 1997. To operate the new full service branch facility and attain the
substantial loan growth in 1997, the Bank's staff increased by 15 employees
during the year. This is the primary reason for the 29% increase in salaries and
employee benefit expense from $2.2 million for the year ended September 30, 1996
to $2.8 million for the year ended September 30, 1997.
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 demand 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
advances 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 in 1995. 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 1996 fiscal year, as compared
to 1995, primarily as a result of increased volumes of certificates of deposit
and FHLB advances. Increased rates paid on certificates of deposit also
contributed to the interest expense increase. Net interest income increased
$530,000 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.
Noninterest 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.
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
Liquidity relates primarily to the Company's ability to fund loan demand,
meet deposit customers' withdrawal requirements and provide for operating
expenses. Assets used to satisfy these needs consist of cash, deposits with
other financial institutions, overnight interest-bearing deposits in other
financial institutions and securities, excluding FHLB stock. These assets are
commonly referred to as liquid assets.
A standard measure of liquidity for savings associations is the ratio of
cash and eligible investments to a certain percentage of net withdrawable
savings and borrowings due within one year. The minimum required ratio is
currently set by OTS regulation at 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, 1997, the Bank's liquidity ratio was 16.98% and the short-term
liquidity ratio was 7.06%. 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, 1997, 1996 and 1995.
Liquid assets totaled $49.1 million as of September 30, 1997 compared to
$69.0 million as of September 30, 1996 and $61.4 million as of September 30,
1995. The $19.9 million decrease in liquidity from September 30, 1996 to
September 30, 1997 was primarily due to a $27.1 million decrease in securities,
offset by a $7.7 million increase in cash and interest-bearing deposits in other
financial institutions. Management believes the liquidity level of $49.1 million
as of September 30, 1997 is sufficient to meet anticipated liquidity needs.
Liquidity levels increased $7.6 million from September 30, 1995 to
September 30, 1996 due primarily to a $14.7 million increase in securities,
partially offset by a $5.4 million decrease in interest-bearing demand deposits
in other financial institutions.
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 advances. As of September 30, 1997, total FHLB borrowings
amounted to $47.5 million, $23.5 million of which were used as part of this
strategy. The remaining $24 million was used primarily to fund loan portfolio
growth. The Bank had commitments to fund loan originations with borrowers
totaling $30.6 million at September 30, 1997. In the opinion of management, the
Company has sufficient cash flow and other cash resources to meet current and
anticipated loan funding commitments, deposit customer withdrawal requirements
and operating expenses. 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, 1997, 1996 and 1995 follows.
During the year ended September 30, 1997, net cash and cash equivalents
increased $7.7 million from $1.7 million at September 30, 1996 to $9.4 million
at September 30, 1997.
The Company experienced a net increase in cash from operating activities of
$1.3 million during the year that was primarily attributable to net income as
adjusted for accrual basis accounting. The $23.0 million net decrease in cash
from investing activities for the year ended September 30, 1997 was primarily
related to the $48.9 million increase in net loans and the $29.7 million
purchase of securities and FHLB stock, offset by sales and maturities of
securities totaling $53.1 million and $2.9 million of mortgage-backed securities
principal payments.
Financing activities generated net cash of $29.4 million for the year ended
September 30, 1997. The net cash was provided primarily from $23.0 million in
net new FHLB advances and net deposit increases of $12.9 million, partially
offset by the use of $6.4 million to repurchase the Company's stock and $554,000
in cash dividend payments during the year.
For the year ended September 30, 1996, net cash decreased $5.8 million from
$7.5 million at September 30, 1995 to $1.7 million at September 30, 1996. Net
cash from operating activities totaled $2.2 million.
The Company experienced a $44.9 million net decrease in cash from investing
activities for the year ended September 30, 1996. This decrease in cash was
primarily related to the net increase in loans of $30.9 million and net
purchases of securities of $15.2 million.
Financing activities generated net cash of $37.0 million for the year ended
September 30, 1996. The net cash was provided primarily from $24.5 million in
new FHLB borrowings and a $14.4 million increase in net deposits, partially
offset by the use of $1.5 million to repurchase the Company's stock during the
year.
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, 1997 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
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities," was issued in 1996. It revises the
accounting for transfers of financial assets, such as loans and securities, and
for distinguishing between sales and secured borrowings. It became effective for
some transactions occurring after December 31, 1996, and will be effective for
others in 1998. The impact of partial adoption in 1997 was not material to the
1997 consolidated financial statements and the impact of the complete adoption
in 1998 is also not expected to be material to the consolidated financial
statements.
Also, in March 1997, the accounting requirements for calculating earnings
per share were revised by SFAS No. 128, "Earnings Per Share." Basic earnings per
share for the quarter ending December 31, 1997 and later will be calculated
solely on average common shares outstanding. Diluted earnings per share will
reflect the potential dilution of stock options and other common stock
equivalents. All prior calculations will be restated to be comparable to the new
methods. As the Company has dilution from stock options, the new calculation
methods will increase basic earnings per share over what otherwise would have
been reported as primary earnings per share, while there will be little effect
on fully diluted earnings per share.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income". This Statement establishes standards
for reporting and display of comprehensive income and its components (revenue,
expenses, gains and losses) in a full set of general-purpose financial
statements. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Income tax effects must also be shown. This
Statement is effective for fiscal years beginning after December 15, 1997. The
adoption of SFAS No. 130 is not expected to have a material impact on the
results of operations or financial condition of the Company.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This Statement is effective for financial statements for periods beginning after
December 15, 1997. The adoption of SFAS No. 131 is not expected to have a
material impact on the results of operations or financial condition of the
Company.
IMPACT OF INFLATION
The audited consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles. These
principles require measurement of financial position and operating results in
terms of historical dollars (except for securities available for sale which are
reported at fair market value and loans held for sale which are reported at the
lower of cost or estimated market value in the aggregate), without considering
changes in the relative purchasing power of money over time due to inflation.
The primary assets and liabilities of the Bank are monetary in nature. As a
result, interest rates have a more significant impact on the Company's
performance than the effects of general levels of inflation. Interest rates,
however, do not necessarily move in the same direction or with the same
magnitude as the price of 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, 1997 and 1996 and the related consolidated statements of
income, shareholders' equity and cash flows for the years ended September 30,
1997, 1996 and 1995. 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, 1997 and 1996, and the results of its operations and its cash
flows for the years ended September 30, 1997, 1996 and 1995 in conformity with
generally accepted accounting principles.
