FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended June 30, 2000
or
[ ] Transaction Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from July 1, 1999 to June 30, 2000
Commission File Number 0-21108
MARION CAPITAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1872393
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
100 West Third Street, P.O. Box 367, Marion, Indiana 46952
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (765) 664-0556
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of August 25, 2000, was $32,454,518.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of August 25, 2000, was 1,366,506 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Exhibit Index on Page E-1
Page 1 of 88 Pages
<PAGE>
MARION CAPITAL HOLDINGS, INC.
Form 10-K
INDEX
Page
Forward Looking Statements.................................................... 3
PART 1
Item 1. Business........................................................ 3
Item 2. Properties......................................................35
Item 3. Legal Proceedings...............................................35
Item 4. Submission of Matters to a Vote of Security Holders.............35
Item 4.5. Executive Officers of MCHI......................................35
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.........................................36
Item 6. Selected Consolidated Financial Data............................37
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................38
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......48
Item 8. Financial Statements and Supplementary Data.....................50
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.........................76
PART III
Item 10. Directors and Executive Officers of the Registrant..............76
Item 11. Executive Compensation..........................................77
Item 12. Security Ownership of Certain Beneficial Owners
and Management..............................................81
Item 13. Certain Relationships and Related Transactions..................83
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.................................................84
Signatures ............................................................85
<PAGE>
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief,
outlook, estimate or expectations of the Corporation (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Corporation. Readers of this Form 10-K are
cautioned that any such forward looking statements are not guarantees of future
events or performance and involve risks and uncertainties, and that actual
results may differ materially from those in the forward looking statements as a
result of various factors. The accompanying information contained in this Form
10-K identifies important factors that could cause such differences. These
factors include changes in interest rates; loss of deposits and loan demand to
other savings and financial institutions; substantial changes in financial
markets; changes in real estate values and the real estate market; regulatory
changes; or unanticipated results in pending legal proceedings.
PART I
Item 1. Business.
General
Marion Capital Holdings, Inc. ("MCHI") is an Indiana corporation
organized on November 23, 1992, to become a unitary savings and loan holding
company. MCHI became a unitary savings and loan holding company upon the
conversion (the "Conversion") of First Federal Savings Bank of Marion (the
"Bank" and together with MCHI, the "Company") from a federal mutual savings bank
to a federal stock savings bank on March 18, 1993. The principal asset of MCHI
consists of 100% of the issued and outstanding shares of common stock, $0.01 par
value per share, of the Bank. The Bank began operations in Marion, Indiana, as a
federal savings and loan association in 1936, and converted to a federal mutual
savings bank in 1986.
On June 8, 2000, MCHI and MutualFirst Financial, Inc. (Nasdaq: MFSF)
("Muncie") based in Muncie, Indiana announced that they had entered into a
definitive agreement to merge their respective holding companies and bank
subsidiaries.
Upon completion of the merger, MCHI will be merged into the recently
renamed Company, MutualFirst Financial, Inc., and the Bank will be merged into
Mutual Federal Savings Bank. The combined banking operation will have a total of
16 branch locations throughout the counties of Delaware, Grant, Kosciusko, and
Randolph in Indiana, and will be called Mutual Federal Savings Bank.
The agreement provides that the shareholders of MCHI will receive 1.862
shares of Muncie common stock for each MCHI common share in a tax-free exchange.
Muncie will issue approximately 2.6 million shares of stock to complete the
merger, which will be accounted for under the purchase method of accounting.
Muncie intends to repurchase as many shares as possible to offset those shares
being issued to MCHI's shareholders. Following the merger, the former Muncie and
MCHI shareholders will own approximately 70% and 30% of the combined company,
respectively.
Muncie's Board of Directors will be comprised of four directors from
MCHI and seven directors from Muncie. Steven L. Banks, the current President and
Chief Executive Officer of MCHI, will serve as Senior Vice President and Chief
Operating Officer of Grant County for Mutual Federal Savings Bank and he will be
one of the four directors joining the Muncie Board of Directors. The other three
Company directors who will be joining the Muncie board are John M. Dalton, Jon
R. Marler and Jerry D. McVicker.
The merger is expected to be completed before the end of calendar 2000,
subject to regulatory approval and approval by MCHI and Muncie shareholders.
The Bank offers a number of consumer and commercial financial services.
These services include: (i) residential and commercial real estate loans; (ii)
multi-family loans; (iii) construction loans; (iv) installment loans; (v) loans
secured by deposits; (vi) auto loans; (vii) NOW accounts; (viii) consumer and
commercial demand and time deposit accounts; (ix) individual retirement
accounts; and (x) tax deferred annuities and mutual funds through its service
corporation subsidiary, First Marion Service Corporation ("First Marion"). The
Bank provides these services at three full-service offices, two in Marion, and
one in Gas City, Indiana. The Bank's market area for loans and deposits consists
of Grant and surrounding counties.
The Company's primary source of revenue is interest income from the
Bank's lending activities. The Bank's principal lending activity is the
origination of conventional mortgage loans to enable borrowers to purchase or
refinance one- to four-family residential real property. At June 30, 2000, 61.1%
of the Company's total loan portfolio consisted of conventional mortgage loans
on residential real property. These loans are generally secured by first
mortgages on the property. Substantially all of the residential real estate
loans originated by the Bank are secured by properties located in Grant and
surrounding counties. The Bank also offers secured and unsecured
consumer-related loans (including installment loans, loans secured by deposits,
home equity loans, and auto loans). The Company has a significant commercial
real estate portfolio, with a balance of $31.2 million at June 30, 2000, or
18.4% of total loans. The Bank also makes construction loans, which constituted
$5.3 million or 3.1% of the Company's total loans at June 30, 2000, and
commercial loans, which are generally not secured by real estate, of $10.6
million, or 6.3%.
