Table of Contents
Letter to Shareholders 1
Selected Consolidated Financial Data 2
Management's Discussion and Analysis 3
Report of Independent Auditors 18
Consolidated Balance Sheets 19
Consolidated Statements of Income 20
Consolidated Statements of Shareholders' Equity 21
Consolidated Statements of Cash Flows 22
Notes to Consolidated Financial Statements 24
Directors and Officers 44
Shareholder Information 45
DESCRIPTION OF BUSINESS
MFB Corp. is an Indiana corporation organized in December 1993, to become a
unitary savings and loan holding company. MFB Corp. became a unitary savings and
loan holding company upon the conversion of MFB Financial, formerly known as
Mishawaka Federal Savings (the "Bank") from a federal mutual savings and loan
association to a federal stock savings bank in March 1994. MFB Corp. is the sole
shareholder of the Bank. MFB Corp. and the Bank (collectively referred to as the
"Company") conduct business from their main office in Mishawaka, Indiana, and
five branch locations in St. Joseph and Elkhart Counties of Indiana. The Bank
offers a variety of lending, deposit, trust and other financial services to its
retail and commercial customers. The Bank's wholly-owned subsidiary, Mishawaka
Financial Services, Inc. ("Mishawaka Financial"), is engaged in the sale of
credit life, general fire and accident, car, home, and life insurance as agent
for the Bank's customers and the general public.
BLANK PAGE
Message To Our Shareholders
MFB Corp. has just completed another year of growth and prosperity. We have
continued to enhance our ability to fulfill our stated mission - to deliver the
highest quality financial services to our community that result in ever
improving market share, profitability and shareholder value. Our wholly-owned
subsidiary, MFB Financial ("the Bank"), has further positioned itself to compete
by adding products and services that provide new evidence of our commitment to
being a full service, locally owned bank meeting the financial needs of
consumers and businesses in the Michiana area.
The Bank established a trust department in March that is dedicated to delivering
a full range of personal trust and employee benefit plan services. This new
operation has been extremely well received and has exceeded expectations in
these first few months - a clear sign that the Bank understands the needs of its
community and the desire of customers to have these sensitive and valuable
services provided by their local banker. The Bank's growth strategy includes
creating a broader physical presence in and around our established market area.
To that end the Bank opened its first full service facility in Elkhart County in
June. The activity level is well above our projections and this expanded
presence is expected to generate significant new opportunities for growth. Our
plans call for another full service facility to open in downtown South Bend
early next year. The Bank also recognizes the value of an effective management
team and strives to constantly improve that team. We have been able to add
several outstanding banking professionals this past year including a new Chief
Operating Officer who is a lifetime resident of our community and has over 25
years of local banking knowledge and experience.
Our technological advances this past year included a complete analysis of Year
2000 issues and the renovation of all systems. This project not only allowed the
Bank to address Y2K challenges but to enhance system capabilities to serve
customers more effectively. We are confident that we will provide uninterrupted,
quality service to every customer in the Year 2000 and beyond.
All of the above activities will put pressure on earnings in the near term.
However, the long-term benefits of sound infrastructure and a strong management
team are substantial. Our formula for success has been a simple yet highly
effective one. By using technology to its fullest and adding highly skilled and
experienced banking specialists to support product and service offerings, we
continually enhance our creditability in the community we serve. We convey the
message that MFB Financial is serious about delivering quality financial
services through professional decision makers that are readily accessible to our
clients.
Some important financial trends have emerged as a result of our commitment and
focus on these principles. Total assets have grown from just $226 million three
years ago to over $346 million today. Our core deposit base that includes
checking, demand deposits and savings accounts has increased from $36.7 million
to $59.8 million during the same three year period. Net interest income has
steadily improved. Return on shareholders' equity has almost tripled. Diluted
earnings per common share have gone from $.50 at September 30, 1996 to $1.51 at
September 30, 1999. Each of these statistics provide evidence that our mission
is being achieved and that our goals are being realized.
More consumers and local businesses than ever before can call MFB Financial,
Michiana's Finest Bank, their bank. We are proud of that but not content. There
are many members of this community that have not yet experienced the difference
of working with a bank that puts their interests first. They have only
experienced the indifference of working with mega banks that make arbitrary
decisions in offices and by people far away. The pages that follow provide
additional information about the past year's performance and we are proud to
present this 1999 Annual Report to you. Be assured that we remain committed to
growing long term shareholder value while meeting the financial needs of our
expanding community.
/s/ Charles J. Viater
Charles J. Viater
President and Chief Executive Officer
Selected Consolidated Financial Data
- 1 -
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)
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Summary of Financial Condition:
Total assets $346,454 $314,961 $255,921 $225,809 $187,065
Loans held for sale, net 8,062 13,517 12,671 -- --
Loans receivable, net 269,464 231,606 188,264 152,052 121,181
Cash and cash equivalents 12,062 17,904 9,482 1,734 7,454
Securities, including FHLB stock 47,666 46,456 42,028 68,099 53,293
Interest-bearing time deposits in
other financial institutions 1,000 -- -- 495 1,880
Deposits 201,407 180,666 171,887 158,964 144,552
Securities sold under agreements
to repurchase 6,566 2,366 389 -- --
FHLB advances 104,226 92,726 47,500 24,500 --
Shareholders' equity 31,182 30,886 33,550 37,599 37,999
Years Ended September 30,
-----------------------------------------------------------
(In Thousands)
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Summary of Operating Results:
Interest income $24,254 $20,838 $17,685 $14,182 $12,383
Interest expense 14,448 12,204 10,157 8,057 6,788
------- ------- ------- ------- -------
Net interest income 9,806 8,634 7,528 6,125 5,595
Provision for loan losses 230 120 30 30 30
------- ------- ------- ------- -------
Net interest income after
provision for loan losses 9,576 8,514 7,498 6,095 5,565
Noninterest income
Insurance commissions 148 143 134 127 128
Brokerage commissions 28 36 24 -- --
Net gain from sales of securities 4 8 6 3 --
Net gains from sales of loans 366 333 -- -- --
Loan servicing fees, net 54 12 -- -- --
Other 620 432 261 232 189
------- ------- ------- ------- -------
Total noninterest income 1,220 964 425 362 317
Noninterest expense
Salaries and employee benefits 3,847 3,414 2,772 2,153 2,336
Occupancy and equipment expense 883 720 580 422 406
SAIF deposit insurance premium 109 108 147 1,291 332
Provision to adjust loans held
for sale to lower of cost or market 489 -- -- -- --
Other expense 1,679 1,383 1,100 969 753
------- ------- ------- ------- -------
Total noninterest expense 7,007 5,625 4,599 4,835 3,827
------- ------- ------- ------- -------
Income before income taxes 3,789 3,853 3,324 1,622 2,055
Income tax expense 1,585 1,617 1,322 647 819
------- ------- ------- ------- -------
Net income $ 2,204 $ 2,236 $ 2,002 $ 975 $ 1,236
======= ======= ======= ======= =======
Supplemental Data:
Return on assets (1) .66% .80% .84% .49% .67%
Return on equity (2) 6.97 6.69 5.83 2.55 3.25
Interest rate spread (3) 2.57 2.54 2.49 2.13 2.12
Net yield on average interest-earning assets (4) 3.01 3.17 3.24 3.11 3.10
Dividend pay-out ratio (5) 22.76 23.26 26.45 11.76 --
Net interest income to operating expenses (6) 139.96 153.48 163.70 126.67 146.20
Equity-to-assets (7) 9.00 9.81 13.11 16.65 20.31
Average interest-earning assets to
average interest-bearing liabilities 110.19 114.05 117.14 123.81 126.12
Non-performing assets to total assets .06 .09 .10 .09 .17
Non-performing loans to total loans .03 .05 .14 .13 .25
Allowance for loan losses to total loans, net .24 .20 .20 .22 .26
Allowance for loan losses to non-performing loans 664.58 366.13 141.76 171.72 100.65
Basic earnings per common share $ 1.56 $ 1.44 $ 1.21 $ .51 $ .62
Diluted earnings per common share $ 1.51 $ 1.37 $ 1.16 $ .50 $ .61
Dividends declared per share $ .355 $ .335 $ .32 $ .06 $ --
Book value per share $ 21.96 $ 20.95 $ 20.33 $ 19.05 $ 18.29
- --------------------------------------------------------------------------------
(1) Net income divided by average total assets.
(2) Net income divided by average total equity.
(3) Interest rate spread is calculated by subtracting average interest rate
cost from average interest rate earned.
(4) Net interest income divided by average interest-earning assets.
(5) Dividends declared per share divided by basic earnings per share.
(6) Operating expenses consist of other expenses less taxes.
(7) Total equity divided by total assets.
- 2 -
Management Discussion and Analysis of Financial Condition and Results of
Operations
The principal business of the Bank has historically consisted of attracting
deposits from the general public and the business community and making loans
secured by various types of collateral, including real estate and general
business assets. The Bank is significantly affected by prevailing economic
conditions as well as government policies and regulations concerning, among
other things, monetary and fiscal affairs, housing and financial institutions.
Deposit flows are influenced by a number of factors, including interest rates
paid on competing investments, account maturities, fee structures, and level of
personal income and savings. Lending activities are influenced by the demand for
funds, the number and quality of lenders, and regional economic cycles. Sources
of funds for lending activities of the Bank include deposits, borrowings,
payments on loans and income provided from operations. The Company's earnings
are primarily dependent upon the Bank's net interest income, the difference
between interest income and interest expense.
Interest income is a function of the balances of loans and investments
outstanding during a given period and the yield earned on such loans and
investments. Interest expense is a function of the amount of deposits and
borrowings outstanding during the same period and interest rates paid on such
deposits and borrowings. The Company's earnings are also affected by the Bank's
provisions for loan and real estate losses, service charges, retained mortgage
loan servicing fees, income from subsidiary activities, operating expenses and
income taxes.
Asset/Liability Management
The Company is subject to interest rate risk to the degree that its
interest-bearing liabilities, primarily deposits with short and medium-term
maturities, mature or reprice at different rates than its interest-earning
assets. Although having liabilities that mature or reprice less frequently on
average than assets will be beneficial in times of rising interest rates, such
an asset/liability structure will result in lower net income during periods of
declining interest rates, unless offset by other factors such as noninterest
income.
A key element of the Company's asset/liability plan is to protect net
earnings from changes in interest rates by managing the maturity or repricing
mismatch between its interest-earning assets and rate-sensitive liabilities. The
Company has sought to reduce exposure to its earnings through the use of
adjustable rate loans and through the sale of fixed rate loans in the secondary
market, and by extending funding maturities through the use of FHLB advances.
As part of its efforts to monitor and manage interest rate risk, the
Company uses the Net Portfolio Value ("NPV") methodology adopted by the Office
of Thrift Supervision as part of its capital regulations. In essence, this
approach calculates the difference between the present value of expected cash
flows from assets and the present value of expected cash flows from liabilities,
as well as cash flows from off-balance-sheet contracts. The difference is the
NPV. As of June 30, 1999, (the most recently available data), after a 200 basis
point rate decrease, the Company's NPV ratio was 11.41%. In the event of a 200
basis point increase in rates, the Company's NPV ratio was 9.24%. Management and
the Board of Directors review the OTS measurements on a quarterly basis to
determine whether the Company's interest rate exposure is within the limits
established by the Board of Directors in the Company's interest rate risk
policy.
The Company's asset/liability management strategy dictates acceptable
limits on the amounts of change in NPV given certain changes in interest rates.
The tables presented here, as of June 30, 1999 and 1998, are an analysis of the
Company's interest rate risk as measured by changes in NPV for instantaneous and
sustained parallel shifts in the yield curve, in 100 basis point increments, up
and down 300 basis points.
- 3 -
June 30, 1999
Change in
Interest Rates NPV as % of Portfolio
In Basis Net Portfolio Value Value of Assets
Points NPV
Rate Shock)(1) $ Amount $ Change % Change Ratio Change (1)
- -------------- -------- -------- -------- ----- ----------
(Dollars in Thousands)
+ 300 $ 25,505 $(13,202) (34)% 7.93% (332) bp
+ 200 30,453 (8,254) (21) 9.24 (201) bp
+ 100 35,050 (3,657) (9) 10.39 (86) bp
0 38,707 11.25
- 100 40,233 1,526 4 11.53 28 bp
- 200 40,232 1,525 4 11.41 16 bp
- 300 40,517 1,810 5 11.36 11 bp
(1) Expressed in basis points
As illustrated in the June 30, 1999 table, the Company's interest
rate risk is more sensitive to rising rates than declining rates. This
occurs primarily because, as rates rise, the market value of
fixed-rate loans declines due to both the rate increases and slowing
prepayments. When rates decline, the Company does not experience a
significant rise in market value for these loans because borrower
prepayments increase. The value of the Bank's deposits and borrowings
change in approximately the same proportion in rising and falling rate
scenarios. Specifically, the table indicates that, at June 30, 1999,
the Company's NPV was $38.7 million or 11.25% of the market value of
portfolio assets. Based upon the assumptions utilized, an immediate
200 basis point increase in market interest rates would result in a
$8.3 million or 21% decline in the Company's NPV and would result in a
201 basis point or 17.9% decline in the Company's NPV ratio to 9.24%.
