FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended September 30, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to__________
Commission file number: 0-23374
MFB CORP.
(Exact name of registrant as specified in its charter)
Indiana 35-1907258
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
121 South Church Street, P.O. Box 528 Mishawaka, Indiana 46546
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code:
(574) 255-3146
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, without par value
Common Share Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes x No ___
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(2) Yes x No ___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405,
Regulation S-K (229.405 of this chapter) is not contained herein, and will not
be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Yes No X
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Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act) Yes_____ No X
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The aggregate market value of the issuer's voting stock held by non-affiliates,
as of March 31, 2002, was $25,545,299.
The number of shares of the registrant's common stock, without par value,
outstanding as of December 6, 2002, was 1,301,849 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Annual Report to Shareholders for the fiscal year ended
September 30, 2002 are incorporated by reference into Part II.
Portions of the Proxy Statement for the 2002 Annual Meeting of the Shareholders
are incorporated into Part I and Part III.
Exhibit Index on Page 50
Page one of 50 pages
MFB CORP.
Form 10-K
INDEX
PART I
Item 1. Business 1
Item 2. Properties 39
Item 3. Legal Proceedings 40
Item 4. Submission of Matters to a Vote of Security Holders 40
Item 4.5 Executive Officers of Registrant 40
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 41
Item 6. Selected Financial Data 41
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 42
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 42
Item 8. Financial Statements and Supplementary Data 42
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 42
PART III
Item 10. Directors and Executive Officers of the Registrant 43
Item 11. Executive Compensation 43
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 43
Item 13. Certain Relationships and Related Transactions 44
PART IV
Item 14. Controls and Procedures 44
Item 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 44
Signatures 46
Certifications 47
Exhibit List 50
1
PART 1
Item 1. Business.
General
MFB Corp. ("The Company") is an Indiana corporation organized in December, 1993,
and parent company of its wholly owned savings bank subsidiary, MFB Financial
(the "Bank"). MFB became a unitary savings and loan holding company upon the
conversion of Mishawaka Federal Savings from a federal mutual savings and loan
association to a federal stock savings bank on March 24, 1994. On November 1,
1996, Mishawaka Federal Savings officially changed its name to MFB Financial.
MFB Financial offers a number of consumer and commercial financial services.
These services include: (i) residential real estate loans; (ii) home equity and
second mortgage loans; (iii) construction loans; (iv) commercial loans; (v)
loans secured by deposits and other consumer loans; (vi) NOW accounts; (vii)
passbook savings accounts; (viii) certificates of deposit; (ix) consumer and
commercial demand deposit accounts; (x) individual retirement accounts; (xi)
trust services; and (xii) a variety of insurance products and brokerage services
through Mishawaka Financial Services, Inc., its insurance agency subsidiary. 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. MFB
Financial provides its banking services through its seven offices in of St.
Joseph and Elkhart counties, Indiana.
Lending Activities
General. The Company's principal source of revenue is interest income from
residential mortgage loans, construction loans, commercial loans and consumer
loans. MFB Financial has concentrated its mortgage lending activities on the
origination of loans secured by first mortgage liens for the purchase,
construction or refinancing of one-to-four family residential real property. At
September 30, 2002, $168.8 million, or 53.2% of the Company's total loan
portfolio, consisted of mortgage loans and residential construction loans on
one-to-four family residential real property, and multi-family loans which are
generally secured by first mortgages on the property. A large majority of the
residential real estate loans originated by MFB Financial are secured by
properties located in St. Joseph and Elkhart Counties. In an effort to diversify
the asset mix of the Bank and enhance loan yields, home equity loan, commercial
loan and consumer loan programs have been established over the past seven years.
Commercial loans include term loans and commercial lines of credit. Consumer
loans include loans secured by deposits, home equity and second mortgage loans,
new and used car loans and personal loans. At September 30, 2002, 38.2% of the
Company's loan portfolio consist of commercial loans and 8.6% of the loan
portfolio consist of consumer loans.
Residential Mortgage Loans. Residential mortgage loans consist of one-to-four
family loans. Pursuant to federal regulations, such loans must require at least
semi-annual payments and be for a term of not more than 40 years, and, if the
interest rate is adjustable, it must be correlated with changes in a readily
verifiable index.
MFB Financial offers fixed-rate loans with a maximum term of thirty years for
the purpose of purchasing or refinancing residential properties and building
sites. It is the Company's intent to document and underwrite these loans to
standards established by Freddie Mac to assure that they meet the investor
quality required for sale in the secondary markets.
A significant number of the loans made and retained in the loan portfolio by MFB
Financial feature adjustable rates. Adjustable rate loans permit the Bank to
better match the interest it earns on loans with the interest it pays on
deposits. A variety of programs are offered to borrowers. A majority of these
loans adjust on an annual basis after initial terms of one to seven years.
Initial offering rates, adjustment caps and margins are adjusted periodically to
reflect market conditions and provide diversity to the loan portfolio.
MFB Financial normally requires private mortgage insurance on all conventional
residential first mortgages with loan-to-value ratios in excess of 80%. In
accordance with the Homeowners Protection Act of 1998, MFB has adopted policies
to assure complete compliance with automatic cancellation provisions, depending
on the date the loan was originated. On first mortgages, MFB will generally lend
up to 103% loan-to-value, based upon the lesser of the purchase price or
appraisal. MFB also offers programs that target first-time homebuyers when the
applicants have successfully completed a homebuyer's education course and earn
less than 80% of the area median income. Second mortgages and home equity loans
may be originated with loan-to-values up to 100% with higher yields to
compensate for potentially higher risk.
Substantially all of the residential mortgage loans that MFB Financial
originates include "due-on-sale" clauses, which give MFB Financial the right to
declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid.
Residential mortgage loans in excess of $700,000 must be approved by a majority
of the members of MFB Financial's Board of Directors. Loans under that amount
are approved by one or more members of MFB Financial's Loan Committee.
Construction Loans. MFB Financial offers construction loans on residential and
commercial real estate to builders or developers constructing such properties
and to owners who are to occupy the premises. Both residential and commercial
construction and development loans to builders are underwritten in the corporate
lending department with consistent underwriting standards, including adequate
collateral and sufficient debt coverage ratios. The loan reviews are based on
current economic conditions and personal guarantees may be required.
Construction loans to owners who will occupy the premises are underwritten in
the mortgage loan department.
Generally, construction loans are 12-month adjustable rate mortgage loans with
interest calculated on the amount disbursed under the loan and payable on a
monthly basis. Interest rates for such loans are generally tied to the National
Prime Rate. A construction loan fee is also charged for these loans. MFB
Financial normally requires an 80% loan-to-value ratio for its construction
loans. Inspections are made in conjunction with disbursements under a
construction loan, and the construction phase is generally limited to six
months.
Commercial Loans. MFB Financial's commercial lending department focuses on
meeting the borrowing needs of local businesses primarily located in St. Joseph
and Elkhart counties. Loans may be secured by real estate, equipment, inventory,
receivables or other appropriate collateral. Terms vary and adjustable rate
loans are generally indexed to the Wall Street Journal prime rate. Loans with
longer amortization periods generally contain fixed interest rate balloon
payment provisions of seven years or less. Personal guarantees by business
principals are generally required in order to manage risk on these loans.
When appropriate, MFB Financial uses guaranteed lending programs, such as the
Small Business Administration, Indiana Department of Finance Authority and the
Business Development Corp., to reduce risk. Lending activity is controlled with
individual loan officer lending limits and a loan committee consisting of
various board members. Commercial lending activity has allowed MFB Financial to
diversify its balance sheet, increase market penetration and improve earnings.
Consumer Loans. Federal laws and regulations permit federally chartered savings
institutions to make secured and unsecured consumer loans in an aggregate amount
of up to 35% of the association's total assets. In addition, a federally
chartered savings institution has lending authority above the 35% limit for
certain consumer loans, such as property improvement loans and deposit account
secured loans. However, the Qualified Thrift Lender test places additional
limitations on a savings association's ability to make consumer loans.
Consumer loans involve a higher level of risk than one-to-four family
residential mortgage loans because the collateral, if any, tends to be less
stable. However, the relatively higher yields and shorter terms to maturity of
consumer loans are believed to be helpful in reducing interest-rate risk. MFB
Financial makes secured consumer loans for amounts specifically tied to the
value of the collateral and smaller unsecured loans with higher interest rates.
Consumer loans would include home equity loans and lines of credit, new and used
automobile, boat and recreational vehicle loans, savings account loans,
overdraft lines of credit and Visa credit card loans.
Origination and Sale of Loans. Fixed-rate mortgages secured by single family
owner occupied dwellings are documented and underwritten to conform to the
standards for sale in the secondary market. This provides management with the
opportunity to deliver loans with the intent of increasing its servicing
portfolio and corresponding fee income and creates liquidity in order in order
to fund the acquisition of other assets for the Bank. As loans are originated
with the intent of sale in the secondary market, the Bank can choose to manage
and eliminate interest rate risk by committing forward sales utilizing a Best
Efforts program in which no penalties are incurred for non-delivery of a loan.
Adjustable rate mortgages continue to be originated by the Bank utilizing
standard industry notes and mortgages. They also can be sold to private
institutional investors should the Bank desire additional liquidity or held in
portfolio and provide yields that should better reflect changing market
conditions.
MFB Financial confines its loan origination activities primarily in St. Joseph
and Elkhart Counties and the surrounding area. MFB's loan originations are
generated from referrals from builders, developers, real estate brokers,
existing customers, and limited newspaper and periodical advertising. All loan
applications are underwritten at MFB Financial's main office.
A savings institution generally may not make any loan to a borrower or its
related entities if the total of all such loans exceeds 15% of its capital (plus
up to an additional 10% of capital in the case of loans fully collateralized by
readily marketable collateral); provided, however, that loans up to $500,000,
regardless of the percentage limitations, may be made and certain housing
development loans of up to $30 million or 30% of capital, whichever is less, are
permitted. MFB Financial's portfolio of loans currently contains no loans that
exceed the 15% of capital limitation.
MFB Financial's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. Fixed rate mortgage loans are
generally underwritten to FHLMC and FNMA standards.
MFB Financial generally requires appraisals on all property securing its loans
and requires title insurance and a valid lien on its mortgaged real estate.
Appraisals for residential real property are generally performed by in-house
appraisers who are state-certified residential appraisers. From time to time,
MFB Financial also uses the services of other certified residential appraisers
who are not in-house. MFB Financial requires fire and extended coverage
insurance in amounts at least equal to the principal amount of the loan. It also
requires flood insurance to protect the property securing its interest if the
property is in a flood plain. Tax and insurance payments are typically required
to be escrowed by MFB Financial on new loans.
Origination and Other Fees. MFB Financial realizes loan fee income from late
charges, origination fees, and miscellaneous fees. MFB Financial charges
application fees for most loan applications, but such fees are generally
credited back to the customer upon the closing of the loan. If the loan is
denied, MFB Financial retains a portion of the application fee. Due to
competitive issues, MFB Financial has originated most of its mortgages without
charging points. However, borrowers from time to time wish to pay points and
management negotiates rates on an individual basis. Late charges are generally
assessed if payment is not received within a specified number of days after it
is due. The grace period depends on the individual loan documents.
Nonperforming and Classified Assets
Nonperforming assets. Nonperforming assets were $5.95 million and $2.78 million
at September 30, 2002 and 2001, respectively. Nonperforming assets include
nonperforming loans (loans delinquent 90 days or more and non-accrual loans),
other real estate owned, repossessions and nonperforming investment securities.