In the early 1980s most savings institutions' loan portfolios consisted
of long-term fixed-rate loans which then carried low interest rates. At the same
time, most savings associations had to pay competitive and high market interest
rates in order to maintain deposits. This resulted in a "negative" interest
spread. The Bank experienced these problems, but responded to them as changes in
regulations over the period permitted, and has been quite successful in managing
its interest rate risk. Among its strategies has been an emphasis on originating
adjustable-rate mortgage loans ("ARMs") which permit the Bank to better match
the interest it earns on mortgage loans with the interest it pays on deposits,
with interest rate minimums. As of June 30, 2000, ARMs constituted 86.6% of the
Company's total mortgage loan portfolio. Additionally, the Bank attempts to
lengthen liability repricing by aggressively pricing longer term certificates of
deposit during periods of relatively low interest rates and investing in
intermediate-term or variable-rate investment securities.
Lending Activities
Loan Portfolio Data. The following table sets forth the composition of
the Company's loan portfolio by loan type and security type as of the dates
indicated, including a reconciliation of gross loans receivable after
consideration of the allowance for loan losses and deferred net loan fees on
loans.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ---------------- --------------- ---------------- ----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- --------------- ------ -------- ------ --------
(Dollars In Thousands)
TYPE OF LOAN
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential..................$103,959 61.11% $101,512 59.18% $103,719 61.14% $ 97,017 63.42% $ 87,106 58.85%
Commercial real estate....... 31,231 18.36 32,918 19.19 31,857 18.78 31,122 20.35 36,170 24.43
Multi-family................. 8,549 5.03 9,295 5.42 11,014 6.49 11,394 7.45 15,573 10.52
Construction:
Residential.................. 4,399 2.59 3,674 2.14 2,742 1.62 3,555 2.32 3,904 2.64
Commercial real estate....... 898 0.53 2,658 1.55 4,542 2.68 1,144 .75 506 .34
Multi-family................. --- --- --- --- --- --- --- --- 584 .39
Consumer loans:
Installment loans............ 3,397 2.00 3,957 2.31 2,417 1.42 3,613 2.37 2,725 1.85
Loans secured by deposits.... 635 0.37 867 .50 1,027 .61 895 .58 883 .60
Home equity loans............ 4,709 2.77 3,665 2.14 2,496 1.47 1,376 .90 399 .27
Auto loans................... 1,690 0.99 2,075 1.21 1,323 .78 325 .21 169 .11
Commercial loans................ 10,640 6.25 10,914 6.36 8,511 5.01 2,525 1.65 7 .00
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans receivable.......$170,107 100.00% $171,535 100.00% $169,648 100.00% $152,966 100.00% $148,026 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
TYPE OF SECURITY
Residential (1)..............$113,067 66.47% $108,851 63.46% $108,957 64.23% $101,948 66.65% $ 91,409 61.75%
Commercial real estate....... 32,129 18.89 35,576 20.74 36,399 21.46 32,266 21.09 36,676 24.78
Multi-family................. 8,549 5.03 9,295 5.42 11,014 6.49 11,394 7.45 16,157 10.91
Autos........................ 1,690 0.99 2,075 1.21 1,323 .78 325 .21 169 .11
Deposits..................... 635 0.37 867 .50 1,027 .61 895 .58 883 .60
Other security............... 10,640 6.25 10,914 6.36 8,511 5.01 2,525 1.65 7 .00
Unsecured.................... 3,397 2.00 3,957 2.31 2,417 1.42 3,613 2.37 2,725 1.85
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans receivable....... 170,107 100.00% 171,535 100.00 169,648 100.00 152,966 100.00 148,026 100.00
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Deduct:
Allowance for loan losses ...... 2,283 1.34 2,272 1.32 2,087 1.23 2,032 1.33 2,009 1.36
Deferred net loan fees.......... 235 0.14 270 .15 300 .18 277 .18 313 .21
Loans in process................ 2,611 1.54 3,196 1.86 3,663 2.16 2,626 1.72 2,539 1.71
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Net loans receivable.........$164,978 96.98% $165,797 96.65% $163,598 96.43% $148,031 96.77% $143,165 96.72%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
Mortgage Loans
Adjustable rate..............$129,052 86.59% $128,554 85.67% $130,100 84.55% $128,799 89.30% $128,811 89.55%
Fixed rate................... 19,984 13.41 21,503 14.33 23,774 15.45 15,433 10.70 15,032 10.45
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total......................$149,036 100.00% $150,057 100.00% $153,874 100.00% $144,232 100.00% $143,843 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
-----------------
(1) Includes home equity loans.
The following table sets forth certain information at June 30, 2000,
regarding the dollar amount of loans maturing in the Company's loan portfolio
based on the date that final payment is due under the terms of the loan. Demand
loans having no stated schedule of repayments and no stated maturity and
overdrafts are reported as due in one year or less. This schedule does not
reflect the effects of possible prepayments or enforcement of due-on-sale
clauses. Management expects prepayments will cause actual maturities to be
shorter.
