Microsoft Word 10.0.4219;
ANNUAL REPORT
TO SHAREHOLDERS
TABLE OF CONTENTS
Page
Letter to Shareholders .................................................... 1
Selected Consolidated Financial Data ...................................... 2
Management's Discussion and Analysis ............................ ......... 3
Report of Independent Auditors ............................................ 17
Consolidated Balance Sheets ............................................... 18
Consolidated Statements of Income ......................................... 19
Consolidated Statements of Shareholders' Equity ........................... 20
Consolidated Statements of Cash Flows ..................................... 22
Notes to Consolidated Financial Statements ................................ 24
Directors and Executive Officers .......................................... 53
Shareholder Information ................................................... 54
DESCRIPTION OF BUSINESS
MFB Corp. is an Indiana unitary savings and loan holding company organized in
1993, and parent company of its wholly owned savings bank subsidiary, MFB
Financial (the "Bank"). MFB Corp. and the Bank (collectively referred to as the
"Company") conduct business from their main office in Mishawaka, Indiana, and
six branch locations in St. Joseph and Elkhart Counties of Indiana. The Bank
offers a variety of lending, deposit, trust and other financial services to its
retail and commercial customers. The Bank's wholly-owned subsidiary, Mishawaka
Financial Services, Inc., offers general property, casualty, life and health
insurance to customers in the Bank's market area. The Bank's wholly-owned
subsidiaries, MFB Investments I, Inc., MFB Investments II, Inc. and MFB
Investments, LP are Nevada corporations and a Nevada limited partnership that
manage a portion of the Bank's investment portfolio.
1
MESSAGE TO OUR SHAREHOLDERS
On behalf of the Board of Directors, our management team and all the
employees of MFB Corp. ("the Company") and its subsidiary, MFB Financial ("the
Bank"), it is my pleasure to provide you with our Annual Report for the fiscal
year ended September 30, 2003.
As the economy struggles to recover from recession, interest rates
continue to hover near 40 year lows. The prospects of significant movement from
current interest rate levels are uncertain, but should clearly be driven by
improvement in consumer confidence. Such improvement generally translates into
consumer demand and spending. Perhaps the holiday season will provide some
insight into that confidence level and set the stage for the broad based
recovery we would all welcome. In the interim, net interest margins for the
Company will continue to be under pressure.
The past year was one of several notable achievements. Total assets
grew to $428.6 million, an all time high. Likewise, total bank deposits grew
over 10% for the year to a record $292 million, allowing the Bank to reduce its
reliance on wholesale funding sources. More importantly, this growth was
predominantly "core" deposit grow. Demand, NOW, MMDA and savings accounts
represented over 97% of the $27.7 million growth that was achieved. These
"relationship building" type accounts are the foundation of our strategy to be
the community bank of choice throughout our market and will drive future bank
profitability.
The historically low rate environment resulted in an outstanding year
of mortgage loan production. Secondary market mortgage loan sales totaled $113.3
million last year and generated $3.4 million in net realized gains. The
portfolio of loans serviced for others grew by $29 million to $161.6 million
during the year. All of these are record levels for the Bank. In addition,
business and consumer loans grew by $9.5 million and $3.4 million respectively,
as the Bank continues to diversify the loan portfolio and meet the credit needs
of our entire community. Simultaneously, nonperforming assets declined from
1.88% of total loans one year ago to 1.43% at year end, evidencing our
commitment to asset quality.
The Company generated net income of $2.4 million ($1.80 diluted
earnings per common share) for the year. Book value per common share outstanding
was $26.60 at year-end and the Company increased the annualized dividend rate
again this year to $0.435 per share, the seventh consecutive annual increase.
The market value of the Company's shares increased from $21.89 per share at
September 30, 2002 to $32.00 per share at September 30, 2003, an impressive
increase of more than 46%. During the year more than 75,000 shares were
repurchased by the Company at an average price of $22.25 per share, further
enhancing your shareholder value.
We remain committed to generating long term value to our shareholders
and believe we have positioned the company to achieve that result for years to
come. Many challenges lay ahead, but management is confidently prepared to meet
those challenges.
Charles J. Viater
President and Chief Executive Office
MFB CORP. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of MFB Corp. and its
subsidiary is qualified in its entirety by, and should be read in conjunction
with the consolidated financial statements, including notes thereto, included
elsewhere in this Annual Report.
At September 30,
(In Thousands)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Summary of Financial Condition:
Total assets $ 428,624 $ 421,200 $ 413,084 $ 396,003 $ 346,454
Loans receivable 318,155 316,391 311,613 317,178 270,102
Allowance for loan losses 5,198 5,143 4,632 1,672 638
Loans held for sale, net 6,626 6,404 3,074 6,495 8,062
Cash and cash equivalents 40,357 27,582 34,223 14,544 12,062
Securities, including FHLB stock 46,499 59,892 54,167 47,930 47,666
Deposits 292,106 264,377 245,179 239,394 201,407
Securities sold under agreements to repurchase - - 11,022 9,143 6,566
FHLB advances 98,790 119,215 119,685 112,152 104,226
Shareholders' equity 34,251 33,952 34,380 32,514 31,182
Years Ended September 30,
(In Thousands)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Summary of Operating Results:
Interest income $ 22,933 $ 25,765 $ 30,024 $ 28,555 $ 24,287
Interest expense 12,244 13,829 17,972 16,473 14,448
----------- ----------- ----------- ----------- -----------
Net interest income 10,689 11,936 12,052 12,082 9,839
Provision for loan losses 1,110 3,369 3,096 1,106 230
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 9,579 8,567 8,956 10,976 9,609
Noninterest income
Service charges on deposit accounts 1,624 1,049 903 666 362
Trust fee income 464 298 213 146 29
Insurance commissions 187 158 140 149 148
Net realized gains from sales of loans 3,395 1,578 1,046 525 366
Loan servicing fees, net of amortization of
mortgage servicing rights (940) (84) 32 82 54
Mortgage servicing right impairment charge (239) - - - -
Net gain (loss) on securities available for sale 40 (934) (52) (41) 4
Other 496 150 345 144 216
----------- ----------- ----------- ----------- -----------
Total noninterest income 5,027 2,215 2,627 1,671 1,179
Noninterest expense
Salaries and employee benefits 6,803 5,922 4,944 4,668 3,847
Occupancy and equipment expense 1,558 1,483 1,370 1,148 938
Data processing expense 596 669 517 443 380
Other expense 2,578 2,041 1,891 1,880 1,834
----------- ----------- ----------- ----------- -----------
Total noninterest expense 11,535 10,115 8,722 8,139 6,999
----------- ----------- ----------- ----------- -----------
Income before income taxes 3,071 667 2,861 4,508 3,789
Income tax expense 671 18 951 1,693 1,585
----------- ----------- ----------- ----------- -----------
Net income $ 2,400 $ 649 $ 1,910 $ 2,815 $ 2,204
=========== =========== =========== =========== ===========
Supplemental Data:
Basic earnings per common share $ 1.87 $ 0.49 $ 1.42 $ 2.04 $ 1.56
Diluted earnings per common share 1.80 0.47 1.38 2.00 1.51
Dividends declared per common share .435 .415 .395 .375 .355
Book value per common share 26.60 25.53 25.72 23.93 21.96
Return on assets 0.56% 0.16% .47% .75% .66%
Return on equity 7.14 1.84 5.75 8.88 6.97
Interest rate spread 2.31 2.63 2.65 2.89 2.57
Net yield on average interest-earning assets 2.63 2.98 3.08 3.34 3.01
Dividend pay-out ratio 23.26 84.69 27.82 18.38 22.76
Equity-to-assets 7.99 8.06 8.32 8.21 9.00
Non-performing assets to total loans 1.43 1.88 .89 .02 .03
Allowance for loan losses to total loans 1.63 1.63 1.49 .53 .24
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The principal business of the Bank has historically consisted of attracting
deposits from the general public and the business community and making loans
secured by various types of collateral, including real estate and general
business assets. The Bank is significantly affected by prevailing economic
conditions as well as government policies and regulations concerning, among
other things, monetary and fiscal affairs, housing and financial institutions.
Deposit flows are influenced by a number of factors, including interest rates
paid on competing investments, account maturities, fee structures, and level of
personal income and savings. Lending activities are influenced by the demand for
funds, the number and quality of lenders, and regional economic cycles. Sources
of funds for lending activities of the Bank include deposits, borrowings,
payments on loans, sale of loans and income provided from operations. The
Company's earnings are primarily dependent upon the Bank's net interest income,
the difference between interest income and interest expense.
Interest income is a function of the balances of loans and investments
outstanding during a given period and the yield earned on such loans and
investments. Interest expense is a function of the amount of deposits and
borrowings outstanding during the same period and interest rates paid on such
deposits and borrowings. The Company's earnings are also affected by the Bank's
provisions for loan losses, service charges, fee income, gains from sales of
loans, mortgage loan servicing fees, income from subsidiary activities,
operating expenses and income taxes.
Certain of the Company's accounting policies are important to the portrayal of
the Company's financial condition, since they require management to make
difficult, complex or subjective judgments, some of which may relate to matters
that are inherently uncertain. Estimates associated with these policies are
susceptible to material changes as a result of changes in facts and
circumstances. Facts and circumstances which could affect these judgments
include, but without limitation, changes in interest rates, in the performance
of the economy or in the financial condition of borrowers. Management believes
that its critical accounting policies include determining the allowance for loan
losses, determining the fair value of securities and other financial instruments
and the valuation of mortgage servicing rights. The Company's critical
accounting policies are discussed in detail in Note 1 of the Notes to the
Consolidated Financial Statements under "Securities," "Mortgage Banking
Activities," and "Loans Receivable."
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 2003 AND 2002
RESULTS OF OPERATIONS
Consolidated net income for the Company for the year ended September 30, 2003
was $2.4 million or $1.80 diluted net income per common share compared to
$649,000 or $0.47 diluted net income per common share for the same period in
2002. The increase in net income was primarily attributable to a decreased
provision for loan losses over last year and an increase in noninterest income
offset by decreased net interest income and an increase in noninterest expense.
Net interest income totaled $10.7 million for the year ended September 30, 2003
compared to $11.9 million for the same period one year ago. Interest income
decreased $2.8 million and interest expense decreased $1.6 million during the
year ended September 30, 2003 compared to the same period in 2002. Despite
increases in the volume of interest earning assets and interest bearing
liabilities over the prior year, net interest income decreased as a result of
the decline in the interest rates earned on interest earning assets exceeding
the decline in interest rates paid on interest bearing liabilities. The yield on
interest-earning assets decreased 78 basis points from 6.43% in 2002 to 5.65% in
2003. The average interest rate paid on interest-bearing liabilities decreased
46 basis points from 3.80% to 3.34% during the same period, and as a result, the
interest rate spread decreased 32 basis points from 2.63% to 2.31% in 2003. The
rate paid on interest bearing deposits declined from 2.95% last year to 2.30%
this year. However, the rate paid on FHLB borrowings only declined from 5.68% to
5.64%.
The provision for loan losses is determined in conjunction with management's
review and evaluation of current economic conditions, changes in the character
and size of the loan portfolio, loan delinquencies (current status as well as
past trends), adequacy of collateral securing impaired and delinquent loans,
historical and estimated net charge-offs and other pertinent information. Based
on the factors above, the provision for loan losses decreased from $3.4 million
for the year ended September 30, 2002 to $1.1 million for the year ended
September 30, 2003. Net charge-offs totaled $2.9 million and $1.1 million for
the years ended September 30, 2002 and 2003 respectively. For the year ended
September 30, 2002, the provision was charged $1.25 million related to a
commercial loan to a furniture manufacturing company. The provision was also
charged $770,000 for increases in loss allocations on certain commercial loans
from information obtained from a required periodic examination completed in
August 2002 by the Office of Thrift Supervision (OTS). For the year ended
September 30, 2003, the $1.1 million provision relates specifically to the
factors above and $387,000 in charge offs on two loans exceeding specific
reserves allocated to those loans. The Bank continues to improve its loan review
and risk assessment procedures giving particular consideration to the risks
related to the growing commercial loan portfolio and the risk of loss for $4.0
million of commercial loans classified as impaired at the end of this year.
