FORM 10-K
UNITED STATES
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, 1998
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 Identification
of Incorporation or Organization) 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: (765) 664-0556
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE 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
of 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 21, 1998, was $37,268,072.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of August 21, 1998, was 1,638,157 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended June 30, 1998
are incorporated into Part II. Portions of the Proxy Statement for the 1998
Annual Meeting of Shareholders are incorporated into Part III.
Exhibit Index on Page 35
Page 1 of 36 Pages
<PAGE>
MARION CAPITAL HOLDINGS, INC.
Form 10-K
INDEX
Page
Forward Looking Statements.................................................. 3
PART 1
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 32
Item 3. Legal Proceedings............................................. 33
Item 4. Submission of Matters to a Vote of Security Holders........... 33
Item 4.5. Executive Officers of MCHI.................................... 33
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 33
Item 6. Selected Consolidated Financial Data.......................... 34
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 34
Item 7A. Quantitative and Qualtative Disclosures About Market Risk..... 34
Item 8. Financial Statements and Supplementary Data................... 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 35
PART III
Item 10. Directors and Executive Officers of the Registrant............ 35
Item 11. Executive Compensation........................................ 35
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................ 35
Item 13. Certain Relationships and Related Transactions................ 35
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K............................................... 35
Signatures .......................................................... 36
<PAGE>
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief,
outlook, estimate or expectations of the Corporation (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Corporation. Readers of this Form 10-K are
cautioned that any such forward looking statements are not guarantees of future
events or performance and involve risks and uncertainties, and that actual
results may differ materially from those in the forward looking statements as a
result of various factors. The accompanying information contained in this Form
10-K identifies important factors that could cause such differences. These
factors include changes in interest rates; loss of deposits and loan demand to
other savings and financial institutions; substantial changes in financial
markets; changes in real estate values and the real estate market; regulatory
changes; or unanticipated results in pending legal proceedings.
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 and time 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 four full-service offices, two in Marion, one in
Decatur, Indiana and one in Gas City, Indiana. The Bank's market area for loans
and deposits consists of Grant and surrounding counties and Adams County in
Indiana. The Bank opened a branch office in the Marion Wal-Mart Supercenter in
October, 1997 and acquired an NBD branch facility in Gas City, Indiana in
December, 1997.
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, 1998, 61.1%
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 $31.9 million at June 30, 1998, or
18.8% of total loans and mortgage-backed securities. The Bank also makes a
limited number of construction loans, which constituted $7.3 million or 4.3% of
the Company's total loans and mortgage-backed securities at June 30, 1998, 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, 1998, ARMs constituted 84.6% 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.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------- ---------------- ---------------- ---------------- ----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
--------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN
Mortgage loans:
Residential..................$103,719 61.14% $ 97,017 63.33% $ 87,106 58.26%$ 81,651 56.21%$ 76,573 55.72%
Commercial real estate....... 31,857 18.78 31,122 20.31 36,170 24.19 35,937 24.74 35,003 25.47
Multi-family................. 11,014 6.49 11,394 7.44 15,573 10.42 14,495 9.98 12,039 8.76
Construction:
Residential.................. 2,742 1.62 3,555 2.32 3,904 2.61 3,448 2.37 3,164 2.30
Commercial real
estate..................... 4,542 2.68 1,144 .75 506 .34 1,257 .87 1,159 .84
Multi-family................. --- --- --- --- 584 .39 2,627 1.81 3,809 2.77
Consumer loans:
Installment loans............ 2,417 1.42 3,613 2.36 2,725 1.82 1,897 1.30 1,340 .98
Loans secured by deposits.... 1,027 .61 895 .58 883 .59 797 .55 822 .60
Home equity loans............ 2,496 1.47 1,376 .90 399 .27 405 .27 494 .36
Auto loans................... 1,323 .78 325 .21 169 .11 120 .08 113 .08
Home improvement loans....... --- --- --- --- --- --- --- --- 1 .00
Education loans.............. --- --- --- --- --- --- --- --- --- ---
Commercial loans................ 8,511 5.01 2,525 1.65 7 .00 9 .01 14 .01
Mortgage-backed securities...... 3 --- 237 .15 1,491 1.00 2,630 1.81 2,905 2.11
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Gross loans receivable and
mortgage-backed
securities................$169,651 100.00% $153,203 100.00% $149,517 100.00% $145,273 100.00% $137,436 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
TYPE OF SECURITY
Residential (1)..............$108,960 64.23% $102,185 66.70% $ 92,888 62.13%$ 88,109 60.65% $ 83,108 60.47%
Commercial real estate....... 36,399 21.46 32,266 21.06 36,688 24.54 37,219 25.62 36,191 26.33
Multi-family................. 11,014 6.49 11,394 7.44 16,157 10.81 17,122 11.79 15,848 11.53
Autos........................ 1,323 .78 325 .21 169 .11 120 .08 113 .08
Deposits..................... 1,027 .61 895 .58 883 .59 797 .55 822 .60
Other security............... 8,511 5.01 2,525 1.65 7 .00 9 .01 14 .01
Unsecured.................... 2,417 1.42 3,613 2.36 2,725 1.82 1,897 1.30 1,340 .98
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Gross loans receivable and
mortgage-backed
securities.............. 169,651 100.00 153,203 100.00 149,517 100.00 145,273 100.00 137,436 100.00
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Deduct:
Allowance for possible losses
on loans..................... 2,087 1.23 2,032 1.33 2,009 1.34 2,013 1.39 2,050 1.49
Deferred net loan fees.......... 300 .18 277 .18 313 .21 303 .21 333 .24
Loans in process................ 3,663 2.16 2,626 1.71 2,539 1.70 4,004 2.75 5,056 3.68
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Net loans receivable
including mortgage-backed
securities.................$163,601 96.43% $148,268 96.78% $144,656 96.75% $138,953 95.65% $129,997 94.59%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Mortgage Loans
Adjustable rate..............$130,100 84.55% $128,799 89.30% $128,811 89.55 $120,496 86.43% $113,184 85.91%
Fixed rate................... 23,774 15.45 15,433 10.70 15,032 10.45 18,919 13.57 18,563 14.09
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total......................$153,874 100.00% $144,232 100.00% $143,843 100.00% $139,415 100.00% $131,747 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
- -----------------
</TABLE>
(1) Includes majority of mortgage-backed securities, home equity loans and
home improvement loans.
The following table sets forth certain information at June 30, 1998,
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 2002 2004 2009 2014
At June 30, to to to and
1998 1999 2000 2001 2003 2008 2013 following
--------------------------------------------------------------------------------------
(In Thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential............ $106,461 $1,152 $102 $470 $1,954 $14,263 $34,526 $53,994
Multi-family........... 11,014 1,098 --- --- 162 2,165 5,549 2,040
Commercial real
estate............... 36,399 4,088 470 952 991 7,372 11,954 10,572
Consumer loans:
Home improvement ...... --- --- --- --- --- --- --- ---
Home equity............ 2,496 92 6 --- --- --- --- 2,398
Auto................... 1,323 54 105 307 817 40 --- ---
Installment............ 2,417 1,089 207 189 616 242 74 ---
Loans secured
by deposits.......... 1,027 663 320 --- 44 --- --- ---
Mortgage-backed
securities ............ --- --- --- --- --- --- --- ---
Commercial loans ..... 8,511 1,532 244 214 843 2,880 2,798 ---
-------- ------ ------ ------ ------ ------- ------- -------
Total.................. $169,648 $9,768 $1,454 $2,132 $5,427 $26,962 $54,901 $69,004
======== ====== ====== ====== ====== ======= ======= =======
</TABLE>
The following table sets forth, as of June 30, 1998, 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, 1999
-------------------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- --------
(In Thousands)
Mortgage loans:
<S> <C> <C> <C>
Residential............................... $12,233 $93,076 $105,309
Multi-family................................... 752 9,164 9,916
Commercial real estate.................... 1,628 30,683 32,311
Consumer loans:
Home improvement ......................... --- --- ---
Home equity............................... 4 2,400 2,404
Auto...................................... 1,269 --- 1,269
Installment............................... 1,328 --- 1,328
Loan secured by deposits.................. 364 --- 364
Mortgage-backed securities ................... --- --- ---
Commercial loans .............................. 5,677 1,302 6,979
------- -------- --------
Total..................................... $23,255 $136,625 $159,880
======= ======== ========
</TABLE>
Residential Loans. Residential loans consist of one-to-four family
loans. Approximately $103.7 million, or 61.1%, of the Company's portfolio of
loans and mortgage-backed securities at June 30, 1998, consisted of one- to
four-family mortgage loans, of which approximately 84.6% had adjustable rates.
The Company is currently selling to the Federal Home Loan Mortgage Corporation
(the "FHLMC") 95% of the principal balance on fixed rate loans originated with
terms in excess of 15 years and retaining all of the servicing rights on these
loans. The option to retain or sell fixed rate loans will be evaluated from time
to time. During the year ended June 30, 1998, $1.4 million in loans were sold to
FHLMC.
The Bank originates fixed-rate loans with terms of up to 30 years. Some
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, a few of these loans originated 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. At June 30, 1998, the
Company had $12.2 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 five-year ARM which has a fixed rate for five years, and a three-year ARM
which has a fixed rate for three years. Both of these ARMs adjust annually after
the initial period is over. Currently, the ARMs have an interest rate average
minimum of 6.5% and average maximum of 13.5%. 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 6.5% 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 25-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.
The Bank generally requires private mortgage insurance on all
conventional residential single-family mortgage loans with loan-to-value ratios
in excess of 90%. 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 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, 1998, these loans amounted to $2.3 million.
Residential mortgage loans in excess of $500,000 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, 1998, residential mortgage loans amounting to $1.5 million,
or .9% of total loans, were included in non-performing assets. See
"--Non-performing and Problem Assets."
Commercial Real Estate Loans. At June 30, 1998, $31.9 million, or
18.8%, 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 9% and maximum interest rates of
15%. 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, 1998, had a balance of $2.6
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 22 commercial and multi-family real estate
loans with balances in excess of $500,000 at June 30, 1998. The average loan
balance for all such loans was $1.0 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 $13.2 million at June
30, 1998.
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, 1998, the Company had classified
no commercial real estate loans as substandard and $1.0 million 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
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 $500,000 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, 1998, $11.0 millon, or 6.5%, 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 $287,000 as of June 30, 1998. The largest such
multi-family mortgage loan as of June 30, 1998, had a balance of $1.2 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, 1998, the
Company had $493,000 in loans secured by multi-family dwellings which were
classified as substandard or included in non-performing assets and $3.1 million
as special mention.
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, 1998, $7.3 million, or 4.3%, of the Company's total loan
and mortgage-backed securities portfolio consisted of construction loans, of
which approximately $2.7 million were residential construction loans and $4.6
million related to construction of commercial real estate projects. The largest
construction loan on June 30, 1998, was $1.4 million. No construction loans were
included in non-performing assets on that date.
For most construction loans, the loan is actually a 25-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 $7.3 million as of
June 30, 1998, or 4.3% 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.
The Bank makes installment loans of up to five years, which consisted
of $2.4 million, or 1.4% of the Company's total loan and mortgage-backed
securities portfolio at June 30, 1998. Loans secured by deposits, totaling $1.0
at June 30, 1998, 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 $2.5 million, or 1.5% of the Company's
total loan and mortgage-backed securities portfolio at June 30, 1998. Automobile
loans totaled only $1.3 million or .8% and are made at 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, 1998, $18,000 of consumer loans
were included in non-performing assets.
Mortgage-Backed Securities. At June 30, 1998, the Company had $3,000 in
mortgage-backed securities outstanding. The Company has purchased
mortgage-backed securities in the past and will continue to consider them in the
future as a means of investing available funds.
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 offices. 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 or extend credit to a borrower or its related entities if the total of
all such loans by the savings association exceeds 15% of its unimpaired capital
and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired
capital and surplus, if such loans or extensions of credit are fully secured by
readily marketable collateral, including certain debt and equity securities but
not including real estate. In some cases, a savings association may lend up to
30% of unimpaired capital and surplus to one borrower for purposes of developing
domestic residential housing, provided that the association meets its regulatory
capital requirements and the OTS authorizes the association to use this expanded
lending authority. 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 $5.0 million at June 30, 1998.
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
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 unsecured consumer loans
greater than $15,000 and all secured consumer loans greater than $40,000. The
Bank's Loan Committee approves all mortgage loans. Commercial real estate loans
in excess of $500,000 and residential mortgage loans in excess of $500,000 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, 1998, the Bank sold
$1.4 million of its fixed-rate mortgage loans, and at June 30, 1998, held
$877,000 of 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.
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. At June 30, 1998, the
Company serviced $32.8 million of loans sold to other parties of which $6.8
million or 20.7% 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, 1998,
the Company held in its loan portfolio, participations in mortgage loans
aggregating $6.6 million that it had purchased, all of which were serviced by
others. The largest such participation it held at June 30, 1998, was in a loan
secured by an apartment complex.
The Company's portion of the outstanding balance on that date was
approximately $1.2 million.
The following table shows loan origination, purchase, sale and
repayment activity for the Bank during the periods indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Gross loans receivable and mortgage-backed
securities at beginning of period...................... $153,203 $149,517 $145,273
Originations:
Mortgage loans:
Residential.......................................... 37,309 33,646 28,841
Commercial real estate and multi-family.............. 13,949 11,483 8,655
-------- -------- --------
Total mortgage loans................................. 51,258 45,129 37,496
-------- -------- --------
Consumer loans:
Installment loans.................................... 7,170 4,528 3,492
Loans secured by deposits............................ 807 449 763
-------- -------- --------
Total consumer loans................................ 7,977 4,977 4,255
-------- -------- --------
Commercial loans....................................... 6,664 2,558 146
-------- -------- --------
Total originations................................... 65,899 52,664 41,897
-------- -------- --------
Purchases:
Mortgage-backed securities............................. --- --- ---
Mortgage loans:
Residential.......................................... --- --- 500
Commercial real estate and
multi-family.................................... 500 --- 1,508
-------- -------- --------
Total originations and purchases..................... 66,399 52,664 43,905
-------- -------- --------
Sales:
Mortgage loans:
Residential.......................................... 1,429 76 1,426
Commercial real estate and multi-family.............. 3,443 7,133 4,239
Mortgage-backed securities........................... --- --- ---
-------- -------- --------
Total sales........................................ 4,872 7,209 5,665
-------- -------- --------
Repayments and other deductions........................... 45,082 41,769 33,996
-------- -------- --------
Gross loans receivable and mortgage-backed
securities at end of period.......................... $169,648 $153,203 $149,517
======== ======== ========
</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. 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, 1998, $2.0 million, or 1.0% of the
Company's total assets, were non-performing assets (non-accrual loans, real
estate owned and troubled debt restructurings), compared to $5.4 million, or
3.2% of the Company's total assets, at June 30, 1994. At June 30, 1998,
residential loans, commercial real estate loans, commercial loans, consumer
loans, and real estate owned, accounted for 73.8%, 10.1%, 13.6%, .9% and 1.6%,
respectively, of non-performing assets.
At June 30, 1998, non-performing assets included $31,000 of real estate
acquired as a result of foreclosure, voluntary deed, or other means, compared to
$0.8 million at June 30, 1994. 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). 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,
-----------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Accruing loans delinquent
more than 90 days ........................ $ --- $ --- $ --- $ --- $ ---
Non-accruing loans (1):
Residential............................... 1,454 1,238 1,658 1,698 2,054
Multi-family.............................. --- --- --- --- ---
Commercial real estate......................... 198 139 47 --- 2,580
Commercial loans.......................... 268 --- --- --- ---
Consumer.................................. 18 34 11 54 3
Troubled debt restructurings .................. --- --- --- --- ---
------ ------ ------ ------ ------
Total non-performing loans................ 1,938 1,411 1,716 1,752 4,637
------ ------ ------ ------ ------
Real estate owned, net......................... 31 --- 183 206 830
------ ------ ------ ------ ------
Total non-performing assets .............. $1,969 $1,411 $1,899 $1,958 $5,467
====== ====== ====== ====== ======
Non-performing loans to total
loans, net (2) ........................... 1.16% .94% 1.18% 1.27% 3.59%
Non-performing assets to total assets ......... 1.02% .81% 1.07% 1.13% 3.20%
</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 previously 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, 1998, $1.5 million of
nonaccrual loans were residential loans, $198,000 were commercial real
estate loans, $268,000 were commercial loans, and $18,000 were consumer
loans. For the year ended June 30, 1998, the income that would have
been recorded had the non-accrual loans not been in a non-performing
status totaled 159,000 compared to actual income recorded of $71,000.
(2) Total loans less deferred net loan fees and loans in process.