<TABLE>
<CAPTION>
Balance Due During Years Ended June 30,
Outstanding 2004 2006 2011 2016
At June 30, to to to and
2000 2001 2002 2003 2005 2010 2015 following
---- ---- ---- ---- ---- ---- ---- ---------
(In Thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential............ $108,358 $ 325 $ 377 $357 $1,754 $13,545 $32,008 $59,992
Multi-family........... 8,549 1,045 88 --- 456 2,901 2,385 1,674
Commercial real
estate............... 32,129 702 264 187 1,532 10,370 13,204 5,870
Consumer loans:
Home equity............ 4,709 --- --- --- --- 51 --- 4,658
Auto................... 1,690 49 184 384 1,073 --- --- ---
Installment............ 3,397 430 286 566 1,710 327 68 10
Loans secured
by deposits.......... 635 209 5 68 18 --- 335 ---
Commercial loans.......... 10,640 2,751 322 446 897 5,920 304 ---
-------- ------ ------ ------ ------ ------- ------- -------
Total.................. $170,107 $5,511 $1,526 $2,008 $7,440 $33,114 $48,304 $72,204
======== ====== ====== ====== ====== ======= ======= =======
</TABLE>
The following table sets forth, as of June 30, 2000, the dollar amount of
all loans due after one year which have fixed interest rates and floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Due After June 30, 2001
------------------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- -------
(In Thousands)
<S> <C> <C> <C>
Mortgage loans:
Residential............................... $10,493 $ 97,540 $108,033
Multi-family................................... 1,602 5,902 7,504
Commercial real estate.................... 3,361 28,066 31,427
Consumer loans:
Home equity............................... --- 4,709 4,709
Auto...................................... 1,641 --- 1,641
Installment............................... 2,940 27 2,967
Loan secured by deposits.................. 426 --- 426
Commercial loans .............................. 6,822 1,067 7,889
------- -------- --------
Total..................................... $27,285 $137,311 $164,596
======= ======== ========
</TABLE>
Residential Loans. Residential loans consist of one-to-four family
loans. Approximately $104.0 million, or 61.1%, of the Company's portfolio of
loans at June 30, 2000, consisted of one- to four-family mortgage loans, of
which approximately 86.9% had adjustable rates. The Company is currently selling
to the Federal Home Loan Mortgage Corporation (the "FHLMC") 95% of the principal
balance on fixed rate loans originated with terms in excess of 15 years and
retaining all of the servicing rights on these loans. The option to retain or
sell fixed rate loans will be evaluated from time to time. During the year ended
June 30, 2000, $1.6 million in loans were sold to FHLMC.
The Bank originates fixed-rate loans with terms of up to 30 years. Some
loans are originated in accordance with guidelines established by FHLMC to
facilitate the sale of such loans to FHLMC in the secondary market. These loans
amortize on a monthly basis with principal and interest due each month. As
mentioned above, a few of these loans originated with terms in excess of 15
years, or annual interest rates below 8.5%, were sold to FHLMC promptly after
they were originated. The Bank retained 5% of the principal balance of such sold
loans as well as the servicing on all of such sold loans. At June 30, 2000, the
Company had $10.5 million of fixed rate residential mortgage loans which were
originated in prior years in its portfolio with maturities beyond June 30, 2001,
none of which were held for sale.
Most ARMs adjust on an annual basis, although the Bank currently offers
a five-year ARM which has a fixed rate for five years, and a three-year ARM
which has a fixed rate for three years. Both of these ARMs adjust annually after
the initial period is over. Currently, the ARMs have an interest rate average
minimum of 6.5% and average maximum of 13.5%. The interest rate adjustment for
substantially all of the Bank's ARMs is indexed to the One-Year Treasury
Constant Maturity Index. On new residential mortgage loans, the margin above
such index currently is 3.00%. The Bank offers ARMs with maximum rate changes of
2% per adjustment, and an average of 6.0% over the life of the loan. Generally
made for terms of up to 25 years, the Bank's ARMs are not made on terms that
conform with the standard underwriting criteria of FHLMC or the Federal National
Mortgage Association (the "FNMA"), thereby making resale of such loans
difficult. To better protect the Company against rising interest rates, the Bank
underwrites its residential ARMs based on the borrower's ability to repay the
loan assuming a rate equal to approximately 2% above the initial rate payable if
the loan remained constant during the loan term.
Although the Bank's residential mortgage loans are generally amortized
over a 25-year period, residential mortgage loans generally are paid off before
maturity. Substantially all of the residential mortgage loans that the Bank has
originated include "due on sale" clauses, which give the Bank the right to
declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid.
The Bank generally requires private mortgage insurance on all
conventional residential single-family mortgage loans with loan-to-value ratios
in excess of 90%. The Bank generally will not lend more than 95% of the lower of
current cost or appraised value of a residential single family property. In July
1995, the Bank's wholly-owned subsidiary, First Marion, began a 100% financing
program pursuant to which the Bank would originate an 80% loan-to-value first
mortgage loan using its normal underwriting standard and First Marion would
finance the remaining 20%. The second mortgage loan originated by First Marion
is a fixed rate mortgage loan with an interest rate of 10% and a term not to
exceed 15 years. At June 30, 2000, these loans amounted to $2.7 million.
Residential mortgage loans under $450,000 are approved by one of three
senior officers given authority by the Board of Directors. Residential loans
between $450,000 and $1.0 million can be approved by two of these three senior
officers (one of which must be the president). All loan requests from $1.0
million to 1.5 million are approved by the Bank's Executive Committee. Loan
requests in excess of $1.5 million are approved by the Bank's Board of
Directors.
At June 30, 2000, residential mortgage loans amounting to $0.6 million,
or 0.3% of total loans, were included in non-performing assets. See
"--Non-performing and Problem Assets."
Commercial Real Estate Loans. At June 30, 2000, $31.2 million, or
18.4%, of the Company's total loan portfolio consisted of mortgage loans secured
by commercial real estate. The properties securing these loans consist primarily
of nursing homes, office buildings, hotels, churches, warehouses and shopping
centers. The commercial real estate loans, substantially all adjustable rate,
are made for terms not exceeding 25 years, and generally require an 80% or lower
loan-to-value ratio. Some require balloon payments after 5, 10 or 15 years. A
number of different indices, including the 1, 3, and 5 year Treasury Bills, are
used as the interest rate index for these loans. The commercial real estate
loans generally have minimum interest rates of 9% and maximum interest rates of
15%. Most of these loans adjust annually, but the Company has some 3-year and
5-year commercial real estate adjustable rate loans in its portfolio. The
largest commercial real estate loan as of June 30, 2000, had a balance of $2.4
million.
The Company held in its portfolio 18 commercial and multi-family real
estate loans with balances in excess of $500,000 at June 30, 2000. The average
loan balance for all such loans was $1,035,000. A significant proportion of the
Company's commercial real estate loan portfolio consists of loans secured by
nursing home properties. The balance of such loans totaled $11.5 million at June
30, 2000.
