================================================================================
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended June 30, 1999
or
[ ] Transaction Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to ___________
Commission File Number 0-21108
MARION CAPITAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1872393
(State or other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
100 West Third Street, P.O. Box 367, Marion, Indiana 46952
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (765) 664-0556
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of August 23, 1999, was $28,090,725.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of August 23, 1999, was 1,440,550 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended June 30, 1999
are incorporated into Part II. Portions of the Proxy Statement for the 1999
Annual Meeting of Shareholders are incorporated into Part III.
Exhibit Index on Page E-1
Page 1 of 37 Pages
================================================================================
<PAGE>
MARION CAPITAL HOLDINGS, INC.
Form 10-K
INDEX
Page
Forward Looking Statements................................................ 3
PART 1
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 34
Item 3. Legal Proceedings........................................... 34
Item 4. Submission of Matters to a Vote of Security Holders......... 34
Item 4.5. Executive Officers of MCHI.................................. 34
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..................................... 35
Item 6. Selected Consolidated Financial Data........................ 35
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 35
Item 7A. Quantitative and Qualtative Disclosures About Market Risk... 36
Item 8. Financial Statements and Supplementary Data................. 36
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 36
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 36
Item 11. Executive Compensation...................................... 36
Item 12. Security Ownership of Certain Beneficial Owners
and Management.......................................... 36
Item 13. Certain Relationships and Related Transactions.............. 36
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K............................................. 37
Signatures ........................................................ 38
<PAGE>
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief,
outlook, estimate or expectations of the Corporation (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Corporation. Readers of this Form 10-K are
cautioned that any such forward looking statements are not guarantees of future
events or performance and involve risks and uncertainties, and that actual
results may differ materially from those in the forward looking statements as a
result of various factors. The accompanying information contained in this Form
10-K identifies important factors that could cause such differences. These
factors include changes in interest rates; loss of deposits and loan demand to
other savings and financial institutions; substantial changes in financial
markets; changes in real estate values and the real estate market; regulatory
changes; or unanticipated results in pending legal proceedings.
PART I
Item 1. Business.
General
Marion Capital Holdings, Inc. ("MCHI") is an Indiana corporation
organized on November 23, 1992, to become a unitary savings and loan holding
company. MCHI became a unitary savings and loan holding company upon the
conversion (the "Conversion") of First Federal Savings Bank of Marion (the
"Bank" and together with MCHI, the "Company") from a federal mutual savings bank
to a federal stock savings bank on March 18, 1993. The principal asset of MCHI
consists of 100% of the issued and outstanding shares of common stock, $0.01 par
value per share, of the Bank. The Bank began operations in Marion, Indiana, as a
federal savings and loan association in 1936, and converted to a federal mutual
savings bank in 1986.
The Bank offers a number of consumer and commercial financial services.
These services include: (i) residential and commercial real estate loans; (ii)
multi-family loans; (iii) construction loans; (iv) installment loans; (v) loans
secured by deposits; (vi) auto loans; (vii) NOW accounts; (viii) consumer and
commercial demand and time deposit accounts; (ix) individual retirement
accounts; and (x) tax deferred annuities and mutual funds through its service
corporation subsidiary, First Marion Service Corporation ("First Marion"). The
Bank provides these services at four full-service offices, two in Marion, one in
Decatur, Indiana (which will be sold to another financial institution in
September 1999) and one in Gas City, Indiana. The Bank's market area for loans
and deposits consists of Grant and surrounding counties and Adams County in
Indiana.
The Company's primary source of revenue is interest income from the
Bank's lending activities. The Bank's principal lending activity is the
origination of conventional mortgage loans to enable borrowers to purchase or
refinance one- to four-family residential real property. At June 30, 1999, 59.2%
of the Company's total loan portfolio consisted of conventional mortgage loans
on residential real property. These loans are generally secured by first
mortgages on the property. Substantially all of the residential real estate
loans originated by the Bank are secured by properties located in Grant and
Adams Counties. The Bank also offers secured and unsecured consumer-related
loans (including installment loans, loans secured by deposits, home equity
loans, and auto loans). The Company has a significant commercial real estate
portfolio, with a balance of $32.9 million at June 30, 1999, or 19.2% of total
loans. The Bank also makes construction loans, which constituted $6.3 million or
3.7% of the Company's total loans at June 30, 1999, and commercial loans, which
are generally not secured by real estate, of $10.9 million, or 6.4%.
In the early 1980s most savings institutions' loan portfolios consisted
of long-term fixed-rate loans which then carried low interest rates. At the same
time, most savings associations had to pay competitive and high market interest
rates in order to maintain deposits. This resulted in a "negative" interest
spread. The Bank experienced these problems, but responded to them as changes in
- 3 -
<PAGE>
regulations over the period permitted, and has been quite successful in managing
its interest rate risk. Among its strategies has been an emphasis on originating
adjustable-rate mortgage loans ("ARMs") which permit the Bank to better match
the interest it earns on mortgage loans with the interest it pays on deposits,
with interest rate minimums. As of June 30, 1999, ARMs constituted 85.7% of the
Company's total mortgage loan portfolio. Additionally, the Bank attempts to
lengthen liability repricing by aggressively pricing longer term certificates of
deposit during periods of relatively low interest rates and investing in
intermediate-term or variable-rate investment securities.
Lending Activities
Loan Portfolio Data. The following table sets forth the composition of
the Company's loan portfolio by loan type and security type as of the dates
indicated, including a reconciliation of gross loans receivable after
consideration of the allowance for loan losses and deferred net loan fees on
loans.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ----------------- ---------------- ---------------- ----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN
Mortgage loans:
Residential.................. $101,512 59.18% $103,719 61.14% $ 97,017 63.42%$ 87,106 58.85% $ 81,651 57.24%
Commercial real estate....... 32,918 19.19 31,857 18.78 31,122 20.35 36,170 24.43 35,937 25.19
Multi-family................. 9,295 5.42 11,014 6.49 11,394 7.45 15,573 10.52 14,495 10.16
Construction:
Residential.................. 3,674 2.14 2,742 1.62 3,555 2.32 3,904 2.64 3,448 2.42
Commercial real estate....... 2,658 1.55 4,542 2.68 1,144 .75 506 .34 1,257 .88
Multi-family................. --- --- --- --- --- --- 584 .39 2,627 1.84
Consumer loans:
Installment loans............ 3,957 2.31 2,417 1.42 3,613 2.37 2,725 1.85 1,897 1.33
Loans secured by deposits.... 867 .50 1,027 .61 895 .58 883 .60 797 .56
Home equity loans............ 3,665 2.14 2,496 1.47 1,376 .90 399 .27 405 .28
Auto loans................... 2,075 1.21 1,323 .78 325 .21 169 .11 120 .09
Commercial loans................ 10,914 6.36 8,511 5.01 2,525 1.65 7 .00 9 .01
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans receivable....... $171,535 100.00% $169,648 100.00% $152,966 100.00% $148,026 100.00% $142,643 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
TYPE OF SECURITY
Residential (1).............. $108,851 63.46% $108,957 64.23% $101,948 66.65%$ 91,409 61.75% $ 85,504 59.94%
Commercial real estate....... 35,576 20.74 36,399 21.46 32,266 21.09 36,688 24.78 37,219 26.08
Multi-family................. 9,295 5.42 11,014 6.49 11,394 7.45 16,157 10.91 17,122 12.00
Autos........................ 2,075 1.21 1,323 .78 325 .21 169 .11 120 .08
Deposits..................... 867 .50 1,027 .61 895 .58 883 .60 797 .56
Other security............... 10,914 6.36 8,511 5.01 2,525 1.65 7 .00 9 .01
Unsecured.................... 3,957 2.31 2,417 1.42 3,613 2.37 2,725 1.85 1,897 1.33
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans receivable....... 171,535 100.00 169,648 100.00 152,966 100.00 148,026 100.00 142,643 100.00
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Deduct:
Allowance for loan losses ...... 2,272 1.32 2,087 1.23 2,032 1.33 2,009 1.36 2,013 1.41
Deferred net loan fees.......... 270 .15 300 .18 277 .18 313 .21 303 .21
Loans in process................ 3,196 1.86 3,663 2.16 2,626 1.72 2,539 1.71 4,004 2.81
Net loans receivable......... $165,797 96.65% $163,598 96.43% $148,031 96.77% $143,165 96.72% $136,323 95.57%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Mortgage Loans
Adjustable rate.............. $128,554 85.67% $130,100 84.55% $128,799 89.30% $128,811 89.55% $120,496 86.43%
Fixed rate................... 21,503 14.33 23,774 15.45 15,433 10.70 15,032 10.45 18,919 13.57
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total...................... $150,057 100.00% $153,874 100.00% $144,232 100.00% $143,843 100.00% $139,415 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
- ---------
(1) Includes home equity loans.
- 4 -
<PAGE>
The following table sets forth certain information at June 30, 1999,
regarding the dollar amount of loans maturing in the Company's loan portfolio
based on the date that final payment is due under the terms of the loan. Demand
loans having no stated schedule of repayments and no stated maturity and
overdrafts are reported as due in one year or less. This schedule does not
reflect the effects of possible prepayments or enforcement of due-on-sale
clauses. Management expects prepayments will cause actual maturities to be
shorter.
<TABLE>
<CAPTION>
Due During Years Ended June 30,
Balance ----------------------------------------------------------------------
Outstanding 2003 2005 2010 2015
At June to to to and
1999 2000 2001 2002 2004 2009 2014 following
---------- ----- ----- ------ ------ ------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential............ $105,186 $990 $337 $387 $2,051 $14,516 $34,448 $52,457
Multi-family........... 9,295 462 --- 126 499 3,463 2,723 2,022
Commercial real
estate............... 35,576 3,166 834 347 1,338 7,821 12,313 9,757
Consumer loans:
Home equity............ 3,665 10 --- --- --- 29 --- 3,626
Auto................... 2,075 69 168 455 1,361 22 --- ---
Installment............ 3,957 638 247 488 1,938 483 92 71
Loans secured
by deposits.......... 867 675 169 10 13 --- --- ---
Commercial loans.......... 10,914 3,080 300 344 1,602 5,248 340 ---
-------- ------ ------ ------ ------ ------- ------- -------
Total.................. $171,535 $9,090 $2,055 $2,157 $8,802 $31,582 $49,916 $67,933
======== ====== ====== ====== ====== ======= ======= =======
</TABLE>
The following table sets forth, as of June 30, 1999, the dollar amount of
all loans due after one year which have fixed interest rates and floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Due After June 30, 2000
--------------------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- ---------
(In Thousands)
<S> <C> <C> <C>
Mortgage loans:
Residential............................... $10,971 $93,225 $104,196
Multi-family.............................. 1,661 7,172 8,833
Commercial real estate.................... 2,243 30,167 32,410
Consumer loans:
Home equity............................... --- 3,655 3,655
Auto...................................... 2,006 --- 2,006
Installment............................... 3,272 47 3,319
Loan secured by deposits.................. 192 --- 192
Commercial loans .............................. 6,001 1,833 7,834
------- -------- --------
Total..................................... $26,346 $136,099 $162,445
======= ======== ========
</TABLE>
Residential Loans. Residential loans consist of one-to-four family
loans. Approximately $101.5 million, or 59.2%, of the Company's portfolio of
loans at June 30, 1999, consisted of one- to four-family mortgage loans, of
which approximately 85.7% had adjustable rates. The Company is currently selling
to the Federal Home Loan Mortgage Corporation (the "FHLMC") 95% of the principal
balance on fixed rate loans originated with terms in excess of 15 years and
retaining all of the servicing rights on these loans. The option to retain or
sell fixed rate loans will be evaluated from time to time. During the year ended
June 30, 1999, $9.0 million in loans were sold to FHLMC.
The Bank originates fixed-rate loans with terms of up to 30 years. Some
loans are originated in accordance with guidelines established by FHLMC to
facilitate the sale of such loans to FHLMC in the secondary market. These loans
amortize on a monthly basis with principal and interest due each month. As
- 5 -
<PAGE>
mentioned above, a few of these loans originated with terms in excess of 15
years, or annual interest rates below 8.5%, were sold to FHLMC promptly after
they were originated. The Bank retained 5% of the principal balance of such sold
loans as well as the servicing on all of such sold loans. At June 30, 1999, the
Company had $11.0 million of fixed rate residential mortgage loans which were
originated in prior years in its portfolio, none of which were held for sale.
Most ARMs adjust on an annual basis, although the Bank currently offers
a five-year ARM which has a fixed rate for five years, and a three-year ARM
which has a fixed rate for three years. Both of these ARMs adjust annually after
the initial period is over. Currently, the ARMs have an interest rate average
minimum of 6.5% and average maximum of 13.5%. The interest rate adjustment for
substantially all of the Bank's ARMs is indexed to the One-Year Treasury
Constant Maturity Index. On new residential mortgage loans, the margin above
such index currently is 3.00%. The Bank offers ARMs with maximum rate changes of
2% per adjustment, and an average of 6.0% over the life of the loan. Generally
made for terms of up to 25 years, the Bank's ARMs are not made on terms that
conform with the standard underwriting criteria of FHLMC or the Federal National
Mortgage Association (the "FNMA"), thereby making resale of such loans
difficult. To better protect the Company against rising interest rates, the Bank
underwrites its residential ARMs based on the borrower's ability to repay the
loan assuming a rate equal to approximately 2% above the initial rate payable if
the loan remained constant during the loan term.
Although the Bank's residential mortgage loans are generally amortized
over a 25-year period, residential mortgage loans generally are paid off before
maturity. Substantially all of the residential mortgage loans that the Bank has
originated include "due on sale" clauses, which give the Bank the right to
declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid.
The Bank generally requires private mortgage insurance on all
conventional residential single-family mortgage loans with loan-to-value ratios
in excess of 90%. The Bank generally will not lend more than 95% of the lower of
current cost or appraised value of a residential single family property. In July
1995, the Bank's wholly-owned subsidiary, First Marion, began a 100% financing
program pursuant to which the Bank would originate an 80% loan-to-value first
mortgage loan using its normal underwriting standard and First Marion would
finance the remaining 20%. The second mortgage loan originated by First Marion
is a fixed rate mortgage loan with an interest rate of 10% and a term not to
exceed 15 years. At June 30, 1999, these loans amounted to $2.4 million.
Residential mortgage loans under $250,000 are approved by one of three
senior officers given authority by the Board of Directors. Residential loans
between $250,000 and $600,000 can be approved by two of these three senior
officers. All loan requests above $600,000 are approved by the Bank's Executive
Committee.
At June 30, 1999, residential mortgage loans amounting to $1.1 million,
or .6% of total loans, were included in non-performing assets. See
"--Non-performing and Problem Assets."
Commercial Real Estate Loans. At June 30, 1999, $32.9 million, or
19.2%, of the Company's total loan portfolio consisted of mortgage loans secured
by commercial real estate. The properties securing these loans consist primarily
of nursing homes, office buildings, hotels, churches, warehouses and shopping
centers. The commercial real estate loans, substantially all adjustable rate,
are made for terms not exceeding 25 years, and generally require an 80% or lower
loan-to-value ratio. Some require balloon payments after 5, 10 or 15 years. A
number of different indices, including the 1, 3, and 5 year Treasury Bills, are
used as the interest rate index for these loans. The commercial real estate
loans generally have minimum interest rates of 9% and maximum interest rates of
15%. Most of these loans adjust annually, but the Company has some 3-year and
5-year commercial real estate adjustable rate loans in its portfolio. The
largest commercial real estate loan as of June 30, 1999, had a balance of $2.5
million.
The Company held in its portfolio 21 commercial and multi-family real
estate loans with balances in excess of $500,000 at June 30, 1999. The average
loan balance for all such loans was $997,000. A significant proportion of the
Company's commercial real estate loan portfolio consists of loans secured by
nursing home properties. The balance of such loans totaled $12.3 million at June
30, 1999.
Current federal law limits a savings association's investment in
commercial real estate loans to 400% of its capital. In addition, the
application of the Qualified Thrift Lender Test has had the effect of limiting
the aggregate investment in commercial real estate loans made by the Bank. See
"Regulation -- Qualified Thrift Lender." The Bank currently complies with the
limitations on investments in commercial real estate loans.
- 6 -
<PAGE>
Commercial real estate loans involve greater risk than residential
mortgage loans because payments on loans secured by income properties are often
dependent on the successful operation or management of the properties and are
generally larger. As a result, repayment of such loans may be subject to a
greater extent than residential real estate loans to adverse conditions in the
real estate market or the economy. At June 30, 1999, the Company had classified
$1.0 million as substandard, $147,000 as doubtful, $93,000 as loss and $2.1
million as special mention.
The Company has a high concentration of loans secured by nursing homes.
Like other commercial real estate loans, nursing home loans often involve large
loan balances to single borrowers or groups of related borrowers, and have a
higher degree of credit risk than residential mortgage lending. Loan payments
are often dependent on the operation of the nursing home, the success of which
is dependent upon the long-term health care industry. The risks inherent in such
industry include the federal, state and local licensure and certification laws
which regulate, among other things, the number of beds for which nursing care
can be provided and the construction, acquisition and operation of such nursing
facilities. The failure to obtain or maintain a required regulatory approval or
license could prevent the nursing home from being reimbursed for costs incurred
in offering its services or expanding its business. Moreover, a large percentage
of nursing home revenues is derived from reimbursement by third party payors.
Both governmental and other third party payors have adopted and are continuing
to adopt cost containment measures designed to limit payment to health care
providers, and changes in federal and state regulations in these areas could
adversely affect such homes. Because of the Company's concentration in this
area, a decline in the nursing home industry could have a substantial adverse
effect on the Company's commercial real estate portfolio and, therefore, a
substantial adverse effect on its operating results.
Commercial real estate loans in excess of $1.5 million must be approved
in advance by the Bank's Board of Directors. Commercial real estate loans
between $600,000 and $1.5 million can be approved by the Bank's Executive
Committee. Commercial real estate requests between $250,000 and $600,000 require
approval from two of three senior officers authorized by the Bank's Board of
Directors and a similar request below $250,000 requires approval from any one of
these three same senior officers.
Multi-Family Loans. At June 30, 1999, $9.3 million, or 5.4%, of the
Company's total loan portfolio consisted of mortgage loans secured by
multi-family dwellings (those consisting of more than four units). All of the
Company's multi-family loans are secured by apartment complexes located in
Indiana or Ohio. The average balance of all such multi-family mortgage loans was
$252,000 as of June 30, 1999. The largest such multi-family mortgage loan as of
June 30, 1999, had a balance of $1.1 million. As with the Bank's commercial real
estate loans, multi-family mortgage loans are substantially all adjustable-rate
loans, are written for terms not exceeding 25 years, and require at least an 80%
loan-to-value ratio. At June 30, 1999, the Company had $462,000 in loans secured
by multi-family dwellings which were included in non-performing assets and $2.3
million as special mention.
Multi-family loans, like commercial real estate loans, involve a
greater risk than do residential loans. Also, the more stringent loans-to-one
borrower limitation limits the ability of the Bank to make loans to developers
of apartment complexes and other multi-family units.
Construction Loans. The Bank offers construction loans with respect to
owner-occupied residential and commercial real estate property and, in certain
cases, to builders or developers constructing such properties on an investment
basis (i.e., before the builder/developer obtains a commitment from a buyer).
Most construction loans are made to owners who occupy the premises.
At June 30, 1999, $6.3 million, or 3.7%, of the Company's total loan
portfolio consisted of construction loans, of which approximately $3.7 million
were residential construction loans and $2.6 million related to construction of
commercial real estate projects. The largest construction loan on June 30, 1999,
was $570,000, which is included in a total of such loans classified as
substandard of $1.5 million.
For most construction loans, the loan is actually a 25-year mortgage
loan, but interest only is payable during the construction phase of the loan up
to 18 months, and such interest is charged only on the money disbursed under the
loan. After the construction phase (typically 6 to 12 months), regular mortgage
loan payments of principal and interest are due. Appraisals for these loans are
completed, subject to completion of building plans and specifications.
- 7 -
<PAGE>
Interest rates and fees vary for these loans. While construction is
progressing, periodic inspections are performed for which the Bank assesses a
fee.
While providing the Company with a higher yield than a conventional
mortgage loan, construction loans involve a higher level of risk. For example,
if a project is not completed and the borrower defaults, the Bank may have to
hire another contractor to complete the project at a higher cost. Also, a house
may be completed, but may not be salable, resulting in the borrower defaulting
and the Bank taking title to the house.
Consumer Loans. Federal laws and regulations permit federally chartered
savings associations to make secured and unsecured consumer loans in an
aggregate amount of up to 35% of the association's total assets. In addition, a
federally chartered savings association has lending authority above the 35%
limit for certain consumer loans, such as property improvement loans and deposit
account secured loans. However, the Qualified Thrift Lender test places
additional limitations on a savings association's ability to make consumer
loans.
The Company's consumer loans, consisting primarily of installment
loans, loans secured by deposits, and auto loans, aggregated $10.6 million as of
June 30, 1999, or 6.2% of the Company's total loan portfolio. Although consumer
loans are currently only a small portion of its lending business, the Bank
consistently originates consumer loans to meet the needs of its customers, and
the Bank intends to originate more such loans to assist in meeting its
asset/liability management goals.
The Bank makes installment loans of up to five years, which consisted
of $4.0 million, or 2.3% of the Company's total loan portfolio at June 30, 1999.
Loans secured by deposits, totaling $867,000 at June 30, 1999, are made up to
90% of the original account balance and accrue at a rate of 2% over the
underlying certificate of deposit rate. Variable rate home equity loans of up to
10 years, secured by second mortgages on the underlying residential property
totaled $3.7 million, or 2.1% of the Company's total loan portfolio at June 30,
1999. Automobile loans totaled only $2.1 million, or 1.2% and are made at fixed
rates for terms of up to five years depending on the age of the automobile and
the loan-to-value ratio for the loan. The Bank does not make indirect automobile
loans.
Although consumer loans generally involve a higher level of risk than
one- to four-family residential mortgage loans, their relatively higher yields
and shorter terms to maturity are believed to be helpful in reducing the
interest-rate risk of the loan portfolio. The Bank has thus far been successful
in managing consumer loan risk. As of June 30, 1999, $21,000 of consumer loans
were included in non-performing assets.
Commercial Business Lending. At June 30, 1999, commercial business
loans comprised $10.9 million, or 6.4% of the Bank's gross loan portfolio. Most
of the commercial business loans have been extended to finance local businesses
and include short term loans to finance machinery and equipment purchases,
inventory and accounts receivable.
Unlike residential mortgage loans, commercial business loans are
typically made on the basis of the borrower's ability to make repayment from the
cash flow of the borrower's business. As a result, the availability of funds the
repayment of commercial business loans may be substantially dependent on the
success of the business itself, which, in turn, is often dependent in part upon
general economic conditions. Commercial business loans are usually, but not
always, secured by business assets. However, the collateral securing the loans
may depreciate over time, may be difficult to appraise, and may fluctuate in
value based on the success of the business.
The Bank's commercial business lending policy includes credit file
documentation and analysis of the borrower's background and the capacity to
repay the loan, the accuracy of the borrower's capital and collateral as well as
an evaluation of other conditions effecting the borrower. Analysis of the
borrower's past, present and future cash flows is also an important aspect of
the Bank's credit analysis. The Bank generally obtains personal guarantees on
commercial business loans. Nonetheless, these loans are believed to carry higher
credit risk than more traditional single family loans.
Loans to One Borrower. The Bank occasionally receives multiple loan
requests from a single borrower. These requests are prudently underwritten based
on the Bank's historical experience with the borrower, the loan amount compared
to the collateral's value, the borrower's credit risk, and the financial
position of the borrower, among other things. At June 30, 1999, the largest
aggregate amount of loans to a single borrower totaled $4.6 million. These loans
- 8 -
<PAGE>
are primarily secured by nursing homes located in Indiana; however, one of these
loans is secured by a residential property owned by the borrower in Southern
Indiana. As of the report date, all of the aforementioned loans were performing
in accordance with the original terms extended by the Bank. In addition, the
Bank reviews both the operating statements from the individual projects and the
financial position of the borrower on an annual basis.
Origination, Purchase and Sale of Loans. The Bank currently does not
originate its ARMs in conformity with the standard criteria of the FHLMC or
FNMA. The Bank would therefore experience some difficulty selling such loans in
the secondary market, although most loans could be brought into conformity. The
Bank has no intention, however, of attempting to sell such loans. The Bank's
ARMs vary from secondary market criteria because the Bank does not use the
standard loan form, does not require current property surveys in most cases, and
does not permit the conversion of those loans to fixed-rate loans in the first
three years of their term. These practices allow the Bank to keep the loan
closing costs down.
Although the Bank currently has authority to lend anywhere in the
United States, it has confined its loan origination activities primarily in
Grant and contiguous counties and in Adams County. The Bank's loan originations
are generated from referrals from builders, developers, real estate brokers and
existing customers, newspaper, radio and periodical advertising, and walk-in
customers. Loans are originated at either the main or branch offices. All loan
applications are processed and underwritten at the Bank's main office.
Under current federal law, a savings association generally may not make
any loan or extend credit to a borrower or its related entities if the total of
all such loans by the savings association exceeds 15% of its unimpaired capital
and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired
capital and surplus, if such loans or extensions of credit are fully secured by
readily marketable collateral, including certain debt and equity securities but
not including real estate. In some cases, a savings association may lend up to
30% of unimpaired capital and surplus to one borrower for purposes of developing
domestic residential housing, provided that the association meets its regulatory
capital requirements and the OTS authorizes the association to use this expanded
lending authority. The maximum amount which the Bank could have loaned to one
borrower and the borrower's related entities under the 15% of capital limitation
was $4.4 million at June 30, 1999.
The Bank's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. To assess the borrower's
ability to repay, the Bank studies the employment and credit history and
information on the historical and projected income and expenses of its
individual and corporate mortgagors.
