ANNUAL REPORT
                                 TO SHAREHOLDERS



                                TABLE OF CONTENTS
                                                                            Page

Letter to Shareholders ....................................................   1
Selected Consolidated Financial Data ......................................   2
Management's Discussion and Analysis ......................................   3
Report of Independent Auditors ............................................  18
Consolidated Balance Sheets ...............................................  19
Consolidated Statements of Income .........................................  20
Consolidated Statements of Shareholders' Equity ...........................  21
Consolidated Statements of Cash Flows .....................................  23
Notes to Consolidated Financial Statements ................................  25
Directors and Officers ....................................................  51
Shareholder Information ...................................................  52


DESCRIPTION OF BUSINESS

MFB Corp.  is an Indiana  corporation  organized in December  1993,  to become a
unitary savings and loan holding company. MFB Corp. became a unitary savings and
loan holding  company upon the  conversion of MFB  Financial,  formerly known as
Mishawaka  Federal  Savings (the "Bank") from a federal  mutual savings and loan
association to a federal stock savings bank in March 1994. MFB Corp. is the sole
shareholder of the Bank. MFB Corp. and the Bank (collectively referred to as the
"Company")  conduct business from their main office in Mishawaka,  Indiana,  and
five branch  locations in St. Joseph and Elkhart  Counties of Indiana.  The Bank
offers a variety of lending,  deposit and other financial services to its retail
and  commercial  customers.  The  Bank's  wholly-owned   subsidiary,   Mishawaka
Financial  Services,  Inc.  ("Mishawaka  Financial"),  is engaged in the sale of
credit life,  general fire and accident,  car, home, and life insurance as agent
for the Bank's customers and the general public.




<PAGE>



                                                         1
TO OUR SHAREHOLDERS

On behalf of our employees, the Board of Directors and myself, it is my pleasure
to provide you with the 1998 Annual  Report of MFB Corp.  (the  "Company"),  the
holding  company for MFB  Financial  (the "Bank").  In March of 1994,  after the
formation of MFB Corp.,  the Bank  converted to a federal stock savings bank and
this report summarizes our fourth full year of operation as a stock company.

I am pleased to report that a number of milestones  were achieved this past year
and that we have further  positioned the Company to compete  successfully in the
fiercely  competitive   financial  services  industry.   We  have  developed  an
infrastructure  to support the delivery of quality products and services to such
an extent that we can  aggressively  market  ourselves to the consumer and small
business  segments of our community with renewed  confidence.  By increasing our
Company-wide  commitment to the development of new customer  relationships,  the
strategic  goals of growth and  diversification  continue  to be  realized.  MFB
Financial is a full service  banking  organization  offering the wide variety of
products,   services  and  delivery   systems   necessary  to  grow  and  remain
competitive.  As we look at the financial highlights of the past year, I believe
you will agree that the Company and the Bank have taken another  important  step
forward.

Total assets of the Company grew by more than $59 million  during the past year,
representing  the largest  growth ever achieved by the Company in a single year.
The Bank's loan portfolio grew by more than $44 million, which ranks second only
to last year's increase. A strategic emphasis on increasing both the residential
and small business  lending allowed growth of this magnitude to occur. The small
business banking division continues to mature and attract local businesses.  The
desire for local  service and local  decision  making has clearly had a positive
influence on the growth we have experienced. We will continue to focus attention
on the small business  community in an effort to further diversify our asset mix
and improve earnings.

Continued emphasis on core deposit relationships  resulted in an increase in our
deposit base of almost $9 million during the year.  Non-interest demand accounts
increased  significantly as did other deposit base  categories.  The bulk of the
asset  growth  was funded  through  increased  usage of  Federal  Home Loan Bank
borrowings,  a valuable  alternative to often higher cost certificate of deposit
accounts.

The Company  experienced  improved net  interest  income as well.  In fact,  net
interest income for the year amounted to over $8.6 million, an all time high for
the Company.  In addition  and as a result of increased  emphasis on the sale of
longer term,  fixed rate loans,  non-interest  income more than doubled from the
levels of the previous year. Even with the $1.0 million  increase in general and
administrative  expenses  incurred  as a direct  result  of the  Bank's  growth,
diluted  earnings per share increased over 18% to $1.37 per share from $1.16 per
share.

The Company  reduced the number of  outstanding  common  shares by over  176,000
during the year. In addition,  our quarterly  dividend was increased  again this
year to $.085 per  outstanding  share.  These events have all contributed to the
generation of long term shareholder value.

The pages that  follow  provide  additional  information  about the past  year's
performance.  Management remains committed to serving the financial needs of our
community  effectively and  profitably.  These efforts will continue to grow the
value of your investment in a prudent,  intelligent  fashion.  We appreciate the
continued  confidence  you have  displayed  in MFB Corp.  and will  continue  to
operate the Company in an effort to reward that confidence.



                                           /s/ Charles J. Viater
                                           Charles J. Viater
                                           President and Chief Executive Officer


<PAGE>

                            MFB CORP. AND SUBSIDIARY
                      SELECTED CONSOLIDATED FINANCIAL DATA

The  following  selected  consolidated  financial  data  of MFB  Corp.  and  its
subsidiary  is qualified  in its entirety by, and should be read in  conjunction
with, the consolidated financial statements,  including notes thereto,  included
elsewhere in this Annual Report.

<TABLE>
<CAPTION>


                                                                                    At September 30,
                                                                                     (In Thousands)
                                                           1998           1997            1996           1995           1994
                                                           ----           ----            ----           ----           ----
<S>                                                    <C>             <C>            <C>            <C>             <C>        
Summary of Financial Condition:
Total assets                                           $   314,961     $   255,921    $   225,809    $   187,065     $   183,753
Loans held for sale, net                                    13,517          12,671              -              -               -
Loans receivable, net                                      232,832         188,264        152,052        121,181         115,297
Cash and cash equivalents                                   17,904           9,482          1,734          7,454           6,153
Securities, including FHLB stock                            46,456          42,028         68,099         53,293          56,107
Interest-bearing time deposits in 
     other financial institutions                                -               -            495          1,880           3,365
Deposits                                                   180,666         171,887        158,964        144,552         143,604
Securities sold under agreements to repurchase               2,366             389              -              -               -
FHLB advances                                               92,726          47,500         24,500              -               -
Shareholders' equity                                        30,886          33,550         37,599         37,999          37,705

                                                                                Years Ended September 30,
                                                                                     (In Thousands)
                                                           1998           1997            1996           1995           1994
                                                           ----           ----            ----           ----           ----
Summary of Operating Results:
Interest income                                        $    20,838     $    17,685    $    14,182    $    12,383     $    11,545
Interest expense                                            12,204          10,157          8,057          6,788           6,019
                                                       -----------     -----------    -----------    -----------     -----------
     Net interest income                                     8,634           7,528          6,125          5,595           5,526
Provision for loan losses                                      120              30             30             30              30
                                                       -----------     -----------    -----------    -----------     -----------
     Net interest income after provision 
     for loan losses                                         8,514           7,498          6,095          5,565           5,496
Noninterest income
     Insurance commissions                                     143             134            127            128             127
     Brokerage commissions                                      36              24              -              -               -
     Net gain from sales of securities                           8               6              3              -               -
     Net gains from sales of loans                             333               -              -              -               -
     Loan servicing fees, net                                   12               -              -              -               -
     Other                                                     432             261            232            189             151
                                                       -----------     -----------    -----------    -----------     -----------
         Total noninterest income                              964             425            362            317             278
Noninterest expense
     Salaries and employee benefits                          3,414           2,772          2,153          2,336           1,969
     Occupancy and equipment expense                           720             580            422            406             379
     SAIF deposit insurance premium                            108             147          1,291            332             341
     Other expense                                           1,383           1,100            969            753             666
                                                       -----------     -----------    -----------    -----------     -----------
         Total noninterest expense                           5,625           4,599          4,835          3,827           3,355
Income before income taxes                                   3,853           3,324          1,622          2,055           2,419
Income tax expense                                           1,617           1,322            647            819             887
                                                       -----------     -----------    -----------    -----------     -----------
     Net income                                        $     2,236     $     2,002    $       975    $     1,236     $     1,532
                                                       ===========     ===========    ===========    ===========     ===========

Supplemental Data:
Return on assets (1)                                          .80%           .84%            .49%           .67%           .86%
Return on equity (2)                                         6.69           5.83            2.55           3.25           5.60
Interest rate spread (3)                                     2.54           2.49            2.13           2.12           2.57
Net yield on average interest-earning assets (4)             3.17           3.24            3.11           3.10           3.18
Dividend pay-out ratio (5)                                  23.26          26.45           11.32              -              -
Net interest income to operating expenses (6)              153.48         163.70          126.67         146.20         164.71
Equity-to-assets (7)                                         9.81          13.11           16.65          20.31          20.52
Average interest-earning assets to average interest-bearing
   liabilities                                             114.05         117.14          123.81         126.12         117.61
Non-performing assets to total assets                         .09            .10             .09            .17            .07
Non-performing loans to total loans                           .05            .14             .13            .25            .09
Allowance for loan losses to total loans, net                 .19            .20             .22            .26            .24
Allowance for loan losses to non-performing loans          365.78         141.76          171.72         100.65         261.68
Basic earnings per common share (8)                    $     1.44      $    1.21      $      .51     $      .62      $     .48
Diluted earnings per common share (8)                  $     1.37      $    1.16      $      .50     $      .61      $     .47
Dividends declared per share                           $      .335     $     .32      $      .06     $       -       $       -
Book value per share                                   $    20.95      $   20.33      $    19.05     $    18.29      $   17.24
</TABLE>

(1)  Net income divided by average total assets.
(2)  Net income divided by average total equity.
(3)  Interest  rate spread is calculated by  subtracting  average  interest rate
     cost from average interest rate earned.
(4)  Net interest income divided by average interest-earning assets.
(5)  Dividends declared per share divided by basic earnings per share.
(6)  Operating expenses consist of other expenses less taxes.
(7)  Total equity divided by total assets.
(8)  Earnings per common and common equivalent share subsequent to conversion.


<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

The  principal  business of the Bank has  historically  consisted of  attracting
deposits  from the general  public and the small  business  community and making
loans secured by various types of collateral,  including real estate and general
business  assets.  The Bank is  significantly  affected by  prevailing  economic
conditions  as well as government  policies and  regulations  concerning,  among
other things,  monetary and fiscal affairs,  housing and financial institutions.
Deposit flows are  influenced by a number of factors,  including  interest rates
paid on competing investments,  account maturities, fee structures, and level of
personal income and savings. Lending activities are influenced by the demand for
and supply of housing  lenders,  the  availability and cost of funds and various
other  issues.  Sources  of funds for  lending  activities  of the Bank  include
deposits, borrowings, payments on loans and income provided from operations. The
Company's earnings are primarily  dependent upon the Bank's net interest income,
the difference between interest income and interest expense.

Interest  income  is a  function  of  the  balances  of  loans  and  investments
outstanding  during a given  period  and the  yield  earned  on such  loans  and
investments.  Interest  expense is a  function  of the  amount of  deposits  and
borrowings  outstanding  during the same period and interest  rates paid on such
deposits and borrowings.  The Company's earnings are also affected by the Bank's
provisions for loan and real estate losses,  service charges,  retained mortgage
loan servicing fees, income from subsidiary  activities,  operating expenses and
income taxes.


ASSET/LIABILITY MANAGEMENT

The  Company  is  subject  to  interest   rate  risk  to  the  degree  that  its
interest-bearing  liabilities,  primarily  deposits  with short and  medium-term
maturities,  mature or reprice  at  different  rates  than its  interest-earning
assets.  Although having  liabilities  that mature or reprice less frequently on
average than assets will be beneficial in times of rising interest  rates,  such
an  asset/liability  structure will result in lower net income during periods of
declining  interest  rates,  unless offset by other factors such as  noninterest
income.

A key element of the Company's  asset/liability  plan is to protect net earnings
from changes in interest  rates by managing  the maturity or repricing  mismatch
between its interest-earning assets and rate-sensitive liabilities.  The Company
has sought to reduce exposure to its earnings through the use of adjustable rate
loans and through the sale of fixed rate loans in the secondary  market,  and by
extending funding maturities through the use of FHLB advances.

As part of its efforts to monitor  and manage  interest  rate risk,  the Company
uses the Net Portfolio Value ("NPV") methodology adopted by the Office of Thrift
Supervision  as part of its  capital  regulations.  In  essence,  this  approach
calculates the difference  between the present value of expected cash flows from
assets and the present value of expected cash flows from liabilities, as well as
cash flows from  off-balance-sheet  contracts.  The difference is the NPV. As of
June 30, 1998, (the most recently  available data), after a 200 basis point rate
decrease,  the Company's NPV ratio was 11.67%. In the event of a 200 basis point
increase in rates, the Company's NPV ratio was 12.08%.  Management and the Board
of  Directors  review the OTS  measurements  on a quarterly  basis to  determine
whether the Company's interest rate exposure is within the limits established by
the Board of Directors in the Company's interest rate risk policy.


<PAGE>



The Company's asset/liability  management strategy dictates acceptable limits on
the amounts of change in NPV given certain changes in interest rates.  The table
presented  here, as of June 30, 1998,  is an analysis of the Company's  interest
rate risk as measured by changes in NPV for instantaneous and sustained parallel
shifts in the yield curve, in 100 basis point increments,  up and down 400 basis
points.

     Change in
  Interest Rates                                  NPV as % of Portfolio
  In Basis           Net Portfolio Value            Value of Assets
  Points                                           NPV
(Rate Shock) (1)  $ Amount $ Change % Change      Ratio         Change (1)
----------------  -------- -------- --------      -----         ----------
                                            (Dollars in Thousands)
      +400        $27,628  $(10,601)   (28)%        10.17%        (273)

      +300         31,202    (7,027)   (18)         11.21         (169)

      +200         34,428    (3,801)   (10)         12.08          (82)

      +100         37,104    (1,125)    (3)         12.74          (16)

          0        38,229         -      -          12.90            -

      - 100        37,408      (821)    (2)         12.47          (43)

      - 200        35,339    (2,890)    (8)         11.67         (123)

      - 300        33,382    (4,847)   (13)         10.91         (199)

      - 400        31,518    (6,711)   (18)         10.18         (272)

(1)  Expressed in basis points

     As illustrated in the table,  the Company's NPV declines both in rising and
     falling interest rate  environments.  This phenomenon occurs primarily as a
     result of the  historically  low interest rate  environment that existed at
     June 30, 1998, the heavy concentration of adjustable rate loans in the loan
     portfolio  and the  related  prepayment  assumption  used in the OTS model.
     Specifically, the table indicates that, at June 30, 1998, the Company's NPV
     was $38.2 million or 12.9% of the market value of portfolio  assets.  Based
     upon the  assumptions  utilized,  an immediate 200 basis point  increase in
     market interest rates would result in a $3.8 million or 9.9% decline in the
     Company's  NPV and would  result in a 82 basis point or 6.4% decline in the
     Company's  NPV ratio to 12.0%.  Similarly,  an  immediate  200 basis  point
     decrease in market  interest  rates would  result in a $2.9 million or 7.6%
     decline in the Company's  NPV, and a 123 basis point or 9.5% decline in the
     Company's NPV ratio to 11.7%. Both percentage declines in the Company's NPV
     at June 30,  1998 were  within  the limit in the  Company's  Board-approved
     guidelines.

In addition to monitoring  selected  measures on NPV,  management  also monitors
effects on net interest  income  resulting from increases or decreases in rates.
This  measure is used in  conjunction  with NPV  measures to identify  excessive
interest rate risk. In managing its asset/liability mix, the Company,  depending
on  the  relationship  between  long  and  short  term  interest  rates,  market
conditions  and consumer  preference,  may place  somewhat  greater  emphasis on
maximizing its net interest  margin than on strictly  matching the interest rate
sensitivity  of  its  assets  and  liabilities.  Management  believes  that  the
increased net income which may result from an acceptable  mismatch in the actual
maturity or repricing of its asset and liability  portfolios can, during periods
of declining or stable interest rates, provide sufficient returns to justify the
increased  exposure to sudden and  unexpected  increases in interest rates which
may result from such a mismatch. Management believes that the Company's level of
interest rate risk is acceptable under this approach as well.

In  evaluating  the  Company's  exposure to  interest  rate  movements,  certain
shortcomings inherent in the method of analysis presented in the foregoing table
must be considered.  For example,  although  certain assets and  liabilities may
have similar  maturities  or periods to  repricing,  they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and  liabilities  may  fluctuate in advance of changes in market
interest  rates,  while  interest rates on other types may lag behind changes in
interest rates. Additionally, certain assets, such as ARM's, have features which
restrict  changes in interest  rates on a short-term  basis and over the life of
the asset.  Further,  in the event of a  significant  change in interest  rates,
prepayment and early withdrawal levels would likely deviate  significantly  from
those assumed  above.  Finally,  the ability of many  borrowers to service their
debt may  decrease  in the  event of an  interest  rate  increase.  The  Company
considers all of these factors in monitoring its exposure to interest rate risk.