Conversely, an immediate 200 basis point decrease in market interest
rates would result in a $1.5 million or 4% increase in the Company's
NPV, and a 16 basis point or 1.4% increase in the Company's NPV ratio
to 11.41%. The percentage change in the Company's NPV at June 30, 1999
were within the limit in the Company's Board-approved guidelines.
June 30, 1998
Change in
Interest Rates NPV as % of Portfolio
In Basis Net Portfolio Value Value of Assets
Points NPV
Rate Shock)(1) $ Amount $ Change % Change Ratio Change (1)
- -------------- -------- -------- -------- ----- ----------
(Dollars in Thousands)
+300 $31,202 $(7,027) (18)% 11.21% (169) bp
+200 34,428 (3,801) (10) 12.08 (82) bp
+100 37,104 (1,125) (3) 12.74 (16) bp
0 38,229 - - 12.90 -
- 100 37,408 (821) (2) 12.47 (43) bp
- 200 35,339 (2,890) (8) 11.67 (123) bp
- 300 33,382 (4,847) (13) 10.91 (199) bp
(1) Expressed in basis points
- 4 -
As illustrated in the June 30, 1998 table, the Company's NPV declines both
in rising and falling interest rate environments. This phenomenon occurs
primarily as a result of the historically low interest rate environment that
existed at June 30, 1998, the heavy concentration of adjustable rate loans in
the loan portfolio and the related prepayment assumption used in the OTS model.
Specifically, the table indicates that, at June 30, 1998, the Company's NPV was
$38.2 million or 12.9% of the market value of portfolio assets. Based upon the
assumptions utilized, an immediate 200 basis point increase in market interest
rates would result in a $3.8 million or 10% decline in the Company's NPV and
would result in a 82 basis point or 6.4% decline in the Company's NPV ratio to
12.08%. Similarly, an immediate 200 basis point decrease in market interest
rates would result in a $2.9 million or 8% decline in the Company's NPV, and a
123 basis point or 9.5% decline in the Company's NPV ratio to 11.67%. Both
percentage declines in the Company's NPV at June 30, 1998 were within the limit
in the Company's Board-approved guidelines.
In addition to monitoring selected measures of NPV, management also
monitors effects on net interest income resulting from increases or decreases in
rates. These measures are used to identify excessive interest rate risk. In
managing its asset/liability mix, the Company, depending on the relationship
between long and short term interest rates, market conditions and consumer
preference, may place somewhat greater emphasis on maximizing its net interest
margin than on strictly matching the interest rate sensitivity of its assets and
liabilities. Management believes that the increased net income which may result
from an acceptable mismatch in the actual maturity or repricing of its asset and
liability portfolios can, during periods of declining or stable interest rates,
provide sufficient returns to justify the increased exposure to sudden and
unexpected increases in interest rates which may result from such a mismatch.
Management believes that the Company's level of interest rate risk is acceptable
under this approach as well.
In evaluating the Company's exposure to interest rate movements, certain
shortcomings inherent in the method of analysis presented in the foregoing table
must be considered. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
interest rates. Additionally, certain assets, such as ARM's, have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. Further, in the event of a significant change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed above. Finally, the ability of many borrowers to service their
debt may decrease in the event of an interest rate increase. The Company
considers all of these factors in monitoring its exposure to interest rate risk.
The Board of Directors and management of the Company believe that certain
factors afford the Company the ability to operate successfully despite its
exposure to interest rate risk. The Company manages its interest rate risk by
originating adjustable rate loans and by selling a portion of its fixed rate
one-to-four family real estate loans. While the Company generally originates
mortgage loans for its own portfolio, sales of certain fixed rate first mortgage
loans with maturities of 15 years or greater are currently undertaken to manage
interest rate risk. Loans classified as held for sale as of September 30, 1999
totaled $8.1 million. The Company retains the servicing on loans sold in the
secondary market and, at September 30, 1999, $41.6 million in such loans were
being serviced for others. The Company also maintains capital well in excess of
regulatory requirements.
The Company's investment strategy is to maintain a diversified portfolio of
high quality investments that balances the goals of minimizing interest rate and
credit risks while striving to maximize investment return and provide liquidity
necessary to meet funding needs. Wholesale banking activities are conducted as a
means to supplement net income and to achieve desired growth targets. This
- 5 -
strategy involves the acquisition of assets funded through sources other than
retail deposits, such as FHLB advances. The goal is to create interest rate
spreads between asset yields and funding costs within acceptable risk parameters
while improving return on equity.
The Company's cost of funds responds to changes in interest rates due to
the relatively short-term nature of its deposit portfolio. The Company offers a
range of maturities on its deposit products at competitive rates and monitors
the maturities on an ongoing basis. Average Balance Sheets
The following are the average balance sheets for the years ended September 30:
1999 1998 1997
Average Average Average
Outstanding Outstanding Outstanding
Balance Balance Balance
Assets: (In Thousands)
Interest earning assets:
Interest-bearing deposits $ 11,983 $ 9,633 $ 1,856
Securities (1) 17,593 13,541 30,765
Mortgage-backed securities (1) 30,572 23,218 22,222
FHLB stock 5,453 3,446 1,783
Loans held for sale 15,571 2,401 35
Loans receivable (2) 244,132 220,244 175,726
--------- --------- ---------
Total interest-earning assets 325,304 272,483 232,387
Noninterest-earning assets, net
of allowance for loan losses 10,889 5,414 4,663
--------- --------- ---------
Total assets $ 336,193 $ 277,897 $ 237,050
========= ========= =========
Liabilities and equity:
Interest-bearing liabilities:
Savings accounts $ 12,277 $ 10,737 $ 10,359
NOW and money market accounts 36,422 30,065 26,770
Certificates of deposit 137,734 130,350 126,202
Repurchase agreements 3,892 1,647 97
FHLB advance 104,894 66,123 34,960
--------- --------- ---------
Total interest-bearing liabilities 295,219 238,922 198,388
Other liabilities 9,351 5,571 4,316
--------- --------- ---------
Total liabilities 304,570 244,493 202,704
Shareholders' equity:
Common stock 12,933 12,921 14,015
Retained earnings 24,550 22,958 21,381
Net unrealized gain (loss) on
securities available for sale 213 56 (100)
Less common stock acquired by:
Employee stock ownership plan (352) (565) (790)
Recognition and retention plan (11) (80) (157)
Treasury stock (5,710) (1,886) (3)
--------- --------- ---------
Total shareholders' equity 31,623 33,404 34,346
--------- --------- ---------
Total liabilities and shareholders' equity $ 336,193 $ 277,897 $ 237,050
========= ========= =========
(1) Average outstanding balances reflect unrealized gain (loss) on securities
available for sale.
(2) Total loans less deferred net loan fees and loans in process.
- 6 -
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,
------------------------------
1999 1998 1997
---- ---- ----
Average interest rate earned on:
Interest-bearing deposits 5.12% 5.81% 5.17%
Securities (1) 5.96 6.65 6.86
Mortgage-backed securities (1) 5.99 5.84 6.46
FHLB stock 8.00 8.01 8.08
Loans held for sale 7.01 7.41 --
Loans receivable 7.88 7.98 7.91
Total interest-earning assets 7.46 7.65 7.61
Average interest rate of:
Savings accounts 2.39 2.52 2.68
NOW and money market accounts 2.75 2.83 2.89
Certificates of deposit 5.29 5.57 5.65
Repurchase agreements 3.79 4.09 4.27
FHLB advances 5.45 5.67 5.64
Total interest-bearing liabilities 4.89 5.11 5.12
Interest rate spread (2) 2.57 2.54 2.49
Net yield on interest-earning assets (3) 3.01 3.17 3.24
(1) Yield is based on amortized cost without adjustment for unrealized gain
(loss) on securities available for sale.
(2) Interest rate spread is calculated by subtracting the average interest rate
cost from the average interest rate earned for the period indicated.
(3) The net yield on average interest-earning assets is calculated by dividing
net interest income by the average interest-earning assets for the period
indicated.
The following table describes the extent to which changes in interest rates
and changes in volume of interest-related assets and liabilities have affected
the Company's consolidated interest income and expense during the periods
indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to (1) changes in
rate (i.e., changes in rate multiplied by old volume) and (2) changes in volume
(i.e., changes in volume multiplied by old rate). Changes attributable to both
rate and volume have been allocated proportionally to the change due to volume
and the change due to rate.
- 7 -
Year ending September 30, 1999
compared to year ended Total Net Due to Due to
September 30, 1998 Change Rate Volume
------- ------- -------
(In Thousands)
Interest-earning assets:
Interest-bearing deposits $ 53 $ (73) $ 126
Securities 148 (101) 249
Mortgage-backed securities 474 34 440
FHLB stock 160 -- 160
Loans held for sale 913 (10) 923
Loans receivable 1,668 (216) 1,884
------- ------- -------
Total 3,416 (366) 3,782
Interest-bearing liabilities:
Savings accounts 23 (14) 37
NOW and money market accounts 149 (26) 175
Certificates of deposit 20 (380) 400
Repurchase agreements 80 (5) 85
FHLB Advances 1,972 (148) 2,120
------- ------- -------
Total 2,244 (573) 2,817
------- ------- -------
Change in net interest income $ 1,172 $ 207 $ 965
======= ======= =======
Year ended September 30, 1998
compared to year ended
September 30, 1997
Interest-earning assets:
Interest-bearing deposits $ 464 $ 13 $ 451
Securities (1,212) (1,150)
Mortgage-backed securities (79) (140) 61
FHLB stock 132 (1) 133
Loans held for sale 178 -- 178
Loans receivable 3,670 120 3,550
------- ------- -------
Total 3,153 (70) 3,223
Interest-bearing liabilities:
Savings accounts (7) (17) 10
NOW and money market accounts 84 (9) 93
Certificates of deposit 130 (102) 232
Repurchase agreements 63 -- 63
FHLB Advances 1,777 10 1,767
------- ------- -------
Total 2,047 (118) 2,165
------- ------- -------
Change in net interest income $ 1,106 $ 48 $ 1,058
======= ======= =======
- 8 -
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1999
AND SEPTEMBER 30, 1998
Consolidated net income for the Company for the year ended September 30,
1999 was $2,204,000 or $1.51 diluted net income per common share compared to
$2,236,000 or $1.37 diluted net income per common share for the same period in
1998. Net interest income after provision for loan losses totaled $9.6 million
for the year ended September 30, 1999 compared to $8.5 million for the same
period one year ago.
The increase in net interest income was primarily due to increases in the
interest income on increases in volume of interest-earning assets which more
than offset the increase in interest expense on increases in the volume of
interest-bearing liabilities. First mortgage loan receivables increased by $14.8
million and commercial and consumer loan receivables by approximately $23.3
million from September 30, 1998 to September 30, 1999. At the same time, total
deposits increased by $20.7 million and Federal Home Loan Bank borrowings
increased by $11.5 million. The asset and liability growth was partially offset
by a decrease in the yield on interest-earning assets from 7.65% in 1998 to
7.46% in 1999. The Company also experienced a decrease in interest paid on
interest-bearing liabilities from 5.11% in 1998 to 4.89% in 1999. As a result,
the interest rate spread increased three basis points from 2.54% in 1998 to
2.57% in 1999.
Interest income increased $3.4 million during the year ended September 30,
1999 compared to the same period in 1998. The increase was primarily due to
increased volumes of loans receivable, particularly commercial and consumer
loans. Interest expense increased $2.2 million reflecting the growth in deposits
and borrowed funds.
[graph omitted]
DILUTED EPS
1996 $0.50
1997 $1.16
1998 $1.37
1999 $1.51
Noninterest income increased from $964,000 for the year ended September 30,
1998 to $1.2 million for the twelve months ended September 30, 1999. The
noninterest income increases are primarily due to fees generated from the
growing number of core deposit relationships, recognition of mortgage servicing
rights, net gains from loan sales and the servicing fees retained on these sold
loans.
Noninterest expense increased from $5.6 million to $7.0 million for the
comparable twelve month periods ending September 30. These noninterest expense
increases are primarily attributable to staffing increases, facility upgrades,
expenses incurred in the offering of additional services to the Bank's customers
and the recognition of a $489,000 provision to adjust loans held for sale to the
lower of cost or market at September 30, 1999.
The provision for loan losses was increased from $120,000 during the period
ended September 30, 1998 to $230,000 for the period ended September 30, 1999 due
to the substantial increase in commercial and consumer loan portfolios during
the 1999 fiscal year.
As of September 30, 1999, net loans were $269.5 million, an increase of
$37.9 million from the $231.6 million as of September 30, 1998. Commercial loans
outstanding increased by $16.6 million from $30.8 million at September 30, 1998
to $47.4 million at September 30, 1999. Residential mortgage loans and home
- 9 -
equity loans outstanding increased by $18.7 million during the year ended
September 30, 1999 net of secondary market sales totaling $20.7 million during
the year. Consumer loans outstanding also increased by $2.6 million from $1.9
million at September 30, 1998 to $4.5 million at September 30, 1999. The growth
in all lending divisions is primarily attributed to the Company's reputation as
a quality local lender satisfying the market's desire for local service and
local decision making.