The Bank uses independent appraisers to appraise the property securing
its loans and requires title insurance or an abstract and a valid lien on its
mortgaged real estate. Appraisals on real estate securing most real estate loans
in excess of $250,000, are performed by either state-licensed or state-certified
appraisers, depending on the type and size of the loan. The Bank requires fire
and extended coverage insurance in amounts at least equal to the principal
amount of the loan. It also requires flood insurance to protect the property
securing its interest if the property is in a flood plain. Tax and insurance
payments are required to be escrowed by the Bank on all loans subject to private
mortgage insurance, but this service is offered to all borrowers. Annual site
visitations are made by licensed architects with respect to all commercial real
estate loans in excess of $500,000.
The Bank's Board of Directors has given mortgage lending authority to
three senior officers of the Bank. Each of these individuals can approve
mortgage requests up to $250,000. Loan requests between $250,000 and $600,000
require authorization from two of these three officers. The Bank's Executive
Committee approves all consumer loans greater than $50,000 and mortgage requests
between $600,000 and $1.5 million. Commercial real estate loans in excess of
$1.5 million must be approved in advance by the Bank's Board of Directors.
The Bank applies consistent underwriting standards to the several types
of consumer loans it makes to protect the Bank against the risks inherent in
making such loans. Borrower character, credit history, net worth and underlying
collateral are important considerations.
The Bank has historically participated in the secondary market as a
seller of 95% of the principal balance of its long-term fixed rate mortgage
loans, as described above, although the Bank has recently begun retaining such
loans in the Company's portfolio. The loans the Bank sells are designated for
sale when originated. During the fiscal year ended June 30, 1999, the Bank sold
- 9 -
<PAGE>
$9.0 million of its fixed-rate mortgage loans, and at June 30, 1999, held
$327,000 of such loans for sale. The Bank obtains commitments from investors for
the sale of such loans at their outstanding principal balance and these
commitments are obtained prior to origination of the loans.
When it sells mortgage loans, the Bank generally retains the
responsibility for collecting and remitting loan payments, inspecting the
properties that secure the loans, making certain that monthly principal and
interest payments and real estate tax and insurance payments are made on behalf
of borrowers, and otherwise servicing the loans. The Company receives a
servicing fee for performing these services. The amount of fees received by the
Company varies, but is generally calculated as an amount equal to a rate of .25%
per annum for commercial loans and .375% per annum for residential loans on the
outstanding principal amount of the loans serviced. At June 30, 1999, the
Company serviced $38.3 million of loans sold to other parties of which $13.8
million, or 36.0%, were for loans sold to FHLMC; other service loans are
participation loans sold to other financial institutions.
The Company occasionally purchases participations to diversify its
portfolio, to supplement local loan demand and to obtain more favorable yields.
The participations purchased normally represent a portion of residential or
commercial real estate loans originated by other Indiana financial institutions,
most of which are secured by property located in Indiana. As of June 30, 1999,
the Company held in its loan portfolio, participations in mortgage loans
aggregating $5.7 million that it had purchased, all of which were serviced by
others. The largest such participation it held at June 30, 1999, was in a loan
secured by an apartment complex. The Company's portion of the outstanding
balance on that date was approximately $1.1 million.
The following table shows loan origination, purchase, sale and
repayment activity for the Bank during the periods indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------
1999 1998 1997
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Gross loans receivable at beginning of period $169,648 $153,203 $149,517
Originations:
Mortgage loans:
Residential ............................ 41,622 37,309 33,646
Commercial real estate and multi-family 6,923 13,949 11,483
-------- -------- --------
Total mortgage loans ................... 48,545 51,258 45,129
-------- -------- --------
Consumer loans:
Installment loans ...................... 7,534 7,170 4,528
Loans secured by deposits .............. 642 807 449
-------- -------- --------
Total consumer loans ................... 8,176 7,977 4,977
-------- -------- --------
Commercial loans ......................... 12,784 6,664 2,558
-------- -------- --------
Total originations ..................... 69,505 65,899 52,664
-------- -------- --------
Purchases:
Mortgage loans:
Commercial real estate and
multi-family ...................... -- 500 --
-------- -------- --------
Total originations and purchases ....... 69,505 66,399 52,664
-------- -------- --------
Sales:
Mortgage loans:
Residential ............................ 9,104 1,429 76
Commercial real estate and multi-family 909 3,443 7,133
-------- -------- --------
Total sales .......................... 10,013 4,872 7,209
-------- -------- --------
Repayments and other deductions ............. 57,605 45,082 41,769
-------- -------- --------
Gross loans receivable at end of period ..... $171,535 $169,648 $153,203
======== ======== ========
</TABLE>
Origination and Other Fees. The Company realizes income from fees for
originating commercial real estate loans (equal to one or one-half of a
percentage of the total principal amount of the loan), late charges, checking
and NOW account service charges, fees for the sale of mortgage life insurance by
the Bank, fees for servicing loans and fees for other miscellaneous services
including money orders and travelers checks. In order to increase its
competitive position with respect to other mortgage lenders, the Bank does not
charge points on residential mortgage loans, but does so on its commercial real
estate loans. Late charges are assessed if payment is not received within 15
days after it is due.
- 10 -
<PAGE>
The Bank charges miscellaneous fees for appraisals, inspections
(including an inspection fee for construction loans), obtaining credit reports,
certain loan applications, recording and similar services. The Company also
collects fees for Visa applications which it refers to another financial
institution. The Company does not underwrite any of these credit card loans.
Non-Performing and Problem Assets
Mortgage loans are reviewed by the Company on a regular basis and are
generally placed on a non-accrual status when the loans become contractually
past due 90 days or more. Once a mortgage loan is fifteen days past due, a
reminder is mailed to the borrower requesting payment by a specified date. At
the end of each month, late notices are sent with respect to all mortgage loans
at least 20 days delinquent. When loans are 30 days in default, a third notice
imposing a late charge equal to 5% of the late principal and interest payment is
imposed. Contact by phone or in person is made, if feasible, with respect to all
mortgage loans 30 days or more in default. By the time a mortgage loan is 90
days past due, a letter is sent to the borrower demanding payment by a certain
date and indicating that a foreclosure suit will be filed if this deadline is
not met. The Board of Directors normally confers foreclosure authority at that
time, but management may continue to work with the borrower if circumstances
warrant.
Consumer and commercial loans other than mortgage loans are treated
similarly. Interest income on consumer and other nonmortgage loans is accrued
over the term of the loan except when serious doubt exists as to the
collectibility of a loan, in which case the accrual of interest is discontinued.
It is the Company's policy to recognize losses on these loans as soon as they
become apparent. Collateralized and noncollateralized consumer loans after 180
and 120 days of delinquency, respectively, are charged off.
Non-performing assets. At June 30, 1999, $3.3 million, or 1.7% of the
Company's total assets, were non-performing assets (non-accrual loans, real
estate owned and troubled debt restructurings), compared to $2.0 million, or
1.1% of the Company's total assets, at June 30, 1995. At June 30, 1999,
residential loans, multi-family, commercial real estate loans, commercial loans,
consumer loans, and repossessed assets accounted for 33.2%, 13.9%, 47.6%, 4.6%,
.6% and .1%, respectively, of non-performing assets.
At June 30, 1999, non-performing assets included $2,000 of repossessed
assets compared to real estate acquired as a result of foreclosure, voluntary
deed, or other means, of $206,000 at June 30, 1995. Real estate acquired is
classified by the Company as "real estate owned" or "REO" until it is sold. When
property is so acquired, the value of the asset is recorded on the books of the
Company at the lower of the unpaid principal balance at the date of acquisition
plus foreclosure and other related costs or at fair value. Interest accrual
ceases when the collection of interest becomes doubtful, usually after the loan
has been delinquent for 90 days or more. All costs incurred from the date of
acquisition in maintaining the property are expensed.
The following table sets forth the amounts and categories of the
Company's non-performing assets (non-accrual loans, repossessed assets and
troubled debt restructurings).
- 11 -
<PAGE>
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Accruing loans delinquent
more than 90 days .............. $ -- $ -- $ -- $ -- $ --
Non-accruing loans .................. (1):
Residential .................... 1,108 1,454 1,238 1,658 1,698
Multi-family ................... 462 -- -- -- --
Commercial real estate ......... 1,585 198 139 47 --
Commercial loans ............... 153 268 -- -- --
Consumer ....................... 21 18 34 11 54
Troubled debt restructurings ........ -- -- -- -- --
------ ------ ------ ------ ------
Total non-performing loans ..... 3,229 1,938 1,411 1,716 1,752
------ ------ ------ ------ ------
Repossessed assets, net ............. 2 31 -- 183 206
------ ------ ------ ------ ------
Total non-performing assets .... $3,331 $1,969 $1,411 $1,899 $1,958
====== ====== ====== ====== ======
Non-performing loans to total
loans, net (2) ................. 1.98% 1.16% .94% 1.18% 1.27%
Non-performing assets to total assets 1.69% 1.02% .81% 1.07% 1.13%
</TABLE>
(1) The Company generally places mortgage loans on a nonaccrual status when the
loans become contractually past due 90 days or more. Interest income
previously accrued but not deemed collectible is reversed and charged
against current income. Interest on these loans is then recognized as
income when collected. For the year ended June 30, 1999, the income that
would have been recorded had the non-accrual loans not been in a
non-performing status totaled $236,000 compared to actual income recorded
of $117,000.
(2) Total loans less deferred net loan fees and loans in process.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
Office of Thrift Supervision ("OTS") to be of lesser quality, as "substandard,"
"doubtful" or "loss." An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to sufficient risk to
warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "special mention" by management.
When an insured institution classifies problem assets as either
substandard or doubtful, it must establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the institution's principal supervisory agent, who may
order the establishment of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Company regularly
reviews the problem loans in its portfolio to determine whether any loans
require classification in accordance with applicable regulations. Total
classified assets at June 30, 1999, were $7.7 million.
- 12 -
<PAGE>
The following table sets forth the aggregate amount of the Company's
classified assets, and of the general and specific loss allowances as of the
dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Substandard assets (1)............ $3,060 $2,296 $1,546 $1,226 $1,574
Doubtful assets .................. 147 --- --- --- ---
Loss assets....................... 93 --- --- --- ---
Special mention................... 4,394 4,081 --- --- ---
------ ------ ------ ------ ------
Total classified assets........ $7,694 $6,377 $1,546 $1,226 $1,574
====== ====== ====== ====== ======
General loss allowances........... $2,032 $2,087 $2,032 $2,009 $2,013
Specific loss allowances.......... 240 --- --- --- ---
------ ------ ------ ------ ------
Total allowances............... $2,272 $2,087 $2,032 $2,009 $2,013
====== ====== ====== ====== ======
</TABLE>
(1) Includes REO, net of $0.0, $0.03, $0.0, $0.2, and $0.2 million,
respectively.
The Company regularly reviews its loan portfolio to determine whether any
loans require classification in accordance with applicable regulations. Not all
assets classified by the Company as substandard, doubtful or loss are included
as non-performing assets, and not all of the Company's non-performing assets
constitute classified assets.
Substandard Assets. At June 30, 1999, the Company had 36 loans classified
as substandard totaling approximately $3.1 million. Of the $3.1 million
classified as substandard, $1.8 million is attributable to one borrower
involving five loans secured by commercial real estate in various stages of
completion. The loans were made as construction/permanent financing. Foreclosure
has been filed and calculations performed to determine the net realizable value.
To the extent that a loss appears probable, such loss has been included in the
allowance for loan losses. Also included in substandard assets are certain loans
to facilitate the sale of the real estate owned, totaling $85,000 at June 30,
1999. These are former REO properties sold on contract that are included as
substandard assets to the extent the loan balance exceeds the appraised value of
the property. Also included in substandard assets at June 30, 1999, are slow
mortgage loans (loans or contracts delinquent for generally 90 days or more)
aggregating $273,000, and slow consumer loans totaling $187,000.
Doubtful and Loss Assets. At June 30,1999, $240,000 of the Bank's assets
were classified as doubtful or loss. Two loans, in which a participating
interest was purchased from another financial institution, were reviewed by
regulatory authorities examining the other financial institution, and part of
the outstanding balances of these loans were classified as doubtful and loss.
The regulatory authorities notified the Bank of these classifications and the
Bank in turn classified its respective portion as doubtful and loss. The loans
continue to pay as agreed and have no history of late payments. The Bank
believes that it will suffer little or no loss on these loans due to the
principals involved behind the loans and other collateral which secures the
loans.
Special Mention Assets. At June 30, 1999, the Bank's assets subject to
special mention totaled $4.4 million. Included are three multi-family loans
totaling $1.3 million, two unfunded letter-of-credit commitments on multi-family
loans totaling $1.0 million, and three nursing home loans totaling $2.1 million.
All loans were classified as special mention due to financial statements
indicating insufficient cash flow to meet all expenses. All of the above loans
were current at June 30, 1999. The Company classified $4.1 million as special
mention at June 30, 1998. No assets were classified as special mention at June
30, 1997, 1996 and 1995.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for
losses on loans, which is charged to earnings. The provision is used to adjust
the level of the allowance from period to period based upon estimated losses and
losses actually incurred. Loans or portions thereof are charged to the allowance
when losses are determinable and considered probable. The provision is
determined in conjunction with management's review and evaluation of current
economic conditions (including those of the Bank's lending area), changes in the
character and size of the loan portfolio, loan delinquencies (current status as
well as past and anticipated trends) and adequacy of collateral securing loan
delinquencies, non-performing and other classified loans, historical and
estimated net charge-offs, and other pertinent information derived from a review
of the loan portfolio. The Company maintains the current level of the allowance
partly in recognition of its increased risks inherent in its commercial real
estate, construction, multi-family and commercial loan portfolios.
- 13-
<PAGE>
The allowance for loan losses computation includes assigning estimated
loss percentage to loans outstanding in each category of loans held in the
portfolio. All categories of loans, including multi-family, commercial real
estate, construction, and other commercial and consumer loans, are assigned a
loss percentage based on risk factors inherent in these types of loans. These
loss percentages are based on risk estimate losses inherent in the portfolio,
which the Bank believes are greater than historical loss percentages; historical
losses are considered, but may not necessarily be indicative of future
charge-offs in the entire portfolio. Residential mortgages are generally subject
to lesser risk except during periods of economic downturns or unemployment.
Other real estate loans are subject to risks of inadequate cash flows,
concentrations in industries, size of individual loans and declining collateral
values. Commercial loans are also subject to cash flow dependence, size of
individual loans, industry conditions and borrower operations, and financial
strength and character of borrower. Risk elements for consumer loans include
economic conditions, employment factors, and character and adequacy of
collateral. Estimated loss amounts by loan types are reviewed for reasonableness
based on economic and business conditions at the time.
In addition to maintaining the allowance as a percentage of the
outstanding loans in the portfolio, additional reserves are provided for
non-performing loans and other classified loans based on management's assessment
of impairment, if any. Individual loans are specifically analyzed to determine
an estimate of loss, and those specific allocations are then included as part of
the loan loss allowance.
The overall appropriateness of the allowance determined by management is
based on its evaluation of then- existing economic and business conditions
related to the loan portfolio, volumes and concentrations in commercial real
estate type loans and in other categories with greater risk and non-performing
and classified loans. If evaluation of loss has not more specifically been
identified to a loan category or individual loans, evaluation of loss has been
reflected in the unallocated portion of the allowance. In management's opinion,
the Company's allowance for loan losses is adequate at June 30, 1999, to absorb
anticipated losses on loans in the portfolio.
- 14 -
<PAGE>
Summary of Loan Loss Experience. The following table analyzes changes
in the allowance for loan losses during the past five years ended June 30, 1999.
<TABLE>
<CAPTION>
Year Ended
June 30,
-----------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance of allowance at
beginning of period ............. $2,087 $2,032 $2,009 $2,013 $2,050
------ ------ ------ ------ ------
Add recoveries of loans previously
charged off -- residential real
estate loans .................... -- 18 -- 2 12
Less charge-offs:
Residential real estate loans ... 21 7 35 37 93
Commercial real estate loans .... -- 14 -- 3 2
Consumer loans .................. 21 1 -- -- 22
------ ------ ------ ------ ------
Net charge-offs .................... 42 4 35 38 105
------ ------ ------ ------ ------
Provisions for losses on loans ..... 227 59 58 34 68
------ ------ ------ ------ ------
Balance of allowance at end
of period ....................... $2,272 $2,087 $2,032 $2,009 $2,013
====== ====== ====== ====== ======
Net charge-offs to total average
loans outstanding for period .... .03% ---% .02% .03% .08%
Allowance at end of period to
loans receivable at end of period 1.35 1.25 1.35 1.38 1.45
Allowance to total non-performing
loans at end of period .......... 68.24 107.71 143.98 117.07 114.87
</TABLE>
Allocation of Allowance for Loan Losses. The following table presents
an analysis of the allocation of the Company's allowance for loan losses at the
dates indicated.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- ----------------- ----------------- ---------------- -----------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
to total to total to total to total to total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Balance at end of period
applicable to:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential.................. $280 59.18% $ --- 61.14% $ --- 63.42% $ --- 59.11% $ 10 57.53%
Commercial real estate....... 583 19.19 --- 18.78 --- 20.35 29 24.44 30 25.19
Multi-family................. 393 5.42 72 6.49 72 7.45 264 10.52 264 10.16
Construction loans........... 335 3.69 --- 4.30 --- 3.07 --- 3.37 --- 5.14
Commercial loans............. 102 6.36 --- 5.01 --- 1.65 --- .01 --- .01
Consumer loans............... 145 6.16 86 4.28 33 4.06 24 2.55 20 1.97
Unallocated.................. 434 --- 1,929 --- 1,927 --- 1,692 --- 1,689 ---
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total................... $2,272 100.00% $2,087 100.00% $2,032 100.00% $2,009 100.00% $2,013 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
For 1999, the Bank presented allocations computed by assigning
estimated loss percentages to loans outstanding and allocations for other
estimated losses by loan category, compared to previous years when such amounts
were generally included in the unallocated portion of the allowance.
Investments
Federally chartered savings associations have the authority to invest
in various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds sold. Subject to various restrictions, federally
chartered savings associations may also invest a portion of their assets in
commercial paper, corporate debt securities and asset-backed securities. The
investment policy of MCHI, which is established by the Board of Directors and is
implemented by the Executive Committee, is designed primarily to maximize the
yield on the investment portfolio subject to minimal liquidity risk, default
risk, interest rate risk, and prudent asset/liability management.
- 15 -
<PAGE>
Specifically, MCHI's policies generally limit investments in corporate
debt obligations to those which are rated in the two highest rating categories
by a nationally recognized rating agency at the time of the investment and such
obligations must continue to be rated in one of the four highest rating
categories. Commercial bank obligations, such as certificates of deposit,
brokers acceptances, and federal funds must be rated "C" or better by a major
rating service. Commercial paper must be rated A-1 by Standard and Poor's and
P-1 by Moody's. The policies also allow investments in obligations of federal
agencies such as the Government National Mortgage Association ("GNMA"), FNMA,
and FHLMC, and obligations issued by state and local governments. MCHI does not
utilize options or financial or futures contracts.
The Company's investment portfolio consists of U.S. Treasury and agency
securities, investment in two Indiana limited partnerships, investment in an
insurance company and FHLB stock. At June 30, 1999, approximately $9.5 million,
including securities at market value for those classified as available for sale
and at amortized cost for those classified as held to maturity, or 4.8% of the
Company's total assets, consisted of such investments.
The following tables set forth the carrying value and market value of
the Company's investments at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------------
1999 1998 1997
----------------------- --------------------- ----------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
(In Thousands)
Securities available for sale (1):
<S> <C> <C> <C> <C> <C> <C>
Federal agencies................. $2,993 $3,020 $2,999 $3,049 $ 3,001 $2,998
Total securities available
for sale....................... 2,993 3,020 2,999 3,049 3,001 2,998
Securities held to maturity:
U.S. Treasury.................... --- --- 1,000 999 2,001 1,988
Federal agencies................. --- --- 1,000 1,000 2,000 1,991
State and municipal.............. --- --- --- --- 610 610
Mortgage-backed securites........ --- --- 3 3 237 237
------ ------ ------- ------ ------- ------
Total securities held
to maturity.................... --- --- 2,003 2,002 4,848 4,826
------ ------ ------- ------ ------- ------
Real estate limited partnerships.... 4,713 (3) 4,883 (3) 1,449 (3)
Investment in insurance
company.......................... 675 (3) 650 (3) --- ---
FHLB stock (2)...................... 1,164 1,164 1,134 1,134 1,047 1,047
------ ------- -------
Total investments.............. $9,545 $11,669 $10,345
====== ======= =======
</TABLE>
(1) In accordance with SFAS No. 115, securities available for sale are recorded
at market value in the financial statements.
(2) Market value approximates carrying value.
(3) Market values are not available.
- 16 -
<PAGE>
The following table sets forth investment securities and FHLB stock
which mature during each of the periods indicated and the weighted average
yields for each range of maturities at June 30, 1999.
<TABLE>
<CAPTION>
Amount at June 30, 1999 which matures in
-----------------------------------------------------------------------------
One One to Over
Year or less Five Years Ten Years and Stock
---------------------- ---------------------- ------------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
--------- -------- -------- --------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale (1):
Federal agencies................. $1,000 6.17% $1,993 6.47% $ --- ---%
------ ---- ------ ---- ------ ----
Total securities available
for sale....................... 1,000 6.17 1,993 6.47 --- ---
------ ---- ------ ---- ------ ----
FHLB stock.......................... --- --- --- --- 1,164 8.00
------ ---- ------ ---- ------ ----
Total investments.............. $1,000 6.17% $1,993 6.47% $1,164 8.00%
====== ==== ====== ==== ====== ====
</TABLE>
(1) Securities available for sale are set forth at amortized cost for purposes
of this table.
The Bank owns 99% of the limited partnership interests in Pedcor
Investments 1987-II, an Indiana limited partnership ("Pedcor-87") organized to
build, own, operate and lease a 144-unit apartment complex in Indianapolis,
Indiana. The project, operated as multi-family, low/moderate income housing
project, is complete and performing as planned. A low/moderate income housing
project qualifies for certain tax credits if (i) it is a residential rental
property, (ii) the units are used on a nontransient basis, and (iii) 20% or more
of the units in the project are occupied by tenants whose incomes are 50% or
less of the area median gross income, adjusted for family size, or,
alternatively, at least 40% of the units in the project are occupied by tenants
whose incomes are 60% of the area median gross income. Qualified low income
housing projects generally must comply with these and other rules for 15 years,
beginning with the first year the project qualifies for the tax credit, or some
or all of the tax credit together with interest may be recaptured. The tax
credit is subject to limitations on the use of the general business credit, but
no basis reduction is required for any portion of the tax credit claimed.
The Bank committed to invest approximately $3.4 million in Pedcor-87 at
inception of the project in January, 1988. The Bank has invested approximately
$3.4 million in Pedcor-87 with no additional annual capital contribution
remaining to be paid. The tax credits resulting from Pedcor-87's operation of a
low/moderate income housing project were available to the Company through 1999.
Although the Company has reduced income tax expense by the full amount of the
tax credit available each year, it has not been able to fully utilize available
tax credits to reduce income taxes payable because it is not allowed to use tax
credits that would reduce its regular corporate tax liability below its
alternative minimum tax liability. The Bank may carryforward unused tax credits
for a period of 15 years and believes it will be able to utilize available tax
credits during the carryforward period.
Pedcor-87 has incurred operating losses from its operations primarily due
to rent limitations for subsidized housing, increased operating costs and other
factors. Certain fees to the general partner not recorded or estimable to date
by the partnership under provisions of the partnership agreement could adversely
affect future operating results when accrued or paid. The Bank has accounted for
its investment in Pedcor-87 on the equity method, and, accordingly, has recorded
its shares of these losses or impairment losses as reductions to its investment
in Pedcor-87, which at June 30, 1999, was approximately $1.1 million.
In August 1997, the Bank entered into another limited partnership with
Pedcor Investments organized to build, own, operate and lease a 72-unit
apartment complex in Niles, Michigan. The Bank owns 99% of the partnership, as a
limited partner, in Pedcor Investments-1997-XXIX ("Pedcor-97").
The Bank committed to invest $3.6 million in Pedcor-97 over ten years and
will receive an estimated $3.7 million in tax credits. Contributions are made on
an annual basis and amounted to $395,000 during the year ended June 30, 1999. No
contributions wer made during the year ended June 30, 1998. The Bank did not
recognize any tax credits during the years ended June 30, 1998 and 1999. The
project was substantially completed by June 30, 1999. The Bank expects to begin
- 17 -
<PAGE>
using the tax credits available from Pedcor-97 during the fiscal year ending
June 30, 2000. These tax credits will have an effect of reducing income tax
expense, over a ten year period, and reducing the Bank's federal income taxes
payable, to the limits allowed by alternative minimum tax liability rules.
Although these tax credits will be beneficial to the Bank in future periods,
operating losses from the operations of the facility will increase after the
completion of the apartment complex. These increased operating losses will have
an effect of decreasing the overall return to the Bank on Pedcor-97. The Bank
has also accounted for its investment in Pedcor-97 on the equity method, and,
accordingly, has recorded its share of these losses as reductions to its
investment in Pedcor-97, which at June 30, 1999, was approximately $3.6 million.
The unrelated general partners in Pedcor-87 are two individuals, and the
unrelated general partner in Pedcor-97 is Berrien Woods Housing Company, LLC.
Such partners are affiliated with Pedcor Investments.
The following summarizes the Bank's equity in Pedcor-87's and Pedcor-97's
losses and tax credits recognized in the Company's consolidated financial
statements:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Investment in Pedcor-87............................ $ 1,116 $ 1,275 $ 1,449 $ 1,624 $ 1,527
======== ======= ======= ======= =======
Losses, net of income tax effect................... $ (96) $ (105) $ (184) $ (117) $ (111)
Tax credit......................................... 11 326 405 405 405
-------- ------- ------- ------- -------
Increase (decrease) in after-tax net income
from Pedcor-87 investment..................... $ (85) $ 221 $ 221 $ 288 $ 294
======== ======= ======= ======= =======
Investment in Pedcor-97............................ $ 3,596 $ 3,608
======== =======
Losses, net of income tax effect................... $ (7) $ (16)
Tax credit......................................... --- ---
-------- -------
Decrease in after-tax net income
from Pedcor-97 investment..................... $ (7) $ (16)
======== =======
</TABLE>
In June 1998, the Company capitalized on a unique opportunity to focus
and energize its life insurance product offerings through an equity
participation in Family Financial Life Insurance Company. Family Financial Life
is a fully chartered life insurance company owned by a group of savings banks.