The Board of  Directors  and  management  of the Company  believe  that  certain
factors  afford the  Company  the  ability to operate  successfully  despite its
exposure to interest  rate risk.  The Company  manages its interest rate risk by
originating  adjustable  rate  loans and by  selling a portion of its fixed rate
one-to-four  family real estate loans.  While the Company  generally  originates
mortgage loans for its own  portfolio,  sales of fixed rate first mortgage loans
with  maturities  of 15 years or  greater  are  currently  undertaken  to manage
interest rate risk.  Loans  classified as held for sale as of September 30, 1998
are $13.5  million.  The  Company  retains  the  servicing  on loans sold in the
secondary  market and, at September  30, 1998,  $25.6 million in such loans were
being serviced for others.  The Company also maintains capital well in excess of
regulatory requirements.

The Company's investment strategy is to maintain a diversified portfolio of high
quality   investments  that  minimize  interest  rate  and  credit  risks  while
maximizing  investment return and to provide liquidity necessary to meet funding
needs.  Wholesale banking  activities are conducted as a means to supplement net
income and to  achieve  desired  growth  targets.  This  strategy  involves  the
acquisition of assets funded through sources other than retail deposits, such as
FHLB advances.  The goal is to create interest rate spreads between asset yields
and funding costs within  acceptable risk parameters  while improving  return on
equity.

The  Company's  cost of funds  responds to changes in interest  rates due to the
relatively  short-term  nature of its deposit  portfolio.  The Company  offers a
range of maturities on its deposit  products at  competitive  rates and monitors
the maturities on an ongoing basis.


<PAGE>



AVERAGE BALANCE SHEETS

The following are the average balance sheets for the years ended September 30:
<TABLE>
<CAPTION>


                                                     1998               1997               1996
                                                    Average            Average            Average
                                                  Outstanding        Outstanding        Outstanding
Assets:                                             Balance            Balance            Balance
Interest earning assets:                                           (In Thousands)
<S>                                               <C>                <C>               <C>         
     Interest-bearing deposits                    $      9,633       $      1,856      $      6,709
     Securities (1)                                     13,541             30,765            35,392
     Mortgage-backed securities (1)                     23,218             22,222            19,717
     FHLB stock                                          3,446              7,783             1,303
     Loans held for sale                                 2,401                 35                 -
     Loans receivable (2)                              220,244            175,726           133,670
                                                  ------------       ------------      ------------
         Total interest-earning assets                 272,483            232,387           196,791
Noninterest-earning assets, net
  of allowance for loan losses                           5,414              4,663             3,792
                                                  ------------       ------------      ------------
              Total assets                        $    277,897       $    237,050      $    200,583
                                                  ============       ============      ============

Liabilities and equity:
Interest-bearing liabilities:
     Savings accounts                             $     10,737       $     10,359      $      9,746
     NOW and money market accounts                      30,065             26,770            26,006
     Certificates of deposit                           130,350            126,202           113,570
     Repurchase agreements                               1,647                 97                 -
     FHLB advances                                      66,123             34,960             9,625
                                                  ------------       ------------      ------------
         Total interest-bearing liabilities            238,922            198,388           158,947
Other liabilities                                        5,571              4,316             3,451
                                                  ------------       ------------      ------------
              Total liabilities                        244,493            202,704           162,398
Shareholders' equity:
     Common stock                                       12,921             14,015            19,064
     Retained earnings                                  22,958             21,381            20,496
     Net unrealized gain (loss) on
       securities available for sale                        56               (100)             (133)
     Less common stock acquired by:
         Employee stock ownership plan                    (565)              (790)           (1,007)
         Recognition and retention plan                    (80)              (157)             (235)
     Treasury stock                                     (1,886)                (3)                -
                                                  ------------       ------------      ------------
     Total shareholders' equity                         33,404             34,346            38,185
                                                  ------------       ------------      ------------
     Total liabilities and
       shareholders' equity                       $    277,897       $    237,050      $    200,583
                                                  ============       ============      ============
</TABLE>


(1)  Average  outstanding  balances reflect unrealized gain (loss) on securities
     available for sale.

(2)  Total loans less deferred net loan fees and loans in process.



<PAGE>




INTEREST RATE SPREAD

The following table sets forth the average effective interest rate earned by the
Company  on  its  consolidated  loan  and  investment  portfolios,  the  average
effective cost of the Company's  consolidated deposits and FHLB borrowings,  the
interest   rate   spread  of  the   Company,   and  the  net  yield  on  average
interest-earning assets for the periods presented. Average balances are based on
daily average balances.

<TABLE>
<CAPTION>


                                                               Year ended September 30,
                                                         1998            1997             1996
Average interest rate earned on:
<S>                                                      <C>             <C>             <C>  
     Interest-bearing deposits                           5.81%           5.17%           6.29%
     Securities (1)                                      6.65            6.86            6.17
     Mortgage-backed securities (1)                      5.84            6.46            6.15
     FHLB stock                                          8.01            8.08            7.90
     Loans held for sale                                 7.41               -               -
     Loans receivable                                    7.98            7.91            7.67
         Total interest-earning assets                   7.65            7.61            7.20

Average interest rate of:
     Savings accounts                                    2.52            2.68            2.77
     NOW and money market accounts                       2.83            2.89            3.12
     Certificates of deposit                             5.57            5.65            5.68
     Repurchase agreements                               4.09            4.27               -
     FHLB advances                                       5.67            5.64            5.50
         Total interest-bearing liabilities              5.11            5.12            5.07

Interest rate spread (2)                                 2.54            2.49            2.13
Net yield on interest-earning assets (3)                 3.17            3.24            3.11
</TABLE>


--------------------------------------------------------------------------------

(1)  Yield is based on amortized cost without  adjustment  for  unrealized  gain
     (loss) on securities available for sale.

(2)  Interest rate spread is calculated by subtracting the average interest rate
     cost from the average interest rate earned for the period indicated.

(3)  The net yield on average  interest-earning assets is calculated by dividing
     net interest income by the average  interest-earning  assets for the period
     indicated.



<PAGE>



The following  table describes the extent to which changes in interest rates and
changes in volume of  interest-related  assets and liabilities have affected the
Company's consolidated interest income and expense during the periods indicated.
For each  category of  interest-earning  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.


Year ended September 30, 1998 Increase (Decrease) in Net Increase Income

<TABLE>
<CAPTION>


Year ending September 30, 1998
compared to year ended                                 Total Net           Due to           Due to
September 30, 1997                                      Change              Rate            Volume
Interest-earning assets:                                              (In Thousands)
<S>                                                  <C>               <C>              <C>        
     Interest-bearing deposits                       $       464       $        13      $       451
     Securities                                           (1,212)              (62)          (1,150)
     Mortgage-backed securities                              (79)             (140)              61
     FHLB stock                                              132                (1)             133
     Loans held for sale                                     178                 -              178
     Loans receivable                                      3,670               120            3,550
                                                     -----------       -----------      -----------
         Total                                             3,153               (70)           3,223
Interest-bearing liabilities:
     Savings accounts                                         (7)              (17)              10
     NOW and money market accounts                            84                (9)              93
     Certificates of deposit                                 130              (102)             232
     Repurchase agreements                                    63                 -               63
     FHLB Advances                                         1,777                10            1,767
                                                     -----------       -----------      ----------
         Total                                             2,047              (118)           2,165
                                                     -----------       -----------      -----------
Change in net interest income                        $     1,106       $        48      $     1,058
                                                     ===========       ===========      ===========

Year ended September 30, 1997
compared to year ended
September 30, 1996
Interest-earning assets:
     Interest-bearing deposits                       $      (326)      $       (64)     $      (262)
     Securities                                              (74)              230             (304)
     Mortgage-backed securities                              211                64              147
     FHLB stock                                               41                 2               39
     Loans receivable                                      3,651               332            3,319
                                                     -----------       -----------      -----------
         Total                                             3,503               564            2,939
Interest-bearing liabilities:
     Savings accounts                                          8                (9)              17
     NOW and money market accounts                           (38)              (61)              23
     Certificates of deposit                                 683               (27)             710
     Repurchase agreements                                     4                 -                4
     FHLB Advances                                         1,443                15            1,428
                                                     -----------       -----------      -----------
         Total                                             2,100               (82)           2,182
                                                     -----------       -----------      -----------
Change in net interest income                        $     1,403       $       646      $       757
                                                     ===========       ===========      ===========

</TABLE>

<PAGE>



COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997

Consolidated  net income for the Company for the year ended  September  30, 1998
was $2.2  million  compared to $2.0  million  for the same  period in 1997.  The
increase of $234,000  resulted  primarily  from a $1.1  million  increase in net
interest income and $539,000 increase in non-interest  income,  offset by a $1.0
million increase in non-interest  expense and a $295,000  increase in income tax
expense.

The increase in net interest  income was  primarily  due to volume  increases of
interest-earning   assets   exceeding   the   increases   in   the   volume   of
interest-bearing liabilities. First mortgage loan receivables increased by $18.2
million and commercial  and consumer loan  receivables  by  approximately  $26.6
million  from  September  30, 1997 to  September  30,  1998.  The yield on total
interest-earning  assets also increased  from 7.61% to 7.65% in 1998,  while the
average rate paid on interest-bearing  liabilities decreased from 5.12% to 5.11%
during the same period.  As a result,  the interest rate spread  increased  five
basis points from 2.49% in 1997 to 2.54% in 1998.

Interest income  increased $3.2 million during the year ended September 30, 1998
compared to the same period one year ago.  The  increase  was  primarily  due to
increased volumes of loans receivable and an increase in the average rate earned
on these assets.  Interest expense increased $2.0 million  reflecting the growth
in savings account  deposits and borrowed funds.  Net interest income  increased
$1.1 million for the year ended  September  30, 1998  compared to the year ended
September 30, 1997.

Noninterest income increased from $425,000 for the year ended September 30, 1997
to $964,000 for the twelve  months ended  September  30, 1998.  The  noninterest
income  increases are primarily due to income from the  recognition  of mortgage
servicing  rights from loans sold, net premiums from loan sales,  servicing fees
related  to sold  loans,  and fees  generated  from the  growing  number of core
deposit account relationships.

Noninterest  expense  increased  from  $4.6  million  to  $5.6  million  for the
comparable twelve month periods ending September 30. These  noninterest  expense
increases  are  primarily  attributable  to  staffing  increases  and  renovated
facilities to support lending  operations,  along with expenses  incurred in the
offering of additional services to the Bank's customers.

The provision for loan losses was increased from $30,000 during the period ended
September  30,  1997 to $120,000 at  September  30, 1998 due to the  substantial
increase in the volumes of commercial and consumer loans.

As of September 30, 1998,  net loans were $232.8  million,  an increase of $44.6
million from the $188.2  million as of  September  30,  1997.  Commercial  loans
outstanding  increased  from $8.8 million at September 30, 1997 to $32.0 million
at  September  30,  1998 as a result of  substantial  efforts  to grow the small
business banking  division.  Gross  residential  mortgage loans and equity loans
outstanding  increased by $20.4 million during the year ended September 30, 1998
net of secondary  market sales totaling $28.1 million during the year.  Consumer
loans  outstanding  also  increased  from $96,000 at September  30, 1997 to $1.9
million at September 30, 1998. The significant  growth in all lending  divisions
can be credited to the Company's  reputation as a quality local lender providing
fast and knowledgeable service.

At  September  30,  1997,  $12.7  million  of real  estate  mortgage  loans were
reclassified  from  portfolio  loans  to loans  held  for sale in the  secondary
market.  During the year ended  September 30, 1998,  the Company  completed four
secondary  market  mortgage loan sales  totaling $28.1 million and the net gains
realized  on these loan  sales  were  $333,000,  including  $211,000  related to
recording  mortgage loan servicing  rights. At September 30, 1998, $13.5 million
of loans were classified as loans held for sale in the secondary market.

The loans sold during the year ended September 30, 1998 were fixed rate mortgage
loans with  maturities of fifteen  years or longer.  Servicing of the sold loans
has been retained by the Company and the fees generated  during this period were
approximately $12,000, net of $19,000 in amortization of mortgage loan servicing
rights. Management anticipates further growth in the volume of loans sold in the
secondary  market as a result of the  growing  number of fixed rate loans  being
originated in this period of relatively low interest rates.

Total deposits increased $8.8 million to $180.7 million as of September 30, 1998
from $171.9 as of September 30, 1997.  Federal Home Loan Bank ("FHLB")  advances
and other  short  term  borrowings  also  increased  from  $47.9  million  as of
September 30, 1997 to $100.0 million as of September 30, 1998.  These  increases
in deposits and other  borrowings  primarily  funded the loan growth  during the
year and the $8.4 million increase in cash and cash equivalents.

Cash and cash  equivalents  increased  $8.4  million  from  $9.5  million  as of
September 30, 1997 to $17.9 million as of September 30, 1998.  Net cash provided
by operating  activities and financing  activities  amounted to $2.6 million and
$55.6  million,  respectively,  and was  partially  offset  by net cash  used in
investing activities of $49.8 million.

The  Company's  capital  leveraging  strategy  involves the purchase of mortgage
related  and  other  securities  funded  primarily  with  FHLB  advances.   This
leveraging portfolio represented $15.7 million of the total securities available
for sale at September  30, 1998 compared to $22.7 million at September 30, 1997.
As of  September  30, 1998,  the total  securities  portfolio  amounted to $41.8
million,  an increase of $2.2 million from $39.6  million at September 30, 1997.
The  securities  portfolio  increase  was  primarily  the result of net security
purchases of $44.5 million exceeding matured  securities  totaling $22.7 million
and  principal  payments  of  mortgage-backed  and related  securities  of $19.3
million.

Total  liabilities  increased  from $222.4  million as of September  30, 1997 to
$284.1 million as of September 30, 1998.  This increase was primarily due to the
$8.8  million  increase  in  deposits  and the $52.1  million  increase  in FHLB
advances and other borrowings during the year.

Total shareholders' equity decreased from $33.6 million as of September 30, 1997
to $30.9  million as of September  30, 1998.  The  decreases to equity  resulted
mainly from the repurchases of 245,200 shares of outstanding common stock during
this period at a cost of $5.9 million  along with the payment of cash  dividends
of $544,000.  These decreases were offset by $2.2 million in net income and $1.1
million generated from the exercise of stock options.

The book value of MFB Corp.  common stock,  based on the actual number of shares
outstanding  at each  period,  increased  from $20.33 at  September  30, 1997 to
$20.95 at September 30, 1998.


COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996

Consolidated net income for the Company for the year ended September 30,1997 was
$2.0 million  compared to $975,000 for the same period in 1996.  The increase of
$1.0 million  resulted  primarily  from a $1.4 million  increase in net interest
income and a $237,000  decrease in noninterest  expense,  partially  offset by a
$675,000  increase in income tax  expense.  For the period ended  September  30,
1996, income levels were significantly reduced as a result of a one time special
assessment to recapitalize the Savings Association Insurance Fund ("SAIF"). This
non-recurring expense was approximately  $577,000 on an after tax basis, and net
income for the year ended  September  30, 1996 would have amounted to $1,552,000
had this special assessment not been incurred.

The increase in net  interest  income was due to increases in both the volume of
interest-earning  assets  and higher  rates  earned on those  assets,  partially
offset  by  increases  in the  volume  of  interest-bearing  liabilities.  First
mortgage  loan  receivables   increased  by  approximately   $38.6  million  and
commercial  and consumer loan  receivables by  approximately  $10.6 million from
September  30, 1996 to September 30, 1997.  The yield on total  interest-earning
assets also increased from 7.20% to 7.61% in 1997 while the average rate paid on
interest-bearing  liabilities  increased  from  5.07% to 5.12%  during  the same
period.  As a result,  the interest  rate spread  increased 36 basis points from
2.13% in 1996 to 2.49% in 1997.

Interest income  increased $3.5 million during the year ended September 30, 1997
compared to the same period one year ago. The increase was primarily  related to
increased volumes of loans receivable and an increase in the average rate earned
on these assets. Interest expense increased $2.1 million during the twelve month
period primarily as a result of increased volumes of certificates of deposit and
FHLB  advances.  Net interest  income  increased $1.4 million for the year ended
September 30, 1997 compared to the year ended September 30, 1996.

Noninterest income increased from $362,000 for the year ended September 30, 1996
to $425,000 for the twelve  months ended  September  30, 1997.  The increase was
primarily due to increased  fee income  related to demand  deposit  accounts and
brokerage commissions.

