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 Registered Public Accounting Firm .................. 18
Consolidated Balance Sheets .............................................. 19
Consolidated Statements of Income ........................................ 20
Consolidated Statements of Shareholders' Equity .......................... 21
Consolidated Statements of Cash Flows .................................... 23
Notes to Consolidated Financial Statements ............................... 25
Directors and Executive Officers ......................................... 59
Shareholder Information .................................................. 60
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 corporate office located in Mishawaka,
Indiana and its twelve branch locations in St. Joseph, Elkhart, and Hamilton
Counties of Indiana. The Bank offers a variety of lending, deposit, trust and
other financial services to its retail and business 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. MFBC Statutory Trust I is MFB Corp's wholly-owned trust preferred
security subsidiary.
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, it is my
pleasure to once again provide you with our Annual Report. The fiscal year ended
September 30, 2005 has been an important period of progress for MFB.
We have now been a resident in our new corporate headquarters for over a year.
More importantly, we've had two significant new tenants join us this past summer
and we expect that a third will do so in May, 2006. All are high profile and
well respected firms that will enhance the image of MFB Plaza as the preeminent
professional office property in our market and should generate significant
revenue for the Company for years to come. We also opened a full service branch
facility in the lobby of the Plaza in September, 2005.
The assimilation of the Sobieski Bank acquisition has gone extremely well. Our
new employees and customers are making notable contributions to the growth and
prosperity of our organization and will continue to do so. The lease on one of
the three offices acquired as part of this transaction expired in August, 2005
and was not renewed based on our ability to provide more comprehensive service
at existing, nearby facilities.
We also established a presence in the Indianapolis market this past year. This
is an exciting new venture that is focused on providing private banking and
asset management services to the dynamic and growing market in northern
Indianapolis through a highly professional and knowledgeable group of banking
specialists that bring significant local experience to MFB. We will monitor
results of our efforts here closely as we establish new client relationships
that have the potential to make considerable contributions to the profitability
of our organization.
The Company was well positioned to benefit from significant changes in short
term interest rates this past year. Asset yields improved while the cost of
funds was held in check, resulting in a 26 basis point improvement in our net
interest spread from 2004 to 2005. Net income for the year improved to $2.5
million from $1.8 million last year even after recognizing a $626,000 after tax
write-down of Federal Home Loan Mortgage Corporation and Federal National
Mortgage Corporation securities held in our investment portfolio. This
write-down was necessitated by an analysis that determined a decline in value of
these securities was "other than temporary" by generally accepted accounting
standards. These values have stabilized and in fact improved slightly since the
write-down was recorded in December, 2004.
Our company continued to grow this past year as well. Total assets at September
30, 2005 reached $554.9 million, a $13.7 million increase from the previous
year. Total deposits grew over $16 million, with "core" deposits growing almost
$23 million during the year. Our book value per common share outstanding was
$28.52 at year-end, up from $27.02 a year ago. The Company increased the annual
dividend rate for the ninth consecutive year to $0.495 per share.
We look forward to the year ahead with energy and enthusiasm as we continue to
strive to improve long term value for our shareholders.
Charles J. Viater
President and Chief Executive Officer
MFB CORP. AND SUBSIDIARY
2
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)
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Summary of Financial Condition:
Total assets $ 554,877 $ 541,222 $ 428,624 $ 421,200 $ 413,084
Loans receivable 390,695 399,925 318,155 316,391 311,613
Allowance for loan losses 6,388 6,074 5,198 5,143 4,632
Loans held for sale, net 407 1,034 6,626 6,404 3,074
Cash and cash equivalents 54,209 28,595 40,357 27,582 34,223
Securities available for sale, including FHLB stock 72,563 74,820 46,499 59,892 54,167
Goodwill and other intangible assets 4,557 5,056 - - -
Deposit 374,364 357,893 292,106 264,377 245,179
Securities sold under agreements to repurchase - - - 11,022
FHLB advances 125,854 133,443 98,790 119,215 119,685
Shareholders' equity 38,673 35,906 34,251 33,952 34,380
Years Ended September 30,
(In Thousands)
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Summary of Operating Results:
Interest income $ 27,947 $ 22,792 $ 23,326 $ 26,188 $ 30,316
Interest expense 13,277 11,089 12,244 13,829 17,972
----------- ----------- ----------- ----------- -----------
Net interest income 14,670 11,703 11,082 12,359 12,344
Provision for loan losses 723 800 1,110 3,369 3,096
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 13,947 10,903 9,972 8,990 9,248
Noninterest income
Service charges on deposit accounts 3,291 3,030 1,624 1,049 903
Trust fee income 385 495 464 298 213
Insurance commissions 211 208 187 158 140
Net realized gains from sales of loans 835 1,032 3,395 1,578 1,046
Mortgage servicing right recovery (impairment) 180 217 (576) - -
Net gain (loss) on securities available for sale (948) (109) 40 (934) (52)
Other 1,034 807 (153) 20 346
----------- ---------- ----------- ----------- ----------
Total noninterest income 4,988 5,680 4,981 2,169 2,596
Noninterest expense
Salaries and employee benefits 7,519 7,021 6,803 5,922 4,944
Occupancy and equipment expense 3,063 2,743 1,558 1,483 1,370
Professional and consulting fees 712 1,226 364 297 311
Data processing expense 754 632 596 669 517
Other expense 3,780 2,936 2,561 2,121 1,841
------------ ----------- ----------- ----------- ----------
Total noninterest expense 15,828 14,558 11,882 10,492 8,983
------------ ----------- ----------- ----------- ----------
Income before income taxes 3,107 2,025 3,071 667 2,861
Income tax expense 611 235 671 18 951
------------ ----------- ----------- ----------- ---------
Net income $ 2,496 $ 1,790 $ 2,400 $ 649 $ 1,910
============ =========== =========== =========== ==========
Supplemental Data:
Basic earnings per common share $ 1.85 $ 1.36 $ 1.87 $ 0.49 $ 1.42
Diluted earnings per common share 1.81 1.30 1.80 0.47 1.38
Dividends declared per common share .495 .470 .435 .415 .395
Book value per common share 28.52 27.02 26.60 25.53 25.72
Return on assets 0.47% 0.40% 0.56% 0.16% 0.47%
Return on equity 6.82 5.05 7.14 1.84 5.75
Interest rate spread 2.79 2.53 2.41 2.73 2.73
Net yield on average interest-earning assets 2.97 2.81 2.73 3.08 3.15
Dividend pay-out ratio 26.73 34.56 23.26 84.69 27.82
Equity-to-assets 6.97 6.63 7.99 8.06 8.32
Non-performing assets to total loans 0.80 1.07 1.43 1.88 0.89
Allowance for loan losses to total loans 1.63 1.52 1.63 1.63 1.49
8
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, mortgage servicing rights valuation adjustments,
service charges, fee income, gains from sales of loans, mortgage loan servicing
fees, income from subsidiary activities, operating expenses and income taxes.
CRITICAL ACCOUNTING POLICIES
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 that could affect these judgments
include, but are not limited to; 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 available for sale and the
valuation of mortgage servicing rights.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs, less recoveries. Management estimates
the allowance for loan losses balance required by evaluating current economic
conditions, changes in character and size of the loan portfolio, delinquencies
and adequacy of loan collateral securing loan delinquencies, historical and
estimated charge offs and other pertinent information derived from a review of
the loan portfolio. Allocations of the allowance for loan losses may be made for
specific loans, but the entire allowance for loan losses is available for any
loan that, in management's judgment, should be charged-off. Loan losses are
charged against the allowance for loan losses when management believes the loan
balance is uncollectible.
A loan is impaired when the full payment of principal and interest is not
expected to be paid in accordance with the original terms of the loan.
Impairment is evaluated in total for small-balance loans of similar nature such
as residential mortgage and consumer loans, and on an individual loan basis for
commercial loans. If a loan is impaired, a portion of the allowance for loan
losses is allocated so that the loan is reported on a net basis at the present
value of estimated future cash flows using the loan's existing rate or at the
fair value of collateral if repayment is expected solely from the collateral.
Thus, changes in estimates of future cash flows or collateral values for
individual loans could significantly impact the allowance for loan losses and
provision expense.
Fair Value of Securities Available for Sale: Securities available for sale are
carried at fair value, with unrealized holding gains and losses reported
separately in accumulated other comprehensive income (loss), net of tax. The
Company obtains market values from a third party on a monthly basis in order to
adjust the securities to fair value. As a result of changes in the fair market
value of the Company's available for sale securities portfolio, other
comprehensive (loss), net of tax, totaled $481,000, $(326,000) and $(272,000)
for 2005, 2004, and 2003, respectively. Additionally, securities available for
sale are required to be written down to fair value when a decline in fair value
is not temporary; therefore, future changes in the fair value of securities
could have a significant impact on the Company's operating results. In
determining whether a market value decline is other than temporary, management
considers the reason for the decline, the extent of the decline and the duration
of the decline.
Mortgage Servicing Rights: Servicing rights represent both purchased rights and
the allocated value of servicing rights retained on loans sold. Servicing rights
are expensed in proportion to, and over the period of, estimated net servicing
revenues. Impairment is evaluated based on the fair value of the rights,
determined using prices for similar assets with similar characteristics or
discounted cash flows using market based assumptions. Any impairment of a
grouping is reported as a valuation allowance. Changes in interest rates and the
level of refinance activity can have volatile effects on the carrying value of
servicing rights. The Company obtains an outside appraisal on a quarterly basis
from a national firm who specializes in mortgage servicing valuation. This
valuation is used to evaluate the Company's mortgage servicing rights asset for
impairment. At September 30, 2005, mortgage servicing rights had a carrying
value of $2.34 million.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 2005 AND 2004
RESULTS OF OPERATIONS
Consolidated net income for the Company for the year ended September 30, 2005
was $2.5 million or $1.81 diluted net income per common share compared to $1.8
million or $1.30 diluted net income per common share for the same period in
2004. The increase in net income was primarily attributable to an increase in
net interest income partially offset by a decrease in noninterest income and an
increase in noninterest expense.
Net interest income totaled $14.7 million for the year ended September 30, 2005
compared to $11.7 million for the same period one year ago. Interest income
increased $5.15 million and interest expense increased $2.19 million during the
year ended September 30, 2005 compared to the same period in 2004. Record low
interest rates began to increase during mid-2004, and this was reflected in the
Company's yield earned on interest-bearing assets compared to the prior year due
to upward repricing of these instruments. The yield on interest-earning assets
increased 20 basis points from 5.47% in 2004 to 5.67% in 2005. The average
interest rate paid on interest-bearing liabilities, however, decreased six basis
points from 2.94% to 2.88% during the same period, due mostly to a significant
decrease in the cost of the Company's borrowings from the FHLB. As a result, the
interest rate spread increased 26 basis points from 2.53% to 2.79% in 2005.
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 $800,000 for
the year ended September 30, 2004 to $723,000 for the year ended September 30,
2005. Net charge-offs totaled $526,000 and $409,000 for the years ended
September 30, 2004 and 2005 respectively. The Bank continues to enhance its loan
review and risk assessment procedures giving particular attention to the risks
related to the increasing commercial loan portfolio and the risk of loss for the
$8.7 million of commercial loans classified as impaired at the end of this year.
Impaired loans increased from $2.2 million last year in part due to the
inclusion of two commercial loans with a deterioration of credit quality which
is discussed further in the Balance Sheet comparison. Management of the Bank is
continually monitoring these impaired loans for any changes necessary in the
provision for loan losses.
Noninterest income decreased from $5.7 million for the twelve months ended
September 30, 2004 to $5.0 million for the same period ended September 30, 2005.
The decrease was predominantly the result of a write down of equity securities
held by MFB Corp of $948,000 ($626,000 net of tax) discussed further in Note 3
of the consolidated financial statements. The Company had losses on securities
of $109,000 in fiscal year 2004. Most other categories of noninterest income did
not change significantly; deposit account fees increased $261,000 and net gain
on loan sales decreased $197,000 during 2005.