In operation since 1984, Family Financial Life has had an impressive track
record of growth, profits and returns to its financial institution owners. We
are now offering a full range of life and annuity products with a most
advantageous method to increase insurance earnings and exercise complete control
over the quality of insurance products and services.
Federal regulations require an FHLB-member savings association to maintain
an average daily balance of liquid assets equal to a monthly average of not less
than a specified percentage of its net withdrawable savings deposits plus
short-term borrowings. Liquid assets include cash, certain time deposits,
certain bankers' acceptances, specified U.S. government, state or federal agency
obligations, certain corporate debt securities, commercial paper, certain mutual
funds, certain mortgage-related securities, and certain first lien residential
mortgage loans. This liquidity requirement may be changed from time to time by
the OTS to any amount within the range of 4% to 10%, and is currently 5%,
although the OTS has proposed a reduction of the percentage to 4%. Also, a
savings association currently must maintain short-term liquid assets
constituting at least 1% of its average daily balance of net withdrawable
deposit accounts and current borrowings. Monetary penalties may be imposed for
failure to meet these liquidity requirements. At June 30, 1999, the Bank had
liquid assets of $11.8 million, and a regulatory liquidity ratio of 8.4%, of
which 6.5% constituted short-term investments.
Sources of Funds
General. Deposits with the Bank have traditionally been the Company's
primary source of funds for use in lending and investment activities. In
addition to deposits, the Company derives funds from loan amortization,
prepayments, retained earnings and income on earning assets. While loan
amortization and income on earning assets are relatively stable sources of
funds, deposit inflows and outflows can vary widely and are influenced by
prevailing interest rates, market conditions and levels of competition. The
Company also relies on borrowings from the Federal Home Loan Bank ("FHLB") of
Indianapolis to support the Bank's loan originations and to assist in
asset/liability management.
- 18 -
<PAGE>
Deposits. Deposits are attracted, principally from within Grant and
contiguous counties and Adams County, through the offering of a broad selection
of deposit instruments including NOW and other transaction accounts, fixed-rate
certificates of deposit, individual retirement accounts, and savings accounts.
The Bank does not actively solicit or advertise for deposits outside of Grant
and Adams Counties. Substantially all of the Bank's depositors are residents of
those counties. Deposit account terms vary, with the principal differences being
the minimum balance required, the amount of time the funds remain on deposit and
the interest rate. The Bank also has approximately $1.0 million of brokered
deposits.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Bank on a periodic basis. Determination of
rates and terms are predicated on funds acquisition and liquidity requirements,
rates paid by competitors, growth goals, and federal regulations. The Bank
relies, in part, on customer service and long-standing relationships with
customers to attract and retain its deposits, but also aggressively prices its
deposits in relation to rates offered by its competitors.
An analysis of the Bank deposit accounts by type, maturity, and rate at
June 30, 1999, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening June 30, % of Average
Type of Account Balance 1999 Deposits Rate
- --------------- ------- ---- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Withdrawable:
Savings accounts....................... $ 10.00 $14,791 10.41% 2.26%
NOW and other transactions accounts.... 10.00 26,825 18.88 2.80
-------- ------ ----
Total withdrawable........................ 41,616 29.29 2.61
-------- ------ ----
Certificates (original terms):............
28 days................................ 500 370 .26 3.87
91 days................................ 500 741 .52 4.06
182 days............................... 500 6,607 4.65 4.32
9 months............................... 10,000 8,519 6.00 4.71
12 months.............................. 500 14,780 10.40 4.81
18 months.............................. 500 2,575 1.81 5.15
24 months.............................. 500 17,446 12.28 5.85
30 months.............................. 500 3,578 2.52 4.88
36 months.............................. 500 870 .61 5.10
48 months.............................. 500 3,241 2.28 5.40
60 months.............................. 500 9,988 7.03 6.26
72 months.............................. 500 32 .02 5.44
96 months.............................. 500 351 .25 5.52
Special term CDs....................... 500 13 .01 4.96
IRAs
28 days................................ 500 2 .01 3.12
91 days................................ 500 10 .01 4.12
182 days............................... 500 75 .05 4.38
9 months............................... 500 39 .03 4.67
12 months.............................. 500 1,277 .90 4.82
18 months.............................. 500 125 .09 4.69
24 months.............................. 500 2,258 1.59 5.79
30 months.............................. 500 774 .54 4.82
36 months.............................. 500 109 .07 4.95
48 months.............................. 500 2,748 1.93 5.34
60 months.............................. 500 22,549 15.87 6.38
72 months.............................. 500 511 .36 5.44
96 months.............................. 500 873 .61 6.54
Special term IRAs...................... 500 10 .01 5.94
-------- ------ ----
Total certificates (1).................... 100,471 70.71 5.59
-------- ------ ----
Total deposits............................ $142,087 100.00% 4.71%
======== ====== ====
</TABLE>
(1) Including $14.6 million in certificates of deposit of $100,000 or more.
- 19 -
<PAGE>
The following table sets forth by various interest rate categories the
composition of time deposits of the Bank at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------
1999 1998 1997
-------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Under 5%................ $ 26,368 $17,135 $15,970
5.00 - 6.99%............ 62,589 52,365 45,722
7.00 - 8.99%............ 11,514 21,116 23,165
-------- ------- -------
Total................... $100,471 $90,616 $84,857
======== ======= =======
</TABLE>
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years indicated, and
the total maturing thereafter. Matured certificates which have not been renewed
as of June 30, 1999, have been allocated based upon certain rollover
assumptions.
<TABLE>
<CAPTION>
Amounts At
June 30, 1999, Maturing in
---------------------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
--------- -------- --------- ------------
(In Thousands)
<S> <C> <C> <C> <C>
Under 5%....................... $ 22,179 $ 2,289 $ 857 $ 1,043
5.00 - 6.99% .................. 33,328 13,099 2,541 13,621
7.00 - 8.99% .................. 11,052 --- --- 462
------- ------- ------ -------
Total ......................... $66,559 $15,388 $3,398 $15,126
======= ======= ====== =======
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1999.
Maturity Period (In Thousands)
------------------ --------------
Three months of less.............................. $845
Greater than three months through six months...... 1,508
Greater than six months through twelve months..... 5,816
Over twelve months................................ 6,392
-------
Total............................................. $14,561
=======
- 20 -
<PAGE>
The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs offered by the Bank at the dates indicated,
and the amount of increase or decrease in such deposits as compared to the
previous period.
<TABLE>
<CAPTION>
DEPOSIT ACTIVITY
----------------------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
Balance at from Balance at from
June 30, % of June 30, June 30, % of June 30,
1999 Deposits 1998 1998 Deposits 1997
---- -------- ---- ---- -------- ----
(Dollars in Thousands)
Withdrawable:
<S> <C> <C> <C> <C> <C> <C>
Savings accounts.............. $14,791 10.41% $(1,917) $16,708 12.43% $1,025
NOW and other transactions
accounts.................... 26,825 18.88 (265) 27,091 20.15 5,861
-------- ------ ------ -------- ------ -------
Total withdrawable............... 41,616 29.29 2,183 43,799 32.58 6,886
-------- ------ ------ -------- ------ -------
Certificates (original terms):
28 days....................... 370 .26 (175) 545 .41 448
91 days....................... 741 .52 (301) 1,042 .78 (47)
182 days...................... 6,607 4.65 (4,625) 11,232 8.36 1,925
9 months...................... 8,519 6.00 7,095 1,424 1.06 1,242
12 months..................... 14,780 10.40 8,388 6,392 4.76 (8,092)
18 months..................... 2,575 1.81 (1,144) 3,719 2.77 1,938
24 months..................... 17,446 12.28 3,437 14,009 10.42 11,977
30 months..................... 3,578 2.52 (896) 4,474 3.33 (3,229)
36 months..................... 870 .61 (215) 1,085 .81 (340)
48 months..................... 3,241 2.28 (3,214) 6,455 4.80 709
60 months..................... 9,988 7.03 384 9,604 7.15 (1,478)
72 months..................... 32 .02 1 31 .02 3
96 months..................... 351 .25 (2) 353 .26 (24)
Special term CDs.............. 13 .01 (584) 597 .44 597
IRAs
28 days....................... 2 --- --- 2 --- ---
91 days....................... 10 .01 (33) 43 .03 20
182 days...................... 75 .05 35 40 .03 (134)
9 months...................... 39 .03 (15) 54 .04 54
12 months..................... 1,277 .90 982 295 .22 (322)
18 months..................... 125 .09 (169) 294 .22 56
24 months..................... 2,258 1.59 253 2,005 1.49 471
30 months..................... 774 .54 4 770 .57 (110)
36 months..................... 109 .08 (1) 110 .08 72
48 months..................... 2,748 1.93 (2,446) 5,194 3.86 379
60 months..................... 22,549 15.87 3,259 19,290 14.35 (627)
72 months..................... 511 .36 (10) 521 .39 (64)
96 months..................... 873 .61 (97) 970 .72 87
Special term IRAs............. 10 .01 (56) 66 .05 66
-------- ------ ------ -------- ------ -------
Total certificates.......... 100,471 70.71 9,855 90,616 67.42 5,759
-------- ------ ------ -------- ------ -------
Total deposits.............. $142,087 100.00% $7,672 $134,415 100.00% $12,645
======== ====== ====== ======== ====== =======
</TABLE>
- 21 -
<PAGE>
<TABLE>
<CAPTION>
DEPOSIT ACTIVITY
------------------------------------------------------------------------
Increase
(Decrease)
Balance at from Balance at
June 30, % of June 30, June 30, % of
1997 Deposits 1996 1996 Deposits
---- -------- ---- ---- --------
(Dollars in Thousands)
Withdrawable:
<S> <C> <C> <C> <C> <C>
Savings accounts............... $15,683 12.88% $(1,889) $ 17,572 13.92%
NOW and other transaction
accounts..................... 21,230 17.43 427 20,803 16.47
-------- ------ ------- -------- ------
Total withdrawable................ 36,913 30.31 (1,462) 38,375 30.39
-------- ------ ------- -------- ------
Certificates (original terms):
28 days........................ 97 .08 (224) 321 .25
91 days........................ 1,089 .89 119 970 .77
182 days....................... 9,307 7.64 (260) 9,567 7.58
12 months...................... 14,484 11.89 (499) 14,983 11.87
18 months...................... 1,781 1.46 522 1,259 1.00
24 months...................... 2,032 1.67 470 1,562 1.24
30 months...................... 7,703 6.33 (2,239) 9,942 7.87
36 months...................... 1,425 1.17 (349) 1,774 1.41
48 months...................... 5,746 4.72 (385) 6,131 4.86
60 months...................... 11,082 9.10 (778) 11,860 9.39
72 months...................... 28 .02 (11) 39 .03
96 months...................... 377 .31 8 369 .29
IRAs
28 days........................ 2 .00 1 1 .00
91 days........................ 23 .02 (159) 182 .14
182 days....................... 174 .14 13 161 .13
12 months...................... 617 .51 151 466 .37
18 months...................... 238 .20 182 56 .04
24 months...................... 1,534 1.26 1,496 38 .03
30 months...................... 880 .72 (103) 983 .78
36 months...................... 38 .03 (25) 63 .05
48 months...................... 4,815 3.95 47 4,768 3.78
60 months...................... 19,917 16.36 (858) 20,775 16.45
72 months...................... 585 .48 (30) 615 .49
96 months...................... 883 .72 (117) 1,000 .79
-------- ------ ------- -------- ------
Total certificates................ 84,857 69.69 (3,028) 87,885 69.61
-------- ------ ------- -------- ------
Total deposits.................... $121,770 100.00% $(4,490) $126,260 100.00%
======== ====== ======= ======== ======
</TABLE>
Borrowings. Although deposits are the Company's primary source of
funds, the Company's policy has been to utilize borrowings when they are a less
costly source of funds than deposits (taking into consideration the FDIC
insurance premiums payable on deposits) or can be invested at a positive spread.
The Bank often funds originations of its commercial real estate loans with a
simultaneous borrowing from the FHLB of Indianapolis to assure a profit above
its cost of funds.
The Company's borrowings consist of advances from the FHLB of
Indianapolis upon the security of FHLB stock and certain mortgage loans. Such
advances are made pursuant to several different credit programs each of which
has its own interest rate and range of maturities. The maximum amount that the
FHLB-Indianapolis will advance to member associations, including the Bank, for
purposes other than meeting withdrawals, fluctuates from time to time in
accordance with policies of the FHLB of Indianapolis. At June 30, 1999, FHLB of
Indianapolis advances totaled $15.5 million, representing 7.9% of total assets.
- 22 -
<PAGE>
The following table sets forth the maximum month-end balance and average
balance of FHLB advances for the periods indicated, and weighted average
interest rates paid during the periods indicated and as of the end of each of
the periods indicated.
<TABLE>
<CAPTION>
At or for the Year
Ended June 30,
---------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB Advances:
Average balance outstanding............................ $15,132 $10,840 $7,382
Maximum amount outstanding at any month-end
during the period................................. 16,272 13,684 8,233
Weighted average interest rate
during the period................................. 6.07% 6.01% 6.27%
Weighted average interest rate at
end of period..................................... 6.02% 6.08% 6.14%
</TABLE>
There are regulatory restrictions on advances from the FHLBs. See
"Regulation - Federal Home Loan Bank System" and "- Qualified Thrift Leader."
These limitations are not expected to have any impact on the Company's ability
to borrow from the FHLB of Indianapolis. The Company does not anticipate any
problem obtaining advances appropriate to meet its requirements in the future,
if such advances should become necessary.
Selected Ratios
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------
1999 1998 1997
----- ------ -----
<S> <C> <C> <C>
Return on assets....................................................... 1.09% 1.25% 1.40%
Return on equity....................................................... 6.15 5.94 6.09
Dividend payout ratio (based on diluted earnings per share)............ 64.71 68.22 62.60
Average equity to average assets ratio................................. 17.63 21.00 22.89
</TABLE>
Service Corporation Subsidiary
OTS regulations permit federal savings associations to invest in the
capital stock, obligations, or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants in
an aggregate amount not exceeding 2% of an association's assets, plus an
additional 1% of assets if the amount over 2% is used for specified community or
inner-city development purposes. In addition, federal regulations permit
associations to make specified types of loans to such subsidiaries (other than
special-purpose finance subsidiaries), in which the association owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the association's
regulatory capital if the association's regulatory capital is in compliance with
applicable regulations. Current law requires a savings association that acquires
a non-savings association subsidiary, or that elects to conduct a new activity
within a subsidiary, to give the FDIC and the OTS at least 30 days advance
written notice. The FDIC may, after consultation with the OTS, prohibit specific
activities if it determines such activities pose a serious threat to the Savings
Association Insurance Fund ("SAIF").
The Bank's only subsidiary, First Marion Service Corporation ("First
Marion") was organized in 1971 and currently is engaged in the sale of tax
deferred annuities pursuant to an arrangement with One System, Inc., a licensed
insurance broker, in Indianapolis. It also sells mutual funds through an
arrangement with Lincoln Financial Advisors, a licensed securities broker, in
Fort Wayne, Indiana. First Marion has one licensed employee engaged in such
sales of tax deferred annuities and mutual funds. In addition, beginning in July
1995, First Marion began providing 100% financing to borrowers of the Bank by
providing a 20% second mortgage behind the Bank's 80% mortgage. Such loans
amounted to $2.3 million at June 30, 1999.
At June 30, 1999, the Bank's investment in First Marion totaled $2.3
million. During the year ended June 30, 1999, First Marion had net income of
$81,000.
- 23 -
<PAGE>
Employees
As of June 30, 1999, the Bank employed 49 persons on a full-time basis and
seven persons on a part-time basis. None of the Bank's employees are represented
by a collective bargaining group. Management considers its employee relations to
be good.
Competition
The Bank originates most of its loans to and accepts most of its
deposits from residents of Grant and Adams Counties, Indiana. The Adams County
branch is being sold to another financial institution in September 1999.
The Bank is subject to competition from various financial institutions,
including state and national banks, state and federal savings institutions,
credit unions, certain non-banking consumer lenders, and other companies or
firms, including brokerage houses and mortgage brokers, that provide similar
services in Grant and Adams Counties. The Bank must also compete with money
market funds and with insurance companies with respect to its individual
retirement accounts.
Under current law, bank holding companies may acquire savings
associations. Savings associations may also acquire banks under federal law. To
date, several bank holding company acquisitions of savings associations in
Indiana have been completed. Affiliations between banks and healthy savings
associations based in Indiana may also increase the competition faced by the
Bank and MCHI.
Because of recent changes in Federal law, interstate acquisitions of
banks are less restricted than they were under prior law. Savings associations
have certain powers to acquire savings associations based in other states, and
Indiana law expressly permits reciprocal acquisition of Indiana savings
associations. In addition, Federal savings associations are permitted to branch
on an interstate basis. See "Regulation -- Acquisitions or Dispositions and
Branching."
The primary factors in competing for deposits are interest rates and
convenience of office locations. The Bank competes for loan originations
primarily through the efficiency and quality of services it provides borrowers
through interest rates and loan fees it charges. Competition is affected by,
among other things, the general availability of lendable funds, general and
local economic conditions, current interest rate levels, and other factors which
are not readily predictable.
- 24 -
<PAGE>
REGULATION
General
The Bank, as a federally chartered savings bank, is a member of the
Federal Home Loan Bank System ("FHLB System") and its deposits are insured by
the FDIC and it is a member of the Savings Association Insurance Fund (the
"SAIF") which is adminsitered by the FDIC. The Bank is subject to extensive
regulation by the OTS. Federal associations may not enter into certain
transactions unless certain regulatory tests are met or they obtain prior
governmental approval and the associations must file reports with the OTS about
their activities and their financial condition. Periodic compliance examinations
of the Bank are conducted by the OTS which has, in conjunction with the FDIC in
certain situations, examination and enforcement powers. This supervision and
regulation are intended primarily for the protection of depositors and federal
deposit insurance funds. The Bank is also subject to certain reserve
requirements under regulations of the Board of Governors of the Federal Reserve
System ("FRB").
An OTS regulation establishes a schedule for the assessment of fees
upon all savings associations to fund the operations of the OTS. The regulation
also establishes a schedule of fees for the various types of applications and
filings made by savings associations with the OTS. The general assessment, to be
paid on a semiannual basis, is based upon the savings association's total
assets, including consolidated subsidiaries, as reported in a recent quarterly
thrift financial report. Currently, the quarterly assessment rates range from
.01164% of assets for associations with assets of $67 million or less to .00308%
for associations with assets in excess of $35 billion. The Bank's semiannual
assessment under this assessment scheme, based upon its total assets at March
31, 1999, was $24,095.
The Bank is also subject to federal and state regulation as to such
matters as loans to officers, directors, or principal shareholders, required
reserves, limitations as to the nature and amount of its loans and investments,
regulatory approval of any merger or consolidation, issuance or retirements of
their own securities, and limitations upon other aspects of banking operations.
In addition, the activities and operations of the Bank are subject to a number
of additional detailed, complex and sometimes overlapping federal and state laws
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and anti-trust
laws.
The U.S. Congress is currently considering broad financial reform
legislation intended to modernize the financial services industry. Under the
pending legislation, bank holding companies may be authorized, subject to
certain conditions, to acquire manufacturing and other nonfinancial companies,
and nonfinancial companies may be authorized to acquire banks. Other provisions
of the pending legislation could affect the types of activities in which a
unitary savings and loan holding company, such as the Holding Company, may
engage. In addition, previous versions of banking reform legislation considered
by Congress included provisions that would require all federal savings
associations, including the Bank, to convert to either a state bank or a
national bank and would require savings and loan holding companies to become
bank holding companies. Because Congress is currently considering different
versions of the proposed legislation, it cannot be determined which of these
conflicting provisions might be included in any final legislation approved by
Congress or how such legislation, if enacted, would affect the activities of the
Holding Company or the Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Indianapolis, which is one of
twelve regional FHLBs. Each FHLB serves as a reserve or central bank for its
member savings associations and other financial insititutions within its
assigned region. It is funded primarily from funds deposited by savings
associations and proceeds derived from the sale of consolidated obligations of
the FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB. All
FHLB advances must be fully secured by sufficient collateral as determined by
the FHLB. The Federal Housing Finance Board ("FHFB"), an independent agency,
controls the FHLB System, including the FHLB of Indianapolis.
- 25 -
<PAGE>
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Indianapolis in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts, or similar obligations at
the beginning of each year. The Bank is currently in compliance with this
requirement. At June 30, 1999, the Bank's investment in stock of the FHLB of
Indianapolis was $1,163,600. The FHLB imposes various limitations on advances
such as limiting the amount of certain types of real estate-related collateral
to 30% of a member's capital and limiting total advances to a member. Interest
rates charged for advances vary depending upon maturity, the cost of funds to
the FHLB of Indianapolis and the purpose of the borrowing.
In past years, the Bank received dividends on its FHLB stock. All
twelve FHLBs are required by law to provide funds for the resolution of troubled
savings associations and to establish affordable housing programs through direct
loans or interest subsidies on advances to members to be used for lending at
subsidized interest rates for low- and moderate-income, owner-occupied housing
projects, affordable rental housing, and certain other community projects. These
contributions and obligations have adversely affected the level of FHLB
dividends paid and could continue to do so in the future. For the year ending
June 30, 1999, dividends paid to the Bank totaled $92,000, for an annual rate of
8.06%.
All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. Current law prescribes eligible collateral as first
mortgage loans less than 90 days delinquent or securities evidencing interests
therein, securities (including mortgage-backed securities) issued, insured or
guaranteed by the federal government or any agency thereof, FHLB deposits and,
to a limited extent, real estate with readily ascertainable value in which a
perfected security interest may be obtained. Other forms of collateral may be
accepted as over collateralization or, under certain circumstances, to renew
outstanding advances. All long-term advances are required to provide funds for
residential home financing and the FHLB has established standards of community
service that members must meet to maintain access to long-term advances.
Liquidity
Federal regulations require the Bank to maintain minimum levels of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of mutual
funds and certain corporate debt securities and commercial paper) equal to an
amount not less than a specified percentage of its net withdrawable deposit
accounts plus short-term borrowings. This liquidity requirement may be changed
from time to time by the OTS to an amount within the range of 4% to 10%
depending upon economic conditions and savings flows of member institutions. The
OTS recently lowered the level of liquid assets that must be held by a savings
association from 5% to 4% of the association's net withdrawable accounts plus
short-term borrowings based upon the average daily balance of such liquid assets
for each quarter of the association's fiscal year. The Bank has historically
maintained its liquidity ratio at a level in excess of that required. At June
30, 1999, the Bank's liquidity ratio was 8.4% and has averaged 9.4% over the
past three years. The Bank has never been subject to monetary penalties for
failure to meet its liquidity requirements.
Insurance of Deposits
The FDIC is an independent federal agency that insures the deposits, up
to prescribed statutory limits, of banks and thrifts and safeguards the safety
and soundness of the banking and thrift industries. The FDIC administers two
separate insurance funds, the Bank Insurance Fund (the "BIF") for commercial
banks and state savings banks and the SAIF for savings associations such as the
Bank and banks that have acquired deposits from savings associations. The FDIC
is required to maintain designated levels of reserves in each fund. As of
September 30, 1996, the reserves of the SAIF were below the level required by
law, primarily because a significant portion of the assessments paid into the
SAIF have been used to pay the cost of prior thrift failures, while the reserves
of the BIF met the level required by law in May, 1995. However, on September 30,
1996, provisions designed to recapitalize the SAIF and eliminate the premium
disparity between the BIF and SAIF were signed into law as further described
below.
The FDIC is authorized to establish separate annual assessment rates
for deposit insurance for members of the BIF and members of the SAIF. The FDIC
may increase assessment rates for either fund if necessary to restore the fund's
ratio of reserves to insured deposits to the target level within a reasonable
time and may decrease these rates if the target level has been met. The FDIC has
established a risk-based assessment system for both SAIF and BIF members. Under
- 26 -
<PAGE>
this system, assessments vary depending on the risk the institution poses to its
deposit insurance fund. An institution's risk level is determined based on its
capital level and the FDIC's level of supervisory concern about the institution.
On September 30, 1996, President Clinton signed into law legislation
which included provisions designed to recapitalize the SAIF and eliminate the
significant premium disparity between the BIF and the SAIF. Under the new law,
the Bank was charged a one-time special assessment equal to $.657 per $100 in
assessable deposits at March 31, 1995. The Bank recognized this one-time
assessment as a non-recurring operating expense of $777,000 ($469,000 after tax)
during the three-month period ending September 30, 1996. The assessment was
fully deductible for both federal and state income tax purposes. Beginning
January 1, 1997, the Bank's annual deposit insurance premium was reduced from
.23% to .0648% of total assessable deposits. BIF institutions pay lower
assessments than comparable SAIF institutions because BIF institutions pay only
20% of the rate being paid by SAIF institutions on their deposits with respect
to obligations issued by the federally-chartered corporation which provided some
of the financing to resolve the thrift crisis in the 1980's ("FICO"). The 1996
law also provides for the merger of the SAIF and the BIF by 1999, but not until
such time as bank and thrift charters are combined. Until the charters are
combined, savings associations with SAIF deposits may not transfer deposits into
the BIF system without paying various exit and entrance fees, and SAIF
institutions will continue to pay higher FICO assessments. Such exit and
entrance fees need not be paid if a SAIF institution converts to a bank charter
or merges with a bank, as long as the resulting bank continues to pay applicable
insurance assessments to the SAIF, and as long as certain other conditions are
met.
Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. The OTS recently adopted a regulation, which became effective
April 1, 1999, that requires savings associations that receive the highest
supervisory rating for safety and soundness to maintain "core capital" of at
least 3% of total assets. All other savings associations must maintain core
capital of at least 4% of total assets. Core capital is generally defined as
common shareholders' equity (including retained income), noncumulative perpetual
preferred stock and related surplus, certain minority equity interests in
subsidiaries, qualifying supervisory goodwill, purchased mortgage servicing
rights and purchased credit card relationships (subject to certain limits) less
nonqualifying intangibles. Under the tangible capital requirement, a savings
association must maintain tangible capital (core capital less all intangible
assets except purchased mortgage servicing rights which may be included after
making the above-noted adjustment in an amount up to 100% of tangible capital)
of at least 1.5% of total assets. Under the risk-based capital requirements, a
minimum amount of capital must be maintained by a savings association to account
for the relative risks inherent in the type and amount of assets held by the
savings association. The risk-based capital requirement requires a savings
association to maintain capital (defined generally for these purposes as core
capital plus general valuation allowances and permanent or maturing capital
instruments such as preferred stock and subordinated debt less assets required
to be deducted) equal to 8.0% of risk-weighted assets. Assets are ranked as to
risk in one of four categories (0-100%). A credit risk-free asset, such as cash,
requires no risk-based capital, while an asset with a significant credit risk,
such as a non-accrual loan, requires a risk factor of 100%. Moreover, a savings
association must deduct from capital, for purposes of meeting the core capital,
tangible capital and risk-based capital requirements, its entire investment in
and loans to a subsidiary engaged in activities not permissible for a national
bank (other than exclusively agency activities for its customers or mortgage
banking subsidiaries). At June 30, 1999, the Bank was in compliance with all
capital requirements imposed by law.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. The OTS has delayed the implementation of
this rule, however. The rule requires savings associations with "above normal"
interest rate risk (institutions whose portfolio equity would decline in value
by more than 2% of assets in the event of a hypothetical 200-basis-point move in
interest rates) to maintain additional capital for interest rate risk under the
risk-based capital framework. If the OTS were to implement this regulation, the
Bank would be exempt from its provisions because it has less than $300 million
in assets and its risk-based capital ratio exceeds 12%. The Bank nevertheless
- 27 -
<PAGE>
measures its interest rate risk in conformity with the OTS regulation and, as of
June 30, 1999, the Bank's interest rate risk was within the parameters set forth
in the regulation.
If an association is not in compliance with the capital requirements,
the OTS is required to prohibit asset growth and to impose a capital directive
that may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements. These actions may include restricting the operations activities of
the association, imposing a capital directive, cease and desist order, or civil
money penalties, or imposing harsher measures such as appointing a receiver or
conservator or forcing the association to merge into another institution.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991, as
amended ("FedICIA") requires, among other things,that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions that do
not meet minimum capital requirements. For these purposes, FedICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At June 30,
1999, the Bank was categorized as "well capitalized," meaning that its total
risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio
exceeded 6%, its leverage ratio exceeded 5%, and it was not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure.
The FDIC may order savings associations which have insufficient capital
to take corrective actions. For example, a savings association which is
categorized as "undercapitalized" would be subject to growth limitations and
would be required to submit a capital restoration plan, and a holding company
that controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
Capital Distributions Regulation
The OTS recently adopted a regulation, which became effective on April
1, 1999, that revised the restrictions that apply to "capital distributions" by
savings associations. The amended regulation defines a capital distribution as a
distribution of cash or other property to a savings association's owners, made
on account of their ownership. This definition includes a savings association's
payment of cash dividends to shareholders, or any payment by a savings
association to repurchase, redeem, retire, or otherwise acquire any of its
shares or debt instruments that are included in total capital, and any extension
of credit to finance an affiliate's acquisition of those shares or interests.
The amended regulation does not apply to dividends consisting only of a savings
association's shares or rights to purchase such shares.
The amended regulation exempts certain savings associations from the
requirement under the previous regulation that all savings associations file
either a notice or an application with the OTS before making any capital
distribution. As revised, the regulation requires a savings association to file
an application for approval of a proposed capital distribution with the OTS if
the association is not eligible for expedited treatment under OTS's application
processing rules, or the total amount of all capital distributions, including
the proposed capital distribution, for the applicable calendar year would exceed
an amount equal to the savings association's net income for that year to date
plus the savings association's retained net income for the preceding two years
(the "retained net income standard"). Application is required by the Bank to pay
dividends in excess of this restriction, and, as of June 30, 1999, the Bank had
approval to pay dividends up to $1,000,000. A savings association must also file
an application for approval of a proposed capital distribution if, following the
proposed distribution, the association would not be at least adequately
capitalized under the OTS prompt corrective action regulations, or if the
proposed distribution would violate a prohibition contained in any applicable
statute, regulation, or agreement between the association and the OTS or the
FDIC.
- 28 -
<PAGE>
The amended regulation requires a savings association to file a notice
of a proposed capital distribution in lieu of an application if the association
or the proposed capital distribution do not meet the conditions described above,
and: (1) the savings association will not be at least well capitalized (as
defined under the OTS prompt corrective action regulations) following the
capital distribution; (2) the capital distribution would reduce the amount of,
or retire any part of the savings association's common or preferred stock, or
retire any part of debt instruments such as notes or debentures included in the
association's capital under the OTS capital regulation; or (3) the savings
association is a subsidiary of a savings and loan holding company. Because the
Bank is a subsidiary of a savings and loan holding company, this latter
provision requires that, at a minimum, the Bank must file a notice with the OTS
thirty days before making any capital distributions to the Holding Company.
In addition to these regulatory restrictions, the Bank's Plan of
Conversion imposes additional limitations on the amount of capital distributions
it may make to the Holding Company. The Plan of Conversion requires the Bank to
establish and maintain a liquidation account for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders and prohibits the Bank from
making capital distributions to the Holding Company if its net worth would be
reduced below the amount required for the liquidation account.
Limitations on Rates Paid for Deposits
Regulations promulgated by the FDIC pursuant to FedICIA place limitations
on the ability of insured depository institutions to accept, renew or roll over
deposits by offering rates of interest which are significantly higher than the
prevailing rates of interest on deposits offered by other insured depository
institutions having the same type of charter in the institution's normal market
area. Under these regulations, "well-capitalized" depository institutions may
accept, renew or roll such deposits over without restriction, "adequately
capitalized" depository institutions may accept, renew or roll such deposits
over with a waiver from the FDIC (subject to certain restrictions on payments of
rates) and "undercapitalized" depository institutions may not accept, renew or
roll such deposits over. The regulations contemplate that the definitions of
"well capitalized," "adequately capitalized" and "undercapitalized" will be the
same as the definition adopted by the agencies to implement the corrective
action provisions of FedICIA. The Bank does not believe that these regulations
will have a materially adverse effect on its current operations.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety
and soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. On August 27, 1996, the federal banking agencies added asset
quality and earning standards to the safety and soundness guidelines.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies. The association's written real
estate lending policies must be reviewed and approved by the association's board
of directors at least annually. Further, each association is expected to monitor
conditions in its real estate market to ensure that its lending policies
continue to be appropriate for current market conditions.
- 29 -
<PAGE>
Loans to One Borrower
Under OTS regulations, the Bank may not make a loan or extend credit to
a single or related group of borrowers in excess of 15% of its unimpaired
capital and surplus. Additional amounts may be lent, not in excess of 10% of
unimpaired capital and surplus, if such loans or extensions of credit are fully
secured by readily marketable collateral, including certain debt and equity
securities but not including real estate. In some cases, a savings association
may lend up to 30 percent of unimpaired capital and surplus to one borrower for
purposes of developing domestic residential housing, provided that the
association meets its regulatory capital requirements and the OTS authorizes the
association to use this expanded lending authority. At June 30, 1999, the Bank
did not have any loans or extensions of credit to a single or related group of
borrowers in excess of its lending limits. The Bank does not believe that the
loans-to-one-borrower limits will have a significant impact on its business
operations or earnings.
Transactions with Affiliates
The Bank and MCHI are subject to Sections 22(h), 23A and 23B of the
Federal Reserve Act, which restrict financial transactions between banks and
affiliated companies. The statute limits credit transactions between a bank and
its executive officers and its affiliates, prescribes terms and conditions for
bank affiliate transactions deemed to be consistent with safe and sound banking
practices, and restricts the types of collateral security permitted in
connection with a bank's extension of credit to an affiliate.
Holding Company Regulation
MCHI is regulated as a "non-diversified unitary savings and loan
holding company" within the meaning of the Home Owners' Loan Act, as amended
("HOLA"), and subject to regulatory oversight of the Director of the OTS. As
such, MCHI is registered with the OTS and thereby subject to OTS regulations,
examinations, supervision and reporting requirements. As a subsidiary of a
savings and loan holding company, the Bank is subject to certain restrictions in
its dealings with MCHI and with other companies affiliated with MCHI.
The HOLA generally prohibits a savings and loan holding company,
without prior approval of the Director of the OTS, from (i) acquiring control of
any other savings association or savings and loan holding company or controlling
the assets thereof or (ii) acquiring or retaining more than 5 percent of the
voting shares of a savings association or holding company thereof which is not a
subsidiary. Except with the prior approval of the Director of the OTS, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock may also
acquire control of any savings institution, other than a subsidiary institution,
or any other savings and loan holding company.
MCHI's Board of Directors presently intends to continue to operate MCHI
as a unitary savings and loan holding company. Under current OTS regulations,
there are generally no restrictions on the permissible business activities of a
unitary savings and loan holding company.
Notwithstanding the above rules as to permissible business activities
of unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. (Additional
restrictions on securing advances from the FHLB also apply). See "--Qualified
Thrift Lender." At June 30, 1999, the Bank's asset composition was in excess of
that required to qualify the Bank as a Qualified Thrift Lender.
If MCHI were to acquire control of another savings institution other
than through a merger or other business combination with the Bank, MCHI would
thereupon become a multiple savings and loan holding company. Except where such
acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings association meets the QTL test,
the activities of MCHI and any of its subsidiaries (other than the Bank or other
subsidiary savings associations) would thereafter be subject to further
restrictions. The HOLA provides that, among other things, no multiple savings
and loan holding company or subsidiary thereof which is not a savings
association shall commence or continue for a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof, any
- 30 -
<PAGE>
business activity other than (i) furnishing or performing management services
for a subsidiary savings association, (ii) conducting an insurance agency or
escrow business, (iii) holding, managing, or liquidating assets owned by or
acquired from a subsidiary savings institution, (iv) holding or managing
properties used or occupied by a subsidiary savings institution, (v) acting as
trustee under deeds of trust, (vi) those activities previously directly
authorized by the FSLIC by regulation as of March 5, 1987, to be engaged in by
multiple holding companies or (vii) those activities authorized by the FRB as
permissible for bank holding companies, unless the Director of the OTS by
regulation prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above must also be approved by
the Director of the OTS prior to being engaged in by a multiple holding company.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5,1987, or if
the laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state-chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
Indiana law permits federal and state savings association holding
companies with their home offices located outside of Indiana to acquire savings
associations whose home offices are located in Indiana and savings association
holding companies with their principal place of business in Indiana ("Indiana
Savings Association Holding Companies") upon receipt of approval by the Indiana
Department of Financial Institutions. Moreover, Indiana Savings Association
Holding Companies may acquire savings associations with their home offices
located outside of Indiana and savings associations holding companies with their
principal place of business located outside of Indiana upon receipt of approval
by the Indiana Department of Financial Institutions.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days advance notice of such
declaration and payment. Any dividend declared during such period or without the
giving of such notice shall be invalid.
Federal Securities Law
The shares of Common Stock of MCHI are registered with the SEC under
the 1934 Act. MCHI is subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the 1934 Act and the rules of the
SEC thereunder. If MCHI has fewer than 300 shareholders, it may deregister the
shares under the 1934 Act and cease to be subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of MCHI may
not be resold without registration or unless sold in accordance with the resale
restrictions of Rule 144 under the 1933 Act. If MCHI meets the current public
information requirements under Rule 144, each affiliate of MCHI who complies
with the other conditions of Rule 144 (including conditions that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of MCHI or (ii) the average weekly volume of trading in such shares
during the preceding four calendar weeks.
Qualified Thrift Lender
Savings associations must meet a QTL test. If the Bank maintains an
appropriate level of qualified thrift investments ("QTIs") (primarily
residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualifies as a QTL, the Bank will
continue to enjoy full borrowing privileges from the FHLB of Indianapolis. The
required percentage of QTIs is 65% of portfolio assets (defined as all assets
minus intangible assets, property used by the association in conducting its
business and liquid assets equal to 10% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, FNMA, and FHLMC
as QTIs. Compliance with the QTL test is determined on a monthly basis in nine
out of every twelve months.
- 31 -
<PAGE>
A savings association which fails to meet the QTL test must either
convert to a bank (but its deposit insurance assessments and payments will be
those of and paid to SAIF) or be subject to the following penalties: (i) it may
not enter into any new activity except for those permissible for a national bank
and for a savings association; (ii) its branching activities shall be limited to
those of a national bank; (iii) it shall not be eligible for any new FHLB
advances; and (iv) it shall be bound by regulations applicable to national banks
respecting payment of dividends. Three years after failing the QTL test the
association must (i) dispose of any investment or activity not permissible for a
national bank and a savings association and (ii) repay all outstanding FHLB
advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
A savings association failing to meet the QTL test may requalify as a
QTL if it thereafter meets the QTL test. In the event of such requalification it
shall not be subject to the penalties described above. A savings association
which subsequently again fails to qualify under the QTL test shall become
subject to all of the described penalties without application of any waiting
period.
At June 30, 1999, 75.66% of the Bank's portfolio assets (as defined on
that date) were invested in qualified thrift investments (as defined on that
date), and therefore the Bank's asset composition was in excess of that required
to qualify the Bank as a QTL. Also, the Bank does not expect to significantly
change its lending or investment activities in the near future. The Bank expects
to continue to qualify as a QTL, although there can be no such assurance.
Acquisitions or Dispositions and Branching
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to
the extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in ss.7701(a)(19) of the Code or the asset
composition test of ss.7701(c) of the Code. Branching that would result in the
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located. Moreover, Indiana banks and savings associations are
permitted to acquire other Indiana banks and savings associations and to
establish branches throughout Indiana.
Finally, the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire
banks in other states and, with state consent and subject to certain
limitations, allows banks to acquire out-of-state branches either through merger
or de novo expansion. The State of Indiana enacted legislation establishing
interstate branching provisions for Indiana state-chartered banks consistent
with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The
Indiana Branching Law authorizes Indiana banks to branch interstate by merger or
de novo expansion, provided that such transactions are not permitted to
out-of-state banks unless the laws of their home states permit Indiana banks to
merge or establish de novo banks on a reciprocal basis. The Indiana Branching
Law became effective March 15, 1996.
- 32 -
<PAGE>
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- outstanding, satisfactory, unsatisfactory
and needs improvement -- and a written evaluation of each institution's
performance. Each FHLB is required to establish standards of community
investment or service that its members must maintain for continued access to
long-term advances from the FHLBs. The standards take into account a member's
performance under the CRA and its record of lending to first-time home buyers.
The examiners have determined that the Bank has an outstanding record of meeting
community credit needs.
TAXATION
Federal Taxation
Historically, savings associations, such as the Bank, have been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method. However, for years beginning after
December 31, 1995, the Bank is not able to use the percentage of taxable income
method of computing its allowable tax bad debt deduction. The Bank will be
required to compute its allowable deduction using the experience method. As a
result of the repeal of the percentage of taxable income method, reserves taken
after 1987 using the percentage of taxable income method generally must be
included in future taxable income over a six-year period, although a two-year
delay may be permitted for institutions meeting a residential mortgage loan
origination test. In addition, the pre-1988 reserve, for which no deferred taxes
have been recorded, will not have to be recaptured into income unless (i) the
Bank no longer qualifies as a bank under the Code, or (ii) excess dividends are
paid out by the Bank.
Depending on the composition of its items of income and expense, a
savings association may be subject to the alternative minimum tax. A savings
association must pay an alternative minimum tax equal to the amount (if any) by
which 20% of alternative minimum taxable income ("AMTI"), as reduced by an
exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular
taxable income increased or decreased by certain tax preferences and
adjustments, including depreciation deductions in excess of that allowable for
alternative minimum tax purposes, tax-exempt interest on most private activity
bonds issued after August 7, 1986 (reduced by any related interest expense
disallowed for regular tax purposes), the amount of the bad debt reserve
deduction claimed in excess of the deduction based on the experience method and
75% of the excess of adjusted current earnings over AMTI (before this adjustment
and before any alternative tax net operating loss). AMTI may be reduced only up
to 90% by net operating loss carryovers, but alternative minimum tax paid that
is attributable to most preferences can be credited against regular tax due in
later years.
State Taxation
The Bank is subject to Indiana's Financial Institutions Tax ("FIT"),
which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted
gross income," for purposes of FIT, begins with taxable income as defined by
Section 63 of the Code and, thus, incorporates federal tax law to the extent
that it affects the computation of taxable income. Federal taxable income is
then adjusted by several Indiana modifications the most notable of which is the
required addback of interest that is tax-free for federal income tax purposes.
Other applicable state taxes include generally applicable sales and use taxes
plus real and personal property taxes.
MCHI's (or previously the Bank's) state income tax returns have not
been audited in the last five years.
Other
The Securities and Exchange Commission maintains a Web site that
contains reports, proxy information statements, and other information regarding
registrants that file electronically with the Commission, including the Company.
The address is (http://www.sec.gov).
- 33 -
<PAGE>
Item 2. Properties.
At June 30, 1999, the Company conducted its business from its main
office at 100 West Third Street, Marion, Indiana, and three branch offices.
Three of the full-service offices are owned by the Company. The Company sold the
Decatur location as of September 3, 1999 to another financial institution.
The following table provides certain information with respect to the
Company's offices as of June 30, 1999:
<TABLE>
<CAPTION>
Net Book Value
Total Deposits of Property,
at Furniture
Owned or Year June 30, & Approximate
Description and Address Leased Opened 1999 Fixtures Square Footage
- ----------------------- -------- ------ ---- -------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Main Office in Marion
100 West Third Street.................. Owned 1936 $115,336 $1,473 17,949
Location in Decatur
1045 South 13th Street................. Owned 1974 10,895 171 3,611
Walmart Supercenter in Marion
3240 S. Western........................ Leased 1997 3,350 194 540
Location in Gas City
1010 E. Main Street.................... Owned 1997 12,506 170 2,276
</TABLE>
The Company opened its first automated teller machine in May, 1995 at its
Marion branch and now maintains a ATM at each branch location.
The Company owns computer and data processing equipment which is used
for transaction processing and accounting. The net book value of electronic data
processing equipment owned by the Company was $247,000 at June 30, 1999.
The Company also has contracted for the data processing and reporting
services of BISYS, Inc. in Houston, Texas. The cost of these data processing
services is approximately $26,100 per month.
Item 3. Legal Proceedings.
. The Company is not a party to any material pending legal proceeding.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of MCHI's shareholders during the quarter
ended June 30, 1999.
Item 4.5. Executive Officers of MCHI.
Presented below is certain information regarding the executive officers of
MCHI:
Name Position
---- --------
Steven L. Banks President
Larry G. Phillips Sr. Vice President, Secretary and Treasurer
Cynthia M. Fortney Vice President and Assistant Secretary
Steven L. Banks (age 49) became President of both MCHI and the Bank on
April 1, 1999. He has also served as executive Vice President of First Marion
since 1996. Prior to his affiliation with MCHI and the Bank, Mr. Banks served as
President and CEO of Fidelity Federal Savings Bank of Marion.
Larry G. Phillips (age 50) has been employed by MCHI since November,
1992. He became Sr. Vice President of the Bank in 1996 and has served as
Treasurer of the Bank since 1983, Secretary of the Bank since 1989 and Secretary
and Treasurer of First Marion since 1989. Mr. Phillips served as Vice President
and Treasurer of the Bank from 1983 to 1996.
Cynthia M. Fortney (age 42) became Vice President and Assistant
Secretary of MCHI in 1998 and has been Vice President of the Bank since 1998.
Ms. Fortney has also served as Assistant Vice President of First Marion since
1998.
- 34 -
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Bank converted from a federally charted mutual savings bank to a
federally charted stock savings bank effective March 18, 1993 (the "Conversion")
and simultaneously formed a savings and loan holding company, MCHI. MCHI's
common stock, without par value ("Common Stock"), is quoted on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"),
National Market System, under the symbol "MARN." The following table sets forth
the high and low prices, as reported by NASDAQ, and dividends paid per share for
Common Stock for the quarter indicated. Such over-the-counter quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Quarter Dividends
Ended High Low Declared
----- ---- --- --------
<S> <C> <C> <C> <C>
June 30, 1999.................. $20 3/4 $21 1/2 $20 1/16 $.22
March 31, 1999................. 22 22 3/4 19 3/4 .22
December 31, 1998.............. 20 23 3/4 17 7/8 .22
September 30, 1998............. 23 1/2 28 9/16 22 1/4 .22
June 30, 1998.................. 28 1/2 29 1/2 28 .22
March 31, 1998................. 28 1/2 29 25 7/8 .22
December 31, 1997.............. 27 1/8 28 1/8 26 1/4 .22
September 30, 1997............. 28 28 22 .22
</TABLE>
As of July 31, 1999, there were 393 record holders of MCHI's Common
Stock. MCHI estimates that, as of that date, there were approximately 750
additional shareholders in "street" name.
Since MCHI has no material independent operations or other subsidiaries
to generate income, its ability to accumulate earnings for the payment of cash
dividends to its shareholders is directly dependent upon the earnings on its
investment securities and ability of the Bank to pay dividends to MCHI. The
Bank's ability to pay dividends is subject to certain regulatory restrictions.
See "Regulation -- Capital Distributions Regulation."
Under current federal income tax law, dividend distributions with
respect to the Common Stock, to the extent that such dividends paid are from the
current or accumulated earnings and profits of the Bank (as calculated for
federal income tax purposes), will be taxable as ordinary income to the
recipient and will not be deductible by the Bank. Any dividend distributions in
excess of current or accumulated earnings and profits will be treated for
federal income tax purposes as a distribution from the Bank's accumulated bad
debt reserves, which could result in increased federal income taxes liability
for the Bank.
Unlike the Bank, generally there is no regulatory restriction on the
payment of dividends by MCHI. Indiana law, however, would prohibit MCHI from
paying a dividend if, after giving effect to the payment of that dividend, MCHI
would not be able to pay its debts as they become due in the ordinary course of
business or if MCHI's total assets would be less that the sum of its total
liabilities plus preferential rights of holders of preferred stock, if any.
- 35 -
<PAGE>
Item 6. Selected Consolidated Financial Data
The information required by this item is incorporated by reference to
the material under the heading "Selected Consolidated Financial Information" on
page 2 of MCHI's Shareholder Annual Report for its fiscal year ended June 30,
1999 (the "Shareholder Annual Report").
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required by this item is incorporated by reference to
pages 3 through 14 of the Shareholder Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this item is incorporated by reference to
pages 3 through 4 of the Shareholder Annual Report.
Item 8. Financial Statements and Supplementary Data.
MCHI's Consolidated Financial Statements and Notes thereto contained on
pages 15 through 41 in the Shareholder Annual Report are incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no such changes or disagreements during the applicable
period.
- 36 -
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is
incorporated by reference to pages 1 through 3 of MCHI's Proxy Statement for its
1999 Annual Shareholder Meeting (the "1999 Proxy Statement"). Information
concerning MCHI's executive officers is included in Item 4.5 in Part I of this
report. Information concerning compliance by such persons with Section 16(a) of
the 1934 Act is incorporated by reference to pages 6 through 7 of the 1999 Proxy
Statement.
Item 11. Executive Compensation.
The information required by this item with respect to executive
compensation is incorporated by reference to pages 4 through 6 of the 1999 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to
pages1 through 2 of the 1999 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
page 6 of the 1999 Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following financial statements are filed as part of this report:
Shareholder
Annual Report
Financial Statements Page No.
-------------------- --------
Consolidated Statement of Financial Condition
at June 30, 1999, and 1998 16
Consolidated Statement of Income for the
Fiscal Years ended June 30,
1999, 1998 and 1997 17
Consolidated Statement of Shareholders' Equity
for the Fiscal Years ended
June 30, 1999, 1998 and 1997 18
Consolidated Statement of Cash Flows
for the Fiscal Years ended
June 30, 1999, 1998, and 1997 19
Notes to Consolidated Financial Statements 20
(b) MCHI filed no reports on Form 8-K during the fourth quarter ended June
30, 1999.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index beginning on page E-1.
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
- 37 -
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant had duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
MARION CAPITAL HOLDINGS, INC.
Date: September 27, 1999 /s/ Steven L. Banks
-----------------------------
Steven L. Banks, President
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 27th day of September,
1999.
/s/ Steven L. Banks /s/ John M. Dalton
- -------------------------------------- -----------------------------
Steven L. Banks John M. Dalton, Director
President, Director
(Principal Executive Officer)
/s/ Larry G. Phillips /s/ W. Gordon Coryea
- -------------------------------------- -----------------------------
Larry G. Phillips W. Gordon Coryea, Director
Senior Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
/s/ Jerry D. McVicker
-----------------------------
Jerry D. McVicker, Director
/s/ Jack O. Murrell
-----------------------------
Jack O. Murrell, Director
/s/ Jon R. Marler
-----------------------------
Jon R. Marler, Director
- 38 -
<PAGE>
EXHIBIT INDEX
3(1) The Articles of Incorporation of the Registrant is
incorporated by reference to Exhibit 3(1) to the Registration
Statement on Form S-1 (Registration No. 33-55052).
3(2) The Code of By-Laws of the Registrant is incorporated by
reference to Exhibit 3(2) to Registration Statement on Form
S-I (Registration No. 33-55052).