Noninterest  expense  decreased to $4.6 million for the year ended September 30,
1997 from $4.8 million for the same period last year. This decrease is primarily
related to the one time  special  assessment  of $955,000  incurred in the prior
year to  recapitalize  the SAIF,  offset  by  increased  compensation  expenses,
expenses  related to the Bank's name change which took effect  November 1, 1996,
and expenses  incurred with the opening of a new full service branch facility on
June 6, 1997.  To operate the new full  service  branch  facility and attain the
substantial  loan growth in 1997,  the Bank's  staff  increased  by 15 employees
during the year. This is the primary reason for the 29% increase in salaries and
employee benefit expense from $2.2 million for the year ended September 30, 1996
to $2.8 million for the year ended September 30, 1997.

As of  September  30, 1997 net loans were $188.3  million,  an increase of $36.2
million from the $152.1 million as of September 30, 1996.  Substantial marketing
efforts were utilized in the past year to capitalize on the Bank's reputation as
a quality local  residential  lender providing fast and  knowledgeable  service.
This approach led to gross mortgage loan increases of $25.9 million, an increase
of 17.6% for the year ended September 30, 1997. Also,  although a limited number
of small commercial loans were made in 1996,  substantial efforts were put forth
during the 1997 fiscal year to fully develop the small business banking division
in our community.  As a result,  gross  commercial  loans increased $8.0 million
from September 30, 1996 to September 30, 1997.  Total deposits  increased  $12.9
million to $171.9  million as of  September  30, 1997 from $159.0  million as of
September  30,  1996.  Federal  Home Loan Bank  advances  and other  short  term
borrowings  also  increased  from $24.5  million at September  30, 1996 to $47.9
million as of September 30, 1997.


<PAGE>



Cash and cash  equivalents  increased  $7.7  million  from  $1.7  million  as of
September 30, 1996 to $9.4 million as of September  30, 1997.  Net cash provided
by financing  activities and operating  activities amounted to $29.4 million and
$1.3  million,  respectively,  and was  partially  offset  by net  cash  used in
investing activities of $23.0 million.

During  the year  ended  September  30,  1996,  the  Company  adopted  a capital
leveraging  strategy  that  involved the purchase of mortgage  related and other
securities  funded  primarily  with FHLB  advances.  This  leveraging  portfolio
represented  $22.7  million  of the  total  securities  available  for  sale  at
September  30, 1997  compared to $26.6  million at  September  30,  1996.  As of
September 30, 1997, the total securities  portfolio amounted to $39.6 million, a
decrease of $27.2 million from $66.8  million at September  30, 1996.  The total
securities  portfolio  decrease  consisted  of  a  decrease  in  the  leveraging
portfolio  of $3.9  million and a decrease in the  remainder  of the  securities
portfolio of $23.3 million,  and was the result of securities  maturing totaling
$27.9  million and  principal  payments of  mortgage-backed  securities  of $2.9
million  offset  by net  purchases  of  securities  available  for  sale of $3.4
million.

The $12.9  million  increase in  deposits,  the $23.0  million  increase in FHLB
advances,  and the $27.2  million  decrease  in the  securities  portfolio  were
primarily  used to fund the  $36.2  million  increase  in net  loans,  the $12.7
million  increase in loans held for sale, and the $7.7 million  increase in cash
and cash equivalents.

Total  liabilities  increased  $34.2 million from $188.2 million as of September
30, 1996 to $222.4 million as of September 30, 1997. This increase was primarily
due to the $12.9 million  increase in deposits and the $23.0 million increase in
FHLB advances.

Total  shareholders'  equity  decreased  $4.0 million  from $37.6  million as of
September 30, 1996 to $33.6 million as of September 30, 1997.  This decrease was
primarily  attributable  to the repurchase of the Company's  common stock during
the year in the  amount of $6.4  million  and the  payment of  $554,000  in cash
dividends  during the year,  partially  offset by net income of $2.0 million for
the year ended September 30, 1997.

The book value of MFB Corp.  common stock,  based on the actual number of shares
outstanding  at each period,  increased  from $19.05 as of September 30, 1996 to
$20.33 as of September 30, 1997.


LIQUIDITY AND CAPITAL RESOURCES

Liquidity relates  primarily to the Company's ability to fund loan demand,  meet
deposit customers'  withdrawal  requirements and provide for operating expenses.
Assets  used to  satisfy  these  needs  consist  of cash,  deposits  with  other
financial institutions,  overnight  interest-bearing deposits in other financial
institutions  and  securities,  excluding FHLB stock.  These assets are commonly
referred to as liquid assets.

A standard  measure of liquidity for savings  associations  is the ratio of cash
and eligible investments to a certain percentage of net withdrawable savings and
borrowings due within one year.  The minimum  required ratio is currently set by
OTS  regulation at 4%. At September  30, 1998,  the Bank's  liquidity  ratio was
20.36% and the  short-term  liquidity  ratio was 13.53%.  Therefore,  the Bank's
liquidity is well above the minimum regulatory requirements.

Changes in the Bank's  liquidity  occur as a result of its operating,  investing
and financing  activities.  These  activities are discussed  below for the years
ended September 30, 1998, 1997 and 1996.

Liquid  assets  totaled $59.7 million as of September 30, 1998 compared to $49.1
million as of September 30, 1997 and $69.0 million as of September 30, 1996. The
$10.6  million  increase in liquidity  from  September 30, 1997 to September 30,
1998 was primarily due to an $8.4 million  increase in cash and cash equivalents
and a $2.2 million  increase in  securities.  Management  believes the liquidity
level  of  $59.7  million  as of  September  30,  1998  is  sufficient  to  meet
anticipated liquidity needs.

Liquidity  levels  decreased  $19.9 million from September 30, 1996 to September
30, 1997 due  primarily to a $27.1  million  decrease in  securities,  partially
offset by a $7.7 million increase in cash and cash equivalents.

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.  During the year ended  September  30,  1996 the Bank  instituted  a
capital leveraging  strategy that involved the purchase of earning assets funded
primarily with FHLB advances.  As of September 30, 1998,  total FHLB  borrowings
amounted  to $92.7  million,  $24.5  million  of which were used as part of this
strategy.  The remaining $68.2 million was used primarily to fund loan portfolio
growth.  The Bank had  commitments  to fund  loan  originations  with  borrowers
totaling $37.2 million at September 30, 1998. In the opinion of management,  the
Company has  sufficient  cash flow and other cash  resources to meet current and
anticipated loan funding commitments,  deposit customer withdrawal  requirements
and operating expenses. As of September 30, 1997, total FHLB borrowings amounted
to $47.5  million,  $23.5  million  of which  were  used as part of the  capital
leveraging  strategy.  The remaining $24 million was used primarily to fund loan
portfolio growth.

The cash flow statements provide an indication of the Company's sources and uses
of cash as well as an  indication  of the  ability of the Company to maintain an
adequate  level of  liquidity.  A  discussion  of the  changes  in the cash flow
statements for the years ended September 30, 1998, 1997 and 1996 follows.

During  the year  ended  September  30,  1998,  net  cash  and cash  equivalents
increased  $8.4 million from $9.5 million at September 30, 1997 to $17.9 million
at September 30, 1998.

The Company experienced a net increase in cash from operating activities of $2.6
million during the year that was primarily  attributable  to the  origination of
$28.9 million of loans held for sale and $28.1 million of proceeds realized from
the sale of mortgage loans and net income of $2.2 million.

The $49.8 million decrease in cash from investing  activities for the year ended
September  30, 1998 was primarily  related to the $44.7 million  increase in net
loans and the $49.7  million  purchase of securities  and FHLB stock,  offset by
sales and  maturities of securities  totaling $25.7 million and $19.3 million of
mortgage-backed securities principal payments.

Financing  activities  generated  net cash of $55.6  million  for the year ended
September 30, 1998.  The net cash was provided  primarily  from $45.2 million in
net new FHLB advances,  net deposits of $8.8 million,  a $4.9 million commitment
to purchase  securities and increases of $2.0 million in repurchase  agreements,
partially offset by the use of $5.9 million to repurchase the Company's stock.


<PAGE>



During  the year  ended  September  30,  1997,  net  cash  and cash  equivalents
increased  $7.7 million from $1.7 million at September  30, 1996 to $9.4 million
at September 30, 1997.

The Company experienced a net increase in cash from operating activities of $1.3
million  during  the year  that was  primarily  attributable  to net  income  as
adjusted for accrual basis  accounting at September 30, 1997.  The $23.0 million
net decrease in cash from investing  activities for the year ended September 30,
1997 was primarily  related to the $48.9  million  increase in net loans and the
$29.7  million  purchase  of  securities  and FHLB  stock,  offset  by sales and
maturities   of   securities   totaling   $53.1  million  and  $2.9  million  of
mortgage-backed securities principal payments.

Financing  activities  generated  net cash of $29.5  million  for the year ended
September 30, 1997.  The net cash was provided  primarily  from $23.0 million in
net new FHLB  advances  and net deposit  increases of $12.9  million,  partially
offset by the use of $6.4 million to repurchase the Company's stock and $554,000
in cash dividend payments during the year.

For the year ended September 30, 1996, net cash decreased $5.7 million from $7.4
million at September  30, 1995 to $1.7 million at September  30, 1996.  Net cash
from operating activities totaled $2.2 million.

The Company  experienced  a $44.9  million net  decrease in cash from  investing
activities  for the year ended  September  30, 1996.  This  decrease in cash was
primarily  related  to the net  increase  in  loans  of  $30.9  million  and net
purchases of securities of $15.2 million.

Financing  activities  generated  net cash of $37.0  million  for the year ended
September 30, 1996.  The net cash was provided  primarily  from $24.5 million in
new FHLB  borrowings  and a $14.4 million  increase in net  deposits,  partially
offset by the use of $1.5 million to repurchase  the Company's  stock during the
year.

As of September 30, 1998 management is not aware of any current  recommendations
by regulatory authorities which, if they were to be implemented,  would have, or
are  reasonably  likely to have,  a  material  adverse  effect on the  Company's
liquidity, capital resources or operations.


CURRENT ACCOUNTING ISSUES

In the  future,  several  new  accounting  pronouncements  will be  implemented.
Statement  No. 130  requires  "other  comprehensive  income" and  "comprehensive
income"  to be  displayed  along with net  income.  Other  comprehensive  income
includes   changes  in  unrealized  gains  and  losses  on  available  for  sale
securities,  the  offset  of some  pension  liabilities  currently  recorded  as
reductions in equity, foreign currency translation,  and in the future will also
include  deferred hedging gains and losses.  Comprehensive  income is net income
plus other comprehensive income.

Statement No. 131 for public companies redefines segment reporting to follow how
each company's chief operating  decision maker gets  information  about business
segments to make operating decisions.

Statement  No. 132  increases and revises  pension plan  disclosures  for public
companies, and simplifies such disclosures for nonpublic companies.


<PAGE>



Statement No. 133 on derivatives  will, in 2000,  require all  derivatives to be
recorded  at fair value in the  balance  sheet,  with  changes in fair value run
through  income.  If derivatives  are  documented  and effective as hedges,  the
change in the  derivative  fair value  will be offset by an equal  change in the
fair value of the hedged item.

Statement No. 134 on mortgage  banking will, in 1999,  allow mortgage loans that
are  securitized to be classified as trading,  available for sale, or in certain
circumstances held to maturity. Currently these must be classified as trading.

Implementation  guidance on Statement No. 125 will clarify the  requirement  for
loan  participations  to  contain  the right  for the  purchaser  to resell  the
participation,  to avoid  classifying the  participation as a secured  borrowing
instead of a reduction of loans.

Proposals will require that  purchased  loans,  including  those acquired in the
purchase of an entire bank,  be recorded net of estimated  uncollectible  loans.
This means that no  allowance  for loan  losses  will carry over or be  recorded
except  through  subsequent  expense,  although  subsequent  losses equal to the
amount estimated at purchase will not be shown as charge-offs.

The AICPA guidance for financial  institutions  in its accounting  guide will be
revised to conform to current  literature,  make a few changes,  and combine the
banking/savings  guide,  credit union,  and finance company guides,  eliminating
some  differences  therein.  Some changes will be to disclose  loans past due 90
days  or more  that  are  still  on  accrual  and to  disclose  the  policy  for
charging-off loans.

The FASB continues to study several  issues,  including  recording all financial
instruments at fair value and abolishing pooling of interests accounting.  Also,
it is likely that APB 25's measurement for stock option plans will be limited to
employees  and  not  to   nonemployees   such  as  directors,   thereby  causing
compensation expense for stock options to directors.


IMPACT OF INFLATION

The  audited  consolidated  financial  statements  presented  herein  have  been
prepared in accordance  with generally  accepted  accounting  principles.  These
principles  require  measurement of financial  position and operating results in
terms of historical dollars (except for securities  available for sale which are
reported at fair market  value and loans held for sale which are reported at the
lower of cost or estimated market value in the aggregate),  without  considering
changes in the relative purchasing power of money over time due to inflation.

The primary  assets and  liabilities  of the Bank are  monetary in nature.  As a
result,  interest  rates  have  a  more  significant  impact  on  the  Company's
performance  than the effects of general  levels of inflation.  Interest  rates,
however,  do not  necessarily  move  in the  same  direction  or with  the  same
magnitude as the price of goods and services,  since such prices are affected by
inflation.

In periods  of  rapidly  rising  interest  rates,  the  liquidity  and  maturity
structures  of  the  Company's  assets  and  liabilities  are  critical  to  the
maintenance of acceptable  performance levels. For a discussion of the Company's
continuing efforts to reduce its vulnerability to changes in interest rates, see
"Asset/Liability Management."

The principal effect of inflation, as distinct from levels of interest rates, on
earnings is in the area of noninterest  expense.  Such expense items as employee
compensation,  employee  benefits,  and  occupancy  and  equipment  costs may be
subject to increases as a result of inflation. An additional effect of inflation
is the possible  increase in the dollar value of the  collateral  securing loans
made by the Bank. Management is unable to determine the extent, if any, to which
properties  securing  the Bank's loans have  appreciated  in dollar value due to
inflation.


YEAR 2000 READINESS

The Company is aware of the issues  associated with programming code in existing
computer  systems as the year 2000  approaches.  The issue is  whether  computer
systems will properly recognize date sensitive information when the year changes
to 2000.  Systems that do not properly recognize such information could generate
erroneous  data or cause a system to fail.  The Company is heavily  dependent on
computer  processing in its business  activities and the year 2000 issue creates
risk for the Company from unforseen  problems in the Company's  computer  system
and from  third  parties  whom the  Company  uses to process  information.  Such
failure of the Company's  computer system and/or third parties  computer systems
could have a material impact on the Company's ability to conduct its business.

A major third party vendor provides the Company's primary data processing.  This
provider has advised the Company that is has  completed  the  renovation  of its
system to be year 2000 ready, and is currently in the process of providing users
of the system the  opportunity to test the system for readiness.  The Company is
currently  performing  tests of the data processing  provider's  system for year
2000 readiness and anticipates completion of the testing by January31, 1999.

The  Company's  ten year  contract  with its current  data  processing  provider
expires  during 1999.  The Company  hired a consultant to assist with the search
for its future data processing provider. The Company has received responses from
select vendors,  called client references,  and viewed on-site demonstrations of
the  vendor's  products.  The Company  anticipates  selecting a final vendor and
executing a contract with that vendor prior to January 31, 1999.

The Company has performed an  assessment of its computer  hardware and software,
and has  determined  those  systems that require  upgrade to be year 2000 ready.
Such upgrades have either been  completed or will be completed  concurrent  with
the conversion to the Company's new data processing provider,  which is expected
to be completed by June 30, 1999.  In addition,  the Company has reviewed  other
external third party vendors that provide services to the Company (i.e., utility
companies,  electronic funds transfer providers, and software companies) and has
requested or already  received  certification  letters  from these  vendors that
their  systems  will be year  2000  ready on a  timely  basis.  Testing  will be
performed with the service providers,  if possible, to determine their year 2000
readiness.

The Company  could incur  losses if loan  payments  are delayed due to year 2000
problems affecting significant borrowers. The Company is communicating with such
parties to assess their progress in evaluating and  implementing  any corrective
measures  required by them to be year 2000 ready.  To date,  the Company has not
been advised by such parties that they do not have plans in place to address and
correct the issues associated with the year 2000 problem;  however, no assurance
can be given as to the  adequacy  of such  plans or to the  timeliness  of their
implementation.  As part of the current credit approval process, new and renewed
loans are evaluated as to the borrower's year 2000 readiness.