Nonperforming loans totaled $5.46 million and $2.78 million at September 30,
2002 and 2001, respectively. The increase in nonperforming loans from last year
was due primarily to the placing of two large credits into non-accrual status
during the year. Impaired loans consist of non-accrual loans and other loans
where principal and interest may not be collected in accordance with the
original loan terms. Impaired loans were $6.57 million and $8.93 million at
September 30, 2002 and 2001, respectively. Impaired loans declined from last
year due to charge offs and payments on those loans.
Classified assets. Federal regulations and MFB Financial's Classification of
Assets policy provide for the classification of loans and other assets such as
debt and equity securities considered by the Office of Thrift Supervision
("OTS") to be of lesser quality as "substandard," "doubtful" or "loss" assets.
An asset is considered "substandard" if it is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the Bank will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to sufficient risk to
warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "special mention" by management. At
September 30, 2002, the Bank had classified $7,456,000 of its assets as "special
mention," $16,082,000 as "substandard", $0 as "doubtful", $0 as "loss" for
regulatory purposes.
An insured institution is required to establish general allowances for loan and
lease losses in an amount deemed prudent by management for loans classified
substandard, doubtful or impaired, as well as for other problem loans. General
allowances represent loss allowances on pools or types of loans, which have been
established to recognize the inherent risk associated with lending activities.
Unlike specific allowances, general allowances have not been allocated to
particular problem assets. When an insured institution classifies problem assets
as "loss", it is required either to establish a specific allowance for the
identified loss to or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the establishment of
additional general or specific loss allowances. MFB Financial regularly reviews
its loan portfolio to determine whether any loans require classification in
accordance with applicable regulations.
The Company has also adopted an internal risk classification system, and all
commercial loans are assigned a risk grade based on factors such as capacity to
repay, capital, collateral, character of the borrower, and economic conditions.
The risk grading process assists in identifying classified assets for regulatory
purposes, as well as determining the general and specific loss allowances for
classified commercial loans.
During 2001, the Company created an internal loan review function reporting
directly to the Board of Directors. Loan review focuses on the commercial loan
portfolio. The primary objectives are to evaluate the credit risk of individual
loan relationships, as well as the aggregate credit risk associated with the
entire commercial loan portfolio, to help ensure that underwriting standards are
followed and provide a foundation for assessing the adequacy of the allowance
for loan losses. The Company has established a goal of reviewing 60% of all
commercial loans annually, based on dollar amounts outstanding. During the
twelve months ending September 30, 2002, 80% of the commercial loans were
reviewed at least once. The Company reviews all "special mention" loans at least
semi-annually and all "substandard," "doubtful" and "loss" assets at least
quarterly.
All mortgage and consumer loans are reviewed by the Company on a regular basis
and generally are placed on a non-accrual status when the loans become
contractually past due ninety days or more. In cases where there is sufficient
equity in the property and/or the borrowers are willing and able to ultimately
pay all accrued amounts in full, the loan may be allowed to continue to earn
interest. At the end of each month, delinquency notices are sent to all
borrowers from whom payments have not been received. Contact by phone or in
person is made, if feasible, to all such borrowers.
When a loan is 45 days in default, personal contact is made with the borrower to
establish an acceptable repayment schedule. When loans are ninety days in
default, contact is made with the borrower by an employee of MFB Financial after
consultation with a Senior Loan Officer who attempts to establish an acceptable
repayment schedule. Management is authorized to commence foreclosure or
repossession proceedings for any loan upon making a determination that it is
prudent to do so. All loans on which foreclosure or repossession proceedings
have been commenced are placed on non-accrual status.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for loan
losses, which is charged to earnings. The provision is determined in conjunction
with management's review and evaluation of current economic conditions, changes
in the character and size of the loan and lease portfolio, delinquencies
(current status as well as past trends) and adequacy of collateral securing loan
delinquencies, historical and estimated net charge-offs, and other pertinent
information derived from a review of the loan and lease portfolio. During the
fiscal year ended September 30, 2002 the Bank continued to experience growth in
the commercial loan portfolio. Total commercial loans at September 30, 2002 were
$121.1 million compared to $105.6 million at September 30, 2001, a 14.7%
increase. In addition, the Bank continued to improve its loan review and risk
assessment procedures. Based on the factors above, the provision for loan losses
was increased from $3.1 million during the period ended September 30, 2001 to
$3.4 million at September 30, 2002. The balance of the allowance for loan losses
at September 30, 2002 was $5.1 million or 1.63% of loans, up from $4.6 million
or 1.49% of loans, one year ago. In management's opinion, MFB Financial's
allowance for loan losses is adequate to absorb probable incurred losses
existing at September 30, 2002.
Investments
General. Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds sold. Subject to various restrictions, federally
chartered savings institutions may also invest a portion of their assets in
commercial paper, corporate debt securities and asset-backed securities. The
investment policy of MFB Financial, which is established and implemented by MFB
Financial's Investment Committee, is designed primarily to maximize the yield on
the investment portfolio subject to liquidity risk, default risk, interest rate
risk, and prudent asset/liability management.
The Company's investment portfolio consists of U.S. Treasury Bonds, U.S.
government agency securities, municipal bonds, mortgage-backed securities,
commercial paper, corporate debt securities, equity securities and Federal Home
Loan Bank ("FHLB") stock. During the fiscal year ended September 30, 2002, the
Company recorded an $895,000 write down on a $1.0 million WorldCom, Inc.
corporate debt security. That security was sold in October 2002 for a gain of
$40,000 over the reduced book value.
Liquidity. Liquidity relates primarily to the Company's ability to fund loan
demand, meet deposit customers' withdrawal requirements and provide for
operating expenses. Liquid assets include cash, U.S. Treasury obligations,
certain certificates of deposit of insured banks and savings institutions,
certain bankers' acceptances and specified state or federal agency obligations.
Subject to various restrictions, FHLB-member savings institutions may also
invest in certain corporate debt securities, commercial paper, mutual funds,
mortgage-related securities, and first lien residential mortgage loans. The
Financial Regulatory Relief and Economic Efficiency Act of 2000, which was
signed into law on December 27, 2000, repealed the former statutory requirement
that all savings associations maintain an average daily balance of liquid assets
in a minimum amount of not less than 4% or more than 10% of their withdrawable
accounts plus short-term borrowings. Savings associations remain subject to the
OTS regulation that requires them to maintain sufficient liquidity to ensure
their safe an sound operation. Liquid assets were $81.7 million as of September
30, 2002 and management believes the liquidity level as of September 30, 2002 is
sufficient to meet anticipated liquidity needs.
Sources of Funds
General. Deposits have traditionally been MFB Financial's primary source of
funds for use in lending and investment activities. In addition to deposits, MFB
Financial derives funds from scheduled loan payments, loan prepayments,
secondary market loan sales, and income provided from operations. While
scheduled loan payments and income on earning assets are relatively stable
sources of funds, deposit inflows and outflows and secondary market sales can
vary widely and are influenced by prevailing interest rates, market conditions
and levels of competition. Borrowings from the FHLB of Indianapolis are used to
compensate for reductions in deposits or deposit inflows at less than projected
levels.
Deposits. Deposits are attracted principally from within St. Joseph and Elkhart
counties through the offering of a broad selection of deposit instruments
including NOW, business checking and other transaction accounts, certificates of
deposit, individual retirement accounts, and savings accounts. MFB Financial
does not actively solicit or advertise for deposits outside of these counties.
Substantially all of MFB Financial's depositors are residents of these counties.
Deposit account terms vary, with the principal differences being the minimum
balance required, the amount of time the funds remain on deposit and the
interest rate. MFB Financial does not pay a fee for any deposits it receives.
Interest rates paid, maturity terms, service fees and withdrawal penalties are
established by MFB Financial on a periodic basis. Determination of rates and
terms are predicated on funds acquisition and liquidity requirements, rates paid
by competitors, growth goals, and federal regulations. MFB Financial relies, in
part, on customer service and long-standing relationships with customers to
attract and retain its deposits, but also prices its deposits in relation to
rates offered by its competitors.
The flow of deposits is influenced significantly by general economic conditions,
changes in money market and prevailing interest rates and competition. The
variety of deposit accounts offered by MFB Financial has allowed it to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. MFB Financial has become more susceptible to short-term
fluctuations in deposit flows as customers have become more interest rate
conscious. MFB Financial manages the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, the Bank believes that its passbook, NOW and non-interest-bearing
checking accounts are relatively stable sources of deposits. However, the
ability of the Bank to attract and maintain certificates of deposit, and the
rates paid on these deposits, has been and will continue to be significantly
affected by market conditions. In the past year, the Bank introduced 3 and 5
year rising rate certificates of deposit to increase its competitiveness in the
market. The balance of those certificates of deposit at September 30, 2002 was
$52.8 million.
Borrowings. MFB Financial focuses on generating high quality loans and then
seeks the best source of funding from deposits, investments or borrowings.
Short-term borrowings or long term debt may be used to compensate for reduction
in other sources of funds such as deposits and to assist in asset/liability
management. The Bank's policy has been to utilize borrowings when they are a
less costly source of funds, can be invested at a positive interest rate spread
or when the Bank desires additional capacity to fund loan demand.
MFB Financial's borrowings consist mainly of advances from the FHLB of
Indianapolis secured by a blanket collateral agreement and based on percentage
of unencumbered loans and investment securities held by the bank. Such advances
can be made pursuant to several different credit programs, each of which has its
own interest rate and range of maturities. There are regulatory restrictions on
advances from the Federal Home Loan Banks, See "Regulation--Federal Home Loan
Bank System" and "--Qualified Thrift Lender." At September 30, 2002, MFB
Financial had $119.2 million in Federal Home Loan Bank borrowings outstanding at
an average rate of 5.60%. A total of $20.3 million of these advances mature in
2003. MFB Financial does not anticipate any difficulty in obtaining advances
appropriate to meet its requirements in the future.
Until September 2002, MFB Financial entered into repurchase agreements with
selected business customers. Repurchase agreements allowed those business
customers to invest excess cash, were accounted for as borrowings by the Bank
and were secured by certain investment securities of the Bank. Due to excess
liquidity of the Bank and the desire to free the pledged securities, the Bank is
now investing the excess cash of those business customers with an outside mutual
fund. Therefore, the balance of repurchase agreements outstanding at September
30, 2002 was $0.
Bank Subsidiaries
The Bank's insurance agency subsidiary, Mishawaka Financial Services, Inc.
("Mishawaka Financial"), was organized in 1975 and currently is engaged in the
sale of credit life, general fire and accident, car, home and life insurance, as
agent to the Bank's customers and the general public. During fiscal year 2002,
Mishawaka Financial received approximately $155,000 in commissions versus
approximately $152,000 in commissions received during fiscal year 2001. During
the fiscal year ending September 30, 2002, the Company established three new
wholly-owned subsidiaries of the Bank to manage a portion of its investment
portfolio. MFB Investments I, Inc. and MFB Investments II, Inc. are Nevada
corporations which jointly own MFB Investments, LP, a Nevada limited partnership
which holds and manages investment securities previously owned by the Bank. A
total of $48.5 million in investment securities were initially transferred from
the Bank to MFB Investments, LP. All intercompany balances and transactions
between all of the subsidiaries have been eliminated in the consolidation.
Employees
As of September 30, 2002, MFB Financial employed 124 persons on a full-time
basis and 18 persons on a part-time basis. None of MFB Financial's employees are
represented by a collective bargaining group. Management considers its employee
relations to be excellent.
(1) Average outstanding balance reflects unrealized gain (loss) on securities
available for sale. (2) Average outstanding balances reflect unrealized gain
(loss) on loans held for sale. (3) Total loans less deferred net loan fees and
loans in process.