Noninterest expense increased from $14.6 million for the twelve months ended
September 30, 2005 to $15.8 million for the twelve month period ending September
30, 2004. The largest increase was for salaries and employee benefits, which
increased $498,000. Occupancy and equipment expenses increased $321,000, of
which $276,000 was related to the full year of operation of three branches
acquired late in fiscal year 2004. Other expenses increased $438,000 primarily
due to $462,000 increase in amortization of intangible assets recorded in the
acquisition of Sobieski Bank in late 2004. Consulting fees, which had expected
to rise with the implementation of Sarbanes/Oxley Section 404 regulations,
actually decreased $198,000 as the Securities and Exchange Commission delayed
the implementation of 404 regulations for non-accelerated filers.
Income tax expense increased from $235,000 last year to $611,000 this year
primarily due to increased net income before tax. Federal income tax expense
increased from $229,000 to $511,000 and state income tax expense increased from
$6,000 to $99,000. The overall effective income tax expense rate increased from
11.6% last year to 19.7% this year primarily due to maintaining a comparable
level of low income housing income tax credits and non-taxable income on an
increased amount of taxable income.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 2004 AND 2003
RESULTS OF OPERATIONS
Consolidated net income for the Company for the year ended September 30, 2004
was $1.8 million or $1.30 diluted net income per common share compared to $2.4
million or $1.80 diluted net income per common share for the same period in
2003. The decrease in net income was primarily attributable to an increase in
noninterest expense partially offset by an increase in net interest income,
decreased provision for loan losses over last year and an increase in
noninterest income.
Net interest income totaled $11.7 million for the year ended September 30, 2004
compared to $11.1 million for the same period one year ago. Interest income
decreased $534,000 and interest expense decreased $1.1 million during the year
ended September 30, 2004 compared to the same period in 2003. Although record
low interest rates began to increase during the later half of the fiscal year,
the Company experienced overall decreases in yield earned on interest-bearing
assets and rates paid on interest-bearing liabilities as compared to the prior
year due to downward repricing of these instruments. The yield on
interest-earning assets decreased 28 basis points from 5.75% in 2003 to 5.47% in
2004. The average interest rate paid on interest-bearing liabilities decreased
40 basis points from 3.34% to 2.94% during the same period, and as a result, the
interest rate spread increased 12 basis points from 2.41% to 2.53% in 2004.
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 $1.1 million
for the year ended September 30, 2003 to $800,000 for the year ended September
30, 2004. Net charge-offs totaled $1.1 million and $526,000 for the years ended
September 30, 2003 and 2004 respectively. The Bank continued 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
$2.2 million of commercial loans classified as impaired at the end of fiscal
2004. Impaired loans declined from $4.0 million last year due to charge offs and
payments on those loans.
Noninterest income increased from $5.0 million for the twelve months ended
September 30, 2003 to $5.7 million for the year ended September 30, 2004.
Service charges on deposit accounts, trust fee income and insurance commissions
reflected strong growth from 2003 to 2004, offset by the decrease in net gains
on loans sold to secondary markets. Loans sold to the secondary market decreased
by 59.3% between 2003 and 2004. In addition to the items above, the increase in
noninterest income was affected by two additional items, mortgage servicing
right impairment and subsequent recoveries and net losses on securities. For the
year ended September 30, 2004, the mortgage servicing rights valuation recovery
was $217,000 compared to the impairment charge of $576,000 in 2003. The
impairment and recovery on mortgage servicing rights is related to the decline
and subsequent recovery in the market value of servicing rights associated with
MFB Financial's $207 million mortgage loan servicing portfolio. The loss on
securities for the year of $109,000 is the result of a write down of equity
securities held by MFB Corp. based on current estimates of fair value.
Noninterest expense increased from $11.9 million to $14.6 million for the
comparable twelve month periods ending September 30. The significant growth in
occupancy expense is related to the operation of three acquired branches, the
opening of another branch and the expenses related to the acquisition of the new
Corporate offices. Professional and consulting fees increased from 2003 due to
two major projects and expenses related to the acquisition of certain assets and
assumption of certain liabilities of Sobieski Bank. Other expense increased from
2003 due to increases in advertising, telephone, postage, insurance and
foreclosure expenses. Other expenses also increased from 2003 due to $97,000 of
amortization expense on intangible assets recorded in the acquisition.
Income tax expense declined from $671,000 in 2003 to $235,000 in 2004 primarily
due to decreased net income before tax. Federal income tax expense declined from
$552,000 to $229,000 and state income tax expense declined from $119,000 to
$6,000. The overall effective income tax expense rate declined from 21.9% in
2003 to $11.6% in 2004 primarily due to maintaining a comparable level of low
income housing income tax credits on a reduced amount of taxable income.
BALANCE SHEET COMPOSITION
Cash and cash equivalents increased $25.6 million from $28.6 million as of
September 30, 2004 to $54.2 million as of September 30, 2005. Net cash from
operating activities was $9.6 million in 2005 compared to $12.3 million net cash
provided in 2004. The net cash provided from investing activities increased from
a use of cash of $27.0 million in 2004 compared to a source of cash in 2005 of
$2.2 million. The net cash from financing activities also increased from $3.0
million in 2004 to $13.8 million in 2005. The increase in cash is primarily the
result of a new savings deposit product offering in the latter part of fiscal
2005.
As of September 30, 2005, the total securities available for sale portfolio
amounted to $63.6 million, a decrease of $2.4 million from $66.0 million at
September 30, 2004. The securities portfolio activity included security
purchases of $16.4 million, security maturities totaling $4.9 million and
principal payments on mortgage-backed and related securities of $13.0 million.
As of September 30, 2005, loans receivable were $390.7 million, a decrease of
$9.2 million from $399.9 million as of September 30, 2004. Commercial loans
outstanding decreased by $2.4 million from $160.2 million at September 30, 2004
to $157.8 million at September 30, 2005. Consumer loan receivables, which
include home equity term loans and lines of credit, increased $1.9 million to
$41.0 million while residential mortgage loans decreased $8.7 million from
$200.7 million at September 30, 2004 to $192.0 million at September 30, 2005.
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, 2005, the Company completed secondary market
mortgage loan sales totaling $38.5 million, and the net gains realized on these
loan sales were $835,000, including $464,000 related to recording mortgage loan
servicing rights. Loan sales last year were $46.8 million, and the net gains
realized on these loans sales were $1.0 million, including $581,000 related to
recording mortgage loan servicing rights. The loans sold during the year ended
September 30, 2005 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 these loans will continue to be originated and retained in the
Bank's portfolio. Also, as part of its efforts to manage the Company's current
interest rate risk position, the Company originated and held in its portfolio
$6.5 million of fixed rate mortgage loans originated during 2005, with a
weighted average interest rate of 5.82%. At September 30, 2005, $407,000 of
loans were classified as loans held for sale compared to $1.0 million at
September 30, 2004. Mortgage loans serviced for others by the Company grew from
$206.5 million last year to $208.9 million at the end of this year.
The Company's allowance for loan losses at September 30, 2005 was $6.4 million
or 1.63% of loans, comparable to the $6.1 million or 1.52% of loans at the end
of last year. The ratio of nonperforming loans to loans was 0.68% at September
30, 2004 compared to 0.36% at September 30, 2005. 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 $723,000 to its allowance
for loan losses during the year ended September 30, 2005 compared to $800,000
for the prior year ended September 30, 2004. Management's increased attention to
and the Company's subsequent decrease in nonperforming loans was offset by an
increase in Commercial Impaired Loans. During the year ended September 30, 2005
management noted several commercial loans with improved credit performance which
was offset by two commercial loans with a deterioration of credit quality. Net
charge offs deducted from the allowance for loan losses was $409,000 for the
year ended September 30, 2005 compared to $526,000 for the prior year. In
management's opinion, the Company's allowance for loan losses at September 30,
2005 and loan loss provision for the year is appropriate for the loan portfolio.
Premises and equipment increased from $19.4 million at September 30, 2004 to
$20.3 million at September 30, 2005 due to the remodeling of the corporate
headquarters for new tenants and the opening of an additional branch on the
first floor Atrium. The corporate headquarters consists of approximately 114,000
square feet with approximately 45% of the space utilized by the Company. At
September 30, 2005 the Company had leased approximately 70% of the available
tenant space. Presently, tenants occupy approximately 37,350 square feet under
leases with various terms that run through the next 15 years. Another tenant has
executed a lease to occupy approximately 6,500 square feet which will commence
in May 2006. The location of the new headquarters building is expected to
accelerate the growth, recognition and efficiency of the organization.
Goodwill and other intangible assets totaling $5.15 million were recorded at the
acquisition date as a result of the purchase of certain assets and liabilities
of Sobieski Bank. These intangibles represent the difference between the
purchase price and the value of the assets purchased and the value of the
liabilities assumed. At September 30, 2005 the balance of goodwill was $2.42
million and the balance of the other intangible assets was $2.13 million. The
Company assesses goodwill for impairment at least annually and determined there
was no impairment as of September 30, 2005. The other intangible assets included
the identified value of the core deposits acquired and the value of customer
relationships obtained in the acquisition. These two intangible assets are
amortized to expense over a ten year period with approximately nine years
remaining.
Total deposits increased $16.5 million to $374.4 million as of September 30,
2005 from $357.9 million as of September 30, 2004. Core deposits consisting of
demand, NOW, savings and MMDA accounts increased from $167.8 million to $190.7
million from September 30, 2004 to September 30, 2005. Federal Home Loan Bank
("FHLB") advances decreased from $133.4 million as of September 30, 2004 to
$125.9 million as of September 30, 2005.
Total shareholders' equity increased from $35.9 million as of September 30, 2004
to $38.7 million as of September 30, 2005. The increases to equity resulted from
net income of $2.5 million and $481,000 in other comprehensive income and
$454,000 generated from the exercise of stock options, offset by cash dividend
payments of $664,000. The book value of MFB Corp. common stock, based on the
actual number of shares outstanding, increased from $27.02 at September 30, 2004
to $28.52 at September 30, 2005.
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
10.60% as of September 30, 2005, an increase from 8.72% at September 30, 2004.
The increase is primarily the result of the change in the mix of mortgage loans,
cash, deposits, and FHLB advances. As referenced above in the Balance Sheet
Composition section, an increase in cash was offset in part with a decrease in
mortgage loans and an increase in MMDA deposits was offset in part with a
decrease in FHLB advances. 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 September 30, 2005 and 2004, 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 200 basis points (due to the abnormally low interest
rate environment at September 30, 2004, data was not available from the OTS for
the shift downward in rates by 200 basis points).
As illustrated in the September 30, 2005 table below, the Company's interest
rate risk is sensitive to both rising and declining rates. The decline in NPV
with a rate reduction is due to the change in value of fixed rate Federal Home
Loan Bank borrowings that would occur. The decline in NPV with a rate increase
is due to the relative volume of mortgage assets with fixed rate characteristics
over the volume of liabilities with fixed rate characteristics.
September 30, 2005
Change in (Dollars in Thousands)
Interest Rates NPV as % of Portfolio
In Basis Net Portfolio Value Value of Assets
----------------------------------------------- ------------------------------
Points NPV
(Rate Shock) (1) $ Amount $ Change % ChangeRatio Change (1)
- ----------- --- -------- -------- ------------- ----------
+300 $ 46,693 $ (13,763) (23)% 8.56% (204) bp
+200 52,340 (8,115) (13) 9.44 (116) bp
+100 57,091 (3,365) (6) 10.15 (45) bp
0 60,456 - - 10.60 -
(100) 60,147 (309) (1) 10.45 (14) bp
(200) 57,553 (2,902) (5) 9.95 (65) bp
(1) Expressed in basis points
Specifically, the September 30, 2005 table indicates that the Company's NPV was
$60.5 million or 10.60% of the market value of portfolio assets. Based upon the
assumptions utilized, an immediate 200 basis point increase in market interest
rates would result in a $8.1 million or 13% decrease in the Company's NPV and
would result in a 116 basis point decrease in the Company's NPV ratio to 9.44%.
