FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended June 30, 1996
or
[ ] Transaction Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to ___________
Commission File Number 0-21108
MARION CAPITAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1872393
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
100 West Third Street, P.O. Box 367, Marion, Indiana 46952
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code:
(317) 664-0556
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405,
Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of August 23, 1996, was $33,979,017.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of August 23, 1996, was 1,838,442 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended June 30, 1996
are incorporated into Part II. Portions of the Proxy Statement for the 1996
Annual Meeting of Shareholders are incorporated into Part III.
Exhibit Index on Page 36
Page 1 of 41 Pages
<PAGE>
MARION CAPITAL HOLDINGS, INC.
Form 10-K
INDEX
PART 1 Page
Item 1. Business................................................... 1
Item 2. Properties................................................. 31
Item 3. Legal Proceedings.......................................... 31
Item 4. Submission of Matters to a Vote of Security Holders........ 31
Item 4.5. Executive Officers of MCHI................................. 31
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................... 32
Item 6. Selected Consolidated Financial Data....................... 33
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 33
Item 8. Financial Statements and Supplementary Data................ 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 33
PART III
Item 10. Directors and Executive Officers of the Registrant......... 33
Item 11. Executive Compensation..................................... 33
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................... 33
Item 13. Certain Relationships and Related Transactions............. 33
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K............................................ 34
Signatures ....................................................... 35
<PAGE>
PART I
Item 1. Business.
General
Marion Capital Holdings, Inc. ("MCHI") is an Indiana corporation
organized on November 23, 1992, to become a unitary savings and loan holding
company. MCHI became a unitary savings and loan holding company upon the
conversion (the "Conversion") of First Federal Savings Bank of Marion (the
"Bank" and together with MCHI, the "Company") from a federal mutual savings bank
to a federal stock savings bank on March 18, 1993. The principal asset of MCHI
consists of 100% of the issued and outstanding shares of common stock, $0.01 par
value per share, of the Bank. The Bank began operations in Marion, Indiana, as a
federal savings and loan association in 1936, and converted to a federal mutual
savings bank in 1986.
The Bank offers a number of consumer and commercial financial services.
These services include: (i) residential and commercial real estate loans; (ii)
multi-family loans; (iii) construction loans; (iv) installment loans; (v) loans
secured by deposits; (vi) auto loans; (vii) NOW accounts; (viii) consumer and
commercial demand deposit accounts; (ix) individual retirement accounts; and (x)
tax deferred annuities and mutual funds through its service corporation
subsidiary, First Marion Service Corporation ("First Marion"). The Bank provides
these services at two-full service offices, one in Marion and one in Decatur,
Indiana. The Bank's market area for loans and deposits consists of Grant and
surrounding counties and Adams County in Indiana.
The Company's primary source of revenue is interest income from the
Bank's lending activities. The Bank's principal lending activity is the
origination of conventional mortgage loans to enable borrowers to purchase or
refinance one- to four-family residential real property. At June 30, 1996, 58.3%
of the Company's total loan and mortgage-backed securities portfolio consisted
of conventional mortgage loans on residential real property. These loans are
generally secured by first mortgages on the property. Substantially all of the
residential real estate loans originated by the Bank are secured by properties
located in Grant and Adams Counties. The Bank also offers secured and unsecured
consumer-related loans (including installment loans, loans secured by deposits,
home equity loans, and auto loans). The Company has a significant commercial
real estate portfolio, with a balance of $36.2 million at June 30, 1996, or
24.2% of total loans and mortgage-backed securities. The Bank also makes a
limited number of construction loans, which constituted $5.0 million or 3.3% of
the Company's total loans and mortgage-backed securities at June 30, 1996, and a
limited number of commercial loans which are not secured by real estate.
In the early 1980s most savings institutions' loan portfolios consisted
of long-term fixed-rate loans which then carried low interest rates. At the same
time, most savings associations had to pay competitive and high market interest
rates in order to maintain deposits. This resulted in a "negative" interest
spread. The Bank experienced these problems, but responded to them as changes in
regulations over the period permitted, and has been quite successful in managing
its interest rate risk. Among its strategies has been an emphasis on originating
adjustable-rate mortgage loans ("ARMs") which permit the Bank to better match
the interest it earns on mortgage loans with the interest it pays on deposits,
with interest rate minimums. As of June 30, 1996, ARMs constituted 89.6% of the
Company's total mortgage loan portfolio. Additionally, the Bank attempts to
lengthen liability repricing by aggressively pricing longer term certificates of
deposit during periods of relatively low interest rates and investing in
intermediate-term or variable-rate investment securities.
Lending Activities
Loan Portfolio Data. The following table sets forth the composition of
the Company's loan portfolio by loan type and security type as of the dates
indicated, including a reconciliation of gross loans receivable after
consideration of the allowance for possible loan losses and deferred net loan
fees on loans. Because the Conversion did not occur until March 18, 1993, the
information at June 30, 1992 represents loan data for the Bank only.
<PAGE>
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------- ------------------ ----------------- -------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
--------- -------- -------- -------- ------- -------- ------- -------- ------- --------
(Dollars In Thousands)
TYPE OF LOAN
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential.................. $ 87,106 58.26% $ 81,651 56.21% $ 76,573 55.72% $ 76,806 54.41% $ 74,545 53.12%
Commercial real estate....... 36,170 24.19 35,937 24.74 35,003 25.47 39,348 27.87 44,505 31.70
Multi-family................. 15,573 10.42 14,495 9.98 12,039 8.76 12,686 8.99 12,360 8.81
Construction:
Residential.................. 3,904 2.61 3,448 2.37 3,164 2.30 2,479 1.76 2,240 1.60
Commercial real
estate..................... 506 .34 1,257 .87 1,159 .84 1,479 1.05 1,135 .81
Multi-family................. 584 .39 2,627 1.81 3,809 2.77 2,784 1.97 446 .32
Consumer loans:
Installment loans............ 2,725 1.82 1,897 1.30 1,340 .98 1,557 1.10 1,909 1.36
Loans secured by deposits.... 883 .59 797 .55 822 .60 806 .57 1,030 .73
Home equity loans............ 399 .27 405 .27 494 .36 584 .42 725 .52
Auto loans................... 169 .11 120 .08 113 .08 130 .09 187 .13
Home improvement loans....... --- --- --- --- 1 .00 4 .00 11 .01
Education loans.............. --- --- --- --- --- --- 1 .00 3 .00
Commercial loans................ 7 .00 9 .01 14 .01 57 .04 107 .08
Mortgage-backed securities...... 1,491 1.00 2,630 1.81 2,905 2.11 2,446 1.73 1,131 .81
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans receivable and
mortgage-backed
securities................ $149,517 100.00% $145,273 100.00% $137,436 100.00% $141,167 100.00% $140,334 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
TYPE OF SECURITY
Residential (1).............. $ 92,888 62.13% $ 88,109 60.65% $ 83,108 60.47% $ 81,636 57.83% $ 78,410 55.86%
Commercial real estate....... 36,688 24.54 37,219 25.62 36,191 26.33 40,922 28.99 45,871 32.69
Multi-family................. 16,157 10.81 17,122 11.79 15,848 11.53 15,470 10.96 12,806 9.13
Autos........................ 169 .11 120 .08 113 .08 130 .09 187 .13
Deposits..................... 883 .59 797 .55 822 .60 806 .57 1,030 .73
Other security............... 7 .00 9 .01 14 .01 12 .01 25 .03
Unsecured.................... 2,725 1.82 1,897 1.30 1,340 98 2,191 1.55 2,005 1.43
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans receivable and
mortgage-backed
securities.............. 149,517 100.00 145,273 100.00 137,436 100.00 141,167 100.00 140,334 100.00
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Deduct:
Allowance for possible losses
on loans..................... 2,009 1.34 2,013 1.39 2,050 1.49 2,051 1.45 2,305 1.64
Deferred net loan fees.......... 313 .21 303 .21 333 .24 435 .31 523 .38
Loans in process................ 2,539 1.70 4,004 2.75 5,056 3.68 3,235 2.29 3,118 2.22
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Net loans receivable including
mortgage-backed securities. $144,656 96.75% $138,953 95.65% $129,997 94.59% $135,446 95.95% $134,388 95.76%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
Mortgage Loans
Adjustable rate.............. $128,811 89.55% $120,496 86.43% $113,184 85.91% $116,872 86.20% $113,686 84.07%
Fixed rate................... 15,032 10.45 18,919 13.57 18,563 14.09 18,710 13.80% 21,545 15.93
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total...................... $143,843 100.00% $139,415 100.00% $131,747 100.00% $135,582 100.00% $135,231 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
- -----------------
</TABLE>
(1) Includes majority of mortgage-backed securities, home equity loans and home
improvement loans.
<PAGE>
The following table sets forth certain information at June 30, 1996,
regarding the dollar amount of loans maturing in the Company's loan portfolio
based on the date that final payment is due under the terms of the loan. Demand
loans having no stated schedule of repayments and no stated maturity and
overdrafts are reported as due in one year or less. This schedule does not
reflect the effects of possible prepayments or enforcement of due-on-sale
clauses. Management expects prepayments will cause actual maturities to be
shorter.
<TABLE>
<CAPTION>
Due During Years Ended June 30,
Balance ------------------------------------------------------------------------
Outstanding 2000 2002 2007 2012
At June 30, to to to and
1996 1997 1998 1999 2001 2006 2011 following
----------- -------- ------- ------- ------- ------- ------- ---------
(In Thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential............ $ 91,010 $ 671 $ 258 $ 743 $1,660 $14,496 $35,419 $37,763
Multi-family........... 16,157 727 671 2,105 --- 1,290 5,795 5,569
Commercial real
estate............... 36,676 388 2,137 6,416 3,395 8,325 7,873 8,142
Consumer loans:
Home improvement ...... --- --- --- --- --- --- --- ---
Home equity............ 399 121 135 68 16 --- --- 59
Auto................... 169 12 33 41 83 --- --- ---
Installment............ 2,725 1,389 352 257 465 166 96 ---
Loans secured
by deposits.......... 883 611 93 76 91 12 --- ---
Mortgage-backed
securities ............ 1,491 27 817 --- --- 647 --- ---
Commercial loans ..... 7 7 --- --- --- --- --- ---
-------- ------ ------ ------ ------ ------- ------- -------
Total.................. $149,517 $3,953 $4,496 $9,706 $5,710 $24,936 $49,183 $51,533
======== ====== ====== ====== ====== ======= ======= =======
</TABLE>
<PAGE>
The following table sets forth, as of June 30, 1996, the dollar amount of
all loans due after one year which have fixed interest rates and floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Due After June 30, 1997
----------------------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- ----------
(In Thousands)
Mortgage loans:
<S> <C> <C> <C>
Residential............................... $ 7,753 $ 82,586 $ 90,339
Multi-family.............................. 925 14,505 15,430
Commercial real estate.................... 5,983 30,305 36,288
Consumer loans:
Home improvement ......................... --- --- ---
Home equity............................... --- 278 278
Auto...................................... 139 18 157
Installment............................... 534 802 1,336
Loan secured by deposits.................. --- 272 272
Mortgage-backed securties .................... 1,452 12 1,464
Commercial loans .............................. --- --- ---
------- -------- --------
Total..................................... $16,786 $128,778 $145,564
======= ======== ========
</TABLE>
Residential Loans. Residential loans consist of one-to-four family
loans. Approximately $87.1 million, or 58.3%, of the Company's portfolio of
loans and mortgage-backed securities at June 30, 1996, consisted of one- to
four-family mortgage loans, of which approximately 91.4% had adjustable rates.
During the past year, the Company sold to the Federal Home Loan Mortgage
Corporation (the "FHLMC") 95% of the principal balance of substantially all
fixed rate loans originated with terms in excess of 15 years or with annual
interest rates lower than 8.5% and retained all of the servicing rights on all
such loans. Currently, the Company is opting to keep these fixed rate loans in
its portfolio since the value of fixed rate loans remains low. The option to
retain or sell fixed rate loans will be evaluated from time to time.
The Bank originates fixed-rate loans with terms of up to 25 years. Such
loans are originated in accordance with guidelines established by FHLMC to
facilitate the sale of such loans to FHLMC in the secondary market. These loans
amortize on a monthly basis with principal and interest due each month. As
mentioned above, ninety-five percent of such loans originated during the 1996
fiscal year with terms in excess of 15 years, or annual interest rates below
8.5%, were sold to FHLMC promptly after they were originated. The Bank retained
5% of the principal balance of such sold loans as well as the servicing on all
of such sold loans. Recently, the Bank has decided to retain these fixed rate
loans in its portfolio. At June 30, 1996, the Company had $7.8 million of fixed
rate residential mortgage loans which were originated in prior years in its
portfolio, none of which were held for sale.
Most ARMs adjust on an annual basis, although the Bank currently offers
a 5-year ARM which has a fixed rate for five years, and adjusts annually
thereafter. Currently, the ARMs have an interest rate average minimum of 6% and
average maximum of 12%. The interest rate adjustment for substantially all of
the Bank's ARMs is indexed to the One-Year Treasury Constant Maturity Index. On
new residential mortgage loans, the margin above such index currently is 2.75%.
The Bank offers ARMs with maximum rate changes of 2% per adjustment, and an
average of 6% over the life of the loan. Generally made for terms of up to 25
years, the Bank's ARMs are not made on terms that conform with the standard
underwriting criteria of FHLMC or the Federal National Mortgage Association (the
"FNMA"), thereby making resale of such loans difficult. To better protect the
Company against rising interest rates, the Bank underwrites its residential ARMs
based on the borrower's ability to repay the loan assuming a rate equal to
approximately 4% above the initial rate payable if the loan remained constant
during the loan term.
Although the Bank's residential mortgage loans are generally amortized
over a 20-year period, residential mortgage loans generally are paid off before
maturity. Substantially all of the residential mortgage loans that the Bank has
originated include "due on sale" clauses, which give the Bank the right to
declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid.
<PAGE>
The Bank generally requires private mortgage insurance on all
conventional residential single-family mortgage loans with loan-to-value ratios
in excess of 80%. The Bank generally will not lend more than 95% of the lower of
current cost or appraised value of a residential single family property. In July
1995, the Bank's wholly-owned subsidiary, First Marion, began a 100% financing
program pursuant to which the Bank would originate an 80% loan-to-value first
mortgage loan using its normal underwriting standard and First Marion would
finance the remaining 20%. The loans apply only to the purchase or construction
of a single family residence and the borrower is required to have "above
average" credit. The second mortgage loan originated by First Marion is a fixed
rate mortgage loan with an interest rate of 12% and a term not to exceed 15
years. At June 30, 1996, these loans amounted to $540,000.
Residential mortgage loans in excess of $250,000 must be approved in
advance by the Bank's Board of Directors. Such loans under that amount must be
approved by the Bank's Loan Committee.
At June 30, 1996, residential mortgage loans amounting to $1.7 million,
or 1.2% of total loans, were included in non-performing assets. See
"--Non-performing and Problem Assets."
Commercial Real Estate Loans. At June 30, 1996, $36.2 million, or
24.2%, of the Company's total loan and mortgage-backed securities portfolio
consisted of mortgage loans secured by commercial real estate. The properties
securing these loans consist primarily of nursing homes, office buildings,
hotels, churches, warehouses and shopping centers. The commercial real estate
loans, substantially all adjustable rate, are made for terms not exceeding 25
years, and generally require an 80% or lower loan-to-value ratio. Some require
balloon payments after 5, 10 or 15 years. A number of different indices,
including the prime rate as announced by NBD Bank, Indianapolis, Indiana, are
used as the interest rate index for these loans. The commercial real estate
loans generally have minimum interest rates of 8% and maximum interest rates of
14%. Most of these loans adjust annually, but the Company has some 3-year and
5-year commercial real estate adjustable rate loans in its portfolio. The
largest commercial real estate loan as of June 30, 1996, had a balance of $2.7
million.
Because of certain credit problems it was experiencing in its
commercial real estate and multi-family loan portfolio, the Bank has since the
summer of 1991 limited the size of any commercial real estate or multi-family
loan or participation originated or purchased to $500,000, wherever practicable.
The Company held in its portfolio 25 commercial and multi-family real estate
loans with balances in excess of $500,000 at June 30, 1996. The average loan
balance for all such loans was $1.1 million. A significant proportion of the
Company's commercial real estate loan portfolio consists of loans secured by
nursing home properties. The balance of such loans totaled $16.6 million at June
30, 1996.
Current federal law limits a savings association's investment in
commercial real estate loans to 400% of its capital. In addition, the
application of the Qualified Thrift Lender Test has had the effect of limiting
the aggregate investment in commercial real estate loans made by the Bank. See
"Regulation -- Qualified Thrift Lender." The Bank currently complies with the
limitations on investments in commercial real estate loans.
Commercial real estate loans involve greater risk than residential
mortgage loans because payments on loans secured by income properties are often
dependent on the successful operation or management of the properties and are
generally larger. As a result, repayment of such loans may be subject to a
greater extent than residential real estate loans to adverse conditions in the
real estate market or the economy. At June 30, 1996, the Company had not
classified any of its commercial real estate and multi-family portfolio as
substandard and no loans were classified as special mention.
The Company has a high concentration of loans secured by nursing homes.
Like other commercial real estate loans, nursing home loans often involve large
loan balances to single borrowers or groups of related borrowers, and have a
higher degree of credit risk than residential mortgage lending. Loan payments
are often dependent on the operation of the nursing home, the success of which
is dependent upon the long-term health care industry. The risks inherent in such
industry include the federal, state and local licensure and certification laws
which regulate, among other things, the number of beds for which nursing care
can be provided and the construction, acquisition and operation of such nursing
facilities. The failure to obtain or maintain a required regulatory approval or
license could prevent the nursing home from being reimbursed for costs incurred
in offering its services or expanding its business. Moreover, a large percentage
of nursing home revenues is derived from reimbursement by third party payors.
Both governmental and other third party payors have adopted and are continuing
to adopt cost containment measures designed to limit payment to health care
providers, and changes in federal and state regulations in these areas could
<PAGE>
adversely affect such homes. Because of the Company's concentration in this
area, a decline in the nursing home industry could have a substantial adverse
effect on the Company's commercial real estate portfolio and, therefore, a
substantial adverse effect on its operating results.
Commercial real estate loans in excess of $200,000 must be approved in
advance by the Bank's Board of Directors. Commercial real estate loans under
that amount must be approved by the Bank's Loan Committee.
Multi-Family Loans. At June 30, 1996, $15.6 millon, or 10.4%, of the
Company's total loan and mortgage-backed securities portfolio consisted of
mortgage loans secured by multi-family dwellings (those consisting of more than
four units). All of the Company's multi-family loans are secured by apartment
complexes located in Indiana or Ohio. The average balance of all such
multi-family mortgage loans was $336,000 as of June 30, 1996. The largest such
multi-family mortgage loan as of June 30, 1996, had a balance of $1.6 million.
As with the Bank's commercial real estate loans, multi-family mortgage loans are
substantially all adjustable-rate loans, are written for terms not exceeding 25
years, and require at least an 80% loan-to-value ratio. At June 30, 1996, the
Company had no loans secured by multi-family dwellings which were classified as
substandard or included in non-performing assets.
Multi-family loans, like commercial real estate loans, involve a
greater risk than do residential loans. Also, the more stringent loans-to-one
borrower limitation limits the ability of the Bank to make loans to developers
of apartment complexes and other multi-family units.
Construction Loans. The Bank offers construction loans with respect to
owner-occupied residential and commercial real estate property and, in certain
cases, to builders or developers constructing such properties on an investment
basis (i.e., before the builder/developer obtains a commitment from a buyer).
Most construction loans are made to owners who occupy the premises.
At June 30, 1996, $5.0 million, or 3.3%, of the Company's total loan
and mortgage-backed securities portfolio consisted of construction loans, of
which approximately $584,000 were investment residential construction loans and
$506,000 related to construction of commercial real estate projects. The largest
construction loan on June 30, 1996, was $431,000. No construction loans were
included in non-performing assets on that date.
For most construction loans, the loan is actually a 20-year mortgage
loan, but interest only is payable during the construction phase of the loan up
to 18 months, and such interest is charged only on the money disbursed under the
loan. After the construction phase (typically 6 to 12 months), regular mortgage
loan payments of principal and interest are due. Appraisals for these loans are
completed, subject to completion of building plans and specifications.
Interest rates and fees vary for these loans. While construction is
progressing, periodic inspections are performed for which the Bank assesses a
fee.
While providing the Company with a higher yield than a conventional
mortgage loan, construction loans involve a higher level of risk. For example,
if a project is not completed and the borrower defaults, the Bank may have to
hire another contractor to complete the project at a higher cost. Also, a house
may be completed, but may not be salable, resulting in the borrower defaulting
and the Bank taking title to the house.
Consumer Loans. Federal laws and regulations permit federally chartered
savings associations to make secured and unsecured consumer loans in an
aggregate amount of up to 35% of the association's total assets. In addition, a
federally chartered savings association has lending authority above the 35%
limit for certain consumer loans, such as property improvement loans and deposit
account secured loans. However, the Qualified Thrift Lender test places
additional limitations on a savings association's ability to make consumer
loans.
The Company's consumer loans, consisting primarily of installment
loans, loans secured by deposits, and auto loans, aggregated $4.2 million as of
June 30, 1996, or 2.8% of the Company's total loan and mortgage-backed
securities portfolio. Although consumer loans are currently only a small portion
of its lending business, the Bank consistently originates consumer loans to meet
the needs of its customers, and the Bank intends to originate more such loans to
assist in meeting its asset/liability management goals.
<PAGE>
The Bank makes installment loans of up to three years, which consisted
of $2.7 million, or 1.8% of the Company's total loan and mortgage-backed
securities portfolio at June 30, 1996. Loans secured by deposits, totaling
$883,000 at June 30, 1996, are made up to 90% of the original account balance
and accrue at a rate of 2% over the underlying certificate of deposit rate.
Variable rate home equity loans of up to 10 years, secured by second mortgages
on the underlying residential property totaled $399,000, or 0.3% of the
Company's total loan and mortgage-backed securities portfolio at June 30, 1996.
Automobile loans totaled only $169,000 and are made at variable and fixed rates
for terms of up to five years depending on the age of the automobile and the
loan-to-value ratio for the loan. The Bank does not make indirect automobile
loans.
Although consumer loans generally involve a higher level of risk than
one- to four-family residential mortgage loans, their relatively higher yields
and shorter terms to maturity are believed to be helpful in reducing the
interest-rate risk of the loan portfolio. The Bank has thus far been successful
in managing consumer loan risk. As of June 30, 1996, $11,000 of consumer loans
were included in non-performing assets.
Mortgage-Backed Securities. At June 30, 1996, the Company had $1.5
million of mortgage-backed securities outstanding, or 1.0% of the Company's
total loan and mortgage-backed securities portfolio. These mortgage-backed
securities have an average estimated remaining life of approximately 4 years,
and may be used as collateral for borrowings and as a source of liquidity.
Origination, Purchase and Sale of Loans. The Bank currently does not
originate its ARMs in conformity with the standard criteria of the FHLMC or
FNMA. The Bank would therefore experience some difficulty selling such loans in
the secondary market, although most loans could be brought into conformity. The
Bank has no intention, however, of attempting to sell such loans. The Bank's
ARMs vary from secondary market criteria because the Bank does not use the
standard loan form, does not require current property surveys in most cases, and
does not permit the conversion of those loans to fixed-rate loans in the first
three years of their term. These practices allow the Bank to keep the loan
closing costs down.
Although the Bank currently has authority to lend anywhere in the
United States, it has confined its loan origination activities primarily in
Grant and contiguous counties and in Adams County. The Bank's loan originations
are generated from referrals from builders, developers, real estate brokers and
existing customers, newspaper, radio and periodical advertising, and walk-in
customers. Loans are originated at either the main or branch office. All loan
applications are processed and underwritten at the Bank's main office.
Under current federal law, a savings association generally may not make
any loan to a borrower or its related entities if the total of all such loans by
the savings association exceeds 15% of its capital (plus up to an additional 10%
of capital in the case of loans fully collateralized by readily marketable
collateral); provided, however, that loans up to $500,000 regardless of the
percentage limitations may be made and certain housing development loans of up
to $30 million or 30% of capital, whichever is less, are permitted. The maximum
amount which the Bank could have loaned to one borrower and the borrower's
related entities under the 15% of capital limitation was $5.3 million at June
30, 1996. The Bank's portfolio of loans currently contains one borrower that
exceeds the 15% of capital limitation. As of July 31, 1996, these loans exceed
the limitation by $312,000. One property is currently in the process of being
refinanced, and when complete, will reduce the total loans below the applicable
requirements.
The Bank's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. To assess the borrower's
ability to repay, the Bank studies the employment and credit history and
information on the historical and projected income and expenses of its
individual and corporate mortgagors.
The Bank uses independent appraisers to appraise the property securing
its loans and requires title insurance or an abstract and a valid lien on its
mortgaged real estate. Appraisals on real estate securing most real estate loans
in excess of $250,000, are performed by either state-licensed or state-certified
appraisers, depending on the type and size of the loan. The Bank requires fire
and extended coverage insurance in amounts at least equal to the principal
amount of the loan. It also requires flood insurance to protect the property
securing its interest if the property is in a flood plain. Tax and insurance
payments are required to be escrowed by the Bank on all loans subject to private
<PAGE>
mortgage insurance, but this service is offered to all borrowers. Annual site
visitations are made by licensed architects with respect to all commercial real
estate loans in excess of $500,000.
The Bank's Executive Committee approves all consumer loans and its Loan
Committee approves all mortgage loans. Commercial real estate loans in excess of
$200,000 and residential mortgage loans in excess of $250,000 must be approved
in advance by the Bank's Board of Directors.
The Bank applies consistent underwriting standards to the several types
of consumer loans it makes to protect the Bank against the risks inherent in
making such loans. Borrower character, credit history, net worth and underlying
collateral are important considerations.
The Bank has historically participated in the secondary market as a
seller of 95% of the principal balance of its long-term fixed rate mortgage
loans, as described above, although the Bank has recently begun retaining such
loans in the Company's portfolio. The loans the Bank sells are designated for
sale when originated. During the fiscal year ended June 30, 1996, the Bank sold
$1.4 million of its fixed-rate mortgage loans, and at June 30, 1996, held no
such loans for sale. The Bank obtains commitments from investors for the sale of
such loans at their outstanding principal balance and these commitments are
obtained prior to origination of the loans. The borrower's interest rate is
equal to the rate required by the investor plus 0.375% servicing, and therefore
no gains or losses are recorded at the time of the sale.
When it sells mortgage loans, the Bank generally retains the
responsibility for collecting and remitting loan payments, inspecting the
properties that secure the loans, making certain that monthly principal and
interest payments and real estate tax and insurance payments are made on behalf
of borrowers, and otherwise servicing the loans. The Company receives a
servicing fee for performing these services. The amount of fees received by the
Company varies, but is generally calculated as an amount equal to a rate of .25%
per annum for commercial loans and .375% per annum for residential loans on the
outstanding principal amount of the loans serviced. The servicing fee is
recognized as income over the life of the loans. At June 30, 1996, the Company
serviced $33.6 million of loans sold to other parties of which $7.8 million or
23.2% were for loans sold to FHLMC.
The Company occasionally purchases participations to diversify its
portfolio, to supplement local loan demand and to obtain more favorable yields.
The participations purchased normally represent a portion of residential or
commercial real estate loans originated by other Indiana financial institutions,
most of which are secured by property located in Indiana. As of June 30, 1996,
the Company held in its loan portfolio, participations in mortgage loans
aggregating $10.9 million that it had purchased, all of which were serviced by
others. The largest such participation it held at June 30, 1996, was in a loan
secured by an apartment complex. The Company's portion of the outstanding
balance on that date was approximately $1.6 million.
<PAGE>
The following table shows loan origination, purchase, sale and repayment
activity for the Bank during the periods indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Gross loans receivable and mortgage-backed
securities at beginning of period...................... $145,273 $137,436 $141,167
-------- -------- --------
Originations:
Mortgage loans:
Residential.......................................... 28,841 21,489 30,561
Commercial real estate and multi-family.............. 8,655 10,758 13,122
-------- -------- --------
Total mortgage loans................................. 37,496 32,247 43,683
-------- -------- --------
Consumer loans:
Installment loans.................................... 3,492 2,206 1,505
Loans secured by deposits............................ 763 521 670
-------- -------- --------
Total consumer loans................................ 4,255 2,727 2,175
-------- -------- --------
Commercial loans....................................... 146 21 31
-------- -------- --------
Total originations................................... 41,897 34,995 45,889
-------- -------- --------
Purchases:
Mortgage-backed securities............................. --- --- 1,010
Mortgage loans:
Residential.......................................... 500 --- ---
Commercial real estate and
multi-family.................................... 1,508 1,200 ---
-------- -------- --------
Total originations and purchases..................... 43,905 36,195 46,899
-------- -------- --------
Sales:
Mortgage loans:
Residential.......................................... 1,426 464 4,800
Commercial real estate and multi-family.............. 4,239 1,950 5,260
Mortgage-backed securities........................... --- --- ---
-------- -------- --------
Total sales........................................ 5,665 2,414 10,060
-------- -------- --------
Repayments and other deductions........................... 33,996 25,944 40,570
-------- -------- --------
Gross loans receivable and mortgage-backed
securities at end of period.......................... $149,517 $145,273 $137,436
======== ======== ========
</TABLE>
Origination and Other Fees. The Company realizes income from fees for
originating commercial real estate loans (equal to one or one-half of a
percentage of the total principal amount of the loan), late charges, checking
and NOW account service charges, fees for the sale of mortgage life insurance by
the Bank, fees for servicing loans, rental income from the lease of space to
Director W. Gordon Coryea, and fees for other miscellaneous services including
money orders and travelers checks. In order to increase its competitive position
with respect to other mortgage lenders, the Bank does not charge points on
residential mortgage loans, but does so on its commercial real estate loans.
Late charges are assessed if payment is not received within 15 days after it is
due.
The Bank charges miscellaneous fees for appraisals, inspections
(including an inspection fee for construction loans), obtaining credit reports,
certain loan applications, recording and similar services. The Company also
collects fees for Visa applications which it refers to another financial
institution. The Company does not underwrite any of these credit card loans.
Non-Performing and Problem Assets
Mortgage loans are reviewed by the Company on a regular basis and are
generally placed on a non-accrual status when the loans become contractually
past due 90 days or more. Once a mortgage loan is fifteen days past due, a
reminder is mailed to the borrower requesting payment by a specified date. At
the end of each month, late notices are sent with respect to all mortgage loans
at least 20 days delinquent. When loans are 30 days in default, a third notice
imposing a late charge equal to 5% of the late principal and interest payment is
imposed. Contact by phone or in person is made, if feasible, with respect to all
mortgage loans 30 days or more in default.
<PAGE>
By the time a mortgage loan is 90 days past due, a letter is sent to the
borrower demanding payment by a certain date and indicating that a foreclosure
suit will be filed if this deadline is not met. The Board of Directors normally
confers foreclosure authority at that time, but management may continue to work
with the borrower if circumstances warrant.
Consumer and commercial loans other than mortgage loans are treated
similarly. Interest income on consumer and other nonmortgage loans is accrued
over the term of the loan except when serious doubt exists as to the
collectibility of a loan, in which case the accrual of interest is discontinued.
It is the Company's policy to recognize losses on these loans as soon as they
become apparent.