Crowe, Chizek and Company LLP
South Bend, Indiana
November 3, 1997
MFB CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and 1996
1997 1996
------------- -------------
ASSETS
Cash and due from financial institutions $ 2,905,849 $ 1,734,388
Interest-bearing deposits in other financial
institutions - short-term 6,576,499 --
------------- -------------
Total cash and cash equivalents 9,482,348 1,734,388
Interest - bearing time deposits in
other financial institutions -- 495,000
Securities available for sale 39,628,414 66,762,558
Federal Home Loan Bank (FHLB) stock, at cost 2,400,000 1,336,100
Loans held for sale, net of
unrealized losses of $-0- in 1997 12,671,186 --
Loans receivable, net of allowance for loan losses
of $370,000 in 1997 and $340,000 in 1996 188,264,198 152,052,092
Accrued interest receivable 718,427 818,014
Premises and equipment, net 2,612,793 1,969,264
Other assets 143,445 641,707
------------- -------------
Total assets $ 255,920,811 $ 225,809,123
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand deposits $ 2,046,702 $ 1,942,145
Savings, NOW and MMDA deposits 38,130,008 34,779,548
Other time deposits 131,710,557 122,242,796
------------- -------------
Total deposits 171,887,267 158,964,489
Securities sold under agreements to repurchase 388,920 --
FHLB advances 47,500,000 24,500,000
Advances from borrowers for taxes and insurance 1,854,248 1,864,427
Accrued expenses and other liabilities 740,360 2,880,838
------------- -------------
Total liabilities 222,370,795 188,209,754
Shareholders' equity
Common stock, no par value, 5,000,000 shares authorized;
shares issued: 1,689,417 - 1997, 1,973,980 - 1996;
shares outstanding: 1,650,567 - 1997, 1,973,980 - 1996 13,108,171 18,316,651
Retained earnings - substantially restricted 22,037,441 20,588,797
Net unrealized appreciation (depreciation) on
securities available for sale, net of tax of $48,017 in
1997 and $(144,252) in 1996 73,208 (219,928)
Unearned Employee Stock Ownership Plan (ESOP) shares (664,610) (893,651)
Unearned Recognition and Retention Plan (RRP) shares (115,500) (192,500)
Treasury Stock, 38,850 common shares, at cost (888,694) --
------------- -------------
Total shareholders' equity 33,550,016 37,599,369
------------- -------------
Total liabilities and shareholders' equity $ 255,920,811 $ 225,809,123
============= =============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part
of these consolidated financial statements.
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1997, 1996 and 1995
1997 1996 1995
----------- ----------- -----------
Interest income
Loans receivable, including fees
Mortgage loans $12,945,694 $ 9,956,394 $ 8,780,654
Consumer and other loans 550,905 182,177 35,433
Financing leases and commercial loans 400,120 107,321 --
Securities - taxable 3,692,136 3,514,380 3,085,427
Other interest-earning assets 95,971 421,984 482,044
----------- ----------- -----------
Total interest income 17,684,826 14,182,256 12,383,558
Interest expense
Deposits 8,181,489 7,528,321 6,788,376
Securities sold under agreements
to repurchase 4,138 -- --
FHLB advances 1,971,537 529,025 --
----------- ----------- -----------
Total interest expense 10,157,164 8,057,346 6,788,376
Net interest income 7,527,662 6,124,910 5,595,182
Provision for loan losses 30,000 30,000 30,000
----------- ----------- -----------
Net interest income after provision
for loan losses 7,497,662 6,094,910 5,565,182
Noninterest income
Insurance commissions 133,870 126,819 127,766
Brokerage Commissions 23,604 -- --
Net realized gains from sales of securities
available for sale 6,098 3,731 --
Other income 261,171 231,766 189,648
----------- ----------- -----------
Total noninterest income 424,743 362,316 317,414
Noninterest expense
Salaries and employee benefits 2,772,154 2,152,656 2,336,230
Occupancy and equipment expense 579,327 422,388 405,998
SAIF deposit insurance premium 147,121 1,291,288 332,175
Other expense 1,099,972 968,951 752,635
----------- ----------- -----------
Total noninterest expense 4,598,574 4,835,283 3,827,038
----------- ----------- -----------
Income before income taxes 3,323,831 1,621,943 2,055,558
Income tax expense 1,321,630 646,793 819,452
----------- ----------- -----------
Net income $ 2,002,201 $ 975,150 $ 1,236,106
=========== =========== ===========
Net income per common and common
equivalent shares
Primary $ 1.16 $ .49 $ .59
Fully diluted 1.14 .48 .59
- --------------------------------------------------------------------------------
The accompanying notes are an integral part
of these consolidated financial statements.
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended September 30, 1997, 1996 and 1995
Net Unrealized
Appreciation
(Depreciation)
on Securities
Available
Retained For Sale, Unearned Unearned
Common Stock Earnings Net of Tax ESOP Shares RRP Shares
------------ -------- ---------- ----------- ----------
Balance at September 30, 1994 $21,048,740 $ 18,495,980 $- $ (1,300,000) $ (540,052)
Purchase and retirement of 109,361
shares of common stock (1,530,486) -- -- -- --
Effect of contribution to fund ESOP -- -- -- 200,000 --
Market adjustment of 22,516 ESOP shares
committed to be released 99,592 -- -- -- --
Amortization of RRP contribution -- -- -- -- 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 19,656,664 19,732,086 -- (1,100,000) (290,152)
Purchase and retirement of 103,893
shares of common stock (1,499,024) -- -- -- --
Net unrealized appreciation on
securities available for sale,
net of tax $77,821 from transfer of securities -- -- 118,648 -- --
Cash dividends declared - $.06 per share -- (118,439) -- 6,349 --
Effect of contribution to fund ESOP -- -- -- 200,000 --
Market adjustment of 21,515 ESOP
shares committed to be released 117,247 -- -- -- --
Amortization of RRP contribution -- -- -- -- 97,652
Tax benefit related to employee stock plans 41,764 -- -- -- --
Net change in unrealized appreciation (depreciation)
on securities available for sale,
net of tax of ($222,073) -- -- (338,576) -- --
Net income for the year ended September 30, 1996 -- 975,150 -- -- --
----------- ------------ -------- ------------ ------------
Balance at September 30, 1996 18,316,651 20,588,797 (219,928) (893,651) (192,500)
Total
Treasury Shareholders'
Stock Equity
----- ------
Balance at September 30, 1994 $- $ 37,704,668
Purchase and retirement of 109,361
shares of common stock - (1,530,486)
Effect of contribution to fund ESOP - 200,000
Market adjustment of 22,516 ESOP shares
committed to be released - 99,592
Amortization of RRP contribution - 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 - 37,998,598
Purchase and retirement of 103,893
shares of common stock - (1,499,024)
Net unrealized appreciation on
securities available for sale,
net of tax $77,821 from transfer of securities - 118,648
Cash dividends declared - $.06 per share - (112,090)
Effect of contribution to fund ESOP - 200,000
Market adjustment of 21,515 ESOP
shares committed to be released - 117,247
Amortization of RRP contribution - 97,652
Tax benefit related to employee stock plans - 41,764
Net change in unrealized appreciation (depreciation
on securities available for sale,
net of tax of ($222,073) - (338,576)
Net income for the year ended September 30, 1996 - 975,150
---- -----------
Balance at September 30, 1996 - 37,599,369
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended September 30, 1997, 1996 and 1995
Net Unrealized
Appreciation
(Depreciation)
on Securities
Available
Retained For Sale, Unearned
Common Stock Earnings Net of Tax ESOP Shares
------------ ------------ ------------ ------------
Balance at September 30, 1996 $ 18,316,651 $ 20,588,797 $ (219,928) $ (893,651)
Purchase and retirement of 288,063 shares of common stock (5,381,427) -- -- --