Also, an immediate 200 basis point decrease in market interest rates would
result in a $2.9 million or 5% decrease in the Company's NPV, and a 65 basis
point decrease in the Company's NPV ratio to 9.95%.
As illustrated in the September 30, 2004 table below, the Company's interest
rate risk was sensitive to both a significant rise and a decline in rates for
the same reasons as noted above.
September 30, 2004
Change in (Dollars in Thousands)
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)
- ----------- --- -------- -------- ------------- ---------
+300 $ 36,125 $ (12,586) (26)% 6.80% (192) bp
+200 41,987 (6,725) (14) 7.76 (96) bp
+100 46,357 (2,355) (5) 8.42 (30) bp
0 48,712 - - 8.72 -
(100) 47,138 (1,574) (3) 8.37 (35) bp
(1) Expressed in basis points
Specifically, the September 30, 2004 table indicates that the Company's NPV was
$48.7 million or 8.72% 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 $6.7 million or 14% decrease in the Company's NPV and
would result in a 96 basis point decrease in the Company's NPV ratio to 7.76%.
Also, an immediate 100 basis point decrease in market interest rates would
result in a $1.6 million or 3% decrease in the Company's NPV, and a 35 basis
point decrease in the Company's NPV ratio to 8.37%.
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. Typically, the Company manages its interest rate
risk by originating and retaining adjustable rate residential mortgage loans for
its portfolio and selling currently originated fixed rate loans. Loans
classified as held for sale as of September 30, 2005 totaled $407,000. The
Company retains the servicing on loans sold in the secondary market and, at
September 30, 2005, $208.9 million of such loans were being serviced for others.
To further manage this risk, the Company's commercial loan portfolio consists
predominantly of adjustable rate loans and fixed rate loans that reprice in five
years or less.
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 2.94% for the year ended September 30,
2004 to 2.88% for the year ended September 30, 2005. The Company has also
experienced an increase in the percentage of low interest cost demand and
savings deposits to total deposits which reduces its sensitivity to an increase
in rates.
AVERAGE BALANCE SHEETS
The following are the average balance sheets for the years ended September 30:
2005 2004 2003
Average Average Average
Outstanding Outstanding Outstanding
Balance Balance Balance
(In Thousands)
Assets:
Interest earning assets:
Interest-bearing deposits $ 22,157 $ 21,210 $ 30,856
Mortgage-backed securities (1) 39,021 18,741 25,852
Other securities available for sale (1) 22,429 24,235 24,412
FHLB stock 8,952 6,932 6,359
Loans held for sale 1,105 1,287 1,532
Loans receivable (2) 399,469 343,545 316,223
------------- ------------ ------------
Total interest-earning assets 493,133 415,950 405,234
Noninterest-earning assets, net
of allowance for loan losses 39,057 29,116 21,643
------------- ------------ ------------
Total assets $ 532,190 $ 445,066 $ 426,877
============= ============ ============
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts $ 47,071 $ 35,309 $ 28,714
NOW and money market accounts 89,443 79,500 67,389
Certificates of deposit 185,268 156,961 155,740
Subordinated debentures 875 - -
Other borrowings 6,500 1,078 155
FHLB advances 131,101 104,801 114,146
------------- ------------ ------------
Total interest-bearing liabilities 460,258 377,649 366,144
Other liabilities 35,345 31,974 27,129
-------------- ------------ ------------
Total liabilities 495,603 409,623 393,273
Shareholders' equity:
Common stock 12,413 12,393 13,020
Retained earnings 32,222 32,120 29,901
Net unrealized gain (loss) on
securities available for sale (418) (812) (419)
Treasury stock (7,630) (8,258) (8,898)
-------------- ------------ ------------
Total shareholders' equity 36,587 35,443 33,604
-------------- ------------ ------------
Total liabilities and
shareholders' equity $ 532,190 $ 445,066 $ 426,877
============== ============ ============
(1) Average outstanding balances reflect unrealized gain (loss) on securities
available for sale. (2) Total loans less deferred net loan fees and loans in
process.
INTEREST RATE SPREAD
The following table sets forth the average effective interest rate earned by the
Company on its consolidated loan and investment portfolios, the average
effective cost of the Company's consolidated deposits and FHLB borrowings, the
interest rate spread of the Company, and the net yield on average
interest-earning assets for the periods presented. Average balances are based on
daily average balances.
Year ended September 30,
2005 2004 2003
---- ---- ----
Average interest rate earned on:
Interest-bearing deposits 1.82% 0.82% 1.11%
Mortgage-backed securities (1) 3.89 3.21 2.22
Other securities available for sale (1) 3.26 3.08 4.16
FHLB stock 4.30 4.63 5.32
Loans held for sale 6.22 6.07 6.62
Loans receivable 6.22 6.07 6.62
Total interest-earning assets 5.67 5.47 5.75
Average interest rate of:
Savings accounts 0.89 0.62 0.95
NOW and money market accounts 1.01 0.72 0.75
Certificates of deposit 2.87 2.94 3.22
Subordinated debentures 6.02 - -
FHLB advances 4.81 5.38 5.64
Other borrowings 4.38 3.52 3.87
Total interest-bearing liabilities 2.88 2.94 3.34
Interest rate spread (2) 2.79 2.53 2.41
Net yield on interest-earning assets (3) 2.97 2.81 2.73
- -
(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, 2005
compared to year ended Total Net Due to Due to
September 30, 2004 Change Rate Volume
------ ---- ------
(In Thousands)
Interest-earning assets:
Interest-bearing deposits $ 229 $ 221 $ 8
Securities (39) 52 (91)
Mortgage-backed securities 919 150 769
FHLB stock 64 (21) 85
Loans held for sale (9) 2 (11)
Loans receivable 3,991 525 3,466
------------ ---------- ----------
Total 5,155 929 4,446
Interest-bearing liabilities:
Savings accounts 201 114 87
NOW and money market accounts 327 249 78
Certificates of deposit 694 (114) 808
Subordinated notes - trust 53 - 53
Other borrowings 666 (489) 1,155
FHLB advances 247 11 236
------------ ---------- ----------
Total 2,188 (229) 2,417
------------ ---------- ----------
Change in net interest income $ 2,967 $ 1,158 $ 1,809
============ ========== ==========
Year ending September 30, 2004
compared to year ended Total Net Due to Due to
September 30, 2003 Change Rate Volume
------ ---- ------
(In Thousands)
Interest-earning assets:
Interest-bearing deposits $ (167) $ (76) $ (91)
Securities 30 212 (182)
Mortgage-backed securities (269) (270) 1
FHLB stock (17) (46) 29
Loans held for sale (23) (8) (15)
Loans receivable (88) (1,820) 1,732
----------- ---------- -----------
Total (534) (2,008) 1,474
Interest-bearing liabilities:
Savings accounts (53) (107) 54
NOW and money market accounts 67 (21) 88
Certificates of deposit (405) (444) 39
Other borrowings 32 (1) 33
FHLB advances (796) (284) (512)
------------ ----------- -----------
Total (1,155) (857) (298)
------------ ----------- -----------
Change in net interest income $ 621 $ (1,151) $ 1,772
============ =========== ===========
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, over night interest-bearing deposits in other financial
institutions, and securities available for sale. These assets are commonly
referred to as liquid assets.
Liquid assets were $119.3 million as of September 30, 2005 compared to $96.1
million as of September 30, 2004. The sale of fixed rate loans throughout the
year, along with the growth in deposits and the maturity of securities available
for sale has provided sources of additional liquidity. Management believes the
Company's liquidity level as of September 30, 2005 is sufficient to meet
anticipated liquidity needs.
The cash flow statements provide an indication of the Company's sources and uses
of cash as well as an indication of the ability of the Company to maintain an
adequate level of liquidity. A discussion of the changes in the cash flow
statements for the years ended September 30, 2005, 2004 and 2003 follows.
During the year ended September 30, 2005, net cash and cash equivalents
increased $25.6 million, from $28.6 million at September 30, 2004 to $54.2
million at year end.
The Company experienced a net increase in cash from operating activities of $9.6
million during the year primarily attributable to net income of $2.5 million,
adjustments for depreciation and amortization of $1.4 million, a write down of
securities of $948,000, adjustments for the provision for loan losses of
$723,000, and proceeds of $38.5 million realized from the sale of mortgage
loans, offset by the origination of $32.3 million of loans held for sale, and a
decrease in accrued expenses and other liabilities of $1.7 million. The Bank
originates, sells and delivers its fixed rate, owner-occupied residential
mortgage loans on either FHLMC "Best Efforts" delivery basis or with "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. This strategy reduces interest rate risk exposure by
minimizing the amount of loans held for sale in the loan portfolio. Under
mandatory delivery programs, loans are committed to be delivered at
predetermined prices and penalties could be assessed if delivery commitments are
not met. Loans determined to be held for sale at the time they are originated
are not committed for delivery. These loans are subject to market price
fluctuations at time of sale. Of the $407,300 of loans held for sale at
September 30, 2005, none were under the "Best Efforts" program; all were
originated without predetermined scheduled delivery.
The $2.2 million increase in cash from investing activities for the year ended
September 30, 2005 was primarily due to principal payments and maturities of
securities of $17.9 million, offset by security purchases of $16.4 million and
loan payments exceeding loan originations by $2.9 million.
Financing activities generated net cash of $13.8 million for the year ended
September 30, 2005. The net cash was provided primarily from a net increase in
deposits of $17.2 million and $5.0 million from subordinated debentures, offset
by net repayments of FHLB borrowings of $6.8 million.
NEW ACCOUNTING PRONOUNCEMENTS
On October, 1, 2005, the Company adopted Statement of Financial Accounting
Standards No. 123(R), "Share-Based Payment." This standard requires companies to
recognize in the income statement the grant-date fair value of stock options and
other equity-based compensation issued to employees based upon the vesting of
such instruments. Based upon stock options that are currently outstanding, the
Company has estimated that compensation expense for stock options will be
approximately $58,000 for fiscal 2006. Should the Company grant additional stock
options in future periods, the amount of compensation expense will increase.
IMPACT OF INFLATION
The audited consolidated financial statements presented herein have been
prepared in accordance with U.S generally accepted accounting principles. These
principles require measurement of financial position and operating results in
terms of historical dollars (except for securities available for sale which are
reported at fair market value and loans held for sale which are reported at the
lower of cost or estimated market value in the aggregate), without considering
changes in the relative purchasing power of money over time due to inflation.
The primary assets and liabilities of the Bank are monetary in nature. As a
result, interest rates have a more significant impact on the Company's
performance than the effects of general levels of inflation. Interest rates 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 fair value of securities available
for sale, 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.
18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2005 and 2004 and the related consolidated
statements of income, shareholders' equity and cash flows for the years ended
September 30, 2005, 2004 and 2003. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2005 and 2004, and the results of their
operations and their cash flows for the years ended September 30, 2005, 2004 and
2003 in conformity with U.S. generally accepted accounting principles.
Crowe Chizek and Company LLC
South Bend, Indiana
November 21, 2005
The accompanying notes are an integral part of these
consolidated financial statements.