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 must 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, 1998, were $6.4 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.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Substandard assets (1)...... $2,296 $1,546 $1,226 $1,574 $5,111
Doubtful assets ............ --- --- --- --- ---
Loss assets................. --- --- --- --- ---
Special mention............. 4,081 --- --- --- ---
------ ------ ------ ------ ------
Total classified assets.. $6,377 $1,546 $1,226 $1,574 $5,111
====== ====== ====== ====== ======
General loss allowances..... $2,087 $2,032 $2,009 $2,013 $2,050
Specific loss allowances.... --- --- --- --- ---
------ ------ ------ ------ ------
Total allowances......... $2,087 $2,032 $2,009 $2,013 $2,050
====== ====== ====== ====== ======
</TABLE>
- --------------
(1) Includes REO, net of $0.03, $0.0, $0.2, $0.2, and $0.8 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, 1998, the Company had 83 loans classified
as substandard totaling approximately $2.3 million. Included in substandard
assets are certain loans to facilitate the sale of the real estate owned,
totaling $73,000 at June 30, 1998. 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.
Also included in substandard assets at June 30, 1998, are slow mortgage
loans (loans or contracts delinquent for generally 90 days or more) aggregating
$1,416,000, multi-family loans equal to $493,000, slow consumer loans totaling
$283,000 and real estate owned of $31,000.
Special Mention Assets. At June 30, 1998, the Bank's assets subject to
special mention totaled $4.1 million. Included are two multi-family loans
totaling $2.1 million, two unfunded letter-of-credit commitments on multi-family
loans totaling $1.0 million, and three nursing home loans totaling $1.0 million.
All loans were classified as special mention due to financial statements
indicating insufficient cash flow to meet all expenses. All of the above loans
were current at June 30, 1998. The Company classified no assets as special
mention at June 30, 1997, 1996, 1995 and 1994.
Subsequent to June 30, 1998, the Board received notification from another
financial institution that it classified a portion of two multi-family loans of
which the Bank holds a participation interest. As a result, $885,000 of these
loans were classified substandard, and $98,000 was classified doubtful. Both of
these loans are current on payments, but financial statements indicate
insufficient cash flows.
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, 1998.
<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, 1998.
<TABLE>
<CAPTION>
Year Ended
June 30,
----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance of allowance at
beginning of period....................... $2,032 $2,009 $2,013 $2,050 $2,051
------ ------ ------ ------ ------
Add recoveries of loans previously
charged off -- residential real
estate loans.............................. 18 --- 2 12 17
Less charge-offs:
Residential real estate loans............. 7 35 37 93 82
Commercial real estate loans.............. 14 --- 3 2 ---
Consumer loans............................ 1 --- --- 22 1
------ ------ ------ ------ ------
Net charge-offs.............................. 4 35 38 105 66
------ ------ ------ ------ ------
Provisions for losses on loans............... 59 58 34 68 65
------ ------ ------ ------ ------
Balance of allowance at end
of period................................. $2,087 $2,032 $2,009 $2,013 $2,050
====== ====== ====== ====== ======
Net charge-offs to total average
loans outstanding for period.............. ---% .02% .03% .08% .05%
Allowance at end of period to
loans receivable at end of period......... 1.25 1.35 1.38 1.45 1.59
Allowance to total non-performing
loans at end of period.................... 107.69 143.98 117.07 114.87 44.21
</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.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------- ---------------- ---------------- ---------------- -----------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
to total to total to total to total to total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Balance at end of period
applicable to:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential.................. $ --- 61.14% $ --- 63.42% $ --- 59.11% $ 10 57.53% $ 48 57.29%
Commercial real estate....... --- 18.78 --- 20.35 29 24.44 30 25.19 438 26.02
Multi-family................. 72 6.49 72 7.45 264 10.52 264 10.16 264 8.95
Construction loans........... --- 4.30 --- 3.07 --- 3.37 --- 5.14 --- 6.04
Commercial loans............. --- 5.01 --- 1.65 --- .01 --- .01 --- .01
Consumer loans............... 86 4.28 33 4.06 24 2.55 20 1.97 39 1.69
Unallocated.................. 1,929 --- 1,927 --- 1,692 --- 1,689 --- 1,261 ---
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total................... $2,087 100.00% $2,032 100.00% $2,009 100.00% $2,013 100.00% $2,050 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</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.
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 U.S. Treasury and agency
securities, investment in two Indiana limited partnerships, investment in an
insurance company and FHLB stock. At June 30, 1998, approximately $11.7 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 6.0% 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,
-------------------------------------------------------------------------
1998 1997 1996
-------------------- --------------------- --------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
(In Thousands)
Securities available for sale (1):
<S> <C> <C> <C> <C> <C> <C>
Federal agencies................. $2,999 $3,049 $ 3,001 $2,998 $ 1,000 $1,000
Marketable equity securities..... --- --- --- --- --- ---
------ ------ -------- ------ -------- ------
Total securities available
for sale....................... 2,999 3,049 3,001 2,998 1,000 1,000
------ ------ -------- ------ -------- ------
Securities held to maturity (2):
U.S. Treasury.................... 1,000 999 2,001 1,988 3,015 2,975
Federal agencies................. 1,000 1,000 2,000 1,991 6,954 6,917
State and municipal.............. --- --- 610 610 610 605
Other ........................... --- --- --- --- 988 1,000
------ ------ -------- ------ -------- ------
Total securities held
to maturity.................... 2,000 1,999 4,611 4,589 11,567 11,497
------ ------ -------- ------ -------- ------
Real estate limited partnerships.... 4,883 (4) 1,449 (4) 1,624 (4)
Investment in insurance
company.......................... 650 (4) --- --- --- ---
FHLB stock (3)...................... 1,134 1,134 1,047 1,047 988 988
------- ------- -------
Total investments.............. $11,666 $10,108 $15,179
======= ======= =======
</TABLE>
(1) In accordance with SFAS No. 115, securities available for sale are
recorded at market value in the financial statements.
(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.
<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, 1998.
<TABLE>
<CAPTION>
Amount at June 30, 1998 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................. $ --- ---% $2,999 6.42% $ --- ---%
------ ---- ------ ---- ------ ----
Total securities available
for sale....................... --- --- 2,999 6.42 --- ---
------ ---- ------ ---- ------ ----
Securities held to maturity (2):
U.S. Treasury.................... 1,000 5.13 --- --- --- ---
Federal agencies................. 1,000 5.53 --- --- --- ---
State and municipal.............. --- --- --- --- --- ---
Other ........................... --- --- --- --- --- ---
------ ---- ------ ---- ------ ----
Total securities held
to maturity.................... 2,000 5.33 --- --- --- ---
------ ---- ------ ---- ------ ----
FHLB stock.......................... --- --- --- --- 1,134 7.96
------ ---- ------ ---- ------ ----
Total investments.............. $2,000 5.33% $2,999 6.42% $1,134 7.96%
====== ==== ====== ==== ====== ====
</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-87") 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-87 at
inception of the project in January, 1988. The Bank has invested approximately
$3.41 million in Pedcor-87 with no additional annual capital contribution
remaining to be paid. The tax credits resulting from Pedcor-87'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.
Pedcor-87 has incurred operating losses from its operations primarily due
to rent limitations for subsidized housing, increased operating costs 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-87 on the equity method, and, accordingly, has recorded
its shares of these losses as reductions to its investment in Pedcor-87, which
at June 30, 1998, was approximately $1.3 million.
In August 1997, the Bank entered into another limited partnership with
Pedcor Investments organized to build, own, operate and lease a 72 unit
apartment complex in Berrien Springs, Michigan. The Bank owns 99% of the limited
partnership interest in Pedcor Investments-1997-XXIX ("Pedcor-97"). The Bank
will contribute $3.6 million over 10 years and will receive an estimated $3.7
million in tax credits.
The following summarizes the Bank's equity in Pedcor-87's and Pedcor-97's
losses and tax credits recognized in the Company's consolidated financial
statements:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Investment in Pedcor-87.......... $1,275 $1,449 $1,624 $1,527 $1,422
====== ====== ====== ====== ======
Equity in losses, net
of income tax effect........ $ (105) $ (184) $ (117) $ (111) $ (137)
Tax credit....................... 326 405 405 405 405
------ ------ ------ ------ ------
Increase in after-tax net income
from Pedcor-87 investment... $ 221 $ 221 $ 288 $ 294 $ 268
====== ======= ======= ======= =======
Investment in Pedcor-97.......... $3,608
======
Equity in losses, net
of income tax effect........ $ (16)
Tax credit....................... ---
------
Decrease in after-tax net income
from Pedcor-97 investment... $ (16)
======
</TABLE>
In June 1998, the Company capitalized on a unique opportunity to focus
and energize its life insurance product offerings through an equity
participation in Family Financial Life Insurance Company. Family Financial Life
is a fully chartered life insurance company owned by a group of savings banks.
In operation since 1984, Family Financial Life has had an impressive track
record of growth, profits and returns to its financial institution owners. We
are now offering a full range of life and annuity products with a most
advantageous method to increase insurance earnings and exercise complete control
over the quality of insurance products and services.
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%,
although the OTS has proposed a reduction of the percentage to 4%. 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, 1998, the Bank had
liquid assets of $9.8 million, and a regulatory liquidity ratio of 7.3%, of
which 4.6% 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 also has approximately $2.5 million of 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.
An analysis of the Bank deposit accounts by type, maturity, and rate at
June 30, 1998, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening June 30, % of Average
Type of Account Balance 1998 Deposits Rate
- ---------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Withdrawable:
<S> <C> <C> <C> <C>
Savings accounts....................... $ 10.00 $16,708 12.43% 2.81%
NOW and other transactions accounts.... 10.00 27,091 20.15 3.19
-------- ------
Total withdrawable........................ 43,799 32.58 3.05
-------- ------
Certificates (original terms):............
28 days................................ 500 545 .41 4.27
91 days................................ 500 1,042 .78 4.31
182 days............................... 500 11,232 8.36 4.92
9 months............................... 10,000 1,424 1.06 5.28
12 months.............................. 500 6,392 4.76 4.83
18 months.............................. 500 3,719 2.77 5.37
24 months.............................. 500 14,009 10.42 5.92
30 months.............................. 500 4,474 3.33 5.01
36 months.............................. 500 1,085 .81 5.47
48 months.............................. 500 6,455 4.80 7.31
60 months.............................. 500 9,604 7.15 6.30
72 months.............................. 500 31 .02 5.45
96 months.............................. 500 353 .26 6.50
Special term CDs....................... 500 597 .44 5.63
IRAs
28 days................................ 500 2 --- 3.71
91 days................................ 500 43 .03 4.31
182 days............................... 500 40 .03 4.81
9 months............................... 500 54 .04 5.35
12 months.............................. 500 295 .22 4.72
18 months.............................. 500 294 .22 5.52
24 months.............................. 500 2,005 1.49 6.00
30 months.............................. 500 770 .57 5.05
36 months.............................. 500 110 .08 5.09
48 months.............................. 500 5,194 3.86 7.85
60 months.............................. 500 19,290 14.35 6.67
72 months.............................. 500 521 .39 5.54
96 months.............................. 500 970 .72 6.53
Special term IRAs...................... 500 66 .05 5.81
-------- ------
Total certificates (1).................... 90,616 67.42 6.01
-------- ------
Total deposits............................ $134,415 100.00% 5.04
======== ======
</TABLE>
(1) Including $11.3 million in certificates of deposit of $100,000 or more.
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,
----------------------------------------------
1998 1997 1996
------- ------- --------
(In Thousands)
Under 5%........... $17,135 $15,970 $14,088
5.00 - 6.99%....... 52,365 45,722 50,836
7.00 - 8.99%....... 21,116 23,165 22,961
9.00% and over..... --- --- ---
------- ------- -------
Total.............. $90,616 $84,857 $87,885
======= ======= =======
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, 1998, have been allocated based upon certain rollover
assumptions.
Amounts At
June 30, 1998, Maturing in
------------------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
------- ----- ----- -----------
(In Thousands)
Under 5%....... $15,685 $ 699 $ 751 $ ---
5.00 - 6.99%... 16,650 23,884 7,987 3,844
7.00 - 8.99%... 9,747 10,923 --- 446
------- ------- -------- ------
Total ......... $42,082 $35,506 $ 8,738 $4,290
======= ======= ======== ======
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,
1998.
Maturity Period (In Thousands)
- ------------------------ --------------
Three months of less........................................ $ 868
Greater than three months through six months................ 500
Greater than six months through twelve months............... 2,020
Over twelve months.......................................... 7,950
-------
Total....................................................... $11,338
=======
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.
<TABLE>
<CAPTION>
DEPOSIT ACTIVITY
Increase Increase
(Decrease) (Decrease)
Balance at from Balance at from
June 30, % of June 30, June 30, % of June 30,
1998 Deposits 1997 1997 Deposits 1996
-------- ------ ------- -------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Withdrawable:
Savings accounts.............. $16,708 12.43% $1,025 $15,683 12.88% $(1,889)
NOW and other transactions
accounts.................... 27,091 20.15 5,861 21,230 17.43 427
-------- ------ ------- -------- ------ -------
Total withdrawable............... 43,799 32.58 6,886 36,913 30.31 (1,462)
-------- ------ ------- -------- ------ -------
Certificates (original terms):
28 days....................... 545 .41 448 97 .08 (224)
91 days....................... 1,042 .78 (47) 1,089 .89 119
182 days...................... 11,232 8.36 1,925 9,307 7.64 (260)
9 months...................... 1,424 1.06 1,242 --- --- ---
12 months..................... 6,392 4.76 (8,092) 14,484 11.89 (499)
18 months..................... 3,719 2.77 1,938 1,781 1.46 522
24 months..................... 14,009 10.42 11,977 2,032 1.67 470
30 months..................... 4,474 3.33 (3,229) 7,703 6.33 (2,239)
36 months..................... 1,085 .81 (340) 1,425 1.17 (349)
48 months..................... 6,455 4.80 709 5,746 4.72 (385)
60 months..................... 9,604 7.15 (1,478) 11,082 9.10 (778)
72 months..................... 31 .02 3 28 .02 (11)
96 months..................... 353 .26 (24) 377 .31 8
Special term CDs.............. 597 .44 597 --- --- ---
IRAs
28 days....................... 2 --- --- 2 .00 1
91 days....................... 43 .03 20 23 .02 (159)
182 days...................... 40 .03 (134) 174 .14 13
9 months...................... 54 .04 54 --- --- ---
12 months..................... 295 .22 (322) 617 .51 151
18 months..................... 294 .22 56 238 .20 182
24 months..................... 2,005 1.49 471 1,534 1.26 1,496
30 months..................... 770 .57 (110) 880 .72 (103)
36 months..................... 110 .08 72 38 .03 (25)
48 months..................... 5,194 3.86 379 4,815 3.95 47
60 months..................... 19,290 14.35 (627) 19,917 16.36 (858)
72 months..................... 521 .39 (64) 585 .48 (30)
96 months..................... 970 .72 87 883 .72 (117)
Special term IRAs............. 66 .05 66 --- --- ---
-------- ------ ------- -------- ------ -------
Total certificates.......... 90,616 67.42 5,759 84,857 69.69 (3,028)
-------- ------ ------- -------- ------ -------
Total deposits.............. $134,415 100.00% $12,645 $121,770 100.00% $(4,490)
======== ====== ======= ======== ====== =======
</TABLE>
<TABLE>
<CAPTION>
DEPOSIT ACTIVITY
Increase
(Decrease)
Balance at from Balance at
June 30, % of June 30, June 30, % of
1996 Deposits 1996 1995 Deposits
---------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Withdrawable:
Savings accounts............... $ 17,572 13.92% $(1,207) $ 18,779 15.57%
NOW and other transaction
accounts..................... 20,803 16.47 2,365 18,438 15.29
-------- ------ ------- -------- ------
Total withdrawable................ 38,375 30.39 1,158 37,217 30.86
-------- ------ ------- -------- ------
Certificates (original terms):
28 days........................ 321 .25 18 303 .25
91 days........................ 970 .77 (72) 1,042 .86
182 days....................... 9,567 7.58 (2,062) 11,629 9.64
12 months...................... 14,983 11.87 5,842 9,141 7.58
18 months...................... 1,259 1.00 (486) 1,745 1.45
24 months...................... 1,562 1.24 (420) 1,982 1.64
30 months...................... 9,942 7.87 (1,029) 10,971 9.10
36 months...................... 1,774 1.41 302 1,472 1.22
48 months...................... 6,131 4.86 (60) 6,191 5.13
60 months...................... 11,860 9.39 619 11,241 9.32
72 months...................... 39 .03 (1) 40 .03
96 months...................... 369 .29 (15) 384 .32
IRAs
28 days........................ 1 .00 (24) 25 .02
91 days........................ 182 .14 208 162 .13
182 days....................... 161 .13 (88) 249 .21
12 months...................... 466 .37 132 334 .28
18 months...................... 56 .04 (78) 134 .11
24 months...................... 38 .03 --- 38 .03
30 months...................... 983 .78 (170) 1,153 .96
36 months...................... 63 .05 29 34 .03
48 months...................... 4,768 3.78 325 4,443 3.68
60 months...................... 20,775 16.45 1,721 19,054 15.80
72 months...................... 615 .49 (8) 623 .52
96 months...................... 1,000 .79 (6) 1,006 .83
-------- ------ ------- -------- ------
Total certificates................ 87,885 69.61 4,489 83,396 69.14
-------- ------ ------- -------- ------
Total deposits.................... $126,260 100.00% $ 5,647 $120,613 100.00%
======== ====== ======= ======== ======
</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, 1998, FHLB of
Indianapolis advances totaled $13.7 million, representing 7.1% of total assets.