Purchase of 45,000 shares of treasury stock -- -- -- --
Stock option exercise-issuance of 3,500 common shares 35,000 -- -- --
Stock option exercise-issuance of 6,150 shares of treasury stock (79,181) -- -- --
Cash dividends declared - $ .32 per share -- (553,557) -- 29,041
Effect of contribution to fund ESOP -- -- -- 200,000
Market adjustment of 23,276 ESOP shares committed to be released 188,153 -- -- --
Amortization of RRP contribution -- -- -- --
Tax benefit related to employee stock plans 28,975 -- -- --
Net change in unrealized appreciation (depreciation) on securities
available for sale, net of tax of $192,269 -- -- 293,136 --
Net income for the year ended September 30, 1997 -- 2,002,201 -- --
------------ ------------ ------------ ------------
Balance at September 30, 1997 $ 13,108,171 $ 22,037,441 $ 73,208 $ (664,610)
============ ============ ============ ============
Total
Unearned Treasury Shareholders'
RRP Shares Stock Equity
------------ ------------ ------------
Balance at September 30, 1996 $ (192,500) $- $ 37,599,369
Purchase and retirement of 288,063 shares of common stock -- -- (5,381,427)
Purchase of 45,000 shares of treasury stock -- (1,029,375) (1,029,375)
Stock option exercise-issuance of 3,500 common shares -- -- 35,000
Stock option exercise-issuance of 6,150 shares of treasury stock -- 140,681 61,500
Cash dividends declared - $ .32 per share -- -- (524,516)
Effect of contribution to fund ESOP -- -- 200,000
Market adjustment of 23,276 ESOP shares committed to be released -- -- 188,153
Amortization of RRP contribution 77,000 -- 77,000
Tax benefit related to employee stock plans -- -- 28,975
Net change in unrealized appreciation (depreciation) on securities
available for sale, net of tax of $192,269 -- -- 293,136
Net income for the year ended September 30, 1997 -- -- 2,002,201
------------ ------------ ------------
Balance at September 30, 1997 $ (115,500) $ (888,694) $ 33,550,016
============ ============ ============
- --------------------------------------------------------------------------------
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, 1997, 1996 and 1995
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities
Net income $ 2,002,201 $ 975,150 $ 1,236,106
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization, net of
accretion 473,203 272,595 315,899
Amortization of RRP contribution 77,000 97,652 249,900
Provision for loan losses 30,000 30,000 30,000
Net realized gains from sales of
securities available for sale (6,098) (3,731) --
Market adjustment of ESOP shares
committed to be released 188,153 117,247 99,592
ESOP expense 200,000 200,000 200,000
Net change in:
Accrued interest receivable 99,587 94 (70,836)
Other assets 498,262 (44,501) (301,900)
Accrued expenses and other liabilities (2,303,772) 586,591 2,050,282
------------ ------------ ------------
Net cash from operating activities 1,258,536 2,231,097 3,809,043
Cash flows from investing activities
Net change in interest-bearing time
deposits in other financial institutions 495,000 1,385,000 1,485,000
Net change in loans receivable (48,913,292) (30,900,930) (5,914,327)
Proceeds from:
Sales of securities available for sale 25,186,766 10,212,124 --
Principal payments of mortgage-backed
and related securities 2,938,521 2,280,597 1,283,272
Maturities of securities available for sale 27,877,752 16,697,252 --
Maturities of securities held to maturity -- 4,300,000 14,350,000
Purchase of:
Securities available for sale (28,634,913) (48,218,517) --
Securities held to maturity -- (500,000) (12,910,926)
FHLB stock (1,063,900) (65,300) (95,300)
Premises and equipment, net (859,211) (137,440) (244,856)
------------ ------------ ------------
Net cash from investing activities (22,973,277) (44,947,214) (2,047,137)
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1997, 1996 and 1995
1997 1996 1995
Cash flows from financing activities
Purchase of MFB Corp. common stock $ (6,410,802) $ (1,499,024) $ (1,530,486)
Net change in deposits 12,922,778 14,412,719 947,319
Net change in securities sold under
agreements to repurchase 388,920 -- --
Proceeds from FHLB advances 66,735,000 24,500,000 --
Repayment of FHLB advances (43,735,000) -- --
Proceeds from exercise of stock options 96,500 -- --
Net change in advances from
borrowers for taxes and insurance (10,179) (305,151) 122,579
Cash dividends paid (524,516) (112,090) --
------------ ------------ ------------
Net cash from financing activities 29,462,701 36,996,454 (460,588)
------------ ------------ ------------
Net change in cash and cash equivalents 7,747,960 (5,719,663) 1,301,318
Cash and cash equivalents at beginning of year 1,734,388 7,454,051 6,152,733
------------ ------------ ------------
Cash and cash equivalents at end of year $ 9,482,348 $ 1,734,388 $ 7,454,051
============ ============ ============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 10,113,767 $ 7,988,256 $ 6,786,274
Income taxes 868,000 974,755 883,000
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 --
Loans receivable to loans held for sale 12,671,186 -- --
- --------------------------------------------------------------------------------
The accompanying notes are an integral part
of these consolidated financial statements.
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial statements
include the accounts of MFB Corp., Inc. and its wholly-owned subsidiary
(together referred to as "the Company"), MFB Financial (the "Bank"), a federal
stock savings bank, and Mishawaka Financial Services, Inc., a wholly-owned
subsidiary of the Bank. Mishawaka Financial Services, Inc. is engaged in the
sale of credit life, general fire and accident, car, home and life insurance as
agent for the Bank's customers and the general public. All significant
intercompany transactions and balances are eliminated in consolidation.
Nature of Business and Concentrations of Credit Risk: The primary source of
income for the Company results from granting commercial and residential real
estate loans in Mishawaka and the surrounding area. Loans secured by real estate
mortgages comprise approximately 96% of the loan portfolio at September 30, 1997
and are primarily secured by residential mortgages. The Company operates
primarily in the banking industry which accounts for more than 90% of its
revenues, operating income and assets.
Use of Estimates In Preparing Financial Statements: The preparation of
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period, as well as the
disclosures provided. Areas involving the use of estimates and assumptions in
the accompanying financial statements include the allowance for loan losses,
fair values of securities and other financial instruments, determination and
carrying value of loans held for sale, determination and carrying value of
impaired loans, the value of mortgage servicing rights, the value of stock
options, the realization of deferred tax assets, and the determination of
depreciation of premises and equipment recognized in the Company's financial
statements. Actual results could differ from those estimates. Estimates
associated with the allowance for loan losses and the fair values of securities
and other financial instruments are particularly susceptible to material change
in the near term.
Cash and Cash Equivalents: For purposes of reporting cash flows, cash and cash
equivalents is defined to include the Company's cash on hand, due from financial
institutions and short-term interest-bearing deposits in other financial
institutions. The Company reports net cash flows for customer loan transactions,
deposit transactions, short term borrowings having an original maturity of 90
days or less, advances from borrowers for taxes and insurance, and
interest-bearing time deposits in other financial institutions.