Non-performing assets. At June 30, 1996, $1.9 million, or 1.1% of the
Company's total assets, were non-performing assets (non-accrual loans, real
estate owned and troubled debt restructurings), compared to $8.9 million, or
5.5% of the Company's total assets, at June 30, 1992. At June 30, 1996,
residential loans, commercial real estate loans, consumer loans and REO
accounted for 87.3%, 2.5%, 0.6% and 9.6%, respectively, of non-performing
assets.
The June 30, 1996, non-performing assets included approximately
$183,000 of real estate acquired as a result of foreclosure, voluntary deed, or
other means, compared to $1.6 million at June 30, 1992. Such real estate
acquired is classified by the Company as "real estate owned" or "REO" until it
is sold. When property is so acquired, the value of the asset is recorded on the
books of the Company at the lower of the unpaid principal balance at the date of
acquisition plus foreclosure and other related costs or at fair value. Interest
accrual ceases when the collection of interest becomes doubtful, usually after
the loan has been delinquent for 90 days or more. All costs incurred from the
date of acquisition in maintaining the property are expensed.
The following table sets forth the amounts and categories of the
Company's non-performing assets (non-accrual loans, real estate owned and
troubled debt restructurings). Information at June 30, 1992 represents
non-performing assets data for the Bank only. It is the policy of the Company
that all earned but uncollected interest on all loans be reviewed monthly to
determine if any portion thereof should be classified as uncollectible for any
loan past due in excess of 90 days.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---------- --------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Accruing loans delinquent
more than 90 days ........................ $ --- $ --- $ --- $ --- $ ---
Non-accruing loans (1):
Residential............................... 1,658 1,698 2,054 2,362 2,637
Multi-family.............................. --- --- --- --- ---
Commercial real estate.................... 47 --- 2,580 2,870 4,654
Consumer.................................. 11 54 3 104 71
Troubled debt restructurings .................. --- --- --- --- ---
------ ------ ------ ------ ------
Total non-performing loans................ 1,716 1,752 4,637 5,336 7,362
------ ------ ------ ------ ------
Real estate owned, net......................... 183 206 830 1,795 1,550
------ ------ ------ ------ ------
Total non-performing assets .............. $1,899 $1,958 $5,467 $7,131 $8,912
====== ====== ====== ====== ======
Non-performing loans to total
loans, net (2) ........................... 1.18% 1.27% 3.59% 3.95% 5.43%
Non-performing assets to total assets ......... 1.07% 1.13% 3.20% 4.10% 5.52%
</TABLE>
(1) The Company generally places mortgage loans on a nonaccrual status when the
loans become contractually past due 90 days or more. Interest income
prevously accrued but not deemed collectible is reversed and charged
against current income. Interest on these loans is then recognized as
income when collected. At June 30, 1996, $1.7 million of nonaccrual loans
were residential loans, $47,000 were commercial real estate loans, and
$11,000 were consumer loans. For the year ended June 30, 1996, the income
that would have been recorded had the non-accrual loans not been in a
non-performing status totaled $153,000 compared to actual income recorded
of $110,000.
(2) Total loans less deferred net loan fees and loans in process.
<PAGE>
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
Office of Thrift Supervision ("OTS") to be of lesser quality, as "substandard,"
"doubtful" or "loss." An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to sufficient risk to
warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "special mention" by management.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the institution's Principal Supervisory Agent, who may
order the establishment of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Company regularly
reviews the problem loans in its portfolio to determine whether any loans
require classification in accordance with applicable regulations. Total
classified assets at June 30, 1996, were $1.2 million.
The following table sets forth the aggregate amount of the Company's
classified assets, and of the general and specific loss allowances as of the
dates indicated. Information at June 30, 1992 represents classified assets data
for the Bank only.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Substandard assets (1).................. $1,226 $1,574 $5,111 $7,375 $ 9,468
Doubtful assets ........................ --- --- --- --- ---
Loss assets............................. --- --- --- --- 213
Special mention......................... --- --- --- 2,500 3,700
------ ------ ------ ------ -------
Total classified assets.............. $1,226 $1,574 $5,111 $9,875 $13,381
====== ====== ====== ====== =======
General loss allowances................. $2,009 $2,013 $2,050 $2,051 $ 2,305
Specific loss allowances................ --- --- --- --- ---
------ ------ ------ ------ -------
Total allowances..................... $2,009 $2,013 $2,050 $2,051 $ 2,305
====== ====== ====== ====== =======
</TABLE>
- ---------------
(1) Includes REO, net, of $0.2, $0.2, $0.8, $1.8, and $1.6 million,
respectively.
The Company regularly reviews its loan portfolio to determine whether any
loans require classification in accordance with applicable regulations. Not all
assets classified by the Company as substandard, doubtful or loss are included
as non-performing assets, and not all of the Company's non-performing assets
constitute classified assets.
Substandard Assets. At June 30, 1996, the Company had 65 loans classified
as substandard totaling approximately $1.0 million. Included in substandard
assets are certain loans to facilitate the sale of the real estate owned,
totaling 152,000 at June 30, 1996. These are former REO properties sold on
contract that are included as substandard assets to the extent the loan balance
exceeds the appraised value of the property.
<PAGE>
Also included in substandard assets at June 30, 1996, are slow mortgage
loans (loans or contracts delinquent for generally 90 days or more) aggregating
$880,000, slow consumer loans totaling $11,000 and REO of $183,000.
Special Mention Assets. The Company classified no assets as special
mention at June 30, 1996, 1995 and 1994. The Company's assets subject to special
mention at June 30, 1993, and 1992 totaled $2.5 million and $3.7 million,
respectively.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for
losses on loans, which is charged to earnings. The provision is determined in
conjunction with management's review and evaluation of current economic
conditions (including those of the Bank's lending area), changes in the
character and size of the loan portfolio, loan delinquencies (current status as
well as past and anticipated trends) and adequacy of collateral securing loan
delinquencies, historical and estimated net charge-offs, and other pertinent
information derived from a review of the loan portfolio. The Company has
increased the provision for losses on loans partly in recognition of changing
economic conditions and its increased perception of risks inherent in its
commercial real estate and multi-family loan portfolio. Loans or portions
thereof are charged to the allowance when losses are considered probable. In
management's opinion, the Company's allowance for possible loan losses is
adequate to absorb anticipated future losses from loans at June 30, 1996.
<PAGE>
Summary of Loan Loss Experience. The following table analyzes changes
in the allowance for loan losses during the past five years ended June 30, 1996.
Information for the year ended June 30, 1992 represents data for the Bank only.
<TABLE>
<CAPTION>
Year Ended
June 30,
-----------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in Thousands)
Balance of allowance at
<S> <C> <C> <C> <C> <C>
beginning of period....................... $2,013 $2,050 $2,051 $2,305 $1,981
------ ------ ------ ------ ------
Add Recoveries of loans previously
charged off -- residential real
estate loans.............................. 2 12 17 1 ---
Less charge-offs:
Residential real estate loans............. 37 93 82 22 48
Commercial real estate loans.............. 3 2 --- 598 778
Consumer loans............................ --- 22 1 2 ---
------ ------ ------ ------ ------
Net charge-offs.............................. 38 105 66 621 826
------ ------ ------ ------ ------
Provisions for losses on loans............... 34 68 65 367 1,150
------ ------ ------ ------ ------
Balance of allowance at end
of period................................. $2,009 $2,013 $2,050 $2,051 $2,305
====== ====== ====== ====== ======
Net charge-offs to total average
loans outstanding for period.............. .03% .08% .05% .46% .60%
Allowance at end of period to
loans receivable at end of period......... 1.38 1.45 1.59 1.52 1.70
Allowance to total non-performing
loans at end of period.................... 117.07 114.87 44.21 38.44 31.31
</TABLE>
Allocation of Allowance for Loan Losses. The following table presents
an analysis of the allocation of the Company's allowance for loan losses at the
dates indicated. Information for the year ended June 30, 1992 represents
allowance data for the Bank only.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ----------------- ---------------- ----------------- -----------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
to total to total to total to total to total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ --------- ------- -------- ------- ------- ------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
Residential $ --- 59.11% $ 10 57.53% $ 48 57.29% $ 194 55.79% $ 165 53.55%
Commercial real estate 29 24.44 30 25.19 438 26.02 478 28.36 476 31.97
Multi-family 264 10.52 264 10.16 264 8.95 264 9.15 136 8.88
Construction loans --- 3.37 --- 5.14 --- 6.04 --- 4.86 --- 2.74
Commercial loans --- .01 --- .01 --- .01 --- 0.04 --- 0.08
Consumer loans 24 2.55 20 1.97 39 1.69 37 1.80 38 2.78
Unallocated 1,692 --- 1,689 --- 1,261 --- 1,078 --- 1,490 ---
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $2,009 100.00% $2,013 100.00% $2,050 100.00% $2,051 100.00% $2,305 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Investments
Federally chartered savings associations have the authority to invest
in various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds sold. Subject to various restrictions, federally
chartered savings associations may also invest a portion of their assets in
commercial paper, corporate debt securities and asset-backed securities. The
investment policy of MCHI, which is established by the Board of Directors and is
implemented by the Executive Committee, is designed primarily to maximize the
yield on the investment portfolio subject to minimal liquidity risk, default
risk, interest rate risk, and prudent asset/liability management.
<PAGE>
Specifically, MCHI's policies generally limit investments in corporate
debt obligations to those which are rated in the two highest rating categories
by a nationally recognized rating agency at the time of the investment and such
obligations must continue to be rated in one of the four highest rating
categories. Commercial bank obligations, such as certificates of deposit,
brokers acceptances, and federal funds must be rated "C" or better by a major
rating service. Commercial paper must be rated A-1 by Standard and Poor's and
P-1 by Moody's. The policies also allow investments in obligations of federal
agencies such as the Government National Mortgage Association ("GNMA"), FNMA,
and FHLMC, and obligations issued by state and local governments. MCHI does not
utilize options or financial or futures contracts.
The Company's investment portfolio consists of marketable equity
securities, U.S. Treasury and agency securities, state and municipal bonds,
investment in two Indiana limited partnerships and FHLB stock. At June 30, 1996,
approximately $14.2 million, including securities at market value for those
classified as available for sale and at amortized cost for those classified as
held to maturity, or 7.79% of the Company's total assets, consisted of such
investments.
The following tables set forth the carrying value and market value of
the Company's investments at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ---------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- ------ -------- ------ -------- ------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale (1):
Federal agencies................. $ 1,000 $ 1,000 $ 3,000 $ 2,985 $ --- $ ---
Marketable equity securities..... --- --- --- --- --- ---
------ ------ ------ ------ ------ ------
Total securities available
for sale....................... 1,000 1,000 3,000 2,985 --- ---
------ ------ ------ ------ ------ ------
Securities held to maturity (2):
U.S. Treasury.................... 3,015 2,975 3,035 2,978 3,055 2,908
Federal agencies................. 6,954 6,917 11,000 10,744 17,986 17,598
State and municipal.............. 610 605 610 592 900 862
Other ........................... 988 1,000 --- --- --- ---
------ ------ ------ ------ ------ ------
Total securities held
to maturity.................... 11,567 11,497 14,645 14,314 21,941 21,368
------ ------ ------ ------ ------ ------
Real estate limited partnerships.... 1,624 (4) 1,527 (4) 1,422 (4)
FHLB stock (3)...................... 988 988 909 909 909 909
------- ------- -------
Total investments.............. $15,179 $20,081 $24,272
======= ======= =======
</TABLE>
- -------------
(1) Upon adoption of SFAS No. 115 as of July 1, 1994, securities available
for sale are recorded at market value in the financial statements.
Prior to the adoption of SFAS No. 115, the marketable equity securities
currently classified as available for sale were carried at the lower
cost or market.
(2) Mortgage-backed securities included in securities held to maturity in
the financial statements are included in the gross loans receivable
table on page 2 of this Form 10-K.
(3) Market value approximates carrying value.
(4) Market values are not available, nor have there been recent appraisals
of the apartment complexes invested in by the partnerships.
<PAGE>
The following table sets forth investment securities and FHLB stock which mature
during each of the periods indicated and the weighted average yields for each
range of maturities at June 30, 1996.
<TABLE>
<CAPTION>
Amount at June 30, 1996 which matures in
-------------------------------------------------------------------------
One One to Over
Year or less Five Years Ten Years and Stock
-------------------- ----------------------- ----------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- ------- -------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale (1):
Federal agencies................. $1,000 4.20% $ --- ---% $ --- ---%
------ ---- ------ ---- ------ ----
Total securities available
for sale....................... 1,000 4.20 --- --- --- ---
------ ---- ------ ---- ------ ----
Securities held to maturity (2):
U.S. Treasury.................... 1,011 4.84 2,004 5.16 --- ---
Federal agencies................. 5,954 5.17 1,000 5.53 --- ---
State and municipal.............. --- --- 610 4.85 --- ---
Other ........................... 988 5.32 --- --- --- ---
------ ---- ------ ---- ------ ----
Total securities held
to maturity.................... 7,953 5.15 3,614 5.21 --- ---
------ ---- ------ ---- ------ ----
FHLB stock.......................... --- --- --- --- 988 7.53
------ ---- ------ ---- ------ ----
Total investments.............. $8,953 5.04% $3,614 5.21% $ 988 7.53%
====== ==== ====== ==== ====== ====
</TABLE>
- ----------------
(1) Securities available for sale are set forth at amortized cost for
purposes of this table.
(2) Mortgage-backed securities included in securities held to maturity in
the financial statements are included in the gross loans receivable
table on page 2.
The Bank owns 99% of the limited partnership interests in Pedcor
Investments 1987-II, an Indiana limited partnership ("Pedcor") organized to
build, own, operate and lease a 144-unit apartment complex in Indianapolis,
Indiana. The project, operated as multi-family, low/moderate income housing
project, is complete and performing as planned. A low/moderate income housing
project qualifies for certain tax credits if (i) it is a residential rental
property, (ii) the units are used on a nontransient basis, and (iii) 20% or more
of the units in the project are occupied by tenants whose incomes are 50% or
less of the area median gross income, adjusted for family size, or,
alternatively, at least 40% of the units in the project are occupied by tenants
whose incomes are 60% of the area median gross income. Qualified low income
housing projects generally must comply with these and other rules for 15 years,
beginning with the first year the project qualifies for the tax credit, or some
or all of the tax credit together with interest may be recaptured. The tax
credit is subject to limitations on the use of the general business credit, but
no basis reduction is required for any portion of the tax credit claimed.
The Bank committed to invest approximately $3.41 million in Pedcor at
inception of the project in January, 1988. Through June 30, 1996, the Bank has
invested approximately $3.28 million in Pedcor with 1 additional annual capital
contribution remaining to be paid in January, 1997 totaling $130,000. The
additional contribution will be used for operating and other expenses of the
partnership. This payment is contingent upon the Bank not exercising a put
option which would require the general partners to buy out the Bank's interest
in the partnership for $5,000. The tax credits resulting from Pedcor's operation
of a low/moderate income housing project will be available to the Company
through 1998. Although the Company has reduced income tax expense by the full
amount of the tax credit available each year, it has not been able to fully
utilize available tax credits to reduce income taxes payable because it is not
allowed to use tax credits that would reduce its regular corporate tax liability
below its alternative minimum tax liability. The Bank may carryforward unused
tax credits for a period of 15 years and believes it will be able to utilize
available tax credits during the carryforward period.
<PAGE>
Pedcor has incurred operating losses from its operations primarily due to
accelerated depreciation of assets and other factors. Certain fees to the
general partner not recorded or estimable to date by the partnership under
provisions of the partnership agreement could adversely affect future operating
results when accrued or paid. The Bank has accounted for its investment in
Pedcor on the equity method, and, accordingly, has recorded its shares of these
losses as reductions to its investment in Pedcor, which at June 30, 1996, was
$1.6 million.
The following summarizes the Bank's equity in Pedcor's losses and tax
credits recognized in the Company's consolidated financial statements:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- -------
Investment in Pedcor:
<S> <C> <C> <C> <C> <C>
Accumulated contributions..................... $3,280 $2,990 $2,700 $2,405 $1,995
Net of equity in losses....................... 1,624 1,527 1,422 1,354 1,156
Equity in losses, net
of income tax effect.......................... (117) (111) (137) (104) (101)
Tax credit......................................... 405 405 405 405 405
------ ------ ------ ------ ------
Increase in after-tax net income
from Pedcor investment........................ $ 288 $ 294 $ 268 $ 301 $ 304
====== ====== ====== ====== ======
</TABLE>
Federal regulations require an FHLB-member savings association to maintain
an average daily balance of liquid assets equal to a monthly average of not less
than a specified percentage of its net withdrawable savings deposits plus
short-term borrowings. Liquid assets include cash, certain time deposits,
certain bankers' acceptances, specified U.S. government, state or federal agency
obligations, certain corporate debt securities, commercial paper, certain mutual
funds, certain mortgage-related securities, and certain first lien residential
mortgage loans. This liquidity requirement may be changed from time to time by
the OTS to any amount within the range of 4% to 10%, and is currently 5%. Also,
a savings association currently must maintain short-term liquid assets
constituting at least 1% of its average daily balance of net withdrawable
deposit accounts and current borrowings. Monetary penalties may be imposed for
failure to meet these liquidity requirements. At June 30, 1996, the Bank had
liquid assets of $15.1 million, and a regulatory liquidity ratio of 12.2%, of
which 7.8% constituted short-term investments. Sources of Funds
General. Deposits with the Bank have traditionally been the Company's
primary source of funds for use in lending and investment activities. In
addition to deposits, the Company derives funds from loan amortization,
prepayments, retained earnings and income on earning assets. While loan
amortization and income on earning assets are relatively stable sources of
funds, deposit inflows and outflows can vary widely and are influenced by
prevailing interest rates, market conditions and levels of competition. The
Company also relies on borrowings from the Federal Home Loan Bank ("FHLB") of
Indianapolis to support the Bank's loan originations and to assist in
asset/liability management.
Deposits. Deposits are attracted, principally from within Grant and
contiguous counties and Adams County, through the offering of a broad selection
of deposit instruments including NOW and other transaction accounts, fixed-rate
certificates of deposit, individual retirement accounts, and savings accounts.
The Bank does not actively solicit or advertise for deposits outside of Grant
and Adams Counties. Substantially all of the Bank's depositors are residents of
those counties. Deposit account terms vary, with the principal differences being
the minimum balance required, the amount of time the funds remain on deposit and
the interest rate. The Bank has no brokered deposits.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Bank on a periodic basis. Determination of
rates and terms are predicated on funds acquisition and liquidity requirements,
rates paid by competitors, growth goals, and federal regulations. The Bank
relies, in part, on customer service and long-standing relationships with
customers to attract and retain its deposits, but also aggressively prices its
deposits in relation to rates offered by its competitors.
<PAGE>
An analysis of the Bank deposit accounts by type, maturity, and rate at
June 30, 1996, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening June 30, % of Average
Type of Account Balance 1996 Deposits Rate
- --------------- ---------- ----------- -------- ---------
(Dollars in Thousands)
Withdrawable:
<S> <C> <C> <C> <C>
Savings accounts....................... $ 10.00 $ 17,572 13.92% 3.25%
NOW and other transactions accounts.... 10.00 20,803 16.47 3.33
-------- ------
Total withdrawable........................ 38,375 30.39 3.29
-------- ------
Certificates (original terms):............
28 days................................ 1,000 321 .25 3.76
91 days................................ 1,000 970 .77 4.36
182 days............................... 1,000 9,567 7.58 4.84
12 months.............................. 1,000 14,983 11.87 5.35
18 months.............................. 1,000 1,259 1.00 5.46
24 months.............................. 1,000 1,562 1.24 5.37
30 months.............................. 1,000 9,942 7.87 5.75
36 months.............................. 1,000 1,774 1.41 5.27
48 months.............................. 1,000 6,131 4.86 7.01
60 months.............................. 1,000 11,860 9.39 6.20
72 months.............................. 1,000 39 .03 5.77
96 months.............................. 1,000 369 .29 6.39
IRA's
28 days................................ 500 1 .00 3.70
91 days................................ 500 182 .14 4.37
182 days............................... 500 161 .13 4.88
12 months.............................. 500 466 .37 5.12
18 months.............................. 500 56 .04 5.57
24 months.............................. 500 38 .03 4.79
30 months.............................. 500 983 .78 5.55
36 months.............................. 500 63 .05 5.06
48 months.............................. 500 4,768 3.78 7.51
60 months.............................. 500 20,775 16.45 6.50
72 months.............................. 500 615 .49 5.63
96 months.............................. 500 1,000 .79 6.12
-------- ------
Total certificates (1).................... 87,885 69.61 5.96
-------- ------
Total deposits............................ $126,260 100.00% 5.15
======== ======
</TABLE>
- ------------
(1) Including $11.8 million in certificates of deposit of $100,000 or more.
<PAGE>
The following table sets forth by various interest rate categories the
composition of time deposits of the Bank at the dates indicated:
At June 30,
---------------------------------------------
1996 1995 1994
------- ------- -------
(In Thousands)
Under 5%............... $14,088 $15,072 $38,221
5.00 - 6.99%........... 50,836 41,070 23,258
7.00 - 8.99%........... 22,961 27,254 14,529
9.00% and over......... --- --- ---
------- ------- -------
Total.................. $87,885 $83,396 $76,008
======= ======= =======
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years indicated, and
the total maturing thereafter. Matured certificates which have not been renewed
as of June 30, 1996, have been allocated based upon certain rollover
assumptions.
<TABLE>
<CAPTION>
Amounts At
June 30, 1996, Maturing in
------------------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
------- ----- ----- -----------
(In Thousands)
<S> <C> <C> <C> <C>
Under 5%....................... $13,546 $ 542 $ --- $ ---
5.00 - 6.99% .................. 19,715 9,223 6,843 15,055
7.00 - 8.99% .................. 363 3,304 8,278 11,016
------- ------- ------- -------
Total ......................... $33,624 $13,069 $15,121 $26,071
======= ======= ======= =======
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1996.
Maturity Period (In Thousands)
------------------------ --------------
Three months of less................................. $ 907
Greater than three months through six months......... 333
Greater than six months through twelve months........ 1,176
Over twelve months................................... 9,345
-------
Total................................................ $11,761
=======
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Bank at the dates
indicated, and the amount of increase or decrease in such deposits as compared
to the previous period.
<PAGE>
<TABLE>
<CAPTION>
DEPOSIT ACTIVITY
---------------------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
Balance at from Balance at from
June 30, % of June 30, June 30, % of June 30,
1996 Deposits 1995 1995 Deposits 1994
---------- -------- --------- ---------- -------- ---------
(Dollars in Thousands)
Withdrawable:
<S> <C> <C> <C> <C> <C> <C>
Savings accounts.............. $ 17,572 13.92% $(1,207) $ 18,779 15.57% $(6,620)
NOW and other transactions
accounts.................... 20,803 16.47 2,365 18,438 15.29 (1,120)
-------- ------ ------- -------- ------ --------
Total withdrawable............... 38,375 30.39 1,158 37,217 30.86 (7,740)
-------- ------ ------- -------- ------ --------
Certificates (original terms):
28 days.......................... 321 .25 18 303 .25 235
91 days.......................... 970 .77 (72) 1,042 .86 (47)
182 days......................... 9,567 7.58 (2,062) 11,629 9.64 (452)
12 months........................ 14,983 11.87 5,842 9,141 7.58 1,015
18 months........................ 1,259 1.00 (486) 1,745 1.45 (442)
24 months........................ 1,562 1.24 (420) 1,982 1.64 (698)
30 months........................ 9,942 7.87 (1,029) 10,971 9.10 1,471
36 months........................ 1,774 1.41 302 1,472 1.22 (113)
48 months........................ 6,131 4.86 (60) 6,191 5.13 3,229
60 months........................ 11,860 9.39 619 11,241 9.32 1,866
72 months........................ 39 .03 (1) 40 .03 3
96 months........................ 369 .29 (15) 384 .32 (483)
IRA's
28 days.......................... 1 .00 (24) 25 .02 9
91 days.......................... 182 .14 20 162 .13 68
182 days......................... 161 .13 (88) 249 .21 9
12 months........................ 466 .37 132 334 .28 (126)
18 months........................ 56 .04 (78) 134 .11 (89)
24 months........................ 38 .03 --- 38 .03 (14)
30 months........................ 983 .78 (170) 1,153 .96 (158)
36 months........................ 63 .05 29 34 .03 (26)
48 months........................ 4,768 3.78 325 4,443 3.68 4,024
60 months........................ 20,775 16.45 1,721 19,054 15.80 (1,358)
72 months........................ 615 .49 (8) 623 .52 (18)
96 months........................ 1,000 .79 (6) 1,006 .83 (517)
-------- ------ ------- -------- ------ --------
Total certificates............... 87,885 69.61 4,489 83,396 69.14 7,388
-------- ------ ------- -------- ------ --------
Total deposits................... $126,260 100.00% $ 5,647 $120,613 100.00% $ (352)
======== ====== ======= ======== ====== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DEPOSIT ACTIVITY
--------------------------------------------------------------------------
Increase
(Decrease)
Balance at from Balance at
June 30, % of June 30, June 30, % of
1994 Deposits 1993 1993 Deposits
--------- -------- -------- ---------- --------
(Dollars in Thousands)
Withdrawable:
<S> <C> <C> <C> <C> <C>
Savings accounts............... $ 25,399 21.00% $ 1,342 $ 24,057 19.73%
NOW and other transaction
accounts..................... 19,558 16.17 1,372 18,186 14.91
-------- ------ ------- -------- ------
Total withdrawable................ 44,957 37.17 2,714 42,243 34.64
-------- ------ ------- -------- ------
Certificates (original terms):
28 days........................ 68 .06 (63) 131 .11
91 days........................ 1,089 .90 117 972 .80
182 days....................... 12,081 9.99 (2,889) 14,970 12.28
12 months...................... 8,126 6.72 (1,462) 9,588 7.86
18 months...................... 2,187 1.81 (301) 2,488 2.04
24 months...................... 2,680 2.22 511 2,169 1.78
30 months...................... 9,500 7.85 (864) 10,364 8.50
36 months...................... 1,585 1.31 (216) 1,801 1.48
48 months...................... 2,962 2.45 (604) 3,566 2.92
60 months...................... 9,375 7.75 2,303 7,072 5.80
72 months...................... 37 .03 (7) 44 .04
96 months...................... 867 .72 (77) 944 .77
IRA's
28 days........................ 16 .01 1 15 .01
91 days........................ 94 .07 (29) 123 .10
182 days....................... 240 .20 (75) 315 .26
12 months...................... 460 .38 (31) 491 .40
18 months...................... 223 .18 8 215 .18
24 months...................... 52 .04 11 41 .03
30 months...................... 1,311 1.08 (160) 1,471 1.21
36 months...................... 60 .05 (21) 81 .07
48 months...................... 419 .35 (90) 509 .42
60 months...................... 20,412 16.87 375 20,037 16.43
72 months...................... 641 .53 4 637 .52
96 months...................... 1,523 1.26 (134) 1,657 1.35
-------- ------ ------- -------- ------
Total certificates................ 76,008 62.83 (3,693) 79,701 65.36
-------- ------ ------- -------- ------
Total deposits.................... $120,965 100.00% $ (979) $121,944 100.00%
======== ====== ======= ======== ======
</TABLE>
Borrowings. Although deposits are the Company's primary source of
funds, the Company's policy has been to utilize borrowings when they are a less
costly source of funds than deposits (taking into consideration the FDIC
insurance premiums payable on deposits) or can be invested at a positive spread.
The Bank often funds originations of its commercial real estate loans with a
simultaneous borrowing from the FHLB of Indianapolis to assure a profit above
its cost of funds.
The Company's borrowings consist of advances from the FHLB of
Indianapolis upon the security of FHLB stock and certain mortgage loans. Such
advances are made pursuant to several different credit programs each of which
has its own interest rate and range of maturities. The maximum amount that the
FHLB-Indianapolis will advance to member associations, including the Bank, for
purposes other than meeting withdrawals, fluctuates from time to time in
accordance with policies of the FHLB of Indianapolis. At June 30, 1996, FHLB of
Indianapolis advances totaled $6.2 million, representing 3.5% of total assets.
<PAGE>
The following table sets forth the maximum month-end balance and
average balance of FHLB advances for the periods indicated, and weighted average
interest rates paid during the periods indicated and as of the end of each of
the periods indicated.
<TABLE>
<CAPTION>
At or for the Year
Ended June 30,
---------------------------------------
1996 1995 1994
------ ------ ------
(Dollars in Thousands)
FHLB Advances:
<S> <C> <C> <C>
Average balance outstanding........................................... $6,694 $5,574 $3,331
Maximum amount outstanding at any month-end
during the period................................................ 6,963 7,963 3,825
Weighted average interest rate
during the period................................................ 6.83% 6.85% 7.33%
Weighted average interest rate at
end of period.................................................... 6.50% 6.78% 6.83%
</TABLE>
There are regulatory restrictions on advances from the FHLBs. See
"Regulation - Federal Home Loan Bank System" and "- Qualified Thrift Leader."
These limitations are not expected to have any impact on the Company's ability
to borrow from the FHLB of Indianapolis. The Company does not anticipate any
problem obtaining advances appropriate to meet its requirements in the future,
if such advances should become necessary.
Service Corporation Subsidiary
OTS regulations permit federal savings associations to invest in the
capital stock, obligations, or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants in
an aggregate amount not exceeding 2% of an association's assets, plus an
additional 1% of assets if the amount over 2% is used for specified community or
inner-city development purposes. In addition, federal regulations permit
associations to make specified types of loans to such subsidiaries (other than
special-purpose finance subsidiaries), in which the association owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the association's
regulatory capital if the association's regulatory capital is in compliance with
applicable regulations. Current law requires a savings association that acquires
a non-savings association subsidiary, or that elects to conduct a new activity
within a subsidiary, to give the FDIC and the OTS at least 30 days advance
written notice. The FDIC may, after consultation with the OTS, prohibit specific
activities if it determines such activities pose a serious threat to the Savings
Association Insurance Fund ("SAIF").
The Bank's only subsidiary, First Marion Service Corporation ("First
Marion") was organized in 1971 and currently is engaged in the sale of tax
deferred annuities pursuant to an arrangement with One System, Inc., a licensed
insurance broker, in Indianapolis. It also sells mutual funds through an
arrangement with Independent Financial Securities, Inc., a licensed securities
broker, in White Plains, New York. First Marion has one licensed employee
engaged in such sales of tax deferred annuities and mutual funds. In addition,
beginning in July 1995, First Marion began providing 100% financing to borrowers
of the Bank by providing a 20% second mortgage behind the Bank's 80% mortgage.
Such loans amounted to $540,000 at June 30, 1996.
At June 30, 1996, the Bank's investment in First Marion totaled
$58,000. During the year ended June 30, 1996, First Marion had net income of
$14,000.
Employees
As of June 30, 1996, the Bank employed 29 persons on a full-time basis
and 2 persons on a part-time basis. None of the Bank's employees are represented
by a collective bargaining group. Management considers its employee relations to
be good.
<PAGE>
Competition
The Bank originates most of its loans to and accepts most of its
deposits from residents of Grant and Adams Counties, Indiana.
The Bank is subject to competition from various financial institutions,
including state and national banks, state and federal savings associations,
credit unions, certain nonbanking consumer lenders, and other companies or
firms, including brokerage houses and mortgage brokers, that provide similar
services in Grant and Adams Counties with significantly larger resources than
the Bank. In particular, three commercial banks and one savings association
compete with the Bank in its market area. The Bank also competes with money
market funds and with insurance companies with respect to its individual
retirement accounts.