Impaired loans declined from $6.6 million at September 30, 2002 due to the loan
charge offs above and an $850,000 reduction in the balance of one specific
impaired loan from liquidation of collateral.
Noninterest income increased from $2.2 million for the twelve months ended
September 30, 2002 to $5.0 million for the year ended September 30, 2003.
Service charges on deposit accounts, trust fee income, insurance commissions and
net gains from sale of loans reflected strong growth from 2002 to 2003. The
decline in the overall interest rate environment resulted in a significant
increase in mortgage loan originations and subsequent mortgage loan sales to the
secondary market. Related to this, the rate decline also contributed to heavy
mortgage refinancings leading to a significant increase in amortization of
mortgage servicing rights which is netted against loan servicing fees. Other
noninterest income increased primarily due to income earned from the purchase of
two bank owned life insurance policies. In addition to the items above, the
increase in noninterest income was affected by two additional items, mortgage
servicing right impairment and net gain (loss) on securities. During the third
quarter ended June 30, 2003, the Company recorded a $704,000 ($425,000 net of
tax) impairment charge due to the decline in value of its approximate $161.6
million mortgage loan servicing portfolio. The value of mortgage servicing
portfolios in the mortgage banking industry has declined significantly from last
year due to the record low interest rate environment. Due to a moderate increase
in values, a $465,000 ($280,000 net of tax) impairment recovery was recorded
during the fourth quarter ended September 30, 2003. During the year ended
September 30, 2002, the Company recorded an $895,000 write down of a $1.0
million WorldCom, Inc. corporate note investment. That note was sold in October,
2002 for $160,000 netting a gain of $40,000.
Noninterest expense increased from $10.1 million to $11.5 million for the
comparable twelve month periods ending September 30. The significant growth in
salaries and benefits is the result of continued staffing of several key
positions in the organization designed to position the Bank for growth in the
coming years, increases in mortgage commissions due to significantly higher
mortgage origination volume and pension expense related to the termination of
the Company's pension plan. Occupancy expense increased due to additional
furniture and equipment purchases while data processing expense decreased due to
the renegotiation of contracted information system services. Other expense
increased over last year due to increases in advertising, telephone, postage,
loan origination, business development, consulting and foreclosure expenses.
BALANCE SHEET COMPOSITION
Cash and cash equivalents increased $12.8 million from $27.6 million as of
September 30, 2002 to $40.4 million as of September 30, 2003. Net cash provided
by operating activities and financing activities amounting to $14.6 million and
$5.5 million, respectively was partially offset by net cash used in investing
activities of $7.3 million.
As of September 30, 2003, the total securities available for sale portfolio
amounted to $40.0 million, a decrease of $13.6 million from $53.6 million at
September 30, 2002. The securities portfolio activity included security
purchases of $27.2 million, security maturities and sales totaling $5.2 million,
principal payments on mortgage-backed and related securities of $34.4 million,
and a $1.2 million decrease due to premium amortization and market value
declines on securities available for sale.
As of September 30, 2003, loans receivable were $318.2 million, an increase of
$1.8 million from $316.4 million as of September 30, 2002. Commercial loans
outstanding increased by $9.5 million from $121.1 million at September 30, 2002
to $130.6 million at September 30, 2003. Consumer loan receivables, which
include home equity term loans and lines of credit, increased $3.4 to $24.5
million while residential mortgage loans decreased $10.6 million to $158.3
million at September 30, 2003. The decline in mortgage loans reflects the
significant volume of mortgage loan payoffs and refinancings during the year.
The majority of new loan originations were fixed rate loans sold to the
secondary market. Diversification of the asset mix in the balance sheet will
continue to be a focus to improve profit margins, control margin volatility and
to appeal to a broader range of customers and potential customers. The Company
continues to build on its reputation as a quality local lender satisfying the
market's desire for local service and local decision making.
During the year ended September 30, 2003, the Company completed secondary market
mortgage loan sales totaling $113.3 million, and the net gains realized on these
loan sales were $3.4 million, including $1.3 related to recording mortgage loan
servicing rights. The mortgage loan sales activity reflected a 53.3% increase
over last year. Mortgage loans serviced for others by the Company grew from
$132.6 million last year to $161.6 million at the end of this year. The loans
sold during the year ended September 30, 2003 were primarily fixed rate mortgage
loans with maturities of fifteen years or longer. The sale of mortgage loans
serves as a source of additional liquidity and management anticipates that the
Company will continue to deliver fixed rate loans to the secondary market to
meet consumer demand, manage interest rate risk, and diversify the asset mix of
the Company. Adjustable rate loans often provide rates of return that are
generally superior to other investments that carry similar terms to repricing.
The Company anticipates that these loans will continue to be originated and
retained in the Bank's portfolio. As part of its efforts to manage interest rate
risk, the Company originated and held in its portfolio $8.9 million of fixed
rate mortgage loans originated during 2003, with an interest rate of 5.94%. At
September 30, 2003, $6.6 million of loans were classified as loans held for sale
compared to $6.4 million at September 30, 2002.
The Company's allowance for loan losses at September 30, 2003 was $5.2 million
or 1.63% of loans, comparable to the $5.1 million or 1.63% of loans at the end
of last year. The ratio of nonperforming assets to loans was 1.43% at September
30, 2003 compared to 1.88% at September 30, 2002. Based on the evaluation of
many factors including current economic conditions, changes in the character and
size of the loan portfolio, current and past delinquency trends and historical
and estimated net charge-offs, the Company provided $1.1 million to its
allowance for loan losses during the year ended September 30, 2003 compared to
$3.4 million for the prior year ended September 30, 2002. Net charge offs
deducted from the allowance for loan losses were $1.1 million for the year ended
September 30, 2003 compared to $2.9 million last year. A total of $1.04 million
of the charge offs this year were on three specific commercial loan
relationships.
Premises and equipment increased from $5.1 million at September 30, 2002 to $6.1
million at September 30, 2003 due to equipment purchases and the addition of one
new branch building. On October 31, 2003, the Company completed the $7.3 million
purchase of an existing building in Mishawaka, Indiana to serve as its new
corporate headquarters. The Company expects to occupy approximately 35% of that
120,000 square foot building and lease the remaining space to tenants.
Presently, tenants occupy approximately 30,000 square feet under leases that run
through May 31, 2004. Additional tenants are being actively pursued prior to the
Company's scheduled occupation of the building in April, 2004. The building's
estimated annual operating expense of $1.2 million before tax is expected to be
largely offset by tenant rental income and expense savings from ceasing to
operate present business development, administrative and operational functions
out of two locations. In addition, the location of the new headquarters building
is expected to accelerate the growth, recognition and efficiency of the
organization.
In November, 2002, the Company invested $5.0 million for bank owned life
insurance policies on key employees of the Bank. The book value of those
policies at September 30, 2003, was $5.2 million.
Total deposits increased $27.7 million to $292.1 million as of September 30,
2003 from $264.4 million as of September 30, 2002. Core deposits consisting of
demand, NOW, savings and MMDA accounts increased from $106.8 million to $133.8
million from September 30, 2002 to September 30, 2003. Federal Home Loan Bank
("FHLB") advances decreased from $119.2 million as of September 30, 2002 to
$98.8 million as of September 30, 2003. The growth in deposits primarily funded
the increase in loans during the year as well as providing the source for the
reduction of the advances.
Total shareholders' equity increased from $34.0 million as of September 30, 2002
to $34.3 million as of September 30, 2003. The increases to equity resulted from
net income of $2.4 million and $408,000 generated from the exercise of stock
options, offset by $1.7 million of treasury stock purchases, cash dividend
payments of $560,000, and a $272,000 adjustment to reflect the increase in
market value of securities available for sale. The book value of MFB Corp.
common stock, based on the actual number of shares outstanding, increased from
$25.53 at September 30, 2002 to $26.60 at September 30, 2003.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 2002 AND 2001
RESULTS OF OPERATIONS
Consolidated net income for the Company for the fiscal year ended September 30,
2002 was $649,000 or $0.47 diluted net income per common share compared to $1.9
million or $1.38 diluted net income per common share for the same period in
2001. The decline in net income was primarily attributable to an increased
provision for loan losses, increased securities losses and an increase in
noninterest expense in 2002 partially offset by increased noninterest income
(excluding the securities losses) and decreased income tax expense.
Net interest income totaled $11.9 million for the year ended September 30, 2002
compared to $12.1 million for the same fiscal period in 2001. Interest income
decreased $4.3 million during the year ended September 30, 2002 compared to the
same fiscal period in 2001. The decrease was primarily due to reduction in
overall rates during 2002, particularly on mortgage, commercial and consumer
loans, investment securities and deposits in other financial institutions.
Interest expense decreased $4.1 million reflecting the reduction in interest
rates. The yield on interest-earning assets decreased 124 basis points from
7.67% in 2001 to 6.43% in 2002. The average interest rate paid on
interest-bearing liabilities decreased 122 basis points from 5.02% to 3.80%
during the same period, and as a result, the interest rate spread decreased two
basis points from 2.65% to 2.63% in 2002.
The provision for loan losses increased from $3.1 million for the year ended
September 30, 2001 to $3.4 million for the year ended September 30, 2002. As
previously mentioned, the provision was charged $2.0 million related to a
commercial loan to a furniture manufacturing company and for increases in loss
allocations on certain commercial loans. A charge to the provision of $1.8
million was taken the year ended September 30, 2001 on a loan to an auto
dealership that declared bankruptcy.
Noninterest income decreased from $2.6 million for the twelve months ended
September 30, 2001 to $2.2 million for the year ended September 30, 2002. The
noninterest income decrease was primarily due to the write down of the WorldCom
corporate note investment previously mentioned. Service charges on deposit
accounts, trust fee income, insurance commissions and net gains from sale of
loans reflected strong growth from 2001 to 2002. Other noninterest income
declined primarily due to reductions in loan servicing fees net of amortization
of mortgage servicing rights and increased low income housing partnership equity
loss.
Noninterest expense increased from $8.7 million to $10.1 million for the
comparable twelve month periods ending September 30. These noninterest expense
increases are primarily attributable to staffing increases and expenses incurred
in the offering of additional services to the Bank's customers.
ASSET/LIABILITY MANAGEMENT
The Company is subject to interest rate risk to the extent that its
interest-bearing liabilities, primarily deposits and Federal Home Loan Bank
(FHLB) advances, reprice more rapidly or at different rates than its
interest-earning assets.
A key element of the Company's asset/liability plan is to protect net earnings
by managing the maturity or repricing mismatch between its interest-earning
assets and rate-sensitive liabilities. Historically, 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 (OTS) as part of its capital regulations. In essence, this approach
calculates the difference between the present value of expected cash flows from
assets and the present value of expected cash flows from liabilities, as well as
cash flows from off-balance-sheet contracts. The difference is the NPV which was
5.15% as of June 30, 2003, (the most recently available data). The NPV has
declined from 7.15% at June 30, 2002 due to the continued decline in overall
interest rates over that time period. 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, 2003 and 2002, 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 300 basis
points and down 100 basis points (Due to the abnormally low interest rate
environment at June 30, 2003 and 2002, data was not available from the OTS for
the shift downward in rates by 200 and 300 basis points).
As illustrated in the June 30, 2003 table below, the Company's interest rate
risk is sensitive to future declines in rates. This is due to the decrease in
value of adjustable rate loans that would occur with a rate reduction. Values of
interest bearing deposits in this scenario would change minimally since they are
currently at a record low level. Conversely, an increase in rate would benefit
the Company through an increase in the value of adjustable rate loans. In
addition, the relative value of interest bearing deposits and FHLB borrowings
would increase the Company's NPV ratio under a rising rate scenario due to the
high proportion of longer term deposits and borrowings.