Current federal law limits a savings association's investment in
commercial real estate loans to 400% of its capital. In addition, the
application of the Qualified Thrift Lender Test has had the effect of limiting
the aggregate investment in commercial real estate loans made by the Bank. See
"Regulation -- Qualified Thrift Lender." The Bank currently complies with the
limitations on investments in commercial real estate loans.
Commercial real estate loans involve greater risk than residential
mortgage loans because payments on loans secured by income properties are often
dependent on the successful operation or management of the properties and are
generally larger. As a result, repayment of such loans may be subject to a
greater extent than residential real estate loans to adverse conditions in the
real estate market or the economy. At June 30, 2000, the Company had $1.3
million of non-performing loans classified as substandard, $0 as doubtful, $0 as
loss and $3.1 million as special mention.
The Company has a high concentration of loans secured by nursing homes.
Like other commercial real estate loans, nursing home loans often involve large
loan balances to single borrowers or groups of related borrowers, and have a
higher degree of credit risk than residential mortgage lending. Loan payments
are often dependent on the operation of the nursing home, the success of which
is dependent upon the long-term health care industry. The risks inherent in such
industry include the federal, state and local licensure and certification laws
which regulate, among other things, the number of beds for which nursing care
can be provided and the construction, acquisition and operation of such nursing
facilities. The failure to obtain or maintain a required regulatory approval or
license could prevent the nursing home from being reimbursed for costs incurred
in offering its services or expanding its business. Moreover, a large percentage
of nursing home revenues is derived from reimbursement by third party payors.
Both governmental and other third party payors have adopted and are continuing
to adopt cost containment measures designed to limit payment to health care
providers, and changes in federal and state regulations in these areas could
adversely affect such homes. Because of the Company's concentration in this
area, a decline in the nursing home industry could have a substantial adverse
effect on the Company's commercial real estate portfolio and, therefore, a
substantial adverse effect on its operating results.
Commercial real estate loans in excess of $1.5 million must be approved
in advance by the Bank's Board of Directors. Commercial real estate loans
between $1.0 million and $1.5 million can be approved by the Bank's Executive
Committee. Commercial real estate requests between $450,000 and $1.0 million
require approval from two of three senior officers (one of which must be the
president) authorized by the Bank's Board of Directors and a similar request
below $450,000 requires approval from any one of these three same senior
officers.
Multi-Family Loans. At June 30, 2000, $8.5 million, or 5.0%, of the
Company's total loan portfolio consisted of mortgage loans secured by
multi-family dwellings (those consisting of more than four units). All of the
Company's multi-family loans are secured by apartment complexes located in
Indiana or Ohio. The average balance of all such multi-family mortgage loans was
$368,000 as of June 30, 2000. The largest such multi-family mortgage loan as of
June 30, 2000, had a balance of $1.1 million. As with the Bank's commercial real
estate loans, multi-family mortgage loans are substantially all adjustable-rate
loans, are written for terms not exceeding 25 years, and require at least an 80%
loan-to-value ratio. At June 30, 2000, the Company had $1.3 million in loans
secured by multi-family dwellings which were included in non-performing assets
and classified as substandard assets and $422,000 classified as special mention.
Multi-family loans, like commercial real estate loans, involve a
greater risk than do residential loans. Also, the more stringent loans-to-one
borrower limitation limits the ability of the Bank to make loans to developers
of apartment complexes and other multi-family units.
Construction Loans. The Bank offers construction loans with respect to
owner-occupied residential and commercial real estate property and, in certain
cases, to builders or developers constructing such properties on an investment
basis (i.e., before the builder/developer obtains a commitment from a buyer).
Most construction loans are made to owners who occupy the premises.
At June 30, 2000, $5.3 million, or 3.1%, of the Company's total loan
portfolio consisted of construction loans, of which approximately $4.4 million
were residential construction loans and $0.9 million related to construction of
commercial real estate projects. The largest construction loan on June 30, 2000,
was $1.0 million.
For most construction loans, the loan is actually a 25-year mortgage
loan, but interest only is payable during the construction phase of the loan up
to 18 months, and such interest is charged only on the money disbursed under the
loan. After the construction phase (typically 6 to 12 months), regular mortgage
loan payments of principal and interest are due. Appraisals for these loans are
completed, subject to completion of building plans and specifications.
Interest rates and fees vary for these loans. While construction is
progressing, periodic inspections are performed for which the Bank assesses a
fee.
While providing the Company with a higher yield than a conventional
mortgage loan, construction loans involve a higher level of risk. For example,
if a project is not completed and the borrower defaults, the Bank may have to
hire another contractor to complete the project at a higher cost. Also, a house
may be completed, but may not be salable, resulting in the borrower defaulting
and the Bank taking title to the house.
Consumer Loans. Federal laws and regulations permit federally chartered
savings associations to make secured and unsecured consumer loans in an
aggregate amount of up to 35% of the association's total assets. In addition, a
federally chartered savings association has lending authority above the 35%
limit for certain consumer loans, such as property improvement loans and deposit
account secured loans. However, the Qualified Thrift Lender test places
additional limitations on a savings association's ability to make consumer
loans.
The Company's consumer loans, consisting primarily of installment
loans, loans secured by deposits, and auto loans, aggregated $10.4 million as of
June 30, 2000, or 6.1% of the Company's total loan portfolio. Although consumer
loans are currently only a small portion of its lending business, the Bank
consistently originates consumer loans to meet the needs of its customers, and
the Bank intends to originate more such loans to assist in meeting its
asset/liability management goals.
The Bank makes installment loans of up to five years, which consisted
of $3.4 million, or 2.0% of the Company's total loan portfolio at June 30, 2000.