<PAGE>



Based on the Company's review of its computer systems,  management  believes the
cost of the remediation effort to make its systems year 2000 ready will not have
an adverse impact on the Company's financial condition, results of operations or
liquidity.  The Company had already planned to replace many of its computers and
associated  equipment  as a result  of the  conversion  to a new  data  services
provider. These cost and time estimates are based on management's best estimates
and could differ from those actually incurred.

The Company has developed a year 2000  contingency  plan that  addresses,  among
other issues, critical operations and potential failures thereof, and strategies
for business continuation.

Although   management  believes  the  Company's  computer  systems  and  service
providers will be year 2000 ready, there can be no assurance that these systems,
or those systems of other companies on which the Company's systems rely, will be
fully functional in the year 2000. Such failure could have a significant adverse
impact on the financial condition and results of operations of the Company.


FORWARD LOOKING STATEMENTS

When  used  in this  filing  and in  future  filings  by the  Company  with  the
Securities  and Exchange  Commission,  in the Company's  press releases or other
public  or  shareholder  communications,  or in oral  statements  made  with the
approval of an authorized executive officer, the words or phrases, "anticipate,"
"would be," "will allow," "intends to," "will likely result," "are expected to,"
will continue," "is anticipated," "estimated," "project," or similar expressions
are intended to identify, "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
risks and  uncertainties,  including  but not  limited to  changes  in  economic
conditions  in the  Company's  market  area,  changes in policies by  regulatory
agencies,  fluctuations  in interest  rates,  demand for loans in the  Company's
market area, and competition, all or some of which could cause actual results to
differ  materially from historical  earnings and those presently  anticipated or
projected.

The Company  wishes to caution  readers not to place undue  reliance on any such
forward-looking  statements,  which  speak only as of the date made,  and advise
readers  that  various  factors,   including   regional  and  national  economic
conditions,  substantial  changes in levels of market interest rates, credit and
other risks of lending and investing activities,  and competitive and regulatory
factors,  could affect the Company's  financial  performance and could cause the
Company's  actual  results for future  periods to differ  materially  from those
anticipated or projected.

The Company does not undertake,  and specifically  disclaims any obligation,  to
update any forward looking  statements to reflect  occurrences or  unanticipated
events or circumstances after the date of such statements.





<PAGE>

                         REPORT OF INDEPENDENT AUDITORS



Board of Directors and Shareholders
MFB Corp.
Mishawaka, Indiana


We have audited the  accompanying  consolidated  balance sheets of MFB Corp. and
Subsidiary  as of  September  30,  1998 and 1997  and the  related  consolidated
statements  of income,  shareholders'  equity and cash flows for the years ended
September 30, 1998, 1997 and 1996. These consolidated  financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position of MFB Corp.  and
Subsidiary as of September 30, 1998 and 1997,  and the results of its operations
and its cash flows for the years  ended  September  30,  1998,  1997 and 1996 in
conformity with generally accepted accounting principles.




                                             /s/  Crowe, Chizek and Company LLP
                                                  Crowe, Chizek and Company LLP

South Bend, Indiana
November 5, 1998, except for Note 2
  as to which the date is November 13, 1998



<PAGE>

                            MFB CORP. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                           September 30, 1998 and 1997

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>


                                                                        1998               1997
                                                                   -------------      -------------
ASSETS
<S>                                                                <C>                <C>          
Cash and due from financial institutions                           $   3,018,404      $   2,905,849
Interest-bearing deposits in other financial
  institutions - short-term                                           14,885,289          6,576,499
                                                                   -------------      -------------
     Total cash and cash equivalents                                  17,903,693          9,482,348
Securities available for sale                                         41,819,768         39,628,414
Federal Home Loan Bank (FHLB) stock, at cost                           4,636,300          2,400,000
Loans held for sale, net of unrealized losses of $-0- in 1998
  and $-0- in 1997                                                    13,516,502         12,671,186
Loans receivable, net of allowance for loan losses
  of $453,567 in 1998 and $370,000 in 1997                           232,831,800        188,264,198
Accrued interest receivable                                              967,995            718,427
Premises and equipment, net                                            2,795,496          2,612,793
Mortgage servicing rights, net                                           191,699                 --
Other assets                                                             297,845            143,445
                                                                   -------------      -------------

     Total assets                                                  $ 314,961,098      $ 255,920,811
                                                                   =============      =============

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
     Deposits
         Noninterest-bearing demand deposits                       $   4,298,516      $   2,046,702
         Savings, NOW and MMDA deposits                               40,835,161         38,130,008
         Other time deposits                                         135,532,298        131,710,557
                                                                   -------------      -------------
              Total deposits                                         180,665,975        171,887,267
     Securities sold under agreements to repurchase                    2,365,716            388,920
     Other borrowings                                                 97,656,964         47,500,000
     Advances from borrowers for taxes and insurance                   2,316,317          1,854,248
     Accrued expenses and other liabilities                            1,070,349            740,360
                                                                   -------------      -------------
         Total liabilities                                           284,075,321        222,370,795

Shareholders' equity
     Common stock, no par value, 5,000,000 shares authorized;
       shares issued:  1,689,417 - 1998, 1,689,417 - 1997;
       shares outstanding:  1,474,217 - 1998, 1,650,567 - 1997        12,846,979         13,108,171
     Retained earnings - substantially restricted                     23,730,167         22,037,441
     Net unrealized appreciation (depreciation) on securities
       available for sale, net of tax of $(29,788) in 1998
       and $48,017 in 1997                                               (45,417)            73,208
     Unearned Employee Stock Ownership Plan (ESOP) shares               (444,557)          (664,610)
     Unearned Recognition and Retention Plan (RRP) shares                (38,500)          (115,500)
     Treasury Stock, 215,200 common shares - 1998;
       38,850 common shares - 1997, at cost                           (5,162,895)          (888,694)
                                                                   -------------      -------------
         Total shareholders' equity                                   30,885,777         33,550,016
                                                                   -------------      -------------

              Total liabilities and shareholders' equity           $ 314,961,098      $ 255,920,811
                                                                   =============      =============
</TABLE>

--------------------------------------------------------------------------------
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

<PAGE>
                        CONSOLIDATED STATEMENTS OF INCOME
                  Years ended September 30, 1998, 1997 and 1996

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>


                                                         1998            1997            1996
                                                     -----------     -----------     -----------
Interest income
     Loans receivable, including fees
<S>                                                  <C>             <C>             <C>        
         Mortgage loans                              $15,071,514     $12,945,694     $ 9,956,394
         Consumer and other loans                        858,670         550,905         182,177
         Financing leases and commercial loans         1,815,178         400,120         107,321
     Securities - taxable                              2,532,974       3,692,136       3,514,380
     Other interest-earning assets                       559,547          95,971         421,984
                                                     -----------     -----------     -----------
         Total interest income                        20,837,883      17,684,826      14,182,256

Interest expense
     Deposits                                          8,388,360       8,181,489       7,528,321
     Securities sold under agreements
       to repurchase                                      67,352           4,138              --
     FHLB advances                                     3,748,087       1,971,537         529,025
                                                     -----------     -----------     -----------
         Total interest expense                       12,203,799      10,157,164       8,057,346

Net interest income                                    8,634,084       7,527,662       6,124,910

Provision for loan losses                                120,000          30,000          30,000
                                                     -----------     -----------     -----------

Net interest income after provision
  for loan losses                                      8,514,084       7,497,662       6,094,910

Noninterest income
     Insurance commissions                               143,201         133,870         126,819
     Brokerage commissions                                35,834          23,604              --
     Net realized gains from sales of securities
       available for sale                                  7,673           6,098           3,731
     Net realized gains from sales of loans              333,171              --              --
     Loan servicing fees, net of
       amortization of $19,376 in 1998                    12,038              --              --
     Other income                                        432,276         261,171         231,766
                                                     -----------     -----------     -----------
         Total noninterest income                        964,193         424,743         362,316

Noninterest expense
     Salaries and employee benefits                    3,413,558       2,772,154       2,152,656
     Occupancy and equipment expense                     720,305         579,327         422,388
     SAIF deposit insurance premium                      107,503         147,121       1,291,288
     Other expense                                     1,384,023       1,099,972         968,951
                                                     -----------     -----------     -----------
         Total noninterest expense                     5,625,389       4,598,574       4,835,283
                                                     -----------     -----------     -----------

Income before income taxes                             3,852,888       3,323,831       1,621,943

Income tax expense                                     1,616,605       1,321,630         646,793
                                                     -----------     -----------     -----------

Net income                                           $ 2,236,283     $ 2,002,201     $   975,150
                                                     ===========     ===========     ===========


     Basic earnings per common share                 $      1.44     $      1.21     $       .51
     Diluted earnings per common share                      1.37            1.16             .50
</TABLE>

--------------------------------------------------------------------------------
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

<PAGE>
                            MFB CORP. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                  Years ended September 30, 1998, 1997 and 1996


<TABLE>
<CAPTION>
                                                                        Common Stock      Earnings    Net of Tax   ESOP Shares 
                                                                        ------------      --------    ----------   ----------- 
------------------------------------------------------------------------------------------------------------------------------------

<S>                                                                    <C>            <C>            <C>         <C>           
Balance at September 30, 1995                                          $  19,656,664  $  19,732,086  $        -  $  (1,100,000)

Purchase and retirement of 103,893 shares of common stock                 (1,499,024)             -           -              - 
Net unrealized appreciation on securities available for  sale,
  net of tax $77,821 from transfer of securities                                   -              -     118,648              - 
Cash dividends declared - $.06 per share                                           -       (118,439)          -          6,349 
Effect of contribution to fund ESOP                                                -              -           -        200,000 
Market adjustment of 21,515 ESOP shares committed to be released             117,247              -           -              - 
Amortization of RRP contribution                                                   -              -           -              - 
Tax benefit related to employee stock plans                                   41,764              -           -              - 
Net change in unrealized appreciation (depreciation)
  on securities available for sale, net of tax of ($222,073)                       -              -    (338,576)             - 
Net income for the year ended September 30, 1996                                   -        975,150           -              - 
                                                                       -------------  -------------  ----------  ------------- 

Balance at September 30, 1996                                             18,316,651     20,588,797    (219,928)      (893,651)

Purchase and retirement of 288,063 shares of common stock                 (5,381,427)             -           -              - 
Purchase of 45,000 shares of treasury stock                                        -              -           -              - 
Stock option exercise-issuance of 3,500 common shares                         35,000              -           -              - 
Stock option exercise-issuance of 6,150 shares of treasury stock             (79,181)             -           -              - 
Cash dividends declared - $ .32 per share                                          -       (553,557)          -         29,041 
Effect of contribution to fund ESOP                                                -              -           -        200,000 
Market adjustment of 23,276 ESOP shares committed to be released             188,153              -           -              - 
Amortization of RRP contribution                                                   -              -           -              - 
Tax benefit related to employee stock plans                                   28,975              -           -              - 
Net change in unrealized appreciation (depreciation) on securities
 available for sale, net of tax of $192,269                                        -              -     293,136              - 
Net income for the year ended September 30, 1997                                   -      2,002,201           -              - 
                                                                       -------------  -------------  ----------  ------------- 

Balance at September 30, 1997                                             13,108,171     22,037,441      73,208       (664,610)
</TABLE>


<PAGE>


<TABLE>                                                                
<CAPTION>                                                              
                                                                          RRP Shares       Stock           Equity  
                                                                          ----------       -----           ------  
-------------------------------------------------------------------------------------------------------------------
                                                                                                                   
<S>                                                                     <C>          <C>            <C>            
Balance at September 30, 1995                                           $ (290,152)  $           -  $  37,998,598  
                                                                                                                   
Purchase and retirement of 103,893 shares of common stock                        -               -     (1,499,024) 
Net unrealized appreciation on securities available for  sale,                                                     
  net of tax $77,821 from transfer of securities                                 -               -        118,648  
Cash dividends declared - $.06 per share                                         -               -       (112,090) 
Effect of contribution to fund ESOP                                              -               -        200,000  
Market adjustment of 21,515 ESOP shares committed to be released                 -               -        117,247  
Amortization of RRP contribution                                            97,652               -         97,652  
Tax benefit related to employee stock plans                                      -               -         41,764  
Net change in unrealized appreciation (depreciation)                                                               
  on securities available for sale, net of tax of ($222,073)                     -               -       (338,576) 
Net income for the year ended September 30, 1996                                 -               -        975,150  
                                                                        ----------   -------------  -------------  
                                                                                                                   
Balance at September 30, 1996                                             (192,500)              -     37,599,369  
                                                                                                                   
Purchase and retirement of 288,063 shares of common stock                        -               -     (5,381,427) 
Purchase of 45,000 shares of treasury stock                                      -      (1,029,375)    (1,029,375) 
Stock option exercise-issuance of 3,500 common shares                            -               -         35,000  
Stock option exercise-issuance of 6,150 shares of treasury stock                 -         140,681         61,500  
Cash dividends declared - $ .32 per share                                        -               -       (524,516) 
Effect of contribution to fund ESOP                                              -               -        200,000  
Market adjustment of 23,276 ESOP shares committed to be released                 -               -        188,153  
Amortization of RRP contribution                                            77,000               -         77,000  
Tax benefit related to employee stock plans                                      -               -         28,975  
Net change in unrealized appreciation (depreciation) on securities                                                 
 available for sale, net of tax of $192,269                                      -               -        293,136  
Net income for the year ended September 30, 1997                                 -               -      2,002,201  
                                                                        ----------   -------------  -------------  
                                                                                                                   
Balance at September 30, 1997                                             (115,500)       (888,694)    33,550,016  

</TABLE>


<PAGE>
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                  Years ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>


                                                                                                    Net Unrealized
                                                                                                     Appreciation
                                                                                                    (Depreciation)
                                                                                                     on Securities
                                                                                                       Available                  
                                                                                        Retained       For Sale,       Unearned   
                                                                      Common Stock      Earnings      Net of Tax      ESOP Shares 
                                                                      ------------      --------      ----------      ----------- 
----------------------------------------------------------------------------------------------------------------------------------

<S>                                                                  <C>            <C>            <C>             <C>            
Balance at September 30, 1997                                        $  13,108,171  $  22,037,441  $       73,208  $    (664,610) 

Purchase of 245,200 shares of treasury stock                                     -              -               -              -  
Stock option exercise-issuance of 68,850 shares of treasury stock         (968,611)             -               -              -  
Cash dividends declared - $ .335 per share                                       -       (543,557)              -         20,053  
Effect of contribution to fund ESOP                                              -              -               -        200,000  
Market adjustment of 20,989 ESOP shares committed to be released           286,919              -               -              -  
Amortization of RRP contribution                                                 -              -               -              -  
Tax benefit related to employee stock plans                                420,500              -               -              -  
Net change in unrealized appreciation (depreciation) on securities
 available for sale, net of tax of $(77,805)                                     -              -        (118,625)             -  
Net income for the year ended September 30, 1998                                 -      2,236,283               -              -  
                                                                     -------------  -------------  --------------  -------------  

Balance at September 30, 1998                                        $  12,846,979  $  23,730,167  $      (45,417) $    (444,557) 
                                                                     =============  =============  ==============  =============  
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                                     
                                                                                                          Total    
                                                                         Unearned      Treasury       Shareholders'
                                                                        RRP Shares       Stock           Equity    
                                                                        ----------       -----           ------    
-----------------------------------------------------------------------------------------------------------------  
                                                                                                                   
<S>                                                                  <C>             <C>            <C>            
Balance at September 30, 1997                                        $    (115,500)  $    (888,694) $  33,550,016  
                                                                                                                   
Purchase of 245,200 shares of treasury stock                                     -      (5,931,312)    (5,931,312) 
Stock option exercise-issuance of 68,850 shares of treasury stock                -       1,657,111        688,500  
Cash dividends declared - $ .335 per share                                       -               -       (523,504) 
Effect of contribution to fund ESOP                                              -               -        200,000  
Market adjustment of 20,989 ESOP shares committed to be released                 -               -        286,919  
Amortization of RRP contribution                                            77,000               -         77,000  
Tax benefit related to employee stock plans                                      -               -        420,500  
Net change in unrealized appreciation (depreciation) on securities                                                 
 available for sale, net of tax of $(77,805)                                     -               -       (118,625) 
Net income for the year ended September 30, 1998                                 -               -      2,236,283  
                                                                     -------------   -------------  -------------  
                                                                                                                   
Balance at September 30, 1998                                        $     (38,500)  $  (5,162,895) $  30,885,777  
                                                                     =============   =============  =============  
</TABLE>


<PAGE>

                            MFB CORP. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  Years ended September 30, 1998, 1997 and 1996