10(1) Marion Capital Holdings, Inc. Stock Option Plan is
incorporated by reference to Exhibit A to the Registrant's
definitive Proxy Statement in respect of its 1993 Annual
Shareholder meeting.
10(2) Recognition and Retention Plans and Trusts are incorporated
by reference to Exhibit B to the Registrant's definitive
Proxy Statement in respect of its 1993 Annual Shareholder
meeting.
10(3) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and John M. Dalton is incorporated by
reference to Exhibit 10(7) to the Registration Statement on
Form S-1 (Registration No. 33-55052). First Amendment to
Director Deferred Compensation Agreement of John M. Dalton
dated December 1, 1996 is incorporated by reference to
Exhibit 10(4) of the Registrant's Form 10-K for the period
ended June 30, 1997.
10(4) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and Robert D. Burchard is incorporated
by reference to Exhibit 10(8) to the Registration Statement
on Form S-1 (Registration No. 33-55052). First Amendment to
Director Deferred Compensation Agreement of Robert D.
Burchard dated December 1, 1996 is incorporated by reference
to Exhibit 10(5) of the Registrant's Form 10-K for the period
ended June 30, 1997.
10(5) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and James O. Murrell is incorporated
by reference to Exhibit 10(9) to the Registration Statement
on Form S-1 (Registration No. 33-55052). First Amendment to
Director Deferred Compensation Agreement of James (Jack ) O.
Murrell dated December 1, 1996 is incorporated by reference
to Exhibit 10(6) of the Registrant's Form 10-K for the period
ended June 30, 1997.
10(6) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and Gordon Coryea is incorporated by
reference to Exhibit 10(10) to the Registration Statement on
Form S-1 (Registration No. 33-55052). First Amendment to
Director Deferred Compensation Agreement of W. Gordon Coryea
dated December 1, 1996 is incorporated by reference to
Exhibit 10(7) of the Registrant's Form 10-K for the period
ended June 30, 1997.
E-1
<PAGE>
Exhibit Index Page
10(7) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and George Thomas is incorporated by
reference to Exhibit 10(11) to the Registration Statement on
Form S-1 (Registration No. 33-55052). First Amendment to
Director Deferred Compensation Agreement of George L. Thomas
dated December 1, 1996 is incorporated by reference to
Exhibit 10(8) of the Registrant's Form 10-K for the period
ended June 30, 1997.
10(8) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and James Gartland is incorporated by
reference to Exhibit 10(12) to the Registration Statement on
Form S-1 (Registration No. 33-55052). First Amendment to
Deferred Compensation Agreement of James Gartland dated May
23, 1994 is incorporated by reference to Exhibit 10(9) to the
Annual Report on Form 10-K for fiscal year ended June 30,
1994.
10(9) Defered Compensation Agreement between the Bank and Gordon
Coryea dated April 30, 1988, as amended as of May 1, 1992, is
incorporated by reference to Exhibit 10(13) to the
Registration Statement on Form S-1 (Registration No.
33-55052).
10(10) Deferred Compensation Agreement between the Bank and Merritt
V. McVicker dated April 30, 1988, as amended as of May 1,
1992, is incorporated by reference to Exhibit 10(14) to the
Registration Statement on Form S-1 (Registration No.
33-55052).
10(11) Restated Executive Supplemental Retirement Agreement
effective December 1, 1996 between the Bank and John M.
Dalton is incorporated by reference to Exhibit 10(12) of the
Registrant's Form 10-K for the period ended June 30, 1997.
10(12) Restated Executive Supplemental Retirement Agreement
effective December 1, 1996 between the Bank and Robert D.
Burchard is incorporated by reference to Exhibit 10(13) of
the Registrant's Form 10-K for the period ended June 30,
1997.
10(13) Restated Executive Supplemental Retirement Agreement
effective December 1, 1996 between the Bank and Jackie Noble
is incorporated by reference to Exhibit 10(14) of the
Registrant's Form 10-K for the period ended June 30, 1997.
10(14) Restated Executive Supplemental Retirement Agreement
effective December 1, 1996 between the Bank and Nora Kuntz is
incorporated by reference to Exhibit 10(15) of the
Registrant's Form 10-K for the period ended June 30, 1997.
10(15) Executive Supplemental Retirement Agreement effective
December 1, 1996 between the Bank and Larry G. Phillips is
incorporated by reference to Exhibit 10(16) of the
Registrant's Form 10-K for the period ended June 30, 1997.
10(16) Death Benefit Agreement between the Bank and Steven L. Banks
dated December 1, 1996 is incorporated by reference to
Exhibit 10(18) of the Registrant's Form 10-K for the period
ended June 30, 1997 .
10(17) Excess Benefit Agreement dated as of Februry 28, 1996 between
the Bank and John M. Dalton is incorporated by reference to
Exhibit 10(18) to the Annual Report on Form 10-K for the
fiscal year ended June 30, 1996. First Amendment to Excess
Benefit Agreement of John M. Dalton dated December 1, 1996 is
incorporated by reference to Exhibit 10(19) of the
Registrant's Form 10-K for the period ended June 30, 1997.
E-2
<PAGE>
Exhibit Index Page
10(18) Excess Benefit Agreement dated as of Februry 28, 1996 between
the Bank and Robert D. Burchard is incorporated by reference
to Exhibit 10(19) to the Annual Report on Form 10-K for the
fiscal year ended June 30, 1996. First Amendment to Excess
Benefit Agreement of Robert D. Burchard dated December 1,
1996 is incorporated by reference to Exhibit 10(20) of the
Registrant's Form 10-K for the period ended June 30, 1997.
10(19) Director Emeritus Agreement dated March 1, 1996 between the
Bank and W. Gordon Coryea and First Amendment to such
agreement dated December 1, 1996 is incorporated by reference
to Exhibit 10(21) of the Registrant's Form 10-K for the
period ended June 30, 1997.
10(20) Director Emeritus Agreement dated March 1, 1996 between the
Bank and George L. Thomas and First Amendment to such
agreement dated December 1, 1996 is incorporated by reference
to Exhibit 10(22) of the Registrant's Form 10-K for the
period ended June 30, 1997.
10(21) Director Emeritus Agreement dated March 1, 1996 between the
Bank and John M. Dalton and First Amendment to such agreement
dated December 1, 1996 is incorporated by reference to
Exhibit 10(23) of the Registrant's Form 10-K for the period
ended June 30, 1997.
10(22) Director Emeritus Agreement dated March 1, 1996 between the
Bank and Jack O. Murrell and First Amendment to such
agreement dated December 1, 1996 is incorporated by reference
to Exhibit 10(24) of the Registrant's Form 10-K for the
period ended June 30, 1997.
10(23) Contingent Executive Supplemental Retirement Income Agreement
between the Bank and Steven L. Banks dated December 1, 1996
is incorporated by reference to Exhibit 10(25) of the
Registrant's Form 10-K for the period ended June 30, 1997.
10(24) Second Director Deferred Compensation Plan between the Bank
and John M. Dalton as of April 1, 1999. ____
10(25) Rabbi Trust for the Director Deferred Compensation Master
Agreement and Director Emeritus Plan dated December 1, 1996
is incorporated by reference to Exhibit 10(26) of the
Registrant's Form 10-K for the period ended June 30, 1997.
10(26) Rabbi Trust for the Executive Supplemental Retirement Income
Plans and Excess Benefit Plans dated December 1, 1996 is
incorporated by reference to Exhibit 10(27) of the
Registrant's Form 10-K for the period ended June 30, 1997.
13 1999 Shareholder Annual Report. ____
21 Subsidiaries of the Registrant is incorporated by reference
to Exhibit 22 to the Registration Statement on Form S-1
(Registration No. 33-55052).
23 Consent of Auditors ____
27 Financial Data Schedule for Period Ended June 30, 1999
- ----------------
* Management contracts and plans required to be filed as exhibits
are included as Exhibits 10(1)-10(26).
E-3
SECOND DIRECTOR DEFERRED
COMPENSATION PLAN
FOR JOHN M. DALTON
FIRST FEDERAL SAVINGS BANK OF MARION
Marion, Indiana
April 1, 1999
Financial Institution Consulting Corporation
700 Colonial Road, Suite 260
Memphis, Tennessee 38117
WATS: 1400-873-0089
FAX: (901) 684-7411
(901) 684-7400
<PAGE>
SECOND DIRECTOR DEFERRED
COMPENSATION PLAN
This Second Director Deferred Compensation Plan (the "Plan"), effective
as of the 1st day of April, 1999, formalizes the understanding by and between
FIRST FEDERAL SAVINGS BANK OF MARION (the "Bank"), a federally chartered savings
bank, and JOHN M. DALTON, hereinafter referred to as "Director." MARION CAPITAL
(the "Holding Company") is a party to this Plan for the sole purpose of
guaranteeing the Bank's performance hereunder.
WITNESSETH:
WHEREAS, the Director serves the Bank as a member of the Board; and
WHEREAS, the Bank recognizes the valuable services heretofore performed
for it by such Director and wishes to encourage Director's continued service;
and
WHEREAS, the Bank values the efforts, abilities and accomplishments of
Director and recognizes that the Director's service substantially contributes to
its continued growth and profits in the future; and
WHEREAS, this Director wishes to continue to defer a certain portion of
his fees to be earned in the future; and
WHEREAS, the Director and the Bank desire to formalize the terms and
conditions upon which the Bank shall pay such deferred compensation to the
Director or his designated beneficiaries; and
WHEREAS, the Bank and the Director intend this Plan to be considered an
unfunded arrangement, maintained primarily to provide retirement income for such
Director, for tax purposes and for purposes of the Employee Retirement Income
Security Act of 1974, as amended; and
WHEREAS, the Bank has adopted this Second Director Deferred
Compensation Plan which controls all issues relating to the Deferred
Compensation Benefits as described herein;
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the parties hereto agree to the following terms and conditions:
SECTION I
DEFINITIONS
When used herein, the following words and phrases shall have the
meanings below unless the context clearly indicates otherwise:
1.1 "Bank" means FIRST FEDERAL SAVINGS BANK OF MARION and any successor
thereto.
1.2 "Beneficiary" means the person or persons (and their heirs) designated
as Beneficiary in the Director's Beneficiary Designation, Exhibit A, to
whom the deceased Director's benefits are payable. If no Beneficiary is
so designated, then the Director's Spouse, if living, will be deemed
the Beneficiary. If the Director's Spouse is not living, then the
Children of the Director will be deemed the Beneficiaries and will take
on a per stirpes basis. If there are no Children, then the Estate of
the Director will be deemed the Beneficiary.
1.3 "Benefit Age" shall be the birthday on which the Director attains age
seventy (70) and becomes eligible to receive benefits under the plan.
1.4 "Benefit Eligibility Date" shall be the date on which a Director is
entitled to receive his Deferred Compensation Benefit. It shall be the
first day of the month following the month in which the Director
attains the Benefit Age.
1.5 "Cause" means personal dishonesty, willful misconduct, willful
malfeasance, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any
law, rule, regulation (other than traffic violations or similar
offenses), or find] cease-and-desist order, material breach of any
provision of this Plan, or incompetence in matters of material
importance to the Bank.
1.6 "Change in Control" of the Holding Company or the Bank shall mean the
first to occur of any of the following events:
(a) Any person or entity or group of affiliate persons or entities
(other than the Holding Company) becomes a beneficial owner,
directly or indirectly, of 25% or more of the Holding
Company's and/or the Bank's voting securities or all or
substantially all of the assets of Holding Company and/or the
Bank.
(b) Holding Company and/or the Bank enters, into a definitive
agreement which contemplates the merger, consolidation or
combination of either Holding Company or the Bank with an
unaffiliated entity in which either or both of the following
is to occur. (i) the directors of Holding Company and/or Bank,
as applicable, immediately prior to such merger, consolidation
or combination will constitute less than a majority of the
board of directors of the surviving, new or combined entity;
or (ii) less than 75% of the outstanding voting securities of
the surviving, new or combined entity will be beneficially
owned by the stockholders of Holding Company or immediately
prior to such merger, consolidation or combination; provided,
however, that if any definitive agreement to merge,
consolidate or combine is terminated without consummation of
the transaction, then no Change in Control shall be deemed to
have occurred pursuant to this paragraph (b).
<PAGE>
(c) Holding Company and/or the Bank enters into a definitive
agreement which contemplates the transfer of all or
substantially all of Holding Company's and/or the Bank's
assets, other than to a wholly-owned subsidiary of Holding
Company; provider, however, that if any definitive agreement
to transfer assets is terminated without consummation of the
transfer, then no Change in Control shall be deemed to have
occurred pursuant to this paragraph (c).
(d) A majority of the members of the Board of Directors of either
Holding Company or the Bank shall be persons who: (i) were not
members of such Board on the date hereof ("current members");
and (ii) were not nominated by a vote of the Board which
included the affirmative vote of a majority of the current
members on the Board at the time of their nomination ("future
designees") and (iii) were not nominated by a vote of the
Board which included the affirmative vote of a majority of the
current members and future designees, taken as a group, on the
Board at the time of their nomination.
The term "person" includes an individual, a group acting in concert, a
corporation, a partnership, an association, a joint venture, a pool, a joint
stock company, a trust, an unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities. The term "acquire" means obtaining ownership, control,
power to vote or sole power of disposition of stock, directly or indirectly or
through one or more transactions or subsidiaries, through purchase, assignment,
transfer, exchange, succession or other means, including (1) an increase in
percentage ownership resulting from a redemption, repurchase, reverse stock
split or a similar transaction involving other securities of the same class; and
(2) the acquisition of stock by a group of persons and/or companies acting in
concert which shall be deemed to occur upon the formation of such group,
provided that an investment advisor shall not be deemed to acquire the voting
stock of its advisee if the advisor (a) votes the stock only upon instruction
from the beneficial owner and (b) does not provide the beneficial owner with
advice concerning the voting of such stock. The term "security" includes
nontransferable subscription rights issued pursuant to a Plan of conversion, as
well as a "security, " as defined in 15 U.S.C. ss. 78c(2)(l); and the term
"acting in concert" means (1) knowing , participation in a joint activity or
interdependent conscious parallel action towards a couti-non goal whether or not
pursuant to an express agreement, or (2) a combination or pooling of voting or
other interests in the securities of an issuer for a common purpose pursuant to
any contract, understanding, relationship, agreement or other arrangement,
whether written or otherwise. Further, acting in concert with any person or
company shall also be deemed to be acting in concert with any person or company
that is acting in concert with such other person or company.
Notwithstanding the above definitions, the boards of directors of the
Bank or the Holding Company, in their absolute discretion, may make a finding
that a Change in Control of the Bank or the Holding Company has taken place
without the occurrence of any or all of the events enumerated above.
1.7 "Children" means the Director's children, both natural and adopted,
determined at the time payments arc: due tire Children under this Plan.
1.8 "Deferral Period" means that period beginning April 1, 1999 and
continuing until the Director's attainment of his Benefit Age.
1.9 "Deferred Compensation Benefit" means the annuitized value (using the
Interest Factor) of the Director's Elective Contribution Account,
measured as of the Director's Benefit Age, payable in monthly
installments throughout the Payout Period and commencing on the
Director's Benefit Eligibility Date.
1.10 "Disability Benefit' means the monthly benefit payable to the Director
following a determination, in accordance with Subsection 5.2, that he
is no longer able, properly and satisfactorily, to perform his duties
as a Director.
1.11 "Effective Date" of this Plan is April 1, 1999.
1.12 "Elective Contribution" shall refer to any bookkeeping entry required
to record the Director's voluntary monthly pre-tax deferral of Board
fees and Committee fees which shall be made in accordance with Section
III.
1.13 "Elective Contribution Account" shall be represented by the bookkeeping
entries required to record the Director's Elective Contributions plus
accrued interest, equal to the Interest Factor, earned to date on such
amounts. However, neither the existence of such bookkeeping entries nor
the Elective Contribution Account itself shall be deemed to create
either a trust of any kind, or a fiduciary relationship between the
Bank and ft Director or any Beneficiary.
1.14 "Estate" means the estate of the Director.
1.15 "Financial Hardship" means an unforeseeable emergency resulting from a
sudden and unexpected illness or accident of the Director's or of a
dependent of the Director, loss of the Director's property due to
casualty. or other similar extraordinary and unforeseeable
circumstances which arise as a result of an event not within the
control of the Director. The circumstances that shall constitute an
unforeseeable emergency will depend upon the facts of each case, but,
in any instance, payment may not be made to the extent that such
hardship is or may be relieved (i) through reimbursement or
compensation by insurance or otherwise, (ii) by liquidation of the
Director's assets to the extent such liquidation would not itself cause
severe financial hardship, or (iii) by cessation of deferrals under the
Plan, Examples of what are not considered to be unforeseeable
emergencies include the need to send the Director's child to college or
the decision to purchase a home.
<PAGE>
1.16 "Financial Hardship Benefit" means a withdrawal or withdrawals of an
amount or amounts attributable to a Financial Hardship and limited to
the extent reasonably needed to satisfy the emergency need.
1.17 "Interest Factor" means monthly compounding or discounting, as
applicable, at a rate equal to the New York Prime Rate, as determined
biannually on the first day of each January and July during the
Deferral Period.
1.18 "Payout Period" means the time frame during which certain benefits
payable hereunder shall be distributed, Payments shall be made in equal
monthly installments commencing on the first day of the month following
the occurrence of the event which triggers distribution and continuing
for a period of one hundred and twenty (120) months.
1.19 "Plan Year" shall mean the calendar year, except that the first Plan
Year shall mean April 1, 1999 to December 31, 1999.
1.20 "Projected Deferral" is an estimate of the total amount of compensation
to be deferred by the Director during his Deferral Period (excluding
any interest accrued on such deferrals), as so designated in Section
III.
1.21 "Spouse" means (the individual to whom the Director is legally married
at the time of the Director's death.
1.22 "Survivor's Benefit" means a stream of monthly installments payable to
the Beneficiary throughout the Payout Period, equal to the amount of
the Director's Elective Contribution Account, and subject to
Subsections 5.1 and 6.1.
SECTION II
ESTABLISHMENT OF RABBI TRUST
The Bank has established a rabbi trust into which the Bank shall
contribute assets which shall be held therein, pursuant to the agreement which
established such rabbi trust. The contributed assets shall be subject to the
claims of the Bank's creditors in the event of the Bank's "Insolvency" as
defined in the agreement which established such rabbi trust, until the
contributed assets are paid to the Director and his Beneficiary(ies) in such
manner arid. at such times as specified in this Plan, It is the intention of the
Bank to make a contribution or contributions to the rabbi trust to provide the
Bank with a source of funds to assist it in meeting the liabilities of this
Plan. The rabbi trust and any assets held therein shall conform to the terms of
the rabbi trust agreement which has been amended in conjunction with this Plan.
Any contribution(s) to the rabbi trust shall be made in accordance with the
rabbi trust agreement. The amount and timing of such contribution(s) shall be
specified in the agreement which establishes such rabbi trust.
SECTION III
DEFERRED COMPENSATION
Commencing on the Effective Date and continuing through the end of the
Deferral Period, the Director and the Bank agree that the Director may defer
into his Elective Contribution Account up to One Hundred Percent (100%) of the
monthly Board fees and Committee fees which the Director would otherwise be
entitled to receive from the Bank for each month of the Deferral Period. The
Director's initial deferral amount shall be $1,000 a month. The specific amount
of the Director's monthly deferred compensation shall apply only to compensation
attributable to servioes not yet performed.
SECTION IV
ADJUSTMENT OF DEFERRAL AMOUNT
Deferral of the specific amount of fees designated in Section III shall
continue in effect pursuant to the terms of this Plan unless and until the
Director files with the Administrator a Notice of Adjustment of Deferral Amount
(Exhibit B of this Plan). If the Bank increases the amount of fees earned by the
Director, the Director can include such additional amounts in his monthly
deferral, provided approval from the Board of Directors is obtained, by filing a
Notice of Adjustment of Deferral Amount. A Notice of Adjustment of Deferral
Amount shall be effective if filed with the Administrator at least thirty (30)
days prior to any January 1st, April 1st, July 1st, or October 1st during the
Director's Deferral Period. Such Notice of Adjustment of Deferral Amount shall
be effective commencing with the first applicable month following its filing and
shall be applicable only to compensation attributable to services not yet
performed by the Director.
SECTION V
RETIREMENT BENEFIT
5.1 Retirement Benefit. Subject to Subsections 5.2 through 5.5, the Bank
agrees to pay the Director the Deferred Compensation Benefit commencing
on the Director's Benefit Eligibility Date. Such payments will be made
over the term of the Payout Period. In the event of the Director's
death after commencement of the Deferred Compensation Benefit, but
prior to conviction of all such payments due and owing hereunder, the
Bank shall pay to the Director's Beneficiary a continuation of the
monthly installments for the number of months renaming in the Payout
Period.
<PAGE>
5.2 Disability Benefit. Notwithstanding any other provision hereof, if
requested by the Director and approved by the Board of Directors, the
Director shall be entitled to receive the Disability Benefit hereunder,
in any case in which it is determined by a duly Housed physician
selected by the Bank, that the Director is no longer able, properly and
satisfactorily, to perform his regular duties as a Director because of
ill health, accident, disability or general inability due to age. If
the Director's service is terminated pursuant to this Subsection and
Board of Director approval is obtained, the Director may elect to begin
receiving the Disability Benefit in lieu of the Deferred Compensation
Benefit, which is not available prior to the Director's Benefit
Eligibility Date. The benefit shall begin within thirty (30) days of
Board of Director approval of such benefit. The amount of the monthly
benefit shall be the annuitized value of the Director's Elective
Contribution Account, measured as of the date of the disability
determination and payable over the Payout Period. The Interest Factor
shall be used to annuitize the Elective Contribution Account. In the
event the Director dies while receiving Disability Benefit payments
pursuant to this Subsection, or after becoming eligible for such
payments but before the actual commencement of such payments, his
Beneficiary shall be entitled to receive those benefits provided for in
Subsection 6.1(a) and the Disability Benefits provided for in this
Subsection shall terminate upon the Director's death.
5.3 Financial Hardship Benefit. In the event the Director incurs a
Financial Hardship, the Director may request a Financial Hardship
Benefit. Such request shall be either approved or rejected by the Bank
in the exercise of its sole discretion. The Director will be required
to demonstrate to the satisfaction of the Bank that a Financial
Hardship has occurred and that the Director is otherwise entitled to a
Financial Hardship Benefit in accordance with Sections 1.15 and 1.16.
If a financial Hardship Benefit is approved, it shall be paid in a lump
sum within thirty (30) days of the event which triggers payment and
only to the extent of the Director's account balances when paid. The
balance of the Director's Elective Contribution Account shall be
reduced for any Financial Hardship Benefit distribution. Any subsequent
Deferred Compensation Benefit, Survivor's Benefit or Disability Benefit
shall be actuarially adjusted to reflect such distribution.
5.4 Removal For Cause. In the event the Director is removed for Cause at
any time prior to reaching his Benefit Age, he shall be entitled to
receive the balance of his Elective Contribution Account, measured as
of the date of removal. Such amount shall be paid in a lump sum within
thirty (30) days of the Director's date of removal. All other benefits
provided for the Director or his Beneficiary under this Plan shall be
forfeited and the Plan shall become null and void with respect to such
Director.
5.5 Voluntary or Involuntary Termination Other Than for Cause, Death or
Disability. If the Director's service with the Bank is voluntarily or
involuntarily terminated prior to attainment of his Benefit Eligibility
Date due to any reason, including a Change in Control, but other than
for Cause, the Director's death or disability, then commencing on his
Benefit Eligibility Date, the Director shall be entitled to the
annuitized value (using the Interest Factor) of his Elective
Contribution Account calculated as of his Benefit Eligibility Date, and
payable over the Payout Period.
SECTION VI
DEATH BENEFITS
6.1 Death Benefit Prior to Commencement of Deferred Compensation Benefit.
In the event of the Director's death prior to commencement of the
Deferred Compensation Benefit, the Bank shall pay the Director's
Beneficiary a monthly benefit for the Payout Period, commencing within
thirty (30) days of the Director's death. The amount of such monthly
benefit payments shall be the annuitized value of the Director's
Elective Contribution Account, measured as of the date of the
Director's Death and payable over the Payout Period. The Interest
Factor shall be used to annuitize the Elective Contribution Account.
6.2 Additional Death Benefit - Burial Expense. In addition to the
above-described death benefits, upon the Director's death, the
Director's Beneficiary shall be entitled to receive a one-time lump sum
death benefit in the amount of Ten Thousand Dollars ($10,000.00). This
benefit shall be provided specifically for the purpose of providing
payment for burial and/or funeral expenses of the Director. Such
benefit shall be payable within thirty (30) days of the Director's
death. The Director's Beneficiary shall not be entitled to such benefit
if the Director is removed for Cause prior to death. Notwithstanding
anything in this Section 6.2 to the contrary, if the Director is also a
participant in any other agreement, under which an additional $10,000
death benefit for burial expenses is being paid, no additional death
benefit shall be paid under this Section 6.2.
SECTION VII
BENEFICIARY DESIGNATION
The Director shall make an initial designation of primary and secondary
Beneficiaries upon execution of this Plan by executing his Beneficiary
Designation form (Exhibit A of this Plan), and shall have the right to change
such designation, at any subsequent time, by submitting to the Administrator in
substantially the same form as Exhibit A, a subsequent written designation of
primary and secondary Beneficiaries. Any Beneficiary designation made subsequent
to execution this Plan shall become effective only when receipt thereof is
acknowledged in writing by the Administrator.