Loans secured by deposits, totaling $635,000 at June 30, 2000, are made up to
90% of the original account balance and accrue at a rate of 2% over the
underlying certificate of deposit rate. Variable rate home equity loans of up to
10 years, secured by second mortgages on the underlying residential property
totaled $4.7 million, or 2.8% of the Company's total loan portfolio at June 30,
2000. Automobile loans totaled only $1.7 million, or 1.0% and are made at fixed
rates for terms of up to five years depending on the age of the automobile and
the loan-to-value ratio for the loan. The Bank does not make indirect automobile
loans.
Although consumer loans generally involve a higher level of risk than
one- to four-family residential mortgage loans, their relatively higher yields
and shorter terms to maturity are believed to be helpful in reducing the
interest-rate risk of the loan portfolio. The Bank has thus far been successful
in managing consumer loan risk. As of June 30, 2000, $28,000 of consumer loans
were included in non-performing assets.
Commercial Business Lending. At June 30, 2000, commercial business
loans comprised $10.6 million, or 6.3% of the Bank's gross loan portfolio. Most
of the commercial business loans have been extended to finance local businesses
and include short term loans to finance machinery and equipment purchases,
inventory and accounts receivable.
Unlike residential mortgage loans, commercial business loans are
typically made on the basis of the borrower's ability to make repayment from the
cash flow of the borrower's business. As a result, the availability of funds for
the repayment of commercial business loans may be substantially dependent on the
success of the business itself, which, in turn, is often dependent in part upon
general economic conditions. Commercial business loans are usually, but not
always, secured by business assets. However, the collateral securing the loans
may depreciate over time, may be difficult to appraise, and may fluctuate in
value based on the success of the business.
The Bank's commercial business lending policy includes credit file
documentation and analysis of the borrower's background and the capacity to
repay the loan, the accuracy of the borrower's capital and collateral as well as
an evaluation of other conditions effecting the borrower. Analysis of the
borrower's past, present and future cash flows is also an important aspect of
the Bank's credit analysis. The Bank generally obtains personal guarantees on
commercial business loans. Nonetheless, these loans are believed to carry higher
credit risk than more traditional single family loans. At June 30, 2000, the
Company had 152,000 in commercial loans which were included in non-performing
assets and classified as substandard and $27,000 classified as special mention.
Loans to One Borrower. The Bank occasionally receives multiple loan
requests from a single borrower. These requests are prudently underwritten based
on the Bank's historical experience with the borrower, the loan amount compared
to the collateral's value, the borrower's credit risk, and the financial
position of the borrower, among other things. At June 30, 2000, the largest
aggregate amount of loans to a single borrower totaled $4.4 million, an amount
that complied with the loans to one borrower limitation in effect at the time
the loans were originated. These loans are primarily secured by nursing homes
located in Indiana; however, one of these loans is secured by a residential
property owned by the borrower in Southern Indiana. As of the report date, all
of the aforementioned loans were performing in accordance with the original
terms extended by the Bank. In addition, the Bank reviews both the operating
statements from the individual projects and the financial position of the
borrower on an annual basis.
Origination, Purchase and Sale of Loans. The Bank currently does not
originate its ARMs in conformity with the standard criteria of the FHLMC or
FNMA. The Bank would therefore experience some difficulty selling such loans in
the secondary market, although most loans could be brought into conformity. The
Bank has no intention, however, of attempting to sell such loans. The Bank's
ARMs vary from secondary market criteria because the Bank does not use the
standard loan form, does not require current property surveys in most cases, and
does not permit the conversion of those loans to fixed-rate loans in the first
three years of their term. These practices allow the Bank to keep the loan
closing costs down.
Although the Bank currently has authority to lend anywhere in the
United States, it has confined its loan origination activities primarily in
Grant and contiguous counties. The Bank's loan originations are generated from
referrals from builders, developers, real estate brokers and existing customers,
newspaper, radio and periodical advertising, and walk-in customers. Loans are
originated at either the main or branch offices. All loan applications are
processed and underwritten at the Bank's main office.
Under current federal law, a savings association generally may not make
any loan or extend credit to a borrower or its related entities if the total of
all such loans by the savings association exceeds 15% of its unimpaired capital
and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired
capital and surplus, if such loans or extensions of credit are fully secured by
readily marketable collateral, including certain debt and equity securities but
not including real estate. In some cases, a savings association may lend up to
30% of unimpaired capital and surplus to one borrower for purposes of developing
domestic residential housing, provided that the association meets its regulatory
capital requirements and the OTS authorizes the association to use this expanded
lending authority. The maximum amount which the Bank could have loaned to one
borrower and the borrower's related entities under the 15% of capital limitation
was $4.2 million at June 30, 2000.
The Bank's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. To assess the borrower's
ability to repay, the Bank studies the employment and credit history and
information on the historical and projected income and expenses of its
individual and corporate mortgagors.
The Bank uses independent appraisers to appraise the property securing
its loans and requires title insurance or an abstract and a valid lien on its
mortgaged real estate. Appraisals on real estate securing most real estate loans
in excess of $250,000, are performed by either state-licensed or state-certified
appraisers, depending on the type and size of the loan. The Bank requires fire
and extended coverage insurance in amounts at least equal to the principal
amount of the loan. It also requires flood insurance to protect the property
securing its interest if the property is in a flood plain. Tax and insurance
payments are required to be escrowed by the Bank on all loans subject to private
mortgage insurance, but this service is offered to all borrowers. Annual site
visitations are made by licensed architects with respect to all commercial real
estate loans in excess of $500,000.
The Bank applies consistent underwriting standards to the several types
of consumer loans it makes to protect the Bank against the risks inherent in
making such loans. Borrower character, credit history, net worth and underlying
collateral are important considerations.
The Bank has historically participated in the secondary market as a
seller of 95% of the principal balance of its long-term fixed rate mortgage
loans, as described above, although the Bank has recently begun retaining such
loans in the Company's portfolio. The loans the Bank sells are designated for
sale when originated. During the fiscal year ended June 30, 2000, the Bank sold
$1.6 million of its fixed-rate mortgage loans, none of which were held for sale
at June 30, 2000. The Bank obtains commitments from investors for the sale of
such loans at their outstanding principal balance and these commitments are
obtained prior to origination of the loans.