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,
1998 1997 1996
---------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB Advances:
Average balance outstanding.................. $10,840 $7,382 $6,694
Maximum amount outstanding at any month-end
during the period....................... 13,684 8,233 6,963
Weighted average interest rate
during the period....................... 6.01% 6.27% 6.83%
Weighted average interest rate at
end of period........................... 6.08% 6.14% 6.50%
</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 $2.3 million at June 30, 1998.
At June 30, 1998, the Bank's investment in First Marion totaled $2.2
million. During the year ended June 30, 1998, First Marion had net income of
$50,000.
Employees
As of June 30, 1998, the Bank employed 44 persons on a full-time basis
and nine 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.
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 institutions,
credit unions, certain non-banking consumer lenders, and other companies or
firms, including brokerage houses and mortgage brokers, that provide similar
services in Grant and Adams Counties. The Bank must also compete 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 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 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 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 merge or establish de novo branches on a
reciprocal basis. This new legislation may also result in increased competition
for the Bank and MCHI.
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. See "Regulation -- Acquisitions or Dispositions and
Branching."
The primary factors in competing for deposits are interest rates and
convenience of office locations. The Bank competes for loan originations
primarily through the efficiency and quality of services it provides borrowers
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 which
are not readily predictable.
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 and it is a member of the Savings Association Insurance Fund (the
"SAIF") which is adminsitered 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 the OTS 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").
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 quarterly assessment rates range from
.01164% of assets for associations with assets of $67 million or less to .00308%
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, 1998, was $27,235.
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.
The United States Congress is considering legislation that would
require all federal savings associations, such as the Bank, to either convert to
a national bank or a state-chartered financial institution by a specified date
to be determined. In addition, under the legislation, the Holding Company likely
would not be regulated as a savings and loan holding company, but rather as a
bank holding company. The proposed legislation would abolish the OTS and
transfer its functions among the other federal banking regulators. Certain
aspects of the legislation remain to be resolved and therefore no assurance can
be given as to whether or in what form the legislation will be enacted or its
effect on the Holding Company and the Bank.
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 beginning
of each year. The Bank is currently in compliance with this requirement. At June
30, 1998, the Bank's investment in stock of the FHLB of Indianapolis was
$1,134,400.
In past years, the Bank received dividends on its FHLB stock. All 12
FHLBs 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 FHLB's ability to pay
dividends and the value of FHLB stock in the future. For the year ending June
30, 1998, dividends paid to the Bank totaled $86,000, for an annual rate of
8.06%.
The FHLB of Indianapolis serves as a reserve or central bank for member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHLB and the Board of Directors of the FHLB of Indianapolis.
All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. Current law prescribes eligible collateral as 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.
Liquidity
Federal regulations require the Bank to maintain minimum levels of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of mutual
funds and certain corporate debt securities and commercial paper) equal to an
amount not less than a specified percentage of its net withdrawable deposit
accounts plus short-term borrowings. This liquidity requirement may be changed
from time to time by the OTS to an amount within the range of 4% to 10%
depending upon economic conditions and savings flows of member institutions. The
OTS recently lowered the level of liquid assets that must be held by a savings
association from 5% to 4% of the association's net withdrawable accounts plus
short-term borrowings based upon the average daily balance of such liquid assets
for each quarter of the association's fiscal year. The Bank has historically
maintained its liquidity ratio at a level in excess of that required. At June
30, 1998, the Bank's liquidity ratio was 7.3% and has averaged ____% over the
past three years. The Bank has never been subject to monetary penalties for
failure to meet its liquidity requirements.
Insurance of Deposits
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. Currently, thrifts may convert from one insurance fund to
the other upon payment of certain exit and entrance fees. Such fees need not be
paid if a SAIF member converts to a bank charter or merges with a bank, 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.
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.
For the first six months of 1995, the assessment schedule for BIF
members and SAIF members ranged from .23% to .31% of deposits. As is the case
with the SAIF, the FDIC is authorized to adjust the insurance premium rates for
banks that are insured by the BIF of the FDIC in order to maintain the reserve
ratio of the BIF at 1.25% of BIF-insured deposits. As a result of the BIF
reaching its statutory reserve ratio, the FDIC in 1995 revised the premium
schedule for BIF insured institutions to provide a range of .04% to .31% of
deposits. The revisions became effective in the third quarter of 1995. At that
time, healthy BIF-insured banks paid premiums of approximately $.04 per $100 in
deposits compared to $.23 per $100 in deposits paid by healthy SAIF-insured
institutions. The BIF rates were further revised, effective January 1996, to
provide a range of 0% to .27%, eliminating insurance premiums for healthy
BIF-insured banks. The SAIF rates, however, were not adjusted. At the time the
FDIC revised the BIF premium schedule, it noted that, absent legislative action
(as discussed below), the SAIF would not attain its designated reserve ratio
until the year 2002. As a result, SAIF-insured members would continue to be
generally subject to higher deposit insurance premiums than BIF-insured
institutions until, all things being equal, the SAIF attained its required
reserve ratio of 1.25% of BIF-insured deposits.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provided for a one time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provided for the merger of the BIF and the SAIF on January 1,
1999, if no savings associations then exist. The special assessment rate was
established by the FDIC at .657% of deposits, and the resulting assessment of
$776,717 on the Bank was accrued in September, 1996. This special assessment
significantly increased noninterest expense and adversely affected the MCHI's
results of operations for the three months ended September 30, 1996. As a result
of the special assessment, the Bank's deposit insurance premiums were reduced to
6.48 basis points based upon its current risk classification and the new
assessment schedule for SAIF-insured institutions. These premiums are subject to
change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC has equalized the SAIF
assessment schedule with the BIF assessment schedule, SAIF-insured institutions
remain subject to a FICO assessment as a result of this continuing obligation.
Although the legislation also now requires assessments to be made on
BIF-assessable deposits for this purpose, effective January 1, 1997, that
assessment is limited to 20% of the rate imposed on SAIF assessable deposits
until the earlier of September 30, 1999, or when no savings association
continues to exist, thereby imposing a greater burden on SAIF member
institutions such as the Bank. Thereafter, however, assessments on BIF-member
institutions are expected to be made on the same basis as SAIF-member
institutions.
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 up to 100% of tangible capital) 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, 1998, the Bank was
in compliance with all capital requirements.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. 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. An
institution with an "above normal" level of exposure will have to maintain
additional capital equal to one-half the difference between its measured
interest rate risk (the most adverse change in the market value of its portfolio
resulting from a 200-basis point move in interest rates divided by the estimated
market value of its assets) and 2%, multiplied by the market value of its
assets. That dollar amount of capital is in addition to an institution's
existing risk-based capital requirement. Although the OTS has decided to delay
implementation of this rule, it will continue to closely 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 to specific sanctions provided in Financial
Institutions Reform, Recovery, and Enforcement Act ("FIRREA") for failing to
meet capital requirements, 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.
Prompt Corrective Action
Federal Deposit Insurance Corporation Improvement Act of 1991, as
amended ("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, 1998, 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.
"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 restrictions 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 may, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to the greater
of (a) 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 smallest excess
over its capital requirements) at the beginning of the calendar year; or (b) 75%
of its net income for the most recent four quarter period. Any additional amount
of capital distributions would require prior regulatory approval.
The OTS has proposed revisions to these regulations which would permit
a savings association, without filing a prior notice or application with the
OTS, to make a capital distribution to its shareholders in a maximum amount that
does not exceed the association's undistributed net income for the prior two
years plus the amount of its undistributed income from the current year. This
proposed rule would require a savings association, such as the Bank, that is a
subsidiary of a savings and loan holding company to file a notice with the OTS
before making a capital distribution up to the "maximum amount" described above.
The proposed rule would also require all savings associations, whether under a
holding company or not, to file an application with the OTS prior to making any
capital distribution where the association is not eligible for "expedited
processing" under the OTS "Expedited Processing Regulation," or where the
proposed distribution, together with any other distributions made in the same
year, would exceed the maximum amount described above.
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. On August 27, 1996, the federal banking agencies added asset
quality and earning standards to the safety and soundness guidelines.
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.
Transactions with Affiliates
The Bank and MCHI are subject to Sections 22(h), 23A and 23B of the
Federal Reserve Act, which restrict financial transactions between banks and
affiliated companies. The statute limits credit transactions between a bank and
its executive officers and its affiliates, prescribes terms and conditions for
bank affiliate transactions deemed to be consistent with safe and sound banking
practices, and restricts the types of collateral security permitted in
connection with a bank's extension of credit to an affiliate.
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. 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. Under current law, there are
generally no restrictions on the permissible business activities of a unitary
savings and loan holding company.
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, 1998, 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.
Indiana law permits federal and state savings association holding
companies with their home offices located outside of Indiana to acquire savings
associations whose home offices are located in Indiana and savings association
holding companies with their principal place of business in Indiana ("Indiana
Savings Association Holding Companies") upon receipt of approval by the Indiana
Department of Financial Institutions. Moreover, Indiana Savings Association
Holding Companies may acquire savings associations with their home offices
located outside of Indiana and savings associations holding companies with their
principal place of business located outside of Indiana upon receipt of approval
by the Indiana Department of Financial Institutions.
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. If MCHI has fewer than 300 shareholders, it may deregister the
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 conditions 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 consist primarily of housing
related loans and investments. Certain assets are subject to a percentage
limitation of 20% of portfolio 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, 1998, 79.75% 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. The Bank expects
to continue to qualify as a QTL, although there can be no such assurance.
Acquisitions or Dispositions and Branching
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to
the extent permitted by federal statute. Federal
statutes permit federal savings associations to branch outside of their home
state if the association meets the domestic building and loan test in
ss.7701(a)(19) of the Code or the asset composition test of ss.7701(c) of the
Code. Branching that would result in the formation of a multiple savings and
loan holding company controlling savings associations in more than one state is
permitted if the law of the state in which the savings association to be
acquired is located specifically authorizes acquisitions of its state-chartered
associations by state- chartered associations or their holding companies in the
state where the acquiring association or holding company is located. Moreover,
Indiana banks and savings associations are permitted to acquire other Indiana
banks and savings associations and to establish branches throughout Indiana.
In addition, 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 Indiana Branching Law authorizes Indiana banks to
branch interstate by merger or de novo expansion. The Indiana Branching Law,
effective March 15, 1996, provided that 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 merge or establish de novo branches on a reciprocal
basis.
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- outstanding, satisfactory, unsatisfactory
and needs improvement -- 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 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 is not 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.
State Taxation
The Bank is subject to Indiana's Financial Institutions Tax ("FIT"),
which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted
gross income," for purposes of FIT, begins with taxable income as defined by
Section 63 of the Code and, thus, incorporates federal tax law to the extent
that it affects the computation of taxable income. Federal taxable income is
then adjusted by several Indiana modifications the most notable of which is the
required addback of interest that is tax-free for federal income tax purposes.
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.
Other
The Securities and Exchange Commission maintains a Web site that
contains reports, proxy information statements, and other information regarding
registrants that file electronically with the Commission, including the Company.
The address is (http://www.sec.gov).
Item 2. Properties.
At June 30, 1998, 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, 1998:
<TABLE>
<CAPTION>
Net Book Value
Total Deposits of Property,
at Furniture
Owned or Year June 30, & Approximate
Description and Address Leased Opened 1998 Fixtures Square Footage
- ----------------------- ------ ------ ---- -------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Main Office in Marion
100 West Third Street.................. Owned 1936 $112,039 $1,382 17,949
Location in Decatur
1045 South 13th Street................. Owned 1974 10,409 146 3,611
Walmart Supercenter in Marion
3240 S. Western........................ Leased 1997 1,104 249 540
Location in Gas City
1010 E. Main Street.................... Owned 1997 10,863 152 2,276
</TABLE>
The Company opened its first automated teller machine in May, 1995 at its
Marion branch and now maintains a ATM at each branch location.
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 $235,000 at June 30, 1998.
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 $24,500 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, 1998.
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 64) 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 50) 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 48) 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.
Tim D. Canode (age 53) 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.
<TABLE>
<CAPTION>
Quarter Dividends
Ended High Low Declared
----- ---- --- --------
<S> <C> <C> <C> <C>
June 30, 1998.......... $28 1/2 $29 1/2 $28 $.22
March 31, 1998......... 28 1/2 29 25 7/8 .22
December 31, 1997...... 27 1/8 28 1/8 26 1/4 .22
September 30, 1997..... 28 28 22 .22
June 30, 1997.......... 28 23 1/4 22 1/2 .22
March 31, 1997......... 22 22 19 1/4 .20
December 31, 1996...... 19 1/4 21 1/2 19 1/4 .20
September 30, 1996..... 20 1/2 21 20 .20
</TABLE>
As of July 31, 1998, there were 426 record holders of MCHI's Common Stock.
MCHI estimates that, as of that date, there were approximately 850 additional
shareholders in "street" name. The Company's percentage of dividends per share
to net income per share on a diluted basis was 68.2%, 62.6% and 60.2% for the
years ended June 30, 1998, 1997 and 1996, 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 (a) 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 (the smallest excess over
its capital requirements), or (b) 75% of its net income over the most recent
four-quarter period. Any additional amount of capital distributions would
require prior regulatory approval.
The OTS has proposed revisions to these regulations which would permit a
savings association, without filing a prior notice or application with the OTS,
to make a capital distribution to its shareholders in a maximum amount that does
not exceed the association's undistributed net income for the prior two years
plus the amount of its undistributed income from the current year. This proposed
rule would require a savings association, such as the Bank, that is a subsidiary
of a savings and loan holding company to file a notice with the OTS before
making a capital distribution up to the "maximum amount" described above. The
proposed rule would also require all savings associations, whether under a
holding company or not, to file an application with the OTS prior to making any
capital distribution where the association is not eligible for "expedited
processing" under the OTS "Expedited Processing Regulation," or where the
proposed distribution, together with any other distributions made in the same
year, would exceed the "maximum amount" described above.
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. 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.
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
2 of MCHI's Shareholder Annual Report for its fiscal year ended June 30, 1998
(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
3 through 16 of the Shareholder Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this item is incorporated by reference to
pages 3 through 5 of the Shareholder Annual Report.
Item 8. Financial Statements and Supplementary Data.
MCHI's Consolidated Financial Statements and Notes thereto contained on
pages 17 through 44 in the Shareholder Annual Report are incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no such changes or disagreements during the applicable
period.
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
1998 Annual Shareholder Meeting (the "1998 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 1998 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 1998 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to
page 3 of the 1998 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
page 6 of the 1998 Proxy Statement.
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, 1998, and
1997
Consolidated Statement of Income for the Fiscal Years ended June 30,
1998, 1997 and 1996
Consolidated Statement of Changes in Shareholders' Equity for the
Fiscal Years ended June 30, 1998, 1997 and 1996
Consolidated Statement of Cash Flows for the Fiscal Years ended June
30, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
(b) MCHI filed no reports on Form 8-K during the fourth quarter ended June 30,
1998.
(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 24, 1998 /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 24th day of September,
1998.
/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/ W. Gordon Coryea
- ------------------------------ -----------------------------
Larry G. Phillips W. Gordon Coryea, Director
Senior Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
/s/ Jerry D. McVicker
-----------------------------
Jerry D. McVicker, Director
/s/ Jack O. Murrell
-----------------------------
Jack O. Murrell, Director
/s/ George L. Thomas
-----------------------------
George L. Thomas, Director
/s/ Jon R. Marler
-----------------------------
Jon R. Marler, 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 Registrant's definitive Proxy
Statement in respect of its 1993 Annual Shareholder meeting.
10(2) Recognition and Retention Plans and Trusts are incorporated by
reference to Exhibit B to the Registrant's definitive Proxy
Statement in respect of its 1993 Annual Shareholder meeting.
10(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). First Amendment to Director
Deferred Compensation Agreement of Merritt B. McVicker dated
December 1, 1996 is incorporated by reference to Exhibit 10(3) of
the Registrant's Form 10-K for the period ended June 30, 1997.
10(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 Director Deferred
Compensation Agreement of John M. Dalton dated December 1, 1996 is
incorporated by reference to Exhibit 10(4) of the Registrant's
Form 10-K for the period ended June 30, 1997.