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported separately in shareholders'
equity, net of tax. Securities are classified as trading when held for short
term periods in anticipation of market gains, and are carried at fair value.
Securities are written down to fair value when a decline in fair value is not
temporary.
Gains and losses on the sale of securities are determined using the specific
identification method based on amortized cost and are reflected in results of
operations at the time of sale. Interest and dividend income, adjusted by
amortization of purchase premium or discount over the estimated life of the
security using the level yield method, is included in earnings.
Loans Held for Sale: Mortgage loans intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to income.
Loans Receivable: Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or pay-off are reported at
their outstanding principal balances adjusted for any charge-offs, the allowance
for loan losses, and any deferred fees or costs on originated loans, and
unamortized premiums or discounts on purchased loans.
Premiums or discounts on mortgage loans are amortized to income using the level
yield method over the remaining period to contractual maturity, adjusted for
anticipated prepayments. Loan fees and certain direct loan origination costs are
deferred, and the net fee or cost is recognized as an adjustment to interest
income using the interest method.
Because some loans may not be repaid in full, an allowance for loan losses is
recorded. The allowance for loan losses is increased by a provision for loan
losses charged to expense and decreased by charge-offs (net of recoveries).
Estimating the risk of loss and the amount of loss on any loan is necessarily
subjective. Accordingly, the allowance is maintained by management at a level
considered adequate to cover losses that are currently anticipated. Management's
periodic evaluation of the adequacy of the allowance is based on the Company's
past loan loss experience, known and inherent risks in the portfolio, periodic,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, and current economic conditions.
While management may periodically allocate portions of the allowance for
specific problem loan situations, the whole allowance is available for any loan
charge-offs that occur.
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans are considered impaired if full principal or interest payments are not
anticipated in accordance with the contractual loan terms. Impaired loans are
carried at the present value of expected future cash flows discounted at the
loan's effective interest rate or at the fair value of the collateral if the
loan is collateral dependent. A portion of the allowance for loan losses is
allocated to impaired loans if the value of such loans is deemed to be less than
the unpaid balance. If these allocations cause the allowance for loan losses to
require increase, such increase is reported as a component of the provision for
loan losses.
Smaller-balance homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by one-to-four family
residences, residential construction loans, automobile, manufactured homes, home
equity and second mortgage loans. Commercial loans and mortgage loans secured by
other properties are evaluated individually for impairment. When analysis of
borrower operating results and financial condition indicates that underlying
cash flows of the borrower's business are not adequate to meet its debt service
requirements, the loan is evaluated for impairment. Often this is associated
with a delay or shortfall in payments of 30 days or more. Nonaccrual loans are
often also considered impaired. Impaired loans, or portions thereof, are charged
off when deemed uncollectible. The nature of disclosures for impaired loans is
considered generally comparable to prior nonaccrual and renegotiated loans and
non-performing and past due asset disclosures.
Interest income on loans is accrued over the term of the loans based upon the
principal outstanding. The accrual of interest on impaired loans in discontinued
when, in management's opinion, the borrower may be unable to meet payments as
they become due. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to the
extent that cash payments are received until, in management's judgment, the
borrower has the ability to make contractual interest and principal payments, in
which case the loan is returned to accrual status.
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.
There were no properties held as foreclosed real estate at September 30, 1997 or
1996.
Income Taxes: Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through income tax expense. A valuation allowance, if needed, reduces deferred
tax assets to the amount expected to be realized.
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment: Land is carried at cost. Buildings and improvements and
furniture and equipment are carried at cost, less accumulated depreciation and
amortization computed principally by using the straight-line method over the
estimated useful lives of the assets. These assets are reviewed for impairment
when events indicate the carrying amount may not be recoverable.
Servicing Rights: Prior to adopting Statement of Financial Accounting Standards
(SFAS) No. 122 on October 1, 1996, servicing right assets were recorded only for
purchased rights to service mortgage loans. Subsequent to adopting this
standard, servicing rights represent both purchased rights and the allocated
value of servicing rights retained on loans sold. Servicing rights are expensed
in proportion to, and over the period of, estimated net servicing revenues.
Impairment is evaluated based on the fair value of the rights, using groupings
of the underlying loans as to interest rates and then, secondarily, as to
geographic and prepayment characteristics. Any impairment of a grouping is
reported as a valuation allowance. The effect of adopting this standard was not
material.
Excess servicing receivable is reported when a loan sale results in servicing
income in excess of normal amounts, and is expensed over the life of the
servicing on the interest method.
Employee Stock Ownership Plan (ESOP): The Company accounts for its ESOP under
AICPA Statement of Position (SOP) 93-6. The cost of shares issued to the ESOP,
but not yet allocated to participants, are presented as a reduction of
shareholders' equity. Compensation expense is recorded based on the average
market price of the shares committed to be released for allocation to
participant accounts. The difference between the market price and the cost of
shares committed to be released is recorded as an adjustment to common stock.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings; dividends on unearned ESOP shares are reflected as a reduction of debt
and accrued interest.
ESOP shares are outstanding for earnings per share calculations as they are
committed to be released; unearned shares are not considered outstanding.
Financial Instruments with Off-Balance-Sheet Risk: The Company, in the normal
course of business, makes commitments to make loans which are not reflected in
the consolidated financial statements. A summary of these commitments is
disclosed in Note 12.
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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:
1997 1996 1995
--------- --------- ---------
Primary 1,732,528 2,008,323 2,083,528
Fully diluted 1,752,687 2,035,087 2,106,785
Stock Compensation: Expense for employee compensation under stock option plans
is based on Accounting Principles Board (APB) Opinion 25, with expense reported
only if options are granted below market price at grant date. If applicable,
disclosures of net income and earnings per share are provided as if the fair
value method of SFAS No. 123 were used for stock-based compensation.
Reclassifications: Certain amounts in the 1996 and 1995 consolidated financial
statements were reclassified to conform with the 1997 presentation.
NOTE 2 - SECURITIES AVAILABLE FOR SALE
The amortized cost and fair value of securities available for sale are as
follows:
September 30, 1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities
U.S. Government
and federal agencies $ 23,617,973 $ 109,623 $ (7,877) $ 23,719,719
Mortgage-backed 15,588,866 26,506 (36,077) 15,579,295
------------ ------------ ------------ ------------
39,206,839 136,129 (43,954) 39,299,014
Marketable equity securities 300,350 29,050 -- 329,400
------------ ------------ ------------ ------------
$ 39,507,189 $ 165,179 $ (43,954) $ 39,628,414
============ ============ ============ ============
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 2 - SECURITIES AVAILABLE FOR SALE (Continued)
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
============ ============ ============ ============
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, 1997
-------------------------
Amortized Fair
Cost Value
----------- -----------
Due in one year or less $ 4,189,883 $ 4,207,833
Due after one year through five years 16,080,773 16,137,593
Due after five years through ten years 3,347,317 3,374,293
----------- -----------
23,617,973 23,719,719
Mortgage-backed securities 15,588,866 15,579,295
----------- -----------
$39,206,839 $39,299,014
=========== ===========
Proceeds from sales of securities available for sale were $25,186,766 during the
year ended September 30, 1997. Gross gains of $59,828 and gross losses of
$53,730 were realized on these sales. During the year ended September 30, 1996,
proceeds from the sales of securities available for sale were $10,212,124 with
gross gains of $25,154 and gross losses of $21,423 realized on these sales. The
Company did not sell any securities during the year ended September 30, 1995.