20
MFB CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 2005 and 2004
2005 2004
---- ----
ASSETS
Cash and due from financial institutions $ 7,612,979 $ 9,524,380
Interest-bearing deposits in other financial
institutions - short-term 46,596,449 19,070,650
------------- ------------
Total cash and cash equivalents 54,209,428 28,595,030
Securities available for sale 63,574,757 66,021,011
Other Investments 12,513,549 12,628,329
Loans held for sale 407,300 1,033,800
Mortgage Loans 191,970,211 200,704,626
Commercial Loans 157,803,878 160,182,544
Consumer Loans 40,921,196 39,037,431
------------- -------------
Loans receivable 390,695,285 399,924,601
Less: allowance for loan losses (6,387,867) (6,074,134)
------------- -------------
Loans receivable, net 384,307,418 393,850,467
------------- -------------
Premises and equipment, net 20,336,172 19,384,466
Mortgage servicing rights, net 2,341,461 2,092,135
Cash surrender value of life insurance 5,963,568 5,706,756
Goodwill 2,423,271 2,423,271
Other intangible assets 2,133,700 2,692,900
Other assets 6,666,917 6,794,271
------------- -------------
Total assets $ 554,877,541 $ 541,222,436
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand deposits $ 36,875,993 $ 31,657,521
Savings, NOW and MMDA deposits 153,864,063 136,099,148
Time deposits 183,623,904 190,135,947
------------- -------------
Total deposits 374,363,960 357,892,616
------------- -------------
Federal Home Loan Bank advances 125,853,984 133,443,392
Loans from correspondent banks 6,500,000 6,500,000
Subordinated debentures 5,000,000 -
Accrued expenses and other liabilities 4,486,382 7,480,558
------------- --------------
Total liabilities 516,204,326 505,316,566
------------- --------------
Shareholders' equity
Common stock, 5,000,000 shares authorized;
shares issued: 1,689,417 - 2005 and 2004, shares outstanding:
1,355,860 - 2005; 1,329,060 - 2004 12,376,858 12,486,314
Retained earnings - substantially restricted 34,026,839 32,194,679
Accumulated other comprehensive loss,
net of tax of ($174,414) in 2005 and $37,932 in 2004 (310,419) (791,717)
Treasury stock, 333,557 common shares - 2005;
360,357 common shares - 2004, at cost (7,420,063) (7,983,406)
-------------- -------------
Total shareholders' equity 38,673,215 35,905,870
-------------- -------------
Total liabilities and shareholders' equity $ 554,877,541 $ 541,222,436
============== =============
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 2005, 2004 and 2003
2005 2004 2003
---- ---- ----
Interest income
Loans receivable, including fees $ 24,903,930 $ 20,921,584 $ 21,033,219
Securities 2,594,143 1,696,947 1,959,835
Other interest-earning assets 449,020 173,736 332,949
--------------- --------------- ----------------
Total interest income 27,947,093 22,792,267 23,326,003
Interest expense
Deposits 6,968,931 5,447,584 5,806,124
FHLB advances and other borrowings 6,308,179 5,641,984 6,438,114
--------------- --------------- ----------------
Total interest expense 13,277,110 11,089,568 12,244,238
--------------- --------------- ----------------
Net interest income 14,669,983 11,702,699 11,081,765
Provision for loan losses 723,141 800,000 1,110,000
--------------- --------------- ----------------
Net interest income after provision
for loan losses 13,946,842 10,902,699 9,971,765
Noninterest income
Service charges on deposit accounts 3,291,113 3,030,459 1,623,611
Trust fee income 385,151 494,922 463,561
Insurance commissions 211,022 208,036 187,143
Net realized gains from sales of loans 835,425 1,032,362 3,395,381
Mortgage servicing right recovery (impairment) 180,434 216,905 (576,376)
Net gain (loss) on securities available for sale (948,000) (109,253) 40,000
Other 1,033,676 806,957 (152,528)
--------------- --------------- -----------------
Total noninterest income 4,988,821 5,680,388 4,980,792
Noninterest expense
Salaries and employee benefits 7,519,073 7,020,737 6,802,641
Occupancy and equipment expense 3,063,869 2,742,768 1,558,025
Professional and consulting fees 712,337 821,308 363,828
Data processing expense 753,905 632,329 596,106
Other expense 3,779,785 3,341,373 2,561,010
--------------- --------------- ----------------
Total noninterest expense 15,828,969 14,558,515 11,881,610
--------------- --------------- ----------------
Income before income taxes 3,106,694 2,024,572 3,070,947
Income tax expense 610,626 234,923 671,163
--------------- --------------- ----------------
Net income $ 2,496,068 $ 1,789,649 $ 2,399,784
=============== =============== ================
Basic earnings per common share $ 1.85 $ 1.36 $ 1.87
Diluted earnings per common share 1.81 1.30 1.80
The accompanying notes are an integral part of these
consolidated financial statements.
21
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended September 30, 2005, 2004 and 2003
Accumulated
Other
Comprehensive Total
Retained Income (Loss), Treasury Shareholders'
Common Stock Earnings Net of Tax Stock Equity
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 - $0.435 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
Stock option exercise-issuance of 41,350 shares
of treasury stock (359,104) - - 881,793 522,689
Tax benefit related to employee stock plan 285,360 - - - 285,360
Cash dividends declared - $0.470 per share - (617,430) - - (617,430)
Comprehensive income:
Net income for the year end September 30, 2004 - 1,789,649 - - 1,789,649
Other comprehensive income (loss) - - (325,604) - (325,604)
-------------
Total comprehensive income - - - - 1,464,045
------------- ------------- -------------- ------------- -------------
Balance at September 30, 2004 $ 12,486,314 $ 32,194,679 $ (791,717) $ (7,983,406) $ 35,905,870
============= ============= =============== ============== =============
The accompanying notes are an integral part of these
consolidated financial statements.
22
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended September 30, 2005, 2004 and 2003
Accumulated
Other
Comprehensive Total
Retained Income (Loss) Treasury Shareholders'
Common Stock Earnings Net of Tax Stock Equity
Balance at September 30, 2004 $ 12,486,314 $ 32,194,679 $ (791,717) $ (7,983,406) $ 35,905,870
Stock option exercise-issuance of 26,800 shares
of treasury stock (124,311) 563,343 439,032
Tax benefit related to employee stock plan 14,855 14,855
Cash dividends declared - $0.495 per share (663,908) (663,908)
Comprehensive income:
Net income for the year end September 30, 2005 2,496,068 2,496,068
Other comprehensive income (loss) 481,298 481,298
-------------
Total comprehensive income 2,977,366
------------- ------------- -------------- ------------- -------------
Balance at September 30, 2005 $ 12,376,858 $ 34,026,839 $ (310,419) $ (7,420,063) $ 38,673,215
============= ============= =============== ============== =============
The accompanying notes are an integral part of these
consolidated financial statements.
23
MFB CORP. SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 2005, 2004 and 2003
2005 2004 2003
---- ---- ----
Cash flows from operating activities
Net income $ 2,496,068 $ 1,789,649 $ 2,399,784
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization, net of
accretion 1,445,387 1,278,662 1,343,323
Provision for loan losses 723,141 800,000 1,110,000
Net (gains) losses on securities available for sale 948,000 109,253 (40,000)
Net realized gains from sales of loans (835,425) (1,032,362) (3,395,381)
Amortization of mortgage servicing rights 394,593 388,580 996,128
Accretion of intangible assets
and purchase adjustments (343,772) (133,391) -
Origination of loans held for sale (32,259,544) (40,741,232) (103,572,557)
Impairment (recovery) of mortgage
servicing rights (180,434) (216,905) 576,376
Proceeds from sales of loans held for sale 38,485,947 46,784,299 115,074,018
(Gains) losses on sales of fixed assets (40,509) 46,165 -
Equity in loss of investment in limited
Partnership 303,180 220,253 165,571
Stock dividend paid by FHLB (188,400) (312,300) (163,000)
Appreciation in cash surrender value of
life insurance (219,871) (230,080) (217,387)
Net change in:
Accrued interest receivable (105,782) 87,453 244,558
Other assets 620,058 1,074,707 111,208
Accrued expenses and other liabilities (1,650,707) 2,392,077 (219,870)
----------------- -------------- --------------
Net cash provided (used) in operating activities 9,591,930 12,304,828 14,414,106
Cash flows from investing activities
Net change in interest-bearing time
deposits in other financial institutions - (500,000) (501,160)
Net change in loans receivable 2,900,325 (29,469,712) (12,474,759)
Net cash received (paid) in acquisition (60,435) 6,873,938 -
Proceeds from:
Sales of securities available for sale - - 160,000
Principal payments of mortgage-backed
and related securities 12,979,039 9,212,720 34,371,588
Maturities and calls of securities available
for sale 4,945,000 8,944,482 5,000,000
Sales of fixed assets 42,122 318,039 -
Purchase of:
Securities available for sale (16,351,731) (11,049,719) (27,152,202)
Life Insurance (36,941) (170,545) (5,000,000)
Premises and equipment, net (2,217,502) (11,180,184) (1,527,053)
---------------- --------------- ---------------
Net cash provided (used) in investing activities $ 2,199,877 $ (27,020,981) $ (7,123,586)
The accompanying notes are an integral part of these
consolidated financial statements.
24
MFB CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 2005, 2004 and 2003
2005 2004 2003
---- ---- ----
Cash flows from financing activities
Purchase of treasury stock $ - $ - $ (1,676,634)
Net change in deposits 17,176,344 (3,292,653) 27,728,373
Proceeds from FHLB borrowings 74,100,000 38,000,000 -
Repayment of FHLB borrowings (80,885,408) (38,929,859) (20,424,864)
Proceeds from other borrowings - 6,500,000 300,000
Proceeds from subordinated debentures 5,000,000 - -
Repayment of other borrowings - (300,000) -
Proceeds from exercise of stock options 439,032 522,689 378,125
Net change in advances from
borrowers for taxes and insurance (1,343,469) 1,071,457 (260,488)
Cash dividends paid (663,908) (617,430) (560,324)
---------------- --------------- ----------------
Net cash from financing activities 13,822,591 2,954,204 5,484,188
------------------- --------------- ----------------
Net change in cash and cash equivalents 25,614,398 (11,761,949) 12,774,708
Cash and cash equivalents at beginning of year 28,595,030 40,356,979 27,582,271
------------------ --------------- ----------------
Cash and cash equivalents at end of year $ 54,209,428 $ 28,595,030 $ 40,356,979
================= =============== ================
Supplemental disclosures of cash flow information Cash paid during the year for:
Interest $ 13,326,157 $ 10,834,701 $ 11,782,216
Income taxes 199,000 670,000 400,000
Supplemental schedule of noncash investing activities:
Transfer from:
Loans receivable to loans held for sale $ 5,227,962 $ - $ 9,656,411
Loans receivable to real estate owned $ 99,286 $ 1,346,757 $ 1,020,835
MFB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004 and 2003
(Continued)
25
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 U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period, as well as the
disclosures provided. Areas involving the use of estimates and assumptions in
the accompanying financial statements include the allowance for loan losses,
fair values of securities and other financial instruments, determination and
carrying value of loans held for sale, determination and carrying value of
impaired loans and other real estate owned, the value of mortgage servicing
rights, the value of investments in limited partnerships, the value of stock
options, the realization of deferred tax assets, the purchase accounting
valuations for assets and liabilities acquired and the determination of
depreciation of premises and equipment recognized in the Company's financial
statements. Actual results could differ from those estimates. Estimates
associated with the allowance for loan losses, and the fair values of securities
and other financial instruments 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)
31
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities: Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported separately in accumulated
other comprehensive income (loss), net of tax. Declines in the fair value of
securities below their cost that are other than temporary are reflected as
realized losses. In estimating other-than-temporary losses, management
considers: (1) the length of time and extent that fair value has been less than
cost, (2) the financial condition and near term prospects of the issuer, and (3)
the Company's ability and intent to hold the security for a period sufficient to
allow for any anticipated recovery in fair value.
Gains and losses on the sale of securities are determined using the specific
identification method based on amortized cost and are reflected in the 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.
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,
determined using prices for similar assets with similar characteristics, when
available, or based upon discounted cash flows using market-based assumptions.
Any impairment charge or recovery is reported in a valuation allowance by
charges or credits to income.
