SCHEDULE 14A
Information Required in Proxy Statement
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant: Yes.
Filed by a Party other than the Registrant: No.
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as Permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
MARION CAPITAL HOLDINGS, INC.
(Name Of Registrant As Specified In Its Charter)
MARION CAPITAL HOLDINGS, INC.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11
(1) Title of each class of securities to which transaction
applies: N/A
(2) Aggregate number of securities to which transaction
applies: N/A
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth
the amount on which the filing fee is calculated and
state how it was determined): N/A
(4) Proposed maximum aggregate value of transaction: N/A
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing. N/A
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
MARION CAPITAL
HOLDINGS, INC.
100 West Third Street
Marion, Indiana 46952
(765) 664-0556
----------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
----------------------------------------
To Be Held On October 18, 1999
Notice is hereby given that the Annual Meeting of Shareholders of
Marion Capital Holdings, Inc. (the "Holding Company") will be held at the
Holding Company's office at 100 West Third Street, Marion, Indiana, on Monday,
October 18, 1999, at 4:30 P.M., Eastern Standard Time.
The Annual Meeting will be held for the following purposes:
1. Election of Directors. Election of two directors of the
Holding Company to serve three-year terms expiring in 2002.
2. Ratification of Auditors. Ratification of the appointment of
Olive LLP as auditors for Marion Capital Holdings, Inc. for
the fiscal year ending June 30, 2000.
3. Other Business. Such other matters as may properly come before
the meeting or any adjournment thereof.
Shareholders of record at the close of business on August 23, 1999, are
entitled to vote at the meeting or any adjournment thereof.
We urge you to read the enclosed Proxy Statement carefully so that you
may be informed about the business to come before the meeting, or any
adjournment thereof. At your earliest convenience, please sign and return the
accompanying proxy in the postage-paid envelope furnished for that purpose.
A copy of our Annual Report for the fiscal year ended June 30, 1999, is
enclosed. The Annual Report is not a part of the proxy soliciting material
enclosed with this letter.
By Order of the Board of Directors
/s/ Steven L. Banks
Steven L. Banks, President and
Chief Executive Officer
Marion, Indiana
September 13, 1999
IT IS IMPORTANT THAT THE PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT
YOU PLAN TO BE PRESENT IN PERSON AT THE ANNUAL MEETING, PLEASE SIGN, DATE AND
COMPLETE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
<PAGE>
MARION CAPITAL
HOLDINGS, INC.
100 West Third Street
Marion, Indiana 46952
(765) 664-0556
---------------
PROXY STATEMENT
---------------
FOR
ANNUAL MEETING OF SHAREHOLDERS
October 18, 1999
This Proxy Statement is being furnished to the holders of common stock,
without par value (the "Common Stock"), of Marion Capital Holdings, Inc. (the
"Holding Company"), an Indiana corporation, in connection with the solicitation
of proxies by the Board of Directors of the Holding Company to be voted at the
Annual Meeting of Shareholders to be held at 4:30 P.M., Eastern Standard Time,
on October 18, 1999, at the Holding Company's office at 100 West Third Street,
Marion, Indiana, and at any adjournment of such meeting. The principal asset of
the Holding Company consists of 100% of the issued and outstanding shares of
common stock, $.01 par value per share, of First Federal Savings Bank of Marion
("First Federal"). This Proxy Statement is expected to be mailed to the
shareholders on or about September 13, 1999.
The proxy solicited hereby, if properly signed and returned to the
Holding Company and not revoked prior to its use, will be voted in accordance
with the instructions contained therein. If no contrary instructions are given,
each proxy received will be voted for each of the matters described below and,
upon the transaction of such other business as may properly come before the
meeting, in accordance with the best judgment of the persons appointed as
proxies.
Any shareholder giving a proxy has the power to revoke it at any time
before it is exercised by (i) filing with the Secretary of the Holding Company
written notice thereof (Larry G. Phillips, 100 West Third Street, Marion,
Indiana 46952), (ii) submitting a duly executed proxy bearing a later date, or
(iii) by appearing at the Annual Meeting and giving the Secretary notice of his
or her intention to vote in person. Proxies solicited hereby may be exercised
only at the Annual Meeting and any adjournment thereof and will not be used for
any other meeting.