On November 30, 1995, securities with an amortized cost of $47,898,025 were
reclassified from held to maturity to available for sale based on
interpretations issued for SFAS No. 115. The transfer increased the unrealized
appreciation on securities available for sale by $196,469 and shareholders'
equity by $118,648, net of tax of $77,821.
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 3 - LOANS RECEIVABLE, NET
Loans receivable, net at September 30 are summarized as follows:
1997 1996
------------- -------------
First mortgage loans (principally conventional)
Principal balances
Secured by one-to-four family residences $ 164,598,210 $ 143,750,857
Construction loans 8,245,274 5,004,730
Other 130,800 162,643
------------- -------------
172,974,284 148,918,230
Less undisbursed portion of construction and
other mortgage loans (117,394) (1,961,107)
------------- -------------
Total first mortgage loans 172,856,890 146,957,123
Consumer and other loans:
Principal balances
Home equity and second mortgage 7,176,832 3,790,075
Commercial 8,832,629 876,348
Financing leases 325,048 1,124,624
Other 96,079 83,843
------------- -------------
Total consumer and other loans 16,430,588 5,874,890
Allowance for loan losses (370,000) (340,000)
Net deferred loan origination fees (653,280) (439,921)
------------- -------------
$ 188,264,198 $ 152,052,092
============= =============
Activity in the allowance for loan losses is summarized as follows for the years
ended September 30:
1997 1996 1995
-------- -------- --------
Balance at beginning of year $340,000 $310,000 $280,000
Provision for loan losses 30,000 30,000 30,000
Charge-offs -- -- --
Recoveries -- -- --
-------- -------- --------
Balance at end of year $370,000 $340,000 $310,000
======== ======== ========
At September 30, 1997 and 1996, no portion of the allowance for loan losses was
allocated to impaired loan balances as there were no loans considered impaired
loans as of or for the years ended September 30, 1997 and 1996.
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 3 - LOANS RECEIVABLE, NET (Continued)
Certain directors and executive officers of the Company and its subsidiary,
including associates of such persons, are loan customers. A summary of the
related party loan activity, for loans aggregating $60,000 or more to any one
related party, is as follows:
1997 1996
----------- -----------
Balance - beginning of year $ 1,032,494 $ 592,367
New loans -- 494,208
Repayments (104,773) (54,081)
----------- -----------
Balance - end of year $ 927,721 $ 1,032,494
=========== ===========
NOTE 4 - PREMISES AND EQUIPMENT, NET
Premises and equipment at September 30 are summarized as follows:
1997 1996
----------- -----------
Land $ 558,681 $ 558,681
Buildings and improvements 2,165,843 1,729,332
Real estate held for future expansion 128,885 128,885
Furniture and equipment 1,291,437 868,737
----------- -----------
Total cost 4,144,846 3,285,635
Accumulated depreciation and amortization (1,532,053) (1,316,371)
----------- -----------
$ 2,612,793 $ 1,969,264
=========== ===========
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
Depreciation and amortization of premises and equipment, included in occupancy
and equipment expense was approximately $216,000, $145,000 and $129,000 for the
years ended September 30, 1997, 1996 and 1995, respectively.
NOTE 5 - DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit in denomination
of $100,000 or more was approximately $24,892,000 and $24,488,000 at September
30, 1997 and 1996.
At September 30, 1997, the scheduled maturities of certificates of deposit are
as follows for the years ended September 30:
1998 $96,037,352
1999 28,099,054
2000 5,409,231
2001 1,620,700
2002 and thereafter 544,220
------------
$131,710,557
============
NOTE 6 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase consist of obligations of the
Company to other parties. These arrangements are all one-day retail repurchase
agreements and are secured by investment securities. Such collateral is held by
safekeeping agents of the Company. Information concerning securities sold under
agreements to repurchase as of September 30, 1997, is summarized as follows:
Average daily balance during the year $97,365
Average interest rate during the year 4.25%
Maximum month end balance during the year $388,920
Securities underlying these agreements at year end were as follows:
Carrying value of securities $3,530,000
Fair value $3,508,000
There were no securities sold under agreements to repurchase at September 30,
1996.
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
At September 30, 1997, advances from the Federal Home Loan Bank of Indianapolis
with fixed and variable rates ranging from 5.01% to 5.95% mature in the year
ending September 30 as follows:
1998 $22,000,000
1999 8,500,000
2000 6,000,000
2002 11,000,000
-----------
$47,500,000
===========
FHLB advances are secured by all FHLB stock, qualifying first mortgage loans,
government agency and mortgage backed securities. At September 30, 1997,
collateral of approximately $216,365,000 is pledged to the FHLB to secure
advances outstanding.
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 8 - 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, 1997, 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, 1997, 1996 and 1995 was
approximately $1,500, $3,000 and $179,000, respectively. Pension plan expense
for the year ended September 30, 1997 and 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) plan for the years ended
September 30, 1997 and 1996 was approximately $42,000 and $5,000, respectively.
Employee Stock Ownership Plan (ESOP): In conjunction with its stock conversion,
the Company established an ESOP for eligible employees. Employees with at least
one year of employment and who have attained age twenty-one are eligible to
participate. The ESOP borrowed $1,400,000 from the Company to purchase 140,000
shares of common stock issued in the conversion at $10 per share. Collateral for
the loan is the unearned shares of common stock purchased by the ESOP with the
loan proceeds. The loan will be repaid principally from the Company's
discretionary contributions to the ESOP over a period of seven years. The
interest rate for the loan is 6.25%. Shares purchased by the ESOP will be held
in suspense until allocated among ESOP participants as the loan is repaid.
ESOP expense was approximately $388,000, $317,000 and $300,000 for the years
ended September 30, 1997, 1996 and 1995. Contributions to the ESOP, including
dividends on unearned ESOP shares, was approximately $229,000, $206,000 and
$200,000 during the years ended September 30, 1997, 1996 and 1995.
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.
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 8 - EMPLOYEE BENEFITS (Continued)
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, 1997, 1996 and 1995, 23,276, 21,515 and 22,516 shares with an
average fair value of $17.92, $15.04 and $13.31 per share, were committed to be
released.
The ESOP shares as of September 30 were as follows:
1997 1996
----------- -----------
Allocated shares 78,968 55,692
Unearned shares 61,032 84,308
Shares withdrawn from the plan by participants (5,601) (2,347)
Total ESOP shares held in the plan 134,399 137,653
----------- -----------
Fair value of unearned shares $ 1,419,000 $ 1,560,000
=========== ===========
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, 1997, 1996 and 1995 was approximately $77,000, $98,000 and
$250,000, 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. As of September
30, 1997, all options granted have an exercise price of at least 100% of the
market value of the common stock on the date of grant and no compensation
expense was recognized for stock options for the years ended September 30, 1997,
1996 and 1995.