June 30, 2003
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 $ 22,446 $ 169 1% 5.39% +25 bp
+200 23,911 1,634 7 5.66 +51 bp
+100 23,930 1,653 7 5.59 +44 bp
0 22,277 5.15
(100) 18,766 (3,511) (16) 4.30 (85) bp
(1) Expressed in basis points
Specifically, the June 30, 2003 table indicates that the Company's NPV was $22.3
million or 5.15% 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 $1.6 million or 7% increase in the Company's NPV and
would result in a 51 basis point or 9.9% increase in the Company's NPV ratio to
5.66%. Conversely, an immediate 100 basis point decrease in market interest
rates would result in a $3.5 million or 16% decrease in the Company's NPV, and a
85 basis point or 16.5% decrease in the Company's NPV ratio to 4.30%.
As illustrated in the June 30, 2002 table below, the Company's interest rate
risk was sensitive to both rising and declining rates. At June 30, 2002, the
Company had a higher percentage of adjustable rate loans in its portfolio.
Comparable to June 30, 2003, a decline in rates would decrease in value of those
adjustable rate loans. However, with relatively higher interest rate levels at
June 30, 2002, compared to June 30, 2003, the increase in value of those loans
was mitigated due to the assumption that borrower prepayments increase and those
loans are converted to fixed rate loans.
June 30, 2002
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 $22,559 $(7,717) (25)% 5.61% (154) bp
+200 26,524 (3,752) (12) 6.47 (68) bp
+100 29,299 ( 977) ( 3) 7.02 (13) bp
0 30,276 7.15
(100) 28,773 (1,503) (5) 6.72 (43) bp
(1) Expressed in basis points
Specifically, the June 30, 2002 table indicates that the Company's NPV was $30.3
million or 7.15% 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 12.0% decline in the Company's NPV and
would result in a 68 basis point or 9.5% decline in the Company's NPV ratio to
6.47%. Conversely, an immediate 100 basis point decrease in market interest
rates would result in a $1.5 million or 5.0% decrease in the Company's NPV, and
a 43 basis point or 6.0% decrease in the Company's NPV ratio to 6.72%.
In addition to monitoring selected measures of NPV, management also monitors
effects on net interest income resulting from increases or decreases in rates.
This process is used in conjunction with NPV measures to identify excessive
interest rate risk. In managing its asset/liability mix, the Company, depending
on the relationship between long and short term interest rates, market
conditions and consumer preference, may place somewhat greater emphasis on
maximizing its net interest margin than on strictly matching the interest rate
sensitivity of its assets and liabilities. Management believes that the
increased net income which may result from an acceptable mismatch in the actual
maturity or repricing of its asset and liability portfolios can, during periods
of declining or stable interest rates, provide sufficient returns to justify the
increased exposure to sudden and unexpected increases in interest rates which
may result from such a mismatch. Management believes that the Company's level of
interest rate risk is acceptable under this approach as well.
In evaluating the Company's exposure to interest rate movements, certain
shortcomings inherent in the method of analysis presented in the foregoing
tables must be considered. For example, although certain assets and liabilities
may have similar maturities or repricing periods, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
interest rates. Additionally, certain assets, such as adjustable rate mortgages
(ARM's), have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of a significant
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed above. Finally, the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase. The Company considers all of these factors in monitoring its exposure
to interest rate risk.
The Board of Directors and management of the Company believe that certain
factors afford the Company the ability to operate successfully despite its
exposure to interest rate risk. The Company manages its interest rate risk by
originating and retaining adjustable rate loans in its portfolio and by normally
selling currently originated fixed rate one-to-four family real estate loans.
Loans classified as held for sale as of September 30, 2003 totaled $6.6 million.
The Company retains the servicing on loans sold in the secondary market and, at
September 30, 2003, $161.6 million of such loans were being serviced for others.
The Company's investment strategy is to maintain a diversified portfolio of high
quality investments that balances the goals of minimizing interest rate and
credit risks while striving to maximize investment return and provide liquidity
necessary to meet funding needs.
The Company offers a range of maturities on its deposit products at competitive
rates and monitors the maturities on an ongoing basis. The Company's cost of
interest-bearing funds has declined from 3.80% for the year ended September 30,
2002 to 3.34% for the year ended September 30, 2003. The Company has experienced
an increase in low interest cost demand and saving deposits and extended the
maturities of its certificates of deposit to reduce its sensitivity to an
increase in rates. The Company also benefited this year through the maturity of
$20.4 million of fixed rate FHLB advances.
AVERAGE BALANCE SHEETS
The following are the average balance sheets for the years ended September 30:
2003 2002 2001
Average Average Average
Outstanding Outstanding Outstanding
Balance Balance Balance
(In Thousands)
Assets:
Interest earning assets:
Interest-bearing deposits $ 30,856 $ 22,797 $ 18,422
Mortgage-backed securities (1) 25,852 26,261 19,707
Other securities available for sale (1) 24,412 30,216 28,589
FHLB stock 6,359 6,308 6,308
Loans held for sale (2) 1,532 353 293
Loans receivable (3) 316,223 314,210 317,403
------------ ------------ ------------
Total interest-earning assets 405,234 400,145 390,722
Noninterest-earning assets, net
of allowance for loan losses 21,643 17,675 17,168
------------ ------------ ------------
Total assets $ 426,877 $ 417,820 $ 407,890
============ ============ ============
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts $ 28,714 $ 19,249 $ 15,946
NOW and money market accounts 67,389 59,433 51,520
Certificates of deposit 155,740 155,519 167,519
Repurchase agreements - 9,988 8,416
Other borrowings 155 - -
FHLB advances 114,146 119,297 114,903
------------ ------------ ------------
Total interest-bearing liabilities 366,144 363,486 358,304
Other liabilities 27,129 19,020 16,333
------------ ------------ ------------
Total liabilities 393,273 382,506 374,637
Shareholders' equity:
Common stock 13,020 12,944 13,077
Retained earnings 29,901 30,402 28,227
Net unrealized gain (loss) on
securities available for sale (419) (196) (434)
Treasury stock (8,898) (7,836) (7,617)
------------- ------------- ------------
Total shareholders' equity 33,604 35,314 33,253
------------ ------------ ------------
Total liabilities and
shareholders' equity $ 426,877 $ 417,820 $ 407,890
============ ============ ============
(1) Average outstanding balances reflect unrealized gain (loss) on securities
available for sale. (2) Average outstanding balances reflect unrealized gain
(loss) on loans held for sale. (3) Total loans less deferred net loan fees and
loans in process.
INTEREST RATE SPREAD
The following table sets forth the average effective interest rate earned by the
Company on its consolidated loan and investment portfolios, the average
effective cost of the Company's consolidated deposits, repurchase agreements 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,
2003 2002 2001
---- ---- ----
Average interest rate earned on:
Interest-bearing deposits 1.11% 1.88% 5.03%
Mortgage-backed securities (1) 2.22 4.39 6.26
Other securities available for sale (1) 4.16 4.67 6.11
FHLB stock 5.32 6.31 7.86
Loans held for sale 6.14 6.23 7.17
Loans receivable 6.50 7.11 8.05
Total interest-earning assets 5.65 6.43 7.67
Average interest rate of:
Savings accounts .95 1.12 2.25
NOW and money market accounts .75 1.18 2.42
Certificates of deposit 3.22 3.85 5.65
Repurchase agreements - 1.54 3.47
FHLB advances 5.64 5.68 5.75
Other borrowings 3.68 - -
Total interest-bearing liabilities 3.34 3.80 5.02
Interest rate spread (2) 2.31 2.63 2.65
Net yield on interest-earning assets (3) 2.63 2.98 3.08
(1) Yield is based on amortized cost without adjustment for unrealized gain
(loss) on securities available for sale.
(2) Interest rate spread is calculated by subtracting the average interest rate
cost from the average interest rate earned for the period indicated.
(3) The net yield on average interest-earning assets is calculated by dividing
net interest income by the average interest-earning assets for the period
indicated.
The following table describes the extent to which changes in interest rates and
changes in volume of interest-related assets and liabilities have affected the
Company's consolidated interest income and expense during the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in rate (i.e.,
changes in rate multiplied by old volume) and (2) changes in volume (i.e.,
changes in volume multiplied by old rate). Changes not solely attributable to
rate or volume have been allocated proportionately to the change due to volume
and the change due to rate.
Year ending September 30, 2003
compared to year ended Total Net Due to Due to
September 30, 2002 Change Rate Volume
------ ---- ------
(In Thousands)
Interest-earning assets:
Interest-bearing deposits $ (88) $ (211) $ 123
Securities (403) (145) (258)
Mortgage-backed securities (569) (560) (9)
FHLB stock (60) (63) 3
Loans held for sale 72 - 72
Loans receivable (1,783) (1,925) 142
------------- ------------- ------------
Total (2,831) (2,904) 73
Interest-bearing liabilities:
Savings accounts 57 (37) 94
NOW and money market accounts (192) (277) 85
Certificates of deposit (964) (972) 8
Repurchase agreements (154) - (154)
Other borrowings 6 - 6
FHLB advances (337) (46) (291)
------------- ------------- -------------
Total (1,584) (1,332) (252)
------------- ------------- -------------
Change in net interest income $ (1,247) $ (1,572) $ 325
============= ============= ============
Year ending September 30, 2002
compared to year ended Total Net Due to Due to
September 30, 2001 Change Rate Volume
------ ---- ------
(In Thousands)
Interest-earning assets:
Interest-bearing deposits $ (498) $ (680) $ 182
Securities (338) (441) 103
Mortgage-backed securities (99) (427) 328
FHLB stock (98) (98) -
Loans held for sale 1 (3) 4
Loans receivable (3,227) (2,972) (255)
------------- ------------- -------------
Total (4,259) (4,621) 362
Interest-bearing liabilities:
Savings accounts (142) (205) 63
NOW and money market accounts (547) (716) 169
Certificates of deposit (3,482) (2,844) (638)
Repurchase agreements (138) (185) 47
FHLB advances 166 (84) 250
------------ ------------- ------------
Total (4,143) (4,034) (109)
------------- ------------- -------------
Change in net interest income $ (116) $ (587) $ 471
============= ============= ============
LIQUIDITY AND CAPITAL RESOURCES
Liquidity relates primarily to the Company's ability to fund loan demand, meet
deposit customers' withdrawal requirements and provide for operating expenses.
Assets used to satisfy these needs consist of cash, deposits with other
financial institutions, overnight interest-bearing deposits in other financial
institutions and securities available for sale. These assets are commonly
referred to as liquid assets.
Liquid assets were $81.4 million as of September 30, 2003 compared to $81.7
million as of September 30, 2002. The sale of fixed rate loans throughout the
year, along with the growth in deposits and the reduction of securities
available for sale has provided sources of additional liquidity. Management
believes the Company's liquidity level as of September 30, 2003 is sufficient to
meet anticipated liquidity needs and the purchase of the new headquarters
building previously mentioned in the Management Discussion and Analysis.
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, 2003, 2002 and 2001 follows.
During the year ended September 30, 2003, net cash and cash equivalents
increased $12.8 million from $27.6 million at September 30, 2002 to $40.4
million at September 30, 2003.
