SCHEDULE 14A
Information Required in Proxy Statement
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant: Yes.
Filed by a Party other than the Registrant: No.
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as Permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
MARION CAPITAL HOLDINGS, INC.
(Name Of Registrant As Specified In Its Charter)
MARION CAPITAL HOLDINGS, INC.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11
(1) Title of each class of securities to which transaction
applies: N/A
(2) Aggregate number of securities to which transaction
applies: N/A
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth
the amount on which the filing fee is calculated and
state how it was determined): N/A
(4) Proposed maximum aggregate value of transaction: N/A
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing. N/A
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
MARION CAPITAL
HOLDINGS, INC.
100 West Third Street
Marion, Indiana 46952
(765) 664-0556
----------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
----------------------------------------
To Be Held On October 8, 1998
Notice is hereby given that the Annual Meeting of Shareholders of
Marion Capital Holdings, Inc. (the "Holding Company") will be held at the
Holiday Inn, 501 East Fourth Street, Marion, Indiana, on Thursday, October 8,
1998, at 10:00 A.M., Eastern Standard Time.
The Annual Meeting will be held for the following purposes:
1. Election of Directors. Election of two directors of the Holding
Company to serve three-year terms expiring in 2001.
2. Ratification of Auditors. Ratification of the appointment of Olive LLP
as auditors for Marion Capital Holdings, Inc. for the fiscal year
ending June 30, 1999.
3. Other Business. Such other matters as may properly come before the
meeting or any adjournment thereof.
Shareholders of record at the close of business on August 21, 1998, are
entitled to vote at the meeting or any adjournment thereof.
We urge you to read the enclosed Proxy Statement carefully so that you may
be informed about the business to come before the meeting, or any adjournment
thereof. At your earliest convenience, please sign and return the accompanying
proxy in the postage-paid envelope furnished for that purpose.
A copy of our Annual Report for the fiscal year ended June 30, 1998, is
enclosed. The Annual Report is not a part of the proxy soliciting material
enclosed with this letter.
By Order of the Board of Directors
/s/ John M. Dalton
John M. Dalton, President and
Chief Executive Officer
Marion, Indiana
September 3, 1998
IT IS IMPORTANT THAT THE PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT
YOU PLAN TO BE PRESENT IN PERSON AT THE ANNUAL MEETING, PLEASE SIGN, DATE AND
COMPLETE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
<PAGE>
MARION CAPITAL
HOLDINGS, INC.
100 West Third Street
Marion, Indiana 46952
(765) 664-0556
---------------
PROXY STATEMENT
---------------
FOR
ANNUAL MEETING OF SHAREHOLDERS
October 8, 1998
This Proxy Statement is being furnished to the holders of common stock,
without par value (the "Common Stock"), of Marion Capital Holdings, Inc. (the
"Holding Company"), an Indiana corporation, in connection with the solicitation
of proxies by the Board of Directors of the Holding Company to be voted at the
Annual Meeting of Shareholders to be held at 10:00 A.M., Eastern Standard Time,
on October 8, 1998, at the Holiday Inn, 501 East Fourth Street, Marion, Indiana,
and at any adjournment of such meeting. The principal asset of the Holding
Company consists of 100% of the issued and outstanding shares of common stock,
$.01 par value per share, of First Federal Savings Bank of Marion ("First
Federal"). This Proxy Statement is expected to be mailed to the shareholders on
or about September 3, 1998.
The proxy solicited hereby, if properly signed and returned to the
Holding Company and not revoked prior to its use, will be voted in accordance
with the instructions contained therein. If no contrary instructions are given,
each proxy received will be voted for each of the matters described below and,
upon the transaction of such other business as may properly come before the
meeting, in accordance with the best judgment of the persons appointed as
proxies.