<PAGE>
SECTION VIII
DIRECTOR'S RIGHT TO ASSETS
The rights of the Director, any Beneficiary, or any other person
claiming through the Director under this Plan, shall be solely those of an
unsecured general creditor of the Bank. The Director, the Beneficiary, or any
other person claiming through the Director, shall only have the right to receive
from the Bank those payments so specified under this Plan. The Director agrees
that he, his Beneficiary, or any other person claiming through him shall have no
rights or interests whatsoever in any asset of the Bank, including any insurance
policies or contracts which the Bank may possess or obtain to informally fund
this Plan. Any asset used or acquired by the Bank in connection with the
liabilities it has assumed under this Plan, unless expressly provided herein,
shall not be deemed to be held under any trust for the benefit of the Director
or his Beneficiaries, nor shall any asset be considered security for the
performance of the obligations of the Bank. Any such asset shall be and remain,
a general, unpledged, and unrestricted asset of the Bank.
SECTION IX
RESTRICTIONS UPON FUNDING
The Bank shall have no obligation to set aside, earmark or entrust any
fund or money with which to pay its obligations under this Plan. The Director,
his Beneficiaries or any successor in interest to him shall be and remain simply
a general unsecured creditor of the Bank in the same manner as any other
creditor having a general claim for matured and unpaid compensation. The Bank
reserves the absolute right in its sole discretion to either purchase assets to
meet its obligations undertaken by this Plan or to refrain from the same and to
determine the extent, nature, and method of any such asset purchases. Should the
Bank decide to purchase assets such as life insurance, mutual funds, disability
policies or annuities, the Bank reserves the absolute right, in its sole
discretion, to terminate such assets at any time, in whole or in part. At no
time shall the Director be deemed to have any lien, right, title or interest in
or to any specific investment or to any assets of the Bank. If the Bank elects
to invest in a life insurance, disability or annuity policy upon the life of the
Director, then the Director shall assist the Bank by freely submitting to a
physical examination and by supplying such additional information necessary to
obtain such insurance or annuities.
SECTION X
ALIENABILITY AND ASSIGNMENT PROHIBITION
Neither the Director nor any Beneficiary under this Plan shall have any
power or right to transfer, assign, anticipate, hypothecate, mortgage, commute,
modify or otherwise encumber in advance any of the benefits payable hereunder,
nor shall any of said benefits be subject to seizure for the payment of any
debts, judgments, alimony or separate maintenance owed by the Director or his
Beneficiary, nor be transferable by operation of law in the event of bankruptcy,
insolvency or otherwise. In the event the Director or any Beneficiary attempts
assignment, communication, hypothecation, transfer or disposal of the benefits
hereunder, the Bank's liabilities shall forthwith cease and terminate.
SECTION XI
ACT PROVISIONS
11.1 Named Fiduciary and Administrator. The Bank shall be the Named
Fiduciary and Administrator (the "Administrator") of this Plan. As
Administrator, the Bank shall be responsible for the management,
control and administration of the Plan as established herein. The
Administrator may delegate to others certain aspects of the management
and operational responsibilities of the Plan, including the employment
of advisors and the delegation of ministerial duties to qualified
individuals.
11.2 Claims Procedure and Arbitration. In the event that benefits under this
Plan are not paid to the Director (or to his Beneficiary in the case of
the Director's death) and such claimants feel they are entitled to
receive such benefits, then a written claim must be made to the
Administrator within sixty (60) days from the date payments are
refused. The Administrator shall review the written claim and, if the
claim is denied, in whole or in part, they shall provide in writing,
within ninety (90) days of receipt of such claim, their specific
reasons for such denial, reference to the provisions of this Plan upon
which the denial is based, and any additional material or information
necessary to perfect the claim. Such writing by the Administrator shall
further indicate the additional steps which must be undertaken by
claimants if an additional review of the claim denial is desired.
If claimants desire a second review, they shall notify the
Administrator in writing within sixty (60) days of the first claim
denial. Claimants may review this Plan, or any documents relating
thereto and submit any issues and comments, in writing, they may feel
appropriate. In its sole discretion, the Administrator shall then
review the second claim and provide a written decision within sixty
(60) days of receipt of such claim. This decision shall state the
specific reasons for the decision and shall include reference to
specific provisions of this Plan upon which the decision is based.
<PAGE>
If claimants continue to dispute the benefit denial based upon
completed performance of this Plan or the meaning and effect of the
terms and conditions thereof, then claimants may submit the dispute to
mediation, administered by the American Arbitration Association ("AAA")
(or a mediator selected by the parties) in accordance with the AAA's
Commercial Mediation Rules. If mediation is not successful in resolving
the dispute, it shall be settled by arbitration administered by the AAA
under it Commercial Arbitration Rules, and judgment on the award
rendered by the arbitrator(s) may be entered in any court having
jurisdiction thereof.
SECTION XII
MISCELLANEOUS
12.1 No Effect on Directorship Rights. Nothing contained herein will confer
upon the Director the right to be retained in the service of the Bank
nor limit the right of the Bank to discharge or otherwise deal with
Director without regard to the existence of the Plan. Pursuant to 12
C.F.R. ss. 563.39(b), the following conditions shall apply to this
Plan:
(1) The Bank's Board of Directors may remove the Director at any
time, but any removal by the Bank's Board of Directors other
than removal for Cause, shall not prejudice the Director's
vested right to compensation or other benefits under the
contract. The Director shall be paid the balance of his
Elective Contribution Account in a lump sum within thirty (30)
days of his removal in the event he is removed for Cause. He
shall have no right to receive additional compensation or
other benefits for any period after removal for Cause.
(2) If the Director is suspended and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a
notice served under Section 8(e)(3) or (g)(1) of the Federal
Deposit Insurance Act (12 U.S.C. 1818(e)(3) and (g)(1)) the
Bank's obligations under the contract shall be suspended as of
the date of termination of service unless stayed by
appropriate proceedings. If the charges in the notice are
dismissed, the Bank may in its discretion (i) pay the Director
all or part of the compensation withheld while its contract
obligations were suspended and (ii) reinstate (in whole or in
part) any of its obligations which were suspended.
(3) If the Director is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order
issued under Section 8(e)(4) or (g)(1) of the Federal Deposit
Insurance Act (12 U.S.C. 1818(e)(4) or (g)(1)), all non-vested
obligations of the Bank under the contract shall terminate as
of the effective date of the order. The Director shall be paid
the balance of his Elective Contribution Account in a lump sum
within thirty (30) days of his removal in the event he is
removed pursuant to such order.
(4) If the Bank is in default (as defined in Section 3(x)(1) of
the Federal Deposit Insurance Art), all non-vested obligations
under the contract shall terminate as of the date of default.
(5) All non-vested obligations under the contract shall be
terminated, except to the extent determined that continuation
of the contract is necessary for the continued operation of
the Bank:
(i) by the Director or his designee at the time the
Federal Deposit Insurance Bank or the Resolution
Trust Bank enters into an agreement to provide
assistance to or on behalf of the Bank under the
authority contained in ss. 13(c) of the Federal
Deposit Insurance Act; or
(ii) by the Director or his designee, at the time the
Director or his designee approves a supervisory
merger to resolve problems related to Operation of
the Bank or when the Bank is determined by the
Director to be in an unsafe or unsound condition.
Any rights of the parties that have already vested (i.e., the
balance of the Director's Elective Contribution Account),
however, shall not be affected by such action.
12.2 State Law. The Plan is established under, and will be construed
according to, the laws of the state of Indiana.
12.3 Severability. In the event that any of the provisions of this Plan or
portion thereof, are held to be inoperative or invalid by any court of
competent jurisdiction, then: (1) insofar as is reasonable, effect will
be given to the intent manifested in the provisions held invalid or
inoperative, and (2) the validity and enforceability of the remaining
provisions will not be affected thereby.
<PAGE>
12.4 Incapacity of Recipient. In the event the Director is declared
incompetent and a conservator or other person legally charged with the
care of his person or Estate is appointed, any benefits under the Plan
to which such Director is entitled shall be paid to such conservator or
other person legally charged with the care of his person or Estate.
Except as provided above in this paragraph, when the Bank's Board of
Directors, in its sole discretion, determines that the Director is
unable to manage his financial affairs, the Board may direct the Bank
to make distributions to any person for the benefit of the Director.
12.5 Unclaimed Benefit. The Director shall keep the Bank informed of his
current address and the current address of his Beneficiaries. If the
location of the Director is not made known to the Bank within three (3)
years after the date on which any payment of the Deferred Compensation
Benefit may first be made, payment may be made as though the Director
had died at the end of the three (3) year period. If, within one (1)
additional year after such three (3) year period has elapsed, or,
within three (3) years after the actual death of the Director,
whichever occurs first, the Bank is unable to locate any Beneficiary of
the Director, then the Bank may fully discharge its obligation by
payment to the Estate.
12.6 Limitations on Liability. Notwithstanding any of the preceding
provisions of the Plan, no individual acting as an employee or agent of
the Bank, or as a member of the Board of Directors shall be personally
liable to the Director or any other person for any claim, loss,
liability or expense incurred in connection with this Plan.
12.7 Gender. Whenever in this Plan words are used in the masculine or neuter
gender, they shall be read and construed as in the masculine, feminine
or neuter gender, whenever they should so apply.
12.8 Effect on Other Corporate Benefit Plans. Nothing contained in this Plan
shall affect the right of the Director to participate in or be covered
by any qualified or non-qualified pension, profit sharing, group, bonus
or other supplemental compensation or fringe benefit agreement
constituting a part of the Bank's existing or future compensation
structure.
12.9 Suicide. Notwithstanding anything to the contrary in this Plan, the
benefits otherwise provided herein shall not be payable if the
Director's death results from suicide, whether sane or insane, within
twenty-six (26) months after the execution of this Plan. If the
Director dies during this twenty-six (26) month period due to suicide,
the balance of his Elective Contribution Account will be paid to the
Director's Beneficiary in a single payment. Payment is to be made
within thirty (30) days after the Director's death is declared a
suicide by competent legal authority. Credit shall be given to the Bank
for payments made prior to determination of suicide.
12.10 Inurement. This Plan shall be binding upon and shall inure to the
benefit of the Bank, its successors and assigns, and the Director, his
successors, heirs, executors, administrators, and Beneficiaries.
12.11 Source of Payments. All payments provided in this Plan shall be timely
paid in cash or check from the general funds of the Bank or the assets
of the rabbi trust. The Holding Company guarantees payment and
provision of all amounts and benefits due to the Directors and, if such
amounts and benefits are not timely paid or provided by the Bank, or
the rabbi trust, such amounts and benefits shall be paid or provided by
the Holding Company.
12.12 Modification of Benefit Eligibility Date. In the event that a Director
desires to modify his Benefit Eligibility Date or Payout Period with
respect to future Elective Contributions, the Director may do so at the
time and in the manner that the Director is entitled to adjust his
Elective Contribution, pursuant to Section IV of the Plan. In the event
that a Director desires to modify his Benefit Eligibility Date or
Payout Period with respect to amounts accrued in his Elective
Contribution Account the Director may do so, provided, however, that
any such modification is made no later than twenty-four (24) months
prior to the date of both (i) the Director's existing Benefit
Eligibility (at the time of such modification) and (ii) the Director's
Benefit Eligibility Date, as modified.
12.13 Headings. Headings and sub-headings in this Plan are inserted for
reference and convenience only and shall not be deemed a part of this
Plan.
12.14 Early Distribution Following a Change in Control. In the event of a
Change in Control of the Bank or the Holding Company, a Director may
apply to the Board of Directors of the acquiring corporation
("Acquiror's Board") to commence the distribution of his Deferred
Compensation Benefit prior to the Benefit Eligibility Date and/or to
receive his Deferred Compensation Benefit in a lump sum or over some
alternative Payout Period the determination whether to permit such
change in election shall be within the sold discretion of the
Acquiror's Board.
12.15 Tax Withholding. The Bank may withhold from any benefits payable under
this Plan all federal, state, city, or other taxes as shall be required
pursuant to any law or governmental regulation then in effect.
<PAGE>
SECTION XIII
AMENDMENT/REVOCATION
This Plan shall not be amended, modified or revoked at any time, in
whole or part, without the mutual written consent of the Director and the Bank,
and such mutual consent shall be required even if the Director is no longer
serving the Bank as a member of the Board.
SECTION XIV
EXECUTION
14.1 This Plan sets forth the entire understanding of the parties hereto
with respect to the transactions contemplated hereby.
14.2 This Plan shall be executed in quadruplicate, each copy of which, when
so executed and delivered, shall be an original, but all three copies
shall together constitute one and the same instrument.
Remainder of page intentionally left blank.
<PAGE>
IN WITNESS WHEREOF, the Director, Bank and the Holding Company have
caused this Plan to be executed on the day and date first above written.
ATTEST: FIRST FEDERAL SAVINGS BANK OF MARION
/s/Larry G. Phillip By: /s/Steven L. Banks
- --------------------------- ---------------------------------
Secretary Title: Executive Vice President
WITNESS: JOHN M. DALTON
/s/Larry G. Phillip /s/John M. Dalton
- --------------------------- ---------------------------------
Secretary
ATTEST: MARION CAPITAL
/s/Larry G. Phillip By: /s/Steven L. Banks
- --------------------------- ---------------------------------
Secretary Title: Executive Vice President
TABLE OF CONTENTS
Description of Business................................................ Below
Message to Shareholders................................................ 1
Selected Consolidated Financial Data................................... 2
Management's Discussion and Analysis................................... 3
Independent Auditor's Report........................................... 15
Consolidated Statement of Financial Condition.......................... 16
Consolidated Statement of Income....................................... 17
Consolidated Statement of Shareholders' Equity......................... 18
Consolidated Statement of Cash Flows................................... 19
Notes to Consolidated Financial Statements............................. 20
Directors and Officers................................................. 43
Shareholder Information................................................ 44
DESCRIPTION OF BUSINESS
Marion Capital Holdings, Inc. ("MCHI"), an Indiana corporation, became a unitary
savings and loan holding company upon the conversion of First Federal Savings
Bank of Marion ("First Federal" and, together with MCHI, the "Company") from a
federally chartered mutual savings bank to a federally chartered stock savings
bank in March, 1993. The Company conducts business from a single office in
Marion, Grant County, Indiana, and First Federal has three branch offices--one
in Decatur, Indiana (which will be sold to another financial institution in
September, 1999), 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,
The fiscal year ended June 30, 1999, continued to be a strong financial
year in growth and earnings for Marion Capital Holdings, Inc. as it completed
its sixth full year of operations. In addition, First Federal Savings Bank of
Marion, its wholly owned subsidiary, recently completed its 63rd year as a
financial services provider.
During the year, Total Assets grew $3,138,580 or 1.6%, Loans Receivable
grew $1,649,018 or 1.0%, and Deposits increased by $7,671,800 or 5.7%. Our
on-going commitment to the enhancement of shareholder value is reflected in a
5.4% increase in diluted earnings per share for the year, while continuing to
pay shareholders an above industry average dividend.
In the past year, the Corporation completed the repurchase of 292,500
shares of its outstanding stock at a cost of $6,890,894. While positively
affecting the Return on Equity, such activity negatively impacts the Return on
Assets, as the earnings on the cash used for the repurchase are sacrificed from
earnings. Since the inception of the original repurchase plan in 1994, 1,129,018
outstanding shares have been retired at a total cost of $23,482,778.
The investment in technology made in recent years to improve our
delivery system, improve efficiency, and contain costs began to produce positive
results. Automated teller machine (ATM) usage experienced a 20% increase and 1st
Class Bankline (24 hour telephone banking) calls increased by 333% in the last
fiscal year. It is our intention to continue the implementation of technological
advances, whenever cost justified, for customer convenience and cost
efficiencies. Such advances planned by calendar year end 1999 include the
implementation of a Marketing Customer Information File (MCIF), a data base
software program that compiles customer information, demographic data,
historical and financial information to provide profitability analysis of
products, services, branches and customer profiles.
Given the world's increased reliance on technology, much attention has
been focused on the Year 2000 Issue. Our staff has been working diligently to
prepare for the next millennium. A Y2K Project Task Force was assigned the
responsibility in early 1998 of coordinating, testing, and reporting on its
findings regarding our operating systems and verifying the efforts of
third-party vendors and major borrowers. The testing and validation of such
operating systems, applications and hardware has been successfully completed
using dates in the Year 2000 and beyond.
Historically, and especially in 1998-99, one of our greatest
achievements has been the ability to attract and retain customers in an
increasingly changing and competitive environment. To meet some of the
challenges of change within our industry, we have recently established a
Commercial Loan Department staffed with experienced personnel and have employed
an outside Mortgage Loan Consultant. Our entry into commercial lending affords
us the opportunity to attain higher yields and develop new business
relationships. The addition of an outside Mortgage Loan Consultant will provide
us the ability to serve non-traditional markets and provide our loan portfolio
geographical diversification with no fixed asset expenditures.
It is now anticipated that the previously announced sale of the
Decatur, Indiana branch of First Federal will be completed on September 3,1999.
We feel this action will be accretive to future earnings.
On behalf of the Corporation, we would like to thank our staff for
their dedication and effort on a daily basis, our customers for allowing us the
opportunity to be of service, and our shareholders for their continual support
of our institution. It is a privilege to serve such a distinguished organization
as ours.
Sincerely,
/s/ Steven L. Banks /s/ John M. Dalton
Steven L. Banks John M. Dalton
President & Chief Executive Officer Chairman of the Board
On April 1, 1999, Chairman John Dalton retired from active day-to-day management
of the Holding Company and First Federal. It is with great appreciation for his
contribution over the past 37 years that we all wish John health and happiness
in a well deserved retirement. John will continue to provide valuable counsel
and direction through his position as Chairman of the Board.
Sincerely,
/s/ Steven L. Banks
Page 1
<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,
1999 1998 1997 1996 1995
----------- ---------- ----------- ----------- ----------
(In Thousands)
Summary of Financial Condition:
<S> <C> <C> <C> <C> <C>
Total assets......................................... $197,101 $193,963 $173,304 $177,767 $172,711
Loans, net........................................... 165,797 163,598 148,031 143,165 136,323
Loans held for sale.................................. 327 877 --- --- ---
Cash and investment securities....................... 11,873 10,186 11,468 21,578 23,743
Real estate limited partnerships..................... 4,713 4,883 1,449 1,624 1,527
Deposits............................................. 142,087 134,415 121,770 126,260 120,613
Borrowings........................................... 18,774 17,319 8,229 6,241 6,963
Shareholders' equity................................. 31,744 37,657 39,066 41,511 41,864
YEAR ENDED JUNE 30,
1999 1998 1997 1996 1995
----------- ---------- ----------- ----------- ----------
(In Thousands)
Summary of Operating Results:
Interest income...................................... $ 14,981 $ 14,333 $ 13,733 $ 13,740 $ 12,786
Interest expense..................................... 7,656 7,093 6,707 6,853 5,922
----------- ---------- ----------- ----------- ----------
Net interest income............................... 7,325 7,240 7,026 6,887 6,864
Provision for losses on loans........................ 227 59 58 34 68
----------- ---------- ----------- ----------- ----------
Net interest income after
provision for losses on loans................... 7,098 7,181 6,968 6,853 6,796
----------- ---------- ----------- ----------- ----------
Other income:
Net loan servicing fees........................... 81 78 86 81 69
Annuity and other commissions..................... 150 142 153 147 144
Other income...................................... 457 209 181 95 76
Losses from limited partnerships.................. (171) (200) (305) (193) (185)
Life insurance income and death benefits.......... 272 175 808 117 108
----------- ---------- ----------- ----------- ----------
Total other income............................. 789 404 923 247 213
----------- ---------- ----------- ----------- ----------
Other expense:
Salaries and employee benefits.................... 2,686 2,556 2,881 2,413 2,447
Other............................................. 1,894 1,846 2,170 1,293 1,216
----------- ---------- ----------- ----------- ----------
Total other expense............................. 4,580 4,402 5,051 3,706 3,663
----------- ---------- ----------- ----------- ----------
Income before income tax ............................ 3,307 3,183 2,840 3,394 3,346
Income tax expense................................... 1,183 859 400 913 916
----------- ---------- ----------- ----------- ----------
Net Income........................................$ 2,124 $ 2,324 $ 2,440 $ 2,481 $ 2,430
=========== ========== =========== =========== ==========
Supplemental Data:
Basic earnings per share.............................$ 1.38 $ 1.32 $ 1.35 $ 1.27 $ 1.18
Diluted earnings per share........................... 1.36 1.29 1.31 1.23 1.14
Book value per common share at end of year........... 22.28 22.16 22.09 21.47 21.08
Return on assets (1)................................. 1.09% 1.25% 1.40% 1.41% 1.41%
Return on equity (2)................................. 6.15 5.94 6.09 5.86 5.58
Interest rate spread (3)............................. 3.42 3.37 3.21 3.01 3.20
Net yield on interest earning assets (4)............. 4.12 4.28 4.29 4.17 4.28
Operating expenses to average assets (5)............. 2.34 2.36 2.89 2.11 2.12
Net interest income to operating expenses (6)........ 1.60x 1.64x 1.39x 1.86x 1.87x
Equity-to-assets at end of year (7).................. 16.11 19.41 22.54 23.35 24.24
Average equity to average total assets............... 17.63 21.00 22.89 24.09 25.27
Average interest-earning assets to average
interest-bearing liabilities...................... 116.21 121.82 126.34 127.93 129.08
Non-performing assets to total assets................ 1.69 1.02 .81 1.07 1.13
Non-performing loans to total loans (8).............. 1.98 1.16 .94 1.18 1.27
Loan loss reserve to total loans (8)................. 1.35 1.25 1.35 1.38 1.45
Loan loss reserve to non-performing loans............ 68.24 107.71 143.98 117.07 114.87
Net charge-offs to average loans..................... .03 --- .02 .03 .08
Number of full service offices....................... 4 4 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 2
<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.
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 rates 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).
Page 3
<PAGE>
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 of 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, 1999 and 1998, 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 300 basis points. At June 30, 1999 and 1998, 2% of
the present value of First Federal's assets were approximately $3.9 million and
$3.8 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 $1.8 million at June 30, 1999 and $.4 million at June 30, 1998,
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.
<TABLE>
<CAPTION>
Interest Rate Risk As of June 30, 1999
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> <C>
+ 300 bp * $32,838 $(978) (3)% 17.33% 0 bp
+ 200 bp 33,941 125 0 17.67 34 bp
+ 100 bp 34,304 487 1 17.68 35 bp
0 bp 33,816 17.33
- 100 bp 32,838 (978) (3) 16.76 (56) bp
- 200 bp 32,053 (1,763) (5) 16.28 (105) bp
- 300 bp 31,762 (2,054) (6) 16.01 (132) bp
Interest Rate Risk As of June 30, 1998
Change Net Portfolio Value NPV as % of Present Value of Assets
In Rates $ Amount $ Change % Change NPV Ratio Change
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
+ 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) 8.90 (33) bp
- 200 bp 36,072 (439) (1) 18.74 (49) bp
- 300 bp 36,264 (247) (1) 18.67 (56) bp
</TABLE>
* Basis points.
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 at least
6.25% for residential loans and 8.25% for commercial real estate loans.
Currently, originations of residential adjustable-rate mortgages have interest
rate minimums of at least 6.25%. 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 2.5% above the
origination rate. The company considers all of these factors in monitoring its
exposure to interest rate risk.
Page 4
<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,
-------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ----------------------- --------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-earning deposits........ $ 4,458 $ 211 4.73% $ 4,020 $ 287 7.14% $ 3,937 $ 264 6.71%
Investment securities............ 3,690 230 6.23 5,739 333 5.80 9,517 528 5.55
Loans (1) .................... 168,542 14,448 8.57 158,212 13,627 8.61 149,170 12,862 8.62
Stock in FHLB of Indianapolis.... 1,141 92 8.06 1,067 86 8.06 1,002 79 7.88
-------- ------ -------- ------- -------- -------
Total interest-earning assets. 177,831 14,981 8.42 169,038 14,333 8.48 163,626 13,733 8.39
Non-interest earning assets........... 17,904 --- 17,257 --- 11,153 ---
-------- ------ -------- ------- -------- -------
Total assets................... $195,735 14,981 $186,295 14,333 $174,779 13,733
======== ------ ======== ------- ======== -------
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts................. $ 15,663 402 2.57 $ 15,983 447 2.80 $ 16,681 483 2.90
NOW and money market accounts.... 26,232 768 2.93 25,071 830 3.31 19,817 657 3.32
Certificates of deposit.......... 96,005 5,567 5.80 86,867 5,164 5.94 85,636 5,104 5.96
-------- ------ -------- ------- -------- -------
Total deposits................ 137,900 6,737 4.89 127,921 6,441 5.04 122,134 6,244 5.11
FHLB borrowings.................. 15,132 919 6.07 10,840 652 6.01 7,382 463 6.27
Other borrowings................. --- --- --- --- --- ---
-------- ------ -------- ------- -------- -------
Total interest-
bearing liabilities......... 153,032 7,656 5.00 138,761 7,093 5.11 129,516 6,707 5.18
Other liabilities .................... 8,187 --- 8,409 --- 5,259 ---
-------- ------ -------- ------- -------- -------
Total liabilities.............. 161,219 --- 147,170 --- 134,775 ---
Shareholders' equity.................. 34,516 --- 39,125 --- 40,004 ---
-------- ------ -------- ------- -------- -------
Total liabilities and
shareholders' equity......... $195,735 7,656 $186,295 7,093 $174,779 6,707
======== ------ ======== ------- ======== -------
Net interest-earning assets........... $ 24,799 $ 30,277 $ 34,110
Net interest income................... $7,325 $ 7,240 $ 7,026
====== ======= =======
Interest rate spread (2).............. 3.42 3.37 3.21
Net yield on weighted average
interest-earning assets (3)...... 4.12 4.28 4.29
Average interest-earning
assets to average
interest-bearing liabilities..... 116.21% 121.82% 126.34%
====== ====== ======
</TABLE>
(1) Average balances include loans held for sale and non-ac crual 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 5
<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>
At Year Ended June 30,
June 30, 1999 1999 1998 1997
------------- -----------------------------------------
Weighted average interest rate earned on:
<S> <C> <C> <C> <C>
Interest-earning deposits................. 5.32% 4.73% 7.14% 6.71%
Investment securities..................... 6.42 6.23 5.80 5.55
Loans (1) ............................. 8.33 8.57 8.61 8.62
Stock in FHLB of Indianapolis............. 8.00 8.06 8.06 7.88
Total interest-earning assets......... 8.18 8.42 8.48 8.39
Weighted average interest rate cost of:
Savings accounts.......................... 2.26 2.57 2.80 2.90
NOW and money market accounts............. 2.80 2.93 3.31 3.32
Certificates of deposit................... 5.59 5.80 5.94 5.96
FHLB borrowings........................... 6.02 6.07 6.01 6.27
Other borrowings.......................... --- --- --- ---
Total interest-bearing liabilities.... 4.84 5.00 5.11 5.18
Interest rate spread (2)....................... 3.34 3.42 3.37 3.21
Net yield on weighted average
interest-earning assets (3)............... 4.12 4.28 4.29
</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, 1999, because the computation of net yield is applicable only over a
period rather than at a specific date.