10(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 Director
Deferred Compensation Agreement of Robert D. Burchard dated
December 1, 1996 is incorporated by reference to Exhibit 10(5) of
the Registrant's Form 10-K for the period ended June 30, 1997.
10(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 Director Deferred
Compensation Agreement of James (Jack ) O. Murrell dated December
1, 1996 is incorporated by reference to Exhibit 10(6) of the
Registrant's Form 10-K for the period ended June 30, 1997.
10(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 Director Deferred
Compensation Agreement of W. Gordon Coryea dated December 1, 1996
is incorporated by reference to Exhibit 10(7) of the Registrant's
Form 10-K for the period ended June 30, 1997.
<PAGE>
Exhibit Index Page
10(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 Director Deferred
Compensation Agreement of George L. Thomas dated December 1, 1996
is incorporated by reference to Exhibit 10(8) of the Registrant's
Form 10-K for the period ended June 30, 1997.
10(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 is
incorporated by reference to Exhibit 10(9) to the Annual Report on
Form 10-K for fiscal year ended June 30, 1994.
10(10) Defered 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).
10(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).
10(12) Restated Executive Supplemental Retirement Agreement effective
December 1, 1996 between the Bank and John M. Dalton is
incorporated by reference to Exhibit 10(12) of the Registrant's
Form 10-K for the period ended June 30, 1997.
10(13) Restated Executive Supplemental Retirement Agreement effective
December 1, 1996 between the Bank and Robert D. Burchard is
incorporated by reference to Exhibit 10(13) of the Registrant's
Form 10-K for the period ended June 30, 1997.
10(14) Restated Executive Supplemental Retirement Agreement effective
December 1, 1996 between the Bank and Jackie Noble is incorporated
by reference to Exhibit 10(14) of the Registrant's Form 10-K for
the period ended June 30, 1997.
10(15) Restated Executive Supplemental Retirement Agreement effective
December 1, 1996 between the Bank and Nora Kuntz is incorporated
by reference to Exhibit 10(15) of the Registrant's Form 10-K for
the period ended June 30, 1997.
10(16) Executive Supplemental Retirement Agreement effective December 1,
1996 between the Bank and Larry G. Phillips is incorporated by
reference to Exhibit 10(16) of the Registrant's Form 10-K for the
period ended June 30, 1997.
10(17) 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).
10(18) Death Benefit Agreement between the Bank and Steven L. Banks dated
December 1, 1996 is incorporated by reference to Exhibit 10(18) of
the Registrant's Form 10-K for the period ended June 30, 1997 .
10(19) Excess Benefit Agreement dated as of Februry 28, 1996
between the Bank and John M. Dalton is incorporated by reference
to Exhibit 10(18) to the Annual Report on Form 10-K for the fiscal
year ended June 30, 1996. First Amendment to Excess Benefit
Agreement of John M. Dalton dated December 1, 1996 is incorporated
by reference to Exhibit 10(19) of the Registrant's Form 10-K for
the period ended June 30, 1997.
<PAGE>
Exhibit Index Page
10(20) Excess Benefit Agreement dated as of Februry 28, 1996 between the
Bank and Robert D. Burchard is incorporated by reference to
Exhibit 10(19) to the Annual Report on Form 10-K for the fiscal
year ended June 30, 1996. First Amendment to Excess Benefit
Agreement of Robert D. Burchard dated December 1, 1996 is
incorporated by reference to Exhibit 10(20) of the Registrant's
Form 10-K for the period ended June 30, 1997.
10(21) Director Emeritus Agreement dated March 1, 1996 between the Bank
and W. Gordon Coryea and First Amendment to such agreement dated
December 1, 1996 is incorporated by reference to Exhibit 10(21) of
the Registrant's Form 10-K for the period ended June 30, 1997.
10(22) Director Emeritus Agreement dated March 1, 1996 between the Bank
and George L. Thomas and First Amendment to such agreement dated
December 1, 1996 is incorporated by reference to Exhibit 10(22) of
the Registrant's Form 10-K for the period ended June 30, 1997.
10(23) Director Emeritus Agreement dated March 1, 1996 between the Bank
and John M. Dalton and First Amendment to such agreement dated
December 1, 1996 is incorporated by reference to Exhibit 10(23) of
the Registrant's Form 10-K for the period ended June 30, 1997.
10(24) Director Emeritus Agreement dated March 1, 1996 between the Bank
and Jack O. Murrell and First Amendment to such agreement dated
December 1, 1996 is incorporated by reference to Exhibit 10(24) of
the Registrant's Form 10-K for the period ended June 30, 1997.
10(25) Contingent Executive Supplemental Retirement Income Agreement
between the Bank and Steven L. Banks dated December 1, 1996 is
incorporated by reference to Exhibit 10(25) of the Registrant's
Form 10-K for the period ended June 30, 1997.
10(26) Rabbi Trust for the Director Deferred Compensation Master
Agreement and Director Emeritus Plan dated December 1, 1996 is
incorporated by reference to Exhibit 10(26) of the Registrant's
Form 10-K for the period ended June 30, 1997.
10(27) Rabbi Trust for the Executive Supplemental Retirement Income Plans
and Excess Benefit Plans dated December 1, 1996 is incorporated by
reference to Exhibit 10(27) of the Registrant's Form 10-K for the
period ended June 30, 1997.
13 1998 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 Auditors ____
27.1 Financial Data Schedule for Period Ended June 30, 1998 ____
27.2 Restated Financial Data Schedule for Period Ended June 30, 1997 ____
27.3 Restated Financial Data Schedule for Period Ended June 30, 1996 ____
- -----------------
* Management contracts and plans required to be filed as exhibits
are included as Exhibits 10(1)-10(27).
Message to Shareholders...................................................... 1
Selected Consolidated Financial Data......................................... 2
Management's Discussion and Analysis......................................... 3
Independent Auditor's Report.................................................17
Consolidated Statement of Financial Condition................................18
Consolidated Statement of Income.............................................19
Consolidated Statement of Changes in Shareholders' Equity....................20
Consolidated Statement of Cash Flows.........................................21
Notes to Consolidated Financial Statements...................................23
Directors and Officers.......................................................45
Shareholder Information......................................................47
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 three branch offices--one
in Decatur, Indiana, one inside the Wal-Mart Supercenter in Marion, Indiana and
one in Gas City, Grant County, 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, except that during the years ended June
30, 1997 and 1998, MCHI extended $3.0 million in loans, and during the year
ended June 30, 1998, MCHI invested $650,000 into an insurance company affiliate.
MCHI is the sole shareholder of First Federal.
<PAGE>
To Our Shareholders
It has now been over five years since Marion Capital Holdings, Inc. began
operations in March 1993 as a result of the conversion of First Federal Marion
to a federal stock savings Bank. First Federal has been in existence since July
1936.
During the year ended June 30, 1998 loans, including loans held for sale,
increased to $164,475,000 or 11.2%. This was by far the largest dollar and
percentage increase in the history of this organization. The net yield on
weighted average interest-earning assets decreased from 4.29% to 4.28%
reflecting lower overall interest rates, but also reflecting the increase in
commercial and consumer loans. Assets and deposits grew by 11.9% and 10.4%,
respectively, during the year ended June 30, 1998. These increases were
primarily due to the acquisition of our Gas City, Indiana office and the
start-up of our sales office in the Marion Wal-Mart Supercenter. Both
operations, as well as the Decatur office, have done well. Gas City has exceeded
our expectations, with the Wal-Mart office slightly above our hopes.
During the fiscal year ending June 30, 1998, net income was $2,324,000, a
decrease of $116,000, or 4.8%. This decrease was primarily the result of: (1)
costs for two new branches established in the past year; and (2) an operating
loss as a result of a deed in lieu of foreclosure on a nursing home. Basic
earnings per share for the year ended June 30, 1998 were $1.32, a decrease of
2.2%. Net interest income increased to $7,240,000 or 3.0% in the past year.
Interest rate spread increased to 3.37% for the year ended June 30, 1998 from
3.21% for the year ended June 30, 1997.
As we approach the year 2000 we wish to inform you that we are placing
great emphasis on making sure our systems are ready for the year 2000 change. We
have adopted a plan and are expected to have critical steps completed well
before the end of this century.
At the end of October, 1998, George L. Thomas will be retiring from our
Board of Directors. Mr. Thomas has been an outstanding director and has served
First Federal for over 36 years and Marion Capital since its beginning in 1993.
In June 1998, we capitalized on a unique opportunity to focus and energize
our life insurance product offerings through an equity participation in Family
Financial Life Insurance Company. Family Financial Life is a fully chartered
life insurance company owned by a group of savings banks. In operation since
1984, Family Financial Life has an impressive track record of growth, profits
and returns to its financial institution owners. We are now offering a full
range of life and annuity products with a most advantageous method to increase
insurance earnings and exercise complete control over the quality of insurance
products and services.
<PAGE>
As the Board of Directors continues to focus on opportunities to enhance
stockholder value for the future, our primary objective is to grow the current
retail franchise. This includes increasing the asset size of First Federal by
capturing more business from our current customer base in addition to increasing
the services that we provide. In late 1997, we successfully completed the
acquisition of a branch and its deposit base in Gas City, and established a
retail sales office in the Marion Wal-Mart. We will continue to actively review
and pursue acquisition opportunities with a continued focus on the ultimate
long-term effect on our shareholders and franchise value.
With our high level of capital, it is difficult to generate a strong return
on equity. Your Board will continue to pursue steps to profitably leverage this
capital position. Included in the capital use plan is the intention to continue
the payment of above market dividends to our shareholders. During the last
thirteen months, through July 31, 1998, we also successfully completed the
repurchase of 158,129 shares or 9% of the outstanding stock. It is our belief
that the continued repurchasing of stock, in addition to an increased retail
presence, are the most viable methods to enhance shareholder value.
Your continued support and confidence are appreciated as we strive to
improve this financial institution.
Very truly yours,
/s/ John M. Dalton
John M. Dalton
Chairman of the Board & President
<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,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Summary of Financial Condition:
Total assets......................................... $193,963 $173,304 $177,767 $172,711 $170,799
Loans, net........................................... 163,598 148,031 143,165 136,323 127,092
Loans held for sale.................................. 877 --- --- --- ---
Cash and investment securities....................... 10,186 11,468 21,578 23,743 30,863
Real estate limited partnerships..................... 4,883 1,449 1,624 1,527 1,422
Deposits............................................. 134,415 121,770 126,260 120,613 120,965
Borrowings........................................... 17,319 8,229 6,241 6,963 3,200
Shareholders' equity................................. 37,657 39,066 41,511 41,864 44,331
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Summary of Operating Results:
Interest income...................................... $ 14,333 $13,733 $13,740 $ 12,786 $ 12,391
Interest expense..................................... 7,093 6,707 6,853 5,922 5,872
--------- ------- ------- --------- ---------
Net interest income............................... 7,240 7,026 6,887 6,864 6,519
Provision for losses on loans........................ 59 58 34 68 65
--------- ------- ------- --------- ---------
Net interest income after
provision for losses on loans................... 7,181 6,968 6,853 6,796 6,454
--------- ------- ------- --------- ---------
Other income:
Net loan servicing fees........................... 78 86 81 69 62
Annuity and other commissions..................... 142 153 147 144 211
Other income...................................... 209 181 95 76 83
Equity in losses of limited partnerships.......... (200) (305) (193) (185) (236)
Gains (losses) on sale of investments ............ --- -- -- -- 15
Life insurance income and death benefits.......... 175 808 117 108 21
--------- ------- ------- --------- ---------
Total other income................................ 404 923 247 213 155
--------- ------- ------- --------- ---------
Other expense:
Salaries and employee benefits.................... 2,556 2,881 2,413 2,447 1,991
Other............................................. 1,846 2,170 1,293 1,216 1,634
--------- ------- ------- --------- ---------
Total other expense............................. 4,402 5,051 3,706 3,663 3,625
--------- ------- ------- --------- ---------
Income before income tax ............................ 3,183 2,840 3,394 3,346 2,984
Income tax expense................................... 859 400 913 916 715
--------- ------- ------- --------- ---------
Net Income........................................ $ 2,324 $ 2,440 $ 2,481 $ 2,430 $ 2,269
========= ========= ======= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Supplemental Data:
<S> <C> <C> <C> <C> <C>
Basic earnings per share.............................$ 1.32 $ 1.35 $ 1.27 $ 1.18 $ 1.02
Diluted earnings per share........................... 1.29 1.31 1.23 1.14 .99
Book value per common share at end of year........... 22.16 22.09 21.47 21.08 20.20
Return on assets (1)................................. 1.25% 1.40% 1.41% 1.41% 1.29%
Return on equity (2)................................. 5.94 6.09 5.86 5.58 5.00
Interest rate spread (3)............................. 3.37 3.21 3.01 3.20 2.96
Net yield on interest earning assets (4)............. 4.28 4.29 4.17 4.28 3.97
Operating expenses to average assets (5)............. 2.36 2.89 2.11 2.12 2.05
Net interest income to operating expenses (6)........ 1.64x 1.39x 1.86x 1.87x 1.80x
Equity-to-assets at end of year (7).................. 19.41 22.54 23.35 24.24 25.96
Average equity to average total assets............... 21.00 22.89 24.09 25.27 25.72
Average interest-earning assets to average
interest-bearing liabilities...................... 121.82 126.34 127.93 129.08 128.37
Non-performing assets to total assets................ 1.02 .81 1.07 1.13 3.20
Non-performing loans to total loans (8).............. 1.16 .94 1.18 1.27 3.59
Loan loss reserve to total loans (8)................. 1.25 1.35 1.38 1.45 1.59
Loan loss reserve to non-performing loans............ 107.71 143.98 117.07 114.87 44.21
Net charge-offs to average loans..................... --- .02 .03 .08 .05
Number of full service offices....................... 4 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) Total loans include loans held for sale.
<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 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.
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 and against problems arising in
a rising interest rate environment by having in excess of 85% of its mortgage
loans with adjustable rate features. 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.
First Federal believes it is critical to manage the relationship between
interest rates and the effect on its net portfolio value ("NPV"). This approach
calculates the difference between the present value of expected cash flows from
assets and the present value of expected cash flows from liabilities, as well as
cash flows from off-balance sheet contracts. First Federal manages assets and
liabilities within the context of the marketplace, regulatory limitations and
within its limits on the amount of change in NPV which is acceptable given
certain interest rate changes.
<PAGE>
The OTS issued a regulation, which uses a net market value methodology to
measure the interest rate risk exposure of savings associations. Under this OTS
regulation, an institution's "normal" level of interest rate risk in the event
of an assumed change in interest related is a decrease in the institution's NPV
in an amount not exceeding 2% of the present value of its assets. Savings
associations with over $300 million in assets or less than a 12% risk-based
capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is
used by the OTS to calculate changes in NPV (and the related "normal" level of
interest rate risk) based upon certain interest rate changes (discussed below).
Associations which do not meet either of the filing requirements are not
required to file OTS Schedule CMR, but may do so voluntarily. As First Federal
does not meet either or these requirements, it is not required to file Schedule
CMR, although it does so voluntarily. Under the regulation, associations which
must file are required to take a deduction (the interest rate risk capital
component) from their total capital available to calculate their risk-based
capital requirement if their interest rate exposure is greater than "normal."
The amount of that deduction is one-half of the difference between (a) the
institution's actual calculated exposure to a 200 basis point interest rate
increase or decrease (whichever results in the greater pro forma decrease in
NPV) and (b) its "normal" level of exposure which is 2% of the present value of
its assets.
Presented below, as of June 30, 1998 and 1997, is an analysis performed by
the OTS of First Federal's interest rate risk as measured by changes in NPV for
instantaneous and sustained parallel shifts in the yield curve, in 100 basis
point increments, up and down 400 basis points. At June 30, 1998 and 1997, 2% of
the present value of First Federal's assets were approximately $3.8 million and
$3.5 million. Because the interest rate risk of a 200 basis point decrease in
market rates (which was greater than the interest rate risk of a 200 basis point
increase) was $.4 million at June 30, 1998 and $1.6 million at June 30, 1997,
First Federal would not have been required to make a deduction from its total
capital available to calculate its risk based capital requirement if it had been
subject to the OTS's reporting requirements under this methodology. The decrease
in interest rate risk from 1997 to 1998 is due to an improved match of expected
cash flows from assets and liabilities.