Any shareholder giving a proxy has the power to revoke it at any time
before it is exercised by (i) filing with the Secretary of the Holding Company
written notice thereof (Larry G. Phillips, 100 West Third Street, Marion,
Indiana 46952), (ii) submitting a duly executed proxy bearing a later date, or
(iii) by appearing at the Annual Meeting and giving the Secretary notice of his
or her intention to vote in person. Proxies solicited hereby may be exercised
only at the Annual Meeting and any adjournment thereof and will not be used for
any other meeting.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Only shareholders of record at the close of business on August 21, 1998
("Voting Record Date"), will be entitled to vote at the Annual Meeting. On the
Voting Record Date, there were 1,638,157 shares of the Common Stock issued and
outstanding, and the Holding Company had no other class of equity securities
outstanding. Each share of Common Stock is entitled to one vote at the Annual
Meeting on all matters properly presented at the Annual Meeting. A majority of
the votes entitled to be cast, in person or by proxy, at the Annual Meeting is
necessary for a quorum. In determining whether a quorum is present, shareholders
who abstain, cast broker non-votes, or withhold authority to vote on one or more
director nominees will be deemed present at the Annual Meeting.
<PAGE>
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of August 21, 1998, by each person
who is known by the Holding Company to own beneficially 5% or more of the Common
Stock, unless otherwise indicated, the named beneficial owner has sole voting
and dispositive power with respect to the shares reported.
Number of Shares of
Name and Address of Common Stock Percent of
Beneficial Owner Beneficially Owned Class (1)
---------------- ------------------ ---------
Charles J. Moore
The Banc Funds 93,500 (2) 5.7%
Banc Fund III L.P.
Banc Fund III Trust
Banc Fund IV L.P.
Banc Fund IV Trust
208 South LaSalle Street
Chicago, Illinois 60604
- ---------------
(1) Based upon 1,638,157 shares of Common Stock outstanding, which does not
include options for 73,848 shares of Common Stock granted to certain
directors, officers and employees of the Holding Company and its
subsidiaries which are currently exercisable.
(2) In a Schedule 13D, signed by Charles T. Moore, on behalf of Banc Fund
III L.P, Banc Fund III Trust, Banc Fund IV L.P. and Banc Fund IV Trust
(collectively, the "Funds"), it is stated that the Funds beneficially
own these shares and provide financing to, and acquire equity interests
in, financial institutions and their holding companies. The Schedule
13D also indicates that Charles J. Moore, as manager of the Funds, has
voting power and dispositive power with respect to the shares
beneficially owned by the Funds.
PROPOSAL I -- ELECTION OF DIRECTORS
The Board of Directors, by resolution adopted pursuant to the By-Laws
of the Holding Company, established that the Board of Directors shall consist of
seven members. The By-Laws provide that the Board of Directors is to be divided
into three classes as nearly equal in number as possible. The members of each
class are to be elected for a term of three years and until their successors are
elected and qualified. One class of directors is to be elected annually. The
nominees for director this year are John M. Dalton and Jack O. Murrell, each of
whom is a current director of the Holding Company. If elected by the
shareholders at the Annual Meeting, the terms of Messrs. Dalton and Murrell will
expire in 2001.
Unless otherwise directed, each proxy executed and returned by a
shareholder will be voted for the election of the nominees listed below. If any
person named as a nominee should be unable or unwilling to stand for election at
the time of the Annual Meeting, the proxy holders will nominate and vote for a
replacement nominee recommended by the Board of Directors. At this time, the
Board of Directors knows of no reason why the nominees listed below may not be
able to serve as directors if elected.
<PAGE>
The following table sets forth certain information regarding directors
continuing in office and the nominees for the position of director of the
Holding Company, including the number and percent of shares of Common Stock
beneficially owned by such persons as of the Voting Record Date. Unless
otherwise indicated, each person in the table below has sole investment and/or
voting power with respect to the shares shown as benefically owned by him. No
nominee for director is related to any other nominee for director or executive
officer of the Holding Company by blood, marriage, or adoption, and there are no
arrangements or understandings between any nominee and any other person pursuant
to which such nominee was selected. The table also sets forth the number of
shares of Holding Company Common Stock benefically owned by Larry G. Phillips,
one of the Holding Company's executive officers, and by all directors and
executive officers of the Holding Company as a group.
