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.
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:
(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. 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.
(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. I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
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.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
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
The following table sets forth the amortized cost and estimated market value of Federal Home Loan Bank (FHLB) stock:
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:
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.
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:
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.
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.
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.
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.
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 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.
(1) Includes home equity and second mortgage loans, repossessed assets, and other loans including, education loans and loans secured by deposits.
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.
V. DEPOSITS
The average amount of deposits and average rates paid are summarized as follows for the years ended September 30:
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
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:
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.
The following table sets forth the Bank's borrowings at the dates indicated:
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.
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.
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.
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.
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.
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.
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.
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.
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.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not Applicable.
PART III
Item 10.
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.
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.
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.
(1) Includes the following plans: MFB's stock option plan, 1997 stock option plan and 2002 stock option plan.
Item 13.
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.
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.
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.