<PAGE>
Interest Rate Risk As of June 30, 1998
<TABLE>
<CAPTION>
Change Net Portfolio Value NPV as % of Present Value of Assets
In Rates $ Amount $ Change % Change NPV Ratio Change
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+ 400 bp * $34,387 $(2,124) (6)% 18.88% (35) bp
+ 300 bp 35,650 (861) (2) 19.30 6 bp
+ 200 bp 36,521 10 0 19.53 30 bp
+ 100 bp 36,845 333 1 19.52 29 bp
0 bp 36,511 19.23
- 100 bp 36,088 (424) (1) 18.90 (33) bp
- 200 bp 36,072 (439) (1) 18.74 (49) bp
- 300 bp 36,264 (247) (1) 18.67 (56) bp
- 400 bp 36,694 183 1 18.69 (54) bp
</TABLE>
<TABLE>
<CAPTION>
Interest Rate Risk As of June 30, 1997
Change Net Portfolio Value NPV as % of Present Value of Assets
In Rates $ Amount $ Change % Change NPV Ratio Change
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+ 400 bp * $37,509 $(3,023) (7)% 22.46% (64) bp
+ 300 bp 38,899 (1,633) (4) 22.93 (17) bp
+ 200 bp 40,000 (532) (1) 23.24 14 bp
+ 100 bp 40,606 74 0 23.32 22 bp
0 bp 40,532 --- --- 23.10 --- bp
- 100 bp 39,809 (723) (2) 22.59 (51) bp
- 200 bp 38,899 (1,633) (4) 21.99 (111) bp
- 300 bp 38,510 (2,022) (5) 21.62 (148) bp
- 400 bp 38,377 (2,155) (5) 21.37 (173) bp
</TABLE>
- -----------
* Basis points.
<PAGE>
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the methods of analysis presented above. 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 adjustable rate loans, have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Most of
First Federal's adjustable-rate loans have interest rate minimums of 6.00% for
residential loans and 8.25% for commercial real estate loans. Currently,
originations of residential adjustable-rate mortgages have interest rate
minimums of 6.50%. Further, in the event of a change in interest rates, expected
rates of prepayments on loans and early withdrawals from certificates could
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,
------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------ -------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
Assets:
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning deposits........$ 4,020 $ 287 7.14%$ 3,937 $ 264 6.71% $ 4,972 $ 334 6.72%
Investment securities............ 5,739 333 5.80 9,517 528 5.55 17,306 877 5.07
Loans (1) .................... 158,212 13,627 8.61 149,170 12,862 8.62 141,946 12,456 8.78
Stock in FHLB of Indianapolis.... 1,067 86 8.06 1,002 79 7.88 927 73 7.87
-------- ------ -------- ------ -------- ------
Total interest-earning assets. 169,038 14,333 8.48 163,626 13,733 8.39 165,151 13,740 8.32
Non-interest earning assets........... 17,257 --- 11,153 -- 10,762 --
-------- ------ -------- ------ -------- ------
Total assets................... $186,295 14,333 $174,779 13,733 $175,913 13,740
======== ------ ======== ------ ======== ------
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts................. $ 15,983 447 2.80 $ 16,681 483 2.90 $18,127 588 3.24
NOW and money market accounts.... 25,071 830 3.31 19,817 657 3.32 18,718 667 3.56
Certificates of deposit.......... 86,867 5,164 5.94 85,636 5,104 5.96 84,650 5,089 6.01
-------- ------ -------- ------ -------- ------
Total deposits................ 127,921 6,441 5.04 122,134 6,244 5.11 121,495 6,344 5.22
FHLB borrowings.................. 10,840 652 6.01 7,382 463 6.27 6,694 457 6.83
Other borrowings................. --- --- -- -- 901 52 5.77
-------- ------ -------- ------ -------- ------
Total interest-bearing
liabilities................... 138,761 7,093 5.11 129,516 6,707 5.18 129,090 6,853 5.31
Other liabilities .................... 8,409 --- 5,259 -- 4,451 --
Total liabilities.............. 147,170 --- 134,775 -- 133,541 --
Shareholders' equity.................. 39,125 --- 40,004 -- 42,372 --
-------- ------ -------- ------ -------- ------
Total liabilities and shareholders'
equity .................... $186,295 $ 7,093 $174,779 6,707 $172,913 6,853
======== ------ ======== ------ ======== ------
Net interest-earning assets........... $ 30,277 $ 34,110 $ 36,061
Net interest income................... $ 7,240 $ 7,026 $ 6,887
======= ======= =======
Interest rate spread (2).............. 3.37 3.21 3.01
Net yield on weighted average
interest-earning assets (3)...... 4.28 4.29 4.17
Average interest-earning assets to average
interest-bearing liabilities..... 121.82% 126.34% 127.93%
====== ====== ======
</TABLE>
<PAGE>
(1) Average balances include loans held for sale and 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, 1998 1998 1997 1996
------------- ---- ---- ----
Weighted average interest rate earned on:
<S> <C> <C> <C> <C>
Interest-earning deposits................. 5.80% 7.14% 6.71% 6.72%
Investment securities..................... 5.98 5.80 5.55 5.07
Loans (1) ............................. 8.45 8.61 8.62 8.78
Stock in FHLB of Indianapolis............. 7.96 8.06 7.88 7.87
Total interest-earning assets......... 8.35 8.48 8.39 8.32
Weighted average interest rate cost of:
Savings accounts.......................... 2.81 2.80 2.90 3.24
NOW and money market accounts............. 3.19 3.31 3.32 3.56
Certificates of deposit................... 5.99 5.94 5.96 6.01
FHLB borrowings........................... 6.08 6.01 6.27 6.83
Other borrowings.......................... --- --- --- 5.77
Total interest-bearing liabilities.... 5.13 5.11 5.18 5.31
Interest rate spread (2)....................... 3.22 3.37 3.21 3.01
Net yield on weighted average
interest-earning assets (3)............... 4.28 4.29 4.17
</TABLE>
(1) Average balances include loans held for sale and 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, 1998, 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, 1998
compared to year
ended June 30, 1997
Interest-earning assets:
<S> <C> <C> <C>
Interest-earning deposits...................$ 23 $ 17 $ 6
Investment securities....................... (195) 23 (218)
Loans....................................... 765 (14) 779
Stock in FHLB of Indianapolis............... 7 2 5
-------- -------- -------
Total..................................... 600 28 572
-------- -------- -------
Interest-bearing liabilities:
Savings accounts............................ (36) (16) (20)
NOW and money market accounts............... 173 (1) 174
Certificates of deposit..................... 60 (13) 73
FHLB advances............................... 189 (20) 209
-------- -------- -------
Total..................................... 386 (50) 436
-------- -------- -------
Change in net interest income................... $ 214 $ 78 $ 136
======== ======== =======
Year ended June 30, 1997
compared to year
ended June 30, 1996
Interest-earning assets:
Interest-earning deposits................... $ (70) $ (1) $ (69)
Investment securities....................... (349) 77 (426)
Loans....................................... 406 (220) 626
Stock in FHLB of Indianapolis............... 6 --- 6
-------- -------- -------
Total..................................... (7) (144) 137
-------- -------- -------
Interest-bearing liabilities:
Savings accounts............................ (105) (60) (45)
NOW and money market accounts............... (10) (48) 38
Certificates of deposit..................... 15 (44) 59
FHLB advances............................... 6 (39) 45
Other borrowings............................ (52) --- (52)
-------- -------- -------
Total..................................... (146) (191) 45
-------- -------- -------
Change in net interest income................... $ 139 $ 47 $ 92
======== ======== =======
</TABLE>
<PAGE>
Changes in Financial Position and Results of Operations - Year Ended June 30,
1998, Compared to Year Ended June 30, 1997:
General. MCHI's total assets were $194.0 million at June 30, 1998, an
increase of $20.7 million or 11.9% from June 30, 1997. During 1998, average
interest-earnings assets increased $5.4 million, or 3.3%, while average
interest-bearing liabilities increased $9.2 million, or 7.1%, compared to June
30, 1997. Cash and cash equivalents and investment securities decreased $1.3
million, or 11.2%, primarily as a result of their use in funding increased loan
originations. Net loans, including loans held for sale, increased $16.4 million,
or 11.1%, primarily from originations of 1- 4 family real estate loans, and 1-4
family equity lending. 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, 1998, $877,000 of loans were held for sale pending
settlement. There were no loans in the portfolio held for sale at June 30, 1997.
Deposits increased $12.6 million, to $134.4 million, or 10.4%, at June 30, 1998
from the amount reported last year. The increase in deposits is directly
attributable to the acquisition of a new branch in Gas City, Indiana from NBD
First Chicago Bank. The branch was acquired on December 5, 1997 and deposits,
net of public funds, amounted to $11,045,017 on that date. In addition to
acquiring the deposits, the Company also acquired the branch facilities and
equipment and retained the existing staff. The deposits and intangibles were
acquired at a premium of $865,710.
MCHI's net income for the year ended June 30, 1998 was $2.3 million, a
decrease of $116,000, or 4.8% from the results for the year ended June 30, 1997.
Net interest income increased $214,000, or 3.0%, from the previous year, and
provision for losses on loans in the amount of $59,000 increasd $1,000 from that
recorded in 1997.
Salaries and employee benefits expense decreased from the prior year since
the Company recorded the expenses related to certain benefit programs in 1997
upon the death of a key employee. These additional expenses were offset by the
proceeds from key man insurance in 1997. During 1998, the Company incurred an
increase in foreclosed real estate expenses from operating a nursing home
acquired as a result of a deed in lieu of foreclosure. Occupancy expense,
equipment expense, and data processing expense also increased as a result of the
Company adding the two new local locations.
Stock Repurchases. During the year ended June 30, 1998, MCHI repurchased
96,979 shares of common stock in the open market at an average cost of $27.91,
or approximately 126.4% of average book value. This repurchase amounted to 5.5%
of the outstanding stock. Subsequent to June 30, 1998, MCHI repurchased 61,150
shares to complete the current 5% buy-back program authorized by the Board of
Directors. 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, $.20 per share for each of the
fourth four quarters, and $.22 in each quarter thereafter through June 30, 1998.
<PAGE>
Interest Income. MCHI's total interest income for the year ended June 30,
1998 was $14.3 million, which was a 4.4% increase, or $600,000, from interest
income for the year ended June 30, 1997.
Interest Expense. Total interest expense for the year ended June 30, 1998,
was $7.1 million, which was an increase of $386,000, or 5.8% from interest
expense for the year ended June 30, 1997. This increase resulted principally
from an increase in interest-bearing liabilities while average interest costs
remained relatively unchanged.
Provision for Losses on Loans. The provision for the year ended June 30,
1998, was $59,000, compared to $58,000 in 1997. The 1998 chargeoffs net of
recoveries totaled $4,000, compared to the prior year of $35,000. The ratio of
the allowance for loan losses to total loans decreased from 1.35% at June 30,
1997 to 1.25% at June 30, 1998, and the ratio of allowance for loan losses to
nonperforming loans decreased from 143.98% at June 30, 1997, to 107.71% at June
30, 1998. The 1998 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, 1998 and
1997, 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, 1998, totaled
$404,000, compared to $923,000 for 1997, a decrease of $519,000. This decrease
was due primarily to a $633,000 decrease in life insurance income and death
benefits. During the year ended June 30, 1997, the Company received death
benefit proceeds from key man life insurance policies in excess of cash
surrender value of the policies.
Other Expenses. MCHI's other expenses for the year ended June 30, 1998,
totaled $4.4 million, a decrease of $649,000, or 12.8%, from the year ended June
30, 1997. This decrease is directly attributable to the signing of the Omnibus
Appropriations Bill September 30, 1996 which imposed a FDIC special assessment
for all institutions with SAIF-insured deposits. This special assessment was
recorded for the year ended in 1997. SAIF insured institutions, like the
Company, are benefiting from a reduction of FDIC premiums which began January 1,
1997 and should have a positive effect on future earnings.
Income Tax Expense. Income tax expense for the year ended June 30, 1998,
totaled $859,000, an increase of $459,000 from the expense recorded in 1997. Tax
expense on earnings was offset by certain low-income housing tax credits which
totaled $338,000 and $423,000 for the years ended June 30, 1998 and 1997,
respectively. During the year ended June 30, 1997, income before income tax
decreased, and additional tax free income from an increase in cash value of life
insurance and death benefits was recorded. As a result, the effective tax
expense for the Company was reduced.
<PAGE>
Changes in Financial Position and Results of Operations - Year Ended June 30,
1997, Compared to Year Ended June 30, 1996:
General. MCHI's total assets were $173.3 million at June 30, 1997, a
decrease of $4.5 million or 2.5% from June 30, 1996. During 1997, average
interest-earnings assets decreased $1.5 million, or .9%, while average
interest-bearing liabilities increased $.4 million, or .3%, compared to June 30,
1996. Cash and cash equivalents and investment securities decreased $10.1
million, or 46.9%, primarily as a result of their use in funding increased loan
originations. Net loans increased $4.9 million, or 3.4%, primarily from
originations of 1- 4 family real estate loans, 1-4 family equity lending, and a
$2.5 million loan to a non-related bank holding company. 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, 1997
and 1996, no loans in the portfolio were held for sale. Deposits decreased $4.5
million, to $121.8 million, or 3.6%, at June 30, 1997 from the amount reported
last year.
MCHI's net income for the year ended June 30, 1997 was $2.4 million, a
decrease of $41,000, or 1.7% over the results for the year ended June 30, 1996.
Net interest income increased $139,000, or 2.0%, from the previous year, and
provision for losses on loans in the amount of $58,000 increasd $24,000 from
that recorded in 1996.
Stock Repurchases. During the year ended June 30, 1997, MCHI repurchased
188,887 shares of common stock in the open market at an average cost of $21.17,
or approximately 97.5% of average book value. This repurchase amounted to 9.8%
of the outstanding stock. In May, 1997, MCHI authorized another 87,905 shares,
or 5% of its outstanding stock, to be repurchased. As of June 30, 1997, no
shares had been repurchased. 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, $.20 per share for each of the
fourth four quarters, and $.22 in the most recent quarter ended June 30, 1997.
Interest Income. MCHI's total interest income for the year ended June 30,
1997 was $13.7 million, which was unchanged from interest income for the year
ended June 30, 1996.
Interest Expense. Total interest expense for the year ended June 30, 1997,
was $6.7 million, which was a decrease of $146,000, or 2.1% from interest
expense for the year ended June 30, 1996. This decrease resulted principally
from a decrease in the cost on interest bearing liabilities from 5.3% to 5.2%
while average interest earning liabilities remained relatively unchanged.
<PAGE>
Provision for Losses on Loans. The provision for the year ended June 30,
1997, was 58,000, compared to $34,000 in 1996. The 1997 chargeoffs net of
recoveries totaled $35,000, compared to the prior year of $38,000. The ratio of
the allowance for loan losses to total loans decreased from 1.38% at June 30,
1996 to 1.35% at June 30, 1997, and the ratio of allowance for loan losses to
nonperforming loans increased from 117.07% at June 30, 1996, to 143.98% at June
30, 1997. The 1997 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, 1997 and
1996, 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, 1997, totaled
$923,000, compared to $247,000 for 1996, an increase of $676,000. This increase
was due primarily to a $691,000 increase in life insurance income and death
benefits. During the year ended June 30, 1997, the Company received death
benefit proceeds from key man life insurance policies in excess of cash
surrender value of the policies. This increase was in part offset by increased
losses from investment in limited partnerships.
Other Expenses. MCHI's other expenses for the year ended June 30, 1997,
totaled $5.1 million, an increase of $1.3 million, or 36.3%, from the year ended
June 30, 1996. This increase is directly attributable to the signing of the
Omnibus Appropriations Bill September 30, 1996 which imposed a FDIC special
assessment for all institutions with SAIF-insured deposits. SAIF insured
institutions, like the Company, are benefiting from a reduction of FDIC premiums
which began January 1, 1997 and should have a positive effect on future
earnings. In addition, salaries and employee benefits expense increased
$468,000, or 12.6%, due to increases in deferred compensation expense and normal
increases in employee compensation and related payroll taxes.
Income Tax Expense. Income tax expense for the year ended June 30, 1997,
totaled $400,000, a decrease of $513,000 from the expense recorded in 1996. Tax
expense on earnings was offset by certain low-income housing tax credits which
totaled $423,000 for the years ended June 30, 1997 and 1996. Additional tax
credits are available through the year ended June 30, 1998. During the year
ended June 30, 1997, income before income tax decreased, and additional tax free
income from an increase in cash value of life insurance and death benefits was
recorded. As a result, the effective tax expense for the Company was reduced.
<PAGE>
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, 1998, such available
collateral totaled $104.6 million. Based on existing FHLB lending policies, the
Company could have obtained approximately $45.8 million in additional advances.
First Federal's deposits have remained relatively stable, with balances
between $134 and $122 million, for the three years in the period ended June 30,
1998. The percentage of IRA deposits to total deposits has increased from 22.3%
($26.9 million) at June 30, 1995, to 22.4% ($30.1 million) at June 30, 1998.