Under current law, bank holding companies may acquire savings
associations. Savings associations may also acquire banks under federal law. To
date, several bank holding company acquisitions of healthy savings associations
in Indiana have been completed. Affiliations between banks and healthy savings
associations based in Indiana may also increase the competition faced by the
Bank and MCHI.
In addition, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to
acquire banks in other states and, with state consent and subject to certain
limitations, allows banks to acquire out-of-state branches either through merger
or de novo expansion. The State of Indiana recently passed a law establishing
interstate branching provisions for Indiana state chartered banks consistent
with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The
Indiana Branching Law authorizes Indiana banks to branch interstate by merger or
de novo expansion and authorizes out-of-state banks meeting certain requirements
to branch into Indiana by merger or de novo expansion. The Indiana Branching Law
became effective March 15, 1996, provided that prior to June 1, 1997, interstate
mergers and de novo branches are not permitted to out-of-state banks unless the
laws of their home states permit Indiana banks to merger or establish de novo
branches on a reciprocal basis. This new legislation may also result in
increased competition for the Company.
Because of recent changes in Federal law, interstate acquisitions of
banks are less restricted than they were under prior law. Savings associations
have certain powers to acquire savings associations based in other states, and
Indiana law expressly permits reciprocal acquisition of Indiana savings
associations. In addition, Federal savings associations are permitted to branch
on an interstate basis.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. The Bank competes for loan
originations primarily through the efficiency and quality of services it
provides borrowers, builders and realtors and through interest rates and loan
fees it charges. Competition is affected by, among other things, the general
availability of lendable funds, general and local economic conditions, current
interest rate levels, and other factors that are not readily predictable.
<PAGE>
REGULATION
General
The Bank, as a federally chartered savings bank, is a member of the
Federal Home Loan Bank System ("FHLB System") and its deposits are insured by
the FDIC. The Bank is subject to extensive regulation by the OTS. Federal
associations may not enter into certain transactions unless certain regulatory
tests are met or they obtain prior governmental approval and the associations
must file reports with these governmental agencies about their activities and
their financial condition. Periodic compliance examinations of the Bank are
conducted by the OTS which has, in conjunction with the FDIC in certain
situations, examination and enforcement powers. This supervision and regulation
are intended primarily for the protection of depositors and federal deposit
insurance funds. The Bank is also subject to certain reserve requirements under
regulations of the Board of Governors of the Federal Reserve System ("FRB").
Congress is considering legislation that would consolidate the
supervision and regulation of all U.S. financial institutions in one
administrative body (the "Legislation"). It cannot be predicted with certainty
whether or when the Legislation will be enacted or the extent to which the Bank
would be affected thereby.
An OTS regulation establishes a schedule for the assessment of fees
upon all savings associations to fund the operations of the OTS. The regulation
also establishes a schedule of fees for the various types of applications and
filings made by savings associations with the OTS. The general assessment, to be
paid on a semiannual basis, is based upon the savings association's total
assets, including consolidated subsidiaries, as reported in a recent quarterly
thrift financial report. Currently, the assessment rates range from .0172761% of
assets for associations with assets of $67 million or less to .0045864% for
associations with assets in excess of $35 billion. The Bank's semiannual
assessment under this assessment scheme, based upon its total assets at March
31, 1996, was $26,217.
The Bank is also subject to federal and state regulation as to such
matters as loans to officers, directors, or principal shareholders, required
reserves, limitations as to the nature and amount of its loans and investments,
regulatory approval of any merger or consolidation, issuance or retirements of
their own securities, and limitations upon other aspects of banking operations.
In addition, the activities and operations of the Bank are subject to a number
of additional detailed, complex and sometimes overlapping federal and state laws
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and anti-trust
laws.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
banks. The Federal Housing Finance Board ("FHFB"), an independent agency,
controls the FHLB System including the FHLB of Indianapolis. The FHLB System
provides a central credit facility primarily for member savings associations and
other member financial institutions. The Bank is required to hold shares of
capital stock in the FHLB of Indianapolis in an amount at least equal to the
greater of 1% of the aggregate principal amount of its unpaid residential
mortgage loans, home purchase contracts and similar obligations at the end of
each calendar year, .3% of its assets or 1/20 (or such greater fraction
established by the FHLB) of outstanding FHLB advances, commitments, lines of
credit and letters of credit. The Bank is currently in compliance with this
requirement. At June 30, 1996, the Bank's investment in stock of the FHLB of
Indianapolis was $988,400.
In past years, the Bank received dividends on its FHLB stock. All 12
FHLB's are required by law to provide funds for the resolution of troubled
savings associations and to establish affordable housing programs through direct
loans or interest subsidies on advances to members to be used for lending at
subsidized interest rates for low- and moderate-income, owner-occupied housing
projects, affordable rental housing, and certain other community projects. These
contributions and obligations could adversely affect the value of FHLB stock in
the future. For the year ending June 30, 1996, dividends paid to the Bank
totaled $73,000, for an annual rate of 7.87%. A reduction in value of such stock
may result in a corresponding reduction in the Bank's capital.
The FHLB of Indianapolis serves as a reserve or central bank for member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB
<PAGE>
System. It makes advances to members in accordance with policies and procedures
established by the FHLB and the Board of Directors of the FHLB of Indianapolis.
All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. Eligible collateral includes first mortgage loans less
than 90 days delinquent or securities evidencing interests therein, securities
(including mortgage-backed securities) issued, insured or guaranteed by the
federal government or any agency thereof, FHLB deposits and, to a limited
extent, real estate with readily ascertainable value in which a perfected
security interest may be obtained. Other forms of collateral may be accepted as
over collateralization or, under certain circumstances, to renew outstanding
advances. All long-term advances are required to provide funds for residential
home financing and the FHLB has established standards of community service that
members must meet to maintain access to long-term advances.
Interest rates charged for advances vary depending upon maturity, the
cost of funds to the FHLB of Indianapolis and the purpose of the borrowing.
Under current law, savings associations which cease to be Qualified Thrift
Lenders are ineligible to receive advances from their FHLB.
Insurance of Deposits
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of banks and thrifts
and safeguards the safety and soundness of the banking and thrift industries.
The FDIC administers two separate insurance funds, the BIF for commercial banks
and state savings banks and the SAIF for savings associations and banks that
have acquired deposits from savings associations. The FDIC is required to
maintain designated levels of reserves in each fund. The reserves of the SAIF
are currently below the level required by law, primarily because a significant
portion of the assessments paid into the SAIF have been used to pay the cost of
prior thrift failures, while the reserves of the BIF met the level required by
law in May, 1995. Thrifts are generally prohibited from converting from one
insurance fund to the other until the SAIF meets its designated reserve level,
except with the prior approval of the FDIC in certain limited cases, and
provided certain fees are paid. The insurance fund conversion provisions do not
prohibit a SAIF member from converting to a bank charter or merging with a bank
during the moratorium as long as the resulting bank continues to pay the
applicable insurance assessments to the SAIF during such period and as long as
certain other conditions are met.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time and may decrease such rates if such target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. Such risk level is determined
based on the institution's capital level and the FDIC's level of supervisory
concern about the institution.
Because of the differing reserve levels of the SAIF and the BIF,
deposit insurance assessments paid by well-capitalized BIF-insured institutions
were recently reduced significantly below the level paid by well-capitalized
SAIF-insured institutions. Assessments paid by well-capitalized SAIF-insured
institutions exceeded those paid by well-capitalized BIF-insured institutions by
approximately $0.19 per $100 in deposits in late 1995 and exceeded them by $0.23
per $100 in deposits beginning in 1996. Such premium disparity could have a
negative competitive impact on the Bank and other institutions with SAIF
deposits.
Congress has recently considered many proposals designed to
recapitalize the SAIF and eliminate the significant premium disparity between
the BIF and the SAIF. Among those considered is a recapitalization plan
providing for a special assessment, currently estimated at approximately $0.68
per $100 of SAIF deposits, in order to increase SAIF reserves to the level
required by law. Certain BIF-insured banks holding SAIF-insured deposits would
pay a lower special assessment. In addition, the cost of prior thrift failures
would be shared by both the SAIF and the BIF. Such cost sharing might increase
BIF assessments. SAIF assessments for well-capitalized SAIF-insured institutions
would be set at a significantly lower level after the legislation is adopted and
could never be reduced below the level set for well-capitalized BIF-insured
institutions. The recapitalization plan also provides for the merger of the SAIF
and BIF on January 1, 1998, subject to certain conditions. It has also been
proposed that the savings association charter be eliminated in connection with
the proposed merger of the BIF and SAIF.
<PAGE>
The Bank had $126.3 million in deposits at June 30, 1996. If the
one-time special assessment in the legislative proposal is enacted into law, the
Bank will pay an additional after-tax assessment of approximately $520,000
(based upon deposits at June 30, 1996), which will reduce capital and earnings
for the quarter in which any such assessment is recorded. However, it is
expected that quarterly SAIF assessments would be reduced significantly sometime
after adoption of the legislation.
No assurances can be given that the SAIF recapitalization plan
discussed above or any other plan will be enacted into law or in what form it
may be enacted. In addition, the Company can give no assurances that the
disparity between BIF and SAIF assessments will be eliminated. If the proposed
legislation is not adopted, SAIF premiums may increase and the disparity between
BIF and SAIF premiums may become greater, with a resulting adverse effect on the
Company's operations.
Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common stockholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill (on a declining basis until 1995), purchased mortgage
servicing rights (which may be included in an amount up to 50% of core capital,
but which are to be reported on an association's balance sheet at the lesser of
90% of their fair market value, 90% of their original purchase price, or 100% of
their remaining unamortized book value), and purchased credit card relationships
(which may be included in an amount up to 25% of core capital) less
nonqualifying intangibles. Under the tangible capital requirement, a savings
association must maintain tangible capital (core capital less all intangible
assets except purchased mortgage servicing rights which may be included after
making the above-noted adjustments) of at least 1.5% of total assets. Under the
risk-based capital requirements, a minimum amount of capital must be maintained
by a savings association to account for the relative risks inherent in the type
and amount of assets held by the savings association. The risk-based capital
requirement requires a savings association to maintain capital (defined
generally for these purposes as core capital plus general valuation allowances
and permanent or maturing capital instruments such as preferred stock and
subordinated debt less assets required to be deducted) equal to 8.0% of
risk-weighted assets. Assets are ranked as to risk in one of four categories
(0-100%) with a credit risk-free asset such as cash requiring no risk-based
capital and an asset with a significant credit risk such as a non-accrual loan
being assigned a factor of 100%. At June 30, 1996, based on the capital
standards then in effect, the Bank was in compliance with the fully phased-in
capital requirements.
The OTS has delayed implementation of a rule which sets forth the
methodology for calculating an interest rate risk component to be incorporated
into the OTS regulatory capital rule. Under the rule, only savings associations
with "above normal" interest rate risk (institutions whose portfolio equity
would decline in value by more than 2% of assets in the event of a hypothetical
200-basis-point move in interest rates) will be required to maintain additional
capital for interest rate risk under the risk-based capital framework. In
addition, most institutions with less than $300 million in assets and a
risk-based capital ratio in excess of 12%, such as the Bank, are subject to less
stringent reporting requirements relating to the interest rate component of the
new rule. Although the OTS has decided to delay implementation of this rule, it
will continue to monitor the level of interest rate risk at individual
institutions and it retains the authority, on a case-by-case basis, to impose
additional capital requirements for individual institutions with significant
interest rate risk.
If an association is not in compliance with its capital requirements,
the OTS is required to prohibit asset growth and to impose a capital directive
that may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements, which actions may include restrictions on operations and banking
activities, the imposition of a capital directive, a cease and desist order,
civil money penalties or harsher measures such as the appointment of a receiver
or conservator or a forced merger into another institution.
<PAGE>
Prompt Corrective Action
FedICIA requires, among other things, federal bank regulatory
authorities to take "prompt corrective action" with respect to institutions that
do not meet minimum capital requirements. For these purposes, FedICIA
establishes five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. At June 30, 1996, the Bank was categorized as "well
capitalized."
An institution is deemed to be "well capitalized" if it has a total
risk-based capital ratio of 10% or greater, a Tier I risk-based capital ratio of
6% or greater, and a leverage ratio of 5% or greater, and is not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure. An institution is deemed to be "adequately
capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier
I risk-based capital ratio of 4% or greater, and generally a leverage ratio 4%
or greater. An institution is deemed to be "undercapitalized" if it has a total
risk-based capital ratio of less than 8%, a Tier I risk-based capital ratio of
less than 4%, or generally a leverage ratio of less than 4%; and (d)
"significantly undercapitalized" if it has a total risk-based capital ratio of
less than 6%, a Tier I risk-based capital ratio of less than 3%, or a leverage
ratio of less than 3%. An institution is deemed to be "critically
undercapitalized" if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than 2%.
"Undercapitalized" institutions are subject to growth limitations and
are required to submit a capital restoration plan. If an "undercapitalized"
institution fails to submit, or fails to implement in a material respect, an
acceptable plan, it is treated as if it is "significantly undercapitalized."
"Significantly undercapitalized" institutions are subject to one or more of a
number of requirements and restrictions, including an order by the FDIC to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cease receipt of deposits from correspondent banks, and
restrictions on compensation of executive officers. "Critically
undercapitalized" institutions may not, beginning 60 days after becoming
"critically undercapitalized," make any payment of principal or interest on
certain subordinated debt or extend credit for a highly leveraged transaction or
enter into any transaction outside the ordinary course of business. In addition,
"critically undercapitalized" institutions are subject to appointment of a
receiver or conservator.
Capital Distributions Regulation
An OTS regulation imposes limitations upon all "capital distributions"
by savings associations, including cash dividends, payments by an institution to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system of regulation, with
the greatest flexibility being afforded to well-capitalized institutions. A
savings association which has total capital (immediately prior to and after
giving effect to the capital distribution) that is at least equal to its fully
phased-in capital requirements would be a Tier 1 institution ("Tier 1
Institution"). An institution that has total capital at least equal to its
minimum capital requirements, but less than its fully phased-in capital
requirements, would be a Tier 2 institution ("Tier 2 Institution"). An
institution having total capital that is less than its minimum capital
requirements would be a Tier 3 institution ("Tier 3 Institution"). However, an
institution which otherwise qualifies as a Tier 1 institution may be designated
by the OTS as a Tier 2 or Tier 3 institution if the OTS determines that the
institution is "in need of more than normal supervision." The Bank is currently
a Tier 1 Institution.
A Tier 1 Institution could, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to 100% of its
net income to date during the calendar year plus an amount that would reduce by
one-half its "surplus capital ratio" (the excess over its Fully Phased-in
Capital Requirements) at the beginning of the calendar year. Any additional
amount of capital distributions would require prior regulatory approval.
The OTS has proposed revisions to these regulations which would permit
savings associations to declare dividends in amounts which would assure that
they remain adequately capitalized following the dividend declaration. Savings
associations in a holding company system which are rated Camel 1 or 2 and which
are not in troubled condition would need to file a prior notice with the OTS
concerning such dividend declaration.
<PAGE>
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies.
The association's written real estate lending policies must be reviewed
and approved by the association's board of directors at least annually. Further,
each association is expected to monitor conditions in its real estate market to
ensure that its lending policies continue to be appropriate for current market
conditions.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety
and soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. Additional standards on earnings and classified assets are expected
to be issued in the near future.
Federal Reserve System
Under FRB regulations, the Bank is required to maintain reserves
against its transaction accounts (primarily checking and NOW accounts) and
non-personal money market deposit accounts. A federal savings association, like
other depository institutions maintaining reservable accounts, may borrow from
the Federal Reserve Bank "discount window," but the FRB's regulations require
the savings association to exhaust other reasonable alternative sources,
including borrowing from its regional FHLB, before borrowing from the Federal
Reserve Bank. FedICIA imposes certain limitations on the ability of
undercapitalized depository institutions to borrow from Federal Reserve Banks.
Holding Company Regulation
MCHI is regulated as a "non-diversified unitary savings and loan
holding company" within the meaning of the Home Owners' Loan Act, as amended
("HOLA"), and subject to regulatory oversight of the Director of the OTS. As
such, MCHI is registered with the OTS and thereby subject to OTS regulations,
examinations, supervision and reporting requirements. As a subsidiary of a
savings and loan holding company, the Bank is subject to certain restrictions in
its dealings with MCHI and with other companies affiliated with MCHI.
HOLA generally prohibits a savings and loan holding company, without
prior approval of the Director of the OTS, from (i) acquiring control of any
other savings association or savings and loan holding company or controlling the
assets thereof or (ii) acquiring or retaining more than 5 percent of the voting
shares of a savings association or holding company thereof which is not a
subsidiary. Additionally, under certain circumstances a savings and loan holding
company is permitted to acquire, with the approval of the Director of the OTS,
up to 15 percent of previously unissued voting shares of an under-capitalized
savings association for cash without that savings association being deemed
controlled by the holding company. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock may also acquire control of any savings institution, other
than a subsidiary institution, or any other savings and loan holding company.
MCHI's Board of Directors presently intends to continue to operate MCHI
as a unitary savings and loan holding company. There are generally no
restrictions on the permissible business activities of a unitary savings and
loan holding company. However, if the Director of OTS determines that there is
reasonable case to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness, or stability of its subsidiary savings association, the Director of
the OTS may impose such restrictions as deemed necessary to address such risk
<PAGE>
and limiting (i) payment of dividends by the savings association, (ii)
transactions between the savings association and its affiliates, and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association.
Notwithstanding the above rules as to permissible business activities
of unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. (Additional
restrictions on securing advances from the FHLB also apply). See "--Qualified
Thrift Lender." At June 30, 1996, the Bank's asset composition was in excess of
that required to qualify the Bank as a Qualified Thrift Lender.
If MCHI were to acquire control of another savings institution other
than through a merger or other business combination with the Bank, MCHI would
thereupon become a multiple savings and loan holding company. Except where such
acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings association meets the QTL test,
the activities of MCHI and any of its subsidiaries (other than the Bank or other
subsidiary savings associations) would thereafter be subject to further
restrictions. HOLA provides that, among other things, no multiple savings and
loan holding company or subsidiary thereof which is not a savings association
shall commence or continue for a limited period of time after becoming a
multiple savings and loan holding company or subsidiary thereof, any business
activity other than (i) furnishing or performing management services for a
subsidiary savings association, (ii) conducting an insurance agency or escrow
business, (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary savings institution, (iv) holding or managing properties used
or occupied by a subsidiary savings institution, (v) acting as trustee under
deeds of trust, (vi) those activities previously directly authorized by the
FSLIC by regulation as of March 5, 1987, to be engaged in by multiple holding
companies or (vii) those activities authorized by the FRB as permissible for
bank holding companies, unless the Director of the OTS by regulation prohibits
or limits such activities for savings and loan holding companies. Those
activities described in (vii) above must also be approved by the Director of the
OTS prior to being engaged in by a multiple holding company.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5,1987, or if
the laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state-chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days advance notice of such
declaration and payment. Any dividend declared during such period or without the
giving of such notice shall be invalid.
Federal Securities Law
The shares of Common Stock of MCHI are registered with the SEC under
the 1934 Act. MCHI is subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the 1934 Act and the rules of the
SEC thereunder. After the third anniversary of the Bank's conversion to stock
form, if MCHI has fewer than 300 shareholders, it may deregister its shares
under the 1934 Act and cease to be subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of MCHI may
not be resold without registration or unless sold in accordance with the resale
restrictions of Rule 144 under the 1933 Act. If MCHI meets the current public
information requirements under Rule 144, each affiliate of MCHI who complies
with the other conditions of Rule 144 (including the two-year holding period and
<PAGE>
those that require the affiliate's sale to be aggregated with those of certain
other persons) would be able to sell in the public market, without registration,
a number of shares not to exceed, in any three-month period, the greater of (i)
1% of the outstanding shares of MCHI or (ii) the average weekly volume of
trading in such shares during the preceding four calendar weeks.
Qualified Thrift Lender
Under current OTS regulations, the QTL test requires that a savings
association have at least 65% of its portfolio assets invested in "qualified
thrift investments" on a monthly average basis in 9 out of every 12 months.
Qualified thrift investments under the QTL test include: (i) loans made to
purchase, refinance, construct, improve or repair domestic residential housing
or manufactured housing; (ii) home equity loans; (iii) mortgage-backed
securities; (iv) direct or indirect existing obligations of either the FDIC or
the FSLIC for ten years from the date of issuance, if issued prior to July 1,
1989; (v) obligations of the FDIC, FSLIC, FSLIC Resolution Fund and the
Resolution Trust Corporation for a five year period from July 1, 1989, if issued
after such date; (vi) FHLB stock; (vii) 50% of the dollar amount of residential
mortgage loans originated and sold within 90 days of origination; (viii)
investments in service corporations that derive at least 80% of their gross
revenues from activities directly related to purchasing, refinancing,
constructing, improving or repairing domestic residential real estate or
manufactured housing; (ix) 200% of the dollar amount of loans and investments
made to acquire, develop and construct one- to four-family residences that are
valued at no more than 60% of the median value of homes constructed in the area;
(x) 200% of the dollar amount of loans for the acquisition or improvement of
residential real property, churches, schools, and nursing homes located within,
and loans for any purpose to any small business located within, an area where
credit needs of its low and moderate income residents are determined not to have
been adequately met; (xi) loans for the purchase, construction, improvement or
upkeep of churches, schools, nursing homes and hospitals not qualified under
(x); (xii) up to 10% of portfolio assets held in consumer loans or loans for
educational purposes; and (xiii) FHLMC and FNMA stock. However, the aggregate
amount of investments in categories (vii)-(xiii) which may be taken into account
for the purpose of whether an institution meets the QTL test cannot exceed 15%
of portfolio assets. Portfolio assets under the QTL test include all of an
association's assets less (i) goodwill and other intangibles, (ii) the value of
property used by the association to conduct its business, and (iii) its liquid
assets as required to be maintained under law up to 20% of total assets.
A savings association which fails to meet the QTL test must either
convert to a bank (but its deposit insurance assessments and payments will be
those of and paid to SAIF) or be subject to the following penalties: (i) it may
not enter into any new activity except for those permissible for a national bank
and for a savings association; (ii) its branching activities shall be limited to
those of a national bank; (iii) it shall not be eligible for any new FHLB
advances; and (iv) it shall be bound by regulations applicable to national banks
respecting payment of dividends. Three years after failing the QTL test the
association must (i) dispose of any investment or activity not permissible for a
national bank and a savings association and (ii) repay all outstanding FHLB
advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
A savings association failing to meet the QTL test may requalify as a
QTL if it thereafter meets the QTL test. In the event of such requalification it
shall not be subject to the penalties described above. A savings association
which subsequently again fails to qualify under the QTL test shall become
subject to all of the described penalties without application of any waiting
period.
At June 30, 1996, 83.17% of the Bank's portfolio assets (as defined on
that date) were invested in qualified thrift investments (as defined on that
date), and therefore the Bank's asset composition was in excess of that required
to qualify the Bank as a QTL. Also, the Bank does not expect to significantly
change its lending or investment activities in the near future, and therefore
expects to continue to qualify as a QTL, although there can be no such
assurance.
<PAGE>
Community Reinvestment Act Matters
Under current law, ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") must be disclosed. The disclosure
includes both a four-unit descriptive rating -- using terms such as satisfactory
and unsatisfactory -- and a written evaluation of each institution's
performance. Each FHLB is required to establish standards of community
investment or service that its members must maintain for continued access to
long-term advances from the FHLBs. The standards take into account a member's
performance under the CRA and its record of lending to first-time home buyers.
The FHLBs have established an "Affordable Housing Program" to subsidize the
interest rate of advances to member associations engaged in lending for
long-term, low- and moderate-income, owner-occupied and affordable rental
housing at subsidized rates. The Bank is participating in this program. The
examiners have determined that the Bank has an outstanding record of meeting
community credit needs.
TAXATION
Federal Taxation
Historically, savings associations, such as the Bank, have been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method. However, for years beginning after
December 31, 1995, the Bank will no longer be able to use the percentage of
taxable income method of computing its allowable tax bad debt deduction. The
Bank will be required to compute its allowable deduction using the experience
method. As a result of the repeal of the percentage of taxable income method,
reserves taken after 1987 using the percentage of taxable income method
generally must be included in future taxable income over a six-year period,
although a two-year delay may be permitted for institutions meeting a
residential mortgage loan origination test. In addition, the pre-1988 reserve,
for which no deferred taxes have been recorded, will not have to be recaptured
into income unless (i) the Bank no longer qualifies as a bank under the Code, or
(ii) excess dividends are paid out by the Bank.
Depending on the composition of its items of income and expense, a
savings association may be subject to the alternative minimum tax. A savings
association must pay an alternative minimum tax equal to the amount (if any) by
which 20% of alternative minimum taxable income ("AMTI"), as reduced by an
exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular
taxable income increased or decreased by certain tax preferences and
adjustments, including depreciation deductions in excess of that allowable for
alternative minimum tax purposes, tax-exempt interest on most private activity
bonds issued after August 7, 1986 (reduced by any related interest expense
disallowed for regular tax purposes), the amount of the bad debt reserve
deduction claimed in excess of the deduction based on the experience method and
75% of the excess of adjusted current earnings over AMTI (before this adjustment
and before any alternative tax net operating loss). AMTI may be reduced only up
to 90% by net operating loss carryovers, but alternative minimum tax paid that
is attributable to most preferences can be credited against regular tax due in
later years.
For federal income tax purposes, MCHI reports its income and expenses
on the accrual method of accounting. MCHI and the Bank file a consolidated
federal income tax return for each fiscal year ending June 30. The federal
income tax returns filed by MCHI (or previously by the Bank) have not been
audited in the last five years.
The consolidated federal income tax return filed by MCHI and the Bank
has the effect of eliminating intercompany distributions, including dividends,
in the computation of consolidated taxable income. Income of MCHI generally will
not be taken into account in determining the bad debt deduction allowed to the
Bank, regardless whether a consolidated tax return is filed.
State Taxation
For its taxable period beginning January 1, 1990, the Bank became
subject to Indiana's Financial Institutions Tax ("FIT"), which is imposed at a
flat rate of 8.5% on "adjusted gross income." "Adjusted gross income," for
purposes of FIT, begins with taxable income as defined by Section 63 of the Code
and, thus, incorporates federal
<PAGE>
tax law to the extent that it affects the computation of taxable income. Federal
taxable income is then adjusted by several Indiana modifications. Other
applicable state taxes include generally applicable sales and use taxes plus
real and personal property taxes.
MCHI's (or previously the Bank's) state income tax returns have not
been audited in the last five years.
Item 2. Properties.
At June 30, 1996, the Company conducted its business from its main
office at 100 West Third Street, Marion, Indiana, and one branch office. Both
offices are full-service offices owned by the Company.
The following table provides certain information with respect to the Company's
offices as of June 30, 1996:
<TABLE>
<CAPTION>
Net Book Value
Total Deposits of Property,
at Furniture
Owned or Year June 30, & Approximate
Description and Address Leased Opened 1996 Fixtures Square Footage
- ----------------------- ------------------- ---- -------- --------------
(Dollars in Thousands)
Main Office in Marion
<S> <C> <C> <C> <C> <C>
100 West Third Street............ Owned 1936 $117,210 $1,326 17,949
Location in Decatur
1045 South 13th Street........... Owned 1974 9,050 120 3,611
</TABLE>
The Company opened its first automated teller machine in May, 1995 at
its Marion branch.
The Company owns computer and data processing equipment which is used
for transaction processing and accounting. The net book value of electronic data
processing equipment owned by the Company was $38,000 at June 30, 1996.
The Company also has contracted for the data processing and reporting
services of BISYS, Inc. in Houston, Texas. The cost of these data processing
services is approximately $11,000 per month.
Item 3. Legal Proceedings.
The Company is not a party to any material pending legal proceeding.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of MCHI's shareholders during the
quarter ended June 30, 1996.
Item 4.5. Executive Officers of MCHI.
Presented below is certain information regarding the executive officers
of MCHI:
Name Position
------------------ -------------------------------------------
John M. Dalton President
Steven L. Banks Executive Vice President
Larry G. Phillips Sr. Vice President, Secretary and Treasurer
Tim D. Canode Vice President
John M. Dalton (age 62) has been employed by MCHI since November, 1992.
He became President of the Bank in 1996 and Executive Vice President of First
Marion in 1996. Mr. Dalton served as Executive Vice President of the Bank from
1983 to 1996.
Larry G. Phillips (age 48) has been employed by MCHI since November,
1992. He became Sr. Vice President of the Bank in 1996 and has served as
Treasurer of the Bank since 1983, Secretary of the Bank since 1989 and Secretary
and Treasurer of First Marion since 1989. Mr. Phillips served as Vice President
and Treasurer of the Bank from 1983 to 1996.
Steven L. Banks (age 46) became Executive Vice President of both MCHI
and the Bank on September 1, 1996. Prior to his affiliation with MCHI and the
Bank, Mr. Banks served as President and CEO of Fidelity Federal Savings Bank of
Marion.
<PAGE>
Tim D. Canode (age 51) became Vice President of MCHI in 1996 and has
been Vice President of the Bank since 1983. Mr. Canode has also served as
Assistant Vice President of First Marion since 1983.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Bank converted from a federally charted mutual savings bank to a
federally charted stock savings bank effective March 18, 1993 (the "Conversion")
and simultaneously formed a savings and loan holding company, MCHI. MCHI's
common stock, without par value ("Common Stock"), is quoted on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"),
National Market System, under the symbol "MARN." The following table sets forth
the high and low prices, as reported by NASDAQ, and dividends paid per share for
Common Stock for the quarter indicated. Such over-the-counter quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions.
Quarter Dividends
Ended High Low Declared
--------- -------- -------- ---------
June 30, 1996............... $20 3/4 $ 21 $ 19 3/4 $.20
March 31, 1996.............. 20 7/16 20 3/4 19 1/4 .18
December 31, 1995........... 20 20 5/8 19 1/4 .18
September 30, 1995.......... 19 3/4 20 5/8 18 1/2 .18
June 30, 1995............... 19 1/4 20 17 1/4 .18
March 31, 1995.............. 17 1/2 17 3/4 15 1/4 .15
December 31, 1994........... 15 3/4 18 15 .15
September 30, 1994.......... 18 18 3/4 15 3/4 .15
As of August 23, 1996, there were 538 record holders of MCHI's Common
Stock. MCHI estimates that, as of that date, there were approximately 900
additional shareholders in "street" name. The Company's percentage of dividends
per share to net income per share was 60.7%, 56.8% and 53.0% for the years ended
June 30, 1996, 1995 and 1994, respectively.
Since MCHI has no independent operations or other subsidiaries to
generate income, its ability to accumulate earnings for the payment of cash
dividends to its shareholders is directly dependent upon the earnings on its
investment securities and ability of the Bank to pay dividends to MCHI.
Under OTS regulations, a converted savings association may not declare
or pay a cash dividend if the effect would be to reduce its net worth below the
amount required for the liquidation account created at the time it converted. In
addition, under OTS regulations, the extent to which a savings association may
make a "capital distribution," which includes, among other things, cash
dividends, will depend upon in which one of three categories, based upon levels
of capital, that savings association is classified. The Bank is now and expects
to continue to be a "tier one institution" and therefore would be able to pay
cash dividends to MCHI during any calendar year up to 100% of its net income
during that calendar year plus the amount that would reduce by one half its
"surplus capital ratio" (the excess over its fully phased-in capital
requirements) at the beginning of the calendar year. Prior notice of any
dividend to be paid by the Bank will have to be given to the OTS.