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NNOTE 8 - EMPLOYEE BENEFITS (Continued)
SFAS No. 123, which became effective for the year ended September 30, 1997,
requires pro forma disclosures for companies that do not adopt its fair value
accounting method for stock-based employee compensation. The effects on the
Company's net income and earnings per share under the provisions of SFAS No. 123
were not material for the years ended September 30, 1997 and 1996. In future
years, the pro forma effect of not applying this standard is expected to
increase as additional options are granted.
Activity in the Option Plan for the years ended is summarized as follows:
Weighted
Average
Available Options Exercise Exercise
For Grant Outstanding Price Price
--------- ----------- ----- -----
Balance at September30,1994 30,000 170,000 $ 10.00 $ 10.00
Granted (20,000) 20,000 $ 15.00 $ 15.00
Exercised -- -- $- $-
Forfeited -- -- $- $-
------ ------- ------ ------ ---------
Balanced at September 30, 1995 10,000 190,000 $10.00-$15.00 $ 10.53
Granted (10,000) 10,000 $ 15.25 $ 15.25
Exercised -- -- $- $-
Forfeited -- -- $- $-
------ ------- ------ ------ ---------
Balance at September 30, 1996 -- 200,000 $10.00-$15.25 $ 10.76
Granted -- -- $- $-
Exercised -- (9,650) $ 10.00 $ 10.00
Forfeited -- -- $- $-
------ ------- ------ ------ ---------
Balance at September 30, 1997 -- 190,350 $10.00-$15.25 $ 10.80
======= ======= ============= =========
Options exercisable at September 30 are as follows:
Weighted
Number Average
of Options Exercise Price
---------- --------------
1995 170,000 $10.00
1996 174,000 $10.11
1997 180,000 $10.28
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 9 - INCOME TAXES
The Company files consolidated income tax returns. Prior to fiscal 1997, if
certain conditions were met in determining taxable income, the Bank was allowed
a special bad debt deduction based on a percentage of taxable income (8% for
fiscal 1996 and 1995) or on specified experience formulas. The Bank used the
percentage-of-taxable-income method for the tax year ended September 30, 1995,
but was unable to use this method for the tax year ended September 30, 1996. Tax
legislation passed in August 1996 now requires the Bank to deduct a provision
for bad debts for tax purposes based on actual loss experience and recapture the
excess bad debt reserve accumulated in tax years after September 30, 1987. The
related amount of deferred tax liability which must be recaptured is
approximately $446,000 and is payable over a six year period beginning no later
than the tax year ending September 30, 1999.
Income tax expense for the years ended September 30 are summarized as follows:
1997 1996 1995
Federal
Current $ 765,810 $725,920 $622,992
Deferred 264,314 (225,467) 12,487
1,030,124 500,453 635,479
State
Current 223,225 225,213 176,270
Deferred 68,281 (78,873) 7,703
291,506 146,340 183,973
Total income tax expense $1,321,630 $ 646,793 $ 819,452
Total income tax expense differed from the amounts computed by applying the
federal income tax rate of 34% in all periods presented to income before income
taxes as a result of the following for the years ended September 30:
1997 1996 1995
----------- ----------- -----------
Income taxes at statutory rate $ 1,130,103 $ 551,461 $ 698,890
Tax effect of:
State tax, net of federal income
tax effect 192,394 96,584 121,422
Excess of fair value of ESOP
shares released over cost 63,972 39,864 33,861
Other items, net (64,839) (41,116) (34,721)
----------- ----------- -----------
Total income tax expense $ 1,321,630 $ 646,793 $ 819,452
=========== =========== ===========
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 9 - INCOME TAXES (Continued)
The components of the net deferred tax asset (liability) recorded in the
consolidated balance sheets as of September 30 are as follows:
1997 1996
--------- ---------
Deferred tax assets
RRP expense $ 16,363 $ 16,363
Net deferred loan fees 277,644 186,966
Net unrealized depreciation
on securities available for sale -- 144,252
SAIF assessment -- 405,235
Other 18,652 --
--------- ---------
312,659 752,816
Deferred tax liabilities
Accretion (59,882) (28,817)
Depreciation (48,685) (42,807)
Bad debt deduction (288,825) (300,895)
Net unrealized appreciation on
securities available for sale (48,017) --
Other (39,171) (27,354)
--------- ---------
(484,580) (399,873)
Valuation allowance -- --
--------- ---------
Net deferred tax asset (liability) $(171,921) $ 352,943
========= =========
Federal income tax laws provided savings banks with additional bad debt
deductions through the tax year ended September 30, 1987, totaling $4,596,000
for the Bank. Accounting standards do not require a deferred tax liability to be
recorded on this amount, which liability would otherwise total $1,563,000 at
September 30, 1997 and 1996. If the Bank were liquidated or otherwise ceases to
be a bank or if tax laws change, the $1,563,000 would be recorded as expense.
NOTE 10 - REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings, and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the financial statements.
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 10 - REGULATORY MATTERS (Continued)
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If only adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
The Bank's actual capital and required capital amounts and ratios are presented
below:
Minimum
Requirement
Minimum To Be Well
Requirement Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
As of September 30, 1997
Total capital (to risk
weighted assets) $32,184 25.40% $10,139 8.00% $12,673 10.00%
Tier I (core) capital
(to risk weighted assets) 31,814 25.10 5,069 4.00 7,604 6.00
Tier I (core) capital (to
adjusted total assets) 31,814 12.43 7,676 3.00 N/A N/A
Tangible capital (to
adjusted total assets) 31,814 12.43 3,838 1.50 N/A N/A
Tier I (core) capital (to
average assets) 31,814 13.42 9,482 4.00 11,853 5.00
As of September 30, 1996
Total capital (to risk
weighted assets) $31,668 32.69% $ 7,749 8.00% $ 9,686 10.00%
Tier I (core) capital
(to risk weighted assets) 31,328 32.34 3,874 4.00 5,812 6.00
Tier I (core) capital
(to adjusted total assets) 31,328 13.85 6,785 3.00 N/A N/A
Tangible capital (to
adjusted total assets) 31,328 13.85 3,392 1.50 N/A N/A
Tier I (core) capital (to
average assets) 31,328 15.62 8,023 4.00 10,029 5.00
Regulations of the Office of Thrift Supervision limit the dividends that may be
paid without prior approval of the Office of Thrift Supervision. The Bank is
currently a "well-capitalized" Tier 1 institution and can make distributions
during a year of 100% of its net income to date during the year plus one-half
its "surplus capital ratio" (the excess over its capital requirements) at the
beginning of the calendar year. Accordingly, at September 30, 1997 approximately
$11,548,000 of the Bank's retained earnings is available for distribution to the
Company.
