MFB Corp. Announces Fourth Quarter Earnings.

MISHAWAKA, Ind. -- MFB Corp. (NASDAQ:MFBC), parent company of MFB Financial (the "Bank"), reported today its consolidated financial results on an unaudited basis of $954,000, or $0.69 diluted earnings per share for the three months ended September 30, 2006, a decrease from net income of $1.2 million, or $0.87 diluted earnings per share, for the three months ended September 30, 2005. MFB Corp's consolidated net income for the year ended September 30, 2006 was $2.2 million, or $1.56 diluted earnings per share, compared to $2.5 million, or $1.81 diluted earnings per share, for the same period last year.

Charles J. Viater, President and CEO, stated, "The partially inverted yield curve has presented a challenging environment for maintaining consistent earnings. However, we have and will continue to monitor closely our net interest margin, noninterest income and noninterest expense. As announced on October 20, 2006, we recently declared a 32% increase in the dividend from one year ago to a record $0.165 per share."

MFB Corp's net interest income before provision for loan losses for the three month period ended September 30, 2006 was $3.2 million compared to $3.9 million for the same period last year. For the year ended September 30, 2006 and 2005, net interest income before provision for loan losses was $13.5 million and $14.7 million, respectively. The decrease in net interest income was predominantly due to an increase in deposit interest expense, offset in part by an increase in interest income and a decrease in FHLB (Federal Home Loan Bank) advance interest expense. Interest expense on deposits increased to $2.5 million for the September 2006 quarter compared to $2.1 million for the September 2005 quarter, and increased to $9.0 million from $7.0 million for the comparable year end. Interest income was $7.1 million for the three months ended September 30, 2006 compared to $7.4 million for the three months ended September 30, 2005, and for the year ended September 30, 2006 and September 30, 2005 was $28.6 million and $27.9 million respectively.

MFB recorded a loan loss recovery of $835,000 for the three months ended September 30, 2006, compared to a provision for loan losses of $91,000 for the three months ended September 30, 2005. The recovery was predominantly related to the payments received on a commercial loan which had been fully reserved since December 31, 2005. As of September 30, 2006, the fully reserved loan balance was $3.1 million and the commercial loan customer was in compliance with a forbearance agreement dated September 8, 2006. The agreement provides for full payment of the outstanding debt by December 31, 2006. However, the Bank maintained the $3.1 million allowance for the loan losses allocation at September 30, 2006 based upon the history of unreliable and inconsistent financial reporting and cash flows of the customer's business. The provision for loan losses increased from $723,000 for the year ended September 30, 2005 to $1.0 million for the year ended September 30, 2006. The increased provision during the year ended September 30, 2006 was primarily related to the commercial loan customer discussed above.

Noninterest income increased from $5.0 million for the twelve months ended September 30, 2005 to $6.3 million for the same period ended September 30, 2006. The year to date increase was primarily the result of the first quarter non-cash impairment charge to earnings in December, 2004 of $948,000 ($626,000 net of tax) resulting from a decline in value of $2.0 million of Fannie Mae ("FNMA") and $2.0 million of Freddie Mac ("FHLMC") floating rate preferred stock securities MFB holds. The Company had no losses on securities in fiscal year 2006. In addition, lease rental income from space in the Company's corporate headquarters increased by $443,000 over fiscal 2005. Two nonrecurring items affected noninterest income in the twelve months ending September 30, 2006, a gain of $238,000 related to a called FHLB advance and a gain of $200,000 from a sale of the Company's Insurance subsidiary property and casualty book of business. The Bank's wholly-owned subsidiary, Mishawaka Financial Services, Inc., continues to offer a variety of life and health insurance products to customers in the Bank's market area.