[PIE CHART OMITTED]
Asset Mix
Mortgage 58%
Cash and Investments 18%
Commercial 14%
Home Equity and Second Mortgages 4%
Construction 3%
Other Assets 2%
Consumer 1%
During the year ended September 30, 1999, the Company completed secondary
market mortgage loan sales totaling $20.7 million and the net gains realized on
these loan sales were $366,000, including $258,000 related to recording mortgage
loan servicing rights. At September 30, 1999, $8.1 million of loans were
classified as loans held for sale.
The loans sold during the year ended September 30, 1999 were fixed rate
mortgage loans with maturities of fifteen years or longer. Servicing of the sold
loans has been retained by the Company and the fees generated during this period
were approximately $54,000, net of $37,000 in amortization of mortgage loan
servicing rights. Management, in order to meet consumer demand, anticipates that
the Company will continue to deliver fixed rate loans to the secondary market to
manage interest rate risk and to diversify the asset mix of the Company.
[BAR GRAPH OMITTED]
Demand, NOW, Savings and MMDA
(Core Deposits)
(In millions)
1996 $36,722
1997 $40,177
1998 $45,134
1999 $59,768
Total deposits increased $20.7 million to $201.4 million as of September
30, 1999 from $180.7 million as of September 30, 1998, and securities sold under
agreements to repurchase increased from $2.4 million to $6.6 million during the
- 10 -
comparable periods. Federal Home Loan Bank ("FHLB") advances and other short
term borrowings also increased from $100.0 million as of September 30, 1998 to
$106.3 million as of September 30, 1999. These increases in deposits, repurchase
agreements and other borrowings primarily funded the loan and investment growth
during the year.
Cash and cash equivalents decreased $5.8 million from $17.9 million as of
September 30, 1998 to $12.1 million as of September 30, 1999. Net cash used in
investing activities totaled $38.0 million and was partially offset by net cash
provided by operating and financing activities amounting to $2.6 million and
$29.6 million, respectively.
The Company's capital leveraging strategy involves the purchase of mortgage
related and other securities funded primarily with FHLB advances. This
leveraging portfolio represented $20.8 million of the total securities available
for sale at September 30, 1999 compared to $15.7 million at September 30, 1998.
As of September 30, 1999, the total securities portfolio amounted to $42.2
million, an increase of $400,000 from $41.8 million at September 30, 1998. The
securities portfolio activity included net security purchases of $65.3 million,
security maturities totaling $42.4 million, principal payments on
mortgage-backed and related securities of $21.5 million and a $1.1 million
decrease in the market value of securities available for sale.
Total liabilities increased from $284.1 million as of September 30, 1998 to
$315.3 million as of September 30, 1999. This increase was primarily due to the
$20.7 million increase in deposits, a $6.3 million increase in FHLB advances and
other borrowings during the year and a $4.2 million increase in securities sold
under agreements to repurchase.
Total shareholders' equity increased from $30.9 million as of September 30,
1998 to $31.2 million as of September 30, 1999. The change to shareholders'
equity resulted mainly from the repurchases of 56,668 shares of outstanding
common stock during this period at a cost of $1.2 million along with the payment
of cash dividends of $515,000 and a $672,000 adjustment to reflect the decrease
in the market value of securities available for sale, net of tax. These
decreases were offset by $2.2 million in net income. The book value of MFB Corp.
common stock, based on the actual number of shares outstanding, increased from
$20.95 at September 30, 1998 to $21.96 at September 30, 1999.
[PIE CHART OMITTED]
Liability and Equity Mix
Other Time Deposits 41%
FHLB Advances 30%
Savings, DDA, NOW &
MMDA Deposits 15%
Stockholders' Equity 9%
Non-Interest
Bearing Deposits 2%
Repurchase Agreements 2%
Other Liabilities 1%
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
Consolidated net income for the Company for the year ended September 30,
1998 was $2.2 million compared to $2.0 million for the same period in 1997. The
increase of $234,000 resulted primarily from a $1.1 million increase in net
interest income and $539,000 increase in non-interest income, offset by a $1.0
million increase in non-interest expense and a $295,000 increase in income tax
expense.
- 11 -
The increase in net interest income was primarily due to increases in
interest income on increases in the volume of interest-earning assets which more
than offset the increases in interest expense on increases in the volume of
interest-bearing liabilities. First mortgage loan receivables increased by $18.2
million and commercial and consumer loan receivables by approximately $25.4
million from September 30, 1997 to September 30, 1998. The yield on total
interest-earning assets also increased from 7.61% in 1997 to 7.65% in 1998,
while the average rate paid on interest-bearing liabilities decreased from 5.12%
in 1997 to 5.11% in 1998. As a result, the interest rate spread increased five
basis points from 2.49% in 1997 to 2.54% in 1998.
Interest income increased $3.2 million during the year ended September 30,
1998 compared to the same period in 1997. The increase was primarily due to
increased volumes of loans receivable and an increase in the average rate earned
on these assets. Interest expense increased $2.0 million reflecting the growth
in deposits and borrowed funds. Net interest income increased $1.1 million for
the year ended September 30, 1998 compared to the year ended September 30, 1997.
Noninterest income increased from $425,000 for the year ended September 30,
1997 to $964,000 for the twelve months ended September 30, 1998. The noninterest
income increases are primarily due to income from the recognition of mortgage
servicing rights from loans sold, net gains from loan sales, servicing fees
related to sold loans, and fees generated from the growing number of core
deposit account relationships.
Noninterest expense increased from $4.6 million to $5.6 million for the
comparable twelve month periods ending September 30. These noninterest expense
increases are primarily attributable to staffing increases and renovated
facilities to support lending operations, along with expenses incurred in the
offering of additional services to the Bank's customers.
The provision for loan losses was increased from $30,000 during the period
ended September 30, 1997 to $120,000 for the period ended September 30, 1998 due
to the substantial increase in the volumes of commercial and consumer loans
during the 1998 fiscal year.
As of September 30, 1998, net loans were $231.6 million, an increase of
$43.3 million from the $188.3 million as of September 30, 1997. Commercial loans
outstanding increased from $8.8 million at September 30, 1997 to $30.8 million
at September 30, 1998 as a result of substantial efforts to grow the small
business banking division. Gross residential mortgage loans and home equity
loans outstanding increased by $20.4 million during the year ended September 30,
1998 net of secondary market sales totaling $28.1 million during the year.
Consumer loans outstanding also increased from $96,000 at September 30, 1997 to
$1.9 million at September 30, 1998. The significant growth in all lending
divisions can be credited to the Company's reputation as a quality local lender
providing fast and knowledgeable service.
At September 30, 1997, $12.7 million of real estate mortgage loans were
reclassified from portfolio loans to loans held for sale in the secondary
market. During the year ended September 30, 1998, the Company completed four
secondary market mortgage loan sales totaling $28.1 million and the net gains
realized on these loan sales were $333,000, including $211,000 related to
recording mortgage loan servicing rights. At September 30, 1998, $13.5 million
of loans were classified as loans held for sale.
The loans sold during the year ended September 30, 1998 were fixed rate
mortgage loans with maturities of fifteen years or longer. Servicing of the sold
loans has been retained by the Company and the fees generated during this period
were approximately $12,000, net of $19,000 in amortization of mortgage loan
servicing rights.
Total deposits increased $8.8 million to $180.7 million as of September 30,
1998 from $171.9 as of September 30, 1997. Federal Home Loan Bank ("FHLB")
advances and other short term borrowings also increased from $49.4 million as of
- 12 -
September 30, 1997 to $100.0 million as of September 30, 1998. These increases
in deposits and other borrowings primarily funded the loan growth during the
year and the $8.4 million increase in cash and cash equivalents.
Cash and cash equivalents increased $8.4 million from $9.5 million as of
September 30, 1997 to $17.9 million as of September 30, 1998. Net cash provided
by operating activities and financing activities amounted to $2.6 million and
$55.6 million, respectively, and was partially offset by net cash used in
investing activities of $49.8 million.
The Company's capital leveraging strategy involves the purchase of mortgage
related and other securities funded primarily with FHLB advances. This
leveraging portfolio represented $15.7 million of the total securities available
for sale at September 30, 1998 compared to $22.7 million at September 30, 1997.
As of September 30, 1998, the total securities portfolio amounted to $41.8
million, an increase of $2.2 million from $39.6 million at September 30, 1997.
The securities portfolio increase was primarily the result of net security
purchases of $44.5 million exceeding matured securities totaling $22.7 million
and principal payments of mortgage-backed and related securities of $19.3
million.
Total liabilities increased from $222.4 million as of September 30, 1997 to
$284.1 million as of September 30, 1998. This increase was primarily due to the
$8.8 million increase in deposits and the $52.1 million increase in FHLB
advances and other borrowings during the year.
Total shareholders' equity decreased from $33.6 million as of September 30,
1997 to $30.9 million as of September 30, 1998. The decreases to equity resulted
mainly from the repurchases of 245,200 shares of outstanding common stock during
this period at a cost of $5.9 million along with the payment of cash dividends
of $544,000. These decreases were offset by $2.2 million in net income and $1.1
million generated from the exercise of stock options.
The book value of MFB Corp. common stock, based on the actual number of
shares outstanding, increased from $20.33 at September 30, 1997 to $20.95 at
September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity relates primarily to the Company's ability to fund loan demand,
meet deposit customers' withdrawal requirements and provide for operating
expenses. Assets used to satisfy these needs consist of cash, deposits with
other financial institutions, overnight interest-bearing deposits in other
financial institutions and securities available for sale. These assets are
commonly referred to as liquid assets.
A standard measure of liquidity for savings associations is the ratio of
cash and eligible investments to a certain percentage of net withdrawable
savings and borrowings due within one year. The minimum required ratio is
currently set by OTS regulation at 4%. At September 30, 1999, the Bank's
liquidity ratio was 16.87%. Therefore, the Bank's liquidity is well above the
minimum regulatory requirements.
Changes in the Bank's liquidity occur as a result of its operating,
investing and financing activities. These activities are discussed below for the
years ended September 30, 1999, 1998 and 1997.
Liquid assets totaled $51.2 million as of September 30, 1999 compared to
$59.7 million as of September 30, 1998 and $49.1 million as of September 30,
1997. The $8.5 million decrease in liquidity from September 30, 1998 to
September 30, 1999 was primarily due to a $5.8 million decrease in cash and cash
equivalents and a $2.7 million decrease in securities available for sale and
interest-bearing time deposits in other financial institutions. Management
believes the liquidity level of $51.2 million as of September 30, 1999 is
sufficient to meet anticipated liquidity needs.
Liquidity levels increased $10.6 million from September 30, 1997 to
September 30, 1998 due primarily to a $8.4 million increase in cash and cash
equivalents and a $2.2 million increase in securities available for sale.
- 13 -
Short-term borrowings or long-term debt may be used to compensate for
reduction in other sources of funds such as deposits and to assist in
asset/liability management. During the year ended September 30, 1996, the Bank
instituted a capital leveraging strategy that involved the purchase of earning
assets funded primarily with FHLB advances. As of September 30, 1999, total FHLB
borrowings amounted to $104.2 million, $20.8 million of which were used as part
of this strategy. The remaining $83.4 million was used primarily to fund loan
portfolio growth. The Bank had commitments to fund loan originations with
borrowers totaling $65.0 million at September 30, 1999. In the opinion of
management, the Company has sufficient cash flow and other cash resources to
meet current and anticipated loan funding commitments, deposit customer
withdrawal requirements and operating expenses. As of September 30, 1998, total
FHLB borrowings amounted to $92.7 million, $15.7 million of which were used as
part of the capital leveraging strategy. The remaining $77.0 million was used
primarily to fund loan portfolio growth.
The cash flow statements provide an indication of the Company's sources and
uses of cash as well as an indication of the ability of the Company to maintain
an adequate level of liquidity. A discussion of the changes in the cash flow
statements for the years ended September 30, 1999, 1998 and 1997 follows.
During the year ended September 30, 1999, net cash and cash equivalents
decreased $5.8 million from $17.9 million at September 30, 1998 to $12.1 million
at September 30, 1999.
The Company experienced a net increase in cash from operating activities of
$2.6 million during the year that was primarily attributable to the net income
of $2.2 million and proceeds of $20.7 million realized from the sale of mortgage
loans, offset by the origination of $20.9 million of loans held for sale.
The $38.0 million decrease in cash from investing activities for the year
ended September 30, 1999 was primarily related to the purchase of securities,
FHLB stock and interest-bearing time deposits totaling $69.1 million, a $32.8
million increase in net loans, and the $2.0 million net increase of premises and
equipment, offset by sales and maturities of securities totaling $44.4 million
and $21.5 million of mortgage-backed securities principal payments.
Financing activities generated net cash of $29.6 million for the year ended
September 30, 1999. The net cash was provided primarily from net deposits of
$20.7 million, $6.6 million in net new borrowed funds, and increases of $4.2
million in repurchase agreements, partially offset by the use of $1.2 million to
repurchase the Company's stock.
During the year ended September 30, 1998, net cash and cash equivalents
increased $8.4 million from $9.5 million at September 30, 1997 to $17.9 million
at September 30, 1998.
The Company experienced a net increase in cash from operating activities of
$2.6 million during the year that was primarily attributable to the origination
of $28.9 million of loans held for sale and $28.1 million of proceeds realized
from the sale of mortgage loans and net income of $2.2 million.
The $49.8 million decrease in cash from investing activities for the year
ended September 30, 1998 was primarily related to the $43.5 million increase in
net loans and the $49.7 purchase of securities and FHLB stock, offset by sale
and maturities of securities totaling $25.7 million and $19.3 million of
mortgage-backed securities principal payments.