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 11 - OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income and expense amounts are summarized as follows for the
years ended September 30:
1997 1996 1995
----------- ----------- -----------
Other noninterest income
Service charges and fees $ 200,759 $ 174,315 $ 124,232
Other 60,412 57,451 65,416
----------- ----------- -----------
$ 261,171 $ 231,766 $ 189,648
=========== =========== ===========
Other noninterest expense
Advertising and promotion $ 179,423 $ 190,614 $ 15,000
Data processing 281,171 200,940 175,734
Professional fees 143,550 175,341 116,008
Printing, postage, stationery,
and supplies 192,514 123,215 87,229
Direct loan origination costs deferred (245,981) (203,332) (99,228)
Other 549,295 482,173 457,892
----------- ----------- -----------
$ 1,099,972 $ 968,951 $ 752,635
=========== =========== ===========
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
AND CONTINGENCIES
Various outstanding commitments and contingent liabilities are not reflected in
the financial statements. Commitments to make loans at September 30 are as
follows:
1 9 9 7 1 9 9 6
Fixed Variable Fixed Variable
Rate Loans Rate Loans Total Rate Loans Rate Loans Total
----------- ----------- ----------- ----------- ----------- -----------
First mortgage loans $ 4,784,788 $ 3,816,543 $ 8,601,331 $ 1,680,256 $ 7,500,852 $ 9,181,108
Commercial loans 2,029,260 6,964,446 8,993,706 -- -- --
Unused lines of credit 717,622 8,931,973 9,649,595 307,028 7,059,117 7,366,145
Unused commercial loan
line of credit -- 1,825,409 1,825,409 -- -- --
Unused construction loan
lines of credit -- 1,380,909 1,380,909 -- 2,721,545 2,721,545
----------- ----------- ----------- ----------- ----------- -----------
$ 7,531,670 $22,919,280 $30,450,950 $ 1,987,284 $17,281,514 $19,268,798
=========== =========== =========== =========== =========== ===========
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
AND CONTINGENCIES (Continued)
Fixed rate loan commitments at September 30, 1997 are at rates primarily ranging
from 7.125% to 10.75%. 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 9.25% and are tied primarily to the National Monthly Median Cost of Funds
Ratio to SAIF - Insured Institutions.
Since commitments to make loans and to fund unused lines of credit and loans in
process may expire without being used, the amounts do not necessarily represent
future cash commitments. In addition, commitments are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. The maximum exposure to credit loss in the event of nonperformance by
the other party is the contractual amount of these instruments. The same credit
policy is used to make such commitments as is used for loans receivable.
Under employment agreements with certain executives, officers, certain events
leading to separation from the Company could result in cash payments totaling
$1,018,000 as of September 30, 1997.
The Company and the Bank are subject to certain claims and legal actions arising
in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material adverse effect on the consolidated financial
position or results of operation of the Company.
NOTE 13 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed financial statements for the parent company,
MFB Corp.
CONDENSED BALANCE SHEETS
September 30, 1997 and 1996
1997 1996
----------- -----------
ASSETS
Cash and cash equivalents $ 796,186 $ 887,580
Equity securities available for sale 329,400 --
Investment in Bank subsidiary 31,939,172 31,108,173
Note receivable from Bank subsidiary -- 4,750,000
Loan receivable from ESOP 664,610 893,651
Other assets 1,438 31,501
----------- -----------
Total assets $33,730,806 $37,670,905
=========== ===========
LIABILITIES
Accrued expenses and other liabilities $ 180,790 $ 71,536
SHAREHOLDERS' EQUITY 33,550,016 37,599,369
----------- -----------
Total liabilities and shareholders' equity $33,730,806 $37,670,905
=========== ===========
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 13 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME
Years ended September 30, 1997, 1996 and 1995
1997 1996 1995
----------- ----------- -----------
Dividends from bank - cash $ 2,000,000 $-- $--
Interest income 57,723 74,390 85,212
Interest expense 3,319 -- --
Other expenses 107,243 153,973 132,605
----------- ----------- -----------
Income (loss) before income taxes
and equity in undistributed net income
of Bank subsidiary 1,947,161 (79,583) (47,393)
Income tax benefit 22,803 32,887 19,326
----------- ----------- -----------
Income (loss) before equity in
undistributed net income of Bank subsidiary 1,969,964 (46,696) (28,067)
Equity in undistributed net income
of Bank subsidiary 32,237 1,021,846 1,264,173
----------- ----------- -----------
Net income $ 2,002,201 $ 975,150 $ 1,236,106
=========== =========== ===========
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 13 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended September 30, 1997, 1996 and 1995
1997 1996 1995
----------- ----------- -----------
Cash flows from operating activities
Net income $ 2,002,201 $ 975,150 $ 1,236,106
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
Bank (32,237) (1,021,846) (1,264,173)
Net change in other assets 30,063 287,659 (317,424)
Net change in accrued expenses and
other liabilities 97,747 40,417 27,738
----------- ----------- -----------
Net cash from operating activities 2,097,774 281,380 (321,990)
Cash flows from investing activities
Net change in interest-bearing deposits
in other financial institutions -- 948,366 --
Principal repayments on loan receivable
from ESOP 229,041 206,349 200,000
Principal repayments on note receivable
from Bank subsidiary 4,750,000 1,000,000 1,000,000
Purchase of securities available for sale (300,350) -- (4,945,231)
Proceeds from maturities of securities -- -- 5,400,000
----------- ----------- -----------
Net cash from investing activities 4,678,691 2,154,715 1,654,769
Cash flows from financing activities
Purchase of MFB Corp. common stock (6,410,802) (1,499,024) (1,530,486)
Proceeds from exercise of stock options 96,500 -- --
Cash dividends paid (553,557) (118,439) --
----------- ----------- -----------
Net cash from financing activities (6,867,859) (1,617,463) (1,530,486)
----------- ----------- -----------
Net change in cash and cash equivalents (91,394) 818,632 (197,707)
Cash and cash equivalents at beginning
of year 887,580 68,948 266,655
----------- ----------- -----------
Cash and cash equivalents at end of year $ 796,186 $ 887,580 $ 68,948
=========== =========== ===========
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 14 - 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, 1997 and 1996.
Items which are not financial instruments are not included.