<TABLE>
<CAPTION>
Director
of the Common Stock
Director of Holding Beneficially Owned
Expiration of First Federal Company as of August 21, Percentage
Name Term as Director Since Since 1998(1) of Class
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Director Nominees
John M. Dalton 2001 1974 1992 37,981(2) 2.31%
Jack O. Murrell 2001 1974 1992 18,161(3) 1.11%
Directors Continuing in Office
Steven L. Banks 1999 1996 1996 10,376(4) 0.63%
W. Gordon Coryea 1999 1965 1992 18,144(5) 1.11%
Jon R. Marler 2000 1997 1997 10,583(6) 0.64%
Jerry D. McVicker 2000 1996 1996 54,566(7) 3.31%
George L. Thomas 1999 1962 1992 28,291(8) 1.72%
Executive Officer
Larry G. Phillips,
Senior Vice President,
Secretary and Treasurer -- -- -- 18,820(9) 1.15%
All directors and executive
officers as a group (9 persons) 218,337(10) 12.92%
</TABLE>
- ---------------
(1) Based upon information furnished by the respective director nominees.
Under applicable regulations, shares are deemed to be beneficially
owned by a person if he or she directly or indirectly has or shares the
power to vote or dispose of the shares, whether or not he or she has
any economic power with respect to the shares. Includes shares
benefically owned by members of the immediate families of the director
nominees residing in their homes.
(2) Of these shares, 17,944 are owned jointly by Mr. Dalton and his wife,
9,537 are held in a revocable trust as to which Mr. Dalton is
co-trustee and his wife is a beneficiary, and 7,000 shares are subject
to a stock option granted under the Marion Capital Holdings, Inc. Stock
Option Plan (the "Option Plan").
<PAGE>
(3) Of these shares, 13,944 are held jointly by Mr. Murrell and his wife,
and 1,667 are subject to a stock option granted under the Option Plan.
(4) Of these shares, 500 are held in a trust as to which Mr. Banks is
trustee and beneficiary, and 9,876 are subject to a stock option
granted under the Option Plan. This number excludes options for 207
shares held by Mr. Banks which become exercisable more than 60 days
after the Voting Record Date.
(5) Of these shares, 2,000 are held jointly by Mr. Coryea and his wife, and
3,144 are subject to a stock option granted under the Option Plan.
(6) Of these shares, 1,500 are held jointly by Mr. Marler and his spouse,
and 9,083 are subject to a stock option granted under the Option Plan.
(7) Includes 6,490 shares owned jointly by Mr. McVicker and his wife,
15,000 shares held in a trust as to which Mr. McVicker is trustee and
beneficiary, and 10,083 shares subject to a stock option granted under
the Option Plan.
(8) Of these shares, 19,640 are held in a trust as to which Mr. Thomas is a
trustee and his wife is a beneficiary, 3,030 are held in a trust as to
which Mr. Thomas' wife is a trustee and his children are beneficiaries,
and 4,083 are subject to a stock option granted under the Option Plan.
(9) Of these shares, 16,320 are held jointly by Mr. Phillips and his wife,
and 2,000 are subject to a stock option granted under the Option Plan.
(10) The total of such shares includes 51,864 shares subject to stock
options granted under the Option Plan. The total excludes options for
207 shares granted under the Option Plan which are exercisable more
than 60 days after the Voting Record Date.
Presented below is certain information concerning the directors and director
nominees of the Holding Company:
Steven L. Banks (age 48) has been Executive Vice President of the
Holding Company and First Federal since September 1, 1996. Theretofore he served
as President and Chief Executive Officer of Fidelity Federal Savings Bank,
Marion, Indiana since prior to 1991.
W. Gordon Coryea (age 73) is an attorney at law based in Marion,
Indiana, and has served as attorney for First Federal since 1965.