The Company experienced a net increase in cash from operating activities of
$14.6 million during the year primarily attributable to net income of $2.4
million, adjustments for the provision for loan losses of $1.1 million, and
proceeds of $115.1 million realized from the sale of mortgage loans, offset by
the origination of $103.6 million of loans held for sale. The Bank originates,
sells and delivers its fixed rate, owner-occupied residential mortgage loans on
either a "Best Efforts" delivery program basis or with FHLMC mandatory delivery
programs. The "Best Efforts" program allows the Bank to commit loans for
delivery to investors at prices that are determined prior to loan approval. In
the event that loans are not closed and therefore not delivered, the Bank incurs
no penalty. The strategy reduces interest rate risk exposure by minimizing the
volume of loans closed and carried in the held for sale loan portfolio. Under
the mandatory delivery programs, loans are committed to be delivered at
predetermined prices and penalties could be assessed if delivery commitments are
not met. Those loans held for sale originated at market that are not committed
for delivery at time of origination are subject to market conditions at time of
sale. Of the $6.6 million of loans held for sale at September 30, 2003, $3.2
million were FHLMC mandatory delivery originations, $2.3 were under the "Best
Efforts" program and $1.1 were originated without predetermined scheduled
delivery dates.
The $7.3 million decrease in cash from investing activities for the year ended
September 30, 2003 was primarily related to loan originations exceeding loan
payments by $12.5 million, bank-owned life insurance purchases of $5.0 million,
fixed asset purchases of $1.5 million and a $500,000 time deposit investment,
offset by principal payments and maturities of securities exceeding security
purchases by $12.2 million.
Financing activities generated net cash of $5.5 million for the year ended
September 30, 2003. The net cash was provided primarily from net deposit
increases of $27.7 million, partially offset by decreases of $20.4 million in
FHLB borrowings and $1.7 million used to repurchase the Company's common stock.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2003, the Company adopted Interpretation 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees. On July 1, 2003, the
Company adopted Statement 149, amendment of Statement 133 on Derivative
Instruments and Hedging Activities, and Statement 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equities. On
October 1, 2003, the Company adopted Interpretation 46, Consolidation of
Variable Interest Entities. Adoption of the new standards did not materially
affect the Company's operating results or financial condition.
IMPACT OF INFLATION
The audited consolidated financial statements presented herein have been
prepared in accordance with accounting principles generally accepted in the
United States of America. These principles require measurement of financial
position and operating results in terms of historical dollars (except for
securities available for sale which are reported at fair market value and loans
held for sale which are reported at the lower of cost or estimated market value
in the aggregate), without considering changes in the relative purchasing power
of money over time due to inflation.
The primary assets and liabilities of the Bank are monetary in nature. As a
result, interest rates have a more significant impact on the Company's
performance than the effects of general levels of inflation. Interest rates can
be affected by inflation. However, they do not necessarily move in the same
direction or with the same magnitude as the indexes that measure inflation.
In periods of rapidly changing interest rates, the liquidity and maturity
structures of the Company's assets and liabilities are critical to the
maintenance of acceptable performance levels. For a discussion of the Company's
continuing efforts to reduce its vulnerability to changes in interest rates, see
"Asset/Liability Management."
The principal effect of inflation, as distinct from levels of interest rates, on
earnings is in the area of noninterest expense. Such expense items as employee
compensation, employee benefits, and occupancy and equipment costs may be
subject to increases as a result of inflation. Although difficult to measure, an
additional effect of inflation is the possible increase in the dollar value of
the collateral securing loans made by the Bank.
FORWARD LOOKING STATEMENTS
When used in this filing and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases, "anticipate,"
"would be," "will allow," "intends to," "will likely result," "are expected to,"
will continue," "is anticipated," "estimated," "project," or similar expressions
are intended to identify, "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
risks and uncertainties, including but not limited to changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area, changes in the position of banking regulators on the adequacy of
our allowance for loan losses, changes in the value of the Company's mortgage
servicing rights, 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, 2003 and 2002 and the related consolidated
statements of income, shareholders' equity and cash flows for the years ended
September 30, 2003, 2002 and 2001. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MFB Corp. and
Subsidiary as of September 30, 2003 and 2002, and the results of their
operations and their cash flows for the years ended September 30, 2003, 2002 and
2001 in conformity with accounting principles generally accepted in the United
States of America.
Crowe Chizek and Company LLC
South Bend, Indiana
November 14, 2003
The accompanying notes are an integral part of these consolidated financial
statements.
19
MFB CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 2003 and 2002
2003 2002
---- ----
ASSETS
Cash and due from financial institutions $ 13,881,081 $ 13,647,196
Interest-bearing deposits in other financial
institutions - short-term 26,475,898 13,935,075
----------------- -----------------
Total cash and cash equivalents 40,356,979 27,582,271
Interest-bearing time deposits in other financial institutions 1,001,160 500,000
Securities available for sale 40,028,743 53,584,736
Federal Home Loan Bank (FHLB) stock, at cost 6,470,600 6,307,600
Loans held for sale 6,625,540 6,404,325
Loans receivable 318,154,658 316,391,178
Less: allowance for loan losses (5,198,137) (5,143,005)
------------------ -----------------
Loans receivable, net 312,956,521 311,248,173
----------------- -----------------
Accrued interest receivable 1,521,631 1,766,189
Premises and equipment, net 6,089,647 5,053,861
Mortgage servicing rights, net 1,373,201 1,616,588
Investment in limited partnership 2,548,022 2,713,593
Cash surrender value of life insurance 5,217,387 -
Other assets 4,434,219 4,423,059
Total assets $ 428,623,650 $ 421,200,395
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand deposits $ 26,481,555 $ 20,270,165
Savings, NOW and MMDA deposits 107,340,694 86,559,465
Time deposits 158,283,602 157,547,848
----------------- -----------------
Total deposits 292,105,851 264,377,478
----------------- -----------------
Federal Home Loan Bank advances 98,790,251 119,215,115
Loans from correspondent banks 300,000 -
Advances from borrowers for taxes and insurance 1,153,172 1,413,660
Accrued expenses and other liabilities 2,023,170 2,241,705
----------------- -----------------
Total liabilities 394,372,444 387,247,958
----------------- -----------------
Shareholders' equity
Common stock, 5,000,000 shares authorized;
shares issued: 1,689,417 - 2003 and 2002; shares outstanding:
1,287,710 - 2003; 1,330,049 - 2002 12,560,058 12,880,716
Retained earnings - substantially restricted 31,022,460 29,183,000
Accumulated other comprehensive (loss),
net of tax of ($35,735) in 2003 and $56,784 in 2002 (466,113) (194,081)
Treasury stock, 401,707 common shares - 2003;
359,368 common shares - 2002, at cost (8,865,199) (7,917,198)
------------------ ------------------
Total shareholders' equity 34,251,206 33,952,437
----------------- -----------------
Total liabilities and shareholders' equity $ 428,623,650 $ 421,200,395
================= =================
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 2003, 2002 and 2001
2003 2002 2001
---- ---- ----
Interest income
Loans receivable, including fees
Mortgage loans $ 9,642,921 $ 11,376,164 $ 13,709,163
Consumer and other loans 1,824,473 2,013,285 2,409,953
Commercial loans 9,173,426 8,962,479 9,458,589
Securities 1,951,761 2,985,112 3,519,155
Other interest-earning assets 341,023 428,318 927,363
--------------- --------------- ----------------
Total interest income 22,933,604 25,765,358 30,024,223
Interest expense
Deposits 5,800,443 6,899,988 11,070,863
Securities sold under agreements
to repurchase - 153,509 292,318
FHLB advances and other borrowings 6,443,795 6,775,439 6,608,615
--------------- --------------- ----------------
Total interest expense 12,244,238 13,828,936 17,971,796
--------------- --------------- ----------------
Net interest income 10,689,365 11,936,422 12,052,427
Provision for loan losses 1,110,000 3,369,431 3,096,594
--------------- --------------- ----------------
Net interest income after provision
for loan losses 9,579,365 8,566,991 8,955,833
Noninterest income
Service charges on deposit accounts 1,623,611 1,048,718 902,887
Trust fee income 463,561 297,727 212,535
Insurance commissions 187,143 158,097 140,084
Net realized gains from sales of loans 3,395,381 1,578,045 1,046,147
Loan servicing fees, net of amortization of
mortgage servicing rights (939,845) (83,752) 31,662
Mortgage servicing right impairment charge (239,140) - -
Net gain (loss) on securities available for sale 40,000 (933,958) (51,570)
Other 495,962 150,209 345,955
--------------- --------------- ----------------
Total noninterest income 5,026,673 2,215,086 2,627,700
Noninterest expense
Salaries and employee benefits 6,802,641 5,922,166 4,943,774
Occupancy and equipment expense 1,558,025 1,482,756 1,370,381
Data processing expense 596,106 669,177 516,504
Other expense 2,578,319 2,040,722 1,891,219
--------------- --------------- ----------------
Total noninterest expense 11,535,091 10,114,821 8,721,878
--------------- --------------- ----------------
Income before income taxes 3,070,947 667,256 2,861,655
Income tax expense 671,163 18,719 951,283
--------------- --------------- ----------------
Net income $ 2,399,784 $ 648,537 $ 1,910,372
=============== =============== ================
Basic earnings per common share $ 1.87 $ .49 $ 1.42
Diluted earnings per common share 1.80 .47 1.38
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended September 30, 2003, 2002 and 2001
Accumulated
Other
Comprehensive Total
Retained Income (Loss), Unearned Treasury Shareholders'
Common Stock Earnings Net of Tax ESOP Shares Stock Equity
Balance at September 30, 2000 $ 13,136,003 $ 27,711,396 $ (916,439) $ - $ (7,416,533)$ 32,514,427
Purchase of 34,760 shares of
treasury stock - - - - (647,398) (647,398)
Stock option exercise-issuance of
12,850 shares of treasury stock (156,893) - - - 286,972 130,079
Tax benefit related to employee stock plan 44,145 - - - 44,145
Cash dividends declared - $ .395 per share - (533,085) - - - (533,085)
Comprehensive income:
Net income for the year end September
30, 2001 - 1,910,372 - - - 1,910,372
Other comprehensive income (loss) - - 961,475 - - 961,475
Total comprehensive income - - - - - 2,871,847
------------- ------------- -------------- ------------- ------------- ------------
Balance at September 30, 2001 13,023,255 29,088,683 45,036 - (7,776,959) 34,380,015
------------- ------------- ------------- ------------- ------------- ------------
Purchase of 23,190 shares of treasury stock (506,881) (506,881)
Stock option exercise-issuance of 16,700
shares of treasury stock (199,642) 366,642 167,000
Tax benefit related to employee stock plan 57,103 57,103
Cash dividends declared - $.415 per share (554,220) (554,220)
Comprehensive income:
Net income for the year end
September 30, 2002 648,537 648,537
Other comprehensive income ( (239,117) (239,117)
Total comprehensive income - - - - - 409,420
------------- ------------- -------------- ------------- ------------- ------------
Balance at September 30, 2002 12,880,716 29,183,000 (194,081) - (7,917,198) 33,952,437
------------ ------------- -------------- ------------- ------------- ------------
Purchase of 75,339 shares of treasury stock (1,676,634) (1,676,634)
Stock option exercise-issuance of 33,000
shares of treasury stock (350,508) - - - 728,633 378,125
Tax benefit related to employee stock plan 29,850 - - - - 29,850
Cash dividends declared - $.435 per share - (560,324) - - - (560,324)
Comprehensive income:
Net income for the year end September 30,
2003 - 2,399,784 - - - 2,399,784
Other comprehensive income (loss) - - (272,032) - - (272,032)
Total comprehensive income - - - - - 2,127,752
------------- ------------- -------------- ------------- ------------- ------------
Balance at September 30, 2003 $ 12,560,058 $ 31,022,460 $ (466,113) $ - $ (8,865,199) $ 34,251,206
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 2003, 2002 and 2001
2003 2002 2001
---- ---- ----
Cash flows from operating activities
Net income $ 2,399,784 $ 648,537 $ 1,910,372
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization, net of
accretion 1,343,323 1,207,633 391,333
Provision for loan losses 1,110,000 3,369,431 3,096,594
Net (gains) losses from sales or valuation
of securities available for sale (40,000) 933,958 51,570
Net realized gains from sales of loans (3,395,381) (1,578,045) (1,046,147)
Amortization of mortgage servicing rights 1,333,364 365,993 146,497
Impairment of mortgage servicing rights 239,140 - -
Origination of loans held for sale (103,572,557) (76,592,582) (53,858,737)
Proceeds from sales of loans held for sale 115,074,018 73,926,222 57,721,467
Equity in loss of investment in limited
partnership 165,571 163,495 89,374
Appreciation in cash surrender value of
life insurance (217,387) - -
Net change in:
Accrued interest receivable 244,558 8,095 120,318
Other assets 111,208 (2,021,347) (1,571,314)
Accrued expenses and other liabilities (218,535) 1,022,653 517,026
---------------- --------------- ----------------
Net cash from operating activities 14,577,106 1,454,043 7,568,353
Cash flows from investing activities