10
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
A. The following are the average balance sheets for the years ending
September 30:
2002 2001 2000
Average Average Average
Outstanding Outstanding Outstanding
Balance Balance Balance
Assets: (In thousands)
Interest-earning assets:
Interest-bearing deposits $ 22,797 $ 18,422 $ 4,536
Mortgage-backed securities (1) 26,261 19,707 19,191
Other securities available for sale (1) 30,216 28,589 25,576
FHLB stock 6,308 6,308 5,853
Loans held for sale (2) 353 293 3,837
Loans receivable (3) 314,210 317,403 300,717
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Total interest-earning assets 400,145 390,722 359,710
Non-interest earning assets, net
of allowance for loan losses 17,675 17,168 17,335
------------- ------------ ------------
Total assets $ 417,820 $ 407,890 $ 377,045
============= ============ ============
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts $ 19,249 $ 15,946 $ 15,218
NOW and money market accounts 59,433 51,520 40,583
Certificates of deposit 155,519 167,519 156,855
Repurchase agreements 9,988 8,416 7,718
FHLB advances 119,297 114,903 108,759
------------- ------------ ------------
Total interest-bearing liabilities 363,486 358,304 329,133
Other liabilities 19,020 16,333 16,222
------------- ------------ ------------
Total liabilities 382,506 374,637 345,355
Shareholders' equity
Common stock 12,944 13,077 13,065
Retained earnings 30,402 28,227 26,541
Net unrealized gain(loss) on securities
available for sale (196) (434) (921)
Less common stock acquired by:
Employee stock ownership plan - - (131)
Treasury stock (7,836) (7,617) (6,864)
-------------- ------------- ------------
Total shareholders' equity 35,314 33,253 31,690
------------- ------------ ------------
Total liabilities and shareholders' equity $ 417,820 $ 407,890 $ 377,045
============= ============ ============
(1) Average balance does not reflect unrealized gain (loss) on securities
available for sale and yield is based on amortized cost.
(2) Total loans less deferred net loan fees and loans in process.
(3) Interest rate spread is calculated by subtracting average interest rate
cost from average interest rate earned for the period indicated.
(4) The net yield on average interest-earning assets is calculated by
dividing net interest income by average interest-earning assets for the
period indicated.
11
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL (Continued)
B. The following tables set forth, for the years indicated, the condensed
average balance of interest-earning assets and interest-bearing
liabilities, the interest earned or paid on such amounts, and the
average interest rates earned or paid thereon.
--------Year Ended September 30, 2002-------
-----------------------------
Average Average
Balance Interest Yield/Cost
(Dollars in thousands)
INTEREST-EARNING ASSETS
Interest-bearing deposits $ 22,797 $ 429 1.88%
Mortgage-backed securities (1) 26,018 1,143 4.39
Other securities available for sale (1) 30,917 1,443 4.67
FHLB stock 6,308 398 6.31
Loans held for sale 353 22 6.23
Loans receivable (2) 314,210 22,330 7.11
------------ ------------ --------
Total interest-earning assets $ 400,603 25,765 6.43
============ ------------ --------
INTEREST-BEARING LIABILITIES
Savings accounts $ 19,249 216 1.12%
NOW and money market accounts 59,433 700 1.18
Certificates of deposit 155,519 5,984 3.85
Repurchase agreements 9,988 154 1.54
FHLB advances 119,297 6,775 5.68
------------ ------------ --------
Total interest-bearing liabilities $ 363,486 13,829 3.80
============ ------------ --------
Net interest-earning assets $ 37,117
============
Net interest income $ 11,936
============
Interest rate spread (3) 2.63%
=====
Net yield on average interest-earning assets (4) 2.98%
=====
(1) Average balance does not reflect unrealized gain (loss) on securities
available for sale and yield is based on amortized cost.
(2) Total loans less deferred net loan fees and loans in process.
(3) Interest rate spread is calculated by subtracting average interest rate
cost from average interest rate earned for the period indicated.
(4) The net yield on average interest-earning assets is calculated by
dividing net interest income by average interest-earning assets for the
period indicated.
13
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL (Continued)
--------Year Ended September 30, 2001-------
-----------------------------
Average Average
Balance Interest Yield/Cost
(Dollars in thousands)
INTEREST-EARNING ASSETS
Interest-bearing deposits $ 18,422 $ 927 5.03%
Mortgage-backed securities (1) 19,834 1,242 6.26
Other securities available for sale (1) 29,144 1,781 6.11
FHLB stock 6,308 496 7.86
Loans held for sale 293 21 7.17
Loans receivable (2) 317,403 25,557 8.05
------------ ------------ --------
Total interest-earning assets $ 391,404 30,024 7.67
============ ------------ --------
INTEREST-BEARING LIABILITIES
Savings accounts $ 15,946 358 2.25%
NOW and money market accounts 51,520 1,247 2.42
Certificates of deposit 167,519 9,466 5.65
Repurchase agreements 8,416 292 3.47
FHLB advances 114,903 6,609 5.75
------------ ------------ --------
Total interest-bearing liabilities $ 358,304 17,972 5.02
============ ------------ --------
Net interest-earning assets $ 33,100
============
Net interest income $ 12,052
============
Interest rate spread (3) 2.65%
=====
Net yield on average interest-earning assets (4) 3.08%
=====
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL (Continued)
--------Year Ended September 30, 2000-------
-----------------------------
Average Average
Balance Interest Yield/Cost
(Dollars in thousands)
INTEREST-EARNING ASSETS
Interest-bearing deposits $ 4,536 $ 290 6.39%
Mortgage-backed securities (1) 20,060 1,323 6.60
Other securities available for sale (1) 26,232 1,761 6.71
FHLB stock 5,853 476 8.13
Loans held for sale 3,837 287 7.48
Loans receivable (2) 300,717 24,418 8.12
------------ ------------ --------
Total interest-earning assets $ 361,235 28,555 7.90
============ ------------ --------
INTEREST-BEARING LIABILITIES
Savings accounts $ 15,218 371 2.44%
NOW and money market accounts 40,583 1,055 2.60
Certificates of deposit 156,855 8,600 5.48
Repurchase agreements 7,718 300 3.89
FHLB advances 108,759 6,147 5.65
------------ ------------ --------
Total interest-bearing liabilities $ 329,133 16,473 5.01
============ ------------ --------
Net interest-earning assets $ 32,102
============
Net interest income $ 12,082
============
Interest rate spread (3) 2.89%
=====
Net yield on average interest-earning assets (4) 3.34%
=====
14
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL (Continued)
C. The following tables describe the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities
have affected MFB Corp.'s consolidated interest income and expense
during the periods indicated. For each category of interest-earning
asset and interest-bearing liability, information is provided on changes
attributable to (1) changes in rate (i.e., changes in rate multiplied by
old volume) and (2) changes in volume (i.e., changes in volume
multiplied by old rate). Changes attributable to both rate and volume
have been allocated proportionally to the change due to volume and the
change due to rate.
Increase (Decrease) in
Net Interest Income
Total Net Due to Due to
Change Rate Volume
(In thousands)
Year ended September 30, 2002 compared
to year ended September 30, 2001
Interest-earning assets
Interest-bearing deposits $ (498) $ (680) $ 182
Mortgage-backed securities (99) (427) 328
Other securities available for sale (338) (441) 103
FHLB stock (98) (98) -
Loans held for sale 1 (3) 4
Loans receivable (3,227) (2,972) (255)
------------ ------------ -------------
Total (4,259) (4,621) 362
Interest-bearing liabilities
Savings accounts (142) (205) 63
NOW and money market accounts (547) (716) 169
Certificates of deposit (3,482) (2,844) (638)
Repurchase agreements (138) (185) 47
FHLB advances 166 (84) 250
----------- ------------ ------------
Total (4,143) (4,034) (109)
------------ ------------ -------------
Change in net interest income $ (116) $ (587) $ 471
============ ============ ============
17
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL (Continued)
Increase (Decrease) in
Net Interest Income
Total Net Due to Due to
Change Rate Volume
(In thousands)
Year ended September 30, 2001 compared
to year ended September 30, 2000
Interest-earning assets
Interest-bearing deposits $ 637 $ (74) $ 711
Mortgage-backed securities (81) (66) (15)
Other securities available for sale 20 (166) 186
FHLB stock 20 (16) 36
Loans held for sale (266) (12) (254)
Loans receivable 1,139 (195) 1,334
----------- ------------ ------------
Total 1,469 (529) 1,998
Interest-bearing liabilities
Savings accounts (13) (30) 17
NOW and money market accounts 192 (77) 269
Certificates of deposit 866 269 597
Repurchase agreements (8) (34) 26
FHLB advances 462 110 352
----------- ----------- ------------
Total 1,499 238 1,261
----------- ----------- ------------
Change in net interest income $ (30) $ (767) $ 737
============ ============ ============
II. INVESTMENT PORTFOLIO
A. The following table sets forth the amortized cost and fair
value of securities available for sale: At September 30,
2002 2001 2000
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(In thousands)
Debt securities
U.S. Government
and federal
agencies $ 12,485 $ 12,814 $ 2,920 $ 3,022 $ 17,944 $ 17,738
Municipal bonds 349 368 145 145 - -
Mortgage-
backed 26,771 27,037 20,091 20,320 14,834 14,212
Commercial
Paper - - 4,995 4,995 - -
Corporate notes 9,880 9,409 15,329 15,207 9,924 9,355
----------- ------------ ----------- ---------- ---------- -----------
49,485 49,628 43,480 43,689 42,702 41,305
Marketable equity
securities 4,237 3,957 4,252 4,171 438 318
----------- ------------ ----------- ---------- ---------- -----------
$ 53,722 $ 53,585 $ 47,732 $ 47,860 $ 43,140 $ 41,623
=========== ============ =========== ========== ========== ===========
The following table sets forth the amortized cost and estimated market value of
Federal Home Loan Bank (FHLB) stock:
At September 30,
-------------------------------------------------------------------------------------------
2002 2001 2000
-------------------------- -------------------------- --------------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(In thousands)
Other securities
FHLB stock, at
cost $ 6,308 $ 6,308 $ 6,308 $ 6,308 $ 6,308 $ 6,308
=========== ============ =========== ========== ========== ===========
II. INVESTMENT PORTFOLIO (Continued)
B. The maturity distribution and weighted average interest rates of debt
securities available for sale, excluding mortgage-backed securities, are as
follows:
Amount at September 30, 2002, which matures in
------------------------------------------------------------------------------------------------------------
One One to Over Five to Over 10
Year or Less Five Years Ten Years Years Totals
-------------------- -------------------- -------------------- -------------------- --------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair AmortizedFair
Cost Value Cost Value Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- ----- ---- ------ ---- -----
(Dollars in thousands)
U.S. Government and federal
agencies $ - $ - $ 8,369 8,660 $ 2,078 $ 2,102 $ 2,038 $ 2,052 $ 12,485 $ 12,814
Municipal bonds - - 349 368 - - - - 349 368
Corporate notes 120 120 5,800 5,866 - - 3,960 3,423 9,880 9,409
---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
$ 120 $ 120 $ 14,518 $ 14,894 $ 2,078 $ 2,102 $ 5,998 $ 5,475 $ 22,714 $ 22,591
========== ========= ========= ========= ========= ========= ========= ========= ========= =========
Weighted
average yield -% 5.20% 6.05% 2.96% 4.66%
There were no securities held to maturity at September 30, 2002.
The weighted average interest rates are based upon coupon rates for securities
purchased at par value and on effective interest rates considering amortization
or accretion if the securities were purchased at a premium or discount.