Financing activities generated net cash of $55.6 million for the year ended
September 30, 1998. The net cash was provided primarily from $45.2 million in
net new FHLB advances, net deposits of $8.8 million, a $4.9 million commitment
to purchase securities and increases of $2.0 million in repurchase agreements,
partially offset by the use of $5.9 million to repurchase the Company's stock.
During the year ended September 30, 1997, net cash and cash equivalents
increased $7.7 million from $1.7 million at September 30, 1996 to $9.5 million
at September 30, 1997.
- 14 -
The Company experienced a net increase in cash from operating activities of
$1.3 million during the year that was primarily attributable to net income as
adjusted for accrual basis accounting at September 30, 1997.
The $23.0 million decrease in cash from investing activities for the year
ended September 30, 1997 was primarily related to the $48.9 million increase in
net loans and the $29.7 million purchase of securities and FHLB stock, offset by
sales and maturities of securities totaling $53.1 million and $2.9 million of
mortgage-backed securities principal payments.
Financing activities generated net cash of $29.5 million for the year ended
September 30, 1997. The net cash was provided primarily from $23.0 million in
net new FHLB advances and net deposit increases of $12.9 million, partially
offset by the use of $6.4 million to repurchase the Company's stock and $554,000
in cash dividend payments during the year.
As of September 30, 1999 management is not aware of any current
recommendations by regulatory authorities which, if they were to be implemented,
would have, or are reasonably likely to have, a material adverse effect on the
Company's liquidity, capital resources or operations.
NEW ACCOUNTING PRONOUNCEMENT
SFAS No. 133 on derivatives will, beginning with the quarter ended December
31, 2000, require all derivatives to be recorded at fair value in the balance
sheet, with changes in fair value run through income. If derivatives are
documented and effective as hedges, the change in the derivative fair value will
be offset by an equal change in the fair value of the hedged item.
IMPACT OF INFLATION
The audited consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles. These
principles require measurement of financial position and operating results in
terms of historical dollars (except for securities available for sale which are
reported at fair market value and loans held for sale which are reported at the
lower of cost or estimated market value in the aggregate), without considering
changes in the relative purchasing power of money over time due to inflation.
The primary assets and liabilities of the Bank are monetary in nature. As a
result, interest rates have a more significant impact on the Company's
performance than the effects of general levels of inflation. Interest rates,
however, do not necessarily move in the same direction or with the same
magnitude as the price of goods and services, since such prices are affected by
inflation.
In periods of rapidly rising interest rates, the liquidity and maturity
structures of the Company's assets and liabilities are critical to the
maintenance of acceptable performance levels. For a discussion of the Company's
continuing efforts to reduce its vulnerability to changes in interest rates, see
"Asset/Liability Management."
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of noninterest expense. Such expense items as
employee compensation, employee benefits, and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans made by the Bank. Management is unable to determine the extent,
if any, to which properties securing the Bank's loans have appreciated in dollar
value due to inflation.
YEAR 2000 READINESS
The Company is aware of the issues associated with programming code in
existing computer systems as the year 2000 approaches that involves the proper
recognition of date sensitive information when the year changes to 2000. Systems
- 15 -
that do not properly recognize such information could generate erroneous data or
cause a system to fail. The Company is heavily dependent on computer processing
in its business activities and the year 2000 issue creates risk for the Company
from unforseen problems in the Company's computer system and from third parties
whom the Company uses to process information. Such failure of the Company's
computer system and/or third parties computer systems could have a material
impact on the Company's ability to conduct its business.
A major third party vendor provides the Company's primary data processing.
This provider has advised the Company that is has completed the renovation of
its system to be year 2000 ready. The Company has performed tests of the data
processing provider's system for year 2000 readiness and encountered no material
difficulties during the testing process.
The Company has performed an assessment of its computer hardware and
software, and has determined those systems that require upgrade to be year 2000
ready. Such upgrades were completed concurrently with the third party vendor
system upgrades that were implemented in June, 1999. In addition, the Company
has reviewed other external third party vendors that provide services to the
Company (i.e., utility companies, electronic funds transfer providers, and
software companies) and has received certification letters from these vendors
that their systems will be year 2000 ready on a timely basis. Testing has been
performed with the service providers to determine their year 2000 readiness.
The Company has followed the FFIEC guidance, as published in a series of
interagency statements, on requirements on year 2000 readiness and has completed
the five phases identified: awareness, assessment, renovation, validation and
implementation for mission critical systems including third-party providers.
Extensive testing of the critical processes in a year 2000 environment has
revealed no material year 2000 problems.
However, there is no assurance that the systems of other companies on which
the Company's systems rely will be timely converted. If such modifications and
conversions are not made, or are not completed timely, the year 2000 issue could
have an adverse impact on operations of the Company. The Company has developed a
year 2000 contingency plan that addresses, among other issues, critical
operations and potential failures thereof, and strategies for business
continuation.
Contingency planning is one of the most important steps in year 2000
readiness. It provides a systematic basis for addressing an unexpected business
interruption due to a year 2000 issue triggered by internal or third party
system failures or by external infrastructure failures. A thorough contingency
plan is prudent to reduce risk and potential impact of year 2000 induced
interruptions or failures of critical business functions. The Company's
contingency plan facilitates the identification of potential problems,
dissemination of information, resolution of issues and decision-making process
during the identified year 2000 timeframe. Our management team will be fully
deployed during this time period and should a year 2000 issue be detected, the
contingency plan will be immediately enacted to address the problem.
The Company's significant suppliers are an online computer services firm
(provides data processing services), the Federal Home Loan Bank of Indianapolis
and utility services. The representations from these suppliers are that they
have been making efforts to become year 2000 ready and to test and validate
their systems during 1999. The Company continues to monitor the progress of
these suppliers by requesting regular updates of the suppliers' progress and
believes that these suppliers will be year 2000 ready before December 31, 1999.
Management does not know of alternative suppliers for the services provided by
these entities, but believes a conversion to these suppliers of the Company's
data processing capabilities would be very difficult to accomplish before the
year 2000.
The Company could incur losses if loan payments are delayed due to year
2000 problems affecting significant borrowers. The Company has communicated with
such parties to assess their progress in evaluating and implementing any
- 16 -
corrective measures required by them to be year 2000 ready. To date, the Company
has not been advised by such parties that they do not have plans in place to
address and correct the issues associated with the year 2000 problem; however,
no assurance can be given as to the adequacy of such plans or to the timeliness
of their implementation. As part of the current credit approval process, new and
renewed loans are evaluated as to the borrower's year 2000 readiness.
The Company, as with all financial institutions, has reviewed the
possibility of some level of reduction in deposits during the later part of
1999. Based on its review, the Company has determined that alternative sources
of funds should be available to maintain adequate funding throughout the period.
Based on the Company's review of its computer systems, management believes
the cost of the remediation effort to make its systems year 2000 ready will not
have an adverse impact on the Company's financial condition, results of
operations or liquidity. The Company had already replaced many of its computers
and associated equipment as a result of third party vendor upgrades. These cost
and time estimates are based on management's best estimates and could differ
from those actually incurred.
Although management believes the Company's computer systems and service
providers will be year 2000 ready, there can be no assurance that these systems,
or those systems of other companies on which the Company's systems rely, will be
fully functional in the year 2000. Such failure could have a significant adverse
impact on the financial condition and results of operations of the Company.
FORWARD LOOKING STATEMENTS
When used in this filing and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases, "anticipate,"
"would be," "will allow," "intends to," "will likely result," "are expected to,"
will continue," "is anticipated," "estimated," "project," or similar expressions
are intended to identify, "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
risks and uncertainties, including but not limited to changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area, and competition, all or some of which could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected.
The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and
advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investing activities, and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation,
to update any forward looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
- 17 -
Report of Independent Auditors
Board of Directors and Shareholders
MFB Corp.
Mishawaka, Indiana
We have audited the accompanying consolidated balance sheets of MFB Corp.
and Subsidiary as of September 30, 1999 and 1998 and the related consolidated
statements of income, shareholders' equity and cash flows for the years ended
September 30, 1999, 1998 and 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MFB Corp.
and Subsidiary as of September 30, 1999 and 1998, and the results of its
operations and its cash flows for the years ended September 30, 1999, 1998 and
1997 in conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
South Bend, Indiana
November 10, 1999
- 18 -
MFB CORP. AND SUBSIDIARY
Consolidated Balance Sheets
September 30,
-------------------------------
1999 1998
------------- -------------
ASSETS
Cash and due from financial institutions $ 6,315,747 $ 3,018,404
Interest-bearing deposits in other financial institutions - short-term 5,746,195 14,885,289
Total cash and cash equivalents 12,061,942 17,903,693
------------- -------------
Interest-bearing time deposits in other financial institutions 1,000,000 --
Securities available for sale 38,170,143 41,819,768
Securities held to maturity (fair value of $3,709,205
in 1999 and $-0- in 1998) 3,984,338 --
Federal Home Loan Bank (FHLB) stock, at cost 5,511,300 4,636,300
Loans held for sale, net of unrealized losses
of $489,152 in 1999 and $-0- in 1998 8,061,951 13,516,502
Loans receivable, net of allowance for loan losses of
$638,465 in 1999 and $453,567 in 1998 269,464,085 231,606,050
Accrued interest receivable 1,363,318 967,995
Premises and equipment, net 4,413,409 2,795,496
Mortgage servicing rights, net of accumulated amortization
of $56,571 in 1999 and $19,376 in 1998 412,390 191,699
Investment in limited partnership 1,213,430 1,221,514
Other assets 797,380 302,081
------------- -------------
Total assets $ 346,453,686 $ 314,961,098
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand deposits $ 7,357,944 $ 4,298,516
Savings, NOW and MMDA deposits 52,409,560 40,835,161
Other time deposits 141,639,885 135,532,298
Total deposits 201,407,389 180,665,975
Securities sold under agreements to repurchase 6,566,395 2,365,716
Other borrowings 104,225,750 97,656,964
Advances from borrowers for taxes and insurance 2,111,183 2,316,317
Accrued expenses and other liabilities 961,339 1,070,349
------------- -------------
Total liabilities 315,272,056 284,075,321
Shareholders' equity
Common stock, no par value, 5,000,000 shares authorized;
shares issued: 1,689,417 - 1999 and 1998; shares
outstanding: 1,420,049- 1999, 1,474,217 - 1998 13,016,302 12,846,979
Retained earnings - substantially restricted 25,419,722 23,730,167
Accumulated other comprehensive income (loss), net of
tax of $(470,824) in 1999 and $(29,788) in 1998 (717,823) (45,417)
Unearned Employee Stock Ownership Plan (ESOP) shares (222,963) (444,557)
Unearned Recognition and Retention Plan (RRP) shares -- (38,500)
Treasury Stock, 269,368 common shares - 1999;
215,200 common shares - 1998, at cost (6,313,608) (5,162,895)
------------- -------------
Total shareholders' equity 31,181,630 30,885,777
------------- -------------
Total liabilities and shareholders' equity $ 346,453,686 $ 314,961,098
============= =============
The accompanying notes are an integral part of
these consolidated financial statements.
- 19 -
MFB CORP. AND SUBSIDIARY
Consolidated Statements of Income
Years ended September 30,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
Interest income
Loans receivable, including fees
Mortgage loans $14,997,969 $15,071,514 $12,945,694
Consumer and other loans 1,267,455 858,670 550,905
Financing leases and commercial loans 4,060,194 1,815,178 400,120
Securities - taxable 3,315,190 2,532,974 3,692,136
Other interest-earning assets 612,977 559,547 95,971
----------- ----------- -----------
Total interest income 24,253,785 20,837,883 17,684,826
Interest expense
Deposits 8,580,571 8,388,360 8,181,489
Securities sold under agreements to repurchase 147,675 67,352 4,138
FHLB advances 5,719,852 3,748,087 1,971,537
----------- ----------- -----------
Total interest expense 14,448,098 12,203,799 10,157,164
Net interest income 9,805,687 8,634,084 7,527,662
Provision for loan losses 230,000 120,000 30,000
----------- ----------- -----------
Net interest income after provision
for loan losses 9,575,687 8,514,084 7,497,662
Noninterest income
Insurance commissions 147,521 143,201 133,870
Brokerage commissions 28,157 35,834 23,604
Net realized gains from sales of securities
available for sale 3,803 7,673 6,098
Net realized gains from sales of loans 366,320 333,171 -
Loan servicing fees, net of amortization
of $37,195 in 1999 and $19,376 in 1998 54,025 12,038 --
Other income 620,240 432,276 261,171
----------- ----------- -----------
Total noninterest income 1,220,066 964,193 424,743
Noninterest expense
Salaries and employee benefits 3,846,889 3,413,558 2,772,154
Occupancy and equipment expense 882,698 720,305 579,327
SAIF deposit insurance premium 109,208 107,503 147,121
Provision to adjust loans held for sale
to lower of cost or market 489,152 -- --
Other expense 1,678,134 1,384,023 1,099,972
----------- ----------- -----------
Total noninterest expense 7,006,081 5,625,389 4,598,574
----------- ----------- -----------
Income before income taxes 3,789,672 3,852,888 3,323,831
Income tax expense 1,585,374 1,616,605 1,321,630
----------- ----------- -----------
Net income $ 2,204,298 $ 2,236,283 $ 2,002,201
=========== =========== ===========
Basic earnings per common share $ 1.56 $ 1.44 $ 1.21
Diluted earnings per common share 1.51 1.37 1.16
The accompanying notes are an integral part of
these consolidated financial statements.