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>


                                                             1998              1997              1996
                                                         ------------      ------------      ------------
Cash flows from operating activities
<S>                                                      <C>               <C>               <C>         
     Net income                                          $  2,236,283      $  2,002,201      $    975,150
     Adjustments to reconcile net income
       to net cash from operating activities
         Depreciation and amortization, net of
           accretion                                          314,688           473,203           272,595
         Amortization of RRP contribution                      77,000            77,000            97,652
         Provision for loan losses                            120,000            30,000            30,000
         Net realized gains from sales of
           securities available for sale                       (7,673)           (6,098)           (3,731)
         Net realized gains from sales of loans              (333,171)               --                --
         Amortization of mortgage servicing rights             19,376                --                --
         Origination of loans held for sale               (28,866,583)               --                --
         Proceeds from sales of loans held for sale        28,143,363                --                --
         Market adjustment of ESOP shares
           committed to be released                           286,919           188,153           117,247
         ESOP expense                                         200,000           200,000           200,000
         Net change in:
              Accrued interest receivable                    (249,568)           99,587                94
              Other assets                                    (76,595)          498,262           (44,501)
              Accrued expenses and other liabilities          750,489        (2,303,772)          586,591
                                                         ------------      ------------      ------------
                  Net cash from operating activities        2,614,528         1,258,536         2,231,097

Cash flows from investing activities
     Net change in interest-bearing time
       deposits in other financial institutions                    --           495,000         1,385,000
     Net change in loans receivable                       (44,687,602)      (48,913,292)      (30,900,930)
     Proceeds from:
         Sales of securities available for sale             2,926,206        25,186,766        10,212,124
         Principal payments of mortgage-backed
           and related securities                          19,343,270         2,938,521         2,280,597
         Maturities of securities available for sale       22,738,565        27,877,752        16,697,252
         Maturities of securities held to maturity                 --                --         4,300,000
     Purchase of:
         Securities available for sale                    (47,461,878)      (28,634,913)      (48,218,517)
         Securities held to maturity                               --                --          (500,000)
         FHLB stock                                        (2,236,300)       (1,063,900)          (65,300)
         Premises and equipment, net                         (423,665)         (859,211)         (137,440)
                                                         ------------      ------------      ------------
              Net cash from investing activities          (49,801,404)      (22,973,277)      (44,947,214)

</TABLE>

--------------------------------------------------------------------------------
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

<PAGE>

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  Years ended September 30, 1998, 1997 and 1996

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                             1998              1997              1996
                                                                         ------------      ------------      ------------
Cash flows from financing activities
<S>                                                                      <C>               <C>               <C>          
     Purchase of MFB Corp. common stock                                  $ (5,931,312)     $ (6,410,802)     $ (1,499,024)
     Net change in deposits                                                 8,778,708        12,922,778        14,412,719
     Net change in securities sold under
       agreements to repurchase                                             1,976,796           388,920                --
     Proceeds from other borrowings                                        72,156,964        66,735,000        24,500,000
     Repayment of other borrowings                                        (22,000,000)      (43,735,000)               --
     Proceeds from exercise of stock options                                  688,500            96,500                --
     Net change in advances from
       borrowers for taxes and insurance                                      462,069           (10,179)         (305,151)
     Cash dividends paid                                                     (523,504)         (524,516)         (112,090)
                                                                         ------------      ------------      ------------
         Net cash from financing activities                                55,608,221        29,462,701        36,996,454
                                                                         ------------      ------------      ------------

Net change in cash and cash equivalents                                     8,421,345         7,747,960        (5,719,663)

Cash and cash equivalents at beginning of year                              9,482,348         1,734,388         7,454,051
                                                                         ------------      ------------      ------------

Cash and cash equivalents at end of year                                 $ 17,903,693      $  9,482,348      $  1,734,388
                                                                         ============      ============      ============

Supplemental disclosures of cash flow information
     Cash paid during the year for
         Interest                                                        $ 12,305,287      $ 10,113,767      $  7,988,256
         Income taxes                                                       1,182,448           868,000           974,755

Supplemental schedule of noncash investing activities Transfer from:
         Securities held to maturity to securities
           available for sale                                            $         --      $         --      $ 47,898,025
         Loans receivable to loans held for sale                                   --        12,671,186                --

</TABLE>


<PAGE>



                            MFB CORP. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        September 30, 1998, 1997 and 1996
--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation:  The accompanying consolidated financial statements
include  the  accounts  of MFB  Corp.,  Inc.  and  its  wholly-owned  subsidiary
(together  referred to as "the Company"),  MFB Financial (the "Bank"), a federal
stock  savings bank,  and Mishawaka  Financial  Services,  Inc., a  wholly-owned
subsidiary of the Bank.  Mishawaka  Financial  Services,  Inc. is engaged in the
sale of credit life, general fire and accident,  car, home and life insurance as
agent  for  the  Bank's  customers  and  the  general  public.  All  significant
intercompany transactions and balances are eliminated in consolidation.

Nature of Business  and  Concentrations  of Credit Risk:  The primary  source of
income for the Company  results from granting  commercial and  residential  real
estate loans in Mishawaka and the surrounding area. Loans secured by real estate
mortgages comprise approximately 86% of the loan portfolio at September 30, 1998
and are  primarily  secured  by  residential  mortgages.  The  Company  operates
primarily  in the  banking  industry  which  accounts  for more  than 90% of its
revenues, operating income and assets.

Use  of  Estimates  In  Preparing  Financial  Statements:   The  preparation  of
consolidated   financial   statements  in  conformity  with  generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets,  liabilities and disclosure of contingent
assets and liabilities at the date of the financial  statements and the reported
amounts of revenue and  expenses  during the  reporting  period,  as well as the
disclosures  provided.  Areas  involving the use of estimates and assumptions in
the  accompanying  financial  statements  include the allowance for loan losses,
fair values of securities and other  financial  instruments,  determination  and
carrying  value of loans  held for sale,  determination  and  carrying  value of
impaired  loans,  the value of  mortgage  servicing  rights,  the value of stock
options,  the  realization  of deferred  tax assets,  and the  determination  of
depreciation  of premises and equipment  recognized  in the Company's  financial
statements.  Actual  results  could  differ  from  those  estimates.   Estimates
associated  with the allowance for loan losses and the fair values of securities
and other financial instruments are particularly  susceptible to material change
in the near term.

Cash and Cash  Equivalents:  For purposes of reporting cash flows, cash and cash
equivalents is defined to include the Company's cash on hand, due from financial
institutions  and  short-term   interest-bearing  deposits  in  other  financial
institutions. The Company reports net cash flows for customer loan transactions,
deposit  transactions,  short term borrowings  having an original maturity of 90
days  or  less,   advances  from   borrowers  for  taxes  and   insurance,   and
interest-bearing time deposits in other financial institutions.

--------------------------------------------------------------------------------
                                   (Continued)


<PAGE>



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Securities:  Securities  are  classified  as held to  maturity  and  carried  at
amortized cost when  management has the positive intent and ability to hold them
to maturity.  Securities are classified as available for sale when they might be
sold before maturity.  Securities  available for sale are carried at fair value,
with unrealized  holding gains and losses reported  separately in  shareholders'
equity,  net of tax.  Securities  are  classified as trading when held for short
term periods in  anticipation  of market  gains,  and are carried at fair value.
Securities  are  written  down to fair value when a decline in fair value is not
temporary.

Gains and losses on the sale of  securities  are  determined  using the specific
identification  method based on amortized  cost and are  reflected in results of
operations  at the time of sale.  Interest  and  dividend  income,  adjusted  by
amortization  of purchase  premium or discount  over the  estimated  life of the
security using the level yield method, is included in earnings.

Mortgage Banking Activities:  Mortgage loans originated and intended for sale in
the secondary  market are reported on the  statements of financial  condition as
loans held for sale and are carried at the lower cost or estimated  market value
in the aggregate.  Net unrealized losses are recognized in a valuation allowance
by charges to income.

Loan  servicing  fees are  recognized  when  received and the related  costs are
recognized when incurred.  The Bank sells mortgages into the secondary market at
market prices, which includes consideration for normal servicing fees.

Effective October 1, 1996, the Company adopted Statement of Financial Accounting
Standards  ("SFAS") No. 122,  Accounting  for Mortgage  Servicing  Rights.  This
Statement  changed the accounting for mortgage  servicing  rights  retained by a
loan  originator.  Under this standard,  if the  originator  sells or securities
mortgage loans and retains the related servicing  rights,  the total cost of the
mortgage loan is allocated  between the loan (without the servicing  rights) and
the servicing  rights,  based on their  relative fair values.  Prior to adopting
SFAS No. 122 on October 1, 1996,  servicing  right assets were recorded only for
purchased  rights to service  mortgage  loans.  The costs  allocated to mortgage
servicing  rights are now  recorded  as a separate  asset and are  amortized  in
proportion  to, and over the life of, the net  servicing  income.  The  carrying
value  of  the  mortgage   servicing  rights  are  periodically   evaluated  for
impairment.

Loans Receivable: Loans receivable that management has the intent and ability to
hold for the  foreseeable  future or until  maturity or pay-off are  reported at
their outstanding principal balances adjusted for any charge-offs, the allowance
for  loan  losses,  and any  deferred  fees or costs on  originated  loans,  and
unamortized premiums or discounts on purchased loans.

Premiums or discounts on mortgage  loans are amortized to income using the level
yield method over the remaining  period to  contractual  maturity,  adjusted for
anticipated prepayments. Loan fees and certain direct loan origination costs are
deferred,  and the net fee or cost is  recognized  as an  adjustment to interest
income using the interest method.

--------------------------------------------------------------------------------
                                   (Continued)

<PAGE>



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Because some loans may not be repaid in full,  an  allowance  for loan losses is
recorded.  The  allowance  for loan losses is increased by a provision  for loan
losses  charged to expense and  decreased by  charge-offs  (net of  recoveries).
Estimating  the risk of loss and the  amount of loss on any loan is  necessarily
subjective.  Accordingly,  the  allowance is maintained by management at a level
considered adequate to cover losses that are currently anticipated. Management's
periodic  evaluation  of the adequacy of the allowance is based on the Company's
past loan loss experience, known and inherent risks in the portfolio,  periodic,
adverse  situations  that may  affect  the  borrower's  ability  to  repay,  the
estimated value of any underlying  collateral,  and current economic conditions.
While  management  may  periodically  allocate  portions  of the  allowance  for
specific problem loan situations,  the whole allowance is available for any loan
charge-offs that occur.

Loans are  considered  impaired if full  principal or interest  payments are not
anticipated in accordance  with the contractual  loan terms.  Impaired loans are
carried at the present  value of expected  future cash flows  discounted  at the
loan's  effective  interest  rate or at the fair value of the  collateral if the
loan is  collateral  dependent.  A portion of the  allowance  for loan losses is
allocated to impaired loans if the value of such loans is deemed to be less than
the unpaid balance.  If these allocations cause the allowance for loan losses to
require increase,  such increase is reported as a component of the provision for
loan losses.

Smaller-balance  homogeneous  loans are evaluated for impairment in total.  Such
loans include  residential  first mortgage  loans secured by one-to-four  family
residences, residential construction loans, automobile, manufactured homes, home
equity and second mortgage loans. Commercial loans and mortgage loans secured by
other  properties are evaluated  individually  for impairment.  When analysis of
borrower  operating  results and financial  condition  indicates that underlying
cash flows of the borrower's  business are not adequate to meet its debt service
requirements,  the loan is evaluated  for  impairment.  Often this is associated
with a delay or shortfall in payments of 30 days or more.  Nonaccrual  loans are
often also considered impaired. Impaired loans, or portions thereof, are charged
off when deemed  uncollectible.  The nature of disclosures for impaired loans is
considered  generally  comparable to prior nonaccrual and renegotiated loans and
non-performing and past due asset disclosures.

Interest  income on loans is accrued  over the term of the loans  based upon the
principal outstanding. The accrual of interest on impaired loans in discontinued
when, in  management's  opinion,  the borrower may be unable to meet payments as
they become due.  When  interest  accrual is  discontinued,  all unpaid  accrued
interest is reversed.  Interest  income is  subsequently  recognized only to the
extent that cash payments are received  until,  in  management's  judgment,  the
borrower has the ability to make contractual interest and principal payments, in
which case the loan is returned to accrual status.


--------------------------------------------------------------------------------
                                   (Continued)

<PAGE>



--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Foreclosed Real Estate:  Real estate properties acquired through, or in lieu of,
loan  foreclosure  are  initially   recorded  at  fair  value  at  the  date  of
acquisition, establishing a new cost basis. Any reduction to fair value from the
carrying  value of the related loan at the time of  acquisition is accounted for
as a loan loss and charged against the allowance for loan losses. Valuations are
periodically  performed by  management  and  valuation  allowances  are adjusted
through a charge to income for changes in fair value or estimated selling costs.
Foreclosed real estate at September 30, 1998 amounted to $145,000. There were no
properties held as foreclosed real estate at September 30, 1997.

Income  Taxes:  Deferred tax assets and  liabilities  are reflected at currently
enacted  income tax rates  applicable  to the period in which the  deferred  tax
assets or liabilities are expected to be realized or settled.  As changes in tax
laws or rates are  enacted,  deferred  tax assets and  liabilities  are adjusted
through income tax expense. A valuation allowance,  if needed,  reduces deferred
tax assets to the amount expected to be realized.

Premises and Equipment:  Land is carried at cost. Buildings and improvements and
furniture and equipment are carried at cost, less  accumulated  depreciation and
amortization  computed  principally by using the  straight-line  method over the
estimated  useful lives of the assets.  These assets are reviewed for impairment
when events indicate the carrying amount may not be recoverable.

Employee Stock  Ownership Plan (ESOP):  The Company  accounts for its ESOP under
AICPA  Statement of Position  (SOP) 93-6. The cost of shares issued to the ESOP,
but  not  yet  allocated  to  participants,  are  presented  as a  reduction  of
shareholders'  equity.  Compensation  expense is  recorded  based on the average
market  price  of  the  shares  committed  to  be  released  for  allocation  to
participant  accounts.  The difference  between the market price and the cost of
shares  committed to be released is recorded as an  adjustment  to common stock.
Dividends  on  allocated  ESOP shares are  recorded  as a reduction  of retained
earnings; dividends on unearned ESOP shares are reflected as a reduction of debt
and accrued interest.

ESOP shares are  outstanding  for  earnings per share  calculations  as they are
committed to be released; unearned shares are not considered outstanding.

Financial  Instruments with  Off-Balance-Sheet  Risk: The Company, in the normal
course of business,  makes  commitments to make loans which are not reflected in
the  consolidated  financial  statements.  A  summary  of these  commitments  is
disclosed in Note 13.

--------------------------------------------------------------------------------
                                   (Continued)

<PAGE>



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Earnings  Per Common  Share:  Basic and diluted  earnings  per common  share are
computed under a new accounting  standard  effective  beginning with the quarter
ended  December 31, 1997.  All prior earnings per common share amounts have been
restated to be  comparable.  Basic earnings per common share is based on the net
income  divided by the  weighted  average  number of common  shares  outstanding
during the period.  ESOP shares are  considered  outstanding  for  earnings  per
common share calculations as they are committed to be released;  unearned shares
are not considered  outstanding.  Recognition  and retention plan ("RRP") shares
are considered  outstanding  for earnings per common share  calculations as they
become vested. Diluted earnings per common share shows the dilutive effective of
additional  potential  common shares  issuable under stock options and nonvested
shares issued under the RRP.

Stock Compensation:  Expense for employee  compensation under stock option plans
is based on Accounting  Principles Board (APB) Opinion 25, with expense reported
only if options are granted below market price at grant date. Disclosures of net
income and earnings per common share are provided as if the fair value method of
SFAS No. 123 were used for stock-based compensation.