Loans Receivable: Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or pay-off are reported at
their outstanding principal balances adjusted for any charge-offs, the allowance
for loan losses, and any deferred fees or costs on originated loans, and
unamortized premiums or discounts on purchased loans. Loan fees and certain
direct loan origination costs are deferred, and the net fee or cost is
recognized as an adjustment to interest income using the interest method.
Because some loans may not be repaid in full, an allowance for loan losses is
recorded. An allowance for loan losses is a valuation allowance for probable
incurred credit losses. The allowance for loan losses is increased by a
provision for loan losses charged to expense and decreased by charge-offs (net
of recoveries). Estimating the risk of loss and the amount of loss on any loan
is necessarily subjective. Accordingly, the allowance is maintained by
management at a level considered adequate to cover losses that are currently
anticipated. Management's periodic evaluation of the adequacy of the allowance
is based on the Company's past loan loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 an 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.
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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Useful life of buildings and improvements is 39 years and the range for
furniture and equipment is 3 years to 15 years. These assets are reviewed for
impairment when events indicate the carrying amount is significantly less than
the fair value.
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 14.
Goodwill and Other Intangible Assets: Goodwill results from business
acquisitions and represents the excess of the purchase price over the fair value
of acquired tangible assets and liabilities and identifiable intangible assets.
Goodwill is assessed annually for impairment and any such impairment will be
recognized in the period identified.
Other intangible assets consist of core deposit intangible assets and acquired
customer relationship intangible assets arising from the acquisition of certain
assets and assumption of certain liabilities previously discussed. They are
initially measured at fair value and then are amortized on an accelerated method
over their estimated useful lives.
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 fair value. Related tax credits are
recognized as allocated to investors.
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 effect
of additional potential common shares issuable under stock option plans.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
2005 2004 2003
---- ---- ----
Net income as reported $ 2,496,068 $ 1,789,649 $ 2,399,784
Less: Stock-based compensation
expense determined under fair value
based method 627,313 223,176 198,346
--------------- -------------- ---------------
Proforma net income $ 1,868,755 $ 1,566,473 $ 2,201,438
=============== ============== ===============
Basic earnings per share as reported $ 1.85 $ 1.36 $ 1.87
Pro forma basic earnings per share 1.39 1.19 1.71
Diluted earnings per share as reported $ 1.81 $ 1.30 $ 1.80
Pro forma diluted earnings per share 1.36 1.14 1.65
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:
2005 2004 2003
---- ---- ----
Risk-free interest rate 4.23% 4.11% 3.72%
Expected dividend rate 1.96 1.44 1.82
Stock price volatility 28.77 24.53 23.23
Estimated Life 8 yrs 8 yrs 8 yrs
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.
On October, 1, 2005, the Company adopted Statement of Financial Accounting
Standards No. 123(R), "Share-Based Payment." This standard requires companies to
recognize in the income statement the grant-date fair value of stock options and
other equity-based compensation issued to employees based upon the vesting of
such instruments. Based upon stock options that are currently outstanding, the
Company has estimated that compensation expense for stock options will be
approximately $58,000 for fiscal 2006. Should the Company grant additional stock
options in future periods, the amount of compensation expense will increase.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Restriction on Cash: Cash on hand or on deposit with correspondent banks of $5.0
million and $5.3 million, respectively, was required to meet regulatory reserve
and clearing requirements at year end 2005 and 2004.
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,
2005 2004 2003
---- ---- ----
Basic Earnings Per Common Share
Numerator
Net income $ 2,496,068 $ 1,789,649 $ 2,399,784
============== ============== ===============
Denominator
Weighted average common shares
outstanding for basic earnings per
common share 1,345,842 1,316,115 1,285,661
============== ============== ===============
Basic earnings per common share $ 1.85 $ 1.36 $ 1.87
============== ============== ==============
Diluted Earnings Per Common Share
Numerator
Net income $ 2,496,068 $ 1,789,649 $ 2,399,784
============== ============== ===============
Denominator
Weighted average common shares
outstanding for basic earnings per
common share 1,345,842 1,316,115 1,285,661
Add: Dilutive effects of assumed
exercises of stock options 31,549 59,885 44,808
-------------- -------------- ---------------
Weighted average common shares
and dilutive potential common
shares outstanding 1,377,391 1,376,000 1,330,469
============== ============== ===============
Diluted earnings per common share $ 1.81 $ 1.30 $ 1.80
============== ============== ===============
Stock options for 24,000, 5,000, and 0 shares of common stock were not
considered in computing diluted earnings per common share for the years ended
September 30, 2005, 2004 and 2003 because they were antidilutive.
(Continued)
53
NOTE 3 - SECURITIES
The amortized cost and fair value of securities available for sale are as
follows:
-------------------------September 30, 2005--------------------------
------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities
U.S. Government
and federal agencies $ 11,219,798 $ 2,063 $ (42,915) $ 11,178,946
Municipal bonds 340,440 3,397 - 343,837
Mortgage-backed 40,574,979 52,292 (352,376) 40,274,895
Corporate notes 8,744,499 36,536 (211,830) 8,569,205
---------------- ------------ -------------- ---------------
60,879,716 94,288 (607,121) 60,366,883
Marketable equity securities 3,179,875 60,000 (32,000) 3,207,875
---------------- ------------ -------------- ---------------
$ 64,059,591 $ 154,288 $ (639,121) $ 63,574,757
================ ============ ============== ===============
-------------------------September 30, 2004--------------------------
------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities
U.S. Government
and federal agencies $ 9,303,466 $ 54,182 $ (6,017) $ 9,351,631
Municipal bonds 343,334 13,176 - 356,510
Mortgage-backed 45,266,242 232,176 (93,096) 45,405,322
Corporate notes 7,733,879 131,603 (210,809) 7,654,673
---------------- ------------ ------------- ---------------
62,646,921 431,137 (309,922) 62,768,136
Marketable equity securities 4,127,875 - (875,000) 3,252,875
---------------- ------------ ------------- ---------------
$ 66,774,796 $ 431,137 $ (1,184,922) $ 66,021,011
================ ============ ============= ===============
Included in marketable equity securities are government sponsored agency
preferred stocks of $3.1 million and $4.0 million at September 30, 2005 and 2004
respectively.
NOTE 3 - SECURITIES (Continued)
Securities with unrealized losses at year-end 2005 and 2004, aggregated by
investment category and length of time that individual securities have been in a
continuous unrealized loss position, are as follows:
September 30, 2005
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
Debt securities
U.S. Government and
federal agencies $ 4,487,808 $ (24,881) $ 2,707,820 $ (18,034) $ 7,195,625 $ (42,915)
Mortgage-backed 22,870,101 (192,232) 10,437,862 (160,144) 33,307,962 (352,376)
Corporate notes - - 4,756,250 (211,830) 4,756,250 (211,830)
----------- ----------- ----------- ------------ ----------- ------------
27,357,906 (217,113) 17,901,932 (390,008) 45,259,837 (607,121)
Marketable equity
securities 1,580,000 (32,000) - - 1,580,000 (32,000)
----------- ------------ ----------- ----------- ----------- ------------
Total $28,937,906 $ (249,113) $17,901,932 $ (390,008) $46,839,837 $ (639,121)
=========== ============ =========== ============ =========== ============
September 30, 2004
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
Debt securities
U.S. Government and
federal agencies $ 2,852,257 $ (6,017) $ - $ - $ 2,852,257 $ (6,017)
Mortgage-backed 12,964,402 (52,988) 3,873,878 (40,108) 16,838,280 (93,096)
Corporate notes 984,855 (15,145) 4,768,560 (195,664) 5,753,415 (210,809)
------------ ---------- -------------- ----------- ------------ --------
16,801,514 (74,150) 8,642,438 (235,772) 25,443,952 (309,922)
Marketable equity
securities - - 3,125,000 (875,000) 3,125,000 (875,000)
-------------- ------------ ------------- -------- -------------- ---------
Total $16,801,514 $(74,150) $11,767,438 $(1,110,772) $28,568,952 $ (1,184,922)
=========== ======== ============ =========== ============== =========
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the Company
to retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value.
Of the total gross unrealized losses of $1,185,000 at September 30, 2004,
$875,000 related to the reduced value of $2.0 million of Fannie Mae ("FNMA") and
$2.0 million of Freddie Mac ("FHLMC") floating rate preferred stocks. The
declines in value were primarily attributed to the level of interest rates, and
the timing of scheduled coupon adjustments. Such adjustments resulted in coupons
being set at levels lower than current market rates. Credit issues were not
considered to be a significant factor relative to the unrealized losses at
September 30, 2004. Based on interest rate forecasts and the resulting estimates
of recovery obtained by the Company from outside experts, management expected
recovery of the unrealized losses as of September 30, 2004.
NOTE 3 - SECURITIES (Continued)
In the first quarter of fiscal 2005, management recorded a non-cash impairment
charge through earnings of $948,000 for the decline in the value of the floating
rate preferred stock securities discussed above. During the quarter ending
December 31, 2004, a multi-billion dollar FNMA preferred stock issuance with a
substantially different structure and higher yield than previous offerings had a
detrimental effect on the fair value of the Company's FNMA and FHLMC preferred
stock holdings. Additionally, a downgrade in rating on the FNMA security due to
disclosed accounting issues, the duration of the suppressed market value on both
the FNMA and FHLMC securities and the Company's inability to project when market
value recovery would occur led management to record the write-down as of
December 31, 2004. The unrealized losses on marketable equity securities
decreased from $875,000 at September 30, 2004 to $32,000 at September 30, 2005
as a result of the non-cash impairment charge.
Related to the unrealized losses for debt securities classified as corporate
notes, $157,000 and $167,000 of unrealized losses at September 30, 2005 and 2004
were attributable to a trust preferred bond issued by a regional banking
organization. These unrealized losses are primarily attributable to the low
interest rate environment, and the variable interest rate structure of the bond.
Such interest rate adjustments resulted in coupons being set at a level lower
than current market rates. As interest rates rise and the bonds coupon rate
increases, management anticipates recovery of the unrealized losses. Management
has the ability to hold this bond to maturity, at which time the face value of
the bond would be realized. Credit issues are not considered to be a significant
factor relative to the current unrealized losses.
Relative to unrealized losses on other debt securities as of September 30, 2005
and 2004, management has the intent and ability to hold the investments for the
foreseeable future, and the decline in fair value is largely due to changes in
market interest rates. The fair value is expected to recover as the investments
approach maturity.
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, 2005
Amortized Fair
Cost Value
Due in one year or less $ 4,105,928 $ 4,092,524
Due after one year through five years 11,215,419 11,192,264
Due after five years through ten years 1,015,310 1,013,750
Due after ten years 3,968,080 3,793,450
---------------- ---------------
20,304,737 20,091,988
Mortgage-backed securities 40,574,979 40,274,895
---------------- ---------------
$ 60,879,716 $ 60,366,883
================ ===============
There were no sales of securities available for sale during the years ended
September 30, 2005 and September 30, 2004. During the years ended September 30,
2005 and 2004 the Company recorded security impairment charges of $948,000 and
$109,253. Proceeds from sales and liquidation of securities available for sale
were $160,000 during the year ended September 30, 2003, and gross gains of
$40,000 and gross losses of $0 were realized on these sales.