John M. Dalton (age 64) has served as President and Chief Executive
Officer of the Holding Company and First Federal since February, 1996, became
Vice Chairman of the Holding Company and First Federal in August, 1996, and
became Chairman of the Holding Company and First Federal in July, 1997.
Theretofore he served as Executive Vice President of First Federal since 1983
and of the Holding Company since 1992. He also serves as President of First
Marion.
Jon R. Marler (age 48) has served as Senior Vice President of Ralph M.
Williams and Associates (a real estate developer located in Marion, Indiana)
since June 1982.
<PAGE>
Jerry D. McVicker (age 53) has served as Director of Operations for
Marion Community Schools (education) since April, 1996. Theretofore he served as
Assistant Principal of Marion High School since prior to 1991.
Jack O. Murrell (age 75) served as President of Murrell and Keal, Inc.,
since 1958 (a retailer located in Marion, Indiana) until his retirement in 1993.
George L. Thomas (age 81) served as Chairman of the Foster-Forbes Glass
Co., a division of the National Can Corporation, located in Marion, Indiana
until his retirement in 1984.
THE DIRECTORS SHALL BE ELECTED UPON RECEIPT OF A PLURALITY OF
AFFIRMATIVE VOTES CAST AT THE ANNUAL SHAREHOLDERS MEETING.
Plurality means that individuals who receive the largest number of votes cast
are elected up to the maximum number of directors to be chosen at the meeting.
Abstentions, broker non-votes, and instructions on the accompanying proxy to
withhold authority to vote for one or more of the nominees will result in the
respective nominees receiving fewer votes. However, the number of votes
otherwise received by the nominee will not be reduced by such action.
The Board of Directors and its Committees
During the fiscal year ended June 30, 1998, the Board of Directors of
the Holding Company met 13 times. No director attended fewer than 75% of the
aggregate total number of meetings during the last fiscal year of the Board of
Directors of the Holding Company held while he served as director and of
meetings of committees which he served during that fiscal year, except George L.
Thomas who attended 69.2% of those meetings. Among other committees, the Board
of Directors of the Holding Company has an Audit Committee and a Stock
Compensation Committee. All committee members are appointed by the Board of
Directors.
The Audit Committee, comprised of Messrs. Coryea, McVicker and Murrell,
recommends the appointment of the Holding Company's independent accountants, and
meets with them to outline the scope and review the results of such audit. The
Audit Committee meets as needed and held one meeting during the year ended June
30, 1998.
The Stock Compensation Committee administers the Holding Company's
Stock Option Plan and the RRP. The members of that Committee are Messrs.
Murrell, and Thomas. It did not meet during the fiscal year ended June 30, 1998.
<PAGE>
The Board of Directors nominated the slate of directors set forth in
the Proxy Statement. Although the Board of Directors of the Holding Company will
consider nominees recommended by shareholders, it has not actively solicited
recommendations for nominees from shareholders nor has it established procedures
for this purpose. Article III, Section 12 of the Holding Company's By-Laws
provides that shareholders entitled to vote for the election of directors may
name nominees for election to the Board of Directors but there are certain
requirements that must be satisfied in order to do so. Among other things,
written notice of a proposed nomination must be received by the Secretary of the
Holding Company not less than 60 days prior to the Annual Meeting; provided,
however, that in the event that less than 70 days' notice or public disclosure
of the date of the meeting is given or made to shareholders (which notice or
public disclosure includes the date of the Annual Meeting specified in the
Holding Company's By-Laws if the Annual Meeting is held on such date), notice
must be received not later than the close of business on the 10th day following
the day on which such notice of the date of the meeting was mailed or such
public disclosure was made.
Management Remuneration and Related Transactions
Remuneration of Named Executive Officers
No cash compensation is paid directly by the Holding Company to any of
its executive officers. Each of such officers is compensated by First Federal.