- 20 -
MFB CORP. AND SUBSIDIARY
Consolidated Statements of Shareholder Equity
Years ended September 30, 1999, 1998 and 1997
Accumulated
Other
Comprehensive
Common Retained Income (Loss), Unearned
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 -- -- --
Market adjustment of 23,276 ESOP shares
committed to be released 188,153 -- -- --
Amortization of RRP contribution -- -- -- --
Tax benefit related to employee stock plans 28,975 -- -- --
Comprehensive income:
Net income for the year end September 30, 1997 -- 2,002,201 -- --
Net change in net unrealized gains and losses on
securities available for sale, net of reclassification
adjustments and tax effects -- -- 293,136 -
Total comprehensive income -- -- -- --
------------ ------------ ------------ ------------
Balance at September 30, 1997 13,108,171 22,037,441 73,208 (664,610)
Purchase of 245,200 shares of treasury stock -- -- -- --
Stock option exercise-issuance of 68,850 shares
of treasury stock (968,611) -- -- --
Cash dividends declared - $ .335 per share -- (543,557) -- 20,053
Effect of contribution to fund ESOP -- -- --
Market adjustment of 20,989 ESOP shares
committed to be released 286,919 - -- --
Amortization of RRP contribution -- -- -- --
Tax benefit related to employee stock plans 420,500 - -- --
Comprehensive income:
Net income for the year end September 30, 1998 -- 2,236,283 -- --
Net change in net unrealized gains and losses on
securities available for sale, net of reclassification
adjustments and tax effects -- -- (118,625) --
Total comprehensive income -- -- -- --
------------ ------------ ------------ ------------
Balance at September 30, 1998 $ 12,846,979 $ 23,730,167 $ (45,417) $ (444,557)
Purchase of 56,668 shares of treasury stock -- -- -- --
Stock option exercise-issuance of 2,500 shares
of treasury stock (33,906) -- -- --
Cash dividends declared - $ .355 per share -- (514,743) -- 13,961
Effect of contribution to fund ESOP -- -- --
Market adjustment of 19,186 ESOP shares
committed to be released 203,229 - -- --
Amortization of RRP contribution -- -- -- --
Comprehensive income:
Net income for the year end September 30, 1999 -- 2,204,298 -- --
Net change in net unrealized gains and losses
on securities available for sale, net of
reclassification adjustments and tax effects -- -- (672,406) --
Total comprehensive income -- -- -- --
------------ ------------ ------------ ------------
Balance at September 30, 1999 $ 13,016,302 $ 25,419,722 $ (717,823) $ (222,963)
============ ============ ============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
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 - -- 200,000
Market adjustment of 23,276 ESOP shares
committed to be released -- -- 188,153
Amortization of RRP contribution 77,000 -- 77,000
Tax benefit related to employee stock plans -- -- 28,975
Comprehensive income:
Net income for the year end September 30, 1997 -- -- 2,002,201
Net change in net unrealized gains and losses on
securities available for sale, net of reclassification
adjustments and tax effects -- -- 293,136
Total comprehensive income -- -- 2,295,337
------------ ------------ ------------
Balance at September 30, 1997 (115,500) (888,694) 33,550,016
Purchase of 245,200 shares of treasury stock -- (5,931,312) (5,931,312)
Stock option exercise-issuance of 68,850 shares
of treasury stock -- 1,657,111 688,500
Cash dividends declared - $ .335 per share -- -- (523,504)
Effect of contribution to fund ESOP 200,000 - -- 200,000
Market adjustment of 20,989 ESOP shares
committed to be released -- -- 286,919
Amortization of RRP contribution 77,000 -- 77,000
Tax benefit related to employee stock plans -- -- 420,500
Comprehensive income:
Net income for the year end September 30, 1998 -- -- 2,236,283
Net change in net unrealized gains and losses on
securities available for sale, net of reclassification
adjustments and tax effects -- -- (118,625)
Total comprehensive income -- -- 2,117,658
------------ ------------ ------------
Balance at September 30, 1998 $ (38,500) $ (5,162,895) $ 30,885,777
Purchase of 56,668 shares of treasury stock -- (1,209,619) (1,209,619)
Stock option exercise-issuance of 2,500 shares
of treasury stock -- 58,906 25,000
Cash dividends declared - $ .355 per share -- -- (500,782)
Effect of contribution to fund ESOP 207,633 - -- 207,633
Market adjustment of 19,186 ESOP shares
committed to be released -- -- 203,229
Amortization of RRP contribution 38,500 -- 38,500
Comprehensive income:
Net income for the year end September 30, 1999 -- -- 2,204,298
Net change in net unrealized gains and losses
on securities available for sale, net of
reclassification adjustments and tax effects -- -- (672,406)
Total comprehensive income -- -- 1,531,892
------------ ------------ ------------
Balance at September 30, 1999 $ -- $ (6,313,608) $ 31,181,630
============ ============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
- 21 -
MFB CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended September 30, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities
Net income $ 2,204,298 $ 2,236,283 $ 2,002,201
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization, net of accretion 298,862 314,688 473,203
Amortization of RRP contribution 38,500 77,000 77,000
Provision for loan losses 230,000 120,000 30,000
Provision to adjust loans held for sale
to lower of cost or market 489,152 -- --
Net realized gains from sales of
securities available for sale (3,803) (7,673) (6,098)
Net realized gains from sales of loans (366,320) (333,171) --
Amortization of mortgage servicing rights 37,195 19,376 --
Origination of loans held for sale (20,948,828) (28,866,583) --
Proceeds from sales of loans held for sale 20,728,574 28,143,363 --
Equity in loss of investment in
limited partnership 8,084 4,236 --
Market adjustment of ESOP shares
committed to be released 203,229 286,919 188,153
ESOP expense 207,633 200,000 200,000
Net change in:
Accrued interest receivable (395,323) (249,568) 99,587
Other assets (24,475) (80,831) 498,262
Accrued expenses and other liabilities (138,798) 750,489 (2,303,772)
----------- ----------- -----------
Net cash from operating activities 2,567,980 2,614,528 1,258,536
Cash flows from investing activities
Net change in interest-bearing time
deposits in other financial institutions (1,000,000) -- 495,000
Net change in loans receivable (32,793,948) (43,461,852) (48,913,292)
Proceeds from:
Sales of securities available for sale 1,989,992 2,926,206 25,186,766
Principal payments of mortgage-backed
and related securities 21,505,020 19,343,270 2,938,521
Maturities of securities available for sale 42,410,326 22,738,565 27,877,752
Purchase of:
Securities available for sale (63,280,952) (47,461,878) (28,634,913)
Securities held to maturity (3,984,360) -- --
FHLB stock (875,000) (2,236,300) (1,063,900)
Premises and equipment, net (2,001,153) (423,665) (859,211)
Investment in limited partnership -- (1,225,750) --
----------- ----------- -----------
Net cash from investing activities (38,030,075) (49,801,404) (22,973,277)
The accompanying notes are an integral part of
these consolidated financial statements.
(Continued)
- 22 -
Consolidated Statements of Cash Flows
Years ended September 30, 1999, 1998 and 1997 (continued)
1999 1998 1997
------------ ------------ ------------
Cash flows from financing activities
Purchase of MFB Corp. common stock $ (1,209,619) $ (5,931,312) $ (6,410,802)
Net change in deposits 20,741,414 8,778,708 12,922,778
Net change in securities sold under
agreements to repurchase 4,200,679 1,976,796 388,920
Proceeds from other borrowings 23,000,000 72,156,964 66,735,000
Repayment of other borrowings (16,431,214) (22,000,000) (43,735,000)
Proceeds from exercise of stock options 25,000 688,500 96,500
Net change in advances from
borrowers for taxes and insurance (205,134) 462,069 (10,179)
Cash dividends paid (500,782) (523,504) (524,516)
------------ ------------ ------------
Net cash from financing activities 29,620,344 55,608,221 29,462,701
------------ ------------ ------------
Net change in cash and cash equivalents (5,841,751) 8,421,345 7,747,960
Cash and cash equivalents at beginning of year 17,903,693 9,482,348 1,734,388
------------ ------------ ------------
Cash and cash equivalents at end of year $ 12,061,942 $ 17,903,693 $ 9,482,348
============ ============ ============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 14,403,181 $ 12,305,287 $ 10,113,767
Income taxes 1,627,895 1,182,448 868,000
Supplemental schedule of noncash investing
activities
Transfer from:
Loans receivable to loans held for sale $ -- $- $ 12,671,186
Loans held for sale to loans receivable 5,294,087 -- --
The accompanying notes are an integral part of
these consolidated financial statements.
- 23 -
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial
statements include the accounts of MFB Corp., and its wholly-owned subsidiary
(together referred to as "the Company"), MFB Financial (the "Bank"), a federal
stock savings bank, and Mishawaka Financial Services, Inc., a wholly-owned
subsidiary of the Bank. Mishawaka Financial Services, Inc. is engaged in the
sale of credit life, general fire and accident, car, home and life insurance as
agent for the Bank's customers and the general public. All significant
intercompany transactions and balances are eliminated in consolidation.
Nature of Business and Concentrations of Credit Risk: The primary source of
income for the Company results from granting commercial, consumer and
residential real estate loans in Mishawaka and the surrounding area. Loans
secured by real estate mortgages comprise approximately 81% of the loan
portfolio at September 30, 1999 and are primarily secured by residential
mortgages. The Company operates primarily in the banking industry which accounts
for more than 90% of its revenues, operating income and assets.
Use of Estimates In Preparing Financial Statements: The preparation of
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period, as well as the
disclosures provided. Areas involving the use of estimates and assumptions in
the accompanying financial statements include the allowance for loan losses,
fair values of securities and other financial instruments, determination and
carrying value of loans held for sale, determination and carrying value of
impaired loans, the value of mortgage servicing rights, the value of investments
in limited partnerships, the value of stock options, the realization of deferred
tax assets, and the determination of depreciation of premises and equipment
recognized in the Company's financial statements. Actual results could differ
from those estimates. Estimates associated with the allowance for loan losses
and the fair values of securities and other financial instruments are
particularly susceptible to material change in the near term.
Cash and Cash Equivalents: For purposes of reporting cash flows, cash and
cash equivalents is defined to include the Company's cash on hand, due from
financial institutions and short-term interest-bearing deposits in other
financial institutions. The Company reports net cash flows for customer loan
transactions, deposit transactions, short term borrowings having an original
maturity of 90 days or less, advances from borrowers for taxes and insurance,
and interest-bearing time deposits in other financial institutions.
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported separately as other
comprehensive income or loss and in shareholders' equity, net of tax. Securities
are classified as trading when held for short term periods in anticipation of
market gains, and are carried at fair value. Securities are written down to fair
value when a decline in fair value is not temporary.
Gains and losses on the sale of securities are determined using the specific
identification method based on amortized cost and are reflected in results of
operations at the time of sale. Interest and dividend income, adjusted by
amortization of purchase premium or discount over the estimated life of the
security using the level yield method, is included in earnings.
Mortgage Banking Activities: Mortgage loans originated and intended for
sale in the secondary market are reported on the statements of financial
- 24 -
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
condition as loans held for sale and are carried at the lower cost or estimated
market value in the aggregate. Net unrealized losses are recognized in a
valuation allowance by charges to income.
Loan servicing fees are recognized when received and the related costs are
recognized when incurred. The Bank sells mortgages into the secondary market at
market prices, which includes consideration for normal servicing fees.
Effective October 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights.
This Statement changed the accounting for mortgage servicing rights retained by
a loan originator. Under this standard, if the originator sells or securitizes
mortgage loans and retains the related servicing rights, the total cost of the
mortgage loan is allocated between the loan (without the servicing rights) and
the servicing rights, based on their relative fair values. Prior to adopting
SFAS No. 122 on October 1, 1996, servicing right assets were recorded only for
purchased rights to service mortgage loans. The costs allocated to mortgage
servicing rights are now recorded as a separate asset and are amortized in
proportion to, and over the life of, the net servicing income. The carrying
value of the mortgage servicing rights are periodically evaluated for
impairment.
Loans Receivable: Loans receivable that management has the intent and
ability to hold for the foreseeable future or until maturity or pay-off are
reported at their outstanding principal balances adjusted for any charge-offs,
the allowance for loan losses, and any deferred fees or costs on originated
loans, and unamortized premiums or discounts on purchased loans.
Premiums or discounts on mortgage loans are amortized to income using the
level yield method over the remaining period to contractual maturity, adjusted
for anticipated prepayments. Loan fees and certain direct loan origination costs
are deferred, and the net fee or cost is recognized as an adjustment to interest
income using the interest method.
Because some loans may not be repaid in full, an allowance for loan losses
is recorded. The allowance for loan losses is increased by a provision for loan
losses charged to expense and decreased by charge-offs (net of recoveries).
Estimating the risk of loss and the amount of loss on any loan is necessarily
subjective. Accordingly, the allowance is maintained by management at a level
considered adequate to cover losses that are currently anticipated. Management's
periodic evaluation of the adequacy of the allowance is based on the Company's
past loan loss experience, known and inherent risks in the portfolio, periodic,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, and current economic conditions.