When it sells mortgage loans, the Bank generally retains the
responsibility for collecting and remitting loan payments, inspecting the
properties that secure the loans, making certain that monthly principal and
interest payments and real estate tax and insurance payments are made on behalf
of borrowers, and otherwise servicing the loans. The Company receives a
servicing fee for performing these services. The amount of fees received by the
Company varies, but is generally calculated as an amount equal to a rate of .25%
per annum for commercial loans and .375% per annum for residential loans on the
outstanding principal amount of the loans serviced. At June 30, 2000, the
Company serviced $33.5 million of loans sold to other parties of which $13.7
million, or 41.0%, were for loans sold to FHLMC; other service loans are
participation loans sold to other financial institutions.
The Company occasionally purchases participations to diversify its
portfolio, to supplement local loan demand and to obtain more favorable yields.
The participations purchased normally represent a portion of residential or
commercial real estate loans originated by other Indiana financial institutions,
most of which are secured by property located in Indiana. As of June 30, 2000,
the Company held in its loan portfolio, participations in mortgage loans
aggregating $4.7 million that it had purchased, all of which were serviced by
others. The largest such participation it held at June 30, 2000, was in a loan
secured by an apartment complex. The Company's portion of the outstanding
balance on that date was approximately $1.1 million.
The following table shows loan origination, purchase, sale and
repayment activity for the Bank during the periods indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------
2000 1999 1998
-------- -------- ---------
(In Thousands)
<S> <C> <C> <C>
Gross loans receivable at beginning of period............. $171,535 $169,648 $153,203
Originations:
Mortgage loans:
Residential.......................................... 30,972 41,622 37,309
Commercial real estate and multi-family.............. 5,359 6,923 13,949
Total mortgage loans................................. 36,331 48,545 51,258
Consumer loans:
Installment loans.................................... 2,990 7,534 7,170
Loans secured by deposits............................ 654 642 807
Total consumer loans................................ 3,644 8,176 7,977
Commercial loans....................................... 11,402 12,784 6,664
Total originations................................... 51,377 69,505 65,899
Purchases:
Mortgage loans:
Commercial real estate and
multi-family.................................... 52 --- 500
Total originations and purchases..................... 51,429 69,505 66,399
Sales:
Mortgage loans:
Residential.......................................... 1,579 8,044 1,429
Commercial real estate and multi-family.............. --- 909 3,443
Total sales........................................ 1,579 8,953 4,872
Repayments and other deductions........................... 51,278 58,665 45,082
-------- -------- --------
Gross loans receivable at end of period................... $170,107 $171,535 $169,648
======== ======== ========
</TABLE>
Origination and Other Fees. The Company realizes income from fees for
originating commercial real estate loans (equal to one or one-half of a
percentage of the total principal amount of the loan), late charges, checking
and NOW account service charges, fees for the sale of mortgage life insurance by
the Bank, fees for servicing loans and fees for other miscellaneous services
including money orders and travelers checks. In order to increase its
competitive position with respect to other mortgage lenders, the Bank does not
charge points on residential mortgage loans, but does so on its commercial real
estate loans. Late charges are assessed if payment is not received within 15
days after it is due.
The Bank charges miscellaneous fees for appraisals, inspections
(including an inspection fee for construction loans), obtaining credit reports,
certain loan applications, recording and similar services. MCHI also collects
fees for Visa applications which it refers to another financial institution.
MCHI does not underwrite any of these credit card loans.
Non-Performing and Problem Assets
Mortgage loans are reviewed by the Company on a regular basis and are
generally placed on a non-accrual status when the loans become contractually
past due 90 days or more. Once a mortgage loan is fifteen days past due, a
reminder is mailed to the borrower requesting payment by a specified date. At
the end of each month, late notices are sent with respect to all mortgage loans
at least 20 days delinquent. When loans are 30 days in default, a third notice
imposing a late charge equal to 5% of the late principal and interest payment is
imposed. Contact by phone or in person is made, if feasible, with respect to all
mortgage loans 30 days or more in default. By the time a mortgage loan is 90
days past due, a letter is sent to the borrower demanding payment by a certain
date and indicating that a foreclosure suit will be filed if this deadline is
not met. The Board of Directors normally confers foreclosure authority at that
time, but management may continue to work with the borrower if circumstances
warrant.
Consumer and commercial loans other than mortgage loans are treated
similarly. Interest income on consumer and other nonmortgage loans is accrued
over the term of the loan except when serious doubt exists as to the
collectibility of a loan, in which case the accrual of interest is discontinued.
It is MCHI's policy to recognize losses on these loans as soon as they become
apparent. Collateralized and noncollateralized consumer loans after 180 and 120
days of delinquency, respectively, are charged off.
Non-performing assets. At June 30, 2000, $2.1 million, or 1.06% of
MCHI's total assets, were non-performing assets (non-accrual loans, real estate
owned and troubled debt restructurings), compared to $1.9 million, or 1.07% of
the Company's total assets, at June 30, 1996. At June 30, 2000, residential
loans, multi-family, commercial real estate loans, commercial loans, consumer
loans, and repossessed assets accounted for 26.2%, 61.9%, 7.2%, 0.1%, 1.2% and
3.4%, respectively, of non-performing assets.
At June 30, 2000, non-performing assets included $72,000 of repossessed
assets compared to real estate acquired as a result of foreclosure, voluntary
deed, or other means, of $183,000 at June 30, 1996. Real estate acquired is
classified by the Company as "real estate owned" or "REO" until it is sold. When
property is so acquired, the value of the asset is recorded on the books of the
Company at the lower of the unpaid principal balance at the date of acquisition
plus foreclosure and other related costs or at fair value. Interest accrual
ceases when the collection of interest becomes doubtful, usually after the loan
has been delinquent for 90 days or more. All costs incurred from the date of
acquisition in maintaining the property are expensed.