Under current federal income tax law, dividend distributions with
respect to the Common Stock, to the extent that such dividends paid are from the
current or accumulated earnings and profits of the Bank (as calculated for
federal income tax purposes), will be taxable as ordinary income to the
recipient and will not be deductible by the Bank. Any dividend distributions in
excess of current or accumulated earnings and profits will be treated for
federal income tax purposes as a distribution from the Bank's accumulated bad
debt reserves, which could result in increased federal income taxes liability
for the Bank.
Unlike the Bank, generally there is no regulatory restriction on the
payment of dividends by MCHI, subject to the determination of the director of
the OTS that there is reasonable cause to believe that the payment of dividends
constitutes a serious risk to the financial safety, soundness or stability of
the Bank. Indiana law, however, would prohibit MCHI from paying a dividend if,
after giving effect to the payment of that dividend, MCHI would not be able to
pay its debts as they become due in the ordinary course of business or if MCHI's
total assets would be less that the sum of its total liabilities plus
preferential rights of holders of preferred stock, if any.
<PAGE>
Item 6. Selected Consolidated Financial Data
The information required by this item is incorporated by reference to
the material under the heading "Selected Consolidated Financial Information" on
page 3 of MCHI's Shareholder Annual Report for its fiscal year ended June 30,
1996 (the "Shareholder Annual Report").
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required by this item is incorporated by reference to
pages 4 through 15 of the Shareholder Annual Report.
Item 8. Financial Statements and Supplementary Data.
MCHI's Consolidated Financial Statements and Notes thereto contained on
pages 16 through 41 in the Shareholder Annual Report are incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is
incorporated by reference to pages 3 and 4 of MCHI's Proxy Statement for its
1996 Annual Shareholder Meeting (the "1996 Proxy Statement"). Information
concerning MCHI's executive officers is included in Item 4.5 in Part I of this
report. Information concerning compliance by such persons with Section 16(a) of
the 1934 Act is incorporated by reference to page 7 of the 1996 Proxy Statement.
Item 11. Executive Compensation.
The information required by this item with respect to executive
compensation is incorporated by reference to pages 4 through 6 of the 1996 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to
pages 2 and 3 of the 1996 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
page 6 of the 1996 Proxy Statement.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following financial statements are filed as part of this report:
Financial Statements
Consolidated Statement of Financial Condition at June 30, 1996, and
1995
Consolidated Statement of Income for the Fiscal Years Ended June 30,
1996, 1995 and 1994
Consolidated Statement of Changes in Shareholders' Equity for the
Fiscal Years ended June 30, 1996, 1995 and 1994
Consolidated Statement of Cash Flows for the Fiscal Years ended June
30, 1996, 1995, and 1994
Notes to Consolidated Financial Statements
(b) MCHI filed no reports on Form 8-K during the fourth quarter ended June
30, 1996.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on page E-1.
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant had duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
MARION CAPITAL HOLDINGS, INC.
Date: September 27, 1996 By: /s/ John M. Dalton
-------------------------
John M. Dalton, President
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 27th day of September,
1996.
/s/ John M. Dalton /s/ Steven L. Banks
- ------------------------------ -----------------------------
John M. Dalton Steven L. Banks, Director
President, Director
(Principal Executive Officer)
/s/ Larry G. Phillips /s/ Robert D. Burchard
- ------------------------------ -----------------------------
Larry G. Phillips Robert D. Burchard, Chairman
Senior Vice President, Secretary and Treasurer of the Board
(Principal Financial and Accounting Officer)
/s/ W. Gordon Coryea
-----------------------------
W. Gordon Coryea, Director
/s/ Jerry D. McVicker
-----------------------------
Jerry D. McVicker, Director
/s/ Jack O. Murrell
-----------------------------
Jack O. Murrell, Director
/s/ George L. Thomas
-----------------------------
George L. Thomas, Director
<PAGE>
EXHIBIT INDEX
Exhibit Index* Page
3(1) The Articles of Incorporation of the Registrant is
incorporated by reference to Exhibit 3(1) to the Registration
Statement on Form S-1 (Registration No. 33-55052).
3(2) The Code of By-Laws of the Registrant is incorporated by
reference to Exhibit 3(2) to Registration Statement on Form
S-I (Registration No. 33-55052).
10(1) Marion Capital Holdings, Inc. Stock Option Plan is
incorporated by reference to Exhibit A to the Registrants
definitive Proxy Statement in respect of its 1993 Annual
Shareholder meeting.
(2) Recognition and Retention Plans and Trusts are incorporated
by reference to Exhibit B to the Registrants definitive Proxy
Statement in respect of its 1993 Annual Shareholder meeting.
(3) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and Merritt B. McVicker is
incorporated by reference to Exhibit 10(6) to the
Registration Statement on Form S-1 (Registration No.
33-55052).
(4) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and John M. Dalton is incorporated by
reference to Exhibit 10(7) to the Registration Statement on
Form S-1 (Registration No. 33-55052). First Amendment to
Deferred Compensation Agreement of John Dalton dated May 19,
1994.
(5) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and Robert D. Burchard is incorporated
by reference to Exhibit 10(8) to the Registration Statement
on Form S-1 (Registration No. 33-55052). First Amendment to
Deferred Compensation Agreement of Robert Burchard dated May
19, 1994.
(6) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and James O. Murrell is incorporated
by reference to Exhibit 10(9) to the Registration Statement
on Form S-1 (Registration No. 33-55052). First Amendment to
Deferred Compensation Agreement of James Murrell dated May
23, 1994.
(7) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and Gordon Coryea is incorporated by
reference to Exhibit 10(10) to the Registration Statement on
Form S-1 (Registration No. 33-55052). First Amendment to
Deferred Compensation Agreement of Gordon Coryea dated May
23, 1994.
(8) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and George Thomas is incorporated by
reference to Exhibit 10(11) to the Registration Statement on
Form S-1 (Registration No. 33-55052). First Amendment to
Deferred Compensation Agreement of George Thomas dated May
24, 1994.
<PAGE>
Exhibit Index Page
(9) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and James Gartland is incorporated by
reference to Exhibit 10(12) to the Registration Statement on
Form S-1 (Registration No. 33-55052). First Amendment to
Deferred Compensation Agreement of James Gartland dated May
23, 1994.
(10) Deferred Compensation Agreement between the Bank and Gordon
Coryea dated April 30, 1988, as amended as of May 1, 1992, is
incorporated by reference to Exhibit 10(13) to the
Registration Statement on Form S-1 (Registration No.
33-55052).
(11) Deferred Compensation Agreement between the Bank and Merritt
V. McVicker dated April 30, 1988, as amended as of May 1,
1992, is incorporated by reference to Exhibit 10(14) to the
Registration Statement on Form S-1 (Registration No.
33-55052).
(12) Deferred Compensation Agreement between the Bank and John M.
Dalton dated April 30, 1988, as amended April 15, 1991, as
amended May 1, 1992, and as amended October 5, 1992, is
incorporated by reference to Exhibit 10(15) to the
Registration Statement on Form S-1 (Registration No.
33-55052).
(13) Deferred Compensation Agreement between the Bank and Robert
D. Burchard dated April 30, 1988, as amended April 15, 1991,
as amended May 1, 1992, and as amended October 5, 1992, is
incorporated by reference to Exhibit 10(16) to the
Registration Statement on Form S-1 (Registration No.
33-55052).
(14) Deferred Compensation Agreement between the Bank and
Jacquelin Ann Noble dated April 30, 1988, as amended April
15, 1991, and as amended October 5, 1992, is incorporated by
reference to Exhibit 10(17) to the Registration Statement on
Form S-1 (Registration No. 33-55052).
(15) Deferred Compensation Agreement between the Bank and Nora K.
Kuntz dated October 8, 1991, as amended October 5, 1992, is
incorporated by reference to Exhibit 10(18) to the
Registration Statement on Form S-1 (Registration No.
33-55052).
(16) Death Benefit Agreement between the Bank and Tim Canode dated
August 25, 1992, is incorporated by reference to Exhibit
10(19) to the Registration Statement on Form S-1
(Registration No. 33-55052).
(17) Death Benefit Agreement between the Bank and Larry G.
Phillips dated August 25, 1992, is incorporated by reference
to Exhibit 10(20) to the Registration Statement on Form S-1
(Registration No. 33-55052).
(18) Excess Benefit Agreement dated as of Februry 28, 1996 between
the Bank and John M. Dalton.
(19) Excess Benefit Agreement dated as of February 28, 1996
between the Bank and Robert D. Burchard.
<PAGE>
Exhibit Index Page
11 Statement regarding computation of per share earnings.
13 1996 Shareholder Annual Report.
21 Subsidiaries of the Registrant is incorporated by reference
to Exhibit 22 to the Registration Statement on Form S-1
(Registration No. 33-55052).
23 Consent of Geo. S. Olive & Co. LLC
27 Financial Data Schedule
- -----------------
* Management contracts and plans required to be filed as exhibits are
included as Exhibits 10(1)-10(19).
EXCESS BENEFIT AGREEMENT
This Excess Benefit Agreement (the "Agreement"), effective as of the
28th day of February, 1996, formalizes the understanding by and between First
Federal Savings Bank of Marion (the "Bank"), a federally chartered savings bank,
and John M. Dalton, hereinafter referred to as "Executive".
WITNESSETH:
WHEREAS, the Executive is employed by the Bank; and
WHEREAS, the Bank recognizes the valuable services heretofore performed
for it by such Executive and wishes to encourage continued employment; and
WHEREAS, the Bank wishes to provide the Executive with retirement
benefits to which he would otherwise be entitled under the Bank's tax-qualified
pension plan but for the changes made to Section 401(a)(17) of the Code by the
Omnibus Budget Reconciliation Act of 1993 ("OBRA `93") and to Section 415 of the
Code by the General Agreement on Tariffs and Trade of `94 ("GATT `94"); and
WHEREAS, the Bank and the Executive wish to provide the terms and
conditions upon which the Bank shall pay such additional compensation to the
Executive after retirement or other termination of employment and/or death
benefits to his beneficiaries after death; and
WHEREAS, the Bank and the Executive intend this Agreement to be
considered an unfunded arrangement, maintained primarily to provide supplemental
retirement income for such Executive, a member of a select group of management
or a highly compensated
<PAGE>
employee of the Bank, for tax purposes and for purposes of the Employee
Retirement Income Security Act of 1974, as amended; and
WHEREAS, the Bank has adopted this Excess Benefit Agreement which
controls all issues relating to the Excess Benefit as described herein;
NOW, THEREFORE, in consideration of the premises and of the mutual
promises herein contained, the Bank and the Executive agree as follows:
SECTION I
DEFINITIONS
When used herein, the following words and phrases shall have the
meanings below unless the context clearly indicates otherwise:
1.1 "Accrued Benefit" means that portion of the Excess Benefit which is
required to be expensed and accrued under generally accepted accounting
principles (GAAP) by any appropriate method which the Bank's Board of
Directors may require in the exercise of its sole discretion.
1.2 "Act" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
1.3 "Bank" means First Federal Savings Bank of Marion and any successor
thereto.
-2-
<PAGE>
1.4 "Beneficiary" means the person or persons (and their heirs) designated
as Beneficiary in Exhibit A of this Agreement to whom the deceased
Executive's benefits are payable. If no Beneficiary is so designated,
then the Executive's Spouse, if living, will be deemed the Beneficiary.
If the Executive's Spouse is not living, then the Children of the
Executive will be deemed the Beneficiaries and will take on a per
stirpes basis. If there are no Children, then the Estate of the
Executive will be deemed the Beneficiary.
1.5 "Benefit Age" means the Executive's sixty-fifth (65th) birthday.
1.6 "Benefit Eligibility Date" means the date on which the Executive is
entitled to receive any benefit(s) pursuant to Subsection 2.1, 2.3 or
2.4 of this Agreement. It shall be the first day of the month following
the month in which the Executive attains his Benefit Age.
1.7 "Cause" means personal dishonesty, willful misconduct, willful
malfeasance, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any
law, rule, regulation (other than traffic violations or similar
offenses), or final cease-and-desist order, material breach of any
provision of this Agreement, or gross negligence in matters of material
importance to the Bank.
1.8 "Change in Control" of the Bank shall mean and include the following:
-3-
<PAGE>
(1) a Change in Control of a nature that would be required to be
reported in response to Item 1 (a) of the current report on
Form 8-K, as in effect on the date hereof, pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"); or
(2) a change in control of the Bank within the meaning of 12
C.F.R. 574.4; or
(3) a Change in Control at such time as
(i) any "person" (as the term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of
securities of the Bank representing Twenty (20.0%)
Percent or more of the combined voting power of the
Bank's outstanding securities ordinarily having the
right to vote at the election of Directors, except
for any stock purchased by the Bank's Employee Stock
Ownership Plan and/or trust; or
(ii) individuals who constitute the board of directors on
the date hereof (the "Incumbent Board") cease for any
reason to constitute at least a majority thereof,
provided that any person becoming a director
subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose
nomination for election by the Bank's shareholders
was approved by the Bank's nominating committee which
is comprised of members of the Incumbent Board, shall
be, for purposes of this
-4-
<PAGE>
clause (ii), considered as though he were a member of
the Incumbent Board; or
(iii) merger, consolidation, or sale of all or
substantially all of the assets of the Bank occurs;
or
(iv) a proxy statement is issued soliciting proxies from
the stockholders of the Bank by someone other than
the current management of the Bank, seeking
stockholder approval of a plan of reorganization,
merger, or consolidation of the Bank with one or more
corporations as a result of which the outstanding
shares of the class of the Bank's securities are
exchanged for or converted into cash or property or
securities not issued by the Bank.
1.9 "Children" means all natural and adopted children of the Executive, and
issue of any predeceased child or children.
1.10 "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
1.11 "Disability Benefit" means the monthly benefit payable to the Executive
following a determination, in accordance with Subsection 2.6, that he
is no longer able, properly and satisfactorily, to perform his duties
as Executive.
1.12 "Effective Date" of this Agreement shall be February 28th, 1996.
1.13 "Estate" means the estate of the Executive.
1.14 "Excess Benefit" means an annual amount equal to Forty One Thousand Six
Hundred Eighty One Dollars ($41,681.00).
-5-
<PAGE>
1.15 "Interest Factor" means monthly compounding, discounting, or
annuitizing as applicable, at Seven and 89/100th's Percent (7.89%) per
annum.
1.16 "Payout Period" means the time frame during which certain benefits
payable hereunder shall be distributed. Payments shall be made in equal
monthly installments commencing on the first day of the month following
the occurrence of the event which triggers distribution and continuing
for a period of one hundred eighty (180) months.
1.17 "Spouse" means the individual to whom the Executive is legally married
at the time of the Executive's death.
1.18 "Survivor's Benefit" means an annual amount equal to Forty One Thousand
Six Hundred Eighty One Dollars ($41,681.00), payable to the Beneficiary
in monthly installments throughout the Payout Period.
SECTION II
BENEFITS
2.1 Retirement Benefit. If the Executive is in service with the Bank until
reaching his Benefit Age, the Executive shall be entitled to the Excess
Benefit. Such benefit shall commence on the Executive's Benefit
Eligibility Date and shall be payable in monthly installments
throughout the Payout Period. In the event the Executive dies at any
time after attaining his Benefit Age, but prior to completion of all
such payments due and owing hereunder, the Bank shall pay to the
Executive's Beneficiary a continuation of the monthly installments for
the remainder of the Payout Period.
-6-
<PAGE>
2.2 Death During Employment. If the Executive dies while employed at the
Bank, the Executive's Beneficiary shall be entitled to the Survivor's
Benefit. The Survivor's Benefit shall commence on the first day of the
month following the Executive's death and shall be payable in monthly
installments throughout the Payout Period.
2.3 Termination Other Than for Cause. If the Executive voluntarily or
involuntarily terminates employment at the Bank before reaching his
Benefit Age, for any reason other than for (i) Cause (which is covered
in Subsection 2.5) or (ii) related to a Change in Control (which is
covered in Subsection 2.4), the Executive (or his Beneficiary) shall be
entitled to a stream of monthly installments based on the Executive's
Accrued Benefit. (a) If, after such termination, the Executive dies
prior to attaining his Benefit Age, the stream of monthly installments
payable to the Beneficiary shall commence within thirty (30) days of
the Executive's death. The Accrued Benefit, measured as of the date of
termination, shall be increased monthly (using the Interest Factor)
from the date of termination until the Executive's death. The Accrued
Benefit, measured as of the date of the Executive's death, shall be
annuitized into monthly installments using the Interest Factor and
shall be payable for the Payout Period. (b) If, after such termination,
the Executive lives until attaining his Benefit Age, the stream of
monthly installments payable to the Executive shall commence on the
Executive's Benefit Eligibility Date. The Accrued Benefit, measured as
of the date of termination, shall be increased monthly (using the
Interest Factor) from the date
-7-
<PAGE>
of termination until the Executive's Benefit Age. The Accrued Benefit
measured as of the Executive's Benefit Age shall be annuitized into
monthly installments using the Interest Factor and shall be payable for
the Payout Period. In the event the Executive dies prior to completion
of all such monthly installments, the Bank shall pay to the Executive's
Beneficiary a continuation of the monthly installments for the
remainder of the Payout Period.
2.4 Termination of Service Related to a Change in Control.
(a) If the Executive's termination of service (as defined in this
Subsection) is related to a Change in Control, the Executive
shall be entitled to receive his Excess Benefit upon
attainment of his Benefit Age, payment of which shall commence
on his Benefit Eligibility Date. In the event the Executive
dies at any time after attaining his Benefit Age, but prior to
completion of all such payments due and owing hereunder, the
Bank shall pay to the Executive's Beneficiary a continuation
of the monthly installments for the remainder of the Payout
Period.
(b) For purposes of this Subsection, "termination of service"
shall include the following:
If, at any time following said Change in Control, (i)
the employment of the Executive is involuntarily
terminated by the Bank, or (ii) voluntarily
terminated by the Executive after: (A) a material
change
-8-
<PAGE>
in the Executive's function, duties, or
responsibilities, which change would cause the
Executive's position to become one of lesser
responsibility, importance, or scope from the
position the Executive held at the time of the Change
in Control, (B) a relocation of the Executive's
principal place of employment by more than thirty
(30) miles from its location prior to the Change in
Control, or (C) a material reduction in the benefits
and perquisites to the Executive from those being
provided at the time of the Change in Control.
(c) Should the Executive die after being terminated following a
Change in Control, but prior to commencement of the Excess
Benefit, his Beneficiary shall be entitled to receive the
Survivor's Benefit, payment of which shall commence within
thirty (30) days following the Executive's death.
2.5 Termination for Cause. If the Executive is terminated for Cause, all
benefits under this Agreement shall be forfeited and this Agreement
shall become null and void.
2.6 Disability Benefit. If the Executive's service is terminated prior to
Benefit Age due to a disability which meets the criteria set forth
below, the Executive may request to receive the Disability Benefit in
lieu of the retirement benefit described in Section 2.1 (which is not
available prior to the Executive's Benefit Eligibility Date).
-9-
<PAGE>
Notwithstanding any other provision hereof, if requested by the
Executive and approved by the Board of Directors, the Executive shall
receive the Disability Benefit hereunder, in any case in which it is
determined by a duly licensed physician selected by the Bank, that the
Executive is no longer able, properly and satisfactorily, to perform
his regular duties as an Executive, because of ill health, accident,
disability or general inability due to age. The monthly benefit shall
not begin more than thirty (30) days following the above-mentioned
disability determination. The amount of the monthly benefit shall be
the annuitized value of the Executive's Accrued Benefit measured as of
the date of such disability determination. The Accrued Benefit shall be
annuitized using the Interest Factor and shall be payable over the
Payout Period. In the event the Executive dies while receiving payments
pursuant to this Subsection, or after becoming eligible for such
payments but before the actual commencement of such payments, his
Beneficiary shall be entitled to receive the Survivor's Benefit for the
balance of the Payout Period.
Furthermore, if (i) Board of Director approval is obtained, and (ii)
the total dollar amount of disability payments received by the
Executive under the provisions of this Subsection is less than the
total dollar amount of payments that would have been received had the
Survivor's Benefit been paid in lieu of the Disability Benefit during
the Executive's life, the Bank shall pay the Executive's Beneficiary a
lump sum payment for the difference. This lump sum payment shall be
made within thirty (30) days of the Executive's death.
-10-
<PAGE>
2.7 Non-Competition During and After Employment.
(a) In consideration of the agreements of the Bank contained herein and
of the payments to be made by the Bank pursuant hereto, the Executive
hereby agrees that, so long as he remains employed by the Bank, he will
devote substantially all of his time, skill, diligence and attention to
the business of the Bank, and will not actively engage, either directly
or indirectly, in any business or other activity which is or may be
deemed to be in any way competitive with or adverse to the best
interests of the business of the Bank. (b) The Executive expressly
agrees that, as consideration for the covenants of the Bank contained
herein and as a condition to the performance by the Bank of its
obligations hereunder, from and after any voluntary or involuntary
termination of service, other than a termination of service pursuant to
Subsection 2.4, and continuing throughout the entire Payout Period, as
provided herein, he will not, without the prior written consent of the
Bank, engage in, become interested, directly or indirectly, as a sole
proprietor, as a partner in a partnership, or as a substantial
shareholder in a corporation, nor become associated with, in the
capacity of an employee, director, officer, principal, agent, trustee
or in any other capacity whatsoever, any enterprise conducted in the
trading area of the business of the Bank which enterprise is, or may be
deemed to be, competitive with any business carried on by the Bank as
of the date of the termination of the Executive's employment or his
retirement.
-11-
<PAGE>
(c) In the event of a termination of the Executive's service related to
a Change in Control pursuant to Subsection 2.4, paragraph (b) of this
Subsection shall cease to be a condition to the performance by the Bank
of its obligations under this Agreement.
2.8 Breach. In the event of any breach by the Executive of the agreements
and covenants contained herein, the Board of Directors of the Bank
shall direct that any unpaid balance of any payments to the Executive
under this Agreement be suspended, and shall thereupon notify the
Executive of such suspensions, in writing. Thereupon, if the Board of
Directors of the Bank shall determine that said breach by the Executive
has continued for a period of one (1) month following notification of
such suspension, all rights of the Executive and his Beneficiaries
under this Agreement, including rights to further payments hereunder,
shall thereupon terminate.
SECTION III
BENEFICIARY DESIGNATION
The Executive shall make an initial designation of primary and
secondary Beneficiaries upon execution of this Agreement and shall have the
right to change such designation, at any subsequent time, by submitting to the
Administrator in substantially the form attached as Exhibit to this Agreement, a
written designation of primary and secondary Beneficiaries. Any Beneficiary
designation made subsequent to execution of this Agreement
-12-
<PAGE>
shall become effective only when receipt thereof is acknowledged in writing by
the Administrator.
SECTION IV
EXECUTIVE'S RIGHT TO ASSETS
The rights of the Executive, any Beneficiary, or any other person
claiming through the Executive under this Agreement, shall be solely those of an
unsecured general creditor of the Bank. The Executive, the Beneficiary, or any
other person claiming through the Executive, shall only have the right to
receive from the Bank those payments so specified under this Agreement. The
Executive agrees that he, his Beneficiary, or any other person claiming through
him shall have no rights or interests whatsoever in any asset of the Bank,
including any insurance policies or contracts which the Bank may possess or
obtain to informally fund this Agreement. Any asset used or acquired by the Bank
in connection with the liabilities it has assumed under this Agreement, unless
expressly provided herein, shall not be deemed to be held under any trust for
the benefit of the Executive or his Beneficiaries, nor shall any asset be
considered security for the performance of the obligations of the Bank. Any such
asset shall be and remain, a general, unpledged, and unrestricted asset of the
Bank.
-13-
<PAGE>
SECTION V
RESTRICTIONS UPON FUNDING
The Bank shall have no obligation to set aside, earmark or entrust any
fund or money with which to pay its obligations under this Agreement. The
Executive, his Beneficiaries or any successor in interest to him shall be and
remain simply a general unsecured creditor of the Bank in the same manner as any
other creditor having a general claim for matured and unpaid compensation. The
Bank reserves the absolute right in its sole discretion to either purchase
assets to meet its obligations undertaken by this Agreement or to refrain from
the same and to determine the extent, nature, and method of such asset
purchases. Should the Bank decide to purchase assets such as life insurance,
mutual funds, disability policies or annuities, the Bank reserves the absolute
right, in its sole discretion, to terminate such assets at any time, in whole or
in part. At no time shall the Executive be deemed to have any lien, right, title
or interest in or to any specific investment or to any assets of the Bank. If
the Bank elects to invest in a life insurance, disability or annuity policy upon
the life of the Executive, then the Executive shall assist the Bank by freely
submitting to a physical examination and by supplying such additional
information necessary to obtain such insurance or annuities.
-14-
<PAGE>
SECTION VI
ALIENABILITY AND ASSIGNMENT PROHIBITION
Neither the Executive nor any Beneficiary under this Agreement shall
have any power or right to transfer, assign, anticipate, hypothecate, mortgage,
commute, modify or otherwise encumber in advance any of the benefits payable
hereunder, nor shall any of said benefits be subject to seizure for the payment
of any debts, judgments, alimony or separate maintenance owed by the Executive
or his Beneficiary, nor be transferable by operation of law in the event of
bankruptcy, insolvency or otherwise. In the event the Executive or any
Beneficiary attempts assignment, communication, hypothecation, transfer or
disposal of the benefits hereunder, the Bank's liabilities shall forthwith cease
and terminate.
SECTION VII
ACT PROVISIONS
7.1 Named Fiduciary and Administrator. The Bank shall be the Named
Fiduciary and Administrator (the "Administrator") of this Agreement. As
Administrator, the Bank shall be responsible for the management,
control and administration of the Agreement as established herein. The
Administrator may delegate to others certain aspects of the management
and operational responsibilities of the Agreement, including the
employment of advisors and the delegation of ministerial duties to
qualified individuals.
-15-
<PAGE>
7.2 Claims Procedure and Arbitration. In the event that benefits under this
Agreement are not paid to the Executive (or to his Beneficiary in the
case of the Executive's death) and such claimants feel they are
entitled to receive such benefits, then a written claim must be made to
the Administrator within sixty (60) days from the date payments are
refused. The Bank and its Board of Directors shall review the written
claim and, if the claim is denied, in whole or in part, they shall
provide in writing, within ninety (90) days of receipt of such claim,
their specific reasons for such denial, reference to the provisions of
this Agreement upon which the denial is based, and any additional
material or information necessary to perfect the claim. Such writing by
the Bank and its Board of Directors shall further indicate the
additional steps which must be undertaken by claimants if an additional
review of the claim denial is desired.
If claimants desire a second review, they shall notify the
Administrator in writing within sixty (60) days of the first claim
denial. Claimants may review this Agreement or any documents relating
thereto and submit any issues and comments, in writing, they may feel
appropriate. In its sole discretion, the Administrator shall then
review the second claim and provide a written decision within sixty
(60) days of receipt of such claim. This decision shall state the
specific reasons for the decision and shall include reference to
specific provisions of this Agreement upon which the decision is based.
-16-
<PAGE>
If claimants continue to dispute the benefit denial based upon
completed performance of this Agreement or the meaning and effect of
the terms and conditions thereof, then claimants may submit the dispute
to a Board of Arbitration for final arbitration. Said Board of
Arbitration shall consist of one member selected by the claimant, one
member selected by the Bank, and the third member selected by the first
two members. The Board of Arbitration shall operate under any generally
recognized set of arbitration rules. The parties hereto agree that
they, their heirs, personal representatives, successors and assigns
shall be bound by the decision of such Board of Arbitration with
respect to any controversy properly submitted to it for determination.
SECTION VIII
MISCELLANEOUS
8.1 No Effect on Employment Rights. Nothing contained herein will confer
upon the Executive the right to be retained in the service of the Bank
nor limit the right of the Bank to discharge or otherwise deal with the
Executive without regard to the existence of the Agreement. Pursuant to
12 C.F.R. ss. 563.39(b), the following conditions shall apply to this
Agreement:
(1) The Bank's Board of Directors may terminate the Executive at
any time, but any termination by the Bank's Board of Directors
other than termination for
-17-
<PAGE>
Cause shall not prejudice the Executive's vested right to
compensation or other benefits under the contract. As provided
in Section 2.5, the Executive shall forfeit his right to all
benefits provided for in the Agreement in the event he is
terminated for Cause. He shall have no right to receive
additional compensation or other benefits for any period after
termination for Cause.
(2) If the Executive is suspended and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a
notice served under Section 8(e)(3) or (g)(1) of the Federal
Deposit Insurance Act (12 U.S.C. 1818(e)(3) and (g)(1)) the
Bank's obligations under the contract shall be suspended
(except vested rights) as of the date of termination of
service unless stayed by appropriate proceedings. If the
charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Executive all or part of the
compensation withheld while its contract obligations were
suspended and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(3) If the Executive is terminated and/or permanently prohibited
from participating in the conduct of the Bank's affairs by an
order issued under Section 8(e)(4) or (g)(1) of the Federal
Deposit Insurance Act (12 U.S.C. 1818(e)(4) or (g)(1)), all
non-vested obligations of the Bank under the contract shall
terminate as of the effective date of the order.
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(4) If the Bank is in default (as defined in Section 3(x)(1) of
the Federal Deposit Insurance Act), all non-vested obligations
under the contract shall terminate as of the date of default.
(5) All non-vested obligations under the contract shall be
terminated, except to the extent determined that continuation
of the contract is necessary for the continued operation of
the Bank:
(i) by the Director [of the Federal Deposit Insurance
Corporation or the Resolution Trust Corporation] or
his designee at the time the Federal Deposit
Insurance Corporation or the Resolution Trust
Corporation enters into an agreement to provide
assistance to or on behalf of the Bank under the
authority contained in ss. 13(c) of the Federal
Deposit Insurance Act; or
(ii) by the Director [of the Federal Deposit Insurance
Corporation or the Resolution Trust Corporation] or
his designee, at the time the Director or his
designee approves a supervisory merger to resolve
problems related to operation of the Bank or when the
Bank is determined by the Director to be in an unsafe
or unsound condition.
Any rights of the parties that have already vested, (i.e., the
Executive's Accrued Benefit), however, shall not be affected by such
action.
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8.2 State Law. The Agreement is established under, and will be construed
according to, the laws of the State of Indiana, to the extent such laws
are not preempted by the Act and valid regulations published
thereunder.
8.3 Severability. In the event that any of the provisions of this Agreement
or portion thereof, are held to be inoperative or invalid by any court
of competent jurisdiction, then: (1) insofar as is reasonable, effect
will be given to the intent manifested in the provisions held invalid
or inoperative, and (2) the validity and enforceability of the
remaining provisions will not be affected thereby.
8.4 Incapacity of Recipient. In the event the Executive is declared
incompetent and a conservator or other person legally charged with the
care of his person or Estate is appointed, any benefits under the
Agreement to which such Executive is entitled shall be paid to such
conservator or other person legally charged with the care of his person
or Estate.
8.5 Unclaimed Benefit. The Executive shall keep the Bank informed of his
current address and the current address of his Beneficiaries. If the
location of the Executive is not made known to the Bank within three
(3) years after the date on which any payment of the Excess Benefit may
first be made, payment may be made as though the Executive had died at
the end of the three (3) year period. If, within one (1) additional
year after such three (3) year period has elapsed, or, within three (3)
years
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after the actual death of the Executive, whichever comes first, the
Bank is unable to locate any Beneficiary of the Executive, the Bank may
fully discharge its obligation by payment to the Estate.