While management may periodically allocate portions of the allowance for
specific problem loan situations, the whole allowance is available for any loan
charge-offs that occur.
Loans are considered impaired if full principal or interest payments are
not anticipated in accordance with the contractual loan terms. Impaired loans
are carried at the present value of expected future cash flows discounted at the
loan's effective interest rate or at the fair value of the collateral if the
loan is collateral dependent. A portion of the allowance for loan losses is
allocated to impaired loans if the value of such loans is deemed to be less than
the unpaid balance. If these allocations cause the allowance for loan losses to
require increase, such increase is reported as a component of the provision for
loan losses.
Smaller-balance homogeneous loans are evaluated for impairment in total.
Such loans include residential first mortgage loans secured by one-to-four
family residences, residential construction loans, automobile, manufactured
homes, home equity and second mortgage loans. Commercial loans and mortgage
loans secured by other properties are evaluated individually for impairment.
When analysis of borrower operating results and financial condition indicates
- 25 -
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
that underlying cash flows of the borrower's business are not adequate to meet
its debt service requirements, the loan is evaluated for impairment. Often this
is associated with a delay or shortfall in payments of 30 days or more.
Nonaccrual loans are often also considered impaired. Impaired loans, or portions
thereof, are charged off when deemed uncollectible. The nature of disclosures
for impaired loans is considered generally comparable to prior nonaccrual and
renegotiated loans and non-performing and past due asset disclosures.
Interest income on loans is accrued over the term of the loans based upon
the principal outstanding. The accrual of interest on impaired loans in
discontinued when, in management's opinion, the borrower may be unable to meet
payments as they become due. When interest accrual is discontinued, all unpaid
accrued interest is reversed. Interest income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment, the
borrower has the ability to make contractual interest and principal payments, in
which case the loan is returned to accrual status.
Foreclosed Real Estate: Real estate properties acquired through, or in lieu
of, loan foreclosure are initially recorded at fair value at the date of
acquisition, establishing a new cost basis. Any reduction to fair value from the
carrying value of the related loan at the time of acquisition is accounted for
as a loan loss and charged against the allowance for loan losses. Valuations are
periodically performed by management and valuation allowances are adjusted
through a charge to income for changes in fair value or estimated selling costs.
Foreclosed real estate at September 30, 1999 and 1998 amounted to $100,000 and
$145,000.
Income Taxes: Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through income tax expense. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
Premises and Equipment: Land is carried at cost. Buildings and improvements
and furniture and equipment are carried at cost, less accumulated depreciation
and amortization computed principally by using the straight-line method over the
estimated useful lives of the assets. These assets are reviewed for impairment
when events indicate the carrying amount may not be recoverable.
Employee Stock Ownership Plan (ESOP): The Company accounts for its ESOP
under AICPA Statement of Position (SOP) 93-6. The cost of shares issued to the
ESOP, but not yet allocated to participants, are presented as a reduction of
shareholders' equity. Compensation expense is recorded based on the average
market price of the shares committed to be released for allocation to
participant accounts. The difference between the market price and the cost of
shares committed to be released is recorded as an adjustment to common stock.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings; dividends on unearned ESOP shares are reflected as a reduction of debt
and accrued interest.
Financial Instruments with Off-Balance-Sheet Risk: The Company, in the
normal course of business, makes commitments to make loans which are not
reflected in the consolidated financial statements. A summary of these
commitments is disclosed in Note 13.
Earnings Per Common Share: Basic earnings per common share is based on the
net income divided by the weighted average number of common shares outstanding
during the period. ESOP shares are considered outstanding for earnings per
common share calculations as they are committed to be released; unearned shares
- 26 -
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
are not considered outstanding. Recognition and retention plan ("RRP") shares
are considered outstanding for earnings per common share calculations as they
become vested. Diluted earnings per common share shows the dilutive effective of
additional potential common shares issuable under stock options and nonvested
shares issued under the RRP.
Stock Compensation: Expense for employee compensation under stock option
plans is based on Accounting Principles Board (APB) Opinion 25, with expense
reported only if options are granted below market price at grant date.
Disclosures of net income and earnings per common share are provided as if the
fair value method of SFAS No. 123 were used for stock-based compensation.
Comprehensive Income (Loss): Comprehensive income (loss) consists of net
income and other comprehensive income (loss). Other comprehensive income
includes the net change in net unrealized gains and losses on securities
available for sale, net of reclassification adjustments and tax effects, and is
also recognized as a separate component of shareholders' equity. The accounting
standard that requires reporting comprehensive income (loss) first applies for
1999, with prior information restated to be comparable.
Segments: MFB Corp. and its subsidiary, MFB Financial and its subsidiary
Mishawaka Financial Services, Inc. provide a broad range of financial services
to individuals and companies in Mishawaka and the surrounding area. These
services include demand, time and savings deposits; lending; and insurance.
While the Company's chief decision makers monitor the revenue streams of the
various Company products and services, operations are managed and financial
performance is evaluated on a Company-wide basis. Accordingly, all of the
Company's banking operations are considered by management to be aggregated in
one reportable operating segment.
New Accounting Pronouncement: SFAS No. 133 on derivatives will, beginning
with the quarter ended December 31, 2000, require all derivatives to be recorded
at fair value in the balance sheet. Unless designated as hedges, changes in
these fair values will be recorded in the income statement. If derivatives are
documented and effective as hedges, the change in the derivative fair value will
generally be offset by an equal change in the fair value of the hedged item.
Reclassifications: Some items in the prior consolidated financial
statements have been reclassified to conform with the current presentation.
NOTE 2 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
A reconciliation of the numerators and denominators used in the computation
of the basic earnings per common share and diluted earnings per common share is
presented below:
Year ended September 30,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
Basic Earnings Per Common Share
Numerator
Net income $ 2,204,298 $ 2,236,283 $ 2,002,201
=========== =========== ===========
Denominator
Weighted average common shares
outstanding 1,448,790 1,611,492 1,742,329
Less: Average unallocated ESOP shares (30,450) (50,538) (72,670)
Less: Average nonvested RRP shares (1,925) (7,700) (15,400)
----------- ----------- -----------
Weighted average common shares
outstanding for basic earnings per
common share 1,416,415 1,553,254 1,654,259
=========== =========== ===========
Basic earnings per common share $ 1.56 $ 1.44 $ 1.21
=========== =========== ===========
- 27 -
Year ended September 30,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
Diluted Earnings Per Common Share
Numerator
Net income $2,204,298 $2,236,283 $2,002,201
========== ========== ==========
Denominator
Weighted average common shares
outstanding for basic earnings per
common share 1,416,415 1,553,254 1,654,259
Add: Dilutive effects of average
nonvested RRP shares 448 3,166 --
Add: Dilutive effects of assumed
exercises of stock options 44,793 75,417 71,916
---------- ---------- ----------
Weighted average common shares
and dilutive potential common
shares outstanding 1,461,656 1,631,837 1,726,175
---------- ---------- ----------
Diluted earnings per common share $ 1.51 $ 1.37 $ 1.16
========== ========== ==========
Stock options for 78,250 and 45,000 shares of common stock were not
considered in computing diluted earnings per common share for the years ended
September 30, 1999 and 1998 because they were antidilutive.
NOTE 3 - SECURITIES
The amortized cost and fair value of securities available for sale and held
to maturity are as follows:
Available for Sale
September 30, 1999
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Debt securities
U.S. Government and
federal agencies $ 7,745,193 $- $ (182,510) $ 7,562,683
Mortgage-backed 27,112,085 56,085 (718,350) 26,449,820
Corporate notes 3,958,662 -- (230,232) 3,728,430
------------ ------------ ------------ ------------
38,815,940 56,085 (1,131,092) 37,740,933
Marketable equity securities 542,850 -- (113,640) 429,210
------------ ------------ ------------ ------------
$ 39,358,790 $ 56,085 $ (1,244,732) $ 38,170,143
============ ============ ============ ============
Held to Maturity
September 30, 1999
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Corporate notes $ 3,984,338 $ - $(275,133) $ 3,709,205
============ ============ ============ ============
- 28 -
Available for Sale
September 30, 1998
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Debt securities
U.S. Government
and federal agencies $ 4,218,461 $ 35,228 $ -- $ 4,253,689
Mortgage-backed 22,259,552 33,404 (25,879) 22,267,077
Other securities 8,929,482 -- -- 8,929,482
Corporate notes 5,944,628 -- (81,488) 5,863,140
------------ ------------ ------------ ------------
41,352,123 68,632 (107,367) 41,313,388
Marketable equity securities 542,850 -- (36,470) 506,380
------------ ------------ ------------ ------------
$ 41,894,973 $ 68,632 $ (143,837) $ 41,819,768
============ ============ ============ ============
There were no securities held to maturity at September 30, 1998.
The amortized cost and fair value of debt securities by contractual
maturity are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
September 30, 1999
--------------------------------------------------------
Available for Sale Held for Maturity
-------------------------- --------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
Due in one year or less $ 501,371 $ 501,250 $ 501,286 $ 501,145
Due after one year through
five years 2,498,157 2,464,075 -- --
Due after five years through
ten years 4,000,000 3,893,760 3,483,052 3,208,060
Due after ten years 4,704,327 4,432,028 -- --
----------- ----------- ----------- -----------
11,703,885 11,291,113 3,984,338 3,709,205
Mortgage-backed securities 27,112,085 26,449,820 -- --
----------- ----------- ----------- -----------
$38,815,940 $37,740,933 $ 3,984,338 $ 3,709,205
=========== =========== =========== ===========
Proceeds from sales of securities available for sale were $1,989,992 during
the year ended September 30, 1999. Gross gains of $5,026 and gross losses of
$1,223 were realized on these sales. During the year ended September 30, 1998,
proceeds from the sales of securities available for sale were $2,926,206 with
gross gains of $10,534 and gross losses of $2,861 realized on these sales.
During the year ended September 1997, proceeds from the sales of securities
available for sale were $25,186,766 with gross gains of $59,828 and gross losses
of $53,730 realized on those losses.
- 29 -
NOTE 4 - LOANS RECEIVABLE, NET
Loans receivable, net at September 30 are summarized as follows:
1999 1998
------------- -------------
First mortgage loans (principally conventional)
Principal balances
Secured by one-to-four family residences $ 191,479,582 $ 183,150,539
Construction loans 11,157,731 8,233,468
Other 3,298,833 120,188
------------- -------------
205,936,146 191,504,195
Less undisbursed portion of construction
and other mortgage loans (87,153) (485,444)
------------- -------------
Total first mortgage loans 205,848,993 191,018,751
Commercial and consumer loans:
Principal balances
Home equity and second mortgage $13,308,441 $ 9,067,504
Commercial 47,399,290 30,774,778
Financing leases 16,969 83,026
Other 4,461,096 1,913,564
Total commercial and consumer loans 65,185,796 41,838,872
Allowance for loan losses (638,465) (453,567)
Net deferred loan origination fees (932,239) (798,006)
------------- -------------
$ 269,464,085 $ 231,606,050
============= =============
Activity in the allowance for loan losses is summarized as follows for the
years ended September 30:
1999 1998 1997
--------- --------- ---------
Balance at beginning of year $ 453,567 $ 370,000 $ 340,000
Provision for loan losses 230,000 120,000 30,000
Charge-offs (45,102) (36,433) --
Recoveries -- -- --
--------- --------- ---------
Balance at end of year $ 638,465 $ 453,567 $ 370,000
========= ========= =========
At September 30, 1999, 1998 and 1997, no portion of the allowance for loan
losses was allocated to impaired loan balances as there were no loans considered
impaired loans as of or for the years ended September 30, 1999, 1998 and 1997.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans at
September 30, are summarized as follows:
1999 1998
----------- -----------
Mortgage loan portfolios serviced for:
Telebank $ 7,597,059 $ 9,943,910
Hanover Capital Mortgage Holdings, Inc. 6,785,972 7,629,859
LaSalle Bank, FSB 7,222,714 8,036,000
Citizens Bank 6,250,822 --
Federal Home Loan Mortgage Corporation 13,709,321 --
----------- -----------
$41,565,888 $25,609,769
=========== ===========
- 30 -
Custodial escrow balances maintained in connection with the foregoing
serviced loans were $209,000 and $62,000 at September 30, 1999 and 1998.
Certain directors and executive officers of the Company and its subsidiary,
including associates of such persons, are loan customers. A summary of the
related party loan activity, for loans aggregating $60,000 or more to any one
related party, is as follows:
1999 1998
----------- -----------
Balance - beginning of year $ 1,513,829 $ 927,721
New loans 443,980 896,705
Repayments (375,307) (117,579)
Effect of changes in related parties -- (193,018)
----------- -----------
Balance - end of year $ 1,582,502 $ 1,513,829
=========== ===========
NOTE 5 - PREMISES AND EQUIPMENT, NET
Premises and equipment at September 30 are summarized as follows:
1999 1998
----------- -----------
Land $ 834,895 $ 581,956
Buildings and improvements 3,571,734 2,544,588
Furniture and equipment 2,052,425 1,441,967
----------- -----------
Total cost 6,459,054 4,568,511
Accumulated depreciation and amortization (2,045,645) (1,773,015)
----------- -----------
$ 4,413,409 $ 2,795,496
=========== ===========
Depreciation and amortization of premises and equipment, included in
occupancy and equipment expense was approximately $383,000, $241,000 and
$216,000 for the years ended September 30, 1999, 1998 and 1997, respectively.