NOTE 4 - LOANS RECEIVABLE
Loans receivable, at September 30 are summarized as follows:
2005 2004
---- ----
Residential mortgage loans:
Secured by one-to-four family residences $ 167,658,516 $ 177,285,667
Construction loans 21,756,812 20,259,466
Other 3,249,047 3,898,833
----------------- -----------------
192,664,375 200,443,966
Less:
Net deferred loan origination fees (508,920) (557,930)
Undisbursed portion of construction and
other mortgage loans (185,244) (181,412)
------------------ -----------------
Total residential mortgage loans 191,970,211 200,704,624
Commercial
Commercial real estate 96,223,551 98,737,792
Commercial 61,846,976 61,752,718
----------------- -----------------
158,070,527 160,490,510
Less: net deferred loan origination fees (266,649) (307,966)
------------------ -----------------
Total commercial loans 157,803,878 160,182,544
Consumer loans:
Home equity and second mortgage 33,900,667 32,006,458
Other 7,010,720 7,008,088
Net deferred loan costs 9,809 22,887
----------------- -----------------
Total consumer loans 40,921,196 39,037,431
Total Loans Receivable $ 390,695,285 $ 399,924,601
================= =================
Activity in the allowance for loan losses is summarized as follows for the years
ended September 30:
2005 2004 2003
---- ---- ----
Balance at beginning of year $ 6,074,134 $ 5,198,137 $ 5,143,005
Provision for loan losses 723,141 800,000 1,110,000
Acquired allowance for loan losses - 602,467 -
Charge-offs (499,827) (543,734) (1,388,152)
Recoveries 90,419 17,264 333,284
-------------- ----------------- -----------------
Balance at end of year $ 6,387,867 $ 6,074,134 $ 5,198,137
============== ================= =================
NOTE 4 - LOANS RECEIVABLE (Continued)
Impaired loans were as follows:
2005 2004
---- ----
Year-end loans with no allocated allowance
for loan losses $ 603,000 $ -
Year-end loans with allocated allowance
for loan losses 8,074,000 2,217,000
--------------- ----------------
Total $ 8,677,000 $ 2,217,000
=============== ================
Amount of the allowance for loan
losses allocated $ 2,714,000 $ 995,000
Average of impaired loans during the year 2,505,000 2,506,000
Interest income recognized during impairment 92,000 82,000
Cash-basis interest income recognized during
impairment 75,000 73,000
The largest loan relationship included in impaired loans as of September 30,
2005 totaled approximately $3.8 million for which $1.4 million of the allowance
for loan losses has been allocated. The allowance for loan losses allocation is
based upon the discounted fair value of the underlying collateral as the loan
relationship is considered to be collateral dependent. The actual loss on this
loan relationship may vary significantly from the current estimate as the amount
that would ultimately be realized in a collateral liquidation is difficult to
estimate.
The average balance of impaired loans in 2003 was $5,233,000 and there was
$82,000 interest income and $66,000 cash-basis interest income recognized during
impairment.
Nonperforming loans were as follows at year end:
2005 2004
---- ----
Loans past due over 90 days still on accrual status $ 136,000 $ -
Non-accrual loans 1,284,000 2,719,000
--------------- ----------------
Total nonperforming loans $ 1,420,000 $ 2,719,000
=============== ================
A total of $747,000 and $1.4 million of the impaired loans were non-accrual
loans as of September 30, 2005 and 2004.
NOTE 4 - LOANS RECEIVABLE (Continued)
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, 2005 and 2004 are summarized
as follows:
2005 2004
---- ----
Mortgage loan portfolios serviced for:
Federal Home Loan Mortgage Corporation $ 202,947,491 $ 197,860,783
Fannie Mae Corporation 1,603,859 2,303,866
Merchants Bank 903,933 1,290,447
Federal Home Loan Bank of Indianapolis 766,588 1,090,545
Telebank 664,326 956,407
Bank Mutual 602,567 975,002
LaSalle Bank, FSB 589,491 867,408
Hanover Capital Mortgage Holdings, Inc. 485,449 495,090
Citizens Bank 374,049 691,911
--------------- ----------------
$ 208,937,753 $ 206,531,459
=============== ================
Custodial escrow balances maintained in connection with the foregoing serviced
loans were $1,645,326 and $3,202,322 at September 30, 2005 and 2004
respectively.
Activity for capitalized mortgage servicing rights and the related valuation
allowance was as follows:
2005 2004 2003
---- ---- ----
Servicing rights, net of valuation allowance:
Balance at beginning of year $ 2,092,135 $ 1,373,201 $ 1,616,588
Additions 463,485 581,035 1,329,117
Change in Valuation allowance 180,434 216,905 (576,376)
Acquired from Sobieski - 309,574 -
Amortized to expense (394,593) (388,580) (996,128)
--------------- ------------- -------------
Balance at end of year $ 2,341,461 $ 2,092,135 $ 1,373,201
============== ============= =============
Valuation allowance:
Balance at beginning of year $ (359,471) $ (576,376) $ -
Impairment charge (554,923) (414,736) (1,155,894)
Impairment recovery 735,357 631,641 579,518
-------------- ------------- -------------
Balance at end of year $ (179,037) $ (359,471) $ (576,376)
=============== ============= ==============
NOTE 4 - LOANS RECEIVABLE, (Continued)
Certain directors and executive officers of the Company and its subsidiary,
including associates of such persons, are loan customers. A summary of the
related party loan activity, for loans aggregating $60,000 or more to any one
related party, is as follows:
2005 2004
---- ----
Balance at beginning of year $ 1,948,015 $ 2,333,898
New loans 136,921 215,335
Repayments (165,553) (601,218)
Related party changes 916,533 -
---------------- ---------------
Balance at end of year $ 2,835,916 $ 1,948,015
================ ===============
NOTE 5 - PREMISES AND EQUIPMENT, NET
Premises and equipment at September 30 are summarized as follows:
2005 2004
---- ----
Land $ 4,537,708 $ 4,492,767
Buildings and improvements 13,307,581 13,187,855
Furniture and equipment 8,365,080 6,319,254
---------------- ---------------
Total cost 26,210,369 23,999,876
Accumulated depreciation and amortization (5,874,197) (4,615,410)
----------------- ---------------
$ 20,336,172 $ 19,384,466
================ ===============
Depreciation and amortization of premises and equipment included in occupancy
and equipment expense was approximately $1,250,000 and $945,000 for the years
ended September 30, 2005 and 2004 respectively.
NOTE 6 - GOODWILL AND INTANGIBLE ASSETS
Goodwill
Goodwill for the years ended September 30 was as follows:
2005 2004
---- ----
Beginning Balance: $ 2,423,271 $ -
Acquired goodwill - 2,423,271
--------------- ----------------
End of Year balance $ 2,423,271 $ 2,423,271
=============== ================
Acquired Intangible Assets
Acquired intangible assets were as follows as of September 30, 2005:
Gross Carrying Accumulated
Amount Amortization
Amortized intangible assets:
Core deposit intangibles $ 1,610,000 $ 336,596
Other customer relationship intangibles 1,180,000 319,704
--------------- ----------------
Total $ 2,790,000 $ 656,300
=============== ================
Acquired intangible assets were as follows as of September 30, 2004:
Gross Carrying Accumulated
Amount Amortization
Amortized intangible assets:
Core deposit intangibles $ 1,610,000 $ 48,800
Other customer relationship intangibles 1,180,000 48,300
--------------- ----------------
Total $ 2,790,000 $ 97,100
=============== ================
Aggregate amortization expense was $559,200 and $97,100 for 2005 and 2004.
Estimated amortization expense for each of the next five years ending September
30:
2006 $ 435,100
2007 385,500
2008 335,800
2009 286,300
2010 236,700
NOTE 7 - DEPOSITS
At September 30, 2005, the scheduled maturities of certificates of deposit for
the years ending September 30, are as follows:
2006 $ 81,204,756
2007 64,589,436
2008 26,417,969
2009 8,564,892
2010 1,898,694
Thereafter 948,157
------------------
$ 183,623,904
The aggregate amount of (predominantly short-term) jumbo certificates of deposit
in denominations of $100,000 or more was approximately $46,292,000 and
$42,736,000 at September 30, 2005 and 2004 respectively.
NOTE 8 - BORROWINGS
At September 30, 2005, advances from the Federal Home Loan Bank of Indianapolis
with fixed rates ranging from 3.60% to 6.73% are required to be repaid in the
year ending September 30 as follows:
2006 $ 12,500,000
2007 9,000,000
2008 54,000,000
2009 17,024,984
2010 11,000,000
Thereafter 22,329,000
-----------------
$ 125,853,984
At September 30, 2005, $8,988,000 of FHLB stock, $111,612,000 of eligible
mortgage loan collateral and $28,067,000 of other real estate related collateral
are pledged to the FHLB to secure advances outstanding. The Company's additional
borrowing capacity with the FHLB is $15.5 million at September 30, 2005.
In addition, $88 million of the advances outstanding at September 30, 2005
contained put options with put dates ranging from October 2005 to January 2006,
whereby the advance can be called by the FHLB prior to maturity.
NOTE 8 - BORROWINGS (Continued)
At September 30, 2005 and 2004, the Company had outstanding borrowings of $6.5
million from a correspondent bank. This variable rate line of credit, tied to
the six month LIBOR rate plus 160 basis points (5.66% as of September 30, 2005),
matures on February 27, 2006, at which time it may be converted to a term loan
to be amortized over a five year period. The borrowing is collateralized by MFB
Financial stock and requires the Bank to remain "well-capitalized" as defined by
regulatory capital adequacy guidelines.
NOTE 9 - SUBORDINATED DEBENTURES
A trust, MFBC Statutory Trust I, formed by the Company issued $5,000,000 of
trust preferred securities on July 29, 2005 as part of a private placement of
such securities. The Company issued subordinated debentures to the trust in
exchange for the proceeds of the offering; the debentures and related debt
issuance costs represent the sole assets of the trust. The securities will
mature in 30 years, will require quarterly distributions and will bear a fixed
rate of interest of 6.22% per annum for the first five years, resetting
quarterly thereafter at the prevailing three-month LIBOR rate plus 1.7% per
annum. Interest on the securities is payable quarterly in arrears each September
15, December 15, March 15, and June 15 commencing September 15, 2005. The
Company may redeem the trust preferred securities, in whole or in part, without
penalty, on or after September 15, 2010, or earlier upon the occurrence of
certain events with the payment of a premium upon redemption, and the securities
mature on September 15, 2035.
NOTE 10 - 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. 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. There was no pension plan expense
for the years ended September 30, 2005 and 2004 and pension plan expense was
approximately $148,000 for fiscal year 2003.
401(k) Plan: The Company maintains a retirement savings 401(k) plan which covers
all employees who are 21 years or older and have completed three months of
service. Employees are eligible to receive contributions from the Company after
one year of service. Participants may defer up to 75% of compensation and the
Company will contribute an amount equal to 125% of elective deferrals on 6% of
the participants' compensation elected to be deferred. Expense for the 401(k)
plan for the years ended September 30, 2005, 2004 and 2003 was approximately
$379,000, $315,000 and $193,000 respectively.
NOTE 10 - EMPLOYEE BENEFITS (Continued)
Employee Stock Ownership Plan (ESOP): On July 1, 2004, the Bank merged the ESOP
into the MFB Financial Employees' Savings and Profit Sharing Plan and Trust. In
doing so, no new participants will enter into the ESOP. Those participants in
the ESOP, as of July 1, 2004, will follow all provisions of the Plan prior to
the merger date. Per the Plan, benefits generally become 100% vested after five
(5) years of credited service. A participant who terminates employment for
reason other than death, normal retirement (or early retirement), or disability
prior to the completion of five (5) years of credited service does not receive
any benefits under the ESOP portion of the combined Plan. Forfeitures are
reallocated among the remaining participating employees.
The ESOP shares as of September 30 were as follows:
2005 2004 2003
---- ---- ----
Allocated shares 152,750 152,750 152,750
Shares withdrawn from the plan by participants (47,246) (29,984) (24,274)
--------------- ------------- ---------------
Total ESOP shares held in the plan 105,504 122,766 128,476
============== ============= ===============
NOTE 10 - EMPLOYEE BENEFITS (Continued)
Stock Option Plans: The Board of Directors of the Company has 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, 2005, 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, 2005,
2004 and 2003. As of September 30, 2005, 13,000 options remain available for
future grants.