The following table sets forth the amounts and categories of the
Company's non-performing assets (non-accrual loans, repossessed assets and
troubled debt restructurings).
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Accruing loans delinquent
more than 90 days ........................ $ --- $ --- $ --- $ --- $ ---
Non-accruing loans (1):
Residential............................... 551 1,108 1,454 1,238 1,658
Multi-family.............................. --- 462 --- --- ---
Commercial real estate......................... 1,305 1,585 198 139 47
Commercial loans.......................... 152 153 268 --- ---
Consumer.................................. 28 21 18 34 11
Troubled debt restructurings .................. --- --- --- --- ---
------ ------ ------ ------ ------
Total non-performing loans................ 2,036 3,329 1,938 1,411 1,716
------ ------ ------ ------ ------
Repossessed assets, net........................ 72 2 31 --- 183
------ ------ ------ ------ ------
Total non-performing assets .............. $2,108 $3,331 $1,969 $1,411 $1,899
====== ====== ====== ====== ======
Non-performing loans to total
loans, net (2) ........................... 1.22% 1.98% 1.16% .94% 1.18%
Non-performing assets to total assets ......... 1.06% 1.69% 1.02% .81% 1.07%
</TABLE>
(1) The Company generally places mortgage loans on a nonaccrual status when the
loans become contractually past due 90 days or more. Interest income
previously accrued but not deemed collectible is reversed and charged
against current income. Interest on these loans is then recognized as
income when collected. For the year ended June 30, 2000, the income that
would have been recorded had the non-accrual loans not been in a
non-performing status totaled $195,000 compared to actual income recorded
of $32,000.
(2) Total loans less deferred net loan fees and loans in process.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
Office of Thrift Supervision ("OTS") to be of lesser quality, as "substandard,"
"doubtful" or "loss." An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to sufficient risk to
warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "special mention" by management.
When an insured institution classifies problem assets as either
substandard or doubtful, it must establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the institution's principal supervisory agent, who may
order the establishment of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Company regularly
reviews the problem loans in its portfolio to determine whether any loans
require classification in accordance with applicable regulations. Total
classified assets at June 30, 2000, were $7.3 million.
The following table sets forth the aggregate amount of the Company's
classified assets, and of the general and specific loss allowances as of the
dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Substandard assets (1)............ $3,791 $3,060 $2,296 $1,546 $1,226
Doubtful assets .................. --- 147 --- --- ---
Loss assets....................... --- 93 --- --- ---
Special mention................... 3,540 4,394 4,081 --- ---
------ ------ ------ ------ ------
Total classified assets........ $7,331 $7,694 $6,377 $1,546 $1,226
====== ====== ====== ====== ======
General loss allowances........... $2,008 $2,032 $2,087 $2,032 $2,009
Specific loss allowances.......... 275 240 --- --- ---
------ ------ ------ ------ ------
Total allowances............... $2,283 $2,272 $2,087 $2,032 $2,009
====== ====== ====== ====== ======
</TABLE>
(1) Includes REO, net of $0.07, $0.0, $0.03, $0.0, and $0.2 million,
respectively.
The Company regularly reviews its loan portfolio to determine whether any
loans require classification in accordance with applicable regulations. Not all
assets classified by the Company as substandard, doubtful or loss are included
as non-performing assets, and not all of the Company's non-performing assets
constitute classified assets.
Substandard Assets. At June 30, 2000, the Company had 37 loans classified
as substandard totaling approximately $3.7 million. Of the $3.7 million
classified as substandard, $1.5 million is attributable to one borrower
involving five loans secured by commercial real estate in various stages of
completion. The loans were made as construction/permanent financing. Foreclosure
has been filed and calculations performed to determine the net realizable value.
To the extent that a loss appears probable, such loss has been included in the
allowance for loan losses. In addition, $1.3 million is attributable to loans
secured by multi-family dwellings. Also included in substandard assets are
certain loans to facilitate the sale of the real estate owned, totaling $65,000
at June 30, 2000. These are former REO properties sold on contract that are
included as substandard assets to the extent the loan balance exceeds the
appraised value of the property. Also included in substandard assets at June 30,
2000, are slow mortgage loans (loans or contracts delinquent for generally 90
days or more) aggregating $606,000, and slow consumer loans totaling $219,000.
Doubtful and Loss Assets. At June 30,2000, none of the Bank's assets were
classified as doubtful or loss.
Special Mention Assets. At June 30, 2000, the Bank's assets subject to
special mention totaled $3.5 million. Included are one multi-family loan
totaling $422,000, one commercial business loan totaling $27,000 and four
nursing home loans totaling $3.1 million. All loans were classified as special
mention due to financial statements indicating insufficient cash flow to meet
all expenses. All of the above loans were current at June 30, 2000. The Bank
classified $4.4 million as special mention at June 30, 1999, and $4.1 million
were classified as special mention at June 30, 1998. No assets were classified
as special mention at June 30, 1997 and 1996.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for
losses on loans, which is charged to earnings. The provision is used to adjust
the level of the allowance from period to period based upon estimated losses and
losses actually incurred. Loans or portions thereof are charged to the allowance
when losses are determinable and considered probable. The provision is
determined in conjunction with management's review and evaluation of current
economic conditions (including those of the Bank's lending area), changes in the
character and size of the loan portfolio, loan delinquencies (current status as
well as past and anticipated trends) and adequacy of collateral securing loan
delinquencies, non-performing and other classified loans, historical and
estimated net charge-offs, and other pertinent information derived from a review
of the loan portfolio. The Company maintains the current level of the allowance
partly in recognition of its increased risks inherent in its commercial real
estate, construction, multi-family and commercial loan portfolios.