NOTE 2 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE

A reconciliation  of the numerators and denominators  used in the computation of
the basic  earnings  per common  share and diluted  earnings per common share is
presented below:
<TABLE>
<CAPTION>


                                                              Year ended September 30,
                                                       1998             1997             1996
                                                    -----------      -----------      -----------
Basic Earnings Per Common Share
     Numerator
<S>                                                 <C>              <C>              <C>        
         Net income                                 $ 2,236,283      $ 2,002,201      $   975,150
                                                    ===========      ===========      ===========

     Denominator
         Weighted average common shares
           outstanding                                1,611,492        1,742,329        2,037,540
         Less:  Average unallocated ESOP shares         (50,538)         (72,670)         (95,066)
         Less:  Average nonvested RRP shares             (7,700)         (15,400)         (23,615)
                                                    -----------      -----------      -----------

         Weighted average common shares
           outstanding for basic earnings per
           common share                               1,553,254        1,654,259        1,918,859
                                                    ===========      ===========      ===========

     Basic earnings per common share                $      1.44      $      1.21      $       .51
                                                    ===========      ===========      ===========
</TABLE>



<PAGE>

NOTE 2 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE (Continued)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>


                                                        Year ended September 30,
                                                    1998           1997           1996
                                                  ----------     ----------     ----------
Diluted Earnings Per Common Share
     Numerator
<S>                                               <C>            <C>            <C>       
         Net income                               $2,236,283     $2,002,201     $  975,150
                                                  ==========     ==========     ==========

     Denominator
         Weighted average common shares
           outstanding for basic earnings per
           common share                            1,553,254      1,654,259      1,918,859
         Add:  Dilutive effects of average
           novested RRP shares                         3,166             --             --
         Add:  Dilutive effects of assumed
           exercises of stock options                 75,417         71,916         49,946
                                                  ----------     ----------     ----------

         Weighted average common shares
           and dilutive potential common
           shares outstanding                      1,631,837      1,726,175      1,968,805
                                                  ----------     ----------     ----------

     Diluted earnings per common share            $     1.37     $     1.16     $      .50
                                                  ==========     ==========     ==========
</TABLE>

Stock options for 45,000 shares of common stock,  granted  during the year ended
September 30, 1998, were not considered in computing diluted earnings per common
share for the year ended  September  30, 1998  because  they were  antidilutive.
Additionally  subsequent  to September 30, 1998,  additional  stock options were
granted on October 20, 1998 and November 13, 1998, totaling 26,500 options which
may impact future diluted earnings per common share calculations.


NOTE 3 - SECURITIES AVAILABLE FOR SALE

The  amortized  cost and  fair  value of  securities  available  for sale are as
follows:
<TABLE>
<CAPTION>


                                           -------------------------September 30, 1998--------------------------
                                                                    Gross            Gross
                                               Amortized         Unrealized       Unrealized            Fair
                                                 Cost               Gains           Losses              Value
Debt securities
     U.S. Government
<S>                                        <C>                 <C>              <C>              <C>            
       and federal agencies                $      4,218,461    $     35,228     $           -    $     4,253,689
     Mortgage-backed                             22,259,552          33,404           (25,879)        22,267,077
     Other securities                             8,929,482               -                 -          8,929,482
     Corporate notes                              5,944,628               -           (81,488)         5,863,140
                                           ----------------    ------------     -------------    ---------------
                                                 41,352,123          68,632          (107,367)        41,313,388
Marketable equity securities                        542,850               -           (36,470)           506,380
                                           ----------------    ------------     -------------    ---------------

                                           $     41,894,973    $     68,632     $    (143,837)   $    41,819,768
                                           ================    ============     =============    ===============
</TABLE>


<PAGE>

NOTE 3 - SECURITIES AVAILABLE FOR SALE (Continued)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>


                                           -------------------------September 30, 1997--------------------------
                                                                    Gross            Gross
                                               Amortized         Unrealized       Unrealized            Fair
                                                 Cost               Gains           Losses              Value
Debt securities
     U.S. Government
<S>                                        <C>                 <C>              <C>              <C>            
       and federal agencies                $     23,617,973    $    109,623     $      (7,877)   $    23,719,719
     Mortgage-backed                             15,588,866          26,506           (36,077)        15,579,295
                                           ----------------    ------------     -------------    ---------------
                                                 39,206,839         136,129           (43,954)        39,299,014
Marketable equity securities                        300,350          29,050                 -            329,400
                                           ----------------    ------------     -------------    ---------------

                                           $     39,507,189    $    165,179     $     (43,954)   $    39,628,414
                                           ================    ============     =============    ===============
</TABLE>

The amortized cost and fair value of debt securities by contractual maturity are
shown below. Expected maturities may differ from contractual  maturities because
borrowers may have the right to call or prepay  obligations with or without call
or prepayment penalties.


                                           ---------September 30, 1998--------
                                              Amortized             Fair
                                                Cost                Value

 Due in one year or less                   $     11,641,206    $    11,668,749
 Due after one year through five years            1,506,737          1,514,422
 Due after five years through ten years                   -                  -
 Due after ten years                              5,944,628          5,863,140
                                           ----------------    ---------------
                                                 19,092,571         19,046,311
 Mortgage-backed securities                      22,259,552         22,267,077
                                           ----------------    ---------------

                                           $     41,352,123    $    41,313,388
                                           ================    ===============

Proceeds from sales of securities  available for sale were $2,926,206 during the
year ended September 30, 1998. Gross gains of $10,534 and gross losses of $2,861
were realized on these sales. During the year ended September 30, 1997, proceeds
from the sales of  securities  available  for sale were  $25,186,766  with gross
gains of $59,828 and gross losses of $53,730 realized on these sales. During the
year ended September 1996,  proceeds from the sales of securities  available for
sale were  $10,212,124  with gross gains of $25,154 and gross  losses of $21,423
realized on those losses.

On November 30, 1995,  securities  with an amortized  cost of  $47,898,025  were
reclassified   from  held  to   maturity   to   available   for  sale  based  on
interpretations  issued for SFAS No. 115. The transfer  increased the unrealized
appreciation  on  securities  available  for sale by $196,469 and  shareholders'
equity by $118,648, net of tax of $77,821.


<PAGE>

NOTE 4 - LOANS RECEIVABLE, NET

Loans receivable, net at September 30 are summarized as follows:
<TABLE>
<CAPTION>


                                                              1998               1997
                                                          -------------      -------------
First mortgage loans (principally conventional)
     Principal balances
<S>                                                       <C>                <C>          
         Secured by one-to-four family residences         $ 183,150,539      $ 164,598,210
         Construction loans                                   8,233,468          8,245,274
         Other                                                  120,188            130,800
                                                          -------------      -------------
                                                            191,504,195        172,974,284
         Less undisbursed portion of construction and
           other mortgage loans                                (485,444)          (117,394)
                                                          -------------      -------------

              Total first mortgage loans                    191,018,751        172,856,890

Commercial and consumer loans:
     Principal balances
         Home equity and second mortgage                      9,067,504          7,176,832
         Commercial                                          32,000,528          8,832,629
         Financing leases                                        83,026            325,048
         Other                                                1,913,564             96,079
                                                          -------------      -------------
              Total commercial and consumer loans            43,064,622         16,430,588
Allowance for loan losses                                      (453,567)          (370,000)
Net deferred loan origination fees                             (798,006)          (653,280)
                                                          -------------      -------------

                                                          $ 232,831,800      $ 188,264,198
                                                          =============      =============
</TABLE>

Activity in the allowance for loan losses is summarized as follows for the years
ended September 30:

                                    1998            1997             1996
                                    ----            ----             ----

  Balance at beginning of year  $     370,000    $    340,000    $    310,000
  Provision for loan losses           120,000          30,000          30,000
  Charge-offs                         (36,433)              -               -
  Recoveries                                -               -               -
                                -------------    ------------    ------------

  Balance at end of year        $     453,567    $    370,000    $    340,000
                                =============    ============    ============

At  September  30, 1998,  1997 and 1996,  no portion of the  allowance  for loan
losses was allocated to impaired loan balances as there were no loans considered
impaired loans as of or for the years ended September 30, 1998, 1997 and 1996.



<PAGE>

NOTE 4 - LOANS RECEIVABLE, NET (Continued)
--------------------------------------------------------------------------------

Mortgage  loans  serviced  for  others  are  not  included  in the  accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans at September 30, 1998 are summarized as follows:

     Mortgage loan portfolios serviced for:
         Telebank                                  $    9,943,910
         Hanover Capital Mortgage Holdings, Inc.        7,629,859
         LaSalle Bank, FSB                              8,036,000
                                                   --------------

                                                   $   25,609,769
                                                   ==============

Custodial escrow balances  maintained in connection with the foregoing  serviced
loans were $62,000 at September 30, 1998.

Certain  directors  and  executive  officers of the Company and its  subsidiary,
including  associates  of such  persons,  are loan  customers.  A summary of the
related party loan activity,  for loans  aggregating  $60,000 or more to any one
related party, is as follows:

                                               1998               1997
                                               ----               ----

    Balance - beginning of year           $      927,721    $    1,032,494
    New loans                                  1,039,174                 -
    Repayments                                  (207,859)         (104,773)
    Effect of changes in related parties          40,798                 -
                                          --------------    --------------

    Balance - end of year                 $    1,799,834    $      927,721
                                          ==============    ==============


NOTE 5 - PREMISES AND EQUIPMENT, NET

Premises and equipment at September 30 are summarized as follows:

                                                    1998             1997
                                                    ----             ----

     Land                                        $     581,956    $    558,681
     Buildings and improvements                      2,544,588       2,165,843
     Real estate held for future expansion                   -         128,885
     Furniture and equipment                         1,441,967       1,291,437
                                                 -------------    ------------
         Total cost                                  4,568,511       4,144,846
     Accumulated depreciation and amortization      (1,773,015)     (1,532,053)
                                                 -------------    ------------

                                                 $   2,795,496    $  2,612,793
                                                 =============    ============

Depreciation and  amortization of premises and equipment,  included in occupancy
and equipment expense was approximately $241,000,  $216,000 and $145,000 for the
years ended September 30, 1998, 1997 and 1996, respectively.


<PAGE>

NOTE 6 - DEPOSITS
--------------------------------------------------------------------------------

The aggregate amount of short-term jumbo certificates of deposit in denomination
of $100,000 or more was  approximately  $27,568,000 and $24,892,000 at September
30, 1998 and 1997.

At September 30, 1998, the scheduled  maturities of  certificates of deposit are
as follows for the years ended September 30:

              1999                                    $      95,769,516
              2000                                           33,655,354
              2001                                            4,645,028
              2002                                              411,458
              2003                                              749,499
              Thereafter                                        301,443
                                                      -----------------

                                                      $     135,532,298
                                                      =================


NOTE 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities  sold under  agreements to repurchase  consist of  obligations of the
Company to other parties.  These  arrangements are all one-day retail repurchase
agreements and are secured by investment securities.  Such collateral is held by
safekeeping agents of the Company.  Information concerning securities sold under
agreements to repurchase as of September 30 is summarized as follows:

<TABLE>
<CAPTION>

                                                                                 1998                1997
                                                                                 ----                ----

<S>                                                                        <C>                  <C>           
     Average daily balance during the year                                 $       1,647,000    $       97,000
     Average interest rate during the year                                             4.09%              4.27%
     Maximum month end balance during the year                             $       3,882,000    $      389,000

Securities underlying these agreements at year end were as follows:

     Carrying value of securities                                          $       8,385,000    $    3,530,000
     Fair value                                                            $       8,387,000    $    3,508,000

</TABLE>

NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES

At September 30, 1998,  advances from the Federal Home Loan Bank of Indianapolis
with fixed and  variable  rates  ranging  from 4.88% to 5.93% mature in the year
ending September 30 as follows:

         1999                                            $       8,500,000
         2000                                                    6,000,000
         2001                                                            -
         2002                                                   11,000,000
         2003                                                   18,000,000
         Thereafter                                             49,225,750
                                                         -----------------

                                                         $      92,725,750
                                                         =================


<PAGE>

NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES (Continued)
--------------------------------------------------------------------------------

FHLB advances are secured by all FHLB stock,  qualifying  first mortgage  loans,
government  agency and mortgage  backed  securities.  At September  30, 1998, in
addition to $4,636,000 in FHLB stock,  collateral of approximately  $194,477,000
is pledged to the FHLB to secure advances outstanding.

At  September  30,  1998,  the Bank had a due to broker for $4.9  million  for a
security purchase which settled October 5, 1998.


NOTE 9 - EMPLOYEE BENEFITS

Employee  Pension  Plan:  The  Bank  is  part  of  a  qualified  noncontributory
multiple-employer defined benefit pension plan covering substantially all of its
employees.   The  plan  is   administered  by  the  trustees  of  the  Financial
Institutions  Retirement Fund.  There is no separate  valuation of plan benefits
nor segregation of plan assets  specifically  for the Bank because the plan is a
multiple-employer  plan and  separate  actuarial  valuations  are not made  with
respect to each  employer nor are the plan assets so  segregated.  As of July 1,
1998,  the latest  actuarial  valuation  date,  total plan assets  exceeded  the
actuarially  determined value of total vested benefits.  The cost of the plan is
set annually as an established percentage of wages. Pension plan expense for the
years ended September 30, 1998, 1997 and 1996 was approximately  $1,500,  $1,500
and $3,000, respectively.

401(k) Plan: On July 1, 1996,  the Company  adopted a retirement  savings 401(k)
plan which covers all full time employees who are 21 or older and have completed
one year of service.  Beginning August 1, 1996, participants may defer up to 15%
of  compensation.  The Company  matches 50% of elective  deferrals  on 6% of the
participants'  compensation.  Expense  for the 401(k)  plan for the years  ended
September 30, 1998, 1997 and 1996 was approximately $52,000, $42,000 and $5,000.

Employee Stock Ownership Plan (ESOP):  In conjunction with its stock conversion,
the Company established an ESOP for eligible employees.  Employees with at least
one year of  employment  and who have  attained age  twenty-one  are eligible to
participate.  The ESOP borrowed  $1,400,000 from the Company to purchase 140,000
shares of common stock issued in the conversion at $10 per share. Collateral for
the loan is the unearned  shares of common stock  purchased by the ESOP with the
loan  proceeds.   The  loan  will  be  repaid  principally  from  the  Company's
discretionary  contributions  to the ESOP  over a period  of  seven  years.  The
interest rate for the loan is 6.25%.  Shares  purchased by the ESOP will be held
in suspense until allocated among ESOP participants as the loan is repaid.


<PAGE>



NOTE 9 - EMPLOYEE BENEFITS (Continued)

ESOP  expense was  approximately  $487,000,  $388,000 and $317,000 for the years
ended September 30, 1998, 1997 and 1996.  Contributions  to the ESOP,  including
dividends on unearned  ESOP shares,  was  approximately  $220,000,  $229,000 and
$206,000 during the years ended September 30, 1998, 1997 and 1996.

Company contributions to the ESOP and shares released from suspense proportional
to the repayment of the ESOP loan are allocated  among ESOP  participants on the
basis of compensation in the year of allocation.  Benefits generally become 100%
vested  after five years of  credited  service.  A  participant  who  terminates
employment   for  reasons  other  than  death,   normal   retirement  (or  early
retirement),  or  disability  prior to the  completion of five years of credited
service  does  not  receive  any  benefits  under  the  ESOP.   Forfeitures  are
reallocated among the remaining participating  employees, in the same proportion
as contributions.

Benefits are payable in the form of stock except for fractional shares which are
paid in cash upon termination of employment.  The Company's contributions to the
ESOP are not fixed, so benefits payable under the ESOP cannot be estimated.

ESOP  participants  receive  distributions  from their ESOP  accounts  only upon
termination of service.

At September 30, 1998, 1997 and 1996,  20,989,  23,276 and 21,515 shares with an
average fair value of $23.20,  $16.68 and $14.75 per share, were committed to be
released.

The ESOP shares as of September 30 were as follows:
<TABLE>
<CAPTION>

                                                                      1998             1997               1996
                                                                      ----             ----               ----

<S>                                                             <C>                <C>              <C>            
     Allocated shares                                           $       99,957     $      78,968    $        55,692
     Unearned shares                                                    40,043            61,032             84,308
     Shares withdrawn from the plan by participants                     (5,601)           (5,601)            (2,347)
                                                                --------------     -------------    ---------------
         Total ESOP shares held in the plan                            134,399           134,399    $       137,653
                                                                ==============     =============    ===============

     Fair value of unearned shares                              $    1,021,000     $   1,419,000    $     1,560,000
                                                                ==============     =============    ===============

</TABLE>
Recognition  and  Retention  Plans  (RRPs):   In  conjunction   with  its  stock
conversion,  the Company  established  RRPs as a method of providing  directors,
officers and other key employees of the Company with a  proprietary  interest in
the Company in a manner  designed to  encourage  such persons to remain with the
Company.  Eligible  directors,  officers and other key  employees of the Company
become  vested  in  awarded  shares  of  common  stock at a rate of 20% per year
commencing March 24, 1994. The RRPs acquired, in the aggregate, 70,000 shares of
common stock issued in the  conversion  at $10 per share and 70,000  shares were
awarded to RRP  participants at no cost to them. RRP expense for the years ended
September  30,  1998,  1997 and  1996 was  approximately  $77,000,  $77,000  and
$98,000, respectively.


<PAGE>
NOTE 9 - EMPLOYEE BENEFITS (Continued)
--------------------------------------------------------------------------------

Stock Option Plan:  The Board of Directors of the Company  adopted the MFB Corp.
Stock Option Plans (the "Option Plans").  The number of options authorized under
the Plans totals 350,000 shares of common stock. Officers, employees and outside
directors of the Company and its  subsidiary  are eligible to participate in the
Option  Plans.  The option  exercise  price must be no less than 85% of the fair
market  value of common  stock on the date of the  grant,  and the  option  term
cannot exceed ten years and one day from the date of the grant.  As of September
30, 1998,  all options  granted  have an exercise  price of at least 100% of the
market  value of the  common  stock on the  date of  grant  and no  compensation
expense was recognized for stock options for the years ended September 30, 1998,
1997 and 1996. As of September 30, 1998,  105,000  options remain  available for
future grants.