NOTE 6 - DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit in
denomination of $100,000 or more was approximately $30,252,000 and $27,568,000
at September 30, 1999 and 1998. At September 30, 1999, the scheduled maturities
of certificates of deposit are as follows for the years ended September 30:
2000 $110,416,081
2001 22,227,730
2002 6,873,015
2003 1,467,270
2004 70,271
Thereafter 285,518
------------
$141,639,885
============
NOTE 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase consist of obligations of
the Company to other parties. These arrangements are all one-day retail
repurchase agreements and are secured by investment securities. Such collateral
is held by safekeeping agents of the Company. Information concerning securities
sold under agreements to repurchase as of September 30 is summarized as follows:
- 31 -
1999 1998 1997
---------- ---------- ----------
Average daily balance during the year $3,892,000 $1,647,000 $ 97,000
Average interest rate during the year 3.79% 4.09% 4.27%
Maximum month end balance
during the year $7,079,000 $3,882,000 $ 389,000
Balance at end of year $6,566,395 $2,365,716 $ 388,920
Securities underlying these agreements
at year end were as follows:
Carrying value of securities $9,892,000 $8,385,000 $3,530,000
Fair value $9,310,000 $8,387,000 $3,508,000
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
At September 30, 1999, advances from the Federal Home Loan Bank of
Indianapolis with fixed and variable rates ranging from 4.76% to 5.93% are
required to be repaid in the year ending September 30 as follows:
2000 $8,000,000
2001 2,350,000
2002 11,350,000
2003 15,300,000
2004 800,000
Thereafter 66,425,750
------------
$104,225,750
============
FHLB advances are secured by all FHLB stock, qualifying first mortgage
loans, government agency and mortgage backed securities. At September 30, 1999
and 1998, in addition to $5,511,000 and $4,636,000 in FHLB stock, collateral of
approximately $225,715,000 and $194,477,000 is pledged to the FHLB to secure
advances outstanding.
At September 30, 1998, the Bank had a due to broker for $4.9 million for a
security purchase which settled October 5, 1998.
NOTE 9 - EMPLOYEE BENEFITS
Employee Pension Plan: The Bank is part of a qualified noncontributory
multiple-employer defined benefit pension plan covering substantially all of its
employees. The plan is administered by the trustees of the Financial
Institutions Retirement Fund. There is no separate valuation of plan benefits
nor segregation of plan assets specifically for the Bank because the plan is a
multiple-employer plan and separate actuarial valuations are not made with
respect to each employer nor are the plan assets so segregated. As of July 1,
1999, the latest actuarial valuation date, total plan assets exceeded the
actuarially determined value of total vested benefits. The cost of the plan is
set annually as an established percentage of wages. Pension plan expense for the
years ended September 30, 1999, 1998 and 1997 was approximately $6,900, $1,500
and $1,500, respectively.
401(k) Plan: On July 1, 1996, the Company adopted a retirement savings
401(k) plan which covers all full time employees who are 21 or older and have
completed one year of service. Beginning August 1, 1996, participants may defer
up to 15% of compensation. The Company matches 50% of elective deferrals on 6%
of the participants' compensation. Expense for the 401(k) plan for the years
ended September 30, 1999, 1998 and 1997 was approximately $60,000, $52,000 and
$42,000.
- 32 -
NOTE 9 - EMPLOYEE BENEFITS (continued)
Employee Stock Ownership Plan (ESOP): In conjunction with its stock
conversion, the Company established an ESOP for eligible employees. Employees
with at least one year of employment and who have attained age twenty-one are
eligible to participate. The ESOP borrowed $1,400,000 from the Company to
purchase 140,000 shares of common stock issued in the conversion at $10 per
share. Collateral for the loan is the unearned shares of common stock purchased
by the ESOP with the loan proceeds. The loan will be repaid principally from the
Company's discretionary contributions to the ESOP over a period of seven years.
The interest rate for the loan is 6.25%. Shares purchased by the ESOP will be
held in suspense until allocated among ESOP participants as the loan is repaid.
ESOP expense was approximately $411,000, $487,000 and $388,000 for the
years ended September 30, 1999, 1998 and 1997. Contributions to the ESOP,
including dividends on unearned ESOP shares, was approximately $222,000,
$220,000 and $229,000 during the years ended September 30, 1999, 1998 and 1997.
Company contributions to the ESOP and shares released from suspense
proportional to the repayment of the ESOP loan are allocated among ESOP
participants on the basis of compensation in the year of allocation. Benefits
generally become 100% vested after five years of credited service. A participant
who terminates employment for reasons other than death, normal retirement (or
early retirement), or disability prior to the completion of five years of
credited service does not receive any benefits under the ESOP. Forfeitures are
reallocated among the remaining participating employees, in the same proportion
as contributions.
Benefits are payable in the form of stock except for fractional shares
which are paid in cash upon termination of employment. The Company's
contributions to the ESOP are not fixed, so benefits payable under the ESOP
cannot be estimated.
ESOP participants receive distributions from their ESOP accounts only upon
termination of service.
At September 30, 1999, 1998 and 1997, 19,186, 20,989 and 23,276 shares with
an average fair value of $21.41, $23.20 and $16.68 per share, were committed to
be released.
The ESOP shares as of September 30 were as follows:
1999 1998 1997
----------- ----------- -----------
Allocated shares 119,143 99,957 78,968
Unearned shares 20,857 40,043 61,032
Shares withdrawn from the plan by participants (14,571) (5,601)
Total ESOP shares held in the plan 125,429 134,399 134,399
----------- ----------- -----------
Fair value of unearned shares $ 412,000 $ 1,021,000 $ 1,419,000
=========== =========== ===========
Recognition and Retention Plans (RRPs): In conjunction with its stock
conversion, the Company established RRPs as a method of providing directors,
officers and other key employees of the Company with a proprietary interest in
the Company in a manner designed to encourage such persons to remain with the
Company. Eligible directors, officers and other key employees of the Company
become vested in awarded shares of common stock at a rate of 20% per year
commencing March 24, 1994. The RRPs acquired, in the aggregate, 70,000 shares of
common stock issued in the conversion at $10 per share and 70,000 shares were
awarded to RRP participants at no cost to them. RRP expense for the years ended
September 30, 1999, 1998 and 1997 was approximately $38,500, $77,000 and
$77,000, respectively.
Stock Option Plan: The Board of Directors of the Company adopted the MFB
Corp. Stock Option Plans (the "Option Plans"). The number of options authorized
- 33 -
under the Plans totals 350,000 shares of common stock. Officers, employees and
outside directors of the Company and its subsidiary are eligible to participate
in the Option Plans. The option exercise price must be no less than 85% of the
fair market value of common stock on the date of the grant, and the option term
cannot exceed ten years and one day from the date of the grant. As of September
30, 1999, all options granted have an exercise price of at least 100% of the
market value of the common stock on the date of grant and no compensation
expense was recognized for stock options for the years ended September 30, 1999,
1998 and 1997. As of September 30, 1999, 69,250 options remain available for
future grants.
SFAS No. 123, which became effective for the year ended September 30, 1997,
requires pro forma disclosures for companies that do not adopt its fair value
accounting method for stock-based employee compensation. Accordingly, the
following proforma information presents net income and earnings per common share
had the fair value method been used to measure compensation cost for stock
option plans. The exercise price of options granted is equivalent to the market
value of underlying stock at the grant date.
The fair value for the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:
1999 1998
---- ----
Risk-free interest rate 4.74% 6.00
Expected dividend rate 1.71% 1.21%
Stock price volatility 12.20% 12.45%
There were no options granted
for the year ended September 30, 1997.
1999 1998 1997
---- ---- ----
Net income as reported $ 2,204,298 $ 2,236,283 $ 2,002,201
Proforma net income 2,054,921 2,069,443 1,981,761
Reported earnings per
common and common
equivalent share
Basic $ 1.56 $ 1.44 $ 1.21
Diluted $ 1.51 $ 1.37 $ 1.16
Proforma earnings per
common and common
equivalent share
Basic $ 1.45 $ 1.33 $ 1.20
Diluted $ 1.41 $ 1.27 $ 1.15
Activity in the Option Plan for the years ended is summarized as follows:
Weighted Weighted
Number of Average Average
Outstanding Exercise Exercise Fair Value
Options Price Price of Grants
------- ----- ----- ---------
Balance at September 30, 1996 200,000 $10.00-$15.25 $ 10.76
Exercised (9,650) $ 10.00 $ 10.00
Balance at September 30, 1997 190,350 $10.00-$15.25 $ 10.80
Granted 45,000 $ 26.75 $ 26.75 $ 9.76
Exercised (68,850) $ 10.00 $ 10.00
Balance at September 30, 1998 166,500 $10.00-$26.75 $ 15.45
Granted 35,750 $18.25-$21.875 $ 21.37 $ 5.30
Exercised (2,500) $ 10.00 $ 10.00
Balance at September 30, 1999 199,750 $10.00-$26.75 $ 16.58
- 34 -
Options exercisable at September 30 are as follows:
Weighted
Number Average
of Options Exercise Price
---------- --------------
1997 176,350 $10.46
1998 122,500 $12.14
1999 155,750 $14.29
At September 30, 1999, options outstanding had a weighted-average remaining
life of 7.65 years.
NOTE 10 - INCOME TAXES
The Company files consolidated income tax returns. Prior to fiscal 1997, if
certain conditions were met in determining taxable income as reported on the
consolidated federal income tax return, the Bank was allowed a special bad debt
deduction based on a percentage of taxable income (8% for fiscal 1996) or on
specified experience formulas. The Bank used the percentage-of-taxable-income
method for the tax year ended September 30, 1996. Tax legislation passed in
August 1996 now requires the Bank to deduct a provision for bad debts for tax
purposes based on actual loss experience and recapture the excess bad debt
reserve accumulated in tax years after September 30, 1987. The related amount of
deferred tax liability which must be recaptured is approximately $446,000 and is
payable over a six year period beginning with the tax year ending September 30,
1999.
Income tax expense for the years ended September 30 are summarized as
follows:
1999 1998 1997
----------- ----------- -----------
Federal
Current $ 1,535,497 $ 1,301,834 $ 765,810
Deferred (284,395) (2,359) 264,314
----------- ----------- -----------
1,251,102 1,299,475 1,030,124
State
Current 397,363 317,774 223,225
Deferred (63,091) (644) 68,281
----------- ----------- -----------
334,272 317,130 291,506
----------- ----------- -----------
Total income tax expense $ 1,585,374 $ 1,616,605 $ 1,321,630
=========== =========== ===========
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:
1999 1998 1997
----------- ----------- -----------
Income taxes at statutory rate $ 1,288,488 $ 1,309,982 $ 1,130,103
Tax effect of:
State tax, net of federal income
tax effect 220,620 209,306 192,394
Excess of fair value of ESOP
shares released over cost 69,098 97,552 63,972
Other items, net 7,168 (235) (64,839)
----------- ----------- -----------
Total income tax expense $ 1,585,374 $ 1,616,605 $ 1,321,630
=========== =========== ===========
- 35 -
The components of the net deferred tax asset (liability) recorded in the
consolidated balance sheets as of September 30 are as follows:
1999 1998
----------- -----------
Deferred tax assets
RRP expense $ -- $ 16,363
Net deferred loan fees 396,202 339,153
Valuation adjustment on loans held for sale 207,890 --
Net unrealized depreciation
on securities available for sale 470,824 29,788
Other 14,764 1,249
----------- -----------
1,089,680 386,553
Deferred tax liabilities
Accretion (20,445) (57,364)
Depreciation (52,057) (60,442)
Bad debt deduction (100,382) (253,309)
Mortgage servicing rights (175,266) (81,472)
Other (44,121) (25,079)
----------- -----------
(392,271) (477,666)
Valuation allowance -- --
----------- -----------
Net deferred tax asset (liability) $ 697,409 $ (91,113)
=========== ===========
Federal income tax laws provided savings banks with additional bad debt
deductions through the tax year ended September 30, 1987, totaling $4,596,000
for the Bank. Accounting standards do not require a deferred tax liability to be
recorded on this amount, which liability would otherwise total $1,563,000 at
September 30, 1999 and 1998. If the Bank were liquidated or otherwise ceases to
be a bank or if tax laws change, the $1,563,000 would be recorded as expense.
NOTE 11 - REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by
federal banking agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings, and other factors,
and the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If only adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
- 36 -
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, 1999
Total capital (to risk
weighted assets) $31,268 15.23% $16,428 8.00% $20,536 10.00%
Tier 1 (core) capital
(to risk weighted assets) 30,630 14.92 8,214 4.00 12,321 6.00
Tier 1 (core) capital (to
adjusted total assets) 30,630 8.83 13,868 4.00 17,335 5.00
As of September 30, 1998
Total capital (to risk
weighted assets) $29,489 16.28% $14,493 8.00% $18,116 10.00%
Tier 1 (core) capital
(to risk weighted assets) 29,046 16.03 7,246 4.00 10,869 6.00
Tier 1 (core) capital (to
adjusted total assets) 29,046 9.38 12,388 4.00 15,485 5.00
Regulations of the Office of Thrift Supervision limit the dividends that
may be paid without prior approval of the Office of Thrift Supervision. The Bank
is currently a "well-capitalized" Tier 1 institution and can make distributions
during a year of 100% of its retained net income for the calendar year-to-date
plus retained net income for the previous two calendar years (less any dividends
previously paid as long as the Bank would remain "well-capitalized", following
the proposed distribution. Accordingly, at September 30, 1999 none of the Bank's
retained earnings was potentially available for distribution to the Company,
without obtaining prior regulatory approval.