C. There were no investments in securities of any one issuer which exceeded
10% of the shareholders' equity of the Company at September 30, 2002.
19
III. LOAN PORTFOLIO
A. The following table sets forth the composition of MFB Corp.'s
consolidated loan portfolio and mortgage-backed securities by
loan type as of the dates indicated, including a reconciliation
of gross loans receivable to net loans receivable after
consideration of the allowance for loan losses, deferred net loan
fees and loans in process:
-------------------------------------------September 30,-------------------------------
2002 2001 2000 1999 1998
Percent Percent Percent Percent Percent
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
(Dollars in thousands)
Mortgage loans
Residential $ 146,943 46.31% $ 157,187 50.29% $ 185,267 58.23% $ 191,480 70.62% $ 183,151 78.49%
Residential construction 15,863 5.00 18,658 5.97 13,146 4.13 11,158 4.12 8,233 3.53
Multi-family 6,027 1.90 4,331 1.38 3,631 1.14 3,299 1.22 120 .05
Commercial and other loans
Commercial loans 121,140 38.18 105,575 33.78 91,105 28.64 47,399 17.48 30,775 13.19
Home equity and second
mortgage loans 21,151 6.67 20,275 6.49 18,917 5.95 13,308 4.91 9,067 3.89
Financing leases - - - - - - 17 .01 83 .03
Other 6,165 1.94 6,537 2.09 6,089 1.91 4,461 1.64 1,914 .82
Gross loans receivable 317,289 100.00% 312,563 100.00% 318,155 100.00% 271,122 100.00% 233,343 100.00%
Less
Allowance for loan losses (5,143) (4,632) (1,672) (638) (454)
Deferred net loan fees (794) (807) (923) (933) (798)
Loans in process (104) (143) (54) (87) (485)
------------ ------------- ------------- ------------- -----------
Net loans receivable $ 311,248 $ 306,981 $ 315,506 $ 269,464 $231,606
Mortgage-backed securities
FHLMC certificates $ 13,748 $ 3,617 $ 610 $ 868 $ 2,316
CMO - REMIC 13,289 16,703 13,602 25,582 19,951
----------- ------------ ------------ ------------ ------------
Net mortgage-backed $ 27,037 $ 20,320 $ 14,212 $ 26,450 $ 22,267
Securities
Mortgage loans
Adjustable rate $ 132,836 78.68 $ 140,284 77.86% $ 157,144 77.78% $ 142,756 69.32% $ 153,897 80.36%
Fixed rate 35,997 21.32 39,892 22.14 44,900 22.22 63,181 30.68 37,607 19.64
Total $ 168,833 100.00% $ 180,176 100.00% $ 202,044 100.00% $ 205,937 100.00% $ 191,504 100.00%
III. LOAN PORTFOLIO (Continued)
B. Loan Maturity. The following table sets forth certain information at
September 30, 2002, regarding the dollar amount of loans maturing in
MFB Corp.'s consolidated loan portfolio based on the date that final
payment is due under the terms of the loan. Demand loans having no
stated schedule of repayments and no stated maturity and overdrafts
are reported as due in one year or less. This schedule does not
reflect the effects of possible prepayments or enforcement of
due-on-sale clauses. Management expects prepayments will cause actual
maturities to be shorter.
Balance Due during years ended September 30,
Outstanding 2006 2008 2013 2012
at September 30, and to to and
2002 2003 2004 2005 2007 2012 2017 Following
(In thousands)
Mortgage Loans
Residential $ 146,943 $ 39 $ 106 $ 161 $ 996 $ 8,951 $ 21,143 $ 115,547
Residential construction 15,863 15,863 - - - - - -
Multi-family 6,027 1,745 971 856 2,397 30 28 -
Commercial and other Loans
Commercial loans 121,140 49,304 10,324 13,426 45,695 1,739 652 -
Home equity and second 21,151 1,444 1,741 1,581 8,161 7,621 265 338
mortgage
Other 6,165 1,377 913 1,468 2,147 260 - -
------------ ----------- ---------- ---------- ----------- --------- ----------- ---------
Total $ 317,289 $ 69,772 $ 14,055 $ 17,492 $ 59,396 $ 18,601 $ 22,088 $ 115,885
The following table sets forth, as of September 30, 2002, the dollar amount of
all loans due after one year which have fixed interest rates and floating or
adjustable interest rates.
Due After September 30, 2003
Variable
Fixed Rates Rates Total
(In thousands)
Mortgage loans
Residential $ 29,866 $ 117,038 $ 146,904
Multi-family 4,252 30 4,282
Commercial and other loans
Commercial loans 71,836 - 71,836
Home equity and second mortgage 7,766 11,941 19,707
Other 4,788 - 4,788
------------ ----------- ----------
Total $ 118,508 $ 129,009 $ 247,517
============ =========== ==========
20
III. LOAN PORTFOLIO (Continued)
C. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans
The table below sets forth the amounts and categories of MFB
Corp.'s consolidated nonperforming assets. It is the policy of
MFB Corp. that all earned but uncollected interest on all
loans be reviewed quarterly to determine if any portion
thereof should be classified as uncollectible for any loan
past due in excess of 90 days.
At September 30,
-----------------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in thousands)
Accruing loans delinquent
more than 90 days $ - $ 152 $ 60 $ 96 $ 124
Non-accruing loans 5,464 2,632 6 - -
---------- --------- ----------- ---------- -----------
Total nonperforming
loans 5,464 2,784 66 96 124
Real estate owned, net 365 - - 100 145
Nonperforming Investments 120 - - - -
---------- --------- ----------- ---------- -----------
Total nonperforming
assets $ 5,949 $ 2,784 $ 66 $ 196 $ 269
========== ========= =========== ========== ===========
Nonperforming loans to
total loans 1.73% .89% .02% .03% .05%
Nonperforming assets to
total loans 1.88% .89% .02% .06% .09%
Management believes that the allowance for loan losses balance at September 30,
2002 is adequate to absorb estimated losses on nonperforming loans, as the
allowance balance is maintained by management at a level considered adequate to
cover losses that are currently anticipated based on past loss experience,
general economic conditions, information about specific borrower situations
including their financial position and collateral values, and other factors and
estimates which are subject to change over time.
21
III. LOAN PORTFOLIO (Continued)
C. Risk Elements (Continued)
2. Potential Problem Loans
As of September 30, 2002, impaired loans totaled $6.57
million. Loans are classified as impaired loans if there
are serious doubts as to the ability of the borrower to
comply with present loan repayment terms, which may result
in disclosure of such loans pursuant to Item III.C.1. The
impaired loans had specific loan loss allowances totaling
$1.77 million at September 30, 2002. A total of $5.00
million of the impaired loans are nonaccrual loans and
included in the nonperforming loans of $5.46 million in
the table above.
3. Foreign Outstandings
None
4. Loan Concentrations
MFB Corp. historically has concentrated its lending
activities on the origination of loans secured by first
mortgage liens for the purchase, construction or
refinancing of one-to-four family and multi-family
residential real property. These loans continue to be a
major focus of MFB Corp.'s loan origination activities,
representing 53.2% of MFB Corp.'s total loan portfolio at
September 30, 2002. However, MFB Corp. continues to place
increased emphasis on diversifying its balance sheet and
improving earnings with significant growth in commercial
lending, which represent 38.2% of the total loan portfolio
at September 30, 2002.
D. Other Interest-Earning Assets
There are no other interest-earning assets as of September 30,
2002 which would be required to be disclosed under Item III. C.1
or 2 if such assets were loans.
* Not including loans held for sale
22
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The allowance for loan losses is maintained through the
provision for loan losses, which is
charged to earnings. The provision for loan losses is
determined in conjunction with
management's review and evaluation of current economic
conditions (including those of MFB Corp.'s
lending area), changes in the characteristic and size of the
loan portfolio, loan delinquencies
(current status as well as past trends) and adequacy of
collateral securing loan delinquencies,
historical and estimated net charge-offs, and other pertinent
information derived from a review
of the loan portfolio. In management's opinion, MFB
Corp.'s allowance for loan losses is
adequate to absorb probable incurred losses from loans at
September 30, 2002.
The following table analyzes changes in the consolidated
allowance for loan losses during the past five years ended
September 30, 2002.
Years Ended September 30,
-------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in thousands)
Balance of allowance at
beginning of period $ 4,632 $ 1,672 $ 638 $ 454 $ 370
Add:
Recoveries of loans
previously charged-
off--residential real
estate loans 14 4 - - -
Less charge offs:
Residential real estate
loans - - - -
Commercial real estate
loans (2,826) (91) (51) (45) (36)
Consumer loans (46) (50) (21) (1) -
------------- ------------ -------------- ----------- ------------
Net charge-offs (2,858) (137) (72) (46) (36)
Provisions for loan losses 3,369 3,097 1,106 230 120
------------ ----------- ------------- ---------- ------------
Balance of allowance at
end of period $ 5,143 $ 4,632 $ 1,672 $ 638 $ 454
============ =========== ============= ========== ============
Net charge-offs to total
average loans out-
standing for period * .91% .04% .02% .02% .02%
Allowance at end of
period to total loans
at end of period * 1.63% 1.49% .53% .24% .20%
(1) Includes home equity and second mortgage loans, repossessed assets, and
other loans including, education loans and loans secured by deposits.
23
IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued)
Allocation of Allowance for Loan Losses. The following table presents an
analysis of the allocation of MFB Corp.'s allowance for loan losses at
the dates indicated.
September 30,
2002 2001 2000 1999 1998
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
to total to total to total to total to total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
(Dollars in thousands)
Balance at end of period
applicable to
Residential $ 121 46.31% $ 96 50.77% $ 99 58.23% $ 110 70.62% $ 181 78.4
Commercial 4,814 38.18 4,359 33.45 1,379 28.64 387 17.48 213 13.19
Multi-family 6 1.90 4 1.37 4 1.14 3 1.22 1 .05
Residential construction 16 5.00 19 5.91 13 4.13 11 4.12 8 3.53
Consumer loans (1) 67 8.61 70 8.50 65 7.86 45 6.56 26 4.74
Unallocated 119 84 - 112 - 82 - 25 -
Total $ 5,143 100.00% $ 4,632 100.00% $ 1,672 100.00% $ 638 100.00% $ 454 100.00%
24
V. DEPOSITS
The average amount of deposits and average rates paid are summarized as
follows for the years ended September 30:
2 0 0 2 2 0 0 1 2 0 0 0
------- ------- -------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in thousands)
Savings accounts $ 19,249 1.12% $ 15,946 2.25% $ 15,218 2.44%
Now and money market accounts 59,433 1.18 51,520 2.42 40,583 2.60
Certificates of deposit 155,519 3.85 167,519 5.65 156,855 5.48
Demand deposits (noninterest-bearing) 16,939 13,194 10,738
------------ ------------ -------------
$ 251,140 $ 248,179 $ 223,394
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at September 30, 2002 is summarized as
follows:
Amount
(In thousands)
Three months or less $ 12,900
Over three months and through six months 4,238
Over six months and through twelve months 1,861
Over twelve months 18,425
---------
$ 37,424
25
VI. RETURN ON EQUITY AND ASSETS
The ratio of net income to average total assets and average
shareholders' equity and certain other ratios are as follows:
September 30,
----------------------------------------------
2002 2001 2000
---- ---- ----
(Dollars in thousands)
Average total assets $ 417,820 $ 407,890 $ 377,045
============ ============ ============
Average shareholders' equity $ 35,314 $ 33,253 $ 31,690
============ ============ ============
Net income $ 649 $ 1,910 $ 2,815
============ ============ ============
Return on average total assets .16% .47% .75%
============ ========= ==========
Return on average shareholders' equity 1.84% 5.75% 8.88%
============ ========= ==========
Dividend payout ratio (dividends
declared per share divided by net
income per share) 84.69% 27.82% 18.38%
============ =========== ===========
Average shareholders' equity
to average total assets 8.45% 8.15% 8.40%
============ ========= ==========
VII. SHORT-TERM AND FEDERAL HOME LOAN BANK BORROWINGS
The following table sets forth the maximum month-end balance and average balance
of FHLB advances and securities sold under agreements to repurchase at the dates
indicated.