<PAGE>
The following table sets forth information as to annual, long-term and
other compensation for services in all capacities to the Holding Company and its
subsidiaries for the last three fiscal years of (i) the individual who served as
the chief executive officer of the Holding Company during the fiscal year ended
June 30, 1998 and (ii) each executive officer of the Holding Company serving as
such during the 1998 fiscal year, who earned over $100,000 in salary and bonuses
during that year (the "Named Executive Officers").
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards
------------------------------------- -------------------------
Other Annual Restricted All Other
Fiscal Compensation Stock Compensation
Name and Principal Position Year Salary ($)Bonus ($)(1) ($) (2) Awards ($) Options (#) ($)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
John M. Dalton 1998 $206,550 $35,000 -- -- -- --
Chairman, President, 1997 $187,450 $32,100 -- -- -- --
Chief Executive Officer 1996 $171,350 $30,000 -- -- -- --
and Director
Steven L. Banks 1998 $136,500 $23,000 -- -- -- --
Executive Vice President 1997 $104,950 $ 7,000 -- -- 10,083 (4) --
and Director (3)
Larry G. Phillips 1998 $110,500 $18,000 -- -- -- --
Senior Vice President, 1997 $101,700 $16,600 -- -- -- --
Secretary and Treasurer 1996 $ 95,350 $15,500 -- -- -- --
</TABLE>
(1) The bonus amounts were paid under First Federal's bonus plan.
(2) The Named Executive Officers of the Holding Company receive certain
perquisites, but the incremental cost of providing such perquisites
does not exeed the lesser of $50,000 or 10% of the officer's salary and
bonus.
(3) Mr. Banks became affiliated with the Bank as Executive Vice President
on September 1, 1996.
(4) These options became exercisable as to 4,938 shares on March 1, 1997,
became exercisable as to 4,938 shares on January 1, 1998 and become
exercisable as to 207 shares on January 1, 1999.
Stock Options
The following table includes information relating to option exercises
by the Named Executive Officers during fiscal 1998 and the number of shares
covered by exercisable and unexercisable stock options held by the Named
Executive Officers as of June 30, 1998. Also reported are the values for
"in-the-money" options (options whose exercise price is lower than the market
value of the shares at fiscal year end) which represent the spread between the
exercise price of any such existing stock options and the fiscal year-end market
price of the stock. There were no stock options granted to the Named Executive
Officers during fiscal 1998.
<PAGE>
Aggregate Option Exercises in Last Fiscal Year and
Outstanding Stock Option Grants and Value Realized as of 6/30/98
<TABLE>
<CAPTION>
Number of Value of Unexercised
Securities Underlying In-the-Money
Unexercised Options Options at
Shares Acquired Value at Fiscal Year End (#) Fiscal Year End ($) (1)
Name on Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John M. Dalton 7,000 $112,875 7,000 -- $130,375.00 --
Steven L. Banks -- $ -- 9,876 207 $ 82,711.50 $1,733.63
Larry G. Phillips 2,000 $ 33,500 2,000 -- $ 37,250.00 --
</TABLE>
(1) Amounts reflecting gains on outstanding options are based on the
average between the high and low prices for the shares on June 30,
1998, which was $28.625 per share.
Compensation of Directors
All directors of First Federal receive a retainer fee of $625 per
month, plus a fee of $625 per Board meeting attended. All directors receive $150
for each special meeting of the Board attended. Members of Board Committees,
other than officers, are paid a separate fee of $100 per meeting, unless the
meetings are unusually long in which case $150 per meeting is paid. As Chairman
of the Board of First Federal, Mr. Dalton receives a retainer fee of $937.50 per
month, plus a fee of $937.50 per Board meeting attended.
Directors of the Holding Company are paid a fee of $50 per meeting if
the meeting is held on the same day as a First Federal meeting and $100 per
meeting if the Holding Company meets on a different day.