During the same period, deposits in withdrawable accounts have increased from
30.9% ($37.3 million) of total deposits at June 30, 1995, to 32.6% ($43.8
million) at June 30, 1998. This change in deposit composition 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 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 require First Federal to maintain minimum levels of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of mutual
funds and certain corporate debt securities and commercial paper) equal to an
amount not less than a specified percentage of its net withdrawable deposit
accounts plus short-term borrowings. This liquidity requirement may be changed
from time to time by the OTS to an amount within the range of 4% to 10%
depending upon economic conditions and savings flows of member institutions. The
OTS recently lowered the level of liquid assets that must be held by a savings
association from 5% to 4% of the association's net withdrawable accounts plus
short-term borrowings based upon the average daily balance of such liquid assets
for each quarter of the association's fiscal year. First Federal has
historically maintained its liquidity ratio at a level in excess of that
required. At June 30, 1998, First Federal's liquidity ratio was 7.3% and has
averaged 12.4% 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.
<PAGE>
Cash flows for the Company are of three major types. Cash flow from
operating activities consists primarily of net income. Investing activities
generate cash flows through the origination and principal collections on loans
as well as the purchases and sales of investments. The Gas City branch
acquisition generated $11.9 million in cash flows for 1998. 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, 1998:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------
1998 1997 1996
--------- ------- ------
(In Thousands)
<S> <C> <C> <C>
Operating activites......................................... $ 1,436 $2,149 $3,232
-------- ------- ------
Investing activities:
Investment purchases................................... (737) (6,191) (11,261)
Investment maturities.................................. 2,844 12,242 17,132
Net change in loans.................................... (15,375) (4,687) (6,918)
Cash received in branch acquisition.................... 11,873 --- ---
Other investing activities............................. 134 275 69
-------- ------- ------
(1,261) 1,639 (978)
-------- ------- ------
Financing activities:
Deposit increases (decreases).......................... (220) (4,490) 5,647
Borrowings............................................. 10,656 5,000 3,500
Payments on borrowings................................. (5,201) (3,012) (4,222)
Repurchase of common stock............................. (2,707) (3,998) (2,066)
Dividends paid......................................... (1,557) (1,495) (1,468)
Other financing activities............................. 366 309 392
-------- ------- ------
1,337 (7,686) 1,783
-------- ------- ------
Net change in cash and cash equivalents..................... $ 1,512 $(3,898) $4,037
======== ======= ======
</TABLE>
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.
Mortgage loans are also originated and sold in the secondary market.
<PAGE>
The Company considers its liquidity and capital resources to be adequate to
meet its foreseeable short and long-term needs. The Company 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, 1998, the Company had outstanding commitments
to originate loans of $1.9 million. Certificates of deposit scheduled to mature
in one year or less at June 30, 1998, totalled $42.1 million. Based upon
historical deposit flow data, the Company's competitive pricing in its market
and management's experience, management believes that a significant portion of
such deposits will remain with the Company. At June 30, 1998, the Company had
$2.4 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 must meet a 4.0% core capital
requirement and a total risk-based capital to risk-weighted assets ratio of
8.0%. At June 30, 1998, First Federal's core capital ratio was 17.6% and its
risk-based capital to risk-weighted assets ratio was 27.1%. 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.
<PAGE>
Year 2000 Issue
Management recognizes the possibility of certain risks associated with Year
2000 and is continuing to evaluate appropriate courses of corrective action. The
Company's data processing is performed primarily by a third party servicer. The
Company also uses software and hardware which are covered under maintenance
agreements with third party vendors. Consequently the Company is dependent on
these vendors to conduct its business. The Company has contacted each vendor to
request time tables for Year 2000 compliance and the expected costs, if any, to
be passed along to the Company. The Company has been informed that its primary
service provider anticipates that all reprogramming efforts will be completed by
December 31, 1998, allowing the Company adequate time for testing. Management
does not expect these costs to have a significant impact on its financial
position or results of operations.
The Company has identified certain systems which it intends to replace
during fiscal 1999. Although the full cost of modifications is not yet known,
management does not anticipate a need to invest heavily in system improvements
to achieve Year 2000 compliance. At this time, it is estimated that costs
associated with Year 2000 issues will be less than $50,000 for fiscal 1999.
Amounts expensed in fiscal 1997 and 1998 were immaterial.
New Accounting Pronouncements
Reporting Comprehensive Income. The Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, in
June 1997. This Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements.
SFAS No. 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. It does not require a specific format for that financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement.
Upon implementing this new Statement, an enterprise will classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position.
This Statement is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
<PAGE>
Disclosures about Segments of an Enterprise and Related Information. SFAS
No. 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This Statement supersedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise, but retains the
requirement to report information about major customers. It amends SFAS No. 94,
Consolidation of All Majority-Owned Subsidiaries, to remove the special
disclosure requirements for previously unconsolidated subsidiaries.
Upon implementing this Statement, a public business enterprise will be
required to report the following:
o Financial and descriptive information about its reportable operating
segments
o A measure of segment profit or loss, certain specific revenue and
expense items, and segment assets.
o Information about the revenues derived from the enterprise's products
or services (or groups of similar products and services), about the
countries in which the enterprise earns revenues and holds assets, and
about major customers regardless of whether that information is used
in making operating decisions.
o Descriptive information about the way that the operating segments were
determined, the products and services provided by the operating
segments, differences between the measurements used in reporting
segment information and those used in the enterprise's general-purpose
financial statements, and changes in the measurement of segment
amounts from period to period.
SFAS No. 131 is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. This Statement need not be
applied to interim financial statements in the initial year of its application,
but comparative information for interim periods in the initial year of
application is to be reported in financial statements for interim periods in the
second year of application.
Employers' Disclosures about Pensions and Other Postretirement Benefits.
SFAS No. 132, which amends FASB Statements No. 87, 88, and 106, was issued in
February, 1998.
While this Statement does not change the measurement or recognition of
pension or other postretirement benefit plans, it revises employers' disclosures
about pension and other postretirement benefit plans. Some of the provisions of
the Statement include:
o The standardization of the disclosure requirements for pensions and
other postretirement benefits to the extent practicable.
<PAGE>
o A requirement for additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate
financial analysis.
o The elimination of certain disclosures that are no longer as useful as
they were when FASB Statements No. 87, Employers' Accounting for
Pensions, No. 88, Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination
Benefits, and No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions, were issued.
o Suggested combined formats for presentation of pension and other
postretirement benefit disclosures.
This Statement is effective for fiscal years beginning after December 15,
1997. Earlier application is encouraged. Restatement of disclosures for earlier
periods provided for comparative purposes is required unless the information is
not readily available, in which case the notes to the financial statements
should include all available information and a description of the information
not available.
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
requires companies to record derivatives on the balance sheet at their fair
value. SFAS No. 133 also acknowledges that the method of recording a gain or
loss depends on the use of the derivative. If certain conditions are met, a
derivative may be specifically designated as (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction.
o For a derivative designated as hedging the exposure to changes in the
fair value of a recognized asset or liability or a firm commitment
(referred to as a fair value hedge), the gain or loss is recognized in
earnings in the period of change together with the offsetting loss or
gain on the hedged item attributable to the risk being hedged. The
effect of that accounting is to reflect in earnings the extent to which
the hedge is not effective in achieving offsetting changes in fair
value.
o For a derivative designated as hedging the exposure to variable cash
flows of a forecasted transaction (referred to as a cash flow hedge),
the effective portion of the derivative's gain or loss is initially
reported as a component of other comprehensive income (outside
earnings) and subsequently reclassified into earnings when the
forecasted transaction affects earnings. The ineffective portion of the
gain or loss is reported in earnings immediately.
<PAGE>
o For a derivative designated as hedging the foreign currency exposure of
a net investment in a foreign operation, the gain or loss is reported
in other comprehensive income (outside earnings) as part of the
cumulative translation adjustment. The accounting for a fair value
hedge described above applies to a derivative designated as a hedge of
the foreign currency exposure of an unrecognized firm commitment or an
available-for-sale security. Similarly, the accounting for a cash flow
hedge described above applies to a derivative designated as a hedge of
the foreign currency exposure of a foreign-currency-denominated
forecasted transaction.
o For a derivative not designated as a hedging instrument, the gain or
loss is recognized in earnings in the period of change.
The new Statement applies to all entities. If hedge accounting is elected
by the entity, the method of assessing the effectiveness of the hedging
derivative and the measurement approach of determining the hedge's
ineffectiveness must be established at the inception of the hedge.
SFAS No. 133 amends SFAS No. 52 and supercedes SFAS Nos. 80, 105, and 119.
SFAS No. 107 is amended to include the disclosure provisions about the
concentrations of credit risk from SFAS No. 105. Several Emerging Issues Task
Force consensuses are also changed or nullified by the provisions of SFAS No.
133.
SFAS No. 133 will be effective for all fiscal years beginning after June
15, 1999. Early application is encouraged; however, this Statement may not be
applied retroactively to financial statements of prior periods.
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Financial Statements
June 30, 1998 and 1997
Independent Auditor's Report
Board of Directors
Marion Capital Holdings, Inc.
Marion, Indiana
We have audited the accompanying consolidated statement of financial condition
of Marion Capital Holdings, Inc. and subsidiary corporations as of June 30, 1998
and 1997, 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, 1998. 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, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended June 30, 1998, in conformity with generally accepted
accounting principles.
/s/ Olive LLP
Indianapolis, Indiana
July 24, 1998
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statement of Financial Condition
<TABLE>
<CAPTION>
June 30,
1998 1997
----------------------------------
Assets
<S> <C> <C>
Cash $ 3,211,191 $ 2,328,605
Short-term interest-bearing deposits 1,923,573 1,294,134
------------ -------------
Total cash and cash equivalents 5,134,764 3,622,739
Investment securities
Available for sale 3,048,751 2,997,500
Held to maturity 2,002,917 4,847,519
------------ -------------
Total investment securities 5,051,668 7,845,019
Loans held for sale 877,309
Loans 165,685,392 150,062,526
Allowance for loan losses (2,087,412) (2,031,535)
------------ -------------
Net loans 163,597,980 148,030,991
Foreclosed real estate 30,735
Premises and equipment 1,928,772 1,520,381
Federal Home Loan Bank of Indianapolis stock, at cost 1,134,400 1,047,300
Investment in limited partnerships 4,883,175 1,448,869
Other assets 11,324,106 9,788,410
------------ -------------
Total assets $193,962,909 $173,303,709
============ ============
Liabilities
Deposits$134,415,469 $121,770,013
Borrowings 17,318,708 8,228,976
Other liabilities 4,572,105 4,238,901
------------ -------------
Total liabilities 156,306,282 134,237,890
------------ -------------
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--1,699,307 and 1,768,099 shares 7,785,191 10,126,365
Retained earnings--substantially restricted 29,841,104 29,074,055
Net unrealized gain (loss) on securities available for sale 30,332 (1,961)
Unearned compensation (132,640)
------------ -------------
Total shareholders' equity 37,656,627 39,065,819
------------ -------------
Total liabilities and shareholders' equity $193,962,909 $173,303,709
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Ended June 30,
1998 1997 1996
-----------------------------------------
Interest Income
<S> <C> <C> <C>
Loans $13,627,462 $12,862,390 $12,456,465
Investment securities 332,864 528,070 876,326
Deposits with financial institutions 286,565 263,806 333,876
Dividend income 86,124 78,585 73,341
----------- ----------- -----------
Total interest income 14,333,015 13,732,851 13,740,008
----------- ----------- -----------
Interest Expense
Deposits 6,440,939 6,243,723 6,344,259
Repurchase
agreements 52,159
Borrowings 651,859 463,288 456,484
----------- ----------- -----------
Total interest expense 7,092,798 6,707,011 6,852,902
----------- ----------- -----------
Net Interest Income 7,240,217 7,025,840 6,887,106
Provision for losses on loans 59,223 58,156 34,231
----------- ----------- -----------
Net Interest Income After Provision
for Losses on Loans 7,180,994 6,967,684 6,852,875
----------- ----------- -----------
Other Income
Net loan servicing fees 78,063 85,837 81,202
Annuity and other commissions 141,717 153,464 146,827
Equity in losses of limited partnerships (200,100) (305,000) (193,139)
Life insurance income and death benefits 175,043 808,424 116,500
Other income 208,886 181,261 94,993
----------- ----------- -----------
Total other income 403,609 923,986 246,383
----------- ----------- -----------
Other Expenses
Salaries and employee benefits 2,555,869 2,880,969 2,412,793
Net occupancy expenses 246,544 168,666 153,340
Equipment expenses 98,923 61,011 59,173
Deposit insurance expense 128,868 996,303 326,871
Foreclosed real estate expenses and losses (gains), net 190,199 (21,054) (12,643)
Data processing expense 226,936 147,720 134,247
Advertising 156,208 153,685 105,060
Other expenses 797,968 663,794 525,674
----------- ----------- -----------
Total other expenses 4,401,515 5,051,094 3,704,515
----------- ----------- -----------
Income Before Income Tax 3,183,088 2,840,576 3,394,743
Income tax expense 858,755 400,382 913,329
----------- ----------- -----------
Net Income $2,324,333 $ 2,440,194 $ 2,481,414
========== =========== ===========
Basic Earnings Per Share $1.32 $1.35 $1.27
========== =========== ===========
Diluted Earnings Per Share $1.29 $1.31 $1.23
========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Marion Capital Holdings, Inc. and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss)
Common Stock Retained Unearned on Securities
Shares Amount Earnings Compensation Available for Sale Total
------ ------ -------- ------------ ------------------ -----
<S> <C> <C> <C> <C> <C> <C>
Balances, July 1, 1995 1,986,288 $15,489,336 $27,114,816 $(730,892) $(9,235) $41,864,025
Net income for 1996 2,481,414 2,481,414
Cash dividends ($.74 per share) (1,467,772) (1,467,772)
Net change in unrealized gain (loss)
on securities available for sale 9,116 9,116
Repurchase of common stock (100,658) (2,066,332) (2,066,332)
Exercise of stock options 47,983 301,855 301,855
Amortization of unearned
compensation expense 298,690 298,690
Tax benefit of stock options
exercised and RRP 90,078 90,078
--------- ----------- ----------- --------- ------- -----------
Balances, June 30, 1996 1,933,613 13,814,937 28,128,458 (432,202) (119) 41,511,074
Net income for 1997 2,440,194 2,440,194
Cash dividends ($.82 per share) (1,494,597) (1,494,597)
Net change in unrealized gain (loss)
on securities available for sale (1,842) (1,842)
Repurchase of common stock (188,887) (3,998,270) (3,998,270)
Exercise of stock options 23,373 176,210 176,210
Amortization of unearned
compensation expense 299,562 299,562
Tax benefit of stock options
exercised and RRP 133,488 133,488
--------- ----------- ----------- --------- ------- -----------
Balances, June 30, 1997 1,768,099 10,126,365 29,074,055 (132,640) (1,961) 39,065,819
Net income for 1998 2,324,333 2,324,333
Cash dividends ($.88 per share) (1,557,284) (1,557,284)
Net change in unrealized gain (loss)
on securities available for sale 32,293 32,293
Repurchase of common stock (96,979) (2,706,834) (2,706,834)
Exercise of stock options 28,187 176,126 176,126
Amortization of unearned
compensation expense 132,640 132,640
Tax benefit of stock options
exercised and RRP 189,534 189,534
--------- ----------- ----------- --------- ------- -----------
Balances, June 30, 1998 1,699,307 $ 7,785,191 $29,841,104 $ 0 $30,332 $37,656,627
========= ============ =========== ========= ======= ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MARION CAPITAL HOLDINGS, INC AND SUBSIDIARIES
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30,
1998 1997 1996
---------------------------------------------
Operating Activities
<S> <C> <C> <C>
Net income $2,324,333 $2,440,194 $2,481,414
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses 59,223 58,156 34,231
Adjustment for losses of foreclosed real estate (27,325) (31,898) (19,136)
Equity in losses of limited partnerships 200,100 305,000 193,139
Amortization of net loan origination costs (fees) (194,372) (262,833) (199,055)
Depreciation 133,743 83,968 77,321
Amortization of unearned compensation 132,640 299,562 298,690
Amortization of core deposits and goodwill 63,124
Deferred income tax benefit (55,341) (465,185) (174,865)
Origination of loans for sale (5,749,103) (7,208,207) (5,664,822)
Proceeds from sale of loans 4,871,794 7,208,207 5,664,822
Changes in
Interest receivable (258,702) (150,548) (64,299)
Interest payable and other liabilities 314,647 484,884 491,704
Cash value of life insurance (175,043) (808,424) (116,500)
Prepaid expense and other assets (168,999) 17,855 73,569
Other (34,643) (48,177) (53,686)
---------- ---------- ----------
Net cash provided by operating activities 1,436,076 1,922,554 3,022,527
Investing Activities
Purchase of securities available for sale (5,002,125)
Proceeds from maturities of securities available for sale 3,000,000 2,000,000
Purchase of securities held to maturity (1,000,000) (10,891,992)
Proceeds from maturities of securities held to maturity 2,843,964 9,241,819 15,131,842
Contribution to limited partnership (130,000) (290,000)
Net changes in loans (15,375,499) (4,459,652) (6,708,883)
Proceeds from real estate owned sales 30,722 98,850
Purchase of FHLB stock (87,100) (58,900) (79,300)
Purchase of premises and equipment (419,583) (158,324) (29,063)
Proceeds from life insurance 553,793 1,261,987
Premiums paid on life insurance (860,000)
Investment in insurance company (650,000)
Cash received in branch acquisition 11,873,327
---------- ---------- ----------
Net cash provided (used) by investing activities (1,261,098) 1,865,527 (768,546)
---------- ---------- ----------
</TABLE>
(Continued)
<PAGE>
MARION CAPITAL HOLDINGS, INC AND SUBSIDIARIES
Consolidated Statement of Cash Flows (continued)
<TABLE>
<CAPTION>
Year Ended June 30,
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
Financing Activities
Net change in
Interest-bearing demand and savings deposits 1,325,530 (1,461,116) 1,157,963
Certificates of deposit (1,545,351) (3,028,881) 4,489,044
Proceeds from Federal Home Loan Bank advances 10,656,000 5,000,000 3,500,000
Repayment of Federal Home Loan Bank advances (5,200,674) (3,012,498) (4,221,678)
Dividends paid (1,557,284) (1,494,597) (1,467,772)
Exercise of stock options 365,660 309,697 391,933
Repurchase of common stock (2,706,834) (3,998,270) (2,066,332)
---------- ---------- ----------
Net cash provided (used) by financing activities 1,337,047 (7,685,665) 1,783,158
---------- ---------- ----------
Net Change in Cash and Cash Equivalents 1,512,025 (3,897,584) 4,037,139
Cash and Cash Equivalents, Beginning of Year 3,622,739 7,520,323 3,483,184
---------- ---------- ----------
Cash and Cash Equivalents, End of Year $5,134,764 $3,622,739 $7,520,323
========== ========== ==========
Additional Cash Flows and
Supplementary Information
Interest paid $7,034,447 $6,704,766 $6,873,949
Income tax paid 856,139 676,345 960,958
Loan balances transferred to foreclosed real estate 1,137,759 119,002 447,511
Loans to finance the sale of foreclosed real estate 1,171,881 321,023 415,000
Loan payable to limited partnership 3,634,406
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 1 -- Nature of Operations and Summary of Significant Accounting Policies
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--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.