September 30,
----------------------------------------------
2002 2001 2000
---- ---- ----
(Dollars in thousands)
Maximum Balance:
FHLB advances............................................. $ 119,685 $ 119,685 $ 118,152
Securities sold under agreements to................. 14,330 11,022 10,201
repurchase
Average Balance:
FHLB advances:............................................ 119,297 114,903 108,759
Securities sold under agreements to....................... 9,988 8,416 7,718
repurchase
Average Rate Paid On:
FHLB advances............................................. 5.68% 5.75% 5.65%
Securities sold under agreements to....................... 1.54 3.47 3.89
repurchase
The following table sets forth the Bank's borrowings at the dates indicated:
September 30,
----------------------------------------------
2002 2001 2000
---- ---- ----
(Dollars in thousands)
Amounts Outstanding:
FHLB advances............................................. $ 119,215 $ 119,685 $ 112,152
Securities sold under agreements to....................... - 11,022 9,143
Repurchase
Weighted Average Interest Rate:
FHLB Advances............................................. 5.60% 5.60% 5.70%
Securities sold under agreements to repurchase............ - 2.28 4.08
50
COMPETITION
MFB Financial originates most of its loans to and accepts most of its deposits
from residents of St. Joseph and Elkhart counties in Indiana. MFB Financial is
subject to competition from various financial institutions, including state and
national banks, state and federal savings associations, credit unions, certain
non-banking consumer lenders, and other companies or firms, including brokerage
houses and mortgage brokers, that provide similar services in St. Joseph and
Elkhart Counties. In total, there are 32 financial institutions located in our
two county market area. These financial institutions consist of 14 commercial
banks, two savings banks and 16 credit unions. MFB Financial also competes with
money market and mutual funds with respect to deposit accounts and with
insurance companies with respect to individual retirement accounts.
The primary factors influencing competition for deposits are interest rates,
service and convenient access. MFB Financial competes for loan originations
primarily through the efficiency and quality of services it provides borrowers,
builders, realtors and the small business community through interest rates and
loan fees it charges. Competition is affected by, among other things, the
general availability of lendable funds, general and local economic conditions,
current interest rate levels, and other factors that are not readily
predictable.
Under current federal law, bank holding companies may acquire savings
institutions and savings institutions may also acquire banks. Commercial
companies may not, however, acquire unitary savings and loan holding companies,
such as MFB Corp. Affiliations between banks and savings associations based in
Indiana may also increase the competition faced by the Company.
In addition, The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in
other states and, with state consent and subject to certain limitations, allows
banks to acquire out-of-state branches either through merger or de novo
expansion. The State of Indiana passed a law establishing interstate branching
provisions for Indiana state-chartered banks consistent with those established
by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana Branching Law
authorizes Indiana banks to branch interstate by merger or de novo expansion and
authorizes out-of-state banks meeting certain requirements to branch into
Indiana by merger or de novo expansion. This legislation has resulted in
increased competition for the Company and the Bank.
REGULATION
General
The Bank is a federally chartered savings bank, the deposits of which are
federally insured and backed by the full faith and credit of the United States
Government. Accordingly, the Bank is subject to broad federal regulation and
oversight extending to all its operations. The Bank is a member of the FHLB of
Indianapolis and is subject to certain limited regulation by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board"). As the
savings and loan holding company of the Bank, the Company also is subject to
federal regulation and oversight. The purpose of the regulation of the Company
and other holding companies is to protect subsidiary savings associations. The
Bank is a member of the Savings Association Insurance Fund ("SAIF") which
together with the Bank Insurance Fund (the "BIF") are the two deposit insurance
funds administered by the FDIC, and the deposits of the Bank are insured by the
FDIC. As a result, the FDIC has certain regulatory and examination authority
over the Bank. Certain of these regulatory requirements and restrictions are
discussed below or elsewhere in this document.
The OTS has extensive authority over the operations of savings institutions. As
part of this authority, the Bank is required to file periodic reports with the
OTS and is subject to periodic examinations by the OTS and the FDIC. The last
regular OTS examination of the Bank was as of March 31, 2002. When these
examinations are conducted by the OTS, the examiners may require the Company to
provide for higher general or specific loan loss reserves. To fund the
operations of the OTS, all savings institutions are subject to a semi-annual
assessment, based on the total assets, condition, and complexity of operations.
The Bank's OTS assessment for the fiscal year ended September 30, 2002, was
approximately $92,000.
The OTS also has extensive enforcement authority over all savings institutions
and their holding companies, including the Bank and the Company. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. Except under certain
circumstances, public disclosure of final enforcement actions by the OTS is
required.
In addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws and it is prohibited from engaging in any activities
not permitted by such laws. For instance, no savings institution may invest in
non-investment grade corporate debt securities. In addition, the permissible
level of investment by federal associations in loans secured by nonresidential
real property may not exceed 400% of total capital, except with approval of the
OTS. The Bank is in compliance with the noted restrictions.
The Bank is also subject to federal and state regulation as to such matters as
loans to officers, directors, or principal shareholders, required reserves,
limitations as to the nature and amount of its loans and investments, regulatory
approval of any merger or consolidation, issuance or retirements of its own
securities, and limitations upon other aspects of banking operations. In
addition, the activities and operations of the Bank are subject to a number of
additional detailed, complex and sometimes overlapping federal and state laws
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, The Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and anti-trust
laws.
Recent Legislative Developments
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Financial Services Modernization Act of 1999 - federal legislation which
modernizes the laws governing the financial services industry. The new law
establishes a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms and other financial service
providers. As a result of this legislation, bank holding companies will be
permitted to engage in a wider variety of financial activities than permitted
under prior law, particularly with respect to insurance and securities
activities. To the extent the law permits banks, securities firms and insurance
companies to affiliate, the financial services industry may experience further
consolidation. This could result in a growing number of larger financial
institutions that offer wider varieties of financial services than are currently
offered by MFB and that could aggressively compete in the markets currently
served by MFB. The statute grandfathered MFB's status as a unitary savings and
loan holding company and its authority to engage in commercial activities. The
legislation also provides, however, that a company that acquires a unitary
savings and loan holding company through a merger or other business combination
may engage only in those activities that are permissible for a multiple savings
and loan holding company or for a financial holding company. This provision
likely could reduce the number of potential acquirors of MFB. The law also
increases commercial banks' access to loan funding by the Federal Home Loan Bank
System, and includes new provisions in the privacy area, restricting the ability
of financial institutions to share nonpublic personal customer information with
third parties.
On October 26, 2001, President Bush signed the USA Patriot Act of 2001 (the
"Patriot Act"). The Patriot Act is intended to strenthen the ability of U.S. Law
Enforcement to combat terrorism on a variety of fronts. The potential impact of
the Patriot Act on financial institutions is significant and wide-ranging. The
Patriot Act contains sweeping anti-money laundering and financial transparency
laws and requires financial institutions to implement additional policies and
procedures with respect to, or additional measures designed to address, any or
all the following matters, among others: money laundering, suspicious activities
and currency transaction reporting, and currency crimes.
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002
(the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act represents a comprehensive
revision of laws affecting corporate governance, accounting obligations and
corporate reportings. The Sarbances-Oxley Act is applicable to all companies
with equity or debt securities registered under the Securities Exchange Act of
1934. In particular, the Sarbanes-Oxley Act establishes: (i) new requirements
for audit committees, including independence, expertise, and responsibilities;
(ii) additional responsibilities regarding financial statements for the Chief
Executive Officer and Chief Financial Officer of the reporting company; (iii)
new standards for auditors and regulation of audits; (iv) increased disclosure
and reporting obligations for the reporting company and their directors and
executive officers; and (v) new and increased civil and criminal penalties for
violation of the securities laws. Many of the provisions became effective
immediately while other provisions become effective over a period of 30 to 270
days and are subject to rulemaking by the Securities and Exchange Commission.
Although we anticipate that we will incur additional expense in complying with
the provisions of the Sarbanes-Oxley Act and the resulting regulations,
management does not expect that such compliance will have a material impact on
our results of operations or financial condition.
Federal Home Loan Bank System
The Bank is a member of the FHLB system, which consists of 12 regional banks.
The Federal Housing Finance Board ("FHFB"), an independent agency, controls the
FHLB System including the FHLB of Indianapolis. The FHLB System provides a
central credit facility primarily for member financial institutions. At
September 30, 2002, the Bank's investment in stock of the FHLB of Indianapolis
was $6.3 million.
All 12 FHLB's are required to provide funds to establish affordable housing
programs through direct loans or interest subsidies on advances to members to be
used for lending at subsidized interest rates for low- and moderate-income,
owner-occupied housing projects, affordable rental housing, and certain other
community projects.
The FHLB of Indianapolis serves as a reserve or central bank for member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHLB and the Board of Directors of the FHLB of Indianapolis.
All FHLB advances must be fully secured by sufficient collateral as determined
by the FHLB. Eligible collateral includes first mortgage loans less than 60 days
delinquent or securities evidencing interests therein, securities (including
mortgage-backed securities) issued, insured or guaranteed by the federal
government or any agency thereof, FHLB deposits, certain small business and
agricultural loans of smaller institutions and real estate with readily
ascertainable value in which a perfected security interest may be obtained.
Other forms of collateral may be accepted as over collateralization or, under
certain circumstances, to renew outstanding advances. All long-term advances are
required to provide funds for residential home financing and the FHLB has
established standards of community service that members must meet to maintain
access to long-term advances. Interest rates charged for advances vary depending
upon maturity, the cost of funds to the FHLB of Indianapolis and the purpose of
the borrowing.
Insurance of Deposits
The FDIC administers two separate insurance funds, which are not commingled: one
primarily for federally insured banks ("BIF") and one primarily for federally
insured savings associations ("SAIF"). As the federal insurer of deposits of
savings institutions, the FDIC determines whether to grant insurance to
newly-chartered savings institutions, has authority to prohibit unsafe or
unsound activities and has enforcement powers over savings institutions (usually
in conjunction with the OTS or on its own if the OTS does not undertake
enforcement action).
Deposit accounts in the Bank are insured by the SAIF within prescribed statutory
limits which generally provide a maximum of $100,000 coverage for each insured
account. As a condition to such insurance, the FDIC is authorized to issue
regulations and, in conjunction with the OTS, conduct examinations and generally
supervise the operations of its insured members. This supervision extends to a
comprehensive regulatory scheme governing, among other things, the form of
deposit instruments issued by savings institutions, and certain aspects of their
lending activities, including appraisal requirements, private mortgage insurance
coverage and lending authority.
The FDIC's deposit insurance premiums are assessed through a risk-based system
under which all insured depository institutions are placed into one of nine
categories and assessed insurance premiums based upon their level of capital and
supervisory evaluation. Under the system, institutions classified as
well-capitalized (i.e. a core capital ratio of at least 5%, a ratio of Tier 1 or
core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least
6% and a total risk-based capital ratio of at least 10%) pay the lowest premium
while institutions that are less than adequately capitalized (i.e. core or Tier
1 risk-based capital ratio of less than 4% or a total risk-based capital ratio
of less than 8%) and considered of substantial supervisory concern pay the
highest premium. Risk classification of all insured institutions is made by the
FDIC semi-annually.