Supplemental Retirement Plan for Directors. Effective May 1, 1992,
First Federal entered into deferred compensation agreements which remain in
effect for the directors listed below. These agreements provide that upon
retirement from the Board after attaining age 70, each director shall be
entitled to receive annual benefits in the following amounts for the following
number of years following such termination of service as a director:
Period Remaining Payable
Director Annual Payment at June 30, 1998
-------------------------------------------------------------------------
John M. Dalton $9,960 10 years
Jack O. Murrell $10,500 6 years, 8 months
W. Gordon Coryea $8,748 6 years, 7 months
George L. Thomas $10,392 6 years, 9 months
<PAGE>
At the request of a director and subject to First Federal's consent,
payments may be made in a lump sum rather than annual installments. A director
may also elect to receive his benefits upon attaining age 70 even if he remains
on the Board of Directors. If service is terminated, the director may request
acceleration of payments based upon the accruals to date.
If the director dies prior to attaining age 70, his beneficiary will
receive annual payments equal to the Board fees paid by First Federal in the
twelve months immediately prior to his death for a period of 15 years. If he
dies after his benefits commence, his beneficiary will be entitled to receive
the remaining payments over the balance of the applicable payment period.
A director has the option of increasing his benefits payable under the
plan by deferring a larger amount of his directors fees to help fund the payment
of such increased benefits, although no director has elected to do so.
First Federal for the fiscal year ended June 30, 1998, accrued an
expense for this plan of $42,030 which consisted of interest on this deferred
liability which accrues at an annual rate of 10.5%.
Death Benefit Agreements with Directors. First Federal, as of April 30,
1988, entered into an agreement with Mr. Coryea which provides that upon his
death his beneficiary will be entitled to receive for a 15-year period, an
annual payment of $26,000. The payment of these death benefits is conditioned
upon the continuous service of Mr. Coryea for a period of five years following
the adoption of the plan and until attaining age 70.
First Federal has purchased paid-up life insurance on the lives of the
directors covered under the supplemental retirement plan for directors and death
benefit agreement described above, to fund the benefits available under these
plans.
Transactions With Certain Related Persons
First Federal may make available to its directors, officers, and
employees real estate mortgage loans secured by their principal residence and
other loans. These loans are made in the ordinary course of business with the
same collateral, interest rates and underwriting criteria as those of comparable
transactions prevailing at the time and do not involve more than the normal risk
of collectibility or present other unfavorable features. All employees of the
Bank, including officers, receive a 1/4% discount with respect to interest rates
charged on loans for their primary residence.
W. Gordon Coryea, a director of both the Holding Company and First
Federal, serves as counsel to First Federal in connection with loan
delinquencies and provides routine legal work such as deed preparation,
foreclosures and preparation of other legal documents. Mr. Coryea received fees
of $30,900 during the fiscal year ended June 30, 1998, for such services. First
Federal expects to continue using Mr. Coryea's services for such matters in the
current fiscal year.
<PAGE>
PROPOSAL II -- RATIFICATION OF AUDITORS
The Board of Directors proposes for the ratification of the
shareholders at the Annual Meeting the appointment of Olive LLP, certified
public accountants, as independent auditors for the fiscal year ended June 30,
1999. Olive LLP has served as auditors for First Federal since 1979. A
representative of Olive LLP will be present at the Annual Meeting with the
opportunity to make a statement if he so desires. He will also be available to
respond to any appropriate questions shareholders may have.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"1934 Act"), requires that the Holding Company's officers and directors and
persons who own more than 10% of the Holding Company's Common Stock file reports
of ownership and changes in ownership with the SEC. Officers, directors and
greater than 10% shareholders are required by SEC regulations to furnish the
Holding Company with copies of all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms received by it,
and/or written representations from certain reporting persons that no Forms 5
were required for those persons, the Holding Company believes that during the
fiscal year ended June 30, 1998, all filing requirements applicable to its
officers, directors and greater than 10% beneficial owners with respect to
Section 16(a) of the 1934 Act were satisfied in a timely manner, except that Tim
D. Canode, a Vice President of the Bank, filed a Form 5 reporting his exercise
of a stock option for 1,000 shares about six months late.