1 9 9 7 1 9 9 6
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Cash and cash equivalents $ 9,482,348 $ 9,482,000 $ 1,734,388 $ 1,734,000
Interest-bearing time deposits
in other financial institutions -- -- 495,000 495,000
Securities available for sale 39,628,414 39,628,000 66,762,558 66,763,000
FHLB stock 2,400,000 2,400,000 1,336,100 1,336,000
Loans held for sale, net 12,671,186 12,671,000 -- --
Loans receivable, net of
allowance for loan losses 188,264,198 191,855,000 152,052,092 152,341,000
Accrued interest receivable 718,427 718,000 818,014 818,000
Noninterest bearing demand
deposits (2,046,702) (2,047,000) (1,942,145) (1,942,000)
Savings, NOW and MMDA
deposits (38,130,008) (38,130,000) (34,779,548) (34,780,000)
Other time deposits (131,710,557) (131,975,000) (122,242,796) (122,579,000)
Securities sold under
agreements to repurchase (388,920) (389,000) -- --
FHLB advances (47,500,000) (47,092,000) (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, 1997 and 1996. 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, 1997 and 1996, applied for the time period until
maturity. The estimated fair value for securities available for sale, is based
upon quoted market values for the individual securities or for equivalent
securities. The estimated fair value for loans held for sale, net, is based on
the price offered in the secondary market on September 30, 1997 for loans having
similar interest rates and maturities. The estimated fair value for loans
receivable is based upon estimates of the difference in interest rates the
Company would charge the borrowers for similar such loans with similar
maturities made at September 30, 1997 and 1996, 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 securities sold under agreements to repurchase and FHLB advances is
based upon estimates of the rate the Company would pay on such deposits or
borrowings at September 30, 1997 and 1996, 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, 1997, 1996 and 1995
NOTE 14 - 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, 1997 and 1996, 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, 1997 and 1996 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 15 - SAIF DEPOSIT INSURANCE PREMIUM
The deposits of savings associations such as the Bank are insured by the Savings
Association Insurance Fund (SAIF). A recapitalization plan signed into law on
September 30, 1996 provided for a one-time assessment of 65.7 basis points
applied to all SAIF deposits as of March 31, 1995. Based on the Bank's deposits
as of this date, a one-time assessment of approximately $955,000 was paid and
recorded as SAIF deposit insurance premium expense for the year ended September
30, 1996.
NOTE 16 - IMPACT OF NEW ACCOUNTING STANDARDS
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," was issued in 1996. It revises the accounting
for transfers of financial assets, such as loans and securities, and for
distinguishing between sales and secured borrowings. It became effective for
some transactions occurring after December 31, 1996, and will be effective for
others in 1998. The impact of partial adoption in 1997 was not material to the
1997 consolidated financial statements and the impact of the complete adoption
in 1998 is also not expected to be material to the consolidated financial
statements.
Also, in March 1997, the accounting requirements for calculating earnings per
share were revised by SFAS No. 128, "Earnings Per Share." Basic earnings per
share for the quarter ending December 31, 1997 and later will be calculated
solely on average common shares outstanding. Diluted earnings per share will
reflect the potential dilution of stock options and other common stock
equivalents. All prior calculations will be restated to be comparable to the new
methods. As the Company has dilution from stock options, the new calculation
methods will increase basic earnings per share over what otherwise would have
been reported as primary earnings per share, while there will be little effect
on fully diluted earnings per share.
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 16 - IMPACT OF NEW ACCOUNTING STANDARDS (Continued)
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income". This Statement establishes standards for
reporting and display of comprehensive income and its components (revenue,
expenses, gains and losses) in a full set of general-purpose financial
statements. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Income tax effects must also be shown. This
Statement is effective for fiscal years beginning after December 15, 1997. The
adoption of SFAS No. 130 is not expected to have a material impact on the
results of operations or financial condition of the Company.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
Statement is effective for financial statements for periods beginning after
December 15, 1997. The adoption of SFAS No. 131 is not expected to have a
material impact on the results of operations or financial condition of the
Company.
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 17 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Year Ended September 30, 1997
---------------------------------
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income $4,107 $4,270 $4,511 $4,797
Interest expense 2,339 2,428 2,612 2,778
------ ------ ------ ------
Net interest income 1,768 1,842 1,899 2,019
Provision for loan losses 7 8 7 8
------ ------ ------ ------
Net interest income after provision for loan 1,761 1,834 1,892 2,011
losses
Noninterest income 113 86 108 118
Noninterest expense 1,084 1,055 1,156 1,304
------ ------ ------ ------
Income before income taxes 790 865 844 825
Income tax expense 314 343 336 329
------ ------ ------ ------
Net income $ 476 $ 522 $ 508 $ 496
====== ====== ====== ======
Earnings per common and common
equivalent share $ .26 $ .30 $ .30 $ .29
====== ====== ====== ======
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE 17 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)
Year Ended September 30, 1996
(In thousands, 1st 2nd 3rd 4th
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 (loss) before income taxes 585 658 703 (324)
Income tax expense 233 262 279 (127)
------- ------- ------- -------
Net income (loss) $ 352 $ 396 $ 424 $ (197)
======= ======= ======= =======
Earnings (loss) per common and
common equivalent share $ .17 $ .20 $ .22 $ (.10)
======= ======= ======= =======
MFB CORP. AND SUBSIDIARY
DIRECTORS AND OFFICERS
September 30, 1997
MFB CORP. AND MFB FINANCIAL DIRECTORS
M. Gilbert Eberhart (age 63) has served as Secretary of the Bank since 1987. He
is also a dentist based in Mishawaka.
Thomas F. Hums (age 64) 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 54) is an optometrist based in Mishawaka.
Michael J. Marien (age 50) is a Sales Representative with Signode Corporation, a
division of ITW.
Marian K. Torian (age 76) 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 42) 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 55) 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.
In addition, Christine A. Lauber has served as a non-voting advisory member
since January 21, 1997. She is a Certified Public Accountant in private practice
in South Bend, Indiana.
MFB FINANCIAL OFFICERS
Charles J. Viater Timothy C. Boenne
President and Chief Executive Officer* Vice President and Controller
Stephen F. Rathka Thomas A. Smith
Senior Vice President Vice President
William L. Stockton, Jr. Michael J. Portolese
Senior Vice President Vice President
M. Gilbert Eberhart
Secretary*
* Holds same position with MFB Corp.
MFB CORP. AND SUBSIDIARY
SHAREHOLDER INFORMATION
September 30, 1997
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, 1997, there were approximately 670
shareholders of record. The following table sets forth market price and dividend
information for the Company's common stock for the periods indicated.
Dividend
Fiscal Quarters Ended High Trade Low Trade Declared
- --------------------- ---------- --------- --------
December 31, 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 .06
December 31, 1996 19.25 15.50 .08
March 31, 1997 19.75 16.63 .08
June 30, 1997 19.75 18.75 .08
September 30, 1997 23.50 19.13 .08
Transfer Agent and Registrar Special Counsel
Registrar and Transfer Co. Barnes & Thornburg
10 Commerce Drive 1313 Merchants Company Building
Cranford, NJ 07016 11 South Meridan Street
Indianapolis, IN 46204
Independent Auditors
Crowe, Chizek and Company LLP
330 East Jefferson Blvd.
South Bend, IN 46601
Shareholder and General Inquiries
The Company is required to file an Annual Report on Form 10-K for its fiscal
year ended September 30, 1997 with the Securities and Exchange Commission.
Copies of this annual report may be obtained without charge upon written request
to:
Charles J. Viater
President and Chief Executive Officer
MFB Corp.
121 South Church Street
PO Box 528
Mishawaka, IN 46546
Office Locations
Main Office Branch Office Mortgage Office
121 S. Church St. 411 W. McKinley Ave. 227 S. Main St, Suite 110
Mishawaka, IN 46544 Mishawaka, IN 46545 Elkhart, IN 46516
Branch Office Branch Office Branch Office
402 W. Cleveland Rd. 2427 Mishawaka Ave. 2304 Lincolnway East
Mishawaka, IN 46545 South Bend, IN 46615 Goshen, IN 46526