In addition to the assessment for deposit insurance, savings institutions are
required to pay on bonds issued in the late 1980s by the Financing Corporation
to recapitalize the predecessor to the SAIF. By law, payments on Financing
Corporation obligations have been shared equally between the members of both
insurance funds since January 1, 2000. The Bank's annual deposit insurance
premium for the year ended September 30, 2002, including the Financing
Corporation payments, was approximately $44,000 based upon its current risk
classification and the new assessment schedule for SAIF insured institutions.
These premiums are subject to change in future periods.
The FDIC is authorized to increase assessment rates, on a semiannual basis, if
it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
Regulatory Capital
Currently, savings institutions are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations with the highest rating for safety and
soundness maintain "core capital" of at least 3% of total assets, with other
savings associations maintaining core capital of 4% to 5% of total assets,
depending on their condition. Core capital is generally defined as common
shareholders' equity (including retained income), noncumulative perpetual
preferred stock and related surplus, certain minority equity interests in
subsidiaries, purchased mortgage servicing rights and purchased credit card
relationships (subject to certain limits), less nonqualifying intangibles. Under
the tangible capital requirement, a savings bank must maintain tangible capital
(core capital less all intangible assets except purchased mortgage servicing
rights and purchased credit card relationships which may be included subject to
certain limits) of at least 1.5% of total assets. Under the risk-based capital
requirements, a minimum amount of capital must be maintained by a savings bank
to account for the relative risks inherent in the type and amount of assets held
by the savings bank. The total risk-based capital requirement requires a savings
bank to maintain capital (defined generally for these purposes as core capital
plus general valuation allowances and permanent or maturing capital instruments
such as preferred stock and subordinated debt less assets required to be
deducted) equal to 8.0% of risk-weighted assets. Assets are ranked as to risk in
one of four categories (0-100%) with a credit risk-free asset such as cash
requiring no risk-based capital and an asset with a significant credit risk such
as a non-accrual loan being assigned a factor of 100%. At September 30, 2002,
based on the capital standards then in effect, the Bank was in compliance with
all capital requirements imposed by law.
If an institution is not in compliance with its capital requirements, the OTS is
required to prohibit asset growth and to impose a capital directive that may
restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings bank that fails to meet its capital
requirements, which actions may include restrictions on operations and banking
activities, the imposition of a capital directive, a cease and desist order,
civil money penalties or harsher measures such as the appointment of a receiver
or conservator or a forced merger into another institution.
Prompt Corrective Action
Applicable Federal law requires that federal bank regulatory authorities take
"prompt corrective action" with respect to institutions that do not meet minimum
capital requirements. For these purposes, five capital tiers have been
established: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. At each
successively lower capital category, an institution is subject to more
restrictive and numerous mandatory or discretionary regulatory actions or
limits, and the OTS has less flexibility in determining how to resolve the
problems of the institution. OTS regulations define these capital levels as
follows: (1) well-capitalized institutions must have total risk-based capital of
at least 10%, core risk-based capital (consisting only of items that qualify for
inclusion in core capital) of at least 6% and a leverage ratio of at least 5%
and are not subject to any order or written directive of the OTS to maintain a
specific capital level for any capital measure; (2) adequately capitalized
associations are those that meet the regulatory minimum of total risk-based
capital of 8%, core risk-based capital of 4% and a leverage ratio of 4%, but
which are not well capitalized; (3) undercapitalized institutions are those that
do not meet the requirements for adequately capitalized institutions, but that
are not significantly undercapitalized; (4) significantly undercapitalized
institutions have total risk-based capital of less than 6%, core risk-based
capital of less than 3% and a leverage ratio of less than 3%; and (5) critically
undercapitalized institutions are those with tangible capital of less than 2% of
total assets. In addition, the OTS can downgrade an institution's designation
notwithstanding its capital level, based on less than satisfactory examination
ratings in areas other than capital or if the institution is deemed to be in an
unsafe or unsound condition. Each undercapitalized institution must submit a
capital restoration plan to the OTS within 45 days after it becomes
undercapitalized. Such institution will be subject to increased monitoring and
asset growth restrictions and will be required to obtain prior approval for
acquisitions, branching and engaging in new lines of business. Significantly
undercapitalized institutions must restrict the payment of bonuses and raises to
their senior executive officers. Furthermore, a critically undercapitalized
institution must be placed in conservatorship or receivership within 90 days
after reaching such capitalization level, except under limited circumstances. It
will also be prohibited from making payments on any subordinate debt securities
without the prior approval of the FDIC and will be subject to significant
additional operating restrictions. The Bank's capital at September 30, 2002,
meets the standards for a well-capitalized institution.
Capital Distributions Regulation
An OTS regulation imposes limitations upon all "capital distributions" by
savings institutions, including cash dividends, payments by an institution to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The OTS regulations permit a savings institution to make a capital
distribution to its shareholders in a maximum amount that does not exceed the
institution's undistributed net income for the prior two years plus the amount
of its undistributed income from the current year. The rule requires a savings
institution, such as the Bank, that is a subsidiary of a savings and loan
holding company to file a notice with the OTS thirty days before making a
capital distribution up to the maximum amount described above. The proposed rule
would also require all savings institutions, whether a holding company or not,
to file an application with the OTS prior to making any capital distribution
where the association is not eligible for "expedited processing" under the OTS
"Expedited Processing Regulation," where the proposed distribution, together
with any other distributions made in the same year, would exceed the "maximum
amount" described above, where the institution would be under capitalized
following the distribution or where the distribution would otherwise be contrary
to a statute, regulation or agreement with the OTS.
Federal Reserve System
Under FRB regulations, the Bank is required to maintain reserves against its
transaction accounts (primarily checking and NOW accounts) and non-personal
money market deposit accounts. The effect of these reserve requirements is to
increase the Bank's cost of funds. The Bank is in compliance with its reserve
requirements.
A federal savings bank, like other depository institutions maintaining
reservable accounts, may borrow from the Federal Reserve Bank "discount window,"
but the FRB's regulations require the savings bank to exhaust other reasonable
alternative sources, including borrowing from its regional FHLB, before
borrowing from the Federal Reserve Bank. Certain limitations are imposed on the
ability of undercapitalized depository institutions to borrow from Federal
Reserve Banks.
Transactions with Affiliates
Transactions between savings associations and any affiliate are governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings bank
is any company or entity which controls the savings bank, any company that is
under common control with the savings bank, or a bank or savings association
subsidiary of the savings bank. In a holding company context the parent holding
company of a savings bank (such as MFB) and any companies controlled by such
parent holding company are affiliates of the savings bank.
Generally, Sections 23A and 23B (i) limit the extent to which the savings bank
or its subsidiaries may engage in "covered transactions" with any one affiliate
to an amount equal to 10% of such institution's capital stock and surplus, and
contain an aggregate limit on all such transactions with all affiliates to an
amount equal to 20% of such capital stock and surplus and (ii) require that all
such transactions be on terms substantially the same, or at least as favorable,
to the institution or subsidiary as those provided to a non-affiliate. The term
"covered transaction" with respect to an affiliate of a financial institution
includes a loan to the affiliate, a purchase of assets from the affiliate, the
issuance of a guarantee on behalf of the affiliate, and similar types of
transactions.
In addition to the restrictions imposed by Sections 23A and 23B, no savings bank
may (i) loan or otherwise extend credit to an affiliate, except for any
affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes, or similar obligations of any affiliate other than shares of a bank or
savings association subsidiary of the savings bank.
The restrictions contained in Section 22(h) of the Federal Reserve Act on loans
to executive officers, directors and principal shareholders also apply to
savings associations. Under Section 22(h), loans to an executive officer and to
a greater than 10% shareholder of a savings bank (18% in the case of
institutions located in an area with less then 30,000 in population), and
certain affiliated entities of either, may not exceed together with all other
outstanding loans to such person and affiliated entities the association's
loan-to-one-borrower limit (generally equal to 15% of the institution's
unimpaired capital and surplus and an additional 10% of such capital and surplus
for loans fully secured by certain readily marketable collateral). Section 22(h)
also prohibits certain loans, above amounts prescribed by the appropriate
federal banking agency, to directors, executive officers and greater than 10%
shareholders of a savings bank, and their respective affiliates, unless such
loan is approved in advance by a majority of the board of directors of the
institution with any "interested" director not participating in the voting.
Currently, the FRB requires board of director approval for certain loans to
directors, officers, and 10% shareholders (including all other outstanding loans
to such persons) above the greater of $25,000 or 5% of capital and surplus (up
to $500,000). Further, the FRB requires that loans to directors, executive
officers and principal shareholders be made on terms substantially the same as
offered in comparable transactions to other unaffiliated parties. Section 22(g)
of the Federal Reserve Act, which imposes limitations on loans made to executive
officers, also applies to savings institutions.
Holding Company Regulation
Under current law, MFB is regulated as a "non-diversified unitary savings and
loan holding company" within the meaning of the Home Owners' Loan Act, as
amended ("HOLA"), and subject to regulatory oversight of the Director of the
OTS. As such, MFB is registered with the OTS and thereby subject to OTS
regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, the Bank is subject to certain
restrictions in its dealings with MFB and with other companies affiliated with
MFB.
HOLA generally prohibits a savings and loan holding company, without prior
approval of the Director of the OTS, from (i) acquiring control of any other
savings bank or savings and loan holding company or controlling the assets
thereof or (ii) acquiring or retaining more than 5 percent of the voting shares
of a savings bank or holding company thereof which is not a subsidiary.
Additionally, under certain circumstances a savings and loan holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15
percent of previously unissued voting shares of an under-capitalized savings
bank for cash without that savings bank being deemed controlled by the holding
company. Except with the prior approval of the Director of the OTS, no director
or officer of a savings and loan holding company or person owning or controlling
by proxy or otherwise more than 25% of such company's stock, may also acquire
control of any savings institution, other than a subsidiary institution, or any
other savings and loan holding company.
Under current law, there are generally no restrictions on the permissible
business activities of a unitary savings and loan holding company. However, if
the Director of OTS determines that there is reasonable cause to believe that
the continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial safety, soundness, or stability of
its subsidiary savings bank, the Director of the OTS may impose such
restrictions as deemed necessary to address such risk and limiting (i) payment
of dividends by the savings bank, (ii) transactions between the savings bank and
its affiliates, and (iii) any activities of the savings bank that might create a
serious risk that the liabilities of the holding company and its affiliates may
be imposed on the savings bank. Further, the recently enacted Gramm-Leach-Bliley
Act prohibits a company that engages in activities in which a multiple thrift
holding company or financial holding company may not engage from acquiring a
savings and loan holding company, such as MFB.
Notwithstanding the above rules as to permissible business activities of unitary
savings and loan holding companies, if the savings bank subsidiary of such a
holding company fails to meet the Qualified Thrift Lender ("QTL") test, then
such unitary holding company must, within one year of the savings association's
failure to meet the QTL test, register as a bank holding company and become
subject to all of the provisions of the Bank Holding Company Act of 1956.
See-"Qualified Thrift Lender." At September 30, 2002, the Bank's asset
composition was in excess of that required to qualify the Bank as a Qualified
Thrift Lender.