<PAGE>
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Only shareholders of record at the close of business on August 23, 1999
("Voting Record Date"), will be entitled to vote at the Annual Meeting. On the
Voting Record Date, there were 1,424,550 shares of the Common Stock issued and
outstanding, and the Holding Company had no other class of equity securities
outstanding. Each share of Common Stock is entitled to one vote at the Annual
Meeting on all matters properly presented at the Annual Meeting. A majority of
the votes entitled to be cast, in person or by proxy, at the Annual Meeting is
necessary for a quorum. In determining whether a quorum is present, shareholders
who abstain, cast broker non-votes, or withhold authority to vote on one or more
director nominees will be deemed present at the Annual Meeting. There are no
persons known by the Holding Company to own beneficially 5% or more of its
Common Stock.
PROPOSAL I -- ELECTION OF DIRECTORS
The Board of Directors, by resolution adopted pursuant to the By-Laws
of the Holding Company, established that the Board of Directors shall consist of
six members. The By-Laws provide that the Board of Directors is to be divided
into three classes as nearly equal in number as possible. The members of each
class are to be elected for a term of three years and until their successors are
elected and qualified. One class of directors is to be elected annually. The
nominees for director this year are Steven L. Banks and W. Gordon Coryea, each
of whom is a current director of the Holding Company. If elected by the
shareholders at the Annual Meeting, the terms of Messrs. Banks and Coryea will
expire in 2002.
Unless otherwise directed, each proxy executed and returned by a
shareholder will be voted for the election of the nominees listed below. If any
person named as a nominee should be unable or unwilling to stand for election at
the time of the Annual Meeting, the proxy holders will nominate and vote for a
replacement nominee recommended by the Board of Directors. At this time, the
Board of Directors knows of no reason why the nominees listed below may not be
able to serve as directors if elected.
<PAGE>
The following table sets forth certain information regarding directors
continuing in office and the nominees for the position of director of the
Holding Company, including the number and percent of shares of Common Stock
beneficially owned by such persons as of the Voting Record Date. Unless
otherwise indicated, each person in the table below has sole investment and/or
voting power with respect to the shares shown as beneficially owned by him. No
nominee for director is related to any other nominee for director or executive
officer of the Holding Company by blood, marriage, or adoption, and there are no
arrangements or understandings between any nominee and any other person pursuant
to which such nominee was selected. The table also sets forth the number of
shares of Holding Company Common Stock beneficially owned by Larry G. Phillips,
one of the Holding Company's executive officers, and by all directors and
executive officers of the Holding Company as a group.
<TABLE>
<CAPTION>
Director
of the Common Stock
Director of Holding Beneficially Owned
Expiration of First Federal Company as of August 23, Percentage
Name Term as Director Since Since 1999(1) of Class
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Director Nominees
Steven L. Banks 2002 1996 1996 10,583(2) 0.74%
W. Gordon Coryea 2002 1965 1992 16,144(3) 1.13%
Directors Continuing in Office
John M. Dalton 2001 1974 1992 28,754(4) 2.02%
Jon R. Marler 2000 1997 1997 11,083(5) 0.77%
Jerry D. McVicker 2000 1996 1996 36,573(6) 2.55%
Jack O. Murrell 2001 1974 1992 18,161(7) 1.27%
Executive Officer
Larry G. Phillips,
Senior Vice President,
Secretary and Treasurer -- -- -- 15,228(8) 1.07%
All directors and executive
officers as a group (8 persons) 136,526(9) 9.36%
</TABLE>
(1) Based upon information furnished by the respective director nominees.
Under applicable regulations, shares are deemed to be beneficially
owned by a person if he or she directly or indirectly has or shares the
power to vote or dispose of the shares, whether or not he or she has
any economic power with respect to the shares. Includes shares
beneficially owned by members of the immediate families of the director
nominees residing in their homes.
(2) Of these shares, 500 are held in a trust as to which Mr. Banks is
trustee and beneficiary, and 10,083 are subject to a stock option
granted under the Marion Capital Holdings, Inc. Stock Option Plan (the
"Option Plan").
(3) Of these shares, 1,000 are held jointly by Mr. Coryea and his wife, and
3,144 are subject to a stock option granted under the Option Plan.
(4) Of these shares, 15,717 are owned jointly by Mr. Dalton and his wife
and 9,537 are held in a revocable trust as to which Mr. Dalton is
co-trustee and his wife is a beneficiary.
(5) Of these shares, 2,000 are held jointly by Mr. Marler and his spouse,
and 9,083 are subject to a stock option granted under the Option Plan.
(6) Includes 6,490 shares owned jointly by Mr. McVicker and his wife,
15,000 shares held in a trust as to which Mr. McVicker is trustee and
beneficiary, and 10,083 shares subject to a stock option granted under
the Option Plan.