Net change in interest-bearing time
deposits in other financial institutions (501,160) 1,000,000 (1,500,000)
Net change in loans receivable (12,474,759) (7,636,389) 5,427,890
Proceeds from:
Sales of securities available for sale 160,000 5,311,521 190,930
Principal payments of mortgage-backed
and related securities 34,371,588 21,451,698 7,451,031
Maturities and calls of securities available
for sale 5,000,000 21,794,846 63,297,820
Purchase of:
Securities available for sale (27,152,202) (56,127,721) (75,417,941)
Life Insurance (5,000,000)
FHLB stock (163,000) - -
Premises and equipment, net (1,527,053) (516,062) (968,523)
Net cash from investing activities $ (7,286,586) $ (14,722,107) $ (1,518,793)
The accompanying notes are an integral part of these
consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 2003, 2002 and 2001
2003 2002 2001
---- ---- ----
Cash flows from financing activities
Purchase of MFB Corp. common stock $ (1,676,634) $ (506,881) $ (647,398)
Net change in deposits 27,728,373 19,198,225 5,785,030
Net change in securities sold under
agreements to repurchase - (11,021,511) 1,878,166
Proceeds from FHLB borrowings - - 20,000,000
Proceeds from other borrowings 300,000 - -
Repayment of FHLB borrowings (20,424,864) (469,870) (12,466,540)
Proceeds from exercise of stock options 378,125 167,000 130,079
Net change in advances from
borrowers for taxes and insurance (260,488) (185,696) (516,476)
Cash dividends paid (560,324) (554,220) (533,085)
---------------- ---------------- ----------------
Net cash from financing activities 5,484,188 6,627,047 13,629,776
--------------- --------------- ----------------
Net change in cash and cash equivalents 12,774,708 (6,641,017) 19,679,336
Cash and cash equivalents at beginning of year 27,582,271 34,223,288 14,543,952
--------------- --------------- ----------------
Cash and cash equivalents at end of year $ 40,356,979 $ 27,582,271 $ 34,223,288
=============== =============== ================
Supplemental disclosures of cash flow information Cash paid during the year for:
Interest $ 11,782,216 $ 13,598,405 $ 17,975,287
Income taxes 400,000 811,500 2,190,000
Supplemental schedule of noncash investing activities:
Transfer from:
Loans receivable to loans held for sale $ 9,656,411 $ - $ -
Loans receivable to real estate owned $ 1,020,835 $ 348,320 $ -
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003, 2002 and 2001
24
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial
statements include the accounts of MFB Corp., and its
wholly-owned subsidiary MFB Financial (the "Bank"), a federal stock savings
bank, and the wholly-owned subsidiaries of the Bank,
Mishawaka Financial Services, Inc., MFB Investments I, Inc., MFB Investments
II, Inc. and MFB Investments, LP (together referred to
as "the Company"). Mishawaka Financial Services, Inc. is engaged in the
sale of general property, casualty, life and health
insurance to customers in the Bank's market area. MFB Investments I, Inc.,
MFB Investments II, Inc. and MFB Investments, LP are
Nevada corporations and a Nevada limited partnership that manage a portion
of the Bank's investment portfolio. All significant
intercompany transactions and balances are eliminated in consolidation.
Nature of Business and Concentrations of Credit Risk: The primary source of
income for the Company results from granting commercial, consumer and
residential real estate loans in St. Joseph and Elkhart counties and the
surrounding area. The Company operates primarily in the banking industry which
accounts for more than 95% of its revenues, operating income and assets.
Use of Estimates In Preparing Financial Statements: The preparation of
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period, as well as the disclosures provided. Areas involving the
use of estimates and assumptions in the accompanying financial statements
include the allowance for loan losses, fair values of securities and other
financial instruments, determination and carrying value of loans held for sale,
determination and carrying value of impaired loans, the value of mortgage
servicing rights, the value of investments in limited partnerships, the value of
stock options, the realization of deferred tax assets, and the determination of
depreciation of premises and equipment recognized in the Company's financial
statements. Actual results could differ from those estimates. Estimates
associated with the allowance for loan losses, the fair values of securities and
other financial instruments and mortgage servicing rights 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.
(Continued)
37
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported separately as other
comprehensive income or loss and in shareholders' equity, net of tax. Securities
are classified as trading when held for short term periods in anticipation of
market gains, and are carried at fair value. Securities are written down to fair
value when a decline in fair value is not temporary.
Gains and losses on the sale of securities are determined using the specific
identification method based on amortized cost and are reflected in results of
operations at the time of sale. Interest and dividend income, adjusted by
amortization of purchase premium or discount over the estimated life of the
security using the level yield method, is included in earnings.
Mortgage Banking Activities: Mortgage loans originated and intended for sale in
the secondary market are reported as loans held for sale and are carried at the
lower of cost or estimated market value in the aggregate. Net unrealized losses
are recognized in a valuation allowance by charges to income.
Loan servicing fees are recognized when received and the related costs are
recognized when incurred. The Bank sells mortgages into the secondary market at
market prices, which includes consideration for normal servicing fees.
Servicing rights are recognized as assets for purchased rights and for the
allocated value of retained servicing rights on loans sold. Servicing rights are
expensed in proportion to, and over the period of, estimated net servicing
revenues. Impairment is evaluated based on the fair value of the rights, using
groupings of the underlying loans as to interest rates and then, secondarily, as
to geographic and prepayment characteristics. Fair value is determined using
prices for similar assets with similar characteristics, when available, or based
upon discounted cash flows using market-based assumptions. Any impairment of a
grouping is reported as a valuation allowance.
Loans Receivable: Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or pay-off are reported at
their outstanding principal balances adjusted for any charge-offs, the allowance
for loan losses, and any deferred fees or costs on originated loans, and
unamortized premiums or discounts on purchased loans. 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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Because some loans may not be repaid in full, an allowance for loan losses is
recorded. An allowance for loan losses is a valuation allowance for probable
incurred credit losses. The allowance for loan losses is increased by a
provision for loan losses charged to expense and decreased by charge-offs (net
of recoveries). Estimating the risk of loss and the amount of loss on any loan
is necessarily subjective. Accordingly, the allowance is maintained by
management at a level considered adequate to cover losses that are currently
anticipated. Management's periodic evaluation of the adequacy of the allowance
is based on the Company's past loan loss experience, known and inherent risks in
the portfolio, periodic, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, and current
economic conditions. While management may periodically allocate portions of the
allowance for specific problem loan situations, the whole allowance is available
for any loan charge-offs that occur. Loan losses are charged against the
allowance when management believes the uncollectibility of a loan balance is
confirmed.
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. 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.
Interest income on loans is accrued over the term of the loans based upon the
principal outstanding. The accrual of interest on loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due. When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent that
cash payments are received until, in management's judgment, the borrower has the
ability to make contractual interest and principal payments, in which case the
loan is returned to accrual status.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreclosed Real Estate: Real estate properties acquired through, or in lieu of,
loan foreclosure are initially recorded at the lower of carrying amount or fair
value at the date of acquisition, establishing a new cost basis. Any reduction
to fair value from the carrying amount of the related loan at the time of
acquisition is accounted for as a loan loss and charged against the allowance
for loan losses. Valuations are periodically performed by management and
valuation allowances are adjusted through a charge to income for changes in fair
value or estimated selling costs.
Income Taxes: Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through income tax expense. A valuation allowance, if needed, reduces deferred
tax assets to the amount expected to be realized.
Premises and Equipment: Land is carried at cost. Buildings and improvements and
furniture and equipment are carried at cost, less accumulated depreciation and
amortization computed principally by using the straight-line method over the
estimated useful lives of the assets. These assets are reviewed for impairment
when events indicate the carrying amount is significantly less than the fair
value.
Employee Stock Ownership Plan (ESOP): The Company accounts for its ESOP under
AICPA Statement of Position (SOP) 93-6. The cost of shares issued to the ESOP,
but not yet allocated to participants, are presented as a reduction of
shareholders' equity. Compensation expense is recorded based on the average
market price of the shares committed to be released for allocation to
participant accounts. The difference between the market price and the cost of
shares committed to be released is recorded as an adjustment to common stock.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings; dividends on unearned ESOP shares are reflected as a reduction of debt
and accrued interest.
Financial Instruments with Off-Balance-Sheet Risk: The Company, in the normal
course of business, makes commitments to make loans which are not reflected in
the consolidated financial statements. A summary of these commitments is
disclosed in Note 12.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investments in Limited Partnerships: Investments in limited partnerships
represent the Company's investments in affordable housing projects for the
primary purpose of available tax benefits. The Company is a limited partner in
these investments and as such, the Company is not involved in the management or
operation of such investments. These investments are accounted for using the
equity method of accounting. Under the equity method of accounting, the Company
records its share of the partnership's earnings or losses in its income
statement and adjusts the carrying amount of the investments on the balance
sheet. These investments are reviewed for impairment when events indicate their
carrying amounts may not be recoverable from future undiscounted cash flows. If
impaired, the investments are reported at discounted amounts.
Cash Surrender Value of Life Insurance: The Company has purchased life insurance
policies on certain key executives. Company owned life insurance is recorded at
its cash surrender value, or the amount that can be realized.
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. Diluted earnings per common share shows the dilutive
effective of additional potential common shares issuable under stock option
plans.
Stock-Based Compensation: Compensation expense under stock options is reported
using the intrinsic value method. No stock-based compensation cost is reflected
in net income, as all options granted had an exercise price equal to or greater
than the market price of the underlying common stock at date of grant. The
following table illustrates the effect of net income and earnings per share if
expense was measured using the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation.
2003 2002 2001
---- ---- ----
Net income as reported $ 2,399,784 $ 648,537 $ 1,910,372
Less: Stock-based compensation
expense determined under fair value
based method 198,346 159,852 126,720
Proforma net income $2,201,438 $ 488,685 $ 1,783,652
Basic earnings per share as reported $ 1.87 $ 0.49 $ 1.42
Pro forma basic earnings per share 1.71 0.37 1.33
Diluted earnings per share as reported $ 1.80 $ 0.47 $ 1.38
Pro forma diluted earnings per share 1.65 0.36 1.29
The fair values for the options granted during the year were estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions (no stock options were granted during the year
ending September 30, 2001):
2003 2002
---- ----
Risk-free interest rate 3.72% 4.83%
Expected dividend rate 1.82 2.06
Stock price volatility 23.23 14.41
Estimated Life 8 yrs 8 yrs
In future years, as additional options are granted, the proforma effect on net
income and earnings per share may increase. Stock options are used to reward
directors and certain executive officers and provide them with an additional
equity interest. Options are issued for ten year periods and have varying
vesting schedules.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income (loss). Other comprehensive income (loss) includes the net
change in net unrealized gains and losses on securities available for sale, net
of reclassification adjustments and tax effects, and is also recognized as a
separate component of shareholders' equity.
Segments: MFB Corp. and its subsidiary, MFB Financial and its subsidiary
Mishawaka Financial Services, Inc. provide a broad range of financial services
to individuals and companies in Mishawaka and the surrounding area. These
services include demand, time and savings deposits; lending; insurance; trust
and other financial services. While the Company's management monitors the
revenue streams of the various Company products and services, operations are
managed and financial performance is evaluated on a Company-wide basis.