If MFB were to acquire control of another savings institution other than through
a merger or other business combination with the Bank, MFB would thereupon become
a multiple savings and loan holding company. Except where such acquisition is
pursuant to the authority to approve emergency thrift acquisitions and where
each subsidiary savings bank meets the QTL test, the activities of MFB and any
of its subsidiaries (other than the Bank or other subsidiary savings
associations) would thereafter be subject to further restrictions. HOLA provides
that, among other things, no multiple savings and loan holding company or
subsidiary thereof which is not a savings bank shall commence or continue for a
limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof, any business activity other than (i) furnishing
or performing management services for a subsidiary savings bank, (ii) conducting
an insurance agency or escrow business, (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings institution, (iv) holding
or managing properties used or occupied by a subsidiary savings institution, (v)
acting as trustee under deeds of trust, (vi) those activities previously
directly authorized by the FSLIC by regulation as of March 5, 1987, to be
engaged in by multiple holding companies or (vii) those activities authorized by
the FRB as permissible for bank holding companies, unless the Director of the
OTS by regulation prohibits or limits such activities for savings and loan
holding companies. Those activities described in (vii) above must also be
approved by the Director of the OTS prior to being engaged in by a multiple
holding company. The OTS has taken the position that multiple holding companies
may also engage in activities that are financial in nature as prescribed in
Section 4(k) of the Bank Holding Company Act of 1956, as amended.
The Director of the OTS may also approve acquisitions resulting in the formation
of a multiple savings and loan holding company which controls savings
institutions in more than one state, if the multiple savings and loan holding
company involved controls a savings bank which operated a home or branch office
in the state of the institution to be acquired as of March 5, 1987, or if the
laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state-chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
institutions in more than one state in the case of certain emergency thrift
acquisitions.
No subsidiary savings bank of a savings and loan holding company may declare or
pay a dividend on its permanent or nonwithdrawable stock unless it first gives
the Director of the OTS 30 days advance notice of such declaration and payment.
Any dividend declared during such period or without the giving of such notice
shall be invalid.
Branching
The OTS has adopted regulations which permit nationwide branching to the extent
permitted by federal statute. Federal statutes permit federal savings
institutions to branch outside of their home state if the institution meets the
domestic building and loan test in Section 7701 (a)(l 9) of the Internal Revenue
Code of 1986, as amended (the "Code") or the asset composition test of Section
770 1 (c) of the Code. Branching that would result in the formation of a
multiple savings and loan holding company controlling savings institutions in
more than one state is permitted if the law of the state in which the savings
bank to be acquired is located specifically authorizes acquisition of its
state-chartered institutions by state-chartered institutions or their holding
companies in the state where the acquiring institution or holding company is
located.
Federal Securities Law
The shares of Common Stock of MFB are registered with the SEC under the 1934
Act. MFB is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the 1934 Act and the rules of the SEC
thereunder.
If MFB has fewer than 300 shareholders, it may deregister its shares under the
1934 Act and cease to be subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of MFB may not be
resold without registration or unless sold in accordance with the resale
restrictions of Rule 144 under the 1933 Act. If MFB meets the current public
information requirements under Rule 144, each affiliate of MFB who complies with
the other conditions of Rule 144 would be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of (i) 1% of the outstanding shares of MFB or (ii) the
average weekly volume of trading in such shares during the preceding four
calendar weeks.
Loans to One Borrower
Under OTS regulations, the Bank may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. Additional amounts may be lent, not in excess of 10% of unimpaired
capital and surplus, if such loans or extensions of credit are fully secured by
readily marketable collateral, including certain debt and equity securities but
not including real estate. In some cases, a savings bank may lend up to 30% of
unimpaired capital and surplus to one borrower for purposes of developing
domestic residential housing, provided that the savings bank meets its
regulatory capital requirements and the OTS authorizes the savings bank to use
this expanded lending authority. At September 30, 2002, the Bank did not have
any loans or extensions of credit to a single or related group of borrowers in
excess of its regulatory lending limits. Management does not believe that the
loans-to-one-borrower limits will have a significant impact on the Bank's
business operations or earnings.
Qualified Thrift Lender
Under current OTS regulations, the QTL test requires that a savings bank have at
least 65% of its portfolio assets invested in "qualified thrift investments" on
a monthly average basis in 9 out of every 12 months. Qualified thrift
investments under the QTL test consist primarily of housing related loans and
investments. Portfolio assets under the QTL test include all of an association's
assets less (i) goodwill and other intangibles, (ii) the value of property used
by the association to conduct its business, and (iii) its liquid assets as
required to be maintained under law up to 20% of total assets.
A savings bank which fails to meet the QTL test must either convert to a bank
(but its deposit insurance assessments and payments will be those of and paid to
SAIF) or be subject to the following penalties: (i) it may not enter into any
new activity except for those permissible for a national bank and for a savings
bank; (ii) its branching activities shall be limited to those of a national
bank; and (iii) it shall be bound by regulations applicable to national banks
respecting payment of dividends. Three years after failing the QTL test the
association must dispose of any investment or activity not permissible for a
national bank and a savings bank. If such a savings bank is controlled by a
savings and loan holding company, then such holding company must, within a
prescribed time period, become registered as a bank holding company and become
subject to all rules and regulations applicable to bank holding companies.
A savings bank failing to meet the QTL test may re-qualify as a QTL if it
thereafter meets the QTL test. In the event of such re-qualification it shall
not be subject to the penalties described above. A savings bank which
subsequently again fails to qualify under the QTL test shall become subject to
all of the described penalties without application of any waiting period.
At September 30, 2002, 83.06% of the Bank's portfolio assets (as defined on that
date) were invested in qualified thrift investment (as defined on that date),
and therefore the Bank's asset composition was in excess of that required to
qualify the Bank as a QTL. Also, the Bank does not expect to significantly
change its lending or investment activities in the near future, and therefore
expects to continue to qualify as a QTL, although there can be no such
assurance.
Community Reinvestment Act Matters
Under current law, ratings of depository institutions under the Community
Reinvestment Act of 1977 must be disclosed. This disclosure includes both a four
tier descriptive rating using terms such as satisfactory and unsatisfactory and
a written evaluation of each institutions performance. The Bank offers programs
that meet the needs of all buyers including loans to first time homebuyers that
require no down payment. Borrowers living or purchasing homes in low-income
areas pay reduced closing costs. The Bank is also actively involved with lending
consortiums that provide market rate loans to low and moderate-income families
that are unable to obtain mortgages through the traditional lending channels.
The OTS has determined that the Bank has a satisfactory record of meeting
community credit needs.
TAXATION
Federal Taxation
Historically, savings institutions, such as the Bank, had been permitted to
compute bad debt deductions using either the bank experience method or the
percentage of taxable income method. However, in August, 1996, legislation was
enacted that repealed the reserve method of accounting for federal income tax
purposes. As a result, the Bank must recapture that portion of the reserve that
exceeds the amount that could have been taken under the experience method for
post-1987 tax years. The recapture is occurring over a six-year period, the
commencement of which began with the Bank's taxable year ending September 30,
1999, since the Bank met certain residential lending requirements. In addition,
the pre-1988 reserve, for which no deferred taxes have been recorded, will not
have to be recaptured into income unless (i) the Bank no longer qualifies as a
bank under the Code, or (ii) excess dividends or distributions are paid out by
the Bank. The remaining amount of bad debt to be recaptured is approximately
$437,000.
Depending on the composition of its items of income and expense, a savings bank
may be subject to the alternative minimum tax. A savings bank must pay an
alternative minimum tax equal to the amount (if any) by which 20% of alternative
minimum taxable income ("AMTI"), as reduced by an exemption varying with AMTI,
exceeds the regular tax due. AMTI equals regular taxable income increased or
decreased by certain tax preferences and adjustments, including depreciation
deductions in excess of that allowable for alternative minimum tax purposes,
tax-exempt interest on most private activity bonds issued after August 7, 1986
(reduced by any related interest expense disallowed for regular tax purposes),
the amount of the bad debt reserve deduction claimed in excess of the deduction
based on the experience method and 75% of the excess of adjusted current
earnings over AMTI (before this adjustment and before any alternative tax net
operating loss). AMTI may be reduced only up to 90% by net operating loss
carryovers, but alternative minimum tax paid can be credited against regular tax
due in later years.
For federal income tax purposes, MFB reports its income and expenses on the
accrual method of accounting. MFB, the Bank and its subsidiaries file a
consolidated federal income tax return for each fiscal year ending September 30.
The federal income tax returns filed by MFB have not been audited in the last
five years.
State Taxation
The Bank is subject to Indiana's Financial Institutions Tax ("FIT"), which is
imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross
income," for purposes of FIT, begins with taxable income as defined by Section
63 of the Code and, thus, incorporates federal tax law to the extent that it
affects the computation of taxable income. Federal taxable income is then
adjusted by several Indiana modifications. Currently, income from the Bank's
subsidiaries MFB Investment, I, Inc., MFB Investments II, Inc. and MFB
Investments, LP is not subject to the FIT. Other applicable state taxes include
generally applicable sales and use taxes plus real and personal property taxes.
MFB's state income tax returns have not been audited in the last five years.
Item 2. Properties.
At September 30, 2002, MFB Financial conducted its business from its main office
at 121 South Church Street, Mishawaka, Indiana 46544, and six full service
financial centers. The main office and four branch offices are owned by MFB
Financial, while the Goshen office and the new South Bend office are leased. A
new branch office in Elkhart is currently under construction and expected to
open in February 2003.
The following table provides certain information with respect to MFB Financial's
offices as of September 30, 2002:
Year Approximate
Description and Address Opened Square Footage
Main Office
121 S. Church Street
Mishawaka, IN 46544 1961 13,738
Branch Office
411 W. McKinley Ave.
Mishawaka, IN 46545 1975 4,800
Branch Office
402 W. Cleveland Rd.
Mishawaka, IN 46545 1977 2,540
Branch Office
2427 Mishawaka Ave.
South Bend, IN 46615 1978 2,600
Branch Office (Wal*Mart)
2304 Lincolnway East
Goshen, In. 46526 1997 500
Branch Office
25990 County Road 6
Elkhart, In. 46514 1999 3,250
Branch Office
100 E. Wayne St., Suite 150
South Bend, In. 46601 2000 3,222
MFB Financial operates seven automatic teller machines (ATMs), one at each
office listed above. MFB Financial's ATMs participate in the nationwide CIRRUS
ATM network.
MFB Financial owns computer and data processing equipment which is used for
transaction processing and accounting. MFB Financial also has contracted for the
data processing and reporting services of BISYS, Inc. in Houston, Texas. The
cost of these data processing services is approximately $55,000 per month.
Item 3. Legal Proceedings.
The Bank is involved in various legal actions arising in the normal course of
its business. In the opinion of management, the resolutions of these legal
actions are in the aggregate not expected to have a material adverse effect on
the Company's results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of MFB's shareholders during the quarter ended
September 30, 2002.
Item 4.5. Executive Officers of Registrant.
Presented below is certain information regarding the executive officers of MFB
and MFB Financial:
Name Position
---- --------
Charles J. Viater President and Chief Executive Officer of MFB
and MFB Financial
Donald R. Kyle Executive Vice President and Chief Operating Officer
of MFB Financial
Thomas J. Flournoy Vice President and Chief Financial Officer
of MFB Financial
M. Gilbert Eberhart Secretary of MFB and MFB Financial
Charles J. Viater (age 48) has served as President and Chief Executive Officer
of MFB Financial since September 1, 1995. Previously, he served as Chief
Financial Officer of Amity Bancshares and Executive Vice President of Amity
Federal Savings in Tinley Park, Illinois.
Donald R. Kyle (age 55) has served as Executive Vice President and Chief
Operating Officer of MFB Financial since July, 1999. Previously, he served as
Regional President of a midwest money center bank.