(7) Of these shares, 13,944 are held jointly by Mr. Murrell and his wife,
and 1,667 are subject to a stock option granted under the Option Plan.
(8) These shares are held jointly by Mr. Phillips and his wife.
(9) The total of such shares includes 34,060 shares subject to stock
options granted under the Option Plan.
<PAGE>
Presented below is certain information concerning the directors and director
nominees of the Holding Company:
Steven L. Banks (age 49) has been President and Chief Executive Officer
of the Holding Company and First Federal since April, 1999. Mr. Banks also
became Vice Chairman of the Holding Company and First Federal in January, 1999.
Theretofore he served as Executive Vice President of the Holding Company and
First Federal since September 1, 1996. Theretofore he served as President and
Chief Executive Officer of Fidelity Federal Savings Bank, Marion, Indiana since
prior to 1991.
W. Gordon Coryea (age 74) is a retired attorney at law and had served
as attorney for First Federal since 1965 until his retirement in 1998.
John M. Dalton (age 65) has served as Chairman of the Holding Company
and First Federal since July, 1997. He retired as President and Chief Executive
Officer of the Holding Company and First Federal in March, 1999 having served in
those positions since February, 1996. Theretofore he served as Executive Vice
President of First Federal since 1983 and of the Holding Company since 1992.
Jon R. Marler (age 49) has served as President of Carico Systems
(distributor of heavy duty wire containers and material handling carts in Fort
Wayne, Indiana) since April, 1999; theretofore he served as Senior Vice
President of Ralph M. Williams and Associates (a real estate developer located
in Marion, Indiana) since June 1982. He also has served as President of Empire
Real Estate and Development, Inc. (a commercial real estate developer located in
Marion, Indiana) since 1989.
Jerry D. McVicker (age 54) has served as Director of Operations for
Marion Community Schools (education) since April, 1996. Theretofore he served as
Assistant Principal of Marion High School since prior to 1991.
Jack O. Murrell (age 76) served as President of Murrell and Keal, Inc.,
since 1958 (a retailer located in Marion, Indiana) until his retirement in 1993.
THE DIRECTORS SHALL BE ELECTED UPON RECEIPT OF A PLURALITY OF
AFFIRMATIVE VOTES CAST AT THE ANNUAL SHAREHOLDERS MEETING. Plurality means that
individuals who receive the largest number of votes cast are elected up to the
maximum number of directors to be chosen at the meeting. Abstentions, broker
non-votes, and instructions on the accompanying proxy to withhold authority to
vote for one or more of the nominees will result in the respective nominees
receiving fewer votes. However, the number of votes otherwise received by the
nominee will not be reduced by such action.
<PAGE>
The Board of Directors and its Committees
During the fiscal year ended June 30, 1999, the Board of Directors of
the Holding Company met seven times. No director attended fewer than 75% of the
aggregate total number of meetings during the last fiscal year of the Board of
Directors of the Holding Company held while he served as director and of
meetings of committees which he served during that fiscal year. Among other
committees, the Board of Directors of the Holding Company has an Audit Committee
and a Stock Compensation Committee. All committee members are appointed by the
Board of Directors.
The Audit Committee, comprised of Messrs. Coryea, McVicker and Murrell,
recommends the appointment of the Holding Company's independent accountants, and
meets with them to outline the scope and review the results of such audit. The
Audit Committee meets as needed and held one meeting during the year ended June
30, 1999.
The Stock Compensation Committee administers the Holding Company's
Stock Option Plan and the First Federal Savings Bank of Marion Recognition and
Retention Plans and Trusts. The members of that Committee are Messrs. Murrell
and Marler. It did not meet during the fiscal year ended June 30, 1999.
The Board of Directors nominated the slate of directors set forth in
the Proxy Statement. Although the Board of Directors of the Holding Company will
consider nominees recommended by shareholders, it has not actively solicited
recommendations for nominees from shareholders nor has it established procedures
for this purpose. Article III, Section 12 of the Holding Company's By-Laws
provides that shareholders entitled to vote for the election of directors may
name nominees for election to the Board of Directors but there are certain
requirements that must be satisfied in order to do so. Among other things,
written notice of a proposed nomination must be received by the Secretary of the
Holding Company not less than 60 days prior to the Annual Meeting; provided,
however, that in the event that less than 70 days' notice or public disclosure
of the date of the meeting is given or made to shareholders (which notice or
public disclosure includes the date of the Annual Meeting specified in the
Holding Company's By-Laws if the Annual Meeting is held on such date), notice
must be received not later than the close of business on the 10th day following
the day on which such notice of the date of the meeting was mailed or such
public disclosure was made.