8.6 Limitations on Liability. Notwithstanding any of the preceding
provisions of the Agreement, no individual acting as an employee or
agent of the Bank, or as a member of the Board of Directors shall be
personally liable to the Executive or any other person for any claim,
loss, liability or expense incurred in connection with the Agreement.
8.7 Gender. Whenever in this Agreement words are used in the masculine or
neuter gender, they shall be read and construed as in the masculine,
feminine or neuter gender, whenever they should so apply.
8.8 Effect on Other Corporate Benefit Agreements. Nothing contained in this
Agreement shall affect the right of the Executive to participate in or
be covered by any qualified or nonqualified pension, profit sharing,
group, bonus or other supplemental compensation or fringe benefit
agreement constituting a part of the Bank's existing or future
compensation structure.
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8.9 Inurement. This Agreement shall be binding upon and shall inure to the
benefit of the Bank, its successors and assigns, and the Executive, his
successors, heirs, executors, administrators, and Beneficiaries.
8.10 Tax Withholding. The Bank may withhold from any benefits payable under
this Agreement all federal, state, city, or other taxes as shall be
required pursuant to any law or governmental regulation then in effect.
8.11 Headings. Headings and sub-headings in this Agreement are inserted for
reference and convenience only and shall not be deemed a part of this
Agreement.
SECTION IX
AMENDMENT/REVOCATION
This Agreement shall not be amended, modified or revoked at any time,
in whole or part, without the mutual written consent of the Executive and the
Bank, and such mutual written consent shall be required even if the Executive is
no longer employed by the Bank.
SECTION X
EXECUTION
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10.1 This Agreement sets forth the entire understanding of the parties
hereto with respect to the transactions contemplated hereby, and any
previous agreements or understandings between the parties hereto
regarding the subject matter hereof are merged into and superseded by
this Agreement.
10.2 This Agreement shall be executed in triplicate, each copy of which,
when so executed and delivered, shall be an original, but all three
copies shall together constitute one and the same instrument.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed
on this 28th day of February, 1996
FIRST FEDERAL SAVINGS BANK OF MARION
By: /s/ Larry G. Phillips
Larry G. Phillips
Vice President & Secretary-Treasuer
Title
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EXCESS BENEFIT AGREEMENT
BENEFICIARY DESIGNATION
The Executive, under the terms of the Excess Benefit Agreement executed
by the Bank, of Marion, Indiana, dated February 28th,1996, hereby designates the
following Beneficiary to receive any guaranteed payments or death benefits under
such Agreement, following his death:
PRIMARY BENEFICIARY: Nancy H. Dalton
SECONDARY BENEFICIARY: Daphne D. Hess & Sidney D. Collier
This Beneficiary Designation hereby revokes any prior Beneficiary
Designation which may have been in effect.
Such Beneficiary Designation is revocable.
DATE: February 28, 1996
/s/ Chris Bradford /s/ John Dalton
(WITNESS) (EXECUTIVE)
/s/ Sondra Rabb
(WITNESS)
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EXCESS BENEFIT AGREEMENT
This Excess Benefit Agreement (the "Agreement"), effective as of the
28th day of February, 1996, formalizes the understanding by and between First
Federal Savings Bank of Marion (the "Bank"), a federally chartered savings bank,
and Robert D. Burchard, hereinafter referred to as "Executive".
W I T N E S S E T H :
WHEREAS, the Executive is employed by the Bank; and
WHEREAS, the Bank recognizes the valuable services heretofore performed
for it by such Executive and wishes to encourage continued employment; and
WHEREAS, the Bank wishes to provide the Executive with retirement
benefits to which he would otherwise be entitled under the Bank's tax-qualified
pension plan but for the changes made to Section 401(a)(17) of the Code by the
Omnibus Budget Reconciliation Act of 1993 ("OBRA `93") and to Section 415 of the
Code by the General Agreement on Tariffs and Trade of `94 ("GATT `94"); and
WHEREAS, the Bank and the Executive wish to provide the terms and
conditions upon which the Bank shall pay such additional compensation to the
Executive after
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retirement or other termination of employment and/or death benefits to his
beneficiaries after death; and
WHEREAS, the Bank and the Executive intend this Agreement to be
considered an unfunded arrangement, maintained primarily to provide supplemental
retirement income for such Executive, a member of a select group of management
or a highly compensated employee of the Bank, for tax purposes and for purposes
of the Employee Retirement Income Security Act of 1974, as amended; and
WHEREAS, the Bank has adopted this Excess Benefit Agreement which
controls all issues relating to the Excess Benefit as described herein;
NOW, THEREFORE, in consideration of the premises and of the mutual
promises herein contained, the Bank and the Executive agree as follows:
SECTION I
DEFINITIONS
When used herein, the following words and phrases shall have the
meanings below unless the context clearly indicates otherwise:
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1.1 "Accrued Benefit" means that portion of the Excess Benefit which is
required to be expensed and accrued under generally accepted accounting
principles (GAAP) by any appropriate method which the Bank's Board of
Directors may require in the exercise of its sole discretion.
1.2 "Act" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
1.3 "Bank" means First Federal Savings Bank of Marion and any successor
thereto.
1.4 "Beneficiary" means the person or persons (and their heirs) designated
as Beneficiary in Exhibit A of this Agreement to whom the deceased
Executive's benefits are payable. If no Beneficiary is so designated,
then the Executive's Spouse, if living, will be deemed the Beneficiary.
If the Executive's Spouse is not living, then the Children of the
Executive will be deemed the Beneficiaries and will take on a per
stirpes basis. If there are no Children, then the Estate of the
Executive will be deemed the Beneficiary.
1.5 "Benefit Age" means the Executive's sixty-fifth (65th) birthday.
1.6 "Benefit Eligibility Date" means the date on which the Executive is
entitled to receive any benefit(s) pursuant to Subsection 2.1, 2.3 or
2.4 of this Agreement. It shall be
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the first day of the month following the month in which the Executive
attains his Benefit Age.
1.7 "Cause" means personal dishonesty, willful misconduct, willful
malfeasance, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any
law, rule, regulation (other than traffic violations or similar
offenses), or final cease-and-desist order, material breach of any
provision of this Agreement, or gross negligence in matters of material
importance to the Bank.
1.8 "Change in Control" of the Bank shall mean and include the following:
(1) a Change in Control of a nature that would be required to be
reported in response to Item 1(a) of the current report on
Form 8-K, as in effect on the date hereof, pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"); or
(2) a change in control of the Bank within the meaning of 12
C.F.R. 574.4; or
(3) a Change in Control at such time as
(i) any "person" (as the term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of
securities of the Bank representing Twenty (20.0%)
Percent or more of the combined voting power of the
Bank's outstanding securities ordinarily
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having the right to vote at the election of
Directors, except for any stock purchased by the
Bank's Employee Stock Ownership Plan and/or trust; or
(ii) individuals who constitute the board of directors on
the date hereof (the "Incumbent Board") cease for any
reason to constitute at least a majority thereof,
provided that any person becoming a director
subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose
nomination for election by the Bank's shareholders
was approved by the Bank's nominating committee which
is comprised of members of the Incumbent Board, shall
be, for purposes of this clause (ii), considered as
though he were a member of the Incumbent Board; or
(iii) merger, consolidation, or sale of all or
substantially all of the assets of the Bank occurs;
or
(iv) a proxy statement is issued soliciting proxies from
the stockholders of the Bank by someone other than
the current management of the Bank, seeking
stockholder approval of a plan of reorganization,
merger, or consolidation of the Bank with one or more
corporations as a result of which the outstanding
shares of the class of the Bank's securities are
exchanged for or converted into cash or property or
securities not issued by the Bank.
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1.9 "Children" means all natural and adopted children of the Executive, and
issue of any predeceased child or children.
1.10 "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
1.11 "Disability Benefit" means the monthly benefit payable to the Executive
following a determination, in accordance with Subsection 2.6, that he
is no longer able, properly and satisfactorily, to perform his duties
as Executive.
1.12 "Effective Date" of this Agreement shall be February 28th, 1996.
1.13 "Estate" means the estate of the Executive.
1.14 "Excess Benefit" means an annual amount equal to Seventeen Thousand
Seven Hundred Forty Three Dollars ($17,743.00).
1.15 "Interest Factor" means monthly compounding, discounting, or
annuitizing as applicable, at Seven and 89/100th's Percent (7.89%) per
annum.
1.16 "Payout Period" means the time frame during which certain benefits
payable hereunder shall be distributed. Payments shall be made in equal
monthly installments commencing on the first day of the month following
the occurrence of
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the event which triggers distribution and continuing for a period of
one hundred eighty (180) months.
1.17 "Spouse" means the individual to whom the Executive is legally married
at the time of the Executive's death.
1.18 "Survivor's Benefit" means an annual amount equal to Seventeen Thousand
Seven Hundred Forty Three Dollars ($17,743.00), payable to the
Beneficiary in monthly installments throughout the Payout Period.
SECTION II
BENEFITS
2.1 Retirement Benefit. If the Executive is in service with the Bank until
reaching his Benefit Age, the Executive shall be entitled to the Excess
Benefit. Such benefit shall commence on the Executive's Benefit
Eligibility Date and shall be payable in monthly installments
throughout the Payout Period. In the event the Executive dies at any
time after attaining his Benefit Age, but prior to completion of all
such payments due and owing hereunder, the Bank shall pay to the
Executive's Beneficiary a continuation of the monthly installments for
the remainder of the Payout Period.
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2.2 Death During Employment. If the Executive dies while employed at the
Bank, the Executive's Beneficiary shall be entitled to the Survivor's
Benefit. The Survivor's Benefit shall commence on the first day of the
month following the Executive's death and shall be payable in monthly
installments throughout the Payout Period.
2.3 Termination Other Than for Cause. If the Executive voluntarily or
involuntarily terminates employment at the Bank before reaching his
Benefit Age, for any reason other than for (i) Cause (which is covered
in Subsection 2.5) or (ii) related to a Change in Control (which is
covered in Subsection 2.4), the Executive (or his Beneficiary) shall be
entitled to a stream of monthly installments based on the Executive's
Accrued Benefit.
(a) If, after such termination, the Executive dies prior to
attaining his Benefit Age, the stream of monthly installments
payable to the Beneficiary shall commence within thirty (30)
days of the Executive's death. The Accrued Benefit, measured
as of the date of termination, shall be increased monthly
(using the Interest Factor) from the date of termination until
the Executive's death. The Accrued Benefit, measured as of the
date of the Executive's death, shall be annuitized into
monthly installments using the Interest Factor and shall be
payable for the Payout Period.
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(b) If, after such termination, the Executive lives until
attaining his Benefit Age, the stream of monthly installments
payable to the Executive shall commence on the Executive's
Benefit Eligibility Date. The Accrued Benefit, measured as of
the date of termination, shall be increased monthly (using the
Interest Factor) from the date of termination until the
Executive's Benefit Age. The Accrued Benefit measured as of
the Executive's Benefit Age shall be annuitized into monthly
installments using the Interest Factor and shall be payable
for the Payout Period. In the event the Executive dies prior
to completion of all such monthly installments, the Bank shall
pay to the Executive's Beneficiary a continuation of the
monthly installments for the remainder of the Payout Period.
2.4 Termination of Service Related to a Change in Control.
(a) If the Executive's termination of service (as defined in this
Subsection) is related to a Change in Control, the Executive
shall be entitled to receive his Excess Benefit upon
attainment of his Benefit Age, payment of which shall commence
on his Benefit Eligibility Date. In the event the Executive
dies at any time after attaining his Benefit Age, but prior to
completion of all such payments due and owing hereunder, the
Bank shall pay to the Executive's Beneficiary a continuation
of the monthly installments for the remainder of the Payout
Period.
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(b) For purposes of this Subsection, "termination of service"
shall include the following:
If, at any time following said Change in Control, (i)
the employment of the Executive is involuntarily
terminated by the Bank, or (ii) voluntarily
terminated by the Executive after: (A) a material
change in the Executive's function, duties, or
responsibilities, which change would cause the
Executive's position to become one of lesser
responsibility, importance, or scope from the
position the Executive held at the time of the Change
in Control, (B) a relocation of the Executive's
principal place of employment by more than thirty
(30) miles from its location prior to the Change in
Control, or (C) a material reduction in the benefits
and perquisites to the Executive from those being
provided at the time of the Change in Control.
(c) Should the Executive die after being terminated following a
Change in Control, but prior to commencement of the Excess
Benefit, his Beneficiary shall be entitled to receive the
Survivor's Benefit, payment of which shall commence within
thirty (30) days following the Executive's death.
2.5 Termination for Cause. If the Executive is terminated for Cause, all
benefits under this Agreement shall be forfeited and this Agreement
shall become null and void.
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2.6 Disability Benefit. If the Executive's service is terminated prior to
Benefit Age due to a disability which meets the criteria set forth
below, the Executive may request to receive the Disability Benefit in
lieu of the retirement benefit described in Section 2.1 (which is not
available prior to the Executive's Benefit Eligibility Date).
Notwithstanding any other provision hereof, if requested by the
Executive and approved by the Board of Directors, the Executive shall
receive the Disability Benefit hereunder, in any case in which it is
determined by a duly licensed physician selected by the Bank, that the
Executive is no longer able, properly and satisfactorily, to perform
his regular duties as an Executive, because of ill health, accident,
disability or general inability due to age. The monthly benefit shall
not begin more than thirty (30) days following the above-mentioned
disability determination. The amount of the monthly benefit shall be
the annuitized value of the Executive's Accrued Benefit measured as of
the date of such disability determination. The Accrued Benefit shall be
annuitized using the Interest Factor and shall be payable over the
Payout Period. In the event the Executive dies while receiving payments
pursuant to this Subsection, or after becoming eligible for such
payments but before the actual commencement of such payments, his
Beneficiary shall be entitled to receive the Survivor's Benefit for the
balance of the Payout Period.
Furthermore, if (i) Board of Director approval is obtained, and (ii)
the total dollar amount of disability payments received by the
Executive under the provisions of this
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Subsection is less than the total dollar amount of payments that would
have been received had the Survivor's Benefit been paid in lieu of the
Disability Benefit during the Executive's life, the Bank shall pay the
Executive's Beneficiary a lump sum payment for the difference. This
lump sum payment shall be made within thirty (30) days of the
Executive's death.
2.7 Non-Competition During and After Employment.
(a) In consideration of the agreements of the Bank contained
herein and of the payments to be made by the Bank pursuant
hereto, the Executive hereby agrees that, so long as he
remains employed by the Bank, he will devote substantially all
of his time, skill, diligence and attention to the business of
the Bank, and will not actively engage, either directly or
indirectly, in any business or other activity which is or may
be deemed to be in any way competitive with or adverse to the
best interests of the business of the Bank.
(b) The Executive expressly agrees that, as consideration for the
covenants of the Bank contained herein and as a condition to
the performance by the Bank of its obligations hereunder, from
and after any voluntary or involuntary termination of service,
other than a termination of service pursuant to Subsection
2.4, and continuing throughout the entire Payout Period, as
provided herein, he will not, without the prior written
consent of the Bank, engage in, become interested, directly or
indirectly, as a sole proprietor, as a
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partner in a partnership, or as a substantial shareholder in a
corporation, nor become associated with, in the capacity of an
employee, director, officer, principal, agent, trustee or in
any other capacity whatsoever, any enterprise conducted in the
trading area of the business of the Bank which enterprise is,
or may be deemed to be, competitive with any business carried
on by the Bank as of the date of the termination of the
Executive's employment or his retirement.
(c) In the event of a termination of the Executive's service
related to a Change in Control pursuant to Subsection 2.4,
paragraph (b) of this Subsection shall cease to be a condition
to the performance by the Bank of its obligations under this
Agreement.
2.8 Breach. In the event of any breach by the Executive of the agreements
and covenants contained herein, the Board of Directors of the Bank
shall direct that any unpaid balance of any payments to the Executive
under this Agreement be suspended, and shall thereupon notify the
Executive of such suspensions, in writing. Thereupon, if the Board of
Directors of the Bank shall determine that said breach by the Executive
has continued for a period of one (1) month following notification of
such suspension, all rights of the Executive and his Beneficiaries
under this Agreement, including rights to further payments hereunder,
shall thereupon terminate.
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SECTION III
BENEFICIARY DESIGNATION
The Executive shall make an initial designation of primary and
secondary Beneficiaries upon execution of this Agreement and shall have the
right to change such designation, at any subsequent time, by submitting to the
Administrator in substantially the form attached as Exhibit to this Agreement, a
written designation of primary and secondary Beneficiaries. Any Beneficiary
designation made subsequent to execution of this Agreement shall become
effective only when receipt thereof is acknowledged in writing by the
Administrator.
SECTION IV
EXECUTIVE'S RIGHT TO ASSETS
The rights of the Executive, any Beneficiary, or any other person
claiming through the Executive under this Agreement, shall be solely those of an
unsecured general creditor of the Bank. The Executive, the Beneficiary, or any
other person claiming through the Executive, shall only have the right to
receive from the Bank those payments so specified under this Agreement. The
Executive agrees that he, his Beneficiary, or any other person claiming through
him shall have no rights or interests whatsoever in any asset of the Bank,
including any insurance policies or contracts which the Bank may possess or
obtain to informally fund this Agreement. Any asset used or acquired by the Bank
in connection with
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the liabilities it has assumed under this Agreement, unless expressly provided
herein, shall not be deemed to be held under any trust for the benefit of the
Executive or his Beneficiaries, nor shall any asset be considered security for
the performance of the obligations of the Bank. Any such asset shall be and
remain, a general, unpledged, and unrestricted asset of the Bank.
SECTION V
RESTRICTIONS UPON FUNDING
The Bank shall have no obligation to set aside, earmark or entrust any
fund or money with which to pay its obligations under this Agreement. The
Executive, his Beneficiaries or any successor in interest to him shall be and
remain simply a general unsecured creditor of the Bank in the same manner as any
other creditor having a general claim for matured and unpaid compensation. The
Bank reserves the absolute right in its sole discretion to either purchase
assets to meet its obligations undertaken by this Agreement or to refrain from
the same and to determine the extent, nature, and method of such asset
purchases. Should the Bank decide to purchase assets such as life insurance,
mutual funds, disability policies or annuities, the Bank reserves the absolute
right, in its sole discretion, to terminate such assets at any time, in whole or
in part. At no time shall the Executive be deemed to have any lien, right, title
or interest in or to any specific investment or to any assets of the Bank. If
the Bank elects to invest in a life insurance, disability or annuity policy upon
the life of the Executive, then the Executive shall assist the Bank by freely
submitting to a physical examination and by supplying such additional
information necessary to obtain such insurance or annuities.
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SECTION VI
ALIENABILITY AND ASSIGNMENT PROHIBITION
Neither the Executive nor any Beneficiary under this Agreement shall
have any power or right to transfer, assign, anticipate, hypothecate, mortgage,
commute, modify or otherwise encumber in advance any of the benefits payable
hereunder, nor shall any of said benefits be subject to seizure for the payment
of any debts, judgments, alimony or separate maintenance owed by the Executive
or his Beneficiary, nor be transferable by operation of law in the event of
bankruptcy, insolvency or otherwise. In the event the Executive or any
Beneficiary attempts assignment, communication, hypothecation, transfer or
disposal of the benefits hereunder, the Bank's liabilities shall forthwith cease
and terminate.
SECTION VII
ACT PROVISIONS
7.1 Named Fiduciary and Administrator. The Bank shall be the Named
Fiduciary and Administrator (the "Administrator") of this Agreement. As
Administrator, the Bank shall be responsible for the management,
control and administration of the Agreement as established herein. The
Administrator may delegate to others certain
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aspects of the management and operational responsibilities of the
Agreement, including the employment of advisors and the delegation of
ministerial duties to qualified individuals.
7.2 Claims Procedure and Arbitration. In the event that benefits under this
Agreement are not paid to the Executive (or to his Beneficiary in the
case of the Executive's death) and such claimants feel they are
entitled to receive such benefits, then a written claim must be made to
the Administrator within sixty (60) days from the date payments are
refused. The Bank and its Board of Directors shall review the written
claim and, if the claim is denied, in whole or in part, they shall
provide in writing, within ninety (90) days of receipt of such claim,
their specific reasons for such denial, reference to the provisions of
this Agreement upon which the denial is based, and any additional
material or information necessary to perfect the claim. Such writing by
the Bank and its Board of Directors shall further indicate the
additional steps which must be undertaken by claimants if an additional
review of the claim denial is desired.
If claimants desire a second review, they shall notify the
Administrator in writing within sixty (60) days of the first claim
denial. Claimants may review this Agreement or any documents relating
thereto and submit any issues and comments, in writing, they may feel
appropriate. In its sole discretion, the Administrator shall then
review the second claim and provide a written decision within sixty
(60) days of receipt of
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such claim. This decision shall state the specific reasons for the
decision and shall include reference to specific provisions of this
Agreement upon which the decision is based.
If claimants continue to dispute the benefit denial based upon
completed performance of this Agreement or the meaning and effect of
the terms and conditions thereof, then claimants may submit the dispute
to a Board of Arbitration for final arbitration. Said Board of
Arbitration shall consist of one member selected by the claimant, one
member selected by the Bank, and the third member selected by the first
two members. The Board of Arbitration shall operate under any generally
recognized set of arbitration rules. The parties hereto agree that
they, their heirs, personal representatives, successors and assigns
shall be bound by the decision of such Board of Arbitration with
respect to any controversy properly submitted to it for determination.
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SECTION VIII
MISCELLANEOUS
8.1 No Effect on Employment Rights. Nothing contained herein will confer
upon the Executive the right to be retained in the service of the Bank
nor limit the right of the Bank to discharge or otherwise deal with the
Executive without regard to the existence of the Agreement. Pursuant to
12 C.F.R. ss. 563.39(b), the following conditions shall apply to this
Agreement:
(1) The Bank's Board of Directors may terminate the Executive at
any time, but any termination by the Bank's Board of Directors
other than termination for Cause shall not prejudice the
Executive's vested right to compensation or other benefits
under the contract. As provided in Section 2.5, the Executive
shall forfeit his right to all benefits provided for in the
Agreement in the event he is terminated for Cause. He shall
have no right to receive additional compensation or other
benefits for any period after termination for Cause.
(2) If the Executive is suspended and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a
notice served under Section 8(e)(3) or (g)(1) of the Federal
Deposit Insurance Act (12 U.S.C. 1818(e)(3) and (g)(1)) the
Bank's obligations under the contract shall be suspended
(except vested rights) as of the date of termination of
service unless stayed by appropriate proceedings. If the
charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Executive all or part of the
compensation withheld while its contract obligations were
suspended and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
-19-
<PAGE>
(3) If the Executive is terminated and/or permanently prohibited
from participating in the conduct of the Bank's affairs by an
order issued under Section 8(e)(4) or (g)(1) of the Federal
Deposit Insurance Act (12 U.S.C. 1818(e)(4) or (g)(1)), all
non-vested obligations of the Bank under the contract shall
terminate as of the effective date of the order.
(4) If the Bank is in default (as defined in Section 3(x)(1) of
the Federal Deposit Insurance Act), all non-vested obligations
under the contract shall terminate as of the date of default.
(5) All non-vested obligations under the contract shall be
terminated, except to the extent determined that continuation
of the contract is necessary for the continued operation of
the Bank:
(i) by the Director [of the Federal Deposit Insurance
Corporation or the Resolution Trust Corporation] or
his designee at the time the Federal Deposit
Insurance Corporation or the Resolution Trust
Corporation enters into an agreement to provide
assistance to or on behalf of the Bank under the
authority contained in ss. 13(c) of the Federal
Deposit Insurance Act; or
-20-
<PAGE>
(ii) by the Director [of the Federal Deposit Insurance
Corporation or the Resolution Trust Corporation] or
his designee, at the time the Director or his
designee approves a supervisory merger to resolve
problems related to operation of the Bank or when the
Bank is determined by the Director to be in an unsafe
or unsound condition.
Any rights of the parties that have already vested, (i.e., the
Executive's Accrued Benefit), however, shall not be affected
by such action.
8.2 State Law. The Agreement is established under, and will be construed
according to, the laws of the State of Indiana, to the extent such laws
are not preempted by the Act and valid regulations published
thereunder.
8.3 Severability. In the event that any of the provisions of this Agreement
or portion thereof, are held to be inoperative or invalid by any court
of competent jurisdiction, then: (1) insofar as is reasonable, effect
will be given to the intent manifested in the provisions held invalid
or inoperative, and (2) the validity and enforceability of the
remaining provisions will not be affected thereby.
8.4 Incapacity of Recipient. In the event the Executive is declared
incompetent and a conservator or other person legally charged with the
care of his person or Estate is appointed, any benefits under the
Agreement to which such Executive is entitled
-21-
<PAGE>
shall be paid to such conservator or other person legally charged with
the care of his person or Estate.
8.5 Unclaimed Benefit. The Executive shall keep the Bank informed of his
current address and the current address of his Beneficiaries. If the
location of the Executive is not made known to the Bank within three
(3) years after the date on which any payment of the Excess Benefit may
first be made, payment may be made as though the Executive had died at
the end of the three (3) year period. If, within one (1) additional
year after such three (3) year period has elapsed, or, within three (3)
years after the actual death of the Executive, whichever comes first,
the Bank is unable to locate any Beneficiary of the Executive, the Bank
may fully discharge its obligation by payment to the Estate.
8.6 Limitations on Liability. Notwithstanding any of the preceding
provisions of the Agreement, no individual acting as an employee or
agent of the Bank, or as a member of the Board of Directors shall be
personally liable to the Executive or any other person for any claim,
loss, liability or expense incurred in connection with the Agreement.
8.7 Gender. Whenever in this Agreement words are used in the masculine or
neuter gender, they shall be read and construed as in the masculine,
feminine or neuter gender, whenever they should so apply.
-22-
<PAGE>
8.8 Effect on Other Corporate Benefit Agreements. Nothing contained in this
Agreement shall affect the right of the Executive to participate in or
be covered by any qualified or nonqualified pension, profit sharing,
group, bonus or other supplemental compensation or fringe benefit
agreement constituting a part of the Bank's existing or future
compensation structure.
8.9 Inurement. This Agreement shall be binding upon and shall inure to the
benefit of the Bank, its successors and assigns, and the Executive, his
successors, heirs, executors, administrators, and Beneficiaries.
8.10 Tax Withholding. The Bank may withhold from any benefits payable under
this Agreement all federal, state, city, or other taxes as shall be
required pursuant to any law or governmental regulation then in effect.
8.11 Headings. Headings and sub-headings in this Agreement are inserted for
reference and convenience only and shall not be deemed a part of this
Agreement.
-23-
<PAGE>
SECTION IX
AMENDMENT/REVOCATION
This Agreement shall not be amended, modified or revoked at any time,
in whole or part, without the mutual written consent of the Executive and the
Bank, and such mutual written consent shall be required even if the Executive is
no longer employed by the Bank.
SECTION X
EXECUTION
10.1 This Agreement sets forth the entire understanding of the parties
hereto with respect to the transactions contemplated hereby, and any
previous agreements or understandings between the parties hereto
regarding the subject matter hereof are merged into and superseded by
this Agreement.
10.2 This Agreement shall be executed in triplicate, each copy of which,
when so executed and delivered, shall be an original, but all three
copies shall together constitute one and the same instrument.
[Remainder of Page Intentionally Left Blank]
-24-
<PAGE>
IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed
on this 28th day of February, 1996.
First Federal Savings Bank of Marion
By: /s/ Larry G. Phillips
Larry G. Phillips
Vice President & Secretary-Treasurer
(Title)
-25-
<PAGE>
EXCESS BENEFIT AGREEMENT
BENEFICIARY DESIGNATION
The Executive, under the terms of the Excess Benefit Agreement executed
by the Bank, of Marion, Indiana, dated February 28th, 1996, hereby designates
the following Beneficiary to receive any guaranteed payments or death benefits
under such Agreement, following his death:
PRIMARY BENEFICIARY: Marge Burchard
SECONDARY BENEFICIARY: Estate
This Beneficiary Designation hereby revokes any prior Beneficiary
Designation which may have been in effect.
Such Beneficiary Designation is revocable.
DATE: February 28 , 1996
----------------------------------------------
/s/ Sondra Rabb /s/ Robert Burchard
(WITNESS) EXECUTIVE
/s/ Chris Bradford
(WITNESS)
Exhibit A
Statement re: Computation of Per Share Earnings
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------
1996 1995 1994
----------- ---------- -----------
<S> <C> <C> <C>
Average Shares Outstanding
Net income $2,269,257
Average number of common shares
outstanding 2,297,853
Earnings per average shares
outstanding $ 0.99
==========
Primary
Net income $2,481,414 $2,429,948
Average number of common shares
outstanding 1,986,376 2,090,600
Add incremental shares for stock options 47,579 95,537
--------- ---------
Adjusted average shares 2,033,955 2,186,137
Primary earnings per share $ 1.22 $ 1.11
========== ==========
Fully Diluted
Net income $2,481,414 $2,429,948
Average number of common shares
outstanding 1,986,376 2,090,600
Add incremental shares for stock options 49,624 97,129
--------- ---------
Adjusted average shares 2,036,000 2,187,729
Fully diluted earnings per share $ 1.22 $ 1.11
========== ==========
</TABLE>
For 1994, the computation of primary and fully diluted earnings per share
reflected no dilution.
[FRONT COVER OF 1996 ANNUAL REPORT]
96
ANNUAL REPORT
MARION CAPITAL
HOLDINGS, INC.
and Subsidiary
First Federal Savings Bank
of Marion
<PAGE>
TABLE OF CONTENTS
Message to Shareholders.............................................. 1
Selected Consolidated Financial Data................................. 3
Management's Discussion and Analysis................................. 4
Independent Auditor's Report......................................... 16
Consolidated Statement of Financial Condition........................ 17
Consolidated Statement of Income..................................... 18
Consolidated Statement of Changes in Shareholders' Equity............ 19
Consolidated Statement of Cash Flows................................. 20
Notes to Consolidated Financial Statements........................... 22
Directors and Officers............................................... 42
Shareholder Information.............................................. 44
DESCRIPTON OF BUSINESS
Marion Capital Holdings, Inc. ("MCHI"), an Indiana corporation, became a unitary
savings and loan holding company upon the conversion of First Federal Savings
Bank of Marion ("First Federal" and, together with MCHI, the "Company") from a
federally chartered mutual savings bank to a federally chartered stock savings
bank in March, 1993. The Company conducts business from a single office in
Marion, Grant County, Indiana, and First Federal has a branch office in Decatur,
Indiana. First Federal is and historically has been among the top real estate
mortgage lenders in Grant County and is the largest independent financial
institution headquartered in Grant County. First Federal offers a variety of
lending, deposit and other financial services to its retail and commercial
customers. MCHI has no other business activity than being the holding company
for First Federal. MCHI is the sole shareholder of First Federal.
<PAGE>
To our Shareholders:
The year ended June 30, 1996 marked the third full year of operations for Marion
Capital Holdings, Inc. as a unitary savings and loan holding company which began
operations on March 18, 1993 when First Federal Savings Bank of Marion converted
to a federal stock savings bank. First Federal Savings Bank of Marion will
complete its 60th year of financial service to the community in 1996.
Our net income for the year ended June 30, 1996 was $2,481,414, which was a 2.1%
increase over the 1995 net income of $2,429,948. This represents the fourth
consecutive year the Company has been able to increase its net income. Earnings
per share for the year ended June 30, 1996 amounted to $1.22, an increase of
9.9% over earnings per share of $1.11 reported in the prior year. In June 1996,
we increased our quarterly dividend to $.20 per share which was an 11% increase
over the dividend paid in each of the previous four quarters. Marion Capital
Holdings, Inc. was able to increase net income even though the interest rate
spread declined slightly. The interest rate spread for the year ended June 30,
1996 decreased to 3.01% from 3.20% for the year ended June 30, 1995.