- 37 -
NOTE 12 - OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income and expense amounts are summarized as follows for
the years ended September 30:
1999 1998 1997
----------- ----------- -----------
Other noninterest income
Service charges and fees $ 510,980 $ 318,636 $ 200,759
Other 109,260 113,640 60,412
----------- ----------- -----------
$ 620,240 $ 432,276 $ 261,171
=========== =========== ===========
Other noninterest expense
Advertising and promotion $ 206,254 $ 186,257 $ 179,423
Data processing 379,715 384,629 281,171
Professional fees 170,429 166,652 143,550
Printing, postage, stationery,
and supplies 219,267 162,794 192,514
Direct loan origination costs deferred (202,349) (262,686) (245,981)
Other 904,818 746,377 549,295
----------- ----------- -----------
$ 1,678,134 $ 1,384,023 $ 1,099,972
=========== =========== ===========
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONTINGENCIES
Various outstanding commitments and contingent liabilities are not
reflected in the financial statements. Commitments to make loans at September 30
are as follows:
1999 1998
---------------------------------------- ----------------------------------------
Fixed Variable Fixed Variable
Rate Loans Rate Loans Total Rate Loans Rate Loans Total
---------- ---------- ----- ---------- ---------- -----
First mortgage loans $ 1,534,750 $ 1,100,350 $ 2,635,100 $ 3,398,489 $ 3,441,451 $ 6,839,940
Commercial loans 9,984,354 8,866,800 18,851,154 3,739,220 5,440,747 9,179,967
Unused lines of credit 7,953,681 7,812,361 15,766,042 3,268,364 8,998,528 12,266,892
Unused commercial loan
lines of credit -- 22,206,913 22,206,913 -- 7,649,903 7,649,903
Unused construction loan
lines of credit -- 5,574,641 5,574,641 -- 1,219,604 1,219,604
----------- ----------- ----------- ----------- ----------- -----------
$19,472,785 $45,561,065 $65,033,850 $10,406,073 $26,750,233 $37,156,306
=========== =========== =========== =========== =========== ===========
Fixed rate mortgage loan commitments at September 30, 1999 are at rates
primarily ranging from 7.50% to 9.50%. Mortgage loan fixed rate commitments are
primarily for terms ranging from 15 to 30 years, while commercial loan fixed
rate commitments are primarily for five year terms. Rates on variable rate
mortgage loans range from 6.875% to 9.25% and are tied to the one year treasury
bill rate. Rates on variable commercial loan commitments are tied to the
national prime rate.
Since commitments to make loans and to fund unused lines of credit and
loans in process may expire without being used, the amounts do not necessarily
represent future cash commitments. In addition, commitments are agreements to
lend to a customer as long as there is no violation of any condition established
in the contract. The maximum exposure to credit loss in the event of
nonperformance by the other party is the contractual amount of these
instruments. The same credit policy is used to make such commitments as is used
for loans receivable.
- 38 -
Under employment agreements with certain executives, officers, certain
events leading to separation from the Company could result in cash payments
totaling $1,379,000 as of September 30, 1999.
The Company and the Bank are subject to certain claims and legal actions
arising in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material adverse effect on the consolidated financial
position or results of operation of the Company.
NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed financial statements for the parent
company, MFB Corp.
CONDENSED BALANCE SHEETS
September 30, 1999 and 1998
1999 1998
----------- -----------
ASSETS
Cash and cash equivalents $ 384,044 $ 552,454
Equity securities available for sale 429,210 506,380
Securities held to maturity 1,000,000 --
Investment in Bank subsidiary 29,980,712 29,064,393
Loan receivable from ESOP 222,963 444,557
Other assets 20,138 388,917
----------- -----------
Total assets $32,037,067 $30,956,701
LIABILITIES
Loan payable to Bank subsidiary $ 750,000 $ --
Accrued expenses and other liabilities 105,437 70,924
----------- -----------
Total liabilities 855,437 70,924
SHAREHOLDERS' EQUITY 31,181,630 30,885,777
----------- -----------
Total liabilities and shareholders' equity $32,037,067 $30,956,701
=========== ===========
CONDENSED STATEMENTS OF INCOME
Years ended September 30, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
Dividends from Bank subsidiary - cash $ 1,125,000 $ 5,650,000 $ 2,000,000
Interest income 57,205 48,748 57,723
Other income -- 919 --
Interest expense 17,062 1,346 3,319
Other expenses 110,790 107,359 107,243
----------- ----------- -----------
Income before income taxes and
equity in undistributed net income
of Bank subsidiary 1,054,353 5,590,962 1,947,161
Income tax benefit 29,857 25,014 22,803
----------- ----------- -----------
Income before equity in undistributed
net income of Bank subsidiary 1,084,210 5,615,976 1,969,964
(Distributions in excess of) equity in
undistributed net income of Bank subsidiary 1,120,088 (3,379,693) 32,237
----------- ----------- -----------
Net income $ 2,204,298 $ 2,236,283 $ 2,002,201
=========== =========== ===========
- 39 -
CONDENSED STATEMENTS OF CASH FLOWS
Years ended September 30, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities
Net income $ 2,204,298 $ 2,236,283 $ 2,002,201
Adjustments to reconcile net income to
net cash from operating activities
Distributions in excess of (equity in
undistributed) net income of
Bank subsidiary (1,120,088) 3,379,693 (32,237)
Net change in other assets 353,863 30,063
Net change in accrued expenses and
other liabilities 121,285 310,634 97,747
----------- ----------- -----------
Net cash from operating activities 1,559,358 5,565,084 2,097,774
Cash flows from investing activities
Principal repayments on loan receivable
from ESOP 221,594 220,053 229,041
Principal repayments on note receivable
from Bank subsidiary -- -- 4,750,000
Purchase of securities available for sale -- (242,500) (300,350)
Purchase of securities held to maturity (1,000,000) -- --
----------- ----------- -----------
Net cash from investing activities (778,406) (22,447) 4,678,691
Cash flows from financing activities
Proceeds from loan payable to Bank
subsidiary 750,000 -- --
Purchase of MFB Corp. common stock (1,209,619) (5,931,312) (6,410,802)
Proceeds from exercise of stock options 25,000 688,500 96,500
Cash dividends paid (514,743) (543,557) (553,557)
----------- ----------- -----------
Net cash from financing activities (949,362) (5,786,369) (6,867,859)
----------- ----------- -----------
Net change in cash and cash equivalents (168,410) (243,732) (91,394)
Cash and cash equivalents at beginning
of year 552,454 796,186 887,580
----------- ----------- -----------
Cash and cash equivalents at end of year $ 384,044 $ 552,454 $ 796,186
=========== =========== ===========
- 40 -
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair values and the related
carrying amounts of the Company's financial instruments at September 30, 1999
and 1998. Items which are not financial instruments are not included.
1999 1998
------------------------------- -------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------- ------------- ------------- -------------
Cash and cash equivalents $ 12,061,942 $ 12,062,000 $ 17,903,693 $ 17,904,000
Interest-bearing time
deposits in other financial
institutions 1,000,000 1,000,000 -- --
Securities available for sale 38,170,143 38,170,000 41,819,768 41,820,000
Securities held to maturity 3,984,338 3,709,000 -- --
FHLB stock 5,511,300 5,511,000 4,636,300 4,636,000
Loans held for sale, net 8,061,951 8,062,000 13,516,502 13,517,000
Loans receivable, net of
allowance for loan losses 269,464,085 269,707,000 232,606,050 234,324,000
Accrued interest receivable 1,363,318 1,363,000 967,995 968,000
Mortgage servicing rights, net 412,390 412,000 191,699 192,000
Investment in limited
partnership 1,213,430 1,213,000 1,221,514 1,222,000
Noninterest bearing demand
deposits (7,357,944) (7,358,000) (4,298,516) (4,299,000)
Savings, NOW and MMDA
deposits (52,409,560) (52,410,000) (40,835,161) (40,835,000)
Other time deposits (141,639,885) (141,314,000) (135,532,298) (135,573,000)
Securities sold under
agreements to repurchase (6,566,395) (6,566,000) (2,365,716) (2,366,000)
FHLB advances (104,225,750) (101,370,000) (92,725,750) (90,333,000)
Advances from borrowers
for taxes and insurance (2,111,183) (2,111,000) (2,316,317) (2,316,000)
Other borrowings -- -- (4,931,214) (4,931,000)
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of September 30, 1999 and 1998. The estimated
fair value for cash and cash equivalents and interest-bearing time deposits in
other financial institutions are considered to approximate cost. The estimated
fair value for securities available for sale and securities held to maturity, is
based upon quoted market values for the individual securities or for equivalent
securities. The estimated fair value for loans held for sale, net, is based on
the price offered in the secondary market on September 30, 1999 and 1998 for
loans having similar interest rates and maturities. The estimated fair value for
loans receivable is based upon estimates of the difference in interest rates the
Company would charge the borrowers for similar such loans with similar
maturities made at September 30, 1999 and 1998, applied for an estimated time
period until the loan is assumed to reprice or be paid. In addition, when
computing the estimated fair value for loans receivable, the allowance for loan
losses was subtracted from the calculated fair value for consideration of credit
- 41 -
issues. The estimated fair value for FHLB stock, accrued interest receivable,
mortgage servicing rights, investment in limited partnership, noninterest
bearing demand deposits, savings, NOW and MMDA deposits, other borrowings and
advances from borrowers for taxes and insurance is based upon their carrying
value. The estimated fair value for other time deposits as well as securities
sold under agreements to repurchase and FHLB advances is based upon estimates of
the rate the Company would pay on such deposits or borrowings at September 30,
1999 and 1998, applied for the time period until maturity. The estimated fair
value of other financial instruments and off-balance-sheet loan commitments
approximate cost and are not considered significant to this presentation.
While these estimates of fair value are based on management's judgment of
the most appropriate factors, there is no assurance that were the Company to
have disposed of such items at September 30, 1999 and 1998, the estimated fair
values would necessarily have been achieved at that date, since market values
may differ depending on various circumstances. The estimated fair values at
September 30, 1999 and 1998 should not necessarily be considered to apply at
subsequent dates. In addition, other assets and liabilities of the Company that
are not defined as financial instruments are not included in the above
disclosures, such as property and equipment. Also, nonfinancial instruments
typically not recognized in financial statements nevertheless may have value but
are not included in the above disclosures. Excluded, among other items, are the
estimated earning power of core deposit accounts, the trained work force,
customer goodwill and similar items.
NOTE 16 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as
follows:
1999 1998 1997
----------- ----------- -----------
Net change in net unrealized gains and losses
on securities available for sale
Unrealized gains (losses) arising during
the year $(1,109,639) $ (188,757) $ 491,503
Reclassification adjustment for gains
included in net income (3,803) (7,673) (6,098)
Net change in net unrealized gains
and losses on securities available
for sale (1,113,442) (196,430) 485,405
Tax effects (441,036) (77,805) 192,269
----------- ----------- -----------
Total other comprehensive income (loss) $ (672,406) $ (118,625) $ 293,136
=========== =========== ===========
- 42 -
NOTE 17 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Year Ended September 30, 1999
-----------------------------------------------
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
-----------------------------------------------
Interest income $5,960 $5,957 $6,075 $6,262
Interest expense 3,626 3,589 3,608 3,625
-----------------------------------------------
Net interest income 2,334 2,368 2,467 2,637
Provision for loan losses 45 45 65 75
-----------------------------------------------
Net interest income after provision
for loan losses 2,289 2,323 2,402 2,562
Noninterest income 304 286 258 372
Noninterest expense 1,467 1,594 2,023 1,923
-----------------------------------------------
Income before income taxes 1,126 1,015 637 1,011
Income tax expense 463 421 272 429
===============================================
Net income $ 663 $ 594 $ 365 $ 582
Basic earnings per common share $ .46 $ .42 $ .26 $ .42
Diluted earnings per common share $ .45 $ .40 $ .25 $ .41
Year Ended September 30, 1998
-----------------------------------------------
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
-----------------------------------------------
Interest income $4,819 $5,154 $5,391 $5,474
Interest expense 2,818 2,958 3,161 3,267
-----------------------------------------------
Net interest income 2,001 2,196 2,230 2,207
Provision for loan losses 15 15 20 70
-----------------------------------------------
Net interest income after provision
for loan losses 1,986 2,181 2,210 2,137
Noninterest income 165 162 182 455
Noninterest expense 1,279 1,461 1,396 1,489
-----------------------------------------------
Income before income taxes 872 882 996 1,103
Income tax expense 370 216 508 523
===============================================
Net income $ 502 $ 666 $ 488 $ 580
Basic earnings per common share $ .32 $ .43 $ .31 $ .38
Diluted earnings per common share $ .30 $ .40 $ .30 $ .37