Management Remuneration and Related Transactions
Remuneration of Named Executive Officers
No cash compensation is paid directly by the Holding Company to any of
its executive officers. Each of such officers is compensated by First Federal.
<PAGE>
The following table sets forth information as to annual, long-term and
other compensation for services in all capacities to the Holding Company and its
subsidiaries for the last three fiscal years of (i) the individuals who served
as the chief executive officer of the Holding Company during the fiscal year
ended June 30, 1999 and (ii) each other executive officer of the Holding Company
serving as such during the 1999 fiscal year, who earned over $100,000 in salary
and bonuses during that year (the "Named Executive Officers").
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards
Other Annual Restricted All Other
Fiscal Compensation Stock Compensation
Name and Principal Position Year Salary ($) Bonus ($)(1) ($) (2) Awards ($) Options (#) ($)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
John M. Dalton 1999 $181,719 $48,000 -- -- -- --
Chairman, former 1998 $206,550 $35,000 -- -- -- --
President and Chief 1997 $187,450 $32,100 -- -- -- --
Executive Officer,
Director (3)
Steven L. Banks 1999 $155,125 $40,000 -- -- -- --
President and Chief 1998 $136,500 $23,000 -- -- -- --
Executive Officer and 1997 $104,950 $ 7,000 -- -- 10,083 (5) --
Director (4)
Larry G. Phillips 1999 $117,350 $28,600 -- -- -- --
Senior Vice President, 1998 $110,500 $18,000 -- -- -- --
Secretary and Treasurer 1997 $101,700 $16,600 -- -- -- --
</TABLE>
(1) The bonus amounts were paid under First Federal's bonus plan. During
the year ended June 30, 1999, amounts were paid in December, 1998 and
June, 1999 as First Federal switched from performing annual reviews and
bonus payments on a calendar year basis to a fiscal year basis.
(2) The Named Executive Officers of the Holding Company receive certain
perquisites, but the incremental cost of providing such perquisites
does not exeed the lesser of $50,000 or 10% of the officer's salary and
bonus.
(3) Mr. Dalton retired as President and Chief Executive Officer on March
31, 1999.
(4) Mr. Banks became affiliated with First Federal as Executive Vice
President on September 1, 1996, and became President and Chief
Executive Officer on March 31, 1999.
(5) These options became exercisable as to 4,938 shares on March 1, 1997,
as to 4,938 shares on January 1, 1998 and as to 207 shares on January
1, 1999.
<PAGE>
Stock Options
The following table includes information relating to option exercises
by the Named Executive Officers during fiscal 1999 and the number of shares
covered by exercisable and unexercisable stock options held by the Named
Executive Officers as of June 30, 1999. Also reported are the values for
"in-the-money" options (options whose exercise price is lower than the market
value of the shares at fiscal year end) which represent the spread between the
exercise price of any such existing stock options and the fiscal year-end market
price of the stock. There were no stock options granted to the Named Executive
Officers during fiscal 1999.
Aggregate Option Exercises in Last Fiscal Year and
Outstanding Stock Option Grants and Value Realized as of 6/30/99
<TABLE>
<CAPTION>
Number of Value of Unexercised
Securities Underlying In-the-Money
Unexercised Options Options at
Shares Acquired Value at Fiscal Year End (#) Fiscal Year End ($) (1)
Name on Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John M. Dalton 7,000 $76,125 -- -- -- --
Steven L. Banks -- -- 10,083 -- $ 2,520.75 --
Larry G. Phillips 2,000 $22,500 -- -- -- --
</TABLE>
(1) Amounts reflecting gains on outstanding options are based on the
average between the high and low prices for the shares on June 30,
1999, which was $20.50 per share.
Compensation of Directors
All directors of First Federal receive a retainer fee of $625 per
month, plus a fee of $625 per Board meeting attended. All directors receive $200
for each special meeting of the Board attended. Members of Board Committees,
other than officers, are paid a separate fee of $200 per meeting. As Chairman of
the Board of First Federal, Mr. Dalton receives a retainer fee of $937.50 per
month, plus a fee of $937.50 per Board meeting attended. Starting in January,
1999, as Vice Chairman of the Board of First Federal, Mr. Banks receives a
retainer fee of $781.25 per month, plus a fee of $781.25 per Board meeting
attended.