Activity in the Option Plans is summarized as follows:
Weighted Weighted
Number of Average Average
Outstanding Exercise Exercise Fair Value
Options Price Price of Grants
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
Granted 26,500 30.35 - 34.01 31.90 9.96
Forfeited - - -
Exercised (41,350) 10.00 - 26.75 13.30
-----------
Balance at September 30, 2004 196,600 15.00 - 34.01 22.69
Granted 68,000 25.50 25.50 8.20
Forfeited (12,500) 18.75 - 30.35 23.37
Exercised (26,800) 15.00 - 21.50 16.48
------------
Balance at September 30, 2005 225,300 15.25 - 34.01 24.24
===========
NOTE 10 - 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
2003 139,994 $ 18.68
2004 123,494 22.04
2005 196,509 23.95
At September 30, 2005 options outstanding were as follows:
Outstanding Exercisable
Weighted Average Weighted
Remaining Average
Range of Contractual Exercise Exercise
Exercise Prices Number Life in years Price Number Price
--------------- ------ ------------- ----- ------ -----
$15.25 - $18.75 14,000 2.10 $ 16.04 14,000 $ 16.04
$20.55 - $26.75 187,300 6.76 23.86 171,109 24.11
$30.35 - $34.01 24,000 8.41 31.94 11,400 31.34
---------- ----------
Outstanding at year end 225,300 6.65 years $ 24.24 196,509 $ 23.95
========== ==========
NOTE 11 - INCOME TAXES
The Company files consolidated income tax returns. Income tax expense for the
years ended September 30 are summarized as follows:
2005 2004 2003
---- ---- ----
Federal: Current $ 477,286 $ 402,246 $ 731,145
Deferred 34,146 (173,499) (178,801)
-------------- -------------- --------------
511,432 228,747 552,344
State: Current 89,865 - 166,354
Deferred 9,329 6,176 (47,535)
-------------- -------------- --------------
99,194 6,176 118,819
-------------- -------------- --------------
Total income tax expense $ 610,626 $ 234,923 $ 671,163
============== ============== ==============
NOTE 11 - 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:
2005 2004 2003
---- ---- ----
Income taxes at statutory rate $ 1,056,276 $ 688,354 $ 1,044,122
Tax effect of:
State tax, net of federal income tax effect 65,468 4,076 78,421
Low income housing credits (402,662) (398,208) (348,257)
Bank owned life insurance income (74,756) (78,227) (73,912)
Other items, net (33,700) 18,928 (29,211)
--------------- -------------- --------------
Total income tax expense $ 610,626 $ 234,923 $ 671,163
============== ============== ==============
The components of the net deferred tax asset (liability) recorded in the
consolidated balance sheets as of September 30 are as follows:
2005 2004
---- ----
Deferred tax assets
Bad debt deduction $ 2,512,344 $ 2,405,965
Low income housing credit carry-forward 618,782 513,556
Net deferred loan fees 283,102 319,344
Impairment on Investment Securities 322,320 -
Intangible Assets 172,608 26,182
Depreciation - 22,586
Net operating loss carryforward 47,160 -
Net unrealized depreciation on securities available for sale 174,414 -
Other 18,571 90,709
-------------- --------------
4,149,301 3,378,342
Deferred tax liabilities
Accretion (77,856) (75,554)
Depreciation (307,842) -
FHLB stock dividend (292,730) (220,477)
Mortgage servicing rights (900,229) (808,493)
Net Unrealized appreciation on securities available for sale - (37,932)
Goodwill (66,982) (9,647)
Partnership income (88,704) (43,137)
Other (72,555) -
--------------- --------------
(1,806,898) (1,195,240)
Net deferred tax asset (liability) $ 2,342,403 $ 2,183,102
============== ==============
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 NOTE 11 - INCOME TAXES
(Continued)
otherwise total $1,563,000 at September 30, 2005 and 2004. 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 was to be recaptured was approximately $446,000 and was payable over a six
year period beginning with the tax year ending September 30, 1999. The deferred
tax liability was fully recaptured as of September 30, 2004.
NOTE 12 - 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.
NOTE 12 - REGULATORY MATTERS (Continued)
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, 2005
Total capital (to risk
weighted assets) $ 40,588 11.11% $ 29,222 8.00% $ 36,528 10.00%
Tier 1 (core) capital
(to risk weighted assets) 38,015 10.23 14,611 4.00 21,917 6.00
Tier 1 (core) capital (to
adjusted total assets) 38,015 6.93 22,180 4.00 27,422 5.00
As of September 30, 2004
Total capital (to risk
weighted assets) $ 36,870 10.04% $ 29,368 8.00% $ 36,710 10.00%
Tier 1 (core) capital
(to risk weighted assets) 33,562 8.88 14,684 4.00 22,026 6.00
Tier 1 (core) capital (to
adjusted total assets) 33,562 6.29 21,334 4.00 26,668 5.00
Regulations limit the dividends that may be paid by the Bank without prior
approval of the Office of Thrift Supervision. Accordingly, at October 1, 2005,
$4.06 million of the Bank's retained earnings was potentially available for
distribution to the Company, without obtaining prior regulatory approval.
NOTE 13 - OTHER NON-INTEREST INCOME AND EXPENSE
Other noninterest income and expense amounts are summarized as follows for the
years ended September 30:
2005 2004 2003
---- ---- ----
Other noninterest income
Loan servicing fees - net $ 126,208 $ 51,460 $ (602,609)
Other service charges and fees 227,063 159,913 226,925
ATM foreign surcharges 49,089 57,010 47,047
Visa interchange income 104,972 81,966 63,856
Partnership equity loss (281,954) (217,510) (165,570)
Bank owned life insurance 219,871 230,079 217,387
Rental income 181,697 244,642 -
Rental income - Other real estate 166,500 102,465 -
Other 240,230 96,932 60,436
-------------- -------------- --------------
$ 1,033,676 $ 806,957 $ (152,528)
============== ============== ===============
Other noninterest expense
Printing, postage and supplies 437,460 438,481 376,421
Advertising and business development 433,123 409,906 357,381
Telephone 214,611 239,479 211,560
Insurance 238,281 170,130 135,606
Directors fees 215,118 167,537 157,788
Other 2,241,192 1,915,840 1,322,254
-------------- -------------- --------------
$ 3,779,785 $ 3,341,373 $ 2,561,010
============== ============== ==============
NOTE 14 - 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 5---------------- ------------------2 0 0 4----------------
------- -------
Fixed Variable Fixed Variable
Rate Loans Rate Loans Total Rate Loans Rate Loans Total
Mortgage loans $ 8,013,396 $ 3,268,236 $ 11,281,632 $ 752,500 $ 606,700 $ 1,359,200
Commercial loans 775,000 2,545,500 3,320,500 3,166,010 - 3,166,010
Unused equity lines of credit 13,738,412 21,219,482 34,957,894 13,937,273 22,364,940 36,302,213
Unused commercial lines
and letters of credit - 34,508,652 34,508,652 - 61,856,887 61,856,887
Unused construction loan
lines of credit 1,571,757 - 1,571,757 3,178,347 - 3,178,347
------------ ------------- ------------ ------------ ------------ ------------
$ 24,098,565 $ 61,541,870 $ 85,640,435 $ 21,034,130 $ 84,828,527 $105,862,657
============ ============= ============ ============ ============ ============
Fixed rate mortgage loan commitments at September 30, 2005 are at an average
rate of 6.59% with terms primarily ranging from 15 to 30 years. Commercial loan
fixed rate commitments are primarily for five year terms with an average rate of
6.95%. The average rate on variable rate mortgage loan commitments is 6.60% 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, 2005.
The Company and the Bank are subject to certain claims and legal actions arising
in the ordinary course of business. Another creditor of the $3.8 million
impaired loan relationship discussed in Note 4 has filed a lawsuit against MFB
seeking to recover $987,000 from MFB. The Company believes it has valid defenses
and will vigorously contest this lawsuit. Based upon information currently
available and consultation with legal counsel, the Company believes the ultimate
outcome of this lawsuit is difficult to predict; therefore, no contingent
liability has been recorded for this lawsuit at September 30, 2005. In the
opinion of management, after consultation with legal counsel, the ultimate
disposition of all other legal matters is not expected to have a material
adverse effect on the consolidated financial position or results of operation of
the Company.
NOTE 15 - 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).
Currently each Right entitles holders of common stock to buy one share of common
stock of the Company at an exercise price of $46. In addition, each 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 16 - BUSINESS COMBINATION
On August 6, 2004, the Company acquired certain assets and assumed certain
liabilities of Sobieski Bank, a savings and loan association with three
locations in South Bend, Indiana. As a result of this acquisition, the Company
expects to further solidify its market share in St. Joseph and Elkhart counties,
expand its customer base to enhance deposit fee income, provide an opportunity
to market additional products and services to new customers, and reduce
operating costs through economies of scale.
The transaction resulted in net cash paid to Sobieski Bank of $407,000 over the
fair value of net assets acquired. As part of the transaction, $2.4 million in
goodwill, $1.2 million in customer relationship intangibles and $1.6 million in
core deposit intangibles were acquired. The intangible assets are being
amortized over ten years, using an accelerated method. Goodwill is evaluated
periodically for impairment. Goodwill and intangible assets will be deducted for
tax purposes over 15 years using the straight line method.
NOTE 16 - BUSINESS COMBINATION (Continued)
The following table summarizes the estimated fair value of assets acquired and
liabilities assumed at the date of acquisition.
Cash $ 7,281,000
Securities, including FHLB stock 35,922,000
Net Loans 53,674,000
Premises and equipment 3,445,000
Goodwill 2,363,000
Core deposit intangible 1,610,000
Customer relationship intangible 1,180,000
Other assets 812,000
----------------------------
----------------------------
Total assets acquired 106,287,000
============================
============================
Certificates of deposits (47,442,000)
Other deposits (21,815,000)
----------------------------
----------------------------
Total Deposits (69,257,000)
FHLB advances (35,739,000)
Other liabilities (884,000)
----------------------------
----------------------------
Total liabilities assumed (105,880,000)
----------------------------
----------------------------
Net assets acquired $ 407,000
============================
The following table presents pro forma information for the years ended September
30, 2004 and 2003 as if the acquisition had occurred at October 1, 2003 and
2002. The pro forma information includes adjustments for interest income and
loans and securities acquired, amortization of intangibles arising from the
transaction, depreciation expense on property acquired, interest expense on
deposits acquired, and the related income tax effects. The effects of certain
transactions related to various fraudulent and otherwise unauthorized loan
matters impacting Sobieski Bank's historical financial results were not included
in the pro forma information below. However, other factors negatively impacting
the historical financial results of Sobieski Bank have not been excluded from
the pro forma information presented below. Therefore, pro forma financial
information is not necessarily indicative of the results of operations as they
would have been had the acquisition been effected on the assumed dates.
2004 2003
Net interest income $ 14,694,000 $ 14,073,000
Net income 1,328,000 1,938,000
Basic earnings per share $ 1.01 $ 1.51
Diluted earnings per share .97 1.46
NOTE 17 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed financial statements for the parent company,
MFB Corp.