The Company showed improvement in many financial ratios. The ratio of
nonperforming assets to total assets at June 30, 1996 was 1.07%, which compares
to 1.13% at June 30, 1995. Real estate owned declined by 11%. Nonperforming
loans to total loans was 1.18% at June 30, 1996 compared to 1.27% at June 30,
1995. Return on assets for the year ended June 30, 1996 was 1.41% which was
unchanged from the previous year. Return on equity improved from 5.58% for the
year ended June 30, 1995 to 5.86% for the current year.
Shareholders' equity decreased during the year as the Company continued to
repurchase common stock in the open market. During the year ended June 30, 1996,
100,658 shares were retired at an average cost of $20.53 or approximately 96% of
average book value. Book value per share increased to $21.47 per share from
$21.08 per share last year. In July 1996, the Company repurchased 96,680 shares
at an average cost of $20.33, or approximately 95% of book value. These
repurchases are intended to enhance the potential for growth in earnings per
share and increase the return on equity.
Loan originations remained strong for the year ended June 30, 1996, and
repayments remained stable as interest rates stabilized and refinancing became
less popular. This resulted in net loans receivable increasing by $6.8 million,
or 5%, from June 30, 1995. This helped improve the yield on assets as funds were
reallocated from lower yielding investments to higher yielding mortgage loans.
The yield on mortgage loans increased from 8.52% for the year ended June 30,
1995 to 8.78% for the year ended June 30, 1996.
Deposits increased by $5.6 million, or 4.7%, from June 30, 1995, and the cost of
those funds increased as well from 4.66% for the year ended June 30, 1995 to
5.22% for the year ended June 30, 1996.
On March 1, 1996 John M. Dalton became President and CEO of Marion Capital
Holdings, Inc. and First Federal Savings Bank of Marion upon the retirement of
Robert D. Burchard.
Mr. Dalton began his career at First Federal in 1962, has been a director since
1974, and was Executive Vice President of First Federal from 1983 until his
recent promotion. He was also Executive Vice President and director of Marion
Capital Holdings, Inc. from its beginning until March 1, 1996. He was elected
Vice Chairman of the boards of Marion Capital Holdings, Inc. and First Federal
on August 12, 1996.
Mr. Burchard was employed at First Federal beginning in 1959, and became a
director in 1969 and President and CEO from 1983 until his retirement. In
addition, he was President and CEO of Marion Capital Holdings, Inc. from March
18, 1993 until his retirement and had been Vice Chairman of First Federal and
Marion Capital Holdings, Inc. He became Chairman on August 12, 1996 of both
organizations.
<PAGE>
In July 1996, we were all saddened by the death of Merritt B. McVicker, Chairman
of the Board of Directors since 1974 and former President of First Federal
Savings Bank from 1967 to 1983. Mr. McVicker first joined the bank in 1959, and
was very instrumental in making First Federal into the area's premier mortgage
lender. Mr. McVicker was past Chairman of the Indiana League of Savings
Institutions, director of the Federal Home Loan Bank of Indianapolis, Trustee of
the Advertising Council of the U.S. League, and served on the boards of various
community organizations. He will be sadly missed by his family, friends and
business associates. He was a real "Team Player!"
On August 12, 1996, the boards of Marion Capital Holdings, Inc. and First
Federal Savings Bank were expanded from six (6) to seven (7) members effective
September 1, 1996. At those board meetings, Jerry D. McVicker was appointed to
fill the unexpired term of Merritt B. McVicker which expires in 1997. Steven L.
Banks was appointed to the new board position. He will be nominated for
re-election at Marion Capital's annual meeting on October 17, 1996, for a
three-year term expiring in 1999.
Mr. McVicker, 51 years of age, is currently Director of Operations for Marion
Community Schools and has served in various capacities throughout many years
with the school.
Mr. Banks, 46 years of age, was President and CEO of Fidelity Federal Savings
Bank of Marion. On September 1, 1996, he assumed the duties of Executive Vice
President of both Marion Capital Holdings, Inc. and First Federal Savings Bank
of Marion.
We believe the Company has enjoyed a good and profitable year, and we are
thankful for the continued support and confidence of our customers and
shareholders.
/s/ John M. Dalton /s/ Robert Burchard
President Chairman of the Board
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
The following selected consolidated financial data of MCHl and its
subsidiaries 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 JUNE 30,
-------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In Thousands)
Summary of Financial Condition:
<S> <C> <C> <C> <C> <C>
Total assets......................................... $177,767 $172,711 $170,799 $173,861 $161,308
Loans, net........................................... 143,165 136,323 127,092 133,000 133,257
Cash and investment securities....................... 21,578 23,743 30,863 27,531 15,257
Real estate limited partnerships..................... 1,624 1,527 1,422 1,363 1,182
Deposits............................................. 126,260 120,613 120,965 121,944 131,174
Advances from FHLB of Indianapolis................... 6,241 6,963 3,200 3,075 5,175
Shareholders' equity................................. 41,511 41,864 44,331 46,773 23,256
YEAR ENDED JUNE 30,
-------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In Thousands)
Summary of Operating Results:
Interest income...................................... $13,740 $ 12,786 $ 12,391 $ 12,885 $ 13,927
Interest expense..................................... 6,853 5,922 5,872 6,936 9,109
-------- -------- -------- -------- --------
Net interest income............................... 6,887 6,864 6,519 5,949 4,818
Provision for losses on loans........................ 34 68 65 367 1,150
-------- -------- -------- -------- --------
Net interest income after
provision for losses on loans................... 6,853 6,796 6,454 5,582 3,668
-------- -------- -------- -------- --------
Other income:
Net loan servicing fees........................... 81 69 62 51 33
Annuity and other commissions..................... 147 144 211 194 166
Other income...................................... 95 76 83 91 82
Equity in losses of limited partnerships.......... (193) (185) (236) (190) (195)
Gains (losses) on sale of investments ............ -- -- 15 (16) --
-------- -------- -------- -------- --------
Total other income................................ 130 105 134 130 86
-------- -------- -------- -------- --------
Other expense:
Salaries and employee benefits.................... 2,296 2,339 1,970 1,574 1,874(8)
Other............................................. 1,293 1,216 1,634 1,470 1,359
-------- -------- -------- -------- --------
Total other expense............................. 3,589 3,555 3,604 3,044 3,233
-------- -------- -------- -------- --------
Income before income tax and accounting
method changes.................................... 3,394 3,346 2,984 2,668 521
Income tax expense (benefit)......................... 913 916 715 578 (230)
Accounting method changes............................ -- -- -- 98 --
-------- -------- -------- -------- --------
Net Income........................................ $ 2,481 $ 2,430 $ 2,269 $ 1,992 $ 751
======== ======== ======== ======== ========
Supplemental Data:
Book value per common share at end of year........... $21.47 $ 21.08 $ 20.20 $ 19.37 N/A
Return on assets (1)................................. 1.41% 1.41% 1.29% 1.19% .46%
Return on equity (2)................................. 5.86 5.58 5.00 6.45 3.28
Interest rate spread (3)............................. 3.01 3.20 2.96 3.08 2.61
Net yield on interest earning assets (4)............. 4.17 4.28 3.97 3.82 3.19
Operating expenses to average assets (5)............. 2.04 2.06 2.04 1.82 1.97(8)
Net interest income to operating expenses (6)........ 1.92x 1.93x 1.81x 1.95x l.49x(8)
Equity-to-assets at end of year (7).................. 23.35 24.24 25.96 26.90 14.42
Average equity to average total assets............... 24.09 25.27 25.72 18.52 13.94
Average interest-earning assets to average
interest-bearing liabilities...................... 127.93 129.08 128.37 116.65 109.69
Non-performing assets to total assets................ 1.07 1.13 3.20 4.10 5.52
Non-performing loans to total loans.................. 1.18 1.27 3.59 3.95 5.43
Loan loss reserve to total loans..................... 1.38 1.45 1.59 1.52 1.70
Loan loss reserve to non-performing loans............ 117.07 114.87 44.21 38.44 31.31
Net charge-offs to average loans..................... .03 .08 .05 .46 .60
Number of full service offices....................... 2 2 2 2 2
</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 combincd weighted average
interest rate cost from combined weighted average interest rate earned for
the period indicated.
(4) Net interest income divided by average interest-earnings assets.
(5) Other expense divided by average total assets.
(6) Net interest income divided by other expense.
(7) Total equity divided by assets.
(8) Other expense was adversely affected during the year ended June 30, 1992,
by $549,000 because of a change in the accounting treatment for a
supplemental retirement program for certain officers and directors.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The principal business of thrift institutions, including First Federal, has
historically consisted of attracting deposits from the general public and making
loans secured by residential and commercial real estate. First Federal and all
other savings associations are 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 and level of personal income
and savings. In addition, deposit growth is affected by how customers perceive
the stability of the financial services industry amid various current events
such as regulatory changes, failures of other financial institutions and
financing of the deposit insurance fund. Lending activities are influenced by
the demand for and supply of housing lenders, the availability and cost of funds
and various other items. Sources of funds for lending activities include
deposits, payments on loans, proceeds from sale of loans, borrowings, and funds
provided from operations. The Company's earnings are primarily dependent upon
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 amounts of deposits and
borrowings outstanding during the same period and rates paid on such deposits
and borrowings. The Company's earnings are also affected by provisions for loan
and real estate losses, service charges, income from subsidiary activities,
operating expenses and income taxes.
Asset/Liability Management
First Federal, like other savings associations, 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.
Since the early 1980's, First Federal's asset/liability management strategy
has been directed toward reducing its exposure to a rise in interest rates. At
June 30, 1996, First Federal's cumulative One-Year Gap, based on total assets,
was a positive 16.81% and has been positive at the end of each quarter since
September 30, 1988. A positive interest rate gap can be expected to have a
favorable effect on the Company's earnings in periods of rising interest rates
because during such periods interest income earned on assets will generally
increase more rapidly than the interest expense paid on liabilities. Conversely,
in a falling interest rate environment, the interest earned on assets will
generally decline more rapidly than the total expense paid on liabilities. A
negative interest rate gap will have the opposite effects. First Federal
protects against problems arising in a falling interest rate environment by
requiring interest rate minimums on its residential and commercial real estate
adjustable-rate mortgages ("ARMs") and against problems arising in a rising
interest rate environment by having in excess of 89% of its mortgage loans with
adjustable rate features. Due to the interest rate minimums, the Company has not
experienced a significant decline in net interest yield in recent periods of
declining interest rates. First Federal's management believes that the interest
rate gap measurement does not accurately depict its interest sensitivity due to
its success in utilizing interest rate minimums. As noted in the table on the
following page, $78.7 million, or 50.2%, of the Company's interest-earning
assets reprice or mature in the 12 months ending June 30, 1997, which could have
a significant impact on future yields and net interest margin. First Federal
includes interest rate minimums on almost all loans originated, and management
believes that these minimums, which establish floors below which the loan
interest rate cannot decline, will continue to reduce its interest rate
vulnerability in a declining interest rate environment. For the loans which do
not adjust because of the interest rate minimums, there is an increased risk of
prepayment. In periods of rising interest rates, the impact on the Company's
yields and net interest margin should be favorable because interest income
earned on its assets will generally increase more rapidly than interest paid on
its liabilities.
<PAGE>
Loan prepayments increased in the year ended June 30, 1996, compared to the
prior fiscal year. Although less than 11% of the Company's residential mortgage
portfolio consists of fixed-rate loans, prepayments could have an impact on
yields and net interest margins in periods of falling interest rates. The net
yield on loans for the year ended June 30, 1996, was 8.78%, an increase from
8.52% for the the year ended June 30, 1995. While loan yields increased during
these periods, the net interest margin decreased to 4.17% for the year ended
June 30, 1996, from 4.28% in the prior fiscal year. First Federal believes its
asset/liability strategy of maintaining over 89% of the Company's residential
portfolio in ARMs and requiring interest rate minimums on these loans will
continue to protect net interest margins.
The Company's mortgage-backed security portfolio is subject to prepayments,
and for those mortgage-backed securities with variable interest rates, to
changing yields. These prepayments have increased in recent years as the
underlying mortgages have been refinanced at lower interest rates, and interest
rate changes on adjustable-rate mortgage-backed securities could have an effect
on First Federal's asset/liability management strategy. Since the Company's
mortgage-backed security portfolio only represents 0.8% of the Company's total
assets at June 30, 1996, management believes that such impact would be
insignificant.
The following table illustrates the projected maturities and the repricing
of the major asset and liability categories of First Federal as of June 30,
1996. Maturity and repricing dates have been projected by applying the
assumptions set forth below to contractual maturity and repricing dates.
Classifications of such items in the table below are different from those
presented in other schedules and financial statements included herein and do not
reflect non-performing loans.
<TABLE>
<CAPTION>
At June 30, 1996
Maturing or Repricing Within
-----------------------------------------------------------------------------
6 Months
0 to 3 3 to 6 to 1 to 3 3 to 5 5 to 10 10 to 20 Over 20
Months Months 1 Year Years Years Years Years Years Total
------ ------ ------ ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustable-rate mortgages $16,180 $21,869 $27,071 $20,209 $32,581 $ 7,135 $ 84 $ 98 $125,227
Fixed-rate mortgages 724 607 872 4,873 2,541 3,345 1,418 270 14,650
Nonmortgage loans 2,965 86 24 349 271 -- 78 -- 3,773
Nonmortgage investments 5,126 1,000 2,000 4,414 -- 648 -- -- 13,188
Mortgage investments 52 47 79 68 (23) (18) (5) (1) 199
Off balance sheet assets (1) (5,899) 196 5,703 -- -- -- -- -- --
Unamortized yield
adjustments (8) (8) (15) (59) (29) (70) (124) -- (313)
------ ------ ------ ------ ------ ----- ----- ----- -------
Total interest-earning
assets 19,140 23,797 35,734 29,854 35,341 11,040 1,451 367 156,724
------ ------ ------ ------ ------ ----- ----- ----- -------
Interest-bearing liabilities
Fixed maturity deposits 12,684 9,504 11,437 28,190 24,477 1,594 -- -- 87,886
Other deposits 4,430 3,524 5,259 9,794 4,648 5,892 3,797 1,060 38,404
FHLB advances 1,800 1,208 4 1,891 864 38 436 -- 6,241
------ ------ ------ ------ ------ ----- ----- ----- -------
Total interest-bearing
liabilities 18,914 14,236 16,700 39,875 29,989 7,524 4,233 1,060 132,531
------ ------ ------ ------ ------ ----- ----- ----- -------
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ 226 $ 9,561 $19,034 $(10,021) $5,352 $3,516 $ (2,782) $ (693)$ 24,193
======= ======= ======= ======== ====== ====== ======== ====== ========
Cumulative excess (deficiency)
of interest-earning assets over
interest-bearing liabilities $ 226 $ 9,787 $28,821 $18,800 $24,152 $27,668 $24,886 $24,193 $ 24,193
Cumulative interest rate gap .13% 5.71% 16.81% 10.97% 14.09% 16.14% 14.52% 14.11% 14.11%
</TABLE>
- ----------
(1) Includes loan commitments and loans in process.
<PAGE>
In preparing the table above it has been assumed, in assessing the interest rate
sensitivity of savings institutions, that (i) adjustable-rate first mortgage
loans will prepay at the rate of 12% per year; (ii) fixed-rate first mortgage
loans will prepay at the rate of 10% per maturity classification, and (iii)
nonmortgage loans and investments will not prepay.
In addition, it is assumed that fixed maturity deposits are not withdrawn
prior to maturity, and that other deposits are withdrawn or repriced as follows:
<TABLE>
<CAPTION>
0 to 3 3 to 6 6 months 1 to 3 3 to 5 5 to 10 10 to 20 Over 20
Type months months to 1 year years years years years years
------ ------ --------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook (1)................. 4.55% 4.34% 8.11% 25.82% 16.83% 21.37% 14.78% 4.20%
Money market
accounts (1).............. 32.31 21.87 24.82 11.00 5.24 4.01 .72 .03
Interest-bearing
transaction
accounts.................. 10.91 9.72 16.37 33.87 9.06 12.16 6.68 1.22
Noninterest-bearing
transaction
accounts.................. 2.60 2.53 4.87 17.10 13.85 24.18 22.71 12.16
</TABLE>
- ----------
(1) Based on actual industry and historical experience, management has
determined that these deposit rates and balances respond slowly to changes
in market rates and that balances tend to remain with First Federal even
when market rates rise above deposit rates.
In evaluating the Company's exposure to interest rate movements, certain
shortcomings inherent in the method of analysis presented in the foregoing
tables must be considered. For example, although certain assets and liabilities
may have similar maturities or 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
market rates. Additionally, certain assets, such as ARMs, have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. In particular, most of First Federal's ARMs and adjustable-rate loans
have interest rate minimums of 6.00% for residential loans and 7.0% for
commercial real estate loans. Currently, originations of residential ARMs have
interest rate minimums of 6.00%. Further, in the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table. Finally, the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase although First Federal does underwrite these mortgages at approximately
4.0% above the origination rate. The Company considers all of these factors in
monitoring its exposure to interest rate risk.
<PAGE>
Average Balances and Interest
The following table presents for the periods indicated the monthly average
balances of each category of the Company's interest-earning assets and
interest-bearing liabilities, the interest earned or paid on such amounts, and
the average yields earned and rates paid. Such yields and costs are determined
by dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods presented. Management believes that the use of
month-end average balances instead of daily average balances has not caused any
material difference in the information presented.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------------
1996 1995
--------------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Assets:
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits ........... $ 4,972 $ 334 6.72% $ 2,531 $ 159 6.28%
Investment securities ............... 17,306 877 5.07 22,674 1,111 4.90
Loans (1) ........................... 141,946 12,456 8.78 134,428 11,451 8.52
Stock in FHLB of Indianapolis ....... 927 73 7.87 909 65 7.15
------- ------ ------- ------
Total interest-earning assets .... 165,151 13,740 8.32 160,542 12,786 7.96
Non-interest earning assets .............. 10,762 -- 11,873 ---
-------- ------ -------- ------
Total assets ...................... $175,913 13,740 $172,415 12,786
======== ------ ======== ------
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts .................... $ 18,127 588 3.24 $ 22,582 726 3.21
NOW and money market accounts ....... 18,718 667 3.56 18,332 593 3.23
Certificates of deposit ............. 84,650 5,089 6.01 77,884 4,221 5.42
------- ------ -------- ------
Total deposits ................... 121,495 6,344 5.22 118,798 5,540 4.66
FHLB borrowings ..................... 6,694 457 6.83 5,574 382 6.85
Other borrowings .................... 901 52 5.77
-------- ------ -------- ------
Total interest-bearing liabilities 129,090 6,853 5.31 124,372 5,922 4.76
Other liabilities ........................ 4,451 -- 4,469
-------- ------ -------- ------
Total liabilities ................. 133,541 -- 128,841
Shareholders' equity ..................... 42,372 -- 43,574
-------- ------ -------- ------
Total liabilities and shareholders'
equity .......................... $172,913 6,853 $172,415 5,922
======== ------ ======== ------
Net interest-earning assets .............. $ 36,061 $ 36,170
Net interest income ...................... $ 6,887 $6,864
======= ======
Interest rate spread (2) ................. 3.01 3.20
Net yield on weighted average
interest-earning assets (3) ......... 4.17 4.28
Average interest-earning assets to
average interest-bearing
liabilities ......................... 127.93% 129.08%
====== ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
1994
------------------------------------
Average Average
Balance Interest Yield/Cost
------- -------- ----------
Assets:
Interest-earning assets:
<S> <C> <C> <C>
Interest-earning deposits ........... $ 7,474 $ 312 4.17%
Investment securities ............... 24,825 1,065 4.29
Loans (1) ........................... 130,897 10,961 8.37
Stock in FHLB of Indianapolis ....... 909 53 5.83
------- ------
Total interest-earning assets .... 164,105 12,391 7.55
Non-interest earning assets .............. 12,309 --
------- ------
Total assets ...................... $176,414 12,391
======== ------
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts .................... $ 24,450 787 3.22
NOW and money market accounts ....... 18,327 522 2.85
Certificates of deposit ............. 81,734 4,319 5.28
------- ------
Total deposits ................... 124,511 5,628 4.52
FHLB borrowings ..................... 3,331 244 7.33
Other borrowings .................... -- --
Total interest-bearing liabilities 127,842 5,872 4.59
Other liabilities ........................ 3,202 --
------- ------
Total liabilities ................. 131,044 --
Shareholders' equity ..................... 45,370 --
------- ------
Total liabilities and shareholders'
equity .......................... $176,414 5,872
======= ------
Net interest-earning assets .............. $ 36,263
Net interest income ...................... $6,519
======
Interest rate spread (2) ................. 2.96
Net yield on weighted average
interest-earning assets (3) ......... 3.97
Average interest-earning assets to
average interest-bearing
liabilities ......................... 128.37%
======
</TABLE>
- ----------
(1) Average balances include non-accrual loans.
(2) Interest rate spread is calculated by subtracting combined weighted
average interest rate cost from combined weighted average interest rate
earned for the period indicated. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Interest Rate Spread."
(3) The net yield on weighted average interest-earning assets is calculated
by dividing net interest income by weighted average interest-earning
assets for the period indicated.
<PAGE>
Interest Rate Spread
The following table sets forth the weighted average effective interest rate
earned by the Company on its loan and investment portfolios, the weighted
average effective cost of the Company's deposits, the interest rate spread of
the Company, and the net yield on weighted average interest-earning assets for
the period and as of the date shown. Average balances are based on month-end
average balances.
<TABLE>
<CAPTION>
Year Ended June 30,
At ----------------------------------------
June 30, 1996 1996 1995 1994
------------- ------ ------ ------
Weighted average interest rate earned on:
<S> <C> <C> <C> <C>
Interest-earning deposits................. 5.31% 6.72% 6.28% 4.17%
Investment securities..................... 5.10 5.07 4.90 4.29
Loans (1) ............................. 8.47 8.78 8.52 8.37
Stock in FHLB of Indianapolis............. 7.53 7.87 7.15 5.83
Total interest-earning assets......... 8.08 8.32 7.96 7.55
Weighted average interest rate cost of:
Savings accounts.......................... 3.25 3.24 3.21 3.22
NOW and money market accounts............. 3.33 3.56 3.23 2.85
Certificates of deposit................... 5.96 6.01 5.42 5.28
FHLB borrowings........................... 6.50 6.83 6.85 7.33
Other borrowings.......................... -- 5.77
Total interest-bearing liabilities.... 5.21 5.31 4.76 4.59
Interest rate spread (2)....................... 2.87 3.01 3.20 2.96
Net yield on weighted average
interest-earning assets (3)............... -- 4.17 4.28 3.97
</TABLE>
- ----------
(1) Average balances include non-accrual loans.
(2) Interest rate spread is calculated by subtracting combined weighted
average interest rate cost from combined weighted average interest rate
earned for the period indicated. Interest rate spread figures must be
considered in light of the relationship between the amounts of
interest-earning assets and interest-bearing liabilities. Since MCHI's
interest-earning assets exceeded its interest-bearing liabilities for
each of the three years shown above, a positive interest rate spread
resulted in net interest income.
(3) The net yield on weighted average interest-earning assets is calculated
by dividing net interest income by weighted average interest-earning
assets for the period indicated. No net yield figure is presented at June
30, 1996, because the computation of net yield is applicable only over a
period rather than at a specific date.
<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 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 (changes in rate
multiplied by old volume) and (2) changes in volume (changes in volume
multiplied by old rate). Changes attributable to both rate and volume that
cannot be segregated have been allocated proportionally to the change due to
volume and the change due to rate.
<TABLE>
<CAPTION>
Increase (Decrease) in Net Interest Income
------------------------------------------
Total
Net Due to Due to
Change Rate Volume
------ ---- ------
(In Thousands)
Year ended June 30, 1996
compared to year
ended June 30, 1995
Interest-earning assets:
<S> <C> <C> <C>
Interest-earning deposits................... $ 175 $ 12 $ 163
Investment securities....................... (234) 37 (271)
Loans....................................... 1,005 352 653
Stock in FHLB of Indianapolis............... 8 7 1
------- ------ -------
Total..................................... 954 408 546
------- ------ -------
Interest-bearing liabilities:
Savings accounts............................ (138) 6 (144)
NOW and money market accounts............... 74 61 13
Certificates of deposit..................... 868 484 384
FHLB advances............................... 75 (1) 76
Other borrowings............................ 52 --- 52
------- ------ -------
Total..................................... 931 550 381
------- ------ -------
Change in net interest income................... $ 23 $(142) $ 165
======= ====== =======
Year ended June 30, 1995
compared to year
ended June 30, 1994
Interest-earning assets:
Interest-earning deposits................... $ (153) $ 112 $ (265)
Investment securities....................... 46 143 (97)
Loans....................................... 490 191 299
Stock in FHLB of Indianapolis............... 12 12 --
------- ------ -------
Total..................................... 395 458 (63)
------- ------ -------
Interest-bearing liabilities:
Savings accounts............................ (61) (1) (60)
NOW and money market accounts............... 71 71 --
Certificates of deposit..................... (98) 109 (207)
FHLB advances............................... 138 (17) 155
------- ------ -------
Total..................................... 50 162 (112)
------- ------ -------
Change in net interest income................... $ 345 $ 296 $ 49
======= ====== =======
</TABLE>
<PAGE>
Changes in Financial Position and Results of Operations - Year Ended June 30,
1996, Compared to Year Ended June 30, 1995:
General. MCHI's total assets were $177.8 million at June 30, 1996, an
increase of $5.1 million or 2.9% from June 30, 1995. During 1996, average
interest-earnings assets increased $4.6 million, or 2.9%, while average
interest-bearing liabilities increased $4.7 million, or 3.8%, compared to June
30, 1995. Cash and cash equivalents and investment securities decreased $2.2
million, or 9.1%, primarily as a result of their use in funding increased loan
originations. Net loans increased $6.8 million, or 5.0%, primarily from
originations of 1-4 family and multi-family real estate loans. Certain loans
originated during the year were sold to other investors. All such loan sales
were consummated at the time of origination of the loan, and at June 30, 1996
and 1995, no loans in the portfolio were held for sale. Deposits increased $5.6
million, to $126.3 million, or 4.7%, at June 30, 1996 from the amount reported
last year.
MCHI's net income for the year ended June 30, 1996 was $2.5 million, an
increase of $51,000, or 2.1% over the results for the year ended June 30, 1995.
Net interest income increased $23,000, or .3%, from the previous year, and
provision for losses on loans in the amount of $34,200 decreasd $33,300 from
that recorded in 1995.
Stock Repurchases. During the year ended June 30, 1996, MCHI repurchased
100,658 shares of common stock in the open market at an average cost of $20.53,
or approximately 96% of average book value. This repurchase amounted to 5% of
the outstanding stock, the maximum amount of stock that could be repurchased
prior to March 18, 1996 under Office of Thrift Supervision ("OTS") regulations
then in effect, except in special circumstances. This 5% limitation expired on
March 18, 1996. In July, 1996, MCHI repurchased another 96,680 shares, or 5%, at
an average cost of $20.33, or approximately 95% of book value. These open-market
purchases are intended to enhance the book value per share and enhance potential
for growth in earnings per share.
Cash Dividends. Since First Federal's conversion in March 1993, MCHI has
paid quarterly dividends in each quarter, amounting to $.125 for each of the
first four quarters, $.15 per share for each of the second four quarters, $.18
per share for each of the third four quarters, and $.20 per share in the most
recent quarter ended June 30, 1996.
Interest Income. MCHI's total interest income for the year ended June 30,
1996 was $13.7 million, an increase of $954,000, or 7.5%, from interest income
for the year ended June 30, 1995. This increase resulted principally from an
increase in the yield on interest earning assets from 7.96% to 8.32% and an
increase in average interest earning assets of $4.6 million.
Interest Expense. Total interest expense for the year ended June 30, 1996,
was $6.9 million, which was an increase of $931,000, or 15.7% from interest
expense for the year ended June 30, 1995. This increase resulted principally
from an increase in the cost on interest bearing liabilities from 4.76% to 5.31%
and an increase in average interest earning liabilities of $4.7 million.
Provision for Losses on Loans. The provision for the year ended June 30,
1996, was $34,200, compared to $67,500 in 1995. The 1996 chargeoffs net of
recoveries totaled $38,000, compared to the prior year of $105,000. The ratio of
the allowance for loan losses to total loans decreased from 1.45% at June 30,
1995 to 1.38% at June 30, 1996, and the ratio of allowance for loan losses to
nonperforming loans increased from 114.87% at June 30, 1995, to 117.07% at June
30, 1996. The 1996 provision was to replenish the allowance for loan losses as a
result of chargeoffs and to maintain management's desired reserve ratios. In
determining the provision for loan losses for the years ended June 30, 1996 and
1995, MCHI considered past loan experience, changes in the composition of the
loan portfolio and the current condition and amount of loans outstanding.
Other Income. MCHI's other income for the year ended June 30, 1996, totaled
$130,000, compared to $105,000 for 1995, an increase of $25,000, or 23.8%. This
increase was due in part from increased loan service fees of $12,000.
<PAGE>
Other Expenses. MCHI's other expenses for the year ended June 30, 1996,
totaled $3.6 million which was unchanged from the previous year. This represents
the third consecutive year where other expenses have remained relatively
constant. There were no significant changes in any of the other expense
categories.
Income Tax Expense. Income tax expense for the year ended June 30, 1996,
totaled $913,000, a decrease of $3,000 from the expense recorded in 1995. Tax
expense on earnings was offset by certain low-income housing tax credits which
totaled $423,000 and $406,000 for the years ended June 30, 1996 and 1995.
Additional tax credits are available through the year ended June 30, 1998.
Changes in Financial Position and Results of Operations - Year Ended June 30,
1995, Compared to Year Ended June 30, 1994:
General. The Company's total assets were $172.7 million at June 30, 1995,
an increase of $1.9 million or 1.1% from June 30, 1994. During 1995, average
interest-earnings assets decreased $3.6 million, or 2.2%, while average
interest-bearing liabilities declined $3.5 million, or 2.7%, compared to June
30, 1994. Average assets were lower for the year ended June 30, 1995 as a result
of First Federal's decision to reduce short-term public fund deposits throughout
the year. However, total assets increased during the year ended June 30, 1995 as
loan originations outpaced loan repayments and funds were borrowed to meet the
demand. Cash and cash equivalents and investment securities decreased $7.1
million, or 23.1%, primarily as a result of their use in funding increased loan
originations. Net loans increased $9.2 million primarily from originations of
1-4 family and multi-family real estate loans. Certain loans originated during
the year were sold to other investors. All such loan sales were consummated at
the time of origination of the loan, and at June 30, 1995 and 1994, no loans
were held for sale in the loan portfolio. Net real estate owned was reduced by
$624,000, or 75.2%, as a result of a combination of disposals and chargeoffs.
The Company's net income for the year ended June 30, 1995, was $2.4
million, an increase of $161,000, or 7.1%, over the results for the year ended
June 30, 1994. Net interest income increased $345,000, or 5.3%, from the
previous year, and provision for losses on loans in the amount of $67,500
increased $2,500 from that recorded in 1994. During the year ended June 30,
1995, the Company reduced its real estate owned loss reserves resulting in
income of $140,000. These loss reserves were reduced when the properties were
sold, resulting in fewer losses than anticipated. In the prior year, $305,000
was charged to provision for real estate owned losses. The 1995 chargeoffs of
real estate owned totaled $171,000, which was $185,000 less than the allowance
for real estate losses at June 30, 1994. Chargeoffs net of recoveries totalled
$152,000, which was $204,000 less than the beginning allowance. The 1995
chargeoffs included additional writedowns on a commercial warehouse facility, a
day care center, and certain smaller chargeoffs from sales of other properties.