Directors of the Holding Company are paid a fee of $100 per meeting if
the meeting is held on the same day as a First Federal meeting and $200 per
meeting if the Holding Company meets on a different day.
Supplemental Retirement Plan for Directors. Effective May 1, 1992,
First Federal entered into deferred compensation agreements which remain in
effect for the directors listed below. These agreements provide that upon
retirement from the Board after attaining age 70, each director shall be
entitled to receive annual benefits in the following amounts for the following
number of years following such termination of service as a director:
Period Remaining Payable
Director Annual Payment at June 30, 1999
--------------------------------------------------------------------------
John M. Dalton $9,960 10 years
Jack O. Murrell $10,500 5 years, 8 months
W. Gordon Coryea $8,748 5 years, 7 months
George L. Thomas $10,392 5 years, 9 months
<PAGE>
At the request of a director and subject to First Federal's consent,
payments may be made in a lump sum rather than annual installments. A director
may also elect to receive his benefits upon attaining age 70 even if he remains
on the Board of Directors. If service is terminated, the director may request
acceleration of payments based upon the accruals to date.
If the director dies prior to attaining age 70, his beneficiary will
receive annual payments equal to the Board fees paid by First Federal in the
twelve months immediately prior to his death for a period of 15 years. If he
dies after his benefits commence, his beneficiary will be entitled to receive
the remaining payments over the balance of the applicable payment period.
A director has the option of increasing his benefits payable under the
plan by deferring a larger amount of his directors fees to help fund the payment
of such increased benefits, although no director has elected to do so.
First Federal for the fiscal year ended June 30, 1999, accrued an
expense for this plan of $37,964 which consisted of interest on this deferred
liability which accrues at an annual rate of 10.5%.
Death Benefit Agreements with Directors. First Federal, as of April 30,
1988, entered into an agreement with Mr. Coryea which provides that upon his
death his beneficiary will be entitled to receive for a 15-year period, an
annual payment of $26,000.
First Federal has purchased paid-up life insurance on the lives of the
directors covered under the supplemental retirement plan for directors and death
benefit agreement described above, to fund the benefits available under these
plans.
Transactions With Certain Related Persons
First Federal may make available to its directors, officers, and
employees real estate mortgage loans secured by their principal residence and
other loans.
First Federal, as permitted under applicable regulations, has a benefit
and compensation program which permits its officer, directors and employees to
receive loans from First Federal at an annual rate which is 1/4% lower than the
rate charged members of the public. First Federal also waives loan processing
fees for such loans. Set forth below is certain information as to loans whose
aggregate indebtedness to First Federal exceeded $60,000 at any time during the
fiscal year ended June 30, 1999, made to any of First Federal's directors and
executive officers pursuant to this program. All such loans were current as of
June 30, 1999.
<TABLE>
<CAPTION>
Highest Balance Interest Rate
Outstanding in Effect on
During the Balance June 30, 1999
Position with Type of Year Ended as of or at Time
Name First Federal Loan June 30, 1999 June 30, 1999 Loan Paid Off
---- ------------- ---- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Steven L. Banks Director, President Adjustable Rate $ 100,000 $ 0 7.25%
and Chief Executive Mortgage
Officer
Fixed Rate Mortgage $ 100,000 $ 0 9.25%
John M. Dalton Chairman of Adjustable Rate $ 64,480 $ 37,592 7.5%
the Board Home Equity Loan
Cynthia Fortney Vice President Fixed Rate Mortgage $ 121,399 $ 113,912 6.875%
Jon R. Marler Director Adjustable Rate $ 60,067 $ 60,067 8.5%
</TABLE>
W. Gordon Coryea, a director of both the Holding Company and First
Federal, served as counsel to First Federal, prior to his retirement in October,
1998, in connection with loan delinquencies and provided routine legal work such
as deed preparation, foreclosures and preparation of other legal documents. Mr.
Coryea received fees of $10,723 during the fiscal year ended June 30, 1999, for
such services, which fees exceed 5% of his law firm's revenues.
PROPOSAL II -- RATIFICATION OF AUDITORS
The Board of Directors proposes for the ratification of the
shareholders at the Annual Meeting the appointment of Olive LLP, certified
public accountants, as independent auditors for the fiscal year ended June 30,
2000. Olive LLP has served as auditors for First Federal since 1979. A
representative of Olive LLP will be present at the Annual Meeting with the
opportunity to make a statement if he so desires. He will also be available to
respond to any appropriate questions shareholders may have.