Accordingly, all of the Company's banking operations are considered by
management to be aggregated in one reportable operating segment.
Reclassifications: Some items in the prior consolidated financial statements
have been reclassified to conform with the current presentation.
NOTE 2 - EARNINGS PER COMMON 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,
2003 2002 2001
---- ---- ----
Basic Earnings Per Common Share
Numerator
Net income $ 2,399,784 $ 648,537 $ 1,910,372
============== ============== ===============
Denominator
Weighted average common shares
outstanding for basic earnings per
common share 1,285,661 1,334,260 1,345,904
============== ============== ===============
Basic earnings per common share $ 1.87 $ .49 $ 1.42
================= =========== =========
Diluted Earnings Per Common Share
Numerator
Net income $ 2,399,784 $ 648,537 $ 1,910,372
============== ============== ===============
Denominator
Weighted average common shares
outstanding for basic earnings per
common share 1,285,661 1,334,260 1,345,904
Add: Dilutive effects of assumed
exercises of stock options 44,808 39,617 34,838
-------------- -------------- ---------------
Weighted average common shares
and dilutive potential common
shares outstanding 1,330,469 1,373,877 1,380,742
============== ============== ===============
Diluted earnings per common share $ 1.80 $ .47 $ 1.38
============== ============== ===============
Stock options for -0-, 42,500 and 75,750 shares of common stock were not
considered in computing diluted earnings per common share for the years ended
September 30, 2003, 2002 and 2001 because they were antidilutive.
NOTE 3 - SECURITIES
The amortized cost and fair value of securities available for sale are as
follows:
-------------------------September 30, 2003--------------------------
------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities
U.S. Government
and federal agencies $ 9,368,820 $ 194,081 $ - $ 9,562,901
Municipal bonds 346,124 22,772 - 368,896
Mortgage-backed 16,807,629 67,861 (106,398) 16,769,092
Corporate notes 9,770,890 196,087 (480,548) 9,486,429
---------------- ------------ -------------- ---------------
36,293,463 480,801 (586,946) 36,187,318
Marketable equity securities 4,237,128 - (395,703) 3,841,425
---------------- ------------ -------------- ---------------
$ 40,530,591 $ 480,801 $ (982,649) $ 40,028,743
================ ============ ============== ===============
-------------------------September 30, 2002--------------------------
------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities
U.S. Government
and federal agencies $ 12,485,469 $ 328,171 $ - $ 12,813,640
Municipal bonds 348,827 19,455 - 368,282
Mortgage-backed 26,771,068 272,193 (6,159) 27,037,102
Corporate notes 9,879,541 138,452 (608,756) 9,409,237
---------------- ------------ -------------- ---------------
49,484,905 758,271 (614,915) 49,628,261
Marketable equity securities 4,237,128 - (280,653) 3,956,475
---------------- ------------ -------------- ---------------
$ 53,722,033 $ 758,271 $ (895,568) $ 53,584,736
================ ============ ============== ===============
NOTE 3 - SECURITIES (Continued)
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, 2003
Amortized Fair
Cost Value
Due in one year or less $ 3,947,856 $ 4,022,608
Due after one year through
five years 7,559,167 7,874,558
Due after five years through
ten years 4,017,653 4,035,940
Due after ten years 3,961,158 3,485,120
---------------- ---------------
19,485,834 19,418,226
Mortgage-backed securities 16,807,629 16,769,092
---------------- ---------------
$ 36,293,463 $ 36,187,318
================ ===============
Proceeds from sales and liquidation of securities available for sale were
$160,000 during the year ended September 30, 2003. Gross gains of $40,000 and
gross losses of $-0- were realized on these sales.
Proceeds from sales and liquidation of securities available for sale were
$5,311,521 during the year ended September 30, 2002. Gross gains of $130,287 and
gross losses of $168,766 were realized on these sales. The Company recorded a
$895,479 write down on a $1.0 million WorldCom, Inc. corporate note investment
during its fiscal third quarter, 2002. The sale of this investment accounted for
the $160,000 in proceeds and $40,000 gain for the year ended September 30, 2003.
Proceeds from sales of securities available for sale were $190,930 during the
year ended September 30, 2001. Gross gains of $-0- and gross losses of $51,570
were realized on these sales.
NOTE 4 - LOANS RECEIVABLE
Loans receivable, at September 30 are summarized as follows:
2003 2002
---- ----
Residential mortgage loans:
Secured by one-to-four family residences $ 129,472,398 $ 146,942,626
Construction loans 22,066,066 15,862,879
Other 6,727,880 6,026,863
----------------- -----------------
158,266,344 168,832,368
Less undisbursed portion of construction and
other mortgage loans 62,265 (102,755)
----------------- -----------------
Total residential mortgage loans 158,328,609 168,729,613
Commercial and consumer loans:
Home equity and second mortgage 24,534,708 21,150,176
Commercial real estate 80,913,758 72,702,908
Commercial 49,709,400 48,437,524
Other 5,489,366 6,165,328
----------------- -----------------
Total commercial and consumer loans 160,647,232 148,455,936
Less: net deferred loan origination fees (821,183) (794,371)
------------------ -----------------
Total Loans Receivable $ 318,154,658 $ 316,391,178
================= =================
Activity in the allowance for loan losses is summarized as follows for the
years ended September 30:
2003 2002 2001
---- ---- ----
Balance at beginning of year $ 5,143,005 $ 4,631,981 $ 1,672,000
Provision for loan losses 1,110,000 3,369,431 3,096,594
Charge-offs (1,388,152) (2,872,683) (140,483)
Recoveries 333,284 14,276 3,870
-------------- ----------------- -----------------
Balance at end of year $ 5,198,137 $ 5,143,005 $ 4,631,981
============== ================= =================
NOTE 4 - LOANS RECEIVABLE (Continued)
Impaired loans were as follows:
2003 2002
---- ----
Year-end loans with no allocated allowance
for loan losses $ - $ -
Year-end loans with allocated allowance
for loan losses 4,027,000 6,567,000
--------------- ----------------
Total $ 4,027,000 $ 6,567,000
=============== ================
Amount of the allowance for loan
losses allocated $ 1,370,000 $ 1,773,000
Average of impaired loans during the year 5,233,000 8,070,000
Interest income recognized during impairment 82,000 227,000
Cash-basis interest income recognized during
impairment 66,000 226,000
The average balance of impaired loans in 2001 was $2,274,000 and there was $-0-
interest income and cash-basis interest income recognized during impairment.
Nonperforming loans were as follows at year end.
2003 2002
---- ----
Loans past due over 90 days still on accrual status $ - $ -
Non-accrual loans 3,845,000 5,464,000
--------------- ----------------
Total nonperforming loans $ 3,845,000 $ 5,464,000
=============== ================
A total of $3.6 million of the impaired loans are non-accrual loans.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The Company is subject to certain recourse
obligations on the loans serviced for Telebank. The unpaid principal balances of
mortgage loans serviced for others at September 30, 2003 and 2002 are summarized
as follows:
2003 2002
---- ----
Mortgage loan portfolios serviced for:
Federal Home Loan Mortgage Corporation $ 150,542,108 $ 119,837,201
Fannie Mae Corporation 4,532,304 -
Merchants Bank 1,637,562 -
Telebank 1,009,175 2,899,144
Hanover Capital Mortgage Holdings, Inc. 775,670 2,862,781
LaSalle Bank, FSB 1,088,242 2,776,881
Citizens Bank 861,611 3,145,617
Federal Home Loan Bank of Indianapolis 1,118,750 1,116,450
--------------- ----------------
$ 161,565,422 $ 132,638,074
=============== ================
NOTE 4 - LOANS RECEIVABLE, (Continued)
Custodial escrow balances maintained in connection with the foregoing serviced
loans were $1,247,181 and $1,083,000 at September 30, 2003 and 2002.
Activity for capitalized mortgage servicing rights and the related valuation
allowance was as follows:
2003 2002 2001
---- ---- ----
Servicing rights, net of valuation allowance:
Balance at beginning of year $ 1,616,588 $ 1,068,801 $ 611,013
Additions 1,329,117 913,780 604,285
Amortized to expense (1,572,504) (365,993) (146,497)
----------- --------- ---------
Balance at end of year $ 1,373,201 $ 1,616,588 $ 1,068,801
============== ============= =============
Valuation allowance:
Balance at beginning of year $ -
Impairment charge (703,929)
Impairment recovery 464,789
---------------
Balance at end of year $ (239,140)
===============
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:
2003 2002
---- ----
Balance at beginning of year $ 2,058,788 $ 1,949,414
New loans 1,058,916 1,109,517
Repayments (783,806) (809,150)
Effect of changes in related parties - (190,993)
---------------- ---------------
Balance at end of year $ 2,333,898 $ 2,058,788
================ ===============
NOTE 5 - PREMISES AND EQUIPMENT, NET
Premises and equipment at September 30 are summarized as follows:
2003 2002
---- ----
Land$ 1,851,042 $ 1,537,840
Buildings and improvements 4,606,342 3,894,217
Furniture and equipment 3,707,259 3,205,533
---------------- ---------------
Total cost 10,164,643 8,637,590
Accumulated depreciation and amortization (4,074,996) (3,583,729)
----------------- ---------------
$ 6,089,647 $ 5,053,861
================ ===============
Depreciation and amortization of premises and equipment included in occupancy
and equipment expense was approximately $557,000, $562,000 and $556,000 for the
years ended September 30, 2003, 2002 and 2001, respectively. The Company
purchased a new headquarters building on October 31, 2003 at a cost of $7.3
million.
NOTE 6 - DEPOSITS
At September 30, 2003, the scheduled maturities of certificates of deposit for
the years ending September 30, are as follows:
2004 $ 57,633,111
2005 50,301,358
2006 8,069,759
2007 36,059,320
2008 6,009,648
Thereafter 210,406
------------------
$ 158,283,602
The aggregate amount of short-term jumbo certificates of deposit in
denominations of $100,000 or more was approximately $38,795,000 and $37,424,000
at September 30, 2003 and 2002.
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
At September 30, 2003, advances from the Federal Home Loan Bank of Indianapolis
with fixed and variable rates ranging from 3.60% to 6.82% are required to be
repaid in the year ending September 30 as follows:
2004 $ 800,000
2005 5,200,000
2006 10,500,000
2007 5,000,000
2008 43,000,000
Thereafter 34,290,251
-----------------
$ 98,790,251
FHLB advances are secured by all FHLB stock, qualifying first mortgage loans,
and government agency securities. At September 30, 2003, $6,470,600 of FHLB
stock, $134,400,000 of eligible mortgage loan collateral and $51,334,000 of
other real estate related collateral are pledged to the FHLB to secure advances
outstanding.
In addition, $89 million of the advances outstanding at September 30, 2003
contained put options with put dates ranging from October 2003 to January 2004,
whereby the advance can be called by the FHLB prior to maturity.
NOTE 8 - EMPLOYEE BENEFITS
Employee Pension Plan: On April 1, 2003, the Bank terminated its qualified
noncontributory multiple-employer defined benefit pension plan covering
substantially all of its employees. The plan was administered by the trustees of
the Financial Institutions Retirement Fund. There were no separate valuation of
plan benefits nor segregation of plan assets specifically for the Bank because
the plan was a multiple-employer plan and separate actuarial valuations are not
made with respect to each employer nor are the plan assets so segregated. At
termination, the Company made a contribution of $148,000 to the Fund as part of
the termination agreement to cover the deficit between the vested benefits and
the value of the Company's calculated portion of the total plan assets. Pension
plan expense for the years ended September 30, 2003, 2002 and 2001 was
approximately $148,000, $5,300 and $6,600, respectively.
401(k) Plan: The Company maintains a retirement savings 401(k) plan which covers
all full time employees who are 21 or older and have completed one year of
service. Participants may defer up to 15% of compensation, and the Company
increased its match to 125% (90% for the year ending September 30, 2003) of
elective deferrals on 6% of the participants' compensation effective October 1,
2003.