Mortgage loans held for sale are carried at the lower of aggregate cost or
market. Net unrealized losses, if any, are recognized through a valuation
allowance by charges to income based on the difference between estimated sales
proceeds and aggregate cost.
<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. A loan is impaired when,
based on current information or events, it is probable that the Bank will be
unable to collect all amounts due (principal and interest) according to the
contractual terms of the loan agreement. Payments with insignificant delays not
exceeding 90 days outstanding are not considered impaired. Certain nonaccrual
and substantially delinquent loans may be considered to be impaired. The Bank
considers its investment in one-to-four family residential loans and consumer
loans to be homogeneous and therefore excluded from separate identification for
evaluation of impairment. Interest income is accrued on the principal balances
of loans. The accrual of interest on impaired and nonaccrual loans is
discontinued when, in management's opinion, the borrower may be unable to meet
payments as they become due. When interest accrual is discontinued, all unpaid
accrued interest is reversed when considered uncollectible. Interest income is
subsequently recognized only to the extent cash payments are received. Certain
loan fees and direct costs are being deferred and amortized as an adjustment of
yield on the loans over the contractual lives of 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. When foreclosed real estate is acquired, any required adjustment
is charged to the allowance for real estate. All subsequent activity is included
in current operations. 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, 1998, 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.
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Stock options are granted for a fixed number of shares with an exercise price
equal to the fair value of the shares at the date of grant. The Company accounts
for and will continue to account for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and, accordingly, recognizes no compensation expense for the stock
option grants.
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.
Earnings per share have been computed based upon the weighted average common and
potential common shares outstanding during each year. Earnings per share for
1997 and 1996 have been restated to conform to Statement of Financial Accounting
Standards (SFAS) No.
128, Earnings Per Share.
Reclassifications of certain amounts in the 1997 and 1996 consolidated financial
statements have been made to conform to the 1998 presentation.
Note 2 -- 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, 1998, was $250,000.
Note 3 -- Investment Securities
<TABLE>
<CAPTION>
June 30, 1998
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available for sale
Federal agencies $2,999 $50 $3,049
------ --- -- ------
Held to maturity
U. S. Treasury 1,000 $1 999
Federal agencies 1,000 1,000
Mortgage-backed securities 3 3
------ --- -- ------
Total held to maturity 2,003 1 2,002
------ --- -- ------
Total investment securities $5,002 $50 $1 $5,051
====== === == ======
</TABLE>
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available for sale
Federal agencies $3,001 $ 3 $2,998
------ --- -- ------
Held to maturity
U. S. Treasury 2,001 13 1,988
Federal agencies 2,000 9 1,991
State and municipal 610 610
Mortgage-backed securities 237 2 235
------ --- -- ------
Total held to maturity 4,848 24 4,824
------ --- -- ------
Total investment securities $7,849 $ 0 $27 $7,822
====== ===== === ======
</TABLE>
The amortized cost and fair value of securities held to maturity and available
for sale at June 30, 1998, 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.
<TABLE>
<CAPTION>
Maturity Distribution at June 30, 1998
Available for Sale Held to Maturity
------------------ ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Within one year $2,000 $1,999
One to five years $2,999 $3,049
------ ------ ------ ------
2,999 3,049 2,000 1,999
Mortgage-backed securities 3 3
------ ------ ------ ------
Totals $2,999 $3,049 $2,003 $2,002
====== ====== ====== ======
</TABLE>
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 4 -- Loans
June 30,
1998 1997
-----------------------
Real estate mortgage loans
One-to-four family $ 106,215 $ 98,393
Multi-family 11,014 11,394
Commercial
real estate 31,857 31,122
Real estate
construction loans 7,284 4,699
Commercial
8,511 2,525
Consumer loans 4,767 4,833
-------- --------
Total loans 169,648 152,966
Undisbursed portion
of loans (3,663) (2,626)
Deferred loan fees (300) (277)
-------- --------
$165,685 $150,063
======== ========
1998 1997 1996
------- ------- -------
Allowance for loan losses
Balances,
July 1 $2,032 $ 2,009 $ 2,013
Provision for losses 59 58 34
Recoveries on loans 18 2
Loans charged off (22) (35) (40)
------- ------- -------
Balances, June 30 $ 2,087 $ 2,032 $ 2,009
======= ======= =======
No loans were considered impaired at June 30, 1998 and 1997.
Mortgage loans serviced for others are not included in the accompanying
consolidated statement of financial condition. The unpaid principal balances
totaled $6,775,000 and $6,643,000 at June 30, 1998 and 1997. The amount of
servicing rights capitalized is not material.
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 5 -- Forclosed Real Estate
June 30,
1998
Real estate acquired in settlement of loans $ 31
Allowance for losses
----
$ 31
====
1998 1997 1996
---- ---- ----
Allowance for losses on foreclosed real estate
Balances, July 1 $ 0 $ 16 $ 64
Provision (adjustment) for losses (27) (32) (19)
Real estate charged off (25) (49)
Recoveries on real estate 27 41 20
---- ----- ----
Balances, June 30 $ 0 $ 0 $ 16
==== ===== ====
Note 6 -- Premises and Equipment
June 30,
-------------------------
1998 1997
------ ------
Land $ 654 $ 632
Buildings and land improvements 1,604 1,458
Leasehold improvements 192
Furniture and equipment 636 490
------ ------
Total cost 3,086 2,580
Accumulated depreciation (1,157) (1,060)
------ ------
Net $1,929 $1,520
====== ======
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 7 -- Other Assets and Other Liabilities
June 30,
1998 1997
------- -------
Other assets
Interest receivable
Investment securities $ 73 $ 129
Loans 978 664
Cash value of life
insurance 5,616 5,994
Deferred
income tax asset 2,821 2,786
Investment in insurance company 650
Core deposit intangibles and goodwill 803
Prepaid
expenses and other 383 215
------- -------
Total $11,324 $ 9,788
======= =======
Other liabilities
Interest
payable
Deposits $ 146 $ 97
Other
borrowings 31 21
Deferred
compensation and fees payable 2,550 2,488
Deferred
gain on sale of real estate owned 336 346
Advances
by borrowers for taxes and insurance 208 224
Other
1,301 1,063
------- -------
Total $ 4,572 $ 4,239
======= =======
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 8 -- Investment in Limited Partnership
The Bank has is an investment of $4,883,000 and $1,448,869 at June 30, 1998 and
1997 representing equity in certain limited partnerships organized to build, own
and operate apartment complexes. The Bank records its equity in the net income
or loss of the partnerships based on the Bank's interest in the partnerships,
which interests are 99 percent in Pedcor Investments-1987-II (Pedcor-87) and 99
percent in Pedcor Investments-1997-XXIX (Pedcor-97). During the year ended June
30, 1997, the Bank also recorded an additional loss of $170,000 on Pedcor-87 for
adjustments made to partners' equity. Certain fees to the general partner not
recorded or estimable to date by the partnership for Pedcor-87 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
partnerships, the Bank has recorded the benefit of low income housing tax
credits of $338,000 for 1998, and $423,000 for 1997 and 1996. Condensed combined
financial statements of the partnerships are as follows:
June 30,
1998 1997
------ ------
(Unaudited)
Condensed statement of financial condition
Assets
Cash $ 149 $ 72
Land and property 5,179 3,764
Other assets 1,729 527
------ ------
Total assets $7,057 $4,363
====== ======
Liabilities
Notes payable $6,006 $3,153
Other liabilities 298 113
------ ------
Total liabilities 6,304 3,266
Partners' equity 753 1,097
------ ------
Total liabilities and partners' equity $7,057 $4,363
====== ======
Year Ended June 30,
1998 1997 1996
----- ----- -----
(Unaudited)
Condensed statement of operations
Total revenue $ 699 $ 670 $ 648
Total expense 926 805 808
----- ----- -----
Net loss $(227) $(135) $(160)
===== ===== =====
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 9 -- Deposits
June 30,
1998 1997
-------- --------
Interest-bearing demand $ 27,091 $ 21,230
Savings 16,708 15,683
Certificates and other time
deposits of $100,000 or more 11,338 11,709
Other certificates and time deposits 79,278 73,148
-------- --------
Total deposits $134,415 $121,770
======== ========
Certificates and other time deposits maturing in years ending June 30:
1999 $42,082
2000 35,506
2001 8,738
2002 2,262
2003 1,896
Thereafter 132
-------
$90,616
=======
Note 10 -- Borrowings
June 30,
1998 1997
------- ------
Federal Home Loan Bank (FHLB) advances $13,684 $8,229
Note payable to Pedcor-97, due in installments
to August 2008 3,635
------- ------
$17,319 $8,229
======= ======
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
June 30,
------------------------------------------------------------
1998 1997
------------------------- ----------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------------------------------------------------------------
FHLB advances
Maturities in years
ending June 30:
1998 $ 3,201 6.07%
1999 $ 2,417 6.07% 1,190 5.74
2000 713 6.48 481 6.57
2001 3,633 5.66 383 5.09
2002 2,766 6.27 2,506 6.27
2003 2,277 6.06 7 7.33
Thereafter 1,878 6.55 461 7.33
------- -------
$13,684 6.08% $ 8,229 6.14%
======= =======
The FHLB advances are secured by first-mortgage loans and investment securities
totaling $105,000,000 and $98,034,000 at June 30, 1998 and 1997. Advances are
subject to restrictions or penalties in the event of prepayment.
The notes payable to Pedcor dated August 1, 1997 in the original amount of
$3,635,000 bear no interest so long as there exists no event of default. In the
instances where an event of default has occurred, interest shall be calculated
at a rate equal to the lesser of 9% per annum or the highest amount permitted by
applicable law.
Maturities in years ending June 30:
- ------------------------------------------------
1999 $ 394
2000 415
2001 388
2002 382
2003 376
Thereafter 1,680
------
$3,635
======
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 11 -- Income Tax
Year Ended June 30,
1998 1997 1996
----- ----- -----
Currently payable
Federal $ 645 $ 630 $ 765
State 269 235 323
Deferred
Federal (51) (418) (144)
State (4) (47) (31)
----- ----- -----
Total income tax expense $ 859 $ 400 $ 913
===== ===== =====
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Reconciliation of federal statutory to actual tax expense
Federal
statutory income tax at 34% $ 1,082 $ 966 $ 1,154
Increase
in cash value of life insurance and death benefits (60) (257) (40)
Effect of
state income taxes 175 124 193
Business
income tax credits (338) (423) (423)
Other
(10) 29
------- ------- -------
Actual tax expense $ 859 $ 400 $ 913
======= ======= =======
</TABLE>
A cumulative net deferred tax asset is included in other assets. The components
of the asset are as follows:
June 30,
--------------------------
1998 1997
------ ------
Assets
Allowance for loan losses $1,005 $ 990
Deferred
compensation 1,084 1,057
Loan fees 52 69
Pensions and employee benefits 300 255
Business
income tax credits 592 553
Securities
available for sale 1
Other 23 74
------ ------
Total assets 3,056 2,999
------ ------
Liabilities
State
income tax 166 164
Securities
available for sale 20
Other 49 49
------ ------
Total liabilities 235 213
------ ------
$2,821 $2,786
====== ======
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
No valuation allowance was considered necessary at June 30, 1998 and 1997.
At June 30, 1998, the Company had an unused business income tax credit
carryforward of $592,000. Credits of $338,000 expire in 2013 and $254,000 expire
in 2012.
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
including redemption of bank stock or excess dividends, or loss of "bank"
status, would create income for tax purposes only, which income would be subject
to the then-current corporate income tax rate. At June 30, 1998, the unrecorded
deferred income tax liability on the above amount was approximately $3,300,000.
Note 12 -- Dividends and Capital Restrictions
The Office of Thrift Supervision ("OTS") regulations provide that savings
associations which meet fully phased-in capital requirements and are 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 accounts 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, 1998, total shareholder's equity of the Bank was $33,434,000, of
which a minimum of $9,334,000 was available for the payment of dividends.
Note 13 -- 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
are made subject to market conditions in open market or block transactions.
Note 14 -- Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies and is assigned to a capital category. The assigned
capital category is largely determined by three ratios that are calculated
according to the regulations. The ratios are intended to measure capital
relative to assets and credit risk associated with those assets and off-balance
sheet exposures of the entity. The capital category
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
assigned to an entity can also be affected by qualitative judgments made by
regulatory agencies about the risk inherent in the entity's activities that are
not part of the calculated ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At June 30, 1998 and 1997, the
Bank is categorized as well capitalized and met all subject capital adequacy
requirements. There are no conditions or events since June 30, 1998 that
management believes have changed the Bank's classification.
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
June 30, 1998
------------------------------------------------------------------------------------------
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 risk-based capital 1
(to risk-weighted
assets) $34,079 27.1% $10,048 8.0% $12,560 10.0%
Core capital 1
(to adjusted tangible
assets) 32,503 17.6% 5,546 3.0% 11,093 6.0%
Core capital 1
(to adjusted total assets)32,503 17.6% 5,546 3.0% 9,244 5.0%
June 30, 1997
------------------------------------------------------------------------------------------
Required
for Adequate To Be Well
Actual Capital 1 Capitalized 1
------------------- ------------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total risk-based capital 1
(to risk-weighted
assets) $36,341 32.3% $9,014 8.0% $11,267 10.0%
Core capital 1
(to adjusted tangible
assets) 34,925 20.6% 5,096 3.0% 10,193 6.0%
Core capital 1
(to adjusted total assets)34,925 20.6% 5,096 3.0% 8,494 5.0%
- ------------
1 As defined by the regulatory agencies
</TABLE>
The Bank's tangible capital at June 30, 1998 was $32,503,000, which amount was
17.6 percent of tangible assets and exceeded the required ratio of 1.5 percent.
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 15 -- 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 Pentegra Group. 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 was $117,000, $175,000 and
$211,000 for 1998, 1997 and 1996.
The Bank contributes up to 3 percent of employees' salaries for those
participating in a thrift plan. The Bank's contribution was $33,000, $25,000 and
$23,000 for 1998, 1997 and 1996.
The Bank has purchased life insurance on certain officers and directors, which
insurance had an approximate cash value of $5,616,000 and $5,994,000 at June 30,
1998 and 1997. The Bank has also 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 totaled $301,000, $625,000 and $277,000 for 1998,
1997 and 1996.
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.
Note 16 -- Stock Option Plan
Under the Company's stock option plan, the Company grants stock option awards to
directors, selected executives and other key employees. Stock option awards vest
and become fully exercisable at the end of 6 months of continued employment. 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
options granted to date were granted at the fair market value at the date of
grant. 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. The exercise price of each option was equal to the
market price of the Company's stock on the date of grant; therefore, no
compensation expense was recognized.