Page 6
<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, 1999
compared to year
ended June 30, 1998
Interest-earning assets:
<S> <C> <C> <C>
Interest-earning deposits...................$ (76) $ (105) $ 29
Investment securities....................... (103) 23 (126)
Loans....................................... 821 (65) 886
Stock in FHLB of Indianapolis............... 6 --- 6
------- -------- -------
Total..................................... 648 (147) 795
------- -------- -------
Interest-bearing liabilities:
Savings accounts............................ (45) (36) (9)
NOW and money market accounts............... (62) (99) 37
Certificates of deposit..................... 403 (129) 532
FHLB advances............................... 267 6 261
------- -------- -------
Total..................................... 563 (258) 821
------- -------- -------
Change in net interest income...................$ 85 $ 111 $ (26)
======= ======== =======
Year ended June 30, 1998
compared to year
ended June 30, 1997
Interest-earning assets:
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
======= ======== =======
</TABLE>
Page 7
<PAGE>
Changes in Financial Position and Results of Operations for Year Ended June 30,
1999, Compared to June 30, 1998
General. MCHI's total assets were $197.1 million at June 30, 1999, an
increase of $3.1 million or 1.6% from June 30, 1998. During 1999, average
interest-earning assets increased $8.8 million, or 5.2%, while average
interest-bearing liabilities increased $14.3 million or 10.3%, compared to June
30, 1998. Cash and cash equivalents and investment securities increased $1.7
million, or 16.5%, primarily as a result of a slower growth in the loan
portfolio. Net loans, including loans held for sale, increased $1.6 million, or
1.0%, primarily from originations of non-mortgage loans. Certain loans
originated during the year were sold to other investors. All such loans were
consummated at the time of origination of the loan, and at June 30, 1999,
$327,000 of loans were held for sale pending settlement. There were $877,000 of
loans in the portfolio held for sale at June 30, 1998. Deposits increased $7.7
million, to $142.1 million, or 5.7%, at June 30, 1999 from the amount reported
last year.
MCHI's net income for the year ended June 30, 1999 was $2.1 million, a
decrease of $200,000, or 8.6% from the results for the year ended June 30, 1998.
This decrease in net income resulted substantially from an increased effective
tax rate from 27% to 36%. This increase in the effective tax rate was the result
of the expiration of federal income tax credits generated from an investment in
a limited partnership. These credits will resume in the upcoming year from
another limited partnership investment. Net interest income increased $85,000,
or 1.2% from the previous year. The provision for losses on loans was $227,000
for 1999 compared to $59,000 for 1998. Other income increased by $385,000 for
1999 over 1998.
Interest Income. MCHI's total interest income for the year ended June
30, 1999 was $15.0 million, which was a 4.5% increase or $648,000, from interest
income for the year ended June 30, 1998. A net volume increase in
interest-earning assets accounts for this increase offset partially by rate
decreases.
Interest Expense. Total interest expense for the year ended June 30,
1999, was $7.7 million, which was an increase of $563,000, or 7.9% from interest
expense for the year ended June 30, 1998. This increase resulted principally
from an increase in interest-bearing liabilities while average interest costs
declined from 5.11% to 5.00%.
Provision for Losses on Loans. The provision for the year ended June
30, 1999, was $227,000, compared to $59,000 in 1998. The 1999 chargeoffs totaled
$42,000, compared to the prior year net chargeoffs of $4,000. The ratio of the
allowance for loan losses to total loans increased from 1.25% at June 30, 1998,
to 1.35% at June 30, 1999. The ratio of allowance for loan losses to
nonperforming loans decreased from 107.71% at June 30, 1998, to 68.24% at June
30, 1999 as a result of an increase in nonperforming loans, which were
considered by management in increasing the 1999 provision and year end
allowance. The 1999 provision and resulting level of the allowance for loan
losses was determined, as for any period, based on the evaluation of
nonperforming loans and other classified loans, changes in the composition of
the loan portfolio with allowance allocations made by loan type, past loss
experience, the amount of loans outstanding and current economic conditions.
The allowance for loan losses is computed by assigning an estimated
loss percentage to loans outstanding in each category of loans held in the
portfolio. All categories of loans, including multi-family, commercial real
estate and other commercial, and consumer loans, are assigned a higher
percentage than single-family loans based on greater risk factors inherent in
these types of loans. In addition to maintaining the allowance as a percentage
of the outstanding loans in the portfolio, additional reserves are provided for
nonperforming loans and other classified loans based on management's assessment
of impairment, if any. Individual loans are specifically analyzed to determine
an estimate of loss, and those specific allocations are then included as part of
the loan loss allowance. Historically, MCHI has been able to minimize its losses
on loans in relation to the allowance and loans outstanding. Management
considers the allowance to be adequate and will continue to monitor the
allowance for loan losses at least on a quarterly basis and adjust the provision
accordingly to maintain the allowance for loan losses at the prescribed level.
Other Income. MCHI's other income for the year ended June 30, 1999,
totaled $789,000, compared to $404,000 for 1998, an increase of $385,000. This
increase was due primarily to increased service charge income of $113,000 from
changes in fee structure, increased gains on loan sales of $61,000 and increased
income on life insurance maintained by MCHI of $96,000.
Page 8
<PAGE>
Other Expenses. MCHI's other expenses for the year ended June 30, 1999,
totaled $4.6 million, an increase of $178,000, or 4.1%, from the year ended June
30, 1998. Salaries and employee benefits expense increased $130,000 or 5.1% from
the previous year. Operations for 1998 included $190,000 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 MCHI adding the two new local locations
and adding new technology and expanded product delivery systems.
Income Tax Expense. Income tax expense for the year ended June 30,
1999, totaled $1,183,000, an increase of $324,000 over the expense recorded
in1998 as low income housing credits decreased for 1999 compared to 1998.
Low-income housing tax credits totaled $11,000 and $338,000 for the years ended
June 30, 1999, and1998 respectively.
Changes in Financial Position and Results of Operations for Year Ended June 30,
1998, Compared to 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.
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
Page 9
<PAGE>
30, 1998. The allowance was increased from $2,032,000 at June 30, 1997 to
$2,087,000 at June 30, 1998. In determining the provision for loan losses for
the years ended June 30, 1998 and 1997 and the resulting level of the allowance,
MCHI considered past loss experience, changes in the composition of the loan
portfolio, the level of and losses estimated on nonperforming loans 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.
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, 1999, such available
collateral totaled $99.5 million. Based on existing FHLB lending policies, the
Company could have obtained approximately $41.9 million in additional advances.
First Federal's deposits have remained relatively stable, with balances
between $142 and $122 million, for the three years in the period ended June 30,
1999. The percentage of IRA deposits to total deposits has decreased from 23.1%
($29.1 million) at June 30, 1996, to 22.1% ($31.4 million) at June 30, 1999.
During the same period, deposits in withdrawable accounts have increased from
26.2% ($33.1 million) of total deposits at June 30, 1996, to 29.3% ($41.6
million) at June 30, 1999. 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
moderately 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
Page 10
<PAGE>
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, 1999, First Federal's liquidity ratio was 8.4% and has
averaged 9.4% 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.
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 maturities 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, 1999:
<TABLE>
<CAPTION>
Year Ended June 30,
1999 1998 1997
------ -------- -------
(In Thousands)
<S> <C> <C> <C>
Operating activites........................... $3,069 $ 1,436 $2,149
------ -------- -------
Investing activities:
Investment purchases..................... --- (737) (6,191)
Investment maturities.................... 2,003 2,844 12,242
Net change in loans...................... (2,164) (15,375) (4,687)
Cash received in branch acquisition...... --- 11,873 ---
Other investing activities............... (297) 134 275
------ -------- -------
(458) (1,261) 1,639
------ -------- -------
Financing activities:
Deposit increases (decreases)............ 7,672 (220) (4,490)
Borrowings............................... 4,267 10,656 5,000
Payments on borrowings................... (2,811) (5,201) (3,012)
Repurchase of common stock............... (6,891) (2,707) (3,998)
Dividends paid........................... (1,346) (1,557) (1,495)
Other financing activities............... 216 366 309
------ -------- -------
1,107 1,337 (7,686)
------ -------- -------
Net change in cash and cash equivalents....... $3,718 $ 1,512 $(3,898)
====== ======== =======
</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.
One-to-four residential mortgage loans are also originated and sold in the
secondary market.
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
Page 11
<PAGE>
fund or refinance, on a timely basis, its other material commitments and
long-term liabilities. At June 30, 1999, the Company had outstanding commitments
to originate mortgage loans of $1.7 million and other loan commitments of $5.4
million. Certificates of deposit scheduled to mature in one year or less at June
30, 1999, totalled $66.6 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, 1999, the Company had $.7 million of FHLB advances
which mature in one year or less.
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, 1999.
During the year ended June 30, 1999, MCHI repurchased 292,550 shares of
common stock in the open market at an average cost of $23.55, or approximately
106% of average book value. This repurchase amounted to 17.2% of the outstanding
stock. 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. These open-market purchases are intended to enhance the book
value per share and enhance potential for growth in earnings per share. During
the past five years, MCHI has reduced its capital ratio from 25.96% at June 30,
1994, to 16.11% at June 30, 1999. At the same time, the liquidity ratio has been
reduced from 26.3% at June 30, 1994, to 8.4% at June 30, 1999. Although these
repurchases have reduced the liquidity ratios, MCHI still maintains an adequate
level of liquid assets averaging 9.4% over the past three years in view of
current OTS requirements of 5%. By completing these repurchase programs, MCHI
has been able to reduce its excess liquidity position and also its excess
capital position to become better leveraged. Prior to each repurchase program
that is initiated by the Board of Directors, a thorough evaluation analysis is
performed to determine that the cash repuchase program would not adversely
affect the liquidity demands that may arise in the normal operation of MCHI.
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 3.0% or 4.0% core
capital requirement and a total risk-based capital to risk-weighted assets ratio
of 8.0%. At June 30, 1999, First Federal's core capital ratio was 14.4% and its
total risk-based capital to risk-weighted assets ratio was 22.6%. 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
Page 12
<PAGE>
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.
Year 2000 Issue
The Company's lending and deposit activities, like those of most financial
institutions, depend significantly upon computer systems. The Company is
addressing the potential problems associated with the possibility that the
computers which control its systems, facilities and infrastructure may not be
programmed to read four-digit date codes. This could cause some computer
applications to be unable to recognize the change from the year 1999 to the year
2000, which would cause computer systems to generate erroneous data or to fail.
Management recognizes the possibility of certain risks associated with Year
2000 and is continuing to evaluate appropriate courses of corrective action. As
of June 30, 1999, the Company has completed an inventory of all hardware and
software systems and has made all mission critical classifications. The Company
has implemented both an employee awareness program and a customer awareness
program aimed at educating people about the efforts being made by the Company as
well as bank regulators regarding the Year 2000 issue.
The Company's data processing is performed primarily by a third party
servicer. In November, 1998, the Company began testing the systems of its
primary service provider. Such testing was continued and completed the quarter
ended March 31, 1999. The results from these extensive tests disclosed no
significant weakness or problems in processing and operating beyond December 31,
1999.
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. Most of the Company's vendors
have provided responses as to where they stand regarding Year 2000 readiness.
Those who have not responded to the Company's status requests are being
contacted again. Depending on the responses received from the third party
vendors, the Company will make decisions as to whether to continue those
relationships or to search for new providers of those services.
In addition to possible expenses related to the Company's own systems and
those of its service providers, the Company could be affected by the Year 2000
problems affecting any of its depositors or borrowers. Such problems could
include delayed loan payments due to Year 2000 problems affecting the borrower.
Selected borrowers were sent questionnaires to assess their readiness. Those who
did not respond to the initial inquiry have been sent a second request. The
Company is still in the process of collecting that information.
The Company has completed a Year 2000 Business Continuity Plan which
addresses the ability to continue operations in the event of power or
telecommunication outages. Although complete, the Year 2000 Committee will
systematically monitor the Plan and make changes where necessary.
Costs associated with Year 2000 issues were less than the $50,000 budgeted
for fiscal 1999. Although management believes it is taking the necessary steps
to address the Year 2000 compliance issue, no assurances can be given that some
problems will not occur or that the Company will not incur additional expenses
in future periods. Amounts expensed in fiscal 1998 and 1997 were immaterial.
New Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities. Statement of
Financial Accounting Standards ("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.
Page 13
<PAGE>
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.
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 was to be effective for all fiscal years beginning after June
15, 1999. The implementation date was deferred, and SFAS No. 133 will now be
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000.
Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. SFAS No. 134
establishes accounting standards for certain activities of mortgage banking
enterprises and for other enterprises with similar mortgage operations. This
Statement amends SFAS No. 65.
SFAS No. 65, as previously amended by SFAS Nos. 115 and 125, required a
mortgage banking enterprise to classify a mortgage-backed security as a trading
security following the securitization of the mortgage loan held for sale. This
Statement further amends SFAS No. 65 to require that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking activities
must classify the resulting mortgage-backed security or other retained interests
based on the entity's ability and intent to sell or hold those investments.
The determination of the appropriate classification for securities retained
after the securitization of mortgage loans by a mortgage banking enterprise now
conforms to SFAS No. 115. The only requirement the new SFAS No. 134 adds is that
if an entity has a sales commitment in place, the security must be classified
into trading.
This Statement is effective for the first fiscal quarter beginning after
December 15, 1998. On the date this Statement is initially applied, an entity
may reclassify mortgage-backed securities and other beneficial interest retained
after the securitization of mortgage loans held for sale from the trading
category, except for those with sales commitments in place. Those securities and
other interest shall be classified based on the entity's present ability and
intent to hold the investments.
Page 14
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Financial Statements
June 30, 1999 and 1998
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 subsidiaries as of June 30, 1999 and 1998,
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended June 30, 1999. 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 subsidiaries as of June 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1999, in conformity with generally accepted accounting
principles.
Olive LLP
/s/ Olive LLP
Indianapolis, Indiana
July 23, 1999
Page 15
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statement of Financial Condition
<TABLE>
<CAPTION>
June 30 1999 1998
- -----------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash $ 2,225,804 $ 3,211,191
Short-term interest-bearing deposits 6,626,884 1,923,573
---------------------------------
Total cash and cash equivalents 8,852,688 5,134,764
Investment securities
Available for sale 3,020,000 3,048,751
Held to maturity (fair value of $2,002,000) 2,002,917
---------------------------------
Total investment securities 3,020,000 5,051,668
Loans held for sale 326,901 877,309
Loans, net of allowance for loan losses of
$2,271,701 and $2,087,412 165,797,406 163,597,980
Premises and equipment 2,008,157 1,928,772
Federal Home Loan Bank of Indianapolis stock, at cost 1,163,600 1,134,400
Cash value of life insurance 5,887,166 5,615,666
Investment in limited partnerships 4,712,675 4,883,175
Other assets 5,332,896 5,739,175
---------------------------------
Total assets $197,101,489 $193,962,909
=================================
Liabilities
Deposits $142,087,269 $134,415,469
Borrowings 18,774,076 17,318,708
Other liabilities 4,496,577 4,572,105
---------------------------------
Total liabilities 165,357,922 156,306,282
---------------------------------
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--1,424,550 and 1,699,307 shares 8,001,048 7,785,191
Retained earnings 23,728,895 29,841,104
Accumulated other comprehensive income 13,624 30,332
---------------------------------
Total shareholders' equity 31,743,567 37,656,627
---------------------------------
Total liabilities and shareholders' equity $197,101,489 $193,962,909
=================================
See notes to consolidated financial statements.
</TABLE>
Page 16
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Ended June 30 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Interest Income
<S> <C> <C> <C>
Loans $14,447,985 $13,627,462 $12,862,390
Investment securities 230,054 332,864 528,070
Deposits with financial institutions 211,059 286,565 263,806
Dividend income 91,407 86,124 78,585
----------------------------------------------------
Total interest income 14,980,505 14,333,015 13,732,851
----------------------------------------------------
Interest Expense
Deposits 6,736,962 6,440,939 6,243,723
Borrowings 918,674 651,859 463,288
----------------------------------------------------
Total interest expense 7,655,636 7,092,798 6,707,011
----------------------------------------------------
Net Interest Income 7,324,869 7,240,217 7,025,840
Provision for loan losses 227,184 59,223 58,156
----------------------------------------------------
Net Interest Income After Provision for Loan Losses 7,097,685 7,180,994 6,967,684
----------------------------------------------------
Other Income
Net loan servicing fees 81,732 78,063 85,837
Annuity and other commissions 150,272 141,717 153,464
Losses from limited partnerships (170,500) (200,100) (305,000)
Service charges on deposit accounts 240,547 127,739 62,139
Net gains on loan sales 83,855 22,962 45,630
Life insurance income and death benefits 271,500 175,043 808,424
Other income 131,371 58,185 73,492
----------------------------------------------------
Total other income 788,777 403,609 923,986
----------------------------------------------------
Other Expenses
Salaries and employee benefits 2,686,330 2,555,869 2,880,969
Net occupancy expenses 269,719 246,544 168,666
Equipment expenses 133,697 98,923 61,011
Deposit insurance expense 131,746 128,868 996,303
Foreclosed real estate expenses and losses (gains), net (3,582) 190,199 (21,054)
Data processing expense 313,528 226,936 147,720
Advertising 112,760 156,208 153,685
Other expenses 935,603 797,968 663,794
----------------------------------------------------
Total other expenses 4,579,801 4,401,515 5,051,094
----------------------------------------------------
Income Before Income Tax 3,306,661 3,183,088 2,840,576
Income tax expense 1,182,235 858,755 400,382
----------------------------------------------------
Net Income $ 2,124,426 $ 2,324,333 $ 2,440,194
====================================================
Basic Earnings Per Share $1.38 $1.32 $1.35
====================================================
Diluted Earnings Per Share $1.36 $1.29 $1.31
====================================================
</TABLE>
See notes to consolidated financial statements.
Page 17
<PAGE>
Marion Capital Holdings, Inc. and Subsidiaries
Consolidated Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock Comprehensive Retained Unearned
Shares Amount Income Earnings Compensation
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, July 1, 1996 1,933,613 $13,814,937 $28,128,458 $ (432,202)
Comprehensive income
Net income $2,440,194 2,440,194
Unrealized losses on securities (1,842)
-----------
$2,438,352
===========
Cash dividends ($.82 per share) (1,494,597)
Repurchase of common stock (188,887) (3,998,270)
Exercise of stock options 23,373 176,210
Amortization of unearned
compensation expense 299,562
Tax benefit of stock options
exercised and RRP 133,488
--------------------------------- --------------------------------
Balances, June 30, 1997 1,768,099 10,126,365 29,074,055 (132,640)
Comprehensive income
Net income $2,324,333 2,324,333
Unrealized gains on securities 32,293
-----------
$2,356,626
===========
Cash dividends ($.88 per share) (1,557,284)
Repurchase of common stock (96,979) (2,706,834)
Exercise of stock options 28,187 176,126
Amortization of unearned
compensation expense 132,640
Tax benefit of stock options
exercised and RRP 189,534
--------------------------------- --------------------------------
Balances, June 30, 1998 1,699,307 7,785,191 29,841,104 0
Comprehensive income
Net income $2,124,426 2,124,426
Unrealized losses on securities (16,708)
-----------
$2,107,718
===========
Cash dividends ($.88 per share) (1,345,651)
Repurchase of common stock (292,550) (6,890,984)
Exercise of stock options 17,793 108,875
Tax benefit of stock options
exercised and RRP 106,982
--------------------------------- --------------------------------
Balances, June 30, 1999 1,424,550 $ 8,001,048 $23,728,895 $ 0
================================= ================================
</TABLE>
Page 18
<PAGE>
Accumulated Other
Comprehensive
Income (Loss) Total
- ---------------------------------------------------------------------------
Balances, July 1, 1996 $ (119) $41,511,074
Comprehensive income
Net income 2,440,194
Unrealized losses on securities (1,842) (1,842)
Cash dividends ($.82 per share) (1,494,597)
Repurchase of common stock (3,998,270)
Exercise of stock options 176,210
Amortization of unearned
compensation expense 299,562
Tax benefit of stock options
exercised and RRP 133,488
-----------------------------------
Balances, June 30, 1997 (1,961) 39,065,819
Comprehensive income
Net income 2,324,333
Unrealized gains on securities 32,293 32,293
Cash dividends ($.88 per share) (1,557,284)
Repurchase of common stock (2,706,834)
Exercise of stock options 176,126
Amortization of unearned
compensation expense 132,640
Tax benefit of stock options
exercised and RRP 189,534
-----------------------------------
Balances, June 30, 1998 30,332 37,656,627
Comprehensive income
Net income 2,124,426
Unrealized losses on securities (16,708) (16,708)
Cash dividends ($.88 per share) (1,345,651)
Repurchase of common stock (6,890,984)
Exercise of stock options 108,875
Tax benefit of stock options
exercised and RRP 106,982
-----------------------------------
Balances, June 30, 1999 $13,624 $31,743,567
===================================
See notes to consolidated financial statements.
Page 18
<PAGE>
<TABLE>
<CAPTION>
MARION CAPITAL HOLDINGS, INC AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Year Ended June 30 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C> <C>
Net income $2,124,426 $2,324,333 $2,440,194
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 227,184 59,223 58,156
Adjustment for losses of foreclosed real estate (27,325) (31,898)
Losses from limited partnerships 170,500 200,100 305,000
Amortization of net loan origination fees (232,036) (194,372) (262,833)
Depreciation 183,292 133,743 83,968
Amortization of unearned compensation 132,640 299,562
Amortization of core deposits and goodwill 104,006 63,124
Loans sold gains (83,855) (22,962) (45,630)
Deferred income tax 235,357 (55,341) (465,185)
Origination of loans for sale (8,402,745) (5,749,103) (7,208,207)
Proceeds from sale of loans 8,953,153 4,871,794 7,208,207
Changes in
Interest receivable 77,633 (258,702) (150,548)
Interest payable and other liabilities (64,569) 314,647 484,884
Cash value of life insurance (271,500) (175,043) (808,424)
Prepaid expense and other assets 53,363 (146,037) 63,485
Other (4,669) (34,643) (48,177)
-------------------------------------------------
Net cash provided by operating activities 3,069,540 1,436,076 1,922,554
-------------------------------------------------
Investing Activities
Purchase of securities available for sale (5,002,125)
Proceeds from maturities of securities available for sale 3,000,000
Purchase of securities held to maturity (1,000,000)
Proceeds from maturities of securities held to maturity 2,002,770 2,843,964 9,241,819
Contribution to limited partnership (130,000)
Net changes in loans (2,164,099) (15,375,499) (4,459,652)
Proceeds from real estate owned sales 30,722
Purchase of FHLB stock (29,200) (87,100) (58,900)
Purchase of premises and equipment (267,477) (419,583) (158,324)
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 (458,006) (1,261,098) 1,865,527
-------------------------------------------------
Financing Activities
Net change in
Interest-bearing demand and savings deposits (2,183,283) 1,325,530 (1,461,116)
Certificates of deposit 9,855,083 (1,545,351) (3,028,881)
Proceeds from Federal Home Loan Bank advances 4,266,580 10,656,000 5,000,000
Repayment of borrowings (2,811,212) (5,200,674) (3,012,498)
Dividends paid (1,345,651) (1,557,284) (1,494,597)
Exercise of stock options 215,857 365,660 309,697
Repurchase of common stock (6,890,984) (2,706,834) (3,998,270)
-------------------------------------------------
Net cash provided (used) by financing activities 1,106,390 1,337,047 (7,685,665)
-------------------------------------------------
Net Change in Cash and Cash Equivalents 3,717,924 1,512,025 (3,897,584)
Cash and Cash Equivalents, Beginning of Year 5,134,764 3,622,739 7,520,323
-------------------------------------------------
Cash and Cash Equivalents, End of Year $8,852,688 $5,134,764 $3,622,739
=================================================
Additional Cash Flows and Supplementary Information
Interest paid $7,338,583 $7,034,447 $6,704,766
Income tax paid 845,000 856,139 676,345
Loan balances transferred to foreclosed real estate 1,137,759 119,002
Loans to finance the sale of foreclosed real estate 1,171,881 321,023
Loan payable to limited partnership 3,634,406
</TABLE>
See notes to consolidated financial statements.
Page 19
<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 in accumulated other comprehensive income.
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.
Loans held for sale are carried at the lower of aggregate cost or market. Market
is determined using the aggregate method. 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.
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. All loans including nonperforming loans
are reviewed for impairment. Loans whose payments have 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. Collateralized and noncollateralized consumer loans
after 180 and 120 days of delinquency, respectively, are charged off. 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. A loan is
transferred to nonaccrual status after 90 days of delinquency. 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.
Page 20
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Foreclosed assets are 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 losses. 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, 1999, 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.
Intangible assets are being amortized on an accelerated basis over fifteen
years. Such assets are periodically evaluated as to the recoverability of their
carrying value.
Mortgage servicing rights on originated loans are capitalized by allocating the
total cost of the mortgage loans between the mortgage servicing rights and the
loans based on their relative fair values. Capitalized servicing rights are
amortized in proportion to and over the period of estimated servicing revenues.