Expense for the 401(k) plan for the years ended September 30, 2003, 2002 and
2001 was approximately $193,000, $150,000 and $122,000.
Employee Stock Ownership Plan (ESOP): The Company maintains an ESOP for eligible
employees. Employees with at least one year of employment and who have attained
age twenty-one are eligible to participate. 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. During the year ending September
30, 2003, an additional 5,250 shares were purchased by the ESOP and allocated to
participants.
The ESOP shares as of September 30 were as follows:
2003 2002 2001
---- ---- ----
Allocated shares 152,750 147,500 147,500
Shares withdrawn from the plan by participants (24,274) (16,198) (16,198)
--------------- -------------- ---------------
Total ESOP shares held in the plan 128,476 131,302 131,302
============== ============= ===============
Stock Option Plans: The Board of Directors of the Company have adopted the MFB
Corp. Stock Option Plans (the "Option Plans"). The number of options authorized
under the Plans totals 450,000 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, 2003, 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, 2003,
2002 and 2001. As of September 30, 2003, 94,500 options remain available for
future grants.
Activity in the Option Plan is summarized as follows:
Weighted Weighted
Number of Average Average
Outstanding Exercise Exercise Fair Value
Options Price Price of Grants
Balance at September 30, 2000 205,250 $ 10.00 - 26.75 $ 16.59
Granted - -
Forfeited (3,750) 16.31 - 26.75 23.36
Exercised (12,850) 10.00 - 16.31 10.12
-------
Balance at September 30, 2001 188,650 10.00 - 26.75 16.68
Granted 16,500 18.75 - 20.55 19.73 4.45
Forfeited (2,500) 17.25 - 20.55 17.91
Exercised (16,700) 10.00 10.00
--------
Balance at September 30, 2002 185,950 10.00 - 26.75 17.53
Granted 59,000 21.30 21.30 5.82
Forfeited (500) 21.30 21.30
Exercised (33,000) 10.00 - 21.30 11.46
--------
Balance at September 30, 2003 211,450 10.00 - 26.75 19.71
========
NOTE 8 - EMPLOYEE BENEFITS (Continued)
Options exercisable at September 30, based on vesting schedules established at
date of grant, are as follows:
Weighted
Number Average
of Options Exercise Price
2001 146,415 $ 15.05
2002 156,264 16.91
2003 139,994 18.68
At September 30, 2003 options outstanding were as follows:
Outstanding Exercisable
Weighted Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Number Life Price Number Price
- ------ ------ ---- ----- ------ -------
$10-$15 51,700 1.04 years $ 11.93 51,700 $11.93
$15-$20 19,500 5.22 years 16.80 13,100 15.91
$20-$26.7 140,250 6.72 years 22.98 75,144 23.80
Outstanding at year end 211,450 5.20 years $19.71 139,944 $ 18.68
NOTE 9 - INCOME TAXES
The Company files consolidated income tax returns. Income tax expense for the
years ended September 30 are summarized as follows:
2003 2002 2001
---- ---- ----
Federal
Current $ 731,145 $ 367,179 $ 1,456,063
Deferred (178,801) (418,795) (765,324)
--------------- --------------- --------------
552,344 (51,616) 690,739
State
Current 166,354 73,222 400,201
Deferred (47,535) (2,887) (139,657)
--------------- --------------- --------------
118,819 70,335 260,544
-------------- -------------- --------------
Total income tax expense $ 671,163 $ 18,719 $ 951,283
============== ============== ==============
NOTE 9 - INCOME TAXES (Continued)
Total income tax expense differed from the amounts computed by applying the
federal income tax rate of 34% in all periods presented to income before income
taxes as a result of the following for the years ended September 30:
2003 2002 2001
---- ---- ----
Income taxes at statutory rate $ 1,044,122 $ 226,867 $ 972,963
Tax effect of:
State tax, net of federal income tax effect 78,421 46,421 171,960
Low income housing credits (348,257) (214,072) (174,401)
Bank owned life insurance income (73,912) - -
Other items, net (29,211) (40,497) (19,239)
--------------- --------------- --------------
Total income tax expense $ 671,163 $ 18,719 $ 951,283
============== ============== ==============
The components of the net deferred tax asset (liability) recorded in the
consolidated balance sheets as of September 30 are as follows:
2003 2002
---- ----
Deferred tax assets
Bad debt deduction $ 2,111,061 $ 1,992,855
Low income housing credit carry-forward 241,388 -
Net deferred loan fees 325,271 330,776
Security valuation adjustment - 372,878
Net unrealized depreciation on securities
available for sale 35,735 -
Other 118,627 55,208
-------------- --------------
2,832,082 2,751,717
Deferred tax liabilities
Accretion (70,745) (57,628)
Depreciation (27,964) (45,797)
Net unrealized appreciation on securities
available for sale - (56,784)
FHLB stock dividend (96,775) -
Mortgage servicing rights (543,924) (673,147)
Other - (143,744)
-------------- --------------
(739,408) (977,100)
Net deferred tax asset (liability) $ 2,092,674 $ 1,774,617
============== ==============
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, 2003 and 2002. 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.
Tax legislation passed in August 1996 requires the Bank to deduct a provision
for bad debts for tax purposes based on actual loss experience and recapture the
excess bad debt reserve accumulated in tax years after September 30, 1987. The
related amount of deferred tax liability which must be recaptured is
approximately $446,000 and is payable over a six year period beginning with the
tax year ending September 30, 1999.
NOTE 10 - REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings, and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If only adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
The Bank's actual capital and required capital amounts and ratios are presented
below:
Minimum
Requirement
Minimum To Be Well
Requirement Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
As of September 30, 2003
Total capital (to risk
weighted assets) $ 36,346 12.41% $ 23,435 8.00% $ 29,294 10.00%
Tier 1 (core) capital
(to risk weighted assets) 33,268 11.36 11,718 4.00 17,576 6.00
Tier 1 (core) capital (to
adjusted total assets) 33,268 7.77 17,116 4.00 21,395 5.00
As of September 30, 2002
Total capital (to risk
weighted assets) $ 36,167 12.83% $ 22,553 8.00% $ 28,191 10.00%
Tier 1 (core) capital
(to risk weighted assets) 32,948 11.69 11,276 4.00 16,914 6.00
Tier 1 (core) capital (to
adjusted total assets) 32,948 7.83 16,824 4.00 21,032 5.00
Regulations 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 October 1, 2003, $1,593,000 of the Bank's retained earnings was
potentially available for distribution to the Company, without obtaining prior
regulatory approval.
NOTE 11 - OTHER NON-INTEREST INCOME AND EXPENSE
Other noninterest income and expense amounts are summarized as follows for the
years ended September 30:
2003 2002 2001
---- ---- ----
Other noninterest income
Other service charges and fees $ 226,925 $ 171,530 $ 245,647
ATM foreign surcharges 47,047 54,349 61,276
Visa interchange income 63,856 44,946 18,673
Partnership equity loss (165,570) (163,495) (89,374)
Bank owned life insurance 217,387 - -
Other 106,317 42,879 109,733
-------------- -------------- --------------
$ 495,962 $ 150,209 $ 345,955
============== ============== ==============
Other noninterest expense
Advertising and promotion $ 357,381 $ 202,016 $ 155,138
Professional fees 363,828 296,840 311,154
Printing, postage and supplies 376,421 338,588 308,749
Other 1,480,689 1,203,278 1,116,178
-------------- -------------- --------------
$ 2,578,319 $ 2,040,722 $ 1,891,219
============== ============== ==============
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONTINGENCIES
Various outstanding commitments and contingent liabilities are not reflected in
the financial statements. Commitments to make loans at September 30 are as
follows:
------------------2 0 0 3---------------- ------------------2 0 0 2----------------
------- -------
Fixed Variable Fixed Variable
Rate Loans Rate Loans Total Rate Loans Rate Loans Total
Mortgage loans $ 9,885,230 $ 2,211,760 $ 12,096,990 $ 14,254,431 $ 2,644,350 $ 16,898,781
Commercial loans 2,795,409 105,398 2,900,807 615,000 5,164,995 5,779,995
Unused equity lines of credit 10,186,616 20,598,890 30,785,506 11,243,846 14,800,826 26,044,672
Unused commercial loan
lines and letters of credit 13,875 60,825,163 60,839,038 - 31,968,156 31,968,156
Unused construction loan
lines of credit 4,675,825 5,638,811 10,314,636 1,614,237 7,154,417 8,768,654
------------ ------------- ------------ ------------ ------------ ------------
$ 27,556,955 $ 89,380,022 $116,936,977 $ 27,727,514 $ 61,732,744 $ 89,460,258
============ ============= ============ ============ ============ ============
Fixed rate mortgage loan commitments at September 30, 2003 are at an average
rate of 6.09%. 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. The average rate on variable rate mortgage loan
commitments is 4.47% and are tied to the one year treasury bill rate. Rates on
variable commercial loan commitments are tied to the national prime rate.
Since commitments to make loans and to fund unused lines of credit and loans in
process may expire without being used, the amounts do not necessarily represent
future cash commitments. In addition, commitments are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. The maximum exposure to credit loss in the event of nonperformance by
the other party is the contractual amount of these instruments. The same credit
policy is used to make such commitments as is used for loans receivable.
Under employment agreements with certain executive officers, certain events
leading to separation from the Company could result in cash payments totaling
$1.27 million as of September 30, 2003.
The Company and the Bank are subject to certain claims and legal actions arising
in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material adverse effect on the consolidated financial
position or results of operation of the Company.
NOTE 13 - SHAREHOLDER RIGHTS PLAN
The Company has adopted a Shareholder Rights Plan and declared a dividend
distribution at the rate of one Right for each share of common stock held of
record as of the close of business on October 21, 1996, and for each share of
common stock issued thereafter up to the Distribution Date (defined below)
Each Right entitles holders of common stock to buy one share of common stock of
the Company at an exercise price of $46. The Right would be exercisable, and
would detach from the common stock (the "Distribution Date") only if a person or
group (i) were to acquire 12% or more of the outstanding shares of common stock
of the Company; (ii) were to announce a tender or exchange offer that, if
consummated, would result in a person or group beneficially owning 30% or more
of the outstanding shares of common stock of the Company; or (iii) were declared
by the Board to be an Adverse Person (as defined in the Plan) if such person or
group beneficially owns 10% or more of the outstanding shares of common stock in
the Company. In the event of any occurrence triggering the Distribution Date,
each Right may be exercised by the holder (other than such an acquiring person
or group) to purchase shares of common stock of the Company (or, in certain
circumstances, common stock of the acquiring person) at a 50% discount to market
price. The Company is entitled to redeem the Rights at $.01 per Right at any
time. The Rights will expire at the close of business on October 1, 2006.
NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed financial statements for the parent company,
MFB Corp.