SFAS No. 123,  which became  effective  for the year ended  September  30, 1997,
requires pro forma  disclosures  for companies  that do not adopt its fair value
accounting  method  for  stock-based  employee  compensation.  Accordingly,  the
following proforma information presents net income and earnings per common share
had the fair  value  method  been used to  measure  compensation  cost for stock
option plans.  The exercise price of options granted is equivalent to the market
value of underlying stock at the grant date.

The fair value of options  granted during the years ended September 30, 1998 and
1996 is estimated using the following  weighted-average  information:  risk-free
interest rate of 6% and 6.2%,  expected life of 10 years,  expected dividends of
1.21% and .30% per year and  expected  stock  price  volatility  of 6% per year.
There were no options granted for the year ended September 30, 1997.
<TABLE>
<CAPTION>


                                                 1998              1997              1996
                                                 ----              ----              ----

<S>                                         <C>                <C>                <C>         
Net income as reported                      $     2,236,283    $    2,002,201     $    975,150
Proforma net income                               2,069,443         1,981,761          951,304

Reported earnings per common and common
  equivalent share
     Basic                                           $1.44              $1.21         $.51
     Diluted                                         $1.37              $1.16         $.50

Proforma earnings per common and common
  equivalent share
     Basic                                           $1.33              $1.20         $.50
     Diluted                                         $1.27              $1.15         $.48

</TABLE>


<PAGE>

NOTE 9 - EMPLOYEE BENEFITS (Continued)
--------------------------------------------------------------------------------

Activity in the Option Plan for the years ended is summarized as follows:
<TABLE>
<CAPTION>


                                                                                          Weighted       Weighted
                                                           Number of                       Average        Average
                                                          Outstanding    Exercise         Exercise      Fair Value
                                                            Options        Price            Price        of Grants

<S>                                                        <C>        <C>     <C>          <C>    
     Balanced at September 30, 1995                         190,000    $ 10.00-$15.00       $ 10.53

     Granted                                                 10,000    $ 15.25              $ 15.25        $  10.22
                                                       ------------
     Balance at September 30, 1996                          200,000    $ 10.00-$15.25       $ 10.76

     Exercised                                               (9,650)   $ 10.00              $ 10.00
                                                       ------------
     Balance at September 30, 1997                          190,350    $ 10.00-$15.25       $ 10.80

     Granted                                                 45,000    $ 26.75              $ 26.75         $9.76
     Exercised                                              (68,850)   $ 10.00              $ 10.00
                                                       ------------
     Balance at September 30, 1998                          166,500    $ 10.00-$26.75       $ 15.45
</TABLE>


Options exercisable at September 30 are as follows:

                                                        Weighted
                                 Number                  Average
                               of Options            Exercise Price

                  1996             180,000                 $ 10.28
                  1997             176,350                 $ 10.46
                  1998             122,500                 $ 12.14

At September 30, 1998, options outstanding had a weighted-average remaining life
of 7.4 years.


<PAGE>



NOTE 10 - INCOME TAXES

The Company  files  consolidated  income tax returns.  Prior to fiscal 1997,  if
certain conditions were met in determining  taxable income, the Bank was allowed
a special bad debt  deduction  based on a percentage  of taxable  income (8% for
fiscal  1996)  or  on  specified   experience   formulas.   The  Bank  used  the
percentage-of-taxable-income  method for the tax year ended  September 30, 1996.
Tax  legislation  passed  in  August  1996 now  requires  the  Bank to  deduct a
provision  for bad debts for tax purposes  based on actual loss  experience  and
recapture the excess bad debt reserve  accumulated in tax years after  September
30, 1987. The related amount of deferred tax liability  which must be recaptured
is  approximately  $446,000 and is payable  over a six year period  beginning no
later than the tax year ending September 30, 1999.

Income tax expense for the years ended September 30 are summarized as follows:
<TABLE>
<CAPTION>


                                                    1998                1997                1996
                                                    ----                ----                ----
<S>                                           <C>                 <C>                  <C>          
         Federal
              Current                         $     1,301,834     $       765,810      $     725,920
              Deferred                                 (2,359)            264,314           (225,467)
                                              ---------------     ---------------      -------------
                                                    1,299,475           1,030,124            500,453
         State
              Current                                 317,774             223,225            225,213
              Deferred                                   (644)             68,281            (78,873)
                                              ---------------     ---------------      -------------
                                                      317,130             291,506            146,340
                                              ---------------     ---------------      -------------

                  Total income tax expense    $     1,616,605     $     1,321,630      $     646,793
                                              ===============     ===============      =============
</TABLE>

Total  income tax expense  differed  from the amounts  computed by applying  the
federal income tax rate of 34% in all periods  presented to income before income
taxes as a result of the following for the years ended September 30:

<TABLE>
<CAPTION>

                                                                1998                1997                1996
                                                                ----                ----                ----

<S>                                                       <C>                 <C>                  <C>          
Income taxes at statutory rate                            $     1,309,982     $     1,130,103      $     551,461
Tax effect of:
         State tax, net of federal income
           tax effect                                             209,306             192,394             96,584
         Excess of fair value of ESOP
           shares released over cost                               97,552              63,972             39,864
         Other items, net                                            (235)            (64,839)           (41,116)
                                                          ---------------     ---------------      -------------

              Total income tax expense                    $     1,616,605     $     1,321,630      $     646,793
                                                          ===============     ===============      =============
</TABLE>


<PAGE>



NOTE 10 - INCOME TAXES (Continued)

The  components  of the net  deferred  tax  asset  (liability)  recorded  in the
consolidated balance sheets as of September 30 are as follows:

<TABLE>
<CAPTION>


                                                           1998                1997
     Deferred tax assets
<S>                                                  <C>                  <C>          
         RRP expense                                 $        16,363      $      16,363
         Net deferred loan fees                              339,153            277,644
         Net unrealized depreciation
           on securities available for sale                   29,788                  -
         Other                                                 1,249             18,652
                                                     ---------------      -------------
                                                             386,553            312,659
     Deferred tax liabilities
         Accretion                                           (57,364)           (59,882)
         Depreciation                                        (60,442)           (48,685)
         Bad debt deduction                                 (253,309)          (288,825)
         Mortgage servicing rights                           (81,472)                 -
         Net unrealized appreciation on
           securities available for sale                           -            (48,017)
         Other                                               (25,079)           (39,171)
                                                     ---------------      -------------
                                                            (477,666)          (484,580)
     Valuation allowance                                           -                  -
                                                     ---------------      -------------

         Net deferred tax asset (liability)          $       (91,113)     $    (171,921)
                                                     ===============      =============
</TABLE>

Federal  income  tax  laws  provided  savings  banks  with  additional  bad debt
deductions  through the tax year ended September 30, 1987,  totaling  $4,596,000
for the Bank. Accounting standards do not require a deferred tax liability to be
recorded on this amount,  which liability  would  otherwise total  $1,563,000 at
September 30, 1998 and 1997. If the Bank were liquidated or otherwise  ceases to
be a bank or if tax laws change, the $1,563,000 would be recorded as expense.


NOTE 11 - REGULATORY MATTERS

The Bank is subject to regulatory capital  requirements  administered by federal
banking  agencies.  Capital  adequacy  guidelines and prompt  corrective  action
regulations involve quantitative  measures of assets,  liabilities,  and certain
off-balance-sheet   items  calculated  under  regulatory  accounting  practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators  about  components,  risk  weightings,  and  other  factors,  and the
regulators can lower  classifications in certain cases.  Failure to meet various
capital  requirements  can initiate  regulatory  action that could have a direct
material effect on the financial statements.


<PAGE>



NOTE 11 - REGULATORY MATTERS (Continued)

The prompt corrective action regulations provide five classifications, including
well  capitalized,  adequately  capitalized,   undercapitalized,   significantly
undercapitalized, and critically undercapitalized,  although these terms are not
used to represent overall financial condition.  If only adequately  capitalized,
regulatory   approval   is   required   to   accept   brokered   deposits.    If
undercapitalized,  capital  distributions  are  limited,  as is asset growth and
expansion, and plans for capital restoration are required.

The Bank's actual capital and required  capital amounts and ratios are presented
below:

<TABLE>
<CAPTION>


                                                                                                    Minimum
                                                                                                  Requirement
                                                                      Minimum                     To Be Well
                                                                    Requirement                Capitalized Under
                                                                    For Capital                Prompt Corrective
                                         Actual                  Adequacy Purposes           Action Provisions
                                   Amount        Ratio          Amount        Ratio          Amount       Ratio
                                   ------        -----          ------        -----          ------       -----
                                                               (Dollars in Thousands)
<S>                            <C>               <C>        <C>                <C>      <C>               <C>   
As of September 30, 1998
    Total capital (to risk
      weighted assets)         $    29,489       16.28%     $    14,493        8.00%    $    18,116       10.00%
    Tier 1 (core) capital
      (to risk weighted assets)     29,046       16.03            7,246        4.00          10,869        6.00
    Tier 1 (core) capital (to
      adjusted total assets)        29,046        9.38            9,291        3.00             N/A         N/A
    Tangible capital (to
      adjusted total assets)        29,046        9.38            4,646        1.50             N/A         N/A
    Tier 1 (core) capital (to
      average assets)               29,046       10.43           11,136        4.00          13,920        5.00

As of September 30, 1997
    Total capital (to risk
      weighted assets)         $    32,184       25.40%     $    10,139        8.00%    $    12,673       10.00%
    Tier 1 (core) capital
      (to risk weighted assets)     31,814       25.10            5,069        4.00           7,604        6.00
    Tier 1 (core) capital (to
      adjusted total assets)        31,814       12.43            7,676        3.00             N/A         N/A
    Tangible capital (to
      adjusted total assets)        31,814       12.43            3,838        1.50             N/A         N/A
    Tier 1 (core) capital (to
      average assets)               31,814       13.42            9,482        4.00          11,853        5.00
</TABLE>

Regulations of the Office of Thrift  Supervision limit the dividends that may be
paid without  prior  approval of the Office of Thrift  Supervision.  The Bank is
currently a  "well-capitalized"  Tier 1 institution  and can make  distributions
during a year of 100% of its net income to date  during  the year plus  one-half
its "surplus  capital ratio" (the excess over its capital  requirements)  at the
beginning of the calendar year. Accordingly, at September 30, 1998 approximately
$7,222,000 of the Bank's retained  earnings is available for distribution to the
Company.


<PAGE>

NOTE 12 - OTHER NONINTEREST  INCOME AND EXPENSE
--------------------------------------------------------------------------------

Other  noninterest  income and expense amounts are summarized as follows for the
years ended September 30:

<TABLE>
<CAPTION>


                                                                   1998              1997               1996
                                                                   ----              ----               ----
         Other noninterest income
<S>                                                          <C>                <C>               <C>           
              Service charges and fees                       $      318,636     $      200,759    $      174,315
              Other                                                 113,640             60,412            57,451
                                                             --------------     --------------    --------------

                                                             $      432,276     $      261,171    $      231,766
                                                             ==============     ==============    ==============

         Other noninterest expense
              Advertising and promotion                      $      186,257     $      179,423    $      190,614
              Data processing                                       384,629            281,171           200,940
              Professional fees                                     166,652            143,550           175,341
              Printing, postage, stationery,
                and supplies                                        162,794            192,514           123,215
              Direct loan origination costs deferred               (262,686)          (245,981)         (203,332)
              Other                                                 746,377            549,295           482,173
                                                             --------------     --------------    --------------

                                                             $    1,384,023     $    1,099,972    $      968,951
                                                             ==============     ==============    ==============
</TABLE>


NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND   CONTINGENCIES

Various outstanding  commitments and contingent liabilities are not reflected in
the  financial  statements.  Commitments  to make loans at  September  30 are as
follows:
<TABLE>
<CAPTION>


                              -------------------1 9 9 8---------------- -------------------1 9 9 7----------------
                                    Fixed       Variable                       Fixed       Variable
                                 Rate Loans    Rate Loans       Total       Rate Loans    Rate Loans       Total

<S>                           <C>           <C>            <C>           <C>           <C>           <C>           
  First mortgage loans        $   3,398,489 $    3,441,451 $   6,839,940 $   4,784,788 $   3,816,543 $    8,601,331
  Commercial loans                3,739,220      5,440,747     9,179,967     2,029,260     6,964,446      8,993,706
  Unused lines of credit          3,268,364      8,998,528    12,266,892       717,622     8,931,973      9,649,595
  Unused commercial loan
    lines of credit                       -      7,649,903     7,649,903             -     1,825,409      1,825,409
  Unused construction loan
    lines of credit                       -      1,219,604     1,219,604             -     1,380,909      1,380,909
                              ------------- -------------- ------------- ------------- ------------- --------------

                              $  10,406,073 $   26,750,233 $  37,156,306 $   7,531,670 $  22,919,280 $   30,450,950
                              ============= ============== ============= ============= ============= ==============
</TABLE>



<PAGE>



NOTE 13 - FINANCIAL  INSTRUMENTS WITH  OFF-BALANCE-SHEET  RISK AND CONTINGENCIES
(Continued)

Fixed rate loan commitments at September 30, 1998 are at rates primarily ranging
from 6.75% to 9.25%.  Mortgage  loan fixed rate  commitments  are  primarily for
terms ranging from 15 to 30 years,  while commercial loan fixed rate commitments
are primarily for five year terms.  Rates on variable rate mortgage  loans range
from 5.875% to 8.875% and are tied to the one year treasury bill rate.  Rates on
variable commercial loan commitments are tied to the national prime rate.

Since  commitments to make loans and to fund unused lines of credit and loans in
process may expire without being used, the amounts do not necessarily  represent
future cash  commitments.  In addition,  commitments are agreements to lend to a
customer as long as there is no violation of any  condition  established  in the
contract.  The maximum exposure to credit loss in the event of nonperformance by
the other party is the contractual amount of these instruments.  The same credit
policy is used to make such commitments as is used for loans receivable.

Under employment  agreements with certain executives,  officers,  certain events
leading to separation  from the Company  could result in cash payments  totaling
$1,058,000 as of September 30, 1998.

The Company and the Bank are subject to certain claims and legal actions arising
in the  ordinary  course  of  business.  In the  opinion  of  management,  after
consultation  with legal counsel,  the ultimate  disposition of these matters is
not expected to have a material  adverse  effect on the  consolidated  financial
position or results of operation of the Company.


NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS

Presented below are the condensed  financial  statements for the parent company,
MFB Corp.