SHAREHOLDER PROPOSALS
Any proposal which a shareholder wishes to have presented at the next
Annual Meeting of the Holding Company and included in the proxy statement and
form of proxy must be received at the main office of the Holding Company no
later than 120 days in advance of September 3, 1999. Any such proposal should be
sent to the attention of the Secretary of the Holding Company at 100 West Third
Street, Marion, Indiana 46952. A shareholder proposal being submitted outside
the processes of Rule 14a-8 promulgated under the 1934 Act will be considered
untimely if it is received by the Holding Company later than 45 days in advance
of September 3, 1999.
<PAGE>
OTHER MATTERS
Management is not aware of any business to come before the Annual
Meeting other than those matters described in the Proxy Statement. However, if
any other matters should properly come before the Annual Meeting, it is intended
that the proxies solicited hereby will be voted with respect to those other
matters in accordance with the judgment of the persons voting the proxies.
The cost of solicitation of proxies will be borne by the Holding
Company. The Holding Company will reimburse brokerage firms and other
custodians, nominees and fiduciaries for reasonable expenses incurred by them in
sending proxy material to the beneficial owners of the Common Stock. In addition
to solicitation by mail, directors, officers, and employees of the Holding
Company may solicit proxies personally or by telephone without additional
compensation.
Each shareholder is urged to complete, date and sign the proxy and
return it promptly in the enclosed envelope.
By Order of the Board of Directors
/s/ John M. Dalton
John M. Dalton, President
and Chief Executive Officer
September 3, 1998
<PAGE>
REVOCABLE PROXY MARION CAPITAL HOLDINGS, INC.
Annual Meeting of Shareholders
October 8, 1998
The undersigned hereby appoints Steven L. Banks and Larry G. Phillips, with
full power of substitution, to act as attorneys and proxies for the undersigned
to vote all shares of common stock of Marion Capital Holdings, Inc. which the
undersigned is entitled to vote at the Annual Meeting of Shareholders to be held
at the Holiday Inn, 501 East Fourth Street, Marion, Indiana, on Thursday,
October 8, 1998, at 10:00 a.m., and at any and all adjournments thereof, as
follows:
1. The election as directors of all nominees listed below, except as marked to
the contrary.
[ ] FOR [ ] VOTE WITHHELD
INSTRUCTIONS: To withhold authority to vote for any individual nominee, strike a
line through the nominee's name on the list below:
John M. Dalton Jack O. Murrell
(each for a three year term)
2. Ratification of the appointment of Olive LLP as auditors for the year
ending June 30, 1999.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
In their discretion, the proxies are authorized to vote on any other business
that may properly come before the Meeting or any adjournment thereof.
The Board of Directors recommends a vote "FOR" each of the listed propositions.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
This Proxy may be revoked at any time prior to the voting thereof.
The undersigned acknowledges receipt from Marion Capital Holdings, Inc., prior
to the execution of this Proxy, of a Notice of the Meeting, a Proxy Statement
and an Annual Report to Shareholders.
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Should the undersigned be present and elect to vote at the Annual Meeting
or at any adjournment thereof and after notification to the Secretary of the
Corporation at the Meeting of the shareholder's decision to terminate this
Proxy, then the power of such attorneys and proxies shall be deemed terminated
and of no further force and effect.
Dated:___________________________________________, 1998
NUMBER OF SHARES
-------------------------- -------------------------
Print Name of Shareholder Print Name of Shareholder
-------------------------- -------------------------
Signature of Shareholder Signature of Shareholder
Please sign exactly as your name appears above on this
card. When signing as attorney, executor,
administrator, trustee or guardian, please give your
full title. If shares are held jointly, each holder
should sign.
PLEASE PROMPTLY COMPLETE, DATE, SIGN AND MAIL THIS
PROXY IN THE ENCLOSED POSTAGE PAID ENVELOPE.
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