CONDENSED BALANCE SHEETS
September 30, 2005 and 2004
2005 2004
---- ----
ASSETS
Cash and cash equivalents $ 5,610,076 $ 885,981
Securities available for sale 127,875 1,126,925
Investment in Bank subsidiary 44,066,693 40,789,446
Other assets 433,921 113,264
--------------- ----------------
Total assets $ 50,238,565 $ 42,915,616
=============== ================
LIABILITIES
Loan payable to Bank subsidiary $ - $ 450,000
Loans from correspondent bank 6,500,000 6,500,000
Subordinated debentures 5,000,000 -
Accrued expenses and other liabilities 65,350 59,746
--------------- ----------------
Total liabilities 11,565,350 7,009,746
SHAREHOLDERS' EQUITY 38,673,215 35,905,870
Total liabilities and shareholders' equity $ 50,238,565 $ 42,915,616
=============== ================
CONDENSED STATEMENTS OF INCOME
Years ended September 30, 2005, 2004 and 2003
2005 2004 2003
---- ---- ----
INCOME
Dividends from Bank subsidiary - cash $ - $ 630,000 $ 2,070,000
Interest income 10,637 39,081 42,666
-------------- -------------- ---------------
Total 10,637 669,081 2,112,666
EXPENSES
Interest expense 345,080 56,758 36,141
Other expenses 242,389 291,541 186,183
-------------- -------------- ---------------
Total 587,469 348,299 222,324
Income before income taxes and
equity in undistributed (excess distributed)
net income of Bank subsidiary (576,832) 320,782 1,890,342
Income tax (benefit) (279,605) (40,186) (69,884)
--------------- --------------- ----------------
Income (loss) before equity in undistributed
(excess distributed) net income
of Bank subsidiary (297,227) 360,968 1,960,226
Equity in undistributed
net income of Bank subsidiary 2,793,295 1,428,681 439,558
-------------- -------------- ---------------
Net income $ 2,496,068 $ 1,789,649 $ 2,399,784
============== ============== ===============
(Continued)
55
NOTE 17 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended September 30, 2005, 2004 and 2003
2005 2004 2003
---- ---- ----
Cash flows from operating activities
Net income $ 2,496,068 $ 1,789,649 $ 2,399,784
Adjustments to reconcile net income to
net cash from operating activities
Equity in undistributed net income
of Bank subsidiary (2,793,295) (1,428,681) (439,558)
Investment impairment valuation - 109,253 -
Net change in other assets (306,177) 376,055 (155,278)
Net change in accrued expenses and
other liabilities 2,375 18,151 (403)
--------------- -------------- --------------
Net cash from operating activities (601,029) 864,427 1,804,545
Cash flows from investing activities
Investment in banking subsidiary - (6,500,000) -
Maturities and calls of securities 1,000,000 - -
--------------- ------------- --------------
Net cash from investing activities 1,000,000 (6,500,000) -
Cash flows from financing activities
Purchase of MFB Corp. common stock - - (1,676,634)
Proceeds from exercise of stock options 439,032 522,689 378,125
Proceeds from other borrowings - 6,500,000 -
Proceeds from subordinated debentures 5,000,000 - -
Repayment of other borrowings (450,000) (300,000) -
Cash dividends paid (663,908) (617,430) (560,324)
---------------- -------------- --------------
Net cash from financing activities 4,325,124 6,105,259 (1,858,833)
--------------- -------------- --------------
Net change in cash and cash equivalents 4,724,095 469,686 (54,288)
Cash and cash equivalents at beginning
of year 885,981 416,295 470,583
--------------- -------------- --------------
Cash and cash equivalents at end of year $ 5,610,076 $ 885,981 $ 416,295
=============== ============== ==============
NOTE 18 - 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, 2005 and 2004.
Items which are not financial instruments are not included.
2005 2004
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Assets
Cash and cash equivalents $ 54,209,428 $ 54,209,000 $ 28,595,030 $ 28,595,000
Other investments 12,513,549 12,514,000 12,628,329 12,628,000
Securities available for sale 63,574,757 63,575,000 66,021,011 66,021,000
Loans held for sale 407,300 407,000 1,033,800 1,034,000
Loans receivable, net of
allowance for loan losses 384,307,418 385,801,000 393,850,467 401,428,443
Liabilities
Noninterest-bearing demand
deposits (36,875,993) (36,876,000) (31,657,521) (31,658,000)
Savings, NOW and MMDA
deposits (153,864,063) (153,864,000) (136,099,148) (136,099,000)
Time deposits (183,623,904) (182,405,000) (190,135,947) (191,771,000)
FHLB advances (125,853,984) (126,665,000) (133,443,392) (141,889,000)
Loans from correspondent
banks (6,500,000) (6,500,000) (6,500,000) (6,500,000)
Subordinated Debentures (5,000,000) (4,981,000) - -
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of September 30, 2005 and 2004. 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, 2005 and 2004 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,
2005 and 2004, 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 other investments, noninterest-bearing demand deposits and savings,
NOW and MMDA deposits is based upon their carrying value. The estimated fair
value for other time deposits as well as loans from correspondent banks,
subordinated debentures and FHLB advances is based upon estimates of the rate
the Company would pay on such deposits or borrowings at September 30, 2005 and
2004, 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.
57
NOTE 18 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were the Company to have
disposed of such items at September 30, 2005 and 2004, 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, 2005 and 2004 should not necessarily be considered to apply at
subsequent dates.
In addition, other assets and liabilities of the Company that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not recognized
in financial statements nevertheless may have value but are not included in the
above disclosures. Excluded, among other items, are the estimated earning power
of core deposit accounts, the trained work force, customer goodwill and similar
items.
NOTE 19 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows:
2005 2004 2003
---- ---- ----
Net change in net unrealized gains and losses
on securities available for sale
Unrealized gains (losses) arising during
the year $ (679,048) $ (361,190) $ (324,551)
Reclassification adjustment for (gains) losses
included in net income 948,000 109,253 (40,000)
-------------- -------------- ---------------
Net change in net unrealized gains
(losses) on securities available
for sale 268,952 (251,937) (364,551)
Tax expense (benefit) (212,346) 73,667 (92,519)
--------------- -------------- ---------------
Total other comprehensive income (loss) $ 481,298 $ (325,604) $ (272,032)
============== ============== ===============
NOTE 20 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
--------------Year Ended September 30, 2005--------------
-----------------------------
1st * 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income $ 6,831 $ 6,700 $ 6,977 $ 7,440
Interest expense 3,268 3,213 3,225 3,571
----------- ----------- ----------- -----------
Net interest income 3,563 3,487 3,752 3,869
Provision for (recovery of) loan losses 300 (29) 361 91
----------- ------------ ----------- -----------
Net interest income after provision for loan
losses 3,263 3,516 3,391 3,778
Non-interest income 375 1,451 1,276 1,885
Non-interest expense 3,991 3,933 3,885 4,019
----------- ----------- ----------- -----------
Income (loss) before income taxes (353) 1,034 782 1,644
Income tax expense (benefit) (243) 238 168 448
------------ ----------- ----------- -----------
Net income (loss) $ (110) $ 796 $ 614 $ 1,196
============ =========== =========== ===========
Basic earnings (loss) per common share $ (0.08) $ 0.59 $ 0.45 $ 0.88
=========== =========== =========== ===========
Diluted earnings (loss) per common share $ (0.08) $ 0.59 $ 0.44 $ 0.87
=========== =========== =========== ===========
* The significant decrease in non-interest income and the resulting net loss for
the 1st quarter of fiscal 2005 is primarily related to the security impairment
charge of $948,000 as previously discussed.
58
NOTE 20 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)
--------------Year Ended September 30, 2004--------------
-----------------------------
1st 2nd 3rd 4th*
(In thousands, except per share data) Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income $ 5,527 $ 5,446 $ 5,505 $ 6,314
Interest expense 2,719 2,699 2,697 2,974
----------- ----------- ----------- -----------
Net interest income 2,808 2,747 2,808 3,340
Provision for loan losses 300 200 150 150
----------- ----------- ----------- -----------
Net interest income after provision for loan
losses 2,508 2,547 2,658 3,190
Non-interest income 1,474 1,195 1,760 1,251
Non-interest expense 3,255 3,399 3,573 4,331
----------- ----------- ----------- -----------
Income before income taxes 727 343 845 110
Income tax expense (benefit) 108 (10) 238 (101)
----------- ------------ ----------- ------------
Net income $ 619 $ 353 $ 607 $ 211
=========== =========== =========== ===========
Basic earnings per common share $ .48 $ .27 $ .46 $ .16
=========== =========== =========== ===========
Diluted earnings per common share $ .45 $ .26 $ .44 $ .15
=========== =========== =========== ===========
* The increase in non-interest expense in the fourth quarter of fiscal year 2004
is primarily related to expense incurred in connection with the acquisition
previously mentioned and the additional costs incurred to operate the related
new branch locations. The increases in interest income, interest expense and net
interest income during the fourth quarter are primarily related to the assets
and liabilities acquired.
MFB CORP. AND SUBSIDIARY
DIRECTORS AND OFFICERS
September 30, 2005
MFB CORP. AND MFB FINANCIAL DIRECTORS
M. Gilbert Eberhart (age 71) has served as Secretary of MFB Financial since 1987
and of MFB Corp. since inception. He is a dentist based in Mishawaka.
Jonathan E. Kintner (age 62) has a private practice of optometry in Mishawaka.
Christine A. Lauber (age 60) has served as a certified public accountant in
private practice in South Bend, Indiana for more than the last five years. She
also serves as President of Automated Information Management, Inc., South Bend,
Indiana).
Michael J. Marien (age 57) has served as an Account Manager for IT/Signode
Corp., a division of Illinois Tool Works. He is the current Chairman of MFB
Corp. and MFB Financial.
Charles J. Viater (age 51) has served as President and Chief Executive Officer
of MFB Corp., MFB Financial and Mishawaka Financial Services, Inc. since
September 1995.
Reginald H. Wagle (age 63) 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.
Robert C. Beutter (age 70) became of counsel to the South Bend law firm May
Oberfell Lorber in November 2005. Before that he was an attorney in private
practice in Mishawaka since 1962 and served as mayor of Mishawaka from 1984 to
2003.
Edward Levy (age 57) has served as an officer and owner of Freeman-Spicer
Leasing and Insurance Corp. and its affiliated entities (financial services) for
more than the past five years. In 2005 he became an executive officer of Take
Out Foods International, Inc. based in Indianapolis.
MFB FINANCIAL EXECUTIVE OFFICERS
Charles J. Viater James P. Coleman, III
President and Executive Vice President and
Chief Executive Officer* Director of Wealth Management
Donald R. Kyle Terry L. Clark
Executive Vice President and Vice President, Principal Financial
Chief Operating Officer Officer and Controller
M. Gilbert Eberhart
Secretary*
* Holds same position with MFB Corp.
MFB CORP. AND SUBSIDIARY
SHAREHOLDER INFORMATION
September 30, 2005
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, 2005, there were approximately 450
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, 2003 33.09 30.00 .110
March 31, 2004 35.00 29.96 .120
June 30, 2004 35.00 30.52 .120
September 30, 2004 31.54 27.60 .120
December 31, 2004 31.00 27.98 .120
March 31, 2005 30.00 26.62 .125
June 30, 2005 34.00 24.05 .125
September 30, 2005 28.55 24.50 .125
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
61
MFB CORP. AND SUBSIDIARY
SHAREHOLDER INFORMATION
September 30, 2005
Shareholder and General Inquiries
The Company is required to file an Annual Report on Form 10-K for its fiscal
year ended September 30, 2005 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.
4100 Edison Lakes Parkway (Suite 300)
Mishawaka, IN 46545
Office Locations
Corporate Headquarters Main Office Branch Office
4100 Edison Lakes Parkway 121 S Church St. 25990 County Road 6
Mishawaka, IN 46545 Mishawaka, IN 46544 Elkhart, IN 46514
Branch Office Branch Office
2427 Mishawaka Ave. 23132 US 33
South Bend, IN 46615 Elkhart, IN 46517
Branch Office Branch Office
100 E. Wayne St. 402 W. Cleveland Rd.
Suite 150 Mishawaka, IN 46545
South Bend, IN 46601
Branch Office Branch Office
2930 W. Cleveland Rd. 411 W McKinley Ave
South Bend, IN 46628 Mishawaka, IN 46545
Branch Office Branch Office
742 E. Ireland Rd. 23761 Western Ave.
South Bend, IN 46614 South Bend, IN 46619
Branch Office Branch Office
4100 Edison Lakes Parkway 11611 N. Meridian Suite 110
Mishawka, IN 46545 Carmel, IN 46032