Noninterest expense increased from $15.8 million for the twelve months ended September 30, 2005 to $16.4 million for the twelve month period ending September 30, 2006, and increased from $4.0 million for the quarter ending September 30, 2005 to $4.2 million for the quarter ending September 30, 2006. Salaries and employee benefits were $7.5 million and $7.9 million at September 30, 2005 and 2006 respectively; occupancy and equipment expenses increased from $3.1 million at September 30, 2005 to $3.4 million at September 30, 2006; and the loss on sale of fixed assets was $229,000 for the twelve months ending September 30, 2006 predominantly due to the sale of a branch building and real estate. In June, 2006, the Bank disposed of a building and real estate which was originally purchased from Sobieski Bancorp in August 2004 as part of the acquisition of certain assets and liabilities. The building served as Sobieski's headquarters and contained space beyond the typical needs of MFB's current financial centers. In order to reduce future operating expenses, the building was sold at a loss of $189,000 and a new, smaller facility was constructed on an adjacent parcel of vacant land. Other expenses decreased from $3.8 million for the twelve months ending September 30, 2005 to $3.6 million for the same period in 2006.

MFB Corp.'s total assets were $496.1 million at September 30, 2006 compared to $554.9 million at September 30, 2005. A decrease in cash and cash equivalents from $54.2 million at September 30, 2005 to $16.3 million at September 30, 2006 was predominantly due to the net repayment of FHLB advances totaling $28.8 million during the year ended September 30, 2006. Loans receivable were $379.2 million at September 30, 2006, a decrease of $11.5 million from $390.7 million as of September 30, 2005. Residential mortgage loans increased $7.2 million from $192.0 million at September 30, 2005 to $199.2 million at September 30, 2006, offset by commercial loans outstanding decreasing by $23.4 million from $157.8 million at September 30, 2005 to $134.4 million at September 30, 2006. Consumer loan receivables, which include home equity term loans and lines of credit, increased $4.7 million to $45.6 million. Investment securities available for sale decreased from $63.6 million at September 30, 2005 to $58.4 million at September 30, 2006.

MFB Corp.'s allowance for loan losses at September 30, 2006 was $7.2 million or 1.91% of loans, comparable to the $6.4 million or 1.63% of loans at the end of last year. The ratio of nonperforming loans to loans was 0.36% at September 30, 2005 compared to 1.85% at September 30, 2006. Based on the evaluation of many factors including current economic conditions, changes in the character and size of the loan portfolio, current and past delinquency trends and historical and estimated net charge-offs, the Company provided $1.0 million to its allowance for loan losses during the year ended September 30, 2006 compared to $723,000 for the prior year ended September 30, 2005. Total year net charge-offs were $190,000 for the year ended September 30, 2006 and $409,000 for the year ended September 30, 2005. In management's opinion, the allowance for loan losses is adequate to cover probable incurred losses at September 30, 2006.

Total liabilities decreased $59.1 million during the year, from $516.2 million at September 30, 2005 to $457.1 million at September 30, 2006. The decrease was predominantly due to a measured reduction in above-average cost deposit products and the repayment of FHLB Advances. Total deposits declined by $28.2 million since September 30, 2005, from $374.4 million to $346.2 million; savings, NOW and MMDA deposits decreased $24.6 million, while time deposits increased by $3.4 million. Advances from the FHLB decreased $28.8 million, from $125.9 million at September to $97.1 million at September 30.

Total shareholders' equity increased from $38.7 million as of September 30, 2005 to $38.9 million as of September 30, 2006. The increases to equity resulted from net income of $2.2 million and $218,000 generated from the exercise of stock options, offset by $1.5 million in purchases of treasury stock and cash dividend payments of $713,000. The book value of MFB Corp. common stock, based on the actual number of shares outstanding, increased from $28.52 at September 30, 2005 to $29.48 at September 30, 2006.

MFB Corp.'s wholly-owned bank subsidiary, MFB Financial, provides retail and business financial services to the Michiana area through its eleven banking centers in St. Joseph and Elkhart counties and private client services to the Indianapolis market through its office in Hamilton County. For more information, go to www.mfbbank.com.

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