Thomas J. Flournoy (age 47) began serving as Vice President and Chief Financial
Officer in October, 2001. Previously, he served as Vice President and Controller
of a regional midwest bank.
M. Gilbert Eberhart (age 68) has served as Secretary of MFB Financial since 1987
and of MFB since its organization. He is also a dentist based in Mishawaka.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Information concerning the market price of and dividends paid on the common
stock of MFB and related shareholder matters is incorporated by reference to
page 46 of MFB's Annual Report to Shareholders for the fiscal year ended
September 30, 2002 (The "Annual Report"). MFB sold no equity securities during
the period covered by this report that were not registered under the Securities
Act of 1933
Since MFB has no independent operations or other subsidiaries to generate
income, its ability to accumulate earnings for the payment of cash dividends to
its shareholders is directly dependent upon the earnings on its investment
securities and ability of the Bank to pay dividends to MFB.
Under OTS regulations, a converted savings bank may not declare or pay a cash
dividend if the effect would be to reduce net worth below the amount required
for the liquidation account created at the time it converted. In addition, under
OTS regulations, the extent to which a savings bank may make "capital
distributions" is limited (See "Regulation - Capital Distributions Regulation.")
Prior notice of any dividend to be paid by the Bank will have to be given to the
OTS.
Any dividend distributions in excess of current or accumulated earnings and
profits will be treated for federal income tax purposes as a distribution from
the Bank's accumulated bad debt reserves, which could result in increased
federal income tax liability for the Bank.
Unlike the Bank, generally there is no restriction on the payment of dividends
by MFB, subject to the determination of the director of the OTS that there is
reasonable cause to believe that the payment of dividends constitutes a serious
risk to the financial safety, soundness or stability of the Bank. Indiana law,
however, would prohibit MFB from paying a dividend if, after giving effect to
the payment of that dividend, MFB would not be able to pay its debts as they
become due in the ordinary course of business, or if MFB's total assets would be
less than the sum of its total liabilities plus preferential rights of holders
of preferred stock, if any.
See Item 12 for disclosure required about certain equity compensation plans.
Item 6. Selected Financial Data.
The information required by this item is incorporated by reference to the
material under the heading "Selected Consolidated Financial Data" on page 2 of
MFB's Annual Report to Shareholders for its fiscal year ended September 30, 2002
(the "Annual Report").
Item 7.Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required by this item is incorporated by reference to pages 3
through 17 of the Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated by reference to pages 9
through 11 of the Annual Report.
Item 8. Financial Statements and Supplementary Data
MFB's Consolidated Financial Statements and Notes thereto contained on pages 18
through 44 of the Annual Report are incorporated herein by reference. MFB's
Supplementary Data is contained on page 44 of the Annual Report and is
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is incorporated
by reference to page 4 of MFB's Proxy Statement for its 2002 Annual Shareholder
Meeting (the "Proxy Statement"). Information concerning MFB's executive officers
is included in Item 4.5 in Part I of this report. Information concerning
compliance by such persons with Section 16(a) of the 1934 Act is incorporated by
reference to page 3 of the Proxy Statement.
Item 11. Executive Compensation
The information required by this item with respect to executive compensation is
incorporated by reference to pages 6 through 11 of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
The following table provides the information about MFB's common stock that may
be issued upon the exercise of options and rights under all existing equity
compensation plans as of September 30, 2002.
Number of securities remaining
available for future issuance
under equity compensation plans
Number of securities to be as of September 30, 2002
issued upon exercise of Weighted-average exercise (excluding securities reflected
outstanding options, warrants price of outstanding options, in column (a)
and rights as of September 30, warrants and rights (c)
2002 (b)
(a)
Plan category
Equity compensation plans approved
by security holders 185,950 (1) $ 17.53 (1) 153,500 (1)
Equity compensation plans not approved
by security holders - - -
Total 185,950 $ 17.53 153,500
(1) Includes the following plans: MFB's stock option plan, 1997 stock option
plan and 2002 stock option plan.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to page 12 of
the Proxy Statement.
PART IV
Item 14. Controls and Procedures
a) Evaluation of disclosure controls and procedures. MFB's chief executive
officer and chief financial officer, after evaluating the effectiveness
of MFB's disclosure controls and procedures (as defined in Sections 13a
- 14(c) and 15d - 14(c) of the Securities Exchange Act of 1934, as
amended), as of a date (the "Evaluation Date") within 90 days before
the filing date of this annual report, have concluded that as of the
Evaluation Date, MFB's disclosure controls and procedures were adequate
and are designed to ensure that material information relating to MFB
would be made known to such officers by others within MFB.
b) Changes in internal controls. There were no significant changes in
MFB's internal controls or in other factors that could significantly
affect these controls subsequent to the Evaluation Date.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following financial statements are incorporated by reference as part of
this report:
Pages in the Annual
Report to Shareholders
Financial Statements
Report of Independent Auditors 18
Consolidated Balance Sheets at September 30, 2002 and 2001 19
Consolidated Statements of Income for the Years Ended
September 30, 2002, 2001 and 2000 20
Consolidated Statements of Shareholders' Equity for
the Years ended September 30, 2002, 2001 and 2000 21
Consolidated Statements of Cash Flows for the Years ended
September 30, 2002, 2001 and 2000 22-23
Notes to Consolidated Financial Statements 24-44
(b) MFB filed seven Form 8-K reports during the year ended September 30, 2002.
Date of report: October 18, 2001
Item reported : News release dated October 18, 2001, regarding
the announcement of its fourth quarter earnings and
declaration of an $.10 per share cash dividend, payable on
November 13, 2001, to shareholders of record on October
30, 2001.
Date of report: January 16, 2002
Item reported: News release dated January 16, 2002, regarding
the announcement of first quarter earnings and the
declaration of a $.105 per share cash dividend payable on
February 12, 2002 to holders of record on January 29,
2002.
Date of report: April 17, 2002
Item reported: News release dated April 17, 2002, regarding the
announcement of second quarter earnings and declaration of
a $.105 per share cash dividend payable on May 14, 2002 to
holders of record on April 30, 2002.
Date of report: June 19, 2002
Item reported : News release dated June 19, 2002 regarding the
announcement of third quarter charge to earnings related
to a specific commercial loan customer.
Date of report: July 2, 2002
Item reported : News release dated July 2,2002, regarding the announcement
of third quarter charge to earnings for WorldCom Inc.
Investment.
Date of report: July 18, 2002
Item reported : News release dated July 18, 2002, regarding the
announcement of third quarter earnings and declaration of a
$.105 per share cash dividend payable on August 13, 2002 to
holders of record on July 30, 2002.
Date of report: August 13, 2002
Item reported : News release dated August 13, 2002, MFB Corp
files Form 10Q which revises previously announced financial
results.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on page 50.
(d) All schedules are omitted as the required information either is not
applicable or is included in the consolidated Financial Statements or
related notes.
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant had duly caused this report to be signed
on behalf of the undersigned, thereto duly authorized.
MFB CORP.
Date: December 24, 2002 By: /s/ Charles J Viater
--------------------
Charles J. Viater,President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Charles J. Viater /s/ M. Gilbert Eberhart
- --------------------- -----------------------------
Charles J. Viater M. Gilbert Eberhart, Director
President, Chief Executive Officer
and Director Date: /s/ December 23, 2002
(Principal Executive Officer) ---------------------
/s/ Thomas F. Hums
Date: /s/ December 23, 2002 ------------------------------
--------------------- Thomas F. Hums,
Chairman of the Board
Date: /s/ December 23, 2002
-----------------------
/s/ Thomas J. Flournoy /s/ Johnathan E. Kintner
- ---------------------- ------------------------------
Thomas J. Flournoy Jonathan E. Kintner, Director
Vice President and
Chief Financial Officer Date: /s/ December 23, 2002
(Principal Financial and Accounting ---------------------
Officer)
/s/ Christine A. Lauber
-----------------------------
Christine A. Lauber, Director
Date: /s/ December 23, 2002 Date: /s/ December 23, 2002
--------------------- ---------------------
/s/ Michael J. Marien
-----------------------------
Michael J. Marien, Director
Date: /s/ December 23, 2002
---------------------
/s/ Reginald H. Wagle
-----------------------------
Reginald H. Wagle, Director
Date: /s/ December 23, 2002
---------------------
CERTIFICATION
I, Charles J. Viater , certify that:
1. I have reviewed this annual report on Form 10-K of MFB Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date:/s/ December 23, 2002
/s/ Charles J. Viater, Chief Executive Officer
----------------------------------------------
Charles J. Viater
Chief Executive Officer
CERTIFICATION
I, Thomas J. Flournoy, certify that:
1. I have reviewed this annual report on Form 10-K of MFB Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: /s/ December 23, 2002
/s/ Thomas J. Flournoy, Chief Financial Officer
-----------------------------------------------
Thomas J. Flournoy
Chief Financial Officer
CERTIFICATION
By signing below, each of the undersigned officers hereby certifies
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to his knowledge, (i) this report fully
complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and (ii) the information contained in this report fairly
presents, in all material respects, the financial condition and results of
operations of MFB Corp.
Signed this 23rd day of December, 2002.
/s/ Thomas J. Flournoy /s/ Charles J. Viater
- --------------------------------- ---------------------------------
(Signature of Authorized Officer) (Signature of Authorized Officer)
Thomas J. Flournoy Charles J. Viater
- --------------------------------- ---------------------------------
(Typed Name) (Typed Name)
Chief Financial Officer Chief Executive Officer
- --------------------------------- ---------------------------------
(Title) (Title)
EXHIBIT LIST
Exhibit Index
3(l) The Articles of Incorporation of the Registrant is incorporated by
Reference to Exhibit 3(l) to the Registration Statement on Form S-
I (Registration No. 33-73098).
3(2) The Code of By-Laws of Registration is incorporated by reference to
Item 7-Exhibit 3 of the October 15, 1995 Securities and Exchange
Commission Form 8K Report.
10(1) MFB Financial Recognition and Retention Plans and Trusts are
incorporated by reference to Exhibit B to the Registrants
definitive Proxy Statement in respect of its 1996 Annual
Shareholder Meeting.*
10(2) MFB Corp. Stock Option Plan is incorporated by reference to Exhibit
A to the Registrant's definitive Proxy Statement in respect of its
1996 Annual Shareholder Meeting.*
10(3) The MFB Corp. 1997 Stock Option Plan is incorporated by reference
to Exhibit A to the Registrant's definitive Proxy Statement in
respect of its 1997 Annual Shareholder Meeting. *
10(4) MFB Corp. 2002 Stock Option Plan is incorporated by reference to
Exhibit A to the Registrant's definitive proxy statement in respect
of its 2001 Annual Shareholder Meeting. *
10(5) Employment Agreement between MFB Financial and Charles J. Viater is
incorporated by reference to Exhibit 10(3) to the Registrant's Form
10-K filed for its fiscal year ended September 30, 1997. *
10(6) Employment Agreement between MFB Financial and Donald R. Kyle dated
July 1, 1999 is incorporated by reference to Exhibit 10(8) to the
Registrant's Form 10-K filed for its fiscal year end September 30,
2000. *
10(7) Employment Agreement between MFB Financial and Thomas J. Flournoy
dated October 22, 2001.
11 Statement regarding computation of
earnings per share (**)
13 Shareholder Annual Report.
21 Subsidiaries of the Registrant.
23 Consent of Crowe, Chizek and
Company LLP.
* Management contracts and plans required to be filed as exhibits are included
as Exhibits 10(1) - 10(7).
** See Notes 1 and 2 of Notes to Consolidated Financial Statements, included in
the 2002 Shareholder Annual Report as Exhibit 13.