These chargeoffs represented recognition of additional losses in the real estate
owned portfolio that were not evident when the properties were first transferred
from loans to real estate owned. Properties are written down to their fair value
at time of foreclosure with the loss charged to the allowance for loan losses.
As circumstances change and the property or market deteriorates, additional
writedowns are made by chargeoffs to the allowance for losses on real estate
owned.
Stock Repurchases. During the year ended June 30, 1995, MCHI repurchased
214,249 shares of common stock in the open market at an average cost of $18.15,
or approximately 88% of average book value. These repurchases amounted to 5% of
the outstanding stock in each six-month period, the maximum amount of stock that
could be repurchased under Office of Thrift Supervision ("OTS") regulations then
in effect. Current OTS regulations permit a maximum repurchase of 5% in a
twelve-month period, except in special circumstances, during the first three
years after converting to stock form. This 5% limitation imposed by OTS will
expire in March, 1996. These open-market purchases are intended to enhance the
book value per share and enhance the potential for growth in earnings per share.
Cash Dividends. Since First Federal's conversion in March, 1993, MCHI has
paid quarterly dividends in each quarter, amounting to $.125 per share for each
of the first four quarters of operation, $.15 per share for each of the second
four quarters of operation, and $.18 per share in the most recent quarter ending
June 30, 1995.
<PAGE>
Interest Income. The Company's total interest income for the year ended June 30,
1995 was $12.8 million, an increase of $395,000, or 3.2%, from interest income
for the year ended June 30, 1994. This increase resulted principally from an
increase in the yield on interest earning assets from 7.55% to 7.96% while
interest earning assets decreased by $3.6 million.
Interest Expense. Total interest expense for the year ended June 30, 1995,
was $5.9 million, which was unchanged from the year ended June 30, 1994.
Interest expense was unchanged as the average balance of interest-bearing
liabilities decreased by $3.5 million, while the average cost of funds increased
from 4.59% to 4.76%.
Provision for Losses on Loans. The provision for the year ended June 30,
1995, was $67,500, compared to $65,000 in 1994. During the year ended June 30,
1995, the Company acquired title by foreclosure to a nursing home property that
had been included in nonperforming loans. The foreclosure and subsequent sale of
this property resulted in First Federal's nonperforming loans being reduced from
$4.6 million at June 30, 1994, to $1.8 million at June 30, 1995, a decrease of
$2.8 million, or 62.2%. The ratio of the allowance for loan losses to total
loans decreased from 1.59% at June 30, 1994, to 1.45% at June 30, 1995, and the
ratio of allowance for loan losses to nonperforming loans increased from 44.2%
at June 30, 1994, to 114.9% at June 30, 1995. The 1995 provision was to
replenish the allowance for loan losses as a result of chargeoffs and to
maintain management's desired reserve ratios. In determining the provision for
loan losses for the years ended June 30, 1995 and 1994, the Company considered
past loan loss experience, changes in the composition of the loan portfolio and
the current condition and amount of loans outstanding.
Other Income. The Company's other income for the year ended June 30, 1995,
totaled $105,000, compared to $134,000 for 1994, a decrease of $29,000, or
21.6%. This decrease was caused by the Company receiving less commissions for
sales of annuity and other mutual fund products by First Federal's wholly-owned
subsidiary, First Marion Service Corporation. Sales of these products have
declined significantly from the prior year, resulting in fewer commissions
earned.
Other Expenses. The Company's other expenses for the year ended June 30,
1995, totaled $3.6 million which was unchanged from the previous year. Normal
operating cost increases in most categories were offset by a $472,000 decline in
real estate operation expense for the year ended June 30, 1995 as compared to
the prior year as a result of the Company's liquidating real estate owned
properties and substantially reducing the expense incurred in holding and
maintaining such properties. Increases in other categories occurred in the
normal course of business.
Income Tax Expense. Income tax expense for the year ended June 30, 1995
totaled $916,000, an increase of $201,000 from the expense recorded in 1994.
This increase was due to higher pre-tax earnings in 1995. Tax expense on
earnings was offset by certain low-income housing tax credits which totaled
$406,000 and $426,000 for the years ended June 30, 1995, and June 30, 1994,
respectively.
Liquidity and Capital Resources
The Company's primary source of funds is its deposits. To a lesser extent,
the Company has also relied upon loan payments and payoffs and Federal Home Loan
Bank ("FHLB") advances as sources of funds. Scheduled loan payments are a
relatively stable source of funds, but loan payoffs and deposit flows can
fluctuate significantly, being influenced by interest rates, general economic
conditions and competition. First Federal attempts to price its deposits to meet
its asset/liability management objectives consistent with local market
conditions. First Federal's access to FHLB advances is limited to approximately
62% of First Federal's available collateral. At June 30, 1996, such available
collateral totaled $89.5 million. Based on existing FHLB lending policies, the
Company could have obtained approximately $49.7 million in additional advances.
First Federal's deposits have remained relatively stable, averaging between
$126 and $121 million, for the three years in the period ended June 30, 1996.
The percentage of IRA deposits to total deposits has increased from 21.4% ($26.1
million) at June 30, 1993, to 23.1% ($29.1 million) at June 30, 1996. During the
same period, deposits in withdrawable accounts have decreased from 34.6% ($42.2
million) of total deposits at June 30, 1993, to 26.2% ($33.1 million) at June
30, 1996. This change in deposit composition, attributable to the higher
interest rates currently paid on longer term certificates, has not had a
significant effect on First Federal's liquidity. The impact on results of
operations from this change in deposit composition has been a reduction in
interest
<PAGE>
expense on deposits due to a decrease in the average cost of funds. It is
estimated that yields and net interest margin would increase in periods of
rising interest rates since short-term assets reprice more rapidly than
short-term liabilities. In periods of falling interest rates, little change in
yields or net interest margin is expected since First Federal has interest rate
minimums on a significant portion of its interest-earning assets.
Federal regulations have historically required First Federal to maintain
minimum levels of liquid assets. The required percentage has varied from time to
time based upon economic conditions and savings flows. At June 30, 1996, the
requirement was 5.0% subject to reduction for aggregate net withdrawals provided
such ratio is not reduced below 4.0%. Liquid assets for purposes of this ratio
include cash, cash equivalents consisting of short-term interest earning
deposits, certain other time deposits, and other obligations generally having
remaining maturities of less than five years. First Federal has historically
maintained its liquidity ratio at a level in excess of that required. At June
30, 1996, First Federal's liquidity ratio was12.3% and has averaged 19.9% over
the past three years.
Liquidity management is both a daily and long-term responsibility of
management. First Federal adjusts liquid assets based upon management's
assessment of (i) expected loan demand, (ii) projected loan sales, (iii)
expected deposit flows, (iv) yields available on interest-bearing deposits, and
(v) the objectives of its asset/liability management program. Excess liquidity
is invested generally in federal funds and mutual funds investing in government
obligations and adjustable-rate or short-term mortgage-related securities. If
First Federal requires funds beyond its ability to generate them internally, it
has additional borrowing capacity with the FHLB of Indianapolis and collateral
eligible for repurchase agreements.
Cash flows for the Company are of three major types. Cash flows from
operating activities consist primarily of net income generated by cash.
Investing activities generate cash flows through the origination, sale and
principal collections on loans as well as the purchases and sales of
investments. Cash flows from financing activities include savings deposits,
withdrawals and maturities and changes in borrowings. The following table
summarizes cash flows for each of the three years in the period ended June 30,
1996:
Year Ended June 30,
---------------------------------
1996 1995 1994
------ ------- ---------
(In Thousands)
Operating activites........................ $ 3,232 $ 3,181 $ 2,984
Investing activities:
Investment purchases.................. (11,261) (2,418) (68,592)
Investment maturities................. 17,132 6,684 62,484
Net change in loans................... (6,918) (8,419) 5,442
Other investing activities............ 69 183 5,122
------ ------- ---------
(978) (3,968) 4,456
------ ------- ---------
Financing activities:
Deposit increases (decreases)......... 5,647 (352) (978)
Borrowings............................ 3,500 5,000 1,000
Payments on borrowings................ (4,222) (1,237) (875)
Repurchase of common stock............ (2,066) (3,889) (3,931)
Dividends paid........................ (1,468) (1,333) (1,198)
Other financing activities............ 392 64 147
------ ------- ---------
1,783 (1,747) (5,835)
------ ------- ---------
Net change in cash and cash equivalents.... $ 4,037 $(2,534) $ 1,605
====== ======= =========
<PAGE>
Investing cash flows for the three years ended June 30, 1996 have resulted
primarily from investment and loan activities. The Company's cash flows from
investments resulted primarily from the purchases and maturities of term federal
funds and securities. Loan sales during the periods are predominantly from the
origination of commercial real estate loans where the principal balance in
excess of the Company's retained amount is sold to a participating financial
institution. These investors are obtained prior to the origination of the loan
and the sale of participating interests does not result in any gain or loss to
the Company.
The Company considers its liquidity and capital resources to be adequate to
meet its foreseeable short and long-term needs. First Federal anticipates that
it will have sufficient funds available to meet current loan commitments and to
fund or refinance, on a timely basis, its other material commitments and
long-term liabilities. At June 30, 1996, First Federal had outstanding
commitments to originate loans of $4.6 million. Certificates of deposit
scheduled to mature in one year or less at June 30, 1996, totalled $33.6
million. Based upon historical deposit flow data, First Federal's competitive
pricing in its market and management's experience, management believes that a
significant portion of such deposits will remain with First Federal. At June 30,
1996, the Company had $3.0 million of FHLB advances which mature in one year or
less.
First Federal has entered into agreements with certain officers and
directors which provide that, upon their death, their beneficiaries will be
entitled to receive certain benefits. These benefits are to be funded primarily
by the proceeds of insurance policies owned by First Federal on the lives of the
officers and directors. If the insurance companies issuing the policies are not
able to perform under the contracts at the dates of death of the officers or
directors, there would be an adverse effect on the Company's operating results,
financial condition and liquidity. Under currently effective capital
regulations, savings associations currently meet a 1.5% tangible capital
requirement, a 3.0% leverage ratio (or core capital) requirement and a total
risk-based capital to risk-weighted assets ratio of 8.0%. At June 30, 1996,
First Federal's tangible capital ratio was 20.7%, its leverage ratio was 20.7%
and its risk-based capital to risk-weighted assets ratio was 32.7%. Therefore,
First Federal's capital significantly exceeds all of the capital requirements
currently in effect.
Impact of Inflation
The audited consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles. These
principles require the measurement of financial position and operating results
in terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
The primary assets and liabilities of savings institutions such as First
Federal are monetary in nature. As a result, interest rates have a more
significant impact on First Federal'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 a period of rapidly rising
interest rates, the liquidity and maturity structures of First Federal's assets
and liabilities are critical to the maintenance of acceptable performance
levels.
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of other 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 First Federal.
New Accounting Pronouncements Accounting for Mortgage Servicing Rights
During 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 122, entitled Accounting for Mortgage Servicing Rights. SFAS No. 122
pertains to mortgage banking enterprises and financial institutions that conduct
operations that are substantially similar to the primary operations of a
mortgage banking enterprise. The Statement eliminates the accounting distinction
between mortgage servicing rights that are acquired through loan origination
activities and those acquired through purchase transactions. Under this
Statement, if a mortgage banking enterprise sells or securitizes loans and
retains the mortgage servicing rights, the enterprise must allocate the total
cost of the mortgage loans to the mortgage servicing rights and the loans
(without the rights) based on their relative fair values if it is practicable to
estimate those fair values. If it is not practicable, the entire cost should be
allocated to the mortgage loans and no cost should be allocated to the mortgage
servicing rights. An entity would measure impairment of mortgage service rights
and loans based on the excess of the carrying amount of the mortgage servicing
rights portfolio over the fair value of that portfolio.
The Statement is to be applied prospectively in fiscal years beginning
after December 15, 1995, to transactions in which an entity acquires mortgage
servicing rights and to impairment evaluations of all capitalized mortgage
servicing rights. Retroactive application is prohibited.
During 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This statement
is effective for the transactions entered into after January 1, 1997 and at that
date will supersede SFAS No. 122. Early adoption is not permitted.
Accounting for Stock-based Compensation
The FASB has issued SFAS No. 123, Accounting for Stock-based Compensation.
This Statement establishes a fair value based method of accounting for
stock-based compensation plans. The FASB encourages all entities to adopt this
method for accounting for all arrangements under which employees receive shares
of stock or other equity instruments of the employer, or the employer incurs
liabilities to employees in amounts based on the price of its stock.
<PAGE>
Due to the extremely controversial nature of this project, the Statement
permits a company to continue the accounting for stock-based compensation
prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. If a company elects that option, proforma disclosures of
net income (and EPS, if presented) are required in the footnotes as if the
provisions of this Statement had been used to measure stock-based compensation.
The disclosure requirements of Opinion No. 25 have been superseded by the
disclosure requirements of this Statement.
Once an entity adopts the fair value based method for accounting for these
transactions, that election cannot be reversed.
Equity instruments granted or otherwise transferred directly to an employee
by a principal stockholder are stock-based employee compensation to be accounted
for in accordance with either Opinion 25 or this Statement, unless the transfer
clearly is for a purpose other than compensation.
The accounting requirements of this Statement and related disclosure
requirements are effective for transactions entered into by the Bank for the
fiscal year ending June 30, 1997. Proforma disclosures required for entities
that elect to continue to measure compensation cost using Opinion 25 must
include the effects of all awards granted in fiscal years that begin after
December 15, 1994.
In general, during the initial phase-in period, the effects of applying
this Statement are not likely to be representative of the effects on reported
net income for future years because options vest over several years and
additional awards generally are made each year. If that situation exists, the
Company must include a statement to that effect.
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Financial Statements
June 30, 1996 and 1995
Independent Auditor's Report
Board of Directors
Marion Capital Holdings, Inc.
Marion, Indiana
We have audited the consolidated statement of financial condition of Marion
Capital Holdings, Inc. and subsidiary corporations as of June 30, 1996 and 1995,
and the related consolidated statements of income, changes in shareholders'
equity and cash flows for each of the three years in the period ended June 30,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 described above present
fairly, in all material respects, the consolidated financial position of Marion
Capital Holdings, Inc. and subsidiary corporations as of June 30, 1996 and 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended June 30, 1996, in conformity with generally accepted
accounting principles.
As described in the notes to the financial statements, the Company changed its
method of accounting for investments in securities in 1995.
Geo. S. Olive & Co. LLC
Indianapolis, Indiana
July 26, 1996
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statement of Financial Condition
<TABLE>
<CAPTION>
June 30,
----------------------------------
1996 1995
------------ ------------
Assets
<S> <C> <C>
Cash $ 2,365,805 $ 2,178,493
Short-term interest-bearing deposits 5,154,518 1,304,691
------------ ------------
Total cash and cash equivalents 7,520,323 3,483,184
Investment securities
Available-for-sale 999,750 2,985,263
Held-to-maturity 13,057,722 17,274,654
------------ ------------
Total investment securities 14,057,472 20,259,917
Loans 145,173,891 138,336,048
Allowance for loan losses (2,009,250) (2,012,602)
------------ ------------
Net loans 143,164,641 136,323,446
Foreclosed real estate 182,959 205,723
Premises and equipment 1,446,025 1,495,608
Federal Home Loan Bank of Indianapolis stock, at cost 988,400 909,100
Other assets 10,406,755 10,033,778
------------ ------------
Total assets $177,766,575 $172,710,756
============ ============
Liabilities
Deposits $126,260,010 $120,613,003
Advances from Federal Home Loan Bank of Indianapolis 6,241,474 6,963,152
Other liabilities 3,754,017 3,270,576
Total liabilities 136,255,501 130,846,731
Commitments and contingent liabilities
Shareholders' Equity
Preferred stock
Authorized and unissued--2,000,000 shares
Common stock, without par value
Authorized--5,000,000 shares
Issued and outstanding--1,933,613 and 1,986,288 shares 13,814,937 15,489,336
Retained earnings--substantially restricted 28,128,458 27,114,816
Net unrealized loss on securities available-for-sale (119) (9,235)
Unearned compensation (432,202) (730,892)
------------ ------------
Total shareholders' equity 41,511,074 41,864,025
------------ ------------
Total liabilities and shareholders' equity $177,766,575 $172,710,756
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
1996 1995 1994
----------- ----------- -----------
Interest Income
<S> <C> <C> <C>
Loans $12,456,465 $11,451,350 $10,961,117
Investment securities 876,326 1,110,742 1,064,746
Federal funds sold 14,234 141,682
Deposits with financial institutions 333,876 144,344 170,538
Dividend income 73,341 65,386 53,011
----------- ----------- -----------
Total interest income 13,740,008 12,786,056 12,391,094
----------- ----------- -----------
Interest Expense
Deposits 6,344,259 5,539,915 5,627,917
Repurchase agreements 52,159
Federal Home Loan Bank advances 456,484 381,770 243,904
----------- ----------- -----------
Total interest expense 6,852,902 5,921,685 5,871,821
----------- ----------- -----------
Net Interest Income 6,887,106 6,864,371 6,519,273
Provision for losses on loans 34,231 67,500 65,000
----------- ----------- -----------
Net Interest Income After Provision for Losses on Loans 6,852,875 6,796,871 6,454,273
----------- ----------- -----------
Other Income
Gains on sale of marketable equity securities 15,169
Net loan servicing fees 81,202 68,886 61,526
Annuity and other commissions 146,827 143,986 210,746
Equity in losses of limited partnerships (193,139) (184,582) (236,481)
Other income 94,993 76,312 82,860
----------- ----------- -----------
Total other income 129,883 104,602 133,820
----------- ----------- -----------
Other Expenses
Salaries and employee benefits 2,296,293 2,339,129 1,969,862
Net occupancy expenses 153,340 155,997 131,599
Equipment expenses 59,173 51,294 45,306
Deposit insurance expense 326,871 323,835 327,347
Foreclosed real estate expenses and losses, net (12,643) (98,413) 373,676
Other expenses 764,981 783,577 755,974
----------- ----------- -----------
Total other expenses 3,588,015 3,555,419 3,603,764
----------- ----------- -----------
Income Before Income Tax 3,394,743 3,346,054 2,984,329
Income tax expense 913,329 916,106 715,072
----------- ----------- -----------
Net Income $ 2,481,414 $ 2,429,948 $ 2,269,257
=========== =========== ===========
Primary and Fully Diluted Net Income Per Share $ 1.22 $ 1.11 $ .99
=========== =========== ===========
Average Common and Equivalent Shares Outstanding 2,033,955 2,186,137 2,297,853
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock Retained
Shares Amount Earnings
------ ------ --------
<S> <C> <C> <C>
Balances, July 1, 1993 2,415,000 $23,097,375 $24,946,678
Net income for 1994 2,269,257
Cash dividends ($.525 per share) (1,198,401)
Repurchase of common stock (235,695) (3,931,479)
Exercise of stock options 14,863 148,630
Amortization of unearned
compensation expense
--------- ----------- -----------
Balances, June 30, 1994 2,194,168 19,314,526 26,017,534
Net income for 1995 2,429,948
Cash dividends ($.63 per share) (1,332,666)
Cumulative effect of change in accounting
for securities, net of taxes of $(38,098)
Net change in unrealized gain (loss) on
securities available-for-sale, net of
taxes of $32,041
Repurchase of common stock (214,249) (3,888,880)
Exercise of stock options 6,369 63,690
Amortization of unearned
compensation expense
--------- ----------- -----------
Balances, June 30, 1995 1,986,288 15,489,336 27,114,816
Net income for 1996 2,481,414
Cash dividends ($.74 per share) (1,467,772)
Net change in unrealized gain (loss)
on securities available-for-sale,
net of taxes of $5,979
Repurchase of common stock (100,658) (2,066,332)
Exercise of stock options 47,983 301,855
Amortization of unearned
compensation expense
Tax benefit of stock options
exercised and RRP 90,078
--------- ----------- -----------
Balances, June 30, 1996 1,933,613 $13,814,937 $28,128,458
========= =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss)
Unearned on Securities
Compensation Available-for-Sale Total
----------- ------------------ --------------
<S> <C> <C> <C>
Balances, July 1, 1993 $(1,270,628) $46,773,425
Net income for 1994 2,269,257
Cash dividends ($.525 per share) (1,198,401)
Repurchase of common stock (3,931,479)
Exercise of stock options 148,630
Amortization of unearned
compensation expense 269,868 269,868
----------- --------- -----------
Balances, June 30, 1994 (1,000,760) 44,331,300
Net income for 1995 2,429,948
Cash dividends ($.63 per share) (1,332,666)
Cumulative effect of change in accounting
for securities, net of taxes of $(38,098) $(58,085) (58,085)
Net change in unrealized gain (loss) on
securities available-for-sale, net of
taxes of $32,041 48,850 48,850
Repurchase of common stock (3,888,880)
Exercise of stock options 63,690
Amortization of unearned
compensation expense 269,868 269,868
----------- --------- -----------
Balances, June 30, 1995 (730,892) (9,235) 41,864,025
Net income for 1996 2,481,414
Cash dividends ($.74 per share) (1,467,772)
Net change in unrealized gain (loss)
on securities available-for-sale,
net of taxes of $5,979 9,116 9,116
Repurchase of common stock (2,066,332)
Exercise of stock options 301,855
Amortization of unearned
compensation expense 298,690 298,690
Tax benefit of stock options
exercised and RRP 90,078
----------- --------- -----------
Balances, June 30, 1996 $ (432,202) $ (119) $41,511,074
=========== ========= ===========
</TABLE>
<PAGE>
MARION CAPITAL HOLDINGS, INC AND SUBSIDIARIES
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------
1996 1995 1994
--------- --------- ---------
Operating Activities
<S> <C> <C> <C>
Net income $2,481,414 $2,429,948 $2,269,257
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for loan losses 34,231 67,500 65,000
Provision (adjustment) for losses of
foreclosed real estate (19,136) (140,000) 305,000
Marketable equity security gains 15,169
Equity in losses of limited partnerships 193,139 184,582 236,481
Amortization of net loan origination costs (fees) 10,467 (30,065) (102,211)
Depreciation 77,321 64,706 64,050
Amortization of unearned compensation 298,690 269,868 269,868
Deferred income tax benefit (174,865) (153,390) (139,910)
Origination of loans for sale (5,664,822) (2,414,254) (10,059,717)
Proceeds from sale of loans 5,664,822 2,414,254 10,059,717
Changes in
Interest receivable (64,299) (72,120) (60,499)
Interest payable and other liabilities 491,704 583,878 229,633
Cash value of insurance (116,500) (108,000) (21,125)
Prepaid expense and other assets 73,569 85,752 (14,765)
Other (53,686) (1,202) (101,967)
--------- --------- ---------
Net cash provided by operating activities 3,232,049 3,181,457 2,983,643
--------- --------- ---------
Investing Activities
Net change in interest-bearing deposits 100,000
Net change in marketable equity securities 4,025,606
Purchase of term federal funds (2,128,000) (50,945,000)
Proceeds from term federal funds maturities 2,128,000 50,945,000
Proceeds from maturities of securities
available-for-sale 2,000,000 2,000,000
Purchase of securities held-to-maturity (10,891,992) (17,352,386)
Proceeds from maturities of securities
held-to-maturity 15,131,842 2,555,938 11,539,030
Contribution to limited partnership (290,000) (290,000) (295,000)
Net changes in loans (6,918,405) (8,418,943) 5,441,780
Additions to real estate owned (283,000)
Proceeds from real estate owned sales 98,850 291,421 1,495,833
Purchase of FHLB stock (79,300)
Purchase of premises and equipment (29,063) (106,957) (35,259)
Premiums paid on life insurance (180,000)
-------- ---------- ---------
Net cash provided (used) by investing activities (978,068) (3,968,541) 4,456,604
-------- ---------- ---------
(continued)
</TABLE>
<PAGE>
MARION CAPITAL HOLDINGS, INC AND SUBSIDIARIES
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------
1996 1995 1994
--------- --------- ---------
Financing Activities
Net change in
<S> <C> <C> <C>
Interest-bearing demand and savings deposits 1,157,963 (7,741,237) 2,714,713
Certificates of deposit 4,489,044 7,388,768 (3,693,355)
Proceeds from Federal Home Loan Bank advances 3,500,000 5,000,000 1,000,000
Repayment of Federal Home Loan Bank advances (4,221,678) (1,236,848) (875,000)
Dividends paid (1,467,772) (1,332,666) (1,198,401)
Exercise of stock options 391,933 63,690 148,630
Repurchase of common stock (2,066,332) (3,888,880) (3,931,479)
--------- --------- ---------
Net cash provided (used) by financing activities 1,783,158 (1,747,173) (5,834,892)
--------- --------- ---------
Net Change in Cash and Cash Equivalents 4,037,139 (2,534,257) 1,605,355
Cash and Cash Equivalents, Beginning of Year 3,483,184 6,017,441 4,412,086
--------- --------- ---------
Cash and Cash Equivalents, End of Year $7,520,323 $3,483,184 $6,017,441
========== ========== ==========
Additional Cash Flows and Supplementary Information
Interest paid $6,873,949 $5,875,374 $5,890,378
Income tax paid 960,958 948,959 850,000
Loan balances transferred to foreclosed real estate 447,511 2,592,839 1,496,781
Loans to finance the sale of foreclosed real estate 415,000 3,442,850 1,022,262
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The accounting and reporting policies of Marion Capital Holdings, Inc.
("Company") and its wholly owned subsidiary, First Federal Savings Bank of
Marion ("Bank") and the Bank's wholly owned subsidiary, First Marion Service
Corporation ("FMSC"), conform to generally accepted accounting principles and
reporting practices followed by the thrift industry. The more significant of the
policies are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company is a thrift holding company whose principal activity is the
ownership and management of the Bank. The Bank operates under a federal thrift
charter and provides full banking services. As a federally-chartered thrift, the
Bank is subject to regulation by the Office of Thrift Supervision and the
Federal Deposit Insurance Corporation.
The Bank generates residential and commercial mortgage and consumer loans and
receives deposits from customers located primarily in central Indiana. The
Bank's loans are generally secured by specific items of collateral including
real property and consumer assets. FMSC is engaged in the selling of financial
services.
Consolidation--The consolidated financial statements include the accounts of the
Company, the Bank and the Bank's subsidiary after elimination of all material
intercompany transactions and accounts.
Investment Securities--The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and
Equity Securities, on July 1, 1994, and investment securities with an
approximate carrying value of $4,985,000 were reclassified as
available-for-sale. This reclassification resulted in a decrease in total
shareholders' equity, net of taxes, of $58,000.
Debt securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Securities
held-to-maturity are carried at amortized cost.
Debt securities not classified as held-to-maturity are classified as
available-for-sale. Securities available-for-sale are carried at fair value with
unrealized gains and losses reported separately, net of tax, in shareholders'
equity.
Amortization of premiums and accretion of discounts are recorded using the
interest method as interest income from securities. Realized gains and losses
are recorded as net security gains (losses). Gains and losses on sales of
securities are determined on the specific-identification method.
Prior to the adoption of SFAS No. 115, investment securities were carried at
cost, adjusted for amortization of premiums and discounts, and securities held
for sale and marketable equity securities were carried at the lower of aggregate
cost or market. Realized gains and losses on sales were included in other
income. Unrealized losses on securities held for sale were included in other
income. Unrealized losses on marketable equity securities were charged to
shareholders' equity. Gains and losses on the sale of securities were determined
on the specific-identification method.
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Loans are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans. Loans are placed in a nonaccrual
status when the collection of interest becomes doubtful. Interest income
previously accrued but not deemed collectible is reversed and charged against
current income. Interest on these loans is then recognized as income when
collected. Loans are considered impaired when it becomes probable that the bank
subsidiary will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Interest income on these loans is
recognized as described above depending on the accrual status of the loan.
Certain loan fees and direct costs are being deferred and the net amounts are
amortized as an adjustment of yield on the loans. When a loan is paid off or
sold, any unamortized loan origination fee balance is credited to income.
Foreclosed real estate arises from loan foreclosure or deed in lieu of
foreclosure and is carried at the lower of cost or fair value less estimated
selling costs. Real estate has not been acquired for development or sale. Costs
relating to development and improvement of property are capitalized, whereas
costs relating to the holding of property, net of rental and other income are
expensed. Realized gains and losses are recorded upon the sale of real estate,
with gains deferred and recognized on the installment method for sales not
qualifying for the full accrual method.
Allowances for loan and real estate losses are maintained to absorb potential
loan and real estate losses based on management's continuing review and
evaluation of the loan and real estate portfolios and its judgment as to the
impact of economic conditions on the portfolios. The evaluation by management
includes consideration of past loss experience, changes in the composition of
the portfolios, the current condition and amount of loans and foreclosed real
estate outstanding, and the probability of collecting all amounts due. Impaired
loans are measured by the present value of expected future cash flows, or the
fair value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses and the
valuation of real estate is based on estimates that are particularly susceptible
to significant changes in the economic environment and market conditions.
Management believes that as of June 30, 1996, the allowance for loan losses and
carrying value of foreclosed real estate are adequate based on information
currently available. A worsening or protracted economic decline in the area
within which the Bank operates would increase the likelihood of additional
losses due to credit and market risks and could create the need for additional
loss reserves.
Premises and equipment are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method based principally on the
estimated useful lives of the assets. Maintenance and repairs are expensed as
incurred while major additions and improvements are capitalized. Gains and
losses on dispositions are included in current operations.
Federal Home Loan Bank stock is a required investment for institutions that are
members of the Federal Home Loan Bank system. The required investment in the
common stock is based on a predetermined formula.
Pension plan costs are based on actuarial computations and charged to current
operations. The funding policy is to pay at least the minimum amounts required
by ERISA.
Income tax in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. Business
tax credits are deducted from federal income tax in the year the credits are
used to reduce income taxes payable. The Company files consolidated income tax
returns with its subsidiaries.
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Primary earnings per share for 1996 and 1995 are computed by dividing net income
by the weighted average number of common and equivalent shares outstanding
during the period. For 1996 and 1995, fully diluted earnings per share are the
same as primary earnings per share. For 1994, the computation of primary and
fully diluted earnings per share reflected no dilution.
Reclassifications of certain amounts in the 1995 and 1994 consolidated financial
statements have been made to conform to the 1996 presentation.