                            CONDENSED BALANCE SHEETS
                           September 30, 1998 and 1997

                                                        1998            1997
                                                    -----------     -----------
ASSETS
Cash and cash equivalents                           $   552,454     $   796,186
Equity securities available for sale                    506,380         329,400
Investment in Bank subsidiary                        29,064,393      31,939,172
Loan receivable from ESOP                               444,557         664,610
Other assets                                            388,917           1,438
                                                    -----------     -----------

     Total assets                                   $30,956,701     $33,730,806
                                                    ===========     ===========

LIABILITIES
Accrued expenses and other liabilities              $    70,924     $   180,790

SHAREHOLDERS' EQUITY                                 30,885,777      33,550,016
                                                    -----------     -----------

     Total liabilities and shareholders' equity     $30,956,701     $33,730,806
                                                    ===========     ===========


<PAGE>



NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)

                         CONDENSED STATEMENTS OF INCOME
                  Years ended September 30, 1998, 1997 and 1996

<TABLE>
<CAPTION>


                                                     1998             1997            1996
                                                  -----------      -----------     -----------

<S>                                               <C>              <C>             <C>        
Dividends from Bank subsidiary - cash             $ 5,650,000      $ 2,000,000     $        --
Interest income                                        48,748           57,723          74,390
Other income                                              919               --              --
Interest expense                                        1,346            3,319              --
Other expenses                                        107,359          107,243         153,973
                                                  -----------      -----------     -----------

Income (loss) before income taxes
  and equity in undistributed net income
  of Bank subsidiary                                5,590,962        1,947,161         (79,583)

Income tax benefit                                     25,014           22,803          32,887
                                                  -----------      -----------     -----------

Income (loss) before equity in
  undistributed net income of Bank subsidiary       5,615,976        1,969,964         (46,696)

(Distributions in excess of) equity in
  undistributed net income of Bank subsidiary      (3,379,693)          32,237       1,021,846
                                                  -----------      -----------     -----------

Net income                                        $ 2,236,283      $ 2,002,201     $   975,150
                                                  ===========      ===========     ===========
</TABLE>



<PAGE>

NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------

                       CONDENSED STATEMENTS OF CASH FLOWS
                  Years ended September 30, 1998, 1997 and 1996

<TABLE>
<CAPTION>


                                                        1998             1997             1996
                                                     -----------      -----------      -----------
Cash flows from operating activities
<S>                                                  <C>              <C>              <C>        
     Net income                                      $ 2,236,283      $ 2,002,201      $   975,150
     Adjustments to reconcile net income to
       net cash  from operating activities
         Distributions in excess of (equity in
           undistributed) net income of
           Bank subsidiary                             3,379,693          (32,237)      (1,021,846)
         Net change in other assets                     (361,526)          30,063          287,659
         Net change in accrued expenses and
           other liabilities                             310,634           97,747           40,417
                                                     -----------      -----------      -----------
              Net cash from operating activities       5,565,084        2,097,774          281,380

Cash flows from investing activities
     Net change in interest-bearing deposits
       in other financial institutions                        --               --          948,366
     Principal repayments on loan receivable
       from ESOP                                         220,053          229,041          206,349
     Principal repayments on note receivable
       from Bank subsidiary                                   --        4,750,000        1,000,000
     Purchase of securities available for sale          (242,500)        (300,350)              --
                                                     -----------      -----------      -----------
         Net cash from investing activities              (22,447)       4,678,691        2,154,715

Cash flows from financing activities
     Purchase of MFB Corp. common stock               (5,931,312)      (6,410,802)      (1,499,024)
     Proceeds from exercise of stock options             688,500           96,500               --
     Cash dividends paid                                (543,557)        (553,557)        (118,439)
                                                     -----------      -----------      -----------
         Net cash from financing activities           (5,786,369)      (6,867,859)      (1,617,463)
                                                     -----------      -----------      -----------

Net change in cash and cash equivalents                 (243,732)         (91,394)         818,632

Cash and cash equivalents at beginning
  of year                                                796,186          887,580           68,948
                                                     -----------      -----------      -----------

Cash and cash equivalents at end of year             $   552,454      $   796,186      $   887,580
                                                     ===========      ===========      ===========
</TABLE>



<PAGE>
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS

The  following  table shows the estimated  fair values and the related  carrying
amounts of the Company's  financial  instruments at September 30, 1998 and 1997.
Items which are not financial instruments are not included.
<TABLE>
<CAPTION>


                                                1 9 9 8                              1 9 9 7
                                                -------                              -------
                                      Carrying           Estimated          Carrying           Estimated
                                       Amount           Fair Value           Amount           Fair Value

<S>                                <C>                <C>                <C>                <C>          
Cash and cash equivalents          $  17,903,693      $  17,904,000      $   9,482,348      $   9,482,000
Securities available for sale         41,819,768         41,820,000         39,628,414         39,628,000
FHLB stock                             4,636,300          4,636,000          2,400,000          2,400,000
Loans held for sale, net              13,516,502         13,517,000         12,671,186         12,671,000
Loans receivable, net of
  allowance for loan losses          232,831,800        235,550,000        188,264,198        191,855,000
Accrued interest receivable              967,995            968,000            718,427            718,000
Mortgage servicing rights, net           191,699            192,000                 --                 --
Noninterest bearing demand
  deposits                            (4,298,516)        (4,299,000)        (2,046,702)        (2,047,000)
Savings, NOW and MMDA
  deposits                           (40,835,161)       (40,835,000)       (38,130,008)       (38,130,000)
Other time deposits                 (135,532,298)      (135,573,000)      (131,710,557)      (131,975,000)
Securities sold under
  agreements to repurchase            (2,365,716)        (2,366,000)          (388,920)          (389,000)
FHLB advances                        (92,725,750)       (90,333,000)       (47,500,000)       (47,092,000)
Other borrowings                      (4,931,214)        (4,931,000)                --                 --
</TABLE>

For purposes of the above  disclosures  of estimated  fair value,  the following
assumptions  were used as of September  30, 1998 and 1997.  The  estimated  fair
value for cash and cash  equivalents  is considered  to  approximate  cost.  The
estimated  fair value for  securities  available  for sale, is based upon quoted
market values for the individual  securities or for equivalent  securities.  The
estimated fair value for loans held for sale, net, is based on the price offered
in the secondary  market on September 30, 1998 and 1997 for loans having similar
interest rates and maturities.  The estimated fair value for loans receivable is
based upon  estimates  of the  difference  in interest  rates the Company  would
charge the  borrowers  for similar  such loans with similar  maturities  made at
September 30, 1998 and 1997, applied for an estimated time period until the loan
is assumed to reprice or be paid. In addition, when computing the estimated fair
value for loans  receivable,  the allowance for loan losses was subtracted  from
the calculated fair value for consideration of credit issues. The estimated fair
value for FHLB stock,  accrued interest  receivable,  mortgage servicing rights,
noninterest  bearing demand deposits,  savings,  NOW and MMDA deposits and other
borrowings is based upon their  carrying  value.  The  estimated  fair value for
other time  deposits as well as securities  sold under  agreements to repurchase
and FHLB  advances is based upon  estimates of the rate the Company would pay on
such deposits or borrowings at September 30, 1998 and 1997, applied for the time
period until maturity.  The estimated fair value of other financial  instruments
and off-balance-sheet  loan commitments  approximate cost and are not considered
significant to this presentation.


<PAGE>
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

While these  estimates of fair value are based on  management's  judgment of the
most  appropriate  factors,  there is no assurance that were the Company to have
disposed of such items at September 30, 1998 and 1997, the estimated fair values
would  necessarily  have been  achieved at that date,  since  market  values may
differ  depending  on  various  circumstances.  The  estimated  fair  values  at
September  30, 1998 and 1997 should not  necessarily  be  considered to apply at
subsequent dates.

In addition, other assets and liabilities of the Company that are not defined as
financial  instruments  are  not  included  in the  above  disclosures,  such as
property and equipment.  Also, nonfinancial instruments typically not recognized
in financial statements  nevertheless may have value but are not included in the
above disclosures.  Excluded, among other items, are the estimated earning power
of core deposit accounts,  the trained work force, customer goodwill and similar
items.


NOTE 16 - SAIF DEPOSIT INSURANCE PREMIUM

The deposits of savings associations such as the Bank are insured by the Savings
Association  Insurance Fund (SAIF). A  recapitalization  plan signed into law on
September  30, 1996  provided  for a one-time  assessment  of 65.7 basis  points
applied to all SAIF deposits as of March 31, 1995.  Based on the Bank's deposits
as of this date, a one-time  assessment of  approximately  $955,000 was paid and
recorded as SAIF deposit  insurance premium expense for the year ended September
30, 1996.


NOTE 17 - IMPACT OF NEW ACCOUNTING STANDARDS

In the  future,  several  new  accounting  pronouncements  will be  implemented.
Statement  No. 130  requires  "other  comprehensive  income" and  "comprehensive
income"  to be  displayed  along with net  income.  Other  comprehensive  income
includes   changes  in  unrealized  gains  and  losses  on  available  for  sale
securities,  the  offset  of some  pension  liabilities  currently  recorded  as
reductions in equity, foreign currency translation,  and in the future will also
include  deferred hedging gains and losses.  Comprehensive  income is net income
plus other comprehensive income.

Statement No. 131 for public companies redefines segment reporting to follow how
each company's chief operating  decision maker gets  information  about business
segments to make operating decisions.

Statement  No. 132  increases and revises  pension plan  disclosures  for public
companies, and simplifies such disclosures for nonpublic companies.



<PAGE>
NOTE 17 - IMPACT OF NEW ACCOUNTING STANDARDS (Continued)
--------------------------------------------------------------------------------

Statement No. 133 on derivatives  will, in 2000,  require all  derivatives to be
recorded  at fair value in the  balance  sheet,  with  changes in fair value run
through  income.  If derivatives  are  documented  and effective as hedges,  the
change in the  derivative  fair value  will be offset by an equal  change in the
fair value of the hedged item.

Statement No. 134 on mortgage  banking will, in 1999,  allow mortgage loans that
are  securitized to be classified as trading,  available for sale, or in certain
circumstances held to maturity. Currently these must be classified as trading.

Implementation  guidance on Statement No. 125 will clarify the  requirement  for
loan  participations  to  contain  the right  for the  purchaser  to resell  the
participation,  to avoid  classifying the  participation as a secured  borrowing
instead of a reduction of loans.

Proposals will require that  purchased  loans,  including  those acquired in the
purchase of an entire bank,  be recorded net of estimated  uncollectible  loans.
This means that no  allowance  for loan  losses  will carry over or be  recorded
except  through  subsequent  expense,  although  subsequent  losses equal to the
amount estimated at purchase will not be shown as charge-offs.

The AICPA guidance for financial  institutions  in its accounting  guide will be
revised to conform to current  literature,  make a few changes,  and combine the
banking/savings  guide,  credit union,  and finance company guides,  eliminating
some  differences  therein.  Some changes will be to disclose  loans past due 90
days  or more  that  are  still  on  accrual  and to  disclose  the  policy  for
charging-off loans.

The FASB continues to study several  issues,  including  recording all financial
instruments at fair value and abolishing pooling of interests accounting.  Also,
it is likely that APB 25's measurement for stock option plans will be limited to
employees  and  not  to   nonemployees   such  as  directors,   thereby  causing
compensation expense for stock options to directors.




<PAGE>



NOTE 18 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>


                                                          --------------Year Ended September 30, 1998--------------
                                                              1st            2nd             3rd            4th
(In thousands, except per share data)                       Quarter        Quarter         Quarter        Quarter
                                                            -------        -------         -------        -------

<S>                                                       <C>            <C>            <C>             <C>        
Interest income                                           $     4,819    $     5,154    $     5,391     $     5,474

Interest expense                                                2,818          2,958          3,161           3,267
                                                          -----------    -----------    -----------     -----------


Net interest income                                             2,001          2,196          2,230           2,207

Provision for loan losses                                          15             15             20              70
                                                          -----------    -----------    -----------     -----------


Net interest income after provision for loan                    1,986          2,181          2,210           2,137
  losses

Noninterest income                                                165            162            182             455

Noninterest expense                                             1,279          1,461          1,396           1,489
                                                          -----------    -----------    -----------     -----------


Income before income taxes                                        872            882            996           1,103

Income tax expense                                                370            216            508             523
                                                          -----------    -----------    -----------     -----------


Net income                                                $       502    $       666    $       488     $       580
                                                          ===========    ===========    ===========     ===========

Basic earnings per common share                           $       .32    $       .43    $       .31     $       .38
                                                          ===========    ===========    ===========     ===========
Diluted earnings per common share                         $       .30    $       .40    $       .30     $       .37
                                                          ===========    ===========    ===========     ===========

</TABLE>



<PAGE>
NOTE 18 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)
<TABLE>
<CAPTION>




                                                          --------------Year Ended September 30, 1998--------------
                                                              1st            2nd             3rd            4th
(In thousands, except per share data)                       Quarter        Quarter         Quarter        Quarter
                                                            -------        -------         -------        -------

<S>                                                       <C>            <C>            <C>             <C>        

Interest income                                           $     4,107    $     4,270    $     4,511     $     4,797

Interest expense                                                2,339          2,427          2,612           2,779
                                                          -----------    -----------    -----------     -----------


Net interest income                                             1,768          1,843          1,899           2,018

Provision for loan losses                                           7              8              7               8
                                                          -----------    -----------    -----------     -----------


Net interest income after provision for loan                    1,761          1,835          1,892           2,010
  losses

Noninterest income                                                113             85            108             119

Noninterest expense                                             1,084          1,055          1,156           1,304
                                                          -----------    -----------    -----------     -----------


Income before income taxes                                        790            865            844             825

Income tax expense                                                314            343            336             329
                                                          -----------    -----------    -----------     -----------


Net income                                                $       476    $       522    $       508     $       496
                                                          ===========    ===========    ===========     ===========

Basic earnings per common share                           $       .27    $       .32    $       .32     $       .30
                                                          ===========    ===========    ===========     ===========
Diluted earnings per common share                         $       .26    $       .30    $       .30     $       .29
                                                          ===========    ===========    ===========     ===========

</TABLE>


<PAGE>

                            MFB CORP. AND SUBSIDIARY
                             DIRECTORS AND OFFICERS
                               September 30, 1998

                      MFB CORP. AND MFB FINANCIAL DIRECTORS

M. Gilbert  Eberhart (age 64) has served as Secretary of the Bank since 1987. He
is also a dentist based in Mishawaka.

Thomas F. Hums (age 65) served as President and Chief  Executive  Officer of the
Bank from 1972 until  September  1995.  He also  served as  President  and Chief
Executive Officer of Mishawaka Financial from 1975 until September 1995.

Jonathan E. Kintner (age 55) is an optometrist based in Mishawaka.

Michael J. Marien (age 51) is a Sales Representative with Signode Corporation, a
division of ITW.

Marian K. Torian  (age 77) has served as  Chairman of the Bank and of  Mishawaka
Financial  since  1977.  She  also  served  as a  teacher  with  School  City of
Mishawaka.

Charles J. Viater (age 43) has served as President and Chief  Executive  Officer
of the Bank and Mishawaka  Financial since September 1995. He previously  served
as Executive Vice President for Amity Federal Bank and Chief  Financial  Officer
of Amity Bancshares, Inc. beginning in December 1990.

Reginald  H. Wagle  (age 56) has served as Vice  President  of  Memorial  Health
Foundation since 1992. Until 1992, he was a free-lance  political consultant and
until 1991, he also served as District  Director for the Office of United States
Representative John P. Hiler, Third Congressional District of Indiana.

Christine  A.  Lauber  (age 53) is a  Certified  Public  Accountant  in  private
practice in South Bend, Indiana.


<TABLE>
<CAPTION>
                             MFB FINANCIAL OFFICERS

<S>                                              <C>                                    <C>
Charles J. Viater                                Timothy C. Boenne                      Michael J. Portolese
President and Chief Executive Officer*           Vice President and Controller          Vice President

Steven F. Rathka                                 Gretchen L. Cook                       Thomas A. Smith
Senior Vice President                            Vice President                         Vice President

William L. Stockton, Jr.                         Joseph P. DeKever                      Daniel R. Thomas
Senior Vice President                            Vice President                         Vice President

M. Gilbert Eberhart                              Eric C. Edmond
Secretary*                                       Vice President
</TABLE>


* Holds same position with MFB Corp.
--------------------------------------------------------------------------------


<PAGE>



                            MFB CORP. AND SUBSIDIARY
                             SHAREHOLDER INFORMATION
                               September 30, 1998

--------------------------------------------------------------------------------

Market Information

The  common  stock  of MFB  Corp.  is  traded  on the  National  Association  of
Securities Dealers Automated Quotation System, National Market System, under the
symbol  "MFBC."  As  of  September  30,  1998,  there  were   approximately  632
shareholders of record. The following table sets forth market price and dividend
information for the Company's common stock for the periods indicated.

                                                                     Dividend
Fiscal Quarters Ended            High Trade          Low Trade        Declared

December 31, 1996              $     19.25        $     15.50        $    .08
March 31, 1997                       19.75              16.63             .08
June 30, 1997                        19.75              18.75             .08
September 30, 1997                   23.50              19.13             .08
December 31, 1997                    30.38              22.50             .08
March 31, 1998                       30.38              26.25             .085
June 30, 1998                        27.75              24.00             .085
September 30, 1998                   25.50              18.00             .085

Transfer Agent and Registrar            Special Counsel
         Registrar and Transfer Co.            Barnes & Thornburg
         10 Commerce Drive                     1313 Merchants Company Building
         Cranford, NJ 07016                    11 South Meridan Street
                                               Indianapolis, IN 46204

                                    Independent Auditors
                                            Crowe, Chizek and Company LLP
                                            330 East Jefferson Blvd.
                                            South Bend, IN 46601

Shareholder and General Inquiries

The  Company is  required  to file an Annual  Report on Form 10-K for its fiscal
year ended  September  30, 1998 with the  Securities  and  Exchange  Commission.
Copies of this annual report may be obtained without charge upon written request
to:

                  Charles J. Viater
                  President and Chief Executive Officer
                  MFB Corp.
                  121 South Church Street
                  PO Box 528
                  Mishawaka, IN 46546

Office Locations
  Main Office                Branch Office            Mortgage Office
  121 S. Church St.          411 W. McKinley Ave.     227 S. Main St, Suite 110
  Mishawaka, IN 46544        Mishawaka, IN 46545      Elkhart, IN 46516

  Branch Office              Branch Office            Branch Office
  402 W. Cleveland Rd.       2427 Mishawaka Ave.      2304 Lincolnway East
  Mishawaka, IN 46545        South Bend, IN 46615     Goshen, IN 46526