CONDENSED BALANCE SHEETS
September 30, 2003 and 2002
2003 2002
---- ----
ASSETS
Cash and cash equivalents $ 416,295 $ 470,583
Securities available for sale 1,200,915 1,193,655
Investment in Bank subsidiary 33,200,296 33,039,114
Other assets 225,295 41,083
--------------- ----------------
Total assets $ 35,042,801 $ 34,744,435
=============== ================
LIABILITIES
Loan payable to Bank subsidiary $ 450,000 $ 750,000
Accrued expenses and other liabilities 341,595 41,998
--------------- ----------------
Total liabilities 791,595 791,998
SHAREHOLDERS' EQUITY 34,251,206 33,952,437
--------------- --------------
Total liabilities and shareholders' equity $ 35,042,801 $ 34,744,435
=============== ================
NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS (continued)
CONDENSED STATEMENTS OF INCOME
Years ended September 30, 2003, 2002 and 2001
2003 2002 2001
---- ---- ----
INCOME
Dividends from Bank subsidiary - cash $ 2,070,000 $ 1,055,000 $ 790,000
Interest income 42,666 61,740 87,021
-------------- -------------- ---------------
Total 2,112,666 1,116,740 877,021
EXPENSES
Interest expense 36,141 36,901 60,567
Other expenses 186,183 153,178 217,154
-------------- -------------- ---------------
Total 222,324 190,079 277,721
Income before income taxes and
equity in undistributed (excess distributed)
net income of Bank subsidiary 1,890,342 926,661 599,300
Income tax benefit 69,884 50,835 77,410
-------------- -------------- ---------------
Income before equity in undistributed
(excess distributed) net income
of Bank subsidiary 1,960,226 977,496 676,710
Equity in undistributed (excess distributed)
net income of Bank subsidiary 439,558 (328,959) 1,233,662
-------------- --------------- ---------------
Net income $ 2,399,784 $ 648,537 $ 1,910,372
============== ============== ===============
NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended September 30, 2003, 2002 and 2001
2003 2002 2001
---- ---- ----
Cash flows from operating activities
Net income $ 2,399,784 $ 648,537 $ 1,910,372
Adjustments to reconcile net income to
net cash from operating activities
Equity in (undistributed) excess distributed
net income of Bank subsidiary (439,558) 328,959 (1,233,662)
Net realized losses from sales
of securities available for sale - - 51,570
Net change in other assets (155,278) 29,967 (29,798)
Net change in accrued expenses and
other liabilities (403) (7,545) 15,287
---------------- -------------- --------------
Net cash from operating activities 1,804,545 999,918 713,769
Cash flows from investing activities
Purchase of securities available for sale - - (41,778)
Proceeds from sales of securities
available for sale - - 190,930
--------------- -------------- --------------
Net cash from investing activities - - 149,152
Cash flows from financing activities
Purchase of MFB Corp. common stock (1,676,634) (506,881) (647,398)
Proceeds from exercise of stock options 378,125 167,000 130,079
Cash dividends paid (560,324) (554,220) (533,085)
---------------- -------------- --------------
Net cash from financing activities (1,858,833) (894,101) (1,050,404)
---------------- -------------- --------------
Net change in cash and cash equivalents (54,288) 105,817 (187,483)
Cash and cash equivalents at beginning
of year 470,583 364,766 552,249
--------------- -------------- --------------
Cash and cash equivalents at end of year $ 416,295 $ 470,583 $ 364,766
=============== ============== ==============
(Continued)
51
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, 2003 and 2002.
Items which are not financial instruments are not included.
2 0 0 3 2 0 0 2
------- -------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Assets
Cash and cash equivalents $ 40,356,979 $ 40,357,000 $ 27,582,271 $ 27,582,000
Interest-bearing time
deposits in other financial
institutions 1,001,160 1,001,000 500,000 500,000
Securities available for sale 40,028,743 40,029,000 53,584,736 53,585,000
FHLB stock 6,470,600 6,471,000 6,307,600 6,308,000
Loans held for sale 6,625,540 6,626,000 6,404,325 6,404,000
Loans receivable, net of
allowance for loan losses 312,956,521 324,510,000 311,248,173 317,823,000
Accrued interest receivable 1,521,631 1,522,000 1,766,189 1,766,000
Mortgage servicing rights, net 1,373,201 1,373,000 1,616,588 1,617,000
Investment in limited
partnership 2,548,022 2,548,000 2,713,593 2,714,000
Liabilities
Noninterest bearing demand
deposits (26,481,555) (26,482,000) (20,270,165) (20,270,000)
Savings, NOW and MMDA
deposits (107,340,694) (107,341,000) (86,559,465) (86,559,000)
Other time deposits (158,283,602) (163,299,000) (157,547,848) (157,260,000)
FHLB advances (98,790,251) (110,451,000) (119,215,115) (126,694,000)
Loans from correspondent
banks (300,000) (300,000) - -
Advances from borrowers
for taxes and insurance (1,153,172) (1,153,000) (1,413,660) (1,414,000)
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of September 30, 2003 and 2002. 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, 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, 2003 and 2002 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,
2003 and 2002, applied for an estimated time period until the loan is assumed to
reprice or be paid. In addition, when computing the estimated fair value for
loans receivable, the allowance for loan losses was subtracted from the
calculated fair value for consideration of credit issues. The estimated fair
value for FHLB stock, accrued interest receivable, mortgage servicing rights,
investment in limited partnership, noninterest bearing demand deposits, savings,
NOW and MMDA deposits and advances from borrowers for taxes and insurance is
based upon their carrying value. The estimated fair value for other time
deposits as well as securities sold under agreements to repurchase, loans from
correspondent banks and FHLB advances is based upon estimates of the rate the
Company would pay on such deposits or borrowings at September 30, 2003 and 2002,
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, 2003 and 2002, 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, 2003 and 2002 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.
52
NOTE 16 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows:
2003 2002 2001
---- ---- ----
Net change in net unrealized gains and losses
on securities available for sale
Unrealized gains (losses) arising during
the year $ (324,551) $ (1,199,295) $ 1,594,005
Reclassification adjustment for (gains) losses
included in net income (40,000) 933,958 51,570
--------------- -------------- ---------------
Net change in net unrealized gains
and losses on securities available
for sale (364,551) (265,337) 1,645,575
Tax expense (benefit) (92,519) (26,220) 684,100
--------------- -------------- ---------------
Total other comprehensive income (loss) $ (272,032) $ (239,117) $ 961,475
=============== ============== ===============
NOTE 17 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
--------------Year Ended September 30, 2003--------------
-----------------------------
1st 2nd 3rd* 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income $ 6,039 $ 5,568 $ 5,597 $ 5,730
Interest expense 3,259 3,113 3,065 2,808
----------- ----------- ----------- -----------
Net interest income 2,780 2,455 2,532 2,922
Provision for loan losses 450 450 110 100
----------- ----------- ----------- -----------
Net interest income after provision for loan
losses 2,330 2,005 2,422 2,822
Non-interest income 1,322 1,434 401* 1,870
Non-interest expense 2,583 2,878 2,975 3,099
----------- ----------- ----------- -----------
Income before income taxes 1,069 561 (152) 1,593
Income tax expense 308 91 (213) 485
----------- ----------- ------------ -----------
Net income $ 761 $ 470 $ 61 $ 1,108
=========== =========== =========== ===========
Basic earnings per common share $ .58 $ .37 $ .05 $ .87
=========== =========== =========== ===========
Diluted earnings per common share $ .56 $ .36 $ .05 $ .83
=========== =========== =========== ===========
* The significant decline in net income for the third quarter of fiscal year
2003 is primarily due to a $704,000 mortgage servicing rights impairment charge.
NOTE 17 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)
--------------Year Ended September 30, 2002--------------
-----------------------------
1st 2nd 3rd * 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income $ 6,740 $ 6,318 $ 6,365 $ 6,342
Interest expense 3,717 3,441 3,332 3,339
----------- ----------- ----------- -----------
Net interest income 3,023 2,877 3,033 3,003
Provision for loan losses 232 452 2,235* 450
----------- ----------- ------------ -----------
Net interest income after provision for loan
losses 2,791 2,425 798 2,553
Noninterest income 924 696 (253)* 848
Noninterest expense 2,309 2,615 2,602 2,589
----------- ----------- ----------- -----------
Income before income taxes 1,406 506 (2,057) 812
Income tax expense 507 135 (860) 236
----------- ----------- ----------- -----------
Net income $ 899 $ 371 $ (1,197) $ 576
=========== =========== =========== ===========
Basic earnings per common share $ .67 $ .28 $ (.90) $ .44
=========== =========== ========== ===========
Diluted earnings per common share $ .66 $ .26 $ (.90) $ .42
=========== =========== ========== ===========
* The loss during the third quarter of fiscal year 2002 is primarily
attributable to an $895,000 write down of a WorldCom Inc. corporate note
investment and a significant increase in the provision for loan losses related
to increases in loan loss allocations on certain commercial loans.
MFB CORP. AND SUBSIDIARY
DIRECTORS AND OFFICERS
September 30, 2003
MFB CORP. AND MFB FINANCIAL DIRECTORS
M. Gilbert Eberhart (age 69) has served as Secretary of MFB Financial since 1987
and of MFB Corp. since inception. He is a dentist based in Mishawaka.
Thomas F. Hums (age 70) served as President and Chief Executive Officer of MFB
Financial from 1972 until September 1995. He also served as President and Chief
Executive Officer of Mishawaka Financial Services, Inc. from 1975 until
September 1995. He also served as President and Chief Executive Officer of MFB
Corp. from inception until September 1995. He is the current Chairman of MFB
Corp. and MFB Financial.
Jonathan E. Kintner (age 60) is an optometrist based in Mishawaka.
Christine A. Lauber (age 58) is a Certified Public Accountant in private
practice in South Bend, Indiana.
Michael J. Marien (age 56) is a Sales Representative with Signode Corporation, a
division of ITW.
Charles J. Viater (age 49) has served as President and Chief Executive Officer
of MFB Corp., MFB Financial and Mishawaka Financial Services, Inc. since
September 1995. He previously served as Executive Vice President for Amity
Federal Savings Bank and Chief Financial Officer of Amity Bancshares, Inc.
beginning in December 1990.
Reginald H. Wagle (age 61) has served as Vice President of Memorial Health
Foundation since 1992. Until 1992, he was a free-lance political consultant and
until 1991, he also served as District Director for the Office of United States
Representative John P. Hiler, Third Congressional District of Indiana.
MFB FINANCIAL EXECUTIVE OFFICERS
Charles J. Viater Thomas J. Flournoy
President and Vice President and
Chief Executive Officer* Chief Financial Officer
Donald R. Kyle M. Gilbert Eberhart
Executive Vice President and Secretary*
Chief Operating Officer
* Holds same position with MFB Corp.
MFB CORP. AND SUBSIDIARY
SHAREHOLDER INFORMATION
September 30, 2003
Market Information
The common stock of MFB Corp. is traded on the National Association of
Securities Dealers Automated Quotation System, National Market System, under the
symbol "MFBC." As of September 30, 2003, there were approximately 491
shareholders of record. The following table sets forth market price (based on
daily closing prices) and dividend information for the Company's common stock
for the periods indicated.
Dividend
Fiscal Quarters Ended High Trade Low Trade Declared
December 31, 2001 $ 21.30 $ 18.40 $ .10
March 31, 2002 21.96 19.87 .105
June 30, 2002 25.15 21.97 .105
September 30, 2002 24.99 21.71 .105
December 31, 2002 23.44 20.59 .105
March 31, 2003 22.97 21.10 .11
June 30, 2003 26.65 22.39 .11
September 30, 2003 32.00 25.18 .11
Transfer Agent and Registrar
Registrar and Transfer Co.
10 Commerce Drive
Cranford, NJ 07016
Special Counsel
Barnes & Thornburg
1313 Merchants Company Building
11 South Meridian Street
Indianapolis, In. 46204
Independent Auditors
Crowe Chizek and Company LLC
330 East Jefferson Blvd.
South Bend, IN 46624
Shareholder and General Inquiries
The Company is required to file an Annual Report on Form 10-K for its fiscal
year ended September 30, 2003 with the Securities and Exchange Commission.
Copies of this annual report may be obtained without charge upon written request
to:
Charles J. Viater
President and Chief Executive Officer
MFB Corp.
121 South Church Street
PO Box 528
Mishawaka, IN 46546
Office Locations
Main Office Branch Office
121 S. Church St. 411 W. McKinley Ave.
Mishawaka, IN 46544 Mishawaka, IN 46545
Branch Office
Branch Office 2427 Mishawaka Ave.
25990 County Road 6 South Bend, IN 46615
Elkhart, IN 46514
Branch Office Branch Office
23132 US 33 100 E. Wayne Street
Elkhart, IN 46517 Suite 150
South Bend, IN 46601
Branch Office
402 W. Cleveland Rd.
Mishawaka, IN 46545