Restriction on Cash
The Bank is required to maintain reserve funds in cash and/or on deposit with
the Federal Reserve Bank. The reserve required at June 30, 1996, was $200,000.
o Investment Securities
<TABLE>
<CAPTION>
June 30, 1996
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Available-for-sale
Federal agencies $ 1,000 $ 1,000
------- -------
Held-to-maturity
U. S. Treasury 3,015 $ 40 2,975
Federal agencies 6,954 $ 8 45 6,917
State and municipal 610 5 605
Mortgage-backed securities 1,491 102 1,389
Other 988 12 1,000
------- --- ---- -------
Total held-to-maturity 13,058 20 192 12,886
------- --- ---- -------
Total investment securities $14,058 $20 $192 $13,886
======= === ==== =======
</TABLE>
<TABLE>
<CAPTION>
June 30, 1995
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Available-for-sale
Federal agencies $ 3,000 $ 15 $ 2,985
------- ---- -------
Held-to-maturity
U. S. Treasury 3,035 57 2,978
Federal agencies 11,000 256 10,744
State and municipal 610 18 592
Mortgage-backed securities 2,630 52 2,578
------- ---- -------
Total held-to-maturity 17,275 383 16,892
------- --- ---- -------
Total investment securities $20,275 $0 $398 $19,877
======= === ==== =======
</TABLE>
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The amortized cost and fair value of securities held-to-maturity and
available-for-sale at June 30, 1996, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
Maturity Distribution at June 30, 1996
---------------------------------------------
Available-for-Sale Held-to-Maturity
------------------- ----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------ ------ ------- -------
Within one year $1,000 $1,000 $ 7,953 $ 7,958
One to five years 3,614 3,539
------ ------ ------- -------
1,000 1,000 11,567 11,497
Mortgage-backed securities 1,491 1,389
------ ------ ------- -------
Totals $1,000 $1,000 $13,058 $12,886
====== ====== ======= =======
o Loans
June 30,
---------------------------
1996 1995
-------- --------
Real estate mortgage loans
One-to-four family $ 87,505 $ 82,056
Multi-family 15,573 14,495
Commercial real estate 36,170 35,937
Real estate construction loans 4,994 7,332
Commercial 7 9
Consumer loans 3,777 2,814
-------- --------
Total loans 148,026 142,643
Undisbursed portion of loans (2,539) (4,004)
Deferred loan fees (313) (303)
-------- --------
$145,174 $138,336
======== ========
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
1996 1995 1994
------ ------ ------
Allowance for loan losses
Balances, July 1 $2,013 $2,050 $2,051
Provision for losses 34 68 65
Recoveries on loans 2 12 17
Loans charged off (40) (117) (83)
------ ------ ------
Balances, June 30 $2,009 $2,013 $2,050
====== ====== ======
June 30,
-------------------------
1996 1995
-------- -------
Nonperforming loans
Nonaccruing loans $1,716 $1,752
Additional interest income of $43,000, $69,000 and $157,000 for 1996, 1995 and
1994 would have been recognized on nonaccruing loans had such loans been
considered collectible and accounted for on the accrual basis.
On July 1, 1995, the Company adopted SFAS Nos. 114 and No. 118, Accounting for
Creditors for Impairment of a Loan and Accounting for Creditors for Impairment
of a Loan--Income Recognition and Disclosures. The adoption of SFAS Nos. 114 and
118 did not have a material impact on the Company's financial position or
results of operations. No loans were considered impaired at June 30, 1996.
Mortgage loans serviced for others are not included in the accompanying
consolidated statement of financial condition. The loans are serviced primarily
for the Federal Home Loan Mortgage Corporation, and the unpaid principal
balances totaled $7,825,000 and $7,586,000 at June 30, 1996 and 1995.
o Forclosed Real Estate
June 30,
------------------------
1996 1995
------ ------
Real estate acquired in settlement of loans $ 199 $ 270
Allowance for losses (16) (64)
----- -----
$ 183 $ 206
===== =====
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
Allowance for losses on foreclosed real estate
<S> <C> <C> <C>
Balances, July 1 $64 $356 $252
Provision (adjustment) for losses (19) (140) 305
Real estate charged off (49) (171) (426)
Recoveries on real estate 20 19 225
--- ---- ----
Balances, June 30 $16 $ 64 $356
=== ==== ====
</TABLE>
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
o Premises and Equipment
June 30,
--------------------------
1996 1995
--------- ---------
Land $ 632 $ 633
Buildings and land improvements 1,417 1,400
Furniture and equipment 467 481
------ ------
Total cost 2,516 2,514
Accumulated depreciation (1,070) (1,018)
------ ------
Net $1,446 $1,496
====== ======
o Other Assets and Other Liabilities
June 30,
---------------------------
1996 1995
--------- ---------
Other assets
Interest receivable
Investment securities $ 159 $ 262
Loans 483 316
Cash value of insurance 5,588 5,471
Deferred income tax asset 2,320 2,151
Investment in limited partnership 1,624 1,527
Prepaid expenses and other 233 307
------ ------
Total $10,407 $10,034
======= =======
Other liabilities
Interest payable
Deposits $ 99 $ 117
Other borrowings 17 19
Deferred compensation and fees payable 2,072 1,886
Deferred gain on sale of real estate owned 353 362
Advances by borrowers for taxes and insurance 392 214
Other 821 673
------ ------
Total $3,754 $3,271
====== ======
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
o Investment in Limited Partnership
Included in other assets is an investment of $1,623,869 and $1,527,008 at June
30, 1996 and 1995 representing 99 percent equity in a limited partnership
organized to build, own and operate an apartment complex. The Bank records its
equity in the net income or loss of the partnership. Certain fees to the general
partner not recorded or estimable to date by the partnership under provisions of
the partnership agreement could adversely affect future operating results when
accrued or paid. In addition to recording its equity in the losses of the
partnership, the Bank has recorded the benefit of low income housing tax credits
of $405,000, $405,000, and $408,000 for 1996, 1995 and 1994. At June 30, 1996,
the Bank has committed to make its final annual capital contribution in January,
1997, of $130,000. Condensed financial statements of the partnership are as
follows:
June 30,
------------------------
1996 1995
------ ------
(Unaudited)
Condensed statement of financial condition
Assets
Cash $ 306 $ 17
Land and property 3,711 3,807
Other assets 987 1,061
----- -----
Total assets $5,004 $4,885
====== ======
Liabilities
Notes payable $3,289 $3,309
Other liabilities 61 52
----- -----
Total liabilities 3,350 3,361
Partners' equity 1,654 1,524
----- -----
Total liabilities and partners' equity $5,004 $4,885
====== ======
Year Ended June 30,
---------------------------------
1996 1995 1994
------ ------- -------
(Unaudited)
Condensed statement of operations
Total revenue $ 648 $ 662 $676
Total expense 808 862 869
----- ----- -----
Net loss $(160) $(200) $(193)
===== ===== =====
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
o Deposits
June 30,
---------------------------
1996 1995
-------- --------
Interest-bearing demand $ 20,803 $ 18,438
Savings 17,572 18,779
Certificates and other time deposits
of $100,000 or more 11,761 9,389
Other certificates and time deposits 76,124 74,007
-------- --------
Total deposits $126,260 $120,613
======== ========
Certificates maturing in years ending June 30:
1997 $33,624
1998 13,069
1999 15,121
2000 16,559
2001 7,918
Thereafter 1,594
-------
$87,885
=======
o Federal Home Loan Bank Advances
1996
--------------------------
Weighted
Average
Years Ending June 30 Amount Rate
------ ----
Advances from FHLB
Maturities
1997 $3,012 6.81%
1998 1,701 6.10
1999 190 5.93
2000 481 6.57
2001 383 5.09
Thereafter 474 7.33
------
$6,241
======
The FHLB advances are secured by first mortgage loans and investment securities
totaling $89,509,000. Advances are subject to restrictions or penalties in the
event of prepayment.
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
o Income Tax
Year Ended June 30,
-----------------------------------------
1996 1995 1994
------ ------ ------
Currently payable
Federal $765 $706 $574
State 323 363 281
Deferred
Federal (144) (100) (101)
State (31) (53) (39)
---- ---- ----
Total income tax expense $913 $916 $715
==== ==== ====
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------
1996 1995 1994
------- ------ ------
Reconciliation of federal statutory to actual tax expense
<S> <C> <C> <C>
Federal statutory income tax at 34% $1,154 $1,138 $1,014
Increase in cash value of insurance (40) (37) (7)
Effect of state income taxes 193 205 160
Business income tax credits (423) (406) (426)
Other 29 16 (26)
---- ---- ----
Actual tax expense $ 913 $ 916 $ 715
======= ====== ======
</TABLE>
The tax expense related to securities gains was $5,900 for 1994.
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
A cumulative deferred tax asset of $2,320,000 and $2,151,000 is included in
other assets. The components of the asset are as follows:
<TABLE>
<CAPTION>
June 30,
---------------------------
1996 1995
------ ------
<S> <C> <C>
Differences in accounting for loan losses $ 987 $ 992
Deferred compensation 880 801
Deferred loan fees 127 129
Business income tax credits 309 298
Deferred state income taxes (149) (138)
Differences in accounting for pensions and other employee benefits 182 90
Differences in accounting for securities available-for-sale 6
FHLB of Indianapolis stock dividend (49) (49)
Other 33 22
------ ------
$2,320 $2,151
====== ======
Assets $2,518 $2,338
Liabilities (198) (187)
------ ------
$2,320 $2,151
====== ======
</TABLE>
No valuation allowance was considered necessary at June 30, 1996 and 1995.
At June 30, 1996, the Company had an unused business income tax credit
carryforward of $309,000 expiring in 2011.
Retained earnings include approximately $8,300,000 for which no deferred income
tax liability has been recognized. This amount represents an allocation of
income to bad debt deductions as of June 30, 1988 for tax purposes only.
Reduction of amounts so allocated for purposes other than tax bad debt losses or
adjustments arising from carryback of net operating losses would create income
for tax purposes only, which income would be subject to the then-current
corporate income tax rate. At June 30, 1996, the unrecorded deferred income tax
liability on the above amount was approximately $3,300,000.
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
o Restriction on Dividends
The Company is not subject to any regulatory restrictions on the payment of
dividends to its shareholders. The Office of Thrift Supervision ("OTS")
regulations provide that a savings association which meets fully phased-in
capital requirements (those in effect on December 31, 1994) and is subject only
to "normal supervision" may pay out, as a dividend, 100 percent of net income to
date over the calendar year and 50 percent of surplus capital existing at the
beginning of the calendar year without supervisory approval, but with 30 days
prior notice to the OTS. Any additional amount of capital distributions would
require prior regulatory approval.
At the time of the Bank's conversion to a stock savings bank, a liquidation
account was established in an amount equal to the Bank's net worth as reflected
in the latest statement of condition used in its final conversion offering
circular. The liquidation account is maintained for the benefit of eligible
deposit account holders who maintain their deposit account in the Bank after
conversion. In the event of a complete liquidation (and only in such event),
each eligible deposit account holder will be entitled to receive a liquidation
distribution from the liquidation account in the amount of the then current
adjusted subaccount balance for deposit accounts then held, before any
liquidation distribution may be made to stockholders. Except for the repurchase
of stock and payment of dividends, the existence of the liquidation account will
not restrict the use or application of net worth. The initial balance of the
liquidation account was $24,100,000.
At June 30, 1996, total shareholder's equity of the Bank was $35,519,000, of
which a minimum of $11,419,000 was available for the payment of dividends.
Stock Transactions
The Company's Board of Directors has approved periodically the repurchase of up
to 5 percent of the Company's outstanding shares of common stock. Such purchases
were made subject to market conditions in open market or block transactions.
During the years ended June 30, 1996, 1995 and 1994, the Company had repurchased
100,658, 214,249 and 235,695 of its outstanding shares.
Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate actions by the regulatory agencies that, if undertaken, could have a
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
At June 30, 1996, the Bank believes that it meets all capital adequacy
requirements to which it is subject and the most recent notification from the
regulatory agency categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action.
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
June 30, 1996
-----------------------------------------------------------------------------------------
Required
for Adequate To Be Well
Actual Capital 1 Capitalized 1
------------------- ------------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital 1
(to risk weighted
assets)
Bank $36,940 32.7% $9,045 8.0% $11,307 10.0%
Tier I capital 1
(to risk weighted
assets)
Bank 35,519 31.4% 4,523 4.0% 6,784 6.0%
Tier I capital 1
(to total assets)
Bank 35,519 20.7% 6,871 4.0% 8,588 5.0%
</TABLE>
- ----------
1 As defined by the regulatory agencies
o Benefit Plans
The Bank provides pension benefits for substantially all of the Bank's employees
and is a participant in a pension fund known as the Financial Institutions
Retirement Fund ("FIRF"). This plan is a multi-employer plan; separate actuarial
valuations are not made with respect to each participating employer. A
supplemental plan provides for additional benefits for certain employees.
Pension expense (credit) was $211,123, $108,417, and $(464) for 1996, 1995 and
1994.
The Bank contributes up to 3 percent of employees' salaries for those
participating in a nonqualified thrift plan. The Bank's contribution was
$23,300, $20,600, and $18,900 for 1996, 1995 and 1994.
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The Bank has purchased life insurance on certain officers and directors, which
insurance had an approximate cash value of $5,588,000 and $5,471,000 at June 30,
1996 and 1995. The Bank has approved arrangements that provide retirement and
death benefits to those officers and directors covered by the keyman policies.
The benefits to be paid will be funded primarily by the keyman policies and are
being accrued over the period of active service to eligibility dates. The
accrual of benefits totalled $277,000, $447,000, and $248,000 for 1996, 1995 and
1994.
Certain insurance companies which have issued policies described above have been
placed in conservatorship by the insurance commissioner of the state of
California (the "Commissioner"). During the year ended June 30, 1994, the Bank
reduced the cash value on such policies to estimated values provided by the
Commissioner.
The Company has a stock option plan in which 155,089 common shares were reserved
at June 30, 1996 for issuance under the plan. The incentive stock option
exercise price will not be less than the fair market value of the common stock
(or 85 percent of the fair market value of common stock for non-qualified
options) on the date of the grant of the option. The date on which the options
are first exercisable is determined by the Board of Directors, and the terms of
the stock options will not exceed ten years from the date of grant. In March,
1993, the Company granted incentive and non-qualified stock options for 132,824
and 60,377 shares. During the years ended June 30, 1996, 1995 and 1994, options
totaling 65,179 (with 17,196 shares tendered as partial payment), 6,369 and
14,863 were exercised. 48,299 shares were available for grant at June 30, 1996.
The weighted option price per share for the 1996, 1995 and 1994 options
exercised and at June 30, 1996, was $10.
The Bank's Board of Directors has established Recognition and Retention Plans
and Trusts ("RRP"). The Bank contributed $1,349,340 to the RRPs for the purchase
of 96,600 shares of Company common stock, and in March, 1993, awards of grants
for these shares were issued to various directors, officers and employees of the
Bank. These awards generally are to vest and be earned by the recipient at a
rate of 20 percent per year, commencing March, 1994. The unearned portion of
these stock awards is presented as a reduction of shareholders' equity.
SFAS No. 123, Stock-Based Compensation, is effective for the Company for the
year ended June 30, 1997. This statement establishes a fair value based method
of accounting for stock-based compensation plans. The Company has not yet
determined the impact of adopting SFAS No. 123 on net income or financial
position in the year of adoption.
o Postretirement Plan
The Bank sponsors a defined benefit postretirement plan that covers both
salaried and nonsalaried employees. The plan provides postretirement health care
coverage to eligible retirees. An eligible retiree is an employee who retires
from the Bank on or after attaining age 65 and who has rendered at least 15
years of service.
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The Bank continues to fund benefit costs on a pay-as-you-go basis, and, for
1996, 1995 and 1994, the Bank made benefit payments totaling $3,842, $2,986 and
$3,252. The following table sets forth the plan's funded status, and amounts
recognized in the consolidated statement of financial condition:
June 30,
------------------------
1996 1995
------ ------
Accumulated postretirement benefit obligation
Retirees $100 $ 76
Other active plan participants 80 78
Accumulated postretirement benefit obligation 180 154
Unrecognized net gain from past experience
different from that assumed
and from changes in assumptions 84 98
---- ----
Accrued postretirement benefit cost $264 $252
==== ====
<TABLE>
<CAPTION>
June 30,
-----------------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Net periodic postretirement cost included the following
components
Service cost--benefits attributed to service
during the period $13 $21 $19
Interest cost on accumulated postretirement
benefit obligation 12 16 15
Net amortization and deferral (9)
--- --- ---
Net periodic postretirement benefit cost $16 $37 $34
=== === ===
</TABLE>
At June 30, 1996 and 1995, there were no plan assets. The assumed health care
cost trend rate used in measuring the accumulated postretirement benefit
obligation was 12 percent in 1996, gradually declining to 6 percent in the year
2011. The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.75 percent.
If the health care cost trend rate assumptions were increased by 1 percent, the
accumulated postretirement benefit obligation as of June 30, 1996 would have
increased by 14 percent. The effect of this change on the sum of the service
cost and interest would be an increase of 17 percent.
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
o Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit, which are not
included in the accompanying consolidated financial statements. The Bank's
exposure to credit loss in the event of nonperformance by the other party to the
financial instruments for commitments to extend credit is represented by the
contractual or notional amount of those instruments. The Bank uses the same
credit policies in making such commitments as it does for instruments that are
included in the consolidated statement of financial condition.
Financial instruments whose contract amount represents credit risk as of June 30
were as follows:
1996 1995
------- -------
Mortgage loan commitments at variable rates $3,211 $3,894
Consumer and commercial loan commitments 1,365 936
Standby letters of credit 3,239 1,518
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation. Collateral held varies, but may include residential real estate,
income-producing commercial properties, or other assets of the borrower.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of the customer to a third party.
A significant portion of the Bank's loan portfolio consists of commercial real
estate loans, including loans secured by nursing homes. These commercial real
estate loans, totaling $36,170,000 and $35,937,000 at June 30, 1996 and 1995,
have a significantly higher degree of credit risk than residential mortgage
loans. Loan payments on the nursing home loans are often dependent on the
operation of the collateral, and risks inherent in the nursing home industry
include licensure and certification laws and changes affecting payments from
third party payors.
The Company and subsidiaries are also subject to claims and lawsuits which arise
primarily in the ordinary course of business. Based on information presently
available, it is the opinion of management that the disposition or ultimate
determination of such possible claims or lawsuits will not have a material
adverse effect on the consolidated financial position of the Company.
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The deposits of the Bank are presently insured by the Savings Association
Insurance Fund (the "SAIF"). A recapitalization plan for the SAIF under
consideration by Congress provides for a special assessment on all SAIF-insured
institutions to enable the SAIF to achieve its required level of reserves. If
the proposed assessment of .85% was effected based on deposits as of March 31,
1995 (as originally proposed), the Bank's special assessment would amount to
approximately $1,008,000, before taxes. Accordingly, this special assessment
would significantly increase other expenses and adversely affect results of
operations. Depending upon the capital level and supervisory rating of the Bank,
and assuming the insurance premium levels for commercial banks and SAIF members
again equalized, future deposit insurance premiums could decrease from the .23%
of deposits currently paid by the Bank. Such reduction in premiums would reduce
other expenses for future periods.
o Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents--The fair value of cash and cash equivalents
approximates carrying value.
Investment Securities--Fair values are based on quoted market prices.
Loans--The fair value for loans is estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
Interest Receivable/Payable--The fair values of accrued interest
receivable/payable approximates carrying values.
FHLB Stock--Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
Deposits--Fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on such time deposits.
Federal Home Loan Bank Advances--The fair value of these borrowings are
estimated using a discounted cash flow calculation, based on current rates for
similar debt.
Advances by Borrowers for Taxes and Insurance--The fair value approximates
carrying value.
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $7,520 $7,520 $3,483 $3,483
Securities available-for-sale 1,000 1,000 2,985 2,985
Securities held-to-maturity 13,058 12,886 17,275 16,892
Loans, net 143,165 145,788 136,323 136,746
Interest receivable 642 642 578 578
Stock in FHLB 988 988 909 909
Liabilities
Deposits 126,260 127,210 120,613 120,502
FHLB advances 6,241 6,261 6,963 6,893
Interest payable 116 116 136 136
Advances by borrowers for taxes and insurance 392 392 214 214
</TABLE>
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
o Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
Condensed Balance Sheet
June 30,
---------------------------
1996 1995
--------- ---------
Assets
Cash and cash equivalents $ 3,048 $ 603
Investment securities held-to-maturity 2,978
Investment in subsidiary 35,519 41,301
Other assets 5 6
------- -------
Total assets $41,550 $41,910
======= =======
Liabilities $ 39 $ 46
Shareholders' Equity 41,511 41,864
------- -------
Total liabilities and shareholders' equity $41,550 $41,910
======= =======
<TABLE>
<CAPTION>
Condensed Statement of Income
Year Ended June 30,
-------------------------------------------
1996 1995 1994
------ ------ ------
Income
<S> <C> <C> <C>
Dividends from Bank $8,600 $2,000 $3,000
Other 120 96 108
Expenses 85 132 146
------ ------ ------
Income before income tax and equity in undistributed
income of subsidiary 8,635 1,964 2,962
Income tax expense (benefit) 14 (14) (15)
------ ------ ------
Income before equity in undistributed
income of subsidiary 8,621 1,978 2,977
Equity in undistributed (distribution in excess of)
income of subsidiary (6,140) 452 (708)
------ ------ ------
Net Income $2,481 $2,430 $2,269
====== ====== ======
</TABLE>
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows
Year Ended June 30,
------------------------------------------
1996 1995 1994
------ -------- --------
Operating Activities
<S> <C> <C> <C>
Net income $2,481 $2,430 $2,269
Adjustments to reconcile net income to net cash provided
by operating activities 6,057 (434) 653
------ ------ ------
Net cash provided by operating activities 8,538 1,996 2,922
------ ------ ------
Investing Activities
Purchase of securities held-to-maturity (5,951) (496)
Proceeds from maturities of securities held-to-maturity 3,000 6,000
------ ------
Net cash provided (used) by investing activities (2,951) 5,504
------ ------
Financing Activities
Exercise of stock options 392 64 148
Cash dividends (1,468) (1,333) (1,198)
Repurchase of common stock (2,066) (3,889) (3,931)
------ ------ ------
Net cash used by financing activities (3,142) (5,158) (4,981)
------ ------ ------
Net Increase (Decrease) in Cash and Cash Equivalents 2,445 (3,162) 3,445
------ ------ ------
Cash and Cash Equivalents at Beginning of Year 603 3,765 320
------ ------ ------
Cash and Cash Equivalents at End of Year $3,048 $ 603 $3,765
====== ====== ======
</TABLE>
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
o Quarterly Results
<TABLE>
<CAPTION>
Year Ended June 30, 1996
----------------------------------------------
June March December September
1996 1996 1995 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income $3,416 $3,442 $3,465 $3,417
Interest expense 1,706 1,714 1,721 1,712
------ ------ ------ ------
Net interest income 1,710 1,728 1,744 1,705
Provision for losses on loans 10 24
------ ------ ------ ------
Net interest income after provisions for losses on loans 1,700 1,728 1,720 1,705
Other income 24 23 25 58
Other expenses 872 927 874 916
------ ------ ------ ------
Income before income tax 852 824 871 847
Income tax expense 223 216 233 241
------ ------ ------ ------
Net Income $ 629 $ 608 $ 638 $ 606
====== ====== ====== ======
Per share
Net income $.33 $.29 $.31 $.29
Dividends $.20 $.18 $.18 $.18
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30, 1995
----------------------------------------------
June March December September
1995 1995 1994 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income $3,300 $3,246 $3,149 $3,091
Interest expense 1,624 1,500 1,388 1,410
------ ------ ------ ------
Net interest income 1,676 1,746 1,761 1,681
Provision for losses on loans 3 65
------ ------ ------ ------
Net interest income after provisions for losses on loans 1,673 1,746 1,761 1,616
Other income 31 19 14 41
Other expenses 916 913 870 856
------ ------ ------ ------
Income before income tax 788 852 905 801
Income tax expense 177 220 265 254
------ ------ ------ ------
Net Income $ 611 $ 632 $ 640 $ 547
====== ====== ====== ======
Per share
Net income $.28 $.30 $.29 $.24
Dividends $.18 $.15 $.15 $.15
</TABLE>
<PAGE>
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
Robert D. Burchard W. Gordon Coryea Jack O. Murrell
Chairman of the Board Attorney Retired, Murrell and Keal
Retired, Former President
of MCHI and First Federal
Jerry D. McVicker John M. Dalton George L. Thomas
Director of Operations President Retired, Foster-Forbes
Marion Community Schools Vice Chairman of
the Board
Steven L. Banks
Executive Vice President
OFFICERS OF MARION CAPITAL HOLDINGS, INC.
John M. Dalton Larry G. Phillips
President Sr. Vice President and
Secretary-Treasurer
Steven L. Banks Jackie Noble
Executive Vice President Assistant Secretary and
Assistant Treasurer
Tim D. Canode
Vice President
OFFICERS OF FIRST FEDERAL SAVINGS BANK OF MARION
John M. Dalton Larry G. Phillips Steven L. Banks
President Sr. Vice President and Executive Vice President
Secretary-Treasurer
Stephen A. Smithley James E. Adkins Charles N. Sponhauer
Vice President Vice President Vice President
Jackie Noble Chris Bradford Kathy Kuntz
Assistant Secretary and Assistant Secretary Assistant Secretary
Assistant Treasurer
Tim D. Canode Lowell Martin Randy J. Sizemore
Vice President Assistant Vice President, Assistant Treasurer
Branch Manager
<PAGE>
DIRECTORS AND OFFICERS
Robert D. Burchard (age 65) is a Director of Marion Capital Holdings, Inc.
Mr. Burchard served as President of Marion Capital Holdings, Inc. from its
formation until 1996. Mr. Burchard also served as President of First Federal
from 1983 until 1996 and as President of First Marion Service Corporation in
1996. Mr. Burchard became Chairman of the Boards of Marion Captial Holdings,
Inc. and First Federal in 1996.
W. Gordon Coryea (age 71) is a Director of Marion Capital Holdings, Inc. He
is also an attorney at law based in Marion, Indiana, and has served as attorney
for First Federal since 1965.
John M. Dalton (age 62) is a Director of Marion Capital Holdings, Inc. and
has served as its President since 1996. Prior to that, he served as Marion
Capital Holdings, Inc.'s Executive Vice President. He has also served as
President of First Federal since 1996 and as Executive Vice President of First
Marion Service Corporation in 1996. Mr. Dalton was the Executive Vice President
of First Federal from 1983 to 1996.
Merritt B. McVicker (age 77) was Chairman of the Board of Marion Captial
Holdings, Inc. until his death in July 1996. He had also served as Chairman of
First Federal since 1974, as President of First Marion since 1971 and became
Chairman of First Marion Service Corporation in 1974.
Jack O. Murrell (age 73) is a Director of Marion Capital Holdings, Inc. He
has also served as President of Murrell and Keal, Inc. since 1958 (a retailer
located in Marion, Indiana).
George L. Thomas (age 79) is a Director of Marion Capital Holdings, Inc. He
also served as Chairman of Foster-Forbes Glass Co., a division of the National
Can Corporation, located in Marion, Indiana until his retirement in 1984.
Larry G. Phillips (age 47) is Sr. Vice President, Secretary and Treasurer
of Marion Capital Holdings, Inc. He has also served as Sr. Vice President and
Treasurer of First Federal since 1996, as Secretary of First Federal since 1989,
and as Secretary and Treasurer of First Marion since 1989. Mr. Phillips was Vice
President and Treasurer of First Federal from 1983 to 1996.
Tim D. Canode (age 51) has served as Vice President of Marion Capital
Holdings, Inc. since 1996 and as Vice President of First Federal since 1983 and
as Assistant Vice President of First Marion since 1983.
Jacquelin Ann Noble (age 55) is Assistant Secretary and Assistant Treasurer
of Marion Capital Holdings, Inc. She has served as Assistant Secretary and
Assistant Treasurer of First Federal since 1967. She has also served as
Assistant Secretary and Assistant Treasurer of First Marion since 1971.
Steven L. Banks (age 46) was President and CEO of Fidelity Federal Savings
Bank of Marion. On September 1, 1996 he assumed the duties of Executive Vice
President of both Marion Capital Holdings, Inc. and First Federal, and will
serve as a director of Marion Capital Holdings, Inc. and First Federal.
Jerry D. McVicker (age 51) is Director of Operations for Marion Community
Schools. On September 1, 1996, he assumed the duties of director of Marion
Capital Holdings, Inc. and First Federal.
<PAGE>
SHAREHOLDER INFORMATION
Market Information
The common stock of Marion Capital Holdings, Inc. is traded on the National
Association of Securities Dealers Automated Quotation System, National Market
System, under the symbol "MARN," and is listed in the Wall Street Journal under
the abbreviation "MarionCap." As of June 30, 1996, there were approximately 536
shareholders of record and MCHI estimates that, as of that date, there were an
additional 1,000 in "street" name. The following table sets forth market price
information for MCHI's common stock for the periods indicated.
Fiscal Quarter Ended High Low Dividend Per Share
- -------------------- ---- --- ------------------
September 30, 1994 $18.750 $15.750 $.15
December 31, 1994 18.000 15.000 .15
March 31, 1995 17.750 15.250 .15
June 30, 1995 20.000 17.250 .18
September 30, 1995 20.625 18.500 .18
December 31, 1995 20.625 19.250 .18
March 31, 1996 20.750 19.250 .18
June 30, 1996 21.000 19.750 .20
Transfer Agent and Registrar General Counsel
Fifth Third Bank Barnes & Thornburg
38 Fountain Square 1313 Merchants Bank Building
Cincinnati, Ohio 45263 11 South Meridian Street
Indianapolis, Indiana 46204
Shareholders and General Inquiries
MCHI is required to file an Annual Report on Form 10-K for its fiscal year
ended June 30, 1996 with the Securities and Exchange Commission. Copies of this
annual report may be obtained without charge upon written request to:
Larry Phillips
Sr. Vice President, Secretary and Treasurer
Marion Capital Holdings, Inc.
100 West Third Street
Marion, Indiana 46952
Office Location Branch Location
100 West Third Street 1045 South 13th Street
Marion, Indiana 46952 Decatur, Indiana 46733
Telephone: (317) 664-0556 Telephone: (219) 728-2106
<PAGE>
<PAGE>
[LOGO] FIRST FEDERAL
SAVINGS BANK
100 West Third Street, Marion, Indiana 46952
(317) 664-0556
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in a Registration Statement on Form
S-8 (Registration No. 33-69538) of our report dated July 26, 1996, on the
consolidated financial statements of Marion Capital Holdings, Inc. and
subsidiaries contained in the 1996 Annual Report to Shareholders of Marion
Capital Holdings, Inc., which is incorporated by reference in this Form 10-K.
Geo. S. Olive & Co. LLC
Indianapolis, Indiana
September 23, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED
JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000894372
<NAME> Marion Capital Holdings, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-1-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1.000
<CASH> 2,366
<INT-BEARING-DEPOSITS> 5,155
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,000
<INVESTMENTS-CARRYING> 13,058
<INVESTMENTS-MARKET> 12,886
<LOANS> 145,174
<ALLOWANCE> 2,009
<TOTAL-ASSETS> 177,767
<DEPOSITS> 126,260
<SHORT-TERM> 3,012
<LIABILITIES-OTHER> 3,754
<LONG-TERM> 3,229
<COMMON> 13,815
0
0
<OTHER-SE> 27,696
<TOTAL-LIABILITIES-AND-EQUITY> 177,767
<INTEREST-LOAN> 12,456
<INTEREST-INVEST> 876
<INTEREST-OTHER> 407
<INTEREST-TOTAL> 13,740
<INTEREST-DEPOSIT> 6,344
<INTEREST-EXPENSE> 6,853
<INTEREST-INCOME-NET> 6,887
<LOAN-LOSSES> 34
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<EXPENSE-OTHER> 3,588
<INCOME-PRETAX> 3,395
<INCOME-PRE-EXTRAORDINARY> 2,481
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,481
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.22
<YIELD-ACTUAL> 4.17
<LOANS-NON> 1,716
<LOANS-PAST> 0
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<LOANS-PROBLEM> 1,043
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<CHARGE-OFFS> 40
<RECOVERIES> 2
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<ALLOWANCE-UNALLOCATED> 1,692
</TABLE>