Although the Company has elected to follow APB No. 25, SFAS No. 123, Stock-Based
Compensation, requires pro forma disclosures of net income and earnings per
share as if the Company had accounted for its employee stock options under that
Statement. The fair value of each option grant was estimated on the grant date
using an option-pricing model with the following assumptions:
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
June 30,
---------------------
1998 1997
------- -------
Risk-free interest rates 6.0% 6.4%
Dividend yields 3.3 3.9
Expected volatility factor of
market price of common stock 11.0 11.0
Weighted-average expected life of the options 7 years 7 years
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this Statement are as follows:
June 30,
1998 1997
---------------------
Net income As reported $2,324 $2,440
Pro forma 2,300 2,389
Basic earnings per share As reported 1.32 1.35
Pro forma 1.31 1.32
Diluted earnings per share As reported 1.29 1.31
Pro forma 1.28 1.29
The following is a summary of the status of the Company's stock option plan and
changes in that plan as of and for the years ended June 30, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------------
1997 1996 1995
----------------------- ------------------------ -----------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
------- ------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 99,094 $12.09 106,790 $10.00 171,969 $ 10.00
Granted 10,083 23.00 20,166 20.25
Exercised (35,329) 10.37 (27,862) 10.00 (65,179) 10.00
------ ------ -------
Outstanding, end of year 73,848 12.62 99,094 12.09 106,790 10.00
====== ====== =======
Options exercisable at year end 73,848 99,094 106,790
Weighted-average fair value of
options granted during the year $ 3.94 $ 3.14
</TABLE>
As of June 30, 1998, options outstanding totaling 44,599 have an exercise price
of $10 and a weighted-average remaining contractual life of 4.7 years, options
outstanding totaling 20,166 have an exercise price of $20.25 and a
weighted-average remaining contractual life of 8.2 years and options outstanding
totaling 9,083 have an exercise price of $23.00 and a weighted-average remaining
contractual life of 9.1 years.
For the years ended June 30, 1998, 1997 and 1996, 7,142, 4,489 and 17,196 shares
were tendered as partial payment for options exercised. At June 30, 1998, 18,050
shares were available for grant.
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 17 -- 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.
The Bank continues to fund benefit costs on a pay-as-you-go basis, and, for
1998, 1997 and 1996, the Bank made benefit payments totaling $3,293, $5,619 and
$3,842. The following table sets forth the plan's funded status, and amounts
recognized in the consolidated statement of financial condition:
June 30,
-------------
1998 1997
---- ----
Accumulated postretirement benefit obligation
Retirees $ 83 $ 62
Other active plan participants 120 91
Accumulated postretirement benefit obligation 203 153
Unrecognized net gain from past experience different
from that assumed and from changes in assumptions 83 127
---- ----
Accrued postretirement benefit cost $286 $280
==== ====
<TABLE>
<CAPTION>
June 30,
---------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net periodic postretirement cost included the
following components
Service cost--benefits attributed to service during the period $13 $15 $13
Interest cost on accumulated postretirement benefit obligation 12 14 12
Net amortization and deferral (15) (8) (9)
--- -- --
Net periodic postretirement benefit cost $10 $21 $16
=== === ===
</TABLE>
At June 30, 1998 and 1997, there were no plan assets. The assumed health care
cost trend rate used in measuring the accumulated postretirement benefit
obligation was 12 percent in 1998, gradually declining to 6 percent in the year
2013. The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 6.75 percent.
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
If the health care cost trend rate assumptions were increased by 1 percent, the
accumulated postretirement benefit obligation as of June 30, 1998 would have
increased by 15 percent. The effect of this change on the sum of the service
cost and interest would be an increase of 17 percent.
Note 18 -- Earnings Per Share
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------------------------
1998 1997 1996
------------------------- -------------------------- ----------------------------
Weighted- Per Weighted- Per Weighted- Per
Average Share Average Share Average Share
Options Income Shares Amount Income Shares Amount Income Shares Amount
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Share
Income available to
common shareholders $2,324 1,760,166 $1.32 $2,440 1,806,398 $1.35 $2,481 1,949,464 $1.27
Effect of dilutive securities
RRP program 2,493 5,380 13,122
Stock options 39,200 46,911 59,821
------ --------- ------ --------- ------ ---------
Diluted Earnings Per Share
Income available to
common shareholders and
assumed conversions $2,324 1,801,859 $1.29 $2,440 1,858,689 $1.31 $2,481 2,022,407 $1.23
====== ========= ====== ========= ====== =========
</TABLE>
Note 19 -- Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and letters of
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:
1998 1997
------------------------
Mortgage loan commitments at variable rates $1,911 $4,734
Consumer and commercial loan commitments 4,346 2,564
Standby letters of credit 3,644 3,239
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.
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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 $31,857,000 and $31,122,000 at June 30, 1998 and 1997,
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.
Note 20 -- 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.
Note Payable3/4Limited Partnership3/4The fair value of the borrowing is
estimated using a discounted cash flow calculation based on the prime interest
rate.
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>
1998 1997
----------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $5,135 $5,135 $3,623 $3,623
Securities available for sale 3,049 3,049 2,998 2,998
Securities held to maturity 2,003 2,002 4,848 4,824
Loans, including loans held for sale, net 164,475 166,697 148,031 150,524
Interest receivable 1,051 1,051 793 793
Stock in FHLB 1,134 1,134 1,047 1,047
Liabilities
Deposits 134,415 135,299 121,770 121,773
Borrowings
FHLB advances 13,684 13,759 8,229 8,089
Note payable--limited partnership 3,635 2,453
Interest payable 177 177 118 118
Advances by borrowers for taxes and insurance 208 208 224 224
</TABLE>
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 21 -- 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,
--------------------------
1998 1997
------- -------
Assets
Cash and cash equivalents $ 524 $ 591
Loans 3,031 3,500
Investment in subsidiary 33,434 34,963
Other assets 723 63
------- -------
Total assets $37,712 $39,117
======= =======
Liabilities $ 55 $ 51
Shareholders' Equity 37,657 39,066
------- -------
Total liabilities and shareholders' equity $37,712 $39,117
======= =======
Condensed Statement of Income
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------
1998 1997 1996
------ ------ ------
Income
<S> <C> <C> <C>
Dividends from Bank $4,000 $3,250 $8,600
Other 308 300 120
------ ------ ------
Total income 4,308 3,550 8,720
Expenses 118 114 85
------ ------ ------
Income before income tax and equity in
undistributed income of subsidiary 4,190 3,436 8,635
Income tax expense 75 74 14
------ ------ ------
Income before equity in undistributed income of subsidiary 4,115 3,362 8,621
Distribution in excess of income of subsidiary (1,791) (922) (6,140)
------ ------ ------
Net Income $2,324 $2,440 $2,481
====== ====== ======
</TABLE>
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------
1998 1997 1996
------- ------- ------
Operating Activities
<S> <C> <C> <C>
Net income $2,324 $2,440 $2,481
Adjustments to reconcile net income to net
cash provided by operating activities 1,688 786 6,057
------- ------- ------
Net cash provided by operating activities 4,012 3,226 8,538
------- ------- ------
Investing Activities
Purchase of securities held to maturity (5,951)
Proceeds from maturities of securities held to maturity 3,000 3,000
Net change in loans 469 (3,500)
Investment in insurance company (650)
------- ------- ------
Net cash used by investing activities (181) (500) (2,951)
------- ------- ------
Financing Activities
Exercise of stock options 366 310 392
Cash dividends (1,557) (1,495) (1,468)
Repurchase of common stock (2,707) (3,998) (2,066)
------- ------- ------
Net cash used by financing activities (3,898) (5,183) (3,142)
------- ------- ------
Net Change in Cash and Cash Equivalents (67) (2,457) 2,445
Cash and Cash Equivalents at Beginning of Year 591 3,048 603
------- ------- ------
Cash and Cash Equivalents at End of Year $ 524 $ 591 $3,048
======= ======= ======
</TABLE>
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 22 -- Quarterly Results (Unaudited)
<TABLE>
<CAPTION>
Year Ended June 30, 1998
June March December September
1998 1998 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income $3,740 $3,610 $3,551 $3,432
Interest expense 1,825 1,803 1,756 1,709
------ ------ ------ ------
Net interest income 1,915 1,807 1,795 1,723
Provision for losses on loans 36 7 7 9
------ ------ ------ ------
Net interest income after provisions for losses on loans 1,879 1,800 1,788 1,714
Other income 133 119 99 53
Other expenses 1,116 1,209 1,174 903
------ ------ ------ ------
Income before income tax 896 710 713 864
Income tax expense 256 189 210 204
------ ------ ------ ------
Net Income $ 640 $ 521 $ 503 $ 660
====== ====== ====== ======
Basic earnings per share $.37 $.29 $.28 $.38
Diluted earnings per share .36 .29 .28 .37
Dividends per share .22 .22 .22 .22
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30, 1997
-----------------------------------------------
June March December September
1997 1997 1996 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest income $3,416 $3,455 $3,431 $3,431
Interest expense 1,652 1,658 1,683 1,714
------ ------ ------ ------
Net interest income 1,764 1,797 1,748 1,717
Provision for losses on loans 11 37 6 4
------ ------ ------ ------
Net interest income after provisions for losses on loans 1,753 1,760 1,742 1,713
Other income 258 346 113 206
Other expenses 1,099 985 956 2,011
------ ------ ------ ------
Income (loss) before income tax 912 1,121 899 (92)
Income tax expense (benefit) 166 218 236 (220)
------ ------ ------ ------
Net Income $ 746 $ 903 $ 663 $ 128
======= ======= ======= =======
Basic earnings per share $ .42 $.50 $.37 $.07
Diluted earnings per share .41 .48 .36 (.07)
Dividends per share .22 .20 .20 .20
</TABLE>
Life insurance income and death benefits of $180,000, $35,000, $325,000 and
$268,000 for the first through fourth quarters of 1997 have been reclassified
from other expenses to other income.
<PAGE>
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
John M. Dalton Steven L. Banks Jack O. Murrell
President Executive Vice President Retired, Murrell and Keal
Chairman of the Board
Jerry D. McVicker W. Gordon Coryea George L. Thomas
Director of Operations Attorney Retired, Foster-Forbes
Marion Community Schools
Jon R. Marler
Sr. Vice President
Ralph M. Williams
& Associates
OFFICERS OF MARION CAPITAL HOLDINGS, INC.
John M. Dalton Steven L. Banks
President Executive Vice President
Larry G. Phillips Tim D. Canode
Sr. Vice President and Vice President
Secretary-Treasurer
Kathy Kuntz
Assistant Secretary and
Assistant Treasurer
SENIOR 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
Cynthia M. Fortney Tim D. Canode Kathy Kuntz
Vice President Vice President Vice President
<PAGE>
DIRECTORS AND OFFICERS
W. Gordon Coryea (age 73) 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 64) 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 President of First Marion Service
Corporation since 1997. Mr. Dalton was the Executive Vice President of First
Federal from 1983 to 1996. He became Chairman of the Boards of Marion Capital
Holdings, Inc. and First Federal in 1997.
Jack O. Murrell (age 75) 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 81) 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.
Steven L. Banks (age 48) is a Director of Marion Capital Holdings, Inc. and
has served as its Executive Vice President since 1996. He has also served as
Executive Vice President of First Federal since 1996 and as Executive Vice
President of First Marion Service Corporation since 1997.
Jerry D. McVicker (age 53) is a Director of Marion Capital Holdings, Inc.
He also currently serves as Director of Operations for Marion Community Schools.
Jon R. Marler (age 48) is Senior Vice President of Ralph M. Williams and
Associates. He has been a Director of Marion Capital Holdings, Inc. and First
Federal since 1997.
Larry G. Phillips (age 49) 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 53) 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 Service Corporation since 1983.
Kathy Kuntz (age 55) is Assistant Secretary and Assistant Treasurer of
Marion Capital Holdings, Inc. She has served as Vice President of First Federal
since 1998. She has also served as Assistant Secretary of First Marion Service
Corporation since 1971. Ms. Kuntz was assistant secretary of First Federal from
1976 to 1998.
<PAGE>
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, 1998, there were 426 shareholders
of record and MCHI estimates that, as of that date, there were an additional 800
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, 1996 $21.000 $20.000 $.20
December 31, 1996 21.500 19.250 .20
March 31, 1997 22.000 19.250 .20
June 30, 1997 23.250 22.500 .22
September 30, 1997 28.000 22.000 .22
December 31, 1997 28.125 26.250 .22
March 31, 1998 29.000 25.875 .22
June 30, 1998 29.500 28.000 .22
Transfer Agent and Registrar General Counsel
Fifth Third Bank Barnes & Thornburg
38 Fountain Square 11 South Meridian Street
Cincinnati, Ohio 45263 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, 1998 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 Locations
100 West Third Street 1045 South 13th Street
Marion, Indiana 46952 Decatur, Indiana 46733
Telephone: (765) 664-0556 Telephone: (219) 728-2106
3240 S. Western
Marion, Indiana 46953
Telephone: (765) 671-1145
1010 East Main Street
Gas City, Indiana 46933
Telephone: (765) 677-4770
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We consent to the incorporation by reference in a Registration Statement on Form
S-8 (Registration No. 33-69538) of our report dated July 24, 1998, on the
consolidated financial statements of Marion Capital Holdings, Inc. and
subsidiaries contained in the 1998 Annual Report to Shareholders of Marion
Capital Holdings, Inc., which is incorporated by reference in this Form 10-K.
Olive LLP
/s/ Olive LLP
Indianapolis, Indiana
September 22, 1998
<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, 1998 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-30-1998
<PERIOD-START> JUL-1-1997
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 3,211
<INT-BEARING-DEPOSITS> 1,924
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,049
<INVESTMENTS-CARRYING> 2,003
<INVESTMENTS-MARKET> 2,002
<LOANS> 165,685
<ALLOWANCE> 2,087
<TOTAL-ASSETS> 193,763
<DEPOSITS> 134,415
<SHORT-TERM> 2,417
<LIABILITIES-OTHER> 4,572
<LONG-TERM> 11,267
<COMMON> 7,785
0
0
<OTHER-SE> 29,871
<TOTAL-LIABILITIES-AND-EQUITY> 193,963
<INTEREST-LOAN> 13,627
<INTEREST-INVEST> 333
<INTEREST-OTHER> 373
<INTEREST-TOTAL> 14,333
<INTEREST-DEPOSIT> 6,441
<INTEREST-EXPENSE> 7,093
<INTEREST-INCOME-NET> 7,240
<LOAN-LOSSES> 59
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,402
<INCOME-PRETAX> 3,183
<INCOME-PRE-EXTRAORDINARY> 2,324
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,324
<EPS-PRIMARY> 1.32
<EPS-DILUTED> 1.29
<YIELD-ACTUAL> 4.28
<LOANS-NON> 1,938
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,032
<CHARGE-OFFS> 22
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 2,087
<ALLOWANCE-DOMESTIC> 134
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,953
</TABLE>
<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, 1997 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-30-1997
<PERIOD-START> JUL-1-1996
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1.000
<CASH> 2,329
<INT-BEARING-DEPOSITS> 1,294
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,000
<INVESTMENTS-CARRYING> 4,848
<INVESTMENTS-MARKET> 4,824
<LOANS> 150,063
<ALLOWANCE> 2,032
<TOTAL-ASSETS> 173,304
<DEPOSITS> 121,770
<SHORT-TERM> 3,201
<LIABILITIES-OTHER> 4,239
<LONG-TERM> 5,028
<COMMON> 10,126
0
0
<OTHER-SE> 28,940
<TOTAL-LIABILITIES-AND-EQUITY> 173,304
<INTEREST-LOAN> 12,862
<INTEREST-INVEST> 528
<INTEREST-OTHER> 343
<INTEREST-TOTAL> 13,733
<INTEREST-DEPOSIT> 6,244
<INTEREST-EXPENSE> 6,707
<INTEREST-INCOME-NET> 7,026
<LOAN-LOSSES> 58
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,051
<INCOME-PRETAX> 2,841
<INCOME-PRE-EXTRAORDINARY> 2,440
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,440
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.31
<YIELD-ACTUAL> 4.29
<LOANS-NON> 1,411
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,546
<ALLOWANCE-OPEN> 2,009
<CHARGE-OFFS> 35
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,032
<ALLOWANCE-DOMESTIC> 105
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,927
</TABLE>
<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
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<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
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,588
<INCOME-PRETAX> 3,395
<INCOME-PRE-EXTRAORDINARY> 2,481
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,481
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.23
<YIELD-ACTUAL> 4.17
<LOANS-NON> 1,716
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,043
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<CHARGE-OFFS> 40
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 2,009
<ALLOWANCE-DOMESTIC> 317
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,692
</TABLE>