Investments in limited partnerships are recorded using the equity method of
accounting. Losses due to impairment are recorded when it is determined that the
investment no longer has the ability to recover its carrying amount. The
benefits of low income housing tax credits associated with the investment are
accrued when earned.
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 (APB) No. 25, Accounting for Stock Issued to
Employees, and, accordingly, recognizes no compensation expense for the stock
option grants.
Page 21
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
Note 2 -- Investment Securities
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Federal agencies $2,997 $23 $3,020
----------------------------------------------------------------
Total investment securities $2,997 $23 $0 $3,020
================================================================
1998
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------
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 22
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The amortized cost and fair value of securities held to maturity and available
for sale at June 30, 1999, 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.
1999
--------------------------------------
Available for sale
--------------------------------------
Amortized Fair
Maturity Distribution at June 30 Cost Value
- --------------------------------------------------------------------------------
Within one year $1,001 $1,001
One to five years 1,996 2,019
--------------------------------------
Totals $2,997 $3,020
======================================
Note 3 -- Loans and Allowance
June 30 1999 1998
- --------------------------------------------------------------------------------
Real estate mortgage loans
One-to-four family $105,177 $106,215
Multi-family 9,295 11,014
Commercial real estate 32,918 31,857
Real estate construction loans 6,332 7,284
Commercial 10,914 8,511
Consumer loans 6,899 4,767
--------------------------------------
171,535 169,648
Undisbursed portion of loans (3,196) (3,663)
Deferred loan fees (270) (300)
Allowance for loan losses (2,272) (2,087)
--------------------------------------
Total loans, net of allowance $165,797 $163,598
======================================
Page 23
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Information on impaired loans is summarized below.
June 30 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans with an allowance $1,585
Impaired loans for which the discounted cash flows
or collateral value exceeds the carrying value of the loan 615 $ 466
------------------------------------
Total impaired loans $2,200 $ 466
====================================
Allowance for impaired loans
(included in the Company's allowance for loan losses) $ 409
Year Ended June 30 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Average balance of impaired loans $1,622 $ 178
Interest income recognized on impaired loans 77 15
Cash-basis interest included above 77 15
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for loan losses
Balances, July 1 $2,087 $2,032 $2,009
Provision for losses 227 59 58
Recoveries on loans 18
Loans charged off (42) (22) (35)
-------------------------------------------------------------
Balances, June 30 $2,272 $2,087 $2,032
=============================================================
Note 4 -- Premises and Equipment
June 30 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Land $ 654 $ 654
Buildings and land improvements 1,719 1,604
Leasehold improvements 192 192
Furniture and equipment 714 636
------------------------------------
Total cost 3,279 3,086
Accumulated depreciation (1,271) (1,157)
------------------------------------
Net $2,008 $1,929
====================================
</TABLE>
Page 24
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 5 -- Other Assets and Other Liabilities
<TABLE>
<CAPTION>
June 30 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Other assets
Interest receivable
Investment securities $ 46 $ 73
Loans 928 978
Foreclosed assets 31
Deferred income tax asset 2,597 2,821
Investment in insurance company 675 650
Core deposit intangibles and goodwill 698 803
Prepaid expenses and other 389 383
----------------------------------------
Total $5,333 $5,739
========================================
Other liabilities
Interest payable
Deposits $ 103 $ 146
Other borrowings 38 31
Deferred compensation and fees payable 2,631 2,550
Deferred gain on sale of real estate owned 326 336
Advances by borrowers for taxes and insurance 202 208
Other 1,197 1,301
----------------------------------------
Total $4,497 $4,572
========================================
</TABLE>
Page 25
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 6 -- Investment in Limited Partnerships
The Bank has is an investment of approximately $4,713,000 and $4,883,000 at June
30, 1999 and 1998 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), and
impairment losses. 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 $11,000 for 1999,
$338,000 for 1998 and $423,000 for 1997. Condensed combined financial statements
of the partnerships are as follows:
<TABLE>
<CAPTION>
June 30 1999 1998
- ----------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Condensed statement of financial condition
Assets
Cash $ 167 $ 149
Land and property 8,173 5,179
Other assets 393 1,729
---------------------------
Total assets $8,733 $7,057
===========================
Liabilities
Notes payable $7,292 $6,006
Other liabilities 450 298
---------------------------
Total liabilities 7,742 6,304
Partners' equity 991 753
---------------------------
Total liabilities and partners' equity $8,733 $7,057
===========================
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
Condensed statement of operations
<S> <C> <C> <C>
Total revenue $ 704 $ 699 $ 670
Total expense 854 926 805
-------------------------------------------------------------------
Net loss $(150) $(227) $(135)
==================================================================
</TABLE>
Page 26
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 7 -- Deposits
<TABLE>
<CAPTION>
June 30 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Interest-bearing demand $ 26,825 $ 27,091
Savings 14,791 16,708
Certificates and other time deposits of $100,000 or more 14,561 11,338
Other certificates and time deposits 85,910 79,278
----------------------
Total deposits $142,087 $134,415
======================
</TABLE>
Certificates and other time deposits maturing in years ending June 30:
- -----------------------------------------------------------------------------
2000 $ 66,559
2001 15,388
2002 3,398
2003 6,484
2004 8,614
Thereafter 28
--------
$100,471
========
Deposits from related parties held by the Bank at June 30, 1999 totaled
$2,134,000.
The Company has entered into an agreement to sell its Decatur office, including
deposits approximating $11,000,000. Consummation is expected to occur by
September 30, 1999.
Note 8 -- Borrowings
June 30 1999 1998
- --------------------------------------------------------------------------------
Federal Home Loan Bank (FHLB) advances $15,534 $13,684
Note payable to Pedcor-97, due in installments
to August 2008 3,240 3,635
---------------------------
$18,774 $17,319
===========================
Page 27
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------
Weighted Weighted
Average Average
June 30 Amount Rate Amount Rate
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FHLB advances
Maturities in years ending June 30:
1999 $ 2,417 6.07%
2000 $ 725 6.47% 713 6.48
2001 3,655 5.66 3,633 5.66
2002 2,790 6.27 2,766 6.27
2003 2,302 6.07 2,277 6.06
2004 3,320 5.73 293 6.32
Thereafter 2,742 6.42 1,585 6.59
------- -------
$15,534 6.02% $13,684 6.08%
======= =======
</TABLE>
The FHLB advances are secured by first-mortgage loans and investment securities
totaling $99,505,000 and $105,000,000 at June 30, 1999 and 1998. 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:
- --------------------------------------------------------------------------------
2000 $ 415
2001 388
2002 382
2003 376
2004 374
Thereafter 1,305
------
$3,240
======
Page 28
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 9 -- Loan Servicing
Loans serviced for others are not included in the accompanying consolidated
balance sheet. The unpaid principal balances of loans serviced for others
totaled $38,329,000, $32,484,000 and $32,792,000 at June 30, 1999, 1998 and
1997.
The fair value of capitalized mortgage servicing rights is based on comparable
market values and expected cash flows, with impairment assessed based on
portfolio characteristics including product type, investor type, and interest
rates.
1999 1998 1997
- --------------------------------------------------------------------------------
Mortgage servicing rights
Balances, July 1 $ 58 $ 43
Servicing rights capitalized 83 24 $ 46
Amortization of servicing rights (14) (9) (3)
---------------------------------
Balances, June 30 $ 127 $ 58 $ 43
=================================
Note 10 -- Income Tax
Year Ended June 30 1999 1998 1997
- --------------------------------------------------------------------------------
Currently payable
Federal $ 654 $ 645 $ 630
State 293 269 235
Deferred
Federal 254 (51) (418)
State (19) (4) (47)
-------------------------------------
Total income tax expense $ 1,182 $ 859 $ 400
=====================================
<TABLE>
<CAPTION>
Year Ended June 30 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% $ 1,124 $ 1,082 $ 966
Increase in cash value of life insurance and death benefits (92) (60) (257)
Effect of state income taxes 181 175 124
Business income tax credits (11) (338) (423)
Other (20) (10)
-------------------------------------
Actual tax expense $ 1,182 $ 859 $ 400
=====================================
</TABLE>
Page 29
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
A cumulative net deferred tax asset is included in other assets. The components
of the asset are as follows:
June 30 1999 1998
- --------------------------------------------------------------------------------
Assets
Allowance for loan losses $1,087 $1,005
Deferred compensation 1,116 1,084
Loan fees 28 52
Pensions and employee benefits 336 300
Business income tax credits 257 592
Loss on limited partnerships 74 65
Other 34 20
-----------------------------
Total assets 2,932 3,118
-----------------------------
Liabilities
State income tax 166 166
Securities available for sale 9 20
Depreciation 56 34
Mortgage servicing rights 52 25
FHLB stock dividends 49 49
Other 3 3
-----------------------------
Total liabilities 335 297
-----------------------------
$2,597 $2,821
=============================
No valuation allowance was considered necessary at June 30, 1999 and 1998.
At June 30, 1999, the Company had an unused business income tax credit
carryforward of $257,000, which expires in 2013.
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, 1999, the unrecorded
deferred income tax liability on the above amount was approximately $3,300,000.
Page 30
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 11 -- Other Comprehensive Income
<TABLE>
<CAPTION>
1999
--------------------------------------------------------
Before-Tax Tax Net-of-Tax
Year Ended June 30 Amount Benefit Amount
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized losses on securities
Unrealized holding losses arising during the year $(26) $9 $(17)
========================================================
1998
--------------------------------------------------------
Before-Tax Tax Net-of-Tax
Year Ended June 30 Amount Benefit Amount
- ----------------------------------------------------------------------------------------------------------------
Unrealized gains on securities
Unrealized holding gains arising during the year $76 $(44) $32
========================================================
1997
--------------------------------------------------------
Before-Tax Tax Net-of-Tax
Year Ended June 30 Amount Benefit Amount
- ----------------------------------------------------------------------------------------------------------------
Unrealized losses on securities
Unrealized holding losses arising during the year $(3) $1 $(2)
========================================================
</TABLE>
Note 12 -- Year 2000
Like all entities, the Company is exposed to risks associated with the Year 2000
Issue, which affects computer software and hardware; transactions with
customers, vendors, and other entities; and equipment dependent upon microchips.
The Company has begun and is continuing its efforts to identify and remediate
potential Year 2000 problems. It is not possible for any entity to guarantee the
results of its own remediation efforts or to accurately predict the impact of
the Year 2000 Issue on third parties with which the Company does business. If
remediation efforts of the Company or third parties with which the Company does
business are not successful, the Year 2000 Issue could have negative effects on
the Company's financial condition and results of operations in the near term.
Page 31
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 13 -- Dividends and Capital Restrictions
Without prior approval, current regulations allow the Bank to pay dividends to
the Company not exceeding retained net income for the applicable calendar year
to date plus retained net income for the preceding two years. Application is
required by the Bank to pay dividends in excess of this restriction, and as of
June 30, 1999, the Bank has approval to pay dividends of $1,000,000.
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, 1999, total shareholder's
equity of the Bank was $27,946,000.
Note 14 -- 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 15 -- 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 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 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.
Page 32
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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, 1999 and 1998, the
Bank is categorized as well capitalized and met all subject capital adequacy
requirements. There are no conditions or events since June 30, 1999 that
management believes have changed the Bank's classification.
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------------------
Required
for Adequate To Be Well
Actual Capital 1 Capitalized 1
June 30 Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital 1
(to risk-weighted assets) $28,755 22.6% $10,169 8.0% $12,711 10.0%
Tier I risk-based capital 1
(to risk-weighted assets) 27,163 21.4 10,169 8.0 12,711 10.0
Core capital 1
(to adjusted tangible assets) 27,163 14.4 5,668 3.0 11,336 6.0
Core capital 1
(to adjusted total assets) 27,163 14.4 5,668 3.0 9,447 5.0
1998
----------------------------------------------------------------------------
Required
for Adequate To Be Well
Actual Capital 1 Capitalized 1
June 30 Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------
Total risk-based capital 1
(to risk-weighted assets) $34,079 27.1% $10,048 8.0% $12,560 10.0%
Tier I risk-based capital 1
(to risk-weighted assets) 32,503 25.9 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
</TABLE>
1 As defined by regulatory agencies
Page 33
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 16 -- Employee Benefits
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 $97,000, $117,000 and
$175,000 for 1999, 1998 and 1997.
The Bank contributes up to 3 percent of employees' salaries for those
participating in a thrift plan. The Bank's contribution was $40,000, $33,000 and
$25,000 for 1999, 1998 and 1997.
The Bank has purchased life insurance on certain officers and directors, which
insurance had an approximate cash value of $5,887,000 and $5,616,000 at June 30,
1999 and 1998. 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 $363,000, $301,000 and $625,000 for 1999,
1998 and 1997.
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, vested and earned by the recipient at a rate of 20 percent
per year, were fully vested at June 30, 1998.
The Company sponsors a defined-benefit postretirement health plan that covers
both salaried and nonsalaried employees. The following table sets forth the
plan's funded status, and amounts recognized in the consolidated financial
statements:
June 30 1999 1998
- --------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $203 $153
Service cost 21 13
Interest cost 13 12
Actuarial (gain) loss (31) 28
Benefits paid (3) (3)
-------------------------
Benefit obligation at end of year 203 203
Unrecognized net actuarial gain 107 83
-------------------------
Accrued benefit cost $310 $286
=========================
Page 34
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Year Ended June 30 1999 1998 1997
- --------------------------------------------------------------------------------
Components of net periodic benefit cost
Service cost $ 21 $ 13 $ 15
Interest cost 13 12 14
Recognized net actuarial gain (7) (15) (8)
------------------------------------
Net periodic benefit gain $ 27 $ 10 $ 21
====================================
At June 30, 1999 and 1998, there were no plan assets.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 11 percent in 1999, gradually declining to
6 percent in the year 2011.
The weighted average discount rate used in measuring the accumulated
postretirement benefit obligation was 6.75 percent in 1999.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-Percentage 1-Percentage
Point Increase Point Decrease
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest cost components $6 $5
Effect on postretirement benefit obligation 29 24
</TABLE>
Note 17 -- 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 six 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.
Page 35
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Although the Company has elected to follow APB No. 25, Statement of Financial
Accounting Standards (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. No options were
granted in 1999. The fair value of each option grant was estimated on the grant
date using an option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
June 30 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended June 30 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
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, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Year Ended June 30 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
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 73,848 $12.62 99,094 $12.09 106,790 $10.00
Granted 10,083 23.00 20,166 20.25
Exercised (24,188) 10.00 (35,329) 10.37 (27,862) 10.00
------ ------ ------
Outstanding, end of year 49,660 16.54 73,848 12.62 99,094 12.09
====== ====== ======
Options exercisable at year end 49,660 73,848 99,094
Weighted-average fair value of
options granted during the year $3.94 $3.14
</TABLE>
Page 36
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
As of June 30, 1999, options outstanding totaling 20,411 have an exercise price
of $10 and a weighted-average remaining contractual life of 3.7 years, options
outstanding totaling 20,166 have an exercise price of $20.25 and a
weighted-average remaining contractual life of 7.2 years and options outstanding
totaling 9,083 have an exercise price of $23.00 and a weighted-average remaining
contractual life of 8.1 years.
For the years ended June 30, 1999, 1998 and 1997, 6,395, 7,142 and 4,489 shares
were tendered as partial payment for options exercised. At June 30, 1999, 18,050
shares were available for grant.
Note 18 -- Earnings Per Share
Earnings per share were computed as follows:
<TABLE>
<CAPTION>
Year Ended June 30 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
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 $2,124 1,539,569 $1.38 $2,324 1,760,166 $1.32 $2,440 1,806,398 $1.35
Effect of dilutive securities
RRP program 2,493 5,380
Stock options 19,550 39,200 46,911
---------------- ----------------- -----------------
Diluted Earnings Per Share
Income available to
common shareholders
and assumed conversions $2,124 1,559,119 $1.36 $2,324 1,801,859 $1.29 $2,440 1,858,689 $1.31
================ ================= =================
</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:
1999 1998
- --------------------------------------------------------------------------------
Mortgage loan commitments at variable rates $1,705 $1,911
Consumer and commercial loan commitments 5,360 4,346
Standby letters of credit 3,644 3,644
Page 37
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation. Collateral held varies, but may include residential real estate,
income-producing commercial properties, or other assets of the borrower. Standby
letters of credit are conditional commitments issued by the Bank to guarantee
the performance of the customer to a third party.
A significant portion of the Bank's loan portfolio consists of commercial real
estate loans, including loans secured by nursing homes. These commercial real
estate loans, totaling $32,918,000 and $31,857,000 at June 30, 1999 and 1998,
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 Payable--Limited Partnership--The 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 38
<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>
1999 1998
-----------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 8,853 $ 8,853 $ 5,135 $ 5,135
Securities available for sale 3,020 3,020 3,049 3,049
Securities held to maturity 2,003 2,002
Loans, including loans held for sale, net 166,124 168,503 164,475 166,697
Interest receivable 974 974 1,051 1,051
Stock in FHLB 1,164 1,164 1,134 1,134
Liabilities
Deposits 142,087 141,838 134,415 135,299
Borrowings
FHLB advances 15,534 15,364 13,684 13,759
Note payable--limited partnership 3,240 2,334 3,635 2,453
Interest payable 141 141 177 177
Advances by borrowers for taxes and insurance 202 202 208 208
</TABLE>
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 1999 1998
- --------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 131 $ 524
Loans 2,986 3,031
Investment in subsidiary 27,960 33,434
Other assets 764 723
------------------------
Total assets $31,841 $37,712
========================
Liabilities $ 97 $ 55
Shareholders' Equity 31,744 37,657
------------------------
Total liabilities and shareholders' equity $31,841 $37,712
========================
Page 39
<PAGE>
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Condensed Statement of Income
<TABLE>
<CAPTION>
Year Ended June 30 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from Bank $ 7,500 $ 4,000 $ 3,250
Other 374 308 300
--------------------------------------
Total income 7,874 4,308 3,550
Expenses 119 118 114
--------------------------------------
Income before income tax and equity in
undistributed income of subsidiary 7,755 4,190 3,436
Income tax expense 111 75 74
--------------------------------------
Income before equity in undistributed income of subsidiary 7,644 4,115 3,362
Distribution in excess of income of subsidiary (5,520) (1,791) (922)
--------------------------------------
Net Income $ 2,124 $ 2,324 $ 2,440
======================================
</TABLE>
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 2,124 $ 2,324 $ 2,440
Adjustments to reconcile net income
to net cash provided by operating activities 5,459 1,688 786
---------------------------------------
Net cash provided by operating activities 7,583 4,012 3,226
---------------------------------------
Investing Activities
Proceeds from maturities of securities held to maturity 3,000
Net change in loans 45 469 (3,500)
Investment in insurance company (650)
---------------------------------------
Net cash provided (used) by investing activities 45 (181) (500)
---------------------------------------
Financing Activities
Exercise of stock options 216 366 310
Cash dividends (1,346) (1,557) (1,495)
Repurchase of common stock (6,891) (2,707) (3,998)
---------------------------------------
Net cash used by financing activities (8,021) (3,898) (5,183)
---------------------------------------
Net Change in Cash and Cash Equivalents (393) (67) (2,457)
Cash and Cash Equivalents at Beginning of Year 524 591 3,048
---------------------------------------
Cash and Cash Equivalents at End of Year $ 131 $ 524 $ 591
=======================================
</TABLE>
Page 40
<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, 1999
------------------------------------------------
June March December September
1999 1999 1998 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $3,636 $3,747 $3,820 $3,778
Interest expense 1,902 1,873 1,935 1,946
------------------------------------------------
Net interest income 1,734 1,874 1,885 1,832
Provision for losses on loans 209 2 7 9
------------------------------------------------
Net interest income after provisions for losses on loans 1,525 1,872 1,878 1,823
Other income 364 168 132 124
Other expenses 1,177 1,187 1,078 1,137
------------------------------------------------
Income before income tax 712 853 932 810
Income tax expense 214 329 347 293
------------------------------------------------
Net Income $ 498 $ 524 $ 585 $ 517
================================================
Basic earnings per share $ .34 $ .35 $ .37 $ .32
Diluted earnings per share .34 .35 .37 .31
Dividends per share .22 .22 .22 .22
Year Ended June 30, 1998
------------------------------------------------
June March December September
1998 1998 1997 1997
- -------------------------------------------------------------------------------------------------------------------
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>
Page 41
<PAGE>
BOARD OF DIRECTORS
John M. Dalton Steven L. Banks Jack O. Murrell
Chairman of the Board President and Vice Retired, Murrell and Keal
Chairman of the Board
Jerry D. McVicker W. Gordon Coryea Jon R. Marler
Director of Operations Retired, Attorney President, Carico Systems
Marion Community Schools President, Empire Real
Estate and Development, Inc.
OFFICERS OF MARION CAPITAL HOLDINGS, INC.
Steven L. Banks Larry G. Phillips
President Sr. Vice President and
Secretary-Treasurer
Cynthia M. Fortney Kathy Kuntz
Vice President and Assistant Secretary and
Assistant Secretary Assistant Treasurer
SENIOR OFFICERS OF FIRST FEDERAL SAVINGS BANK OF MARION
Steven L. Banks Larry G. Phillips Cynthia M. Fortney
President Sr. Vice President and Vice President
Secretary-Treasurer
Stephen A. Smithley James E. Adkins Charles N. Sponhauer
Vice President Vice President Vice President
Michael G. Fisher Tim D. Canode Kathy Kuntz
Vice President Vice President Vice President
Page 42
<PAGE>
DIRECTORS AND OFFICERS
W. Gordon Coryea (age 74) is a Director of Marion Capital Holdings, Inc. He
is a retired attorney at law and had served as legal counsel for First Federal
from 1965 to his retirement in 1998.
John M. Dalton (age 65) is a Director of Marion Capital Holdings, Inc. and
served as its President from 1996 until his retirement in March, 1999. Prior to
that, he served as Marion Capital Holdings, Inc.'s Executive Vice President. He
also served as President of First Federal from 1996 to March, 1999 and has
served 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 76) 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).
Steven L. Banks (age 49) is a Director of Marion Capital Holdings, Inc. and
has served as its President since April, 1999. He has also served as President
of First Federal since April, 1999 and as Executive Vice President of First
Marion Service Corporation since 1996. Prior to that, he served as Executive
Vice President of Marion Capital Holdings, Inc. from 1996 to March, 1999, and as
Executive Vice President of First Federal from 1996 to March, 1999. He became
Vice Chairman of the Boards of Marion Capital Holdings, Inc., and First Federal
in January, 1999.
Jerry D. McVicker (age 54) is a Director of Marion Capital Holdings, Inc.
He also currently serves as Director of Operations for Marion Community Schools.
Jon R. Marler (age 49) is President of Carico Systems and President of
Empire Real Estate and Development, Inc. He has been a Director of Marion
Capital Holdings, Inc. and First Federal since 1997.
Larry G. Phillips (age 50) 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.
Cynthia M. Fortney (age 42) has served as Vice President and Assistant
Secretary of Marion Capital Holdings, Inc. since 1998 and as Vice President of
First Federal since 1998. She has also served as Assistant Vice President of
First Marion Service Corporation since 1998.
Kathy Kuntz (age 56) is Assistant Secretary and Assistant Treasurer of
Marion Capital Holdings, Inc. She has served as Vice President and Assistant
Secretary of First Federal since 1998. She has also served as Assistant Vice
President and Assistant Secretary of First Marion Service Corporation since
1999. Ms. Kuntz was Assistant Secretary of First Federal from 1976 to 1998 and
First Marion Service Corporation since 1971.
Page 43
<PAGE>
SHAREHOLDER INFORMATION
Market Information
The common stock of Marion Capital Holdings, Inc. is traded on the National
Association of Securities Dealers Automated Quotation System, National Market
System, under the symbol "MARN," and is listed in the Wall Street Journal under
the abbreviation "MarionCap." As of June 30, 1999, there were 397 shareholders
of record and MCHI estimates that, as of that date, there were an additional 750
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, 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
September 30, 1998 28.563 22.250 .22
December 31, 1998 23.750 19.875 .22
March 31, 1999 22.750 19.750 .22
June 30, 1999 21.500 20.063 .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, 1999 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
Page 44
Consent of Independent Certified Public Accountant
We consent to the incorporation by reference in a Registration Statement on
Form S-8 (Registration No. 33-69538) of our report dated July 23, 1999, on the
consolidated financial statements of Marion Capital Holdings, Inc. and
subsidiaries contained in the 1999 Annual Report to Shareholders of Marion
Capital Holdings, Inc., which is incorporated by reference in this Form 10-K.
/s/ Olive LLP
OLIVE LLP
Indianapolis, Indiana
September 23, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000894372
<NAME> Marion Capital Holdings, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-1-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 2,226
<INT-BEARING-DEPOSITS> 6,627
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,020
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 166,124
<ALLOWANCE> 2,272
<TOTAL-ASSETS> 197,101
<DEPOSITS> 142,087
<SHORT-TERM> 400
<LIABILITIES-OTHER> 7,737
<LONG-TERM> 15,134
<COMMON> 8,001
0
0
<OTHER-SE> 23,742
<TOTAL-LIABILITIES-AND-EQUITY> 197,101
<INTEREST-LOAN> 14,448
<INTEREST-INVEST> 230
<INTEREST-OTHER> 303
<INTEREST-TOTAL> 14,981
<INTEREST-DEPOSIT> 6,737
<INTEREST-EXPENSE> 7,656
<INTEREST-INCOME-NET> 7,325
<LOAN-LOSSES> 227
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,580
<INCOME-PRETAX> 3,306
<INCOME-PRE-EXTRAORDINARY> 2,124
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,124
<EPS-BASIC> 1.38
<EPS-DILUTED> 1.36
<YIELD-ACTUAL> 4.12
<LOANS-NON> 3,278
<LOANS-PAST> 462
<LOANS-TROUBLED> 2,723
<LOANS-PROBLEM> 93
<ALLOWANCE-OPEN> 2,087
<CHARGE-OFFS> 42
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,272
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,272
</TABLE>