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"1934 Act"), requires that the Holding Company's officers and directors and
persons who own more than 10% of the Holding Company's Common Stock file reports
of ownership and changes in ownership with the SEC. Officers, directors and
greater than 10% shareholders are required by SEC regulations to furnish the
Holding Company with copies of all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms received by it,
and/or written representations from certain reporting persons that no Forms 5
were required for those persons, the Holding Company believes that during the
fiscal year ended June 30, 1999, all filing requirements applicable to its
officers, directors and greater than 10% beneficial owners with respect to
Section 16(a) of the 1934 Act were satisfied in a timely manner, provided that
John M. Dalton was 5 days late in reporting his sale of 2,674 shares in May,
1999, Jon Marler was approximately three weeks late in reporting his acquisition
of 500 shares in February, 1999, and Gordon Coryea was approximately six weeks
late in reporting his sale of 1,000 shares in February, 1999.
SHAREHOLDER PROPOSALS
Any proposal which a shareholder wishes to have presented at the next
Annual Meeting of the Holding Company and included in the proxy statement and
form of proxy must be received at the main office of the Holding Company no
later than 120 days in advance of September 13, 2000. Any such proposal should
be sent to the attention of the Secretary of the Holding Company at 100 West
Third Street, Marion, Indiana 46952. A shareholder proposal being submitted
outside the processes of Rule 14a-8 promulgated under the 1934 Act will be
considered untimely if it is received by the Holding Company later than 45 days
in advance of September 13, 2000.
OTHER MATTERS
Management is not aware of any business to come before the Annual
Meeting other than those matters described in the Proxy Statement. However, if
any other matters should properly come before the Annual Meeting, it is intended
that the proxies solicited hereby will be voted with respect to those other
matters in accordance with the judgment of the persons voting the proxies.
The cost of solicitation of proxies will be borne by the Holding
Company. The Holding Company will reimburse brokerage firms and other
custodians, nominees and fiduciaries for reasonable expenses incurred by them in
sending proxy material to the beneficial owners of the Common Stock. In addition
to solicitation by mail, directors, officers, and employees of the Holding
Company may solicit proxies personally or by telephone without additional
compensation.
Each shareholder is urged to complete, date and sign the proxy and
return it promptly in the enclosed envelope.
By Order of the Board of Directors
/s/ Steven L. Banks
Steven L. Banks, President and
Chief Executive Officer
September 13, 1999
<PAGE>
REVOCABLE PROXY MARION CAPITAL HOLDINGS, INC.
Annual Meeting of Shareholders
October 18, 1999
The undersigned hereby appoints Cynthia Fortney and Larry G. Phillips,
with full power of substitution, to act as attorneys and proxies for the
undersigned to vote all shares of common stock of Marion Capital Holdings, Inc.
which the undersigned is entitled to vote at the Annual Meeting of Shareholders
to be held at the Holding Company's office, 100 West Third Street, Marion,
Indiana, on Monday, October 18, 1999, at 4:30 p.m., and at any and all
adjournments thereof, as follows:
1. The election as directors of all nominees listed below, except as
marked to the contrary.
|_| FOR |_| VOTE WITHHELD
INSTRUCTIONS: To withhold authority to vote for any individual nominee, strike a
line through the nominee's name on the list below:
Steven L. Banks W. Gordon Coryea
(each for a three year term)
2. Ratification of the appointment of Olive LLP as auditors for the year
ending June 30, 2000.
|_| FOR |_| AGAINST |_| ABSTAIN
In their discretion, the proxies are authorized to vote on any other business
that may properly come before the Meeting or any adjournment thereof.
The Board of Directors recommends a vote "FOR" each
of the listed propositions.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
This Proxy may be revoked at any time prior to the voting thereof.
The undersigned acknowledges receipt from Marion Capital Holdings, Inc., prior
to the execution of this Proxy, of a Notice of the Meeting, a Proxy Statement
and an Annual Report to Shareholders.
PLEASE PROMPTLY COMPLETE, DATE, SIGN AND MAIL THIS PROXY IN THE ENCLOSED POSTAGE
PAID ENVELOPE.
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Should the undersigned be present and elect to vote at the Annual
Meeting or at any adjournment thereof and after notification to the Secretary of
the Corporation at the Meeting of the shareholder's decision to terminate this
Proxy, then the power of such attorneys and proxies shall be deemed terminated
and of no further force and effect.
Dated:_______________________________, 1999
NUMBER OF SHARES
--------------------------------------------
Signature of Shareholder
--------------------------------------------
Signature of Shareholder
Please sign exactly as your name appears
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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
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<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>
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<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
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