The allowance for loan losses computation includes assigning estimated
loss percentage to loans outstanding in each category of loans held in the
portfolio. All categories of loans, including multi-family, commercial real
estate, construction, and other commercial and consumer loans, are assigned a
loss percentage based on risk factors inherent in these types of loans. These
loss percentages are based on risk estimate losses inherent in the portfolio,
which the Bank believes are greater than historical loss percentages; historical
losses are considered, but may not necessarily be indicative of future
charge-offs in the entire portfolio. Residential mortgages are generally subject
to lesser risk except during periods of economic downturns or unemployment.
Other real estate loans are subject to risks of inadequate cash flows,
concentrations in industries, size of individual loans and declining collateral
values. Commercial loans are also subject to cash flow dependence, size of
individual loans, industry conditions and borrower operations, and financial
strength and character of borrower. Risk elements for consumer loans include
economic conditions, employment factors, and character and adequacy of
collateral. Estimated loss amounts by loan types are reviewed for reasonableness
based on economic and business conditions at the time.
In addition to maintaining the allowance as a percentage of the
outstanding loans in the portfolio, additional reserves are provided for
non-performing loans and other classified loans based on management's assessment
of impairment, if any. Individual loans are specifically analyzed to determine
an estimate of loss, and those specific allocations are then included as part of
the loan loss allowance.
The overall appropriateness of the allowance determined by management is
based on its evaluation of then- existing economic and business conditions
related to the loan portfolio, volumes and concentrations in commercial real
estate type loans and in other categories with greater risk and non-performing
and classified loans. If evaluation of loss has not more specifically been
identified to a loan category or individual loans, evaluation of loss has been
reflected in the unallocated portion of the allowance. In management's opinion,
the Company's allowance for loan losses is adequate at June 30, 2000, to absorb
anticipated losses on loans in the portfolio.
Summary of Loan Loss Experience. The following table analyzes changes
in the allowance for loan losses during the past five years ended June 30, 2000.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance of allowance at
beginning of period....................... $2,272 $2,087 $2,032 $2,009 $2,013
------ ------ ------ ------ ------
Add recoveries of loans previously
charged off -- residential real
estate loans.............................. 42 --- 18 --- 2
Less charge-offs:
Residential real estate loans............. 126 21 7 35 37
Commercial real estate loans.............. 327 --- 14 --- 3
Consumer loans............................ 57 21 1 --- ---
Commercial loans.......................... 16 --- --- --- ---
------ ------ ------ ------ ------
Net charge-offs.............................. 484 42 4 35 38
------ ------ ------ ------ ------
Provisions for losses on loans............... 495 227 59 58 34
------ ------ ------ ------ ------
Balance of allowance at end
of period................................. $2,283 $2,272 $2,087 $2,032 $2,009
====== ====== ====== ====== ======
Net charge-offs to total average
loans outstanding for period.............. .29% .03% .---% .02% .03%
Allowance at end of period to
loans receivable at end of period......... 1.36 1.35 1.25 1.35 1.38
Allowance to total non-performing
loans at end of period.................... 112.11 68.24 107.71 143.98 117.07
</TABLE>
Allocation of Allowance for Loan Losses. The following table presents
an analysis of the allocation of the Company's allowance for loan losses at the
dates indicated.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------- ---------------- ---------------- ---------------- ----------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
to total to total to total to total to total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
Residential.................. $ 556 61.11% $280 59.18% $ --- 61.14% $ --- 63.42% $ --- 59.11%
Commercial real estate....... 1,145 18.36 583 19.19 --- 18.78 --- 20.35 29 24.44
Multi-family................. 264 5.03 393 5.42 72 6.49 72 7.45 264 10.52
Construction loans........... 27 3.12 335 3.69 --- 4.30 --- 3.07 --- 3.37
Commercial loans............. 111 6.25 102 6.36 --- 5.01 --- 1.65 --- .01
Consumer loans............... 147 6.13 145 6.16 86 4.28 33 4.06 24 2.55
Unallocated.................. 33 --- 434 --- 1,929 --- 1,927 --- 1,692 ---
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total................... $2,283 100.00% $2,272 100.00% $2,087 100.00% $2,032 100.00% $2,009 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
For 2000 and 1999, the Bank presented allocations computed by assigning
estimated loss percentages to loans outstanding and allocations for other
estimated losses by loan category, compared to previous years when such amounts
were generally included in the unallocated portion of the allowance.
Investments
Federally chartered savings associations have the authority to invest
in various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds sold. Subject to various restrictions, federally
chartered savings associations may also invest a portion of their assets in
commercial paper, corporate debt securities and asset-backed securities. The
investment policy of the Company, which is established by the Board of Directors
and is implemented by the Executive Committee, is designed primarily to maximize
the yield on the investment portfolio subject to minimal liquidity risk, default
risk, interest rate risk, and prudent asset/liability management.
Specifically, the Company's policies generally limit investments in
corporate debt obligations to those which are rated in the two highest rating
categories by a nationally recognized rating agency at the time of the
investment and such obligations must continue to be rated in one of the four
highest rating categories. Commercial bank obligations, such as certificates of
deposit, brokers acceptances, and federal funds must be rated "C" or better by a
major rating service. Commercial paper must be rated A-1 by Standard and Poor's
and P-1 by Moody's. The policies also allow investments in obligations of
federal agencies such as the Government National Mortgage Association ("GNMA"),
FNMA, and FHLMC, and obligations issued by state and local governments. The
Company does not utilize options or financial or futures contracts.
MCHI's investment portfolio consists of U.S. Treasury and agency
securities, investment in two Indiana limited partnerships, investment in an
insurance company and FHLB stock. At June 30, 2000, approximately $9.2 million,
including securities at market value for those classified as available for sale
and at amortized cost for those classified as held to maturity, or 4.6% of the
Company's total assets, consisted of such investments.
The following tables set forth the amortized cost and market value of
the Company's investments at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------
2000 1999 1998
--------------------- --------------------- --------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- --------- --------- ------- ---------- ------
(In Thousands)
Securities available for sale (1):
<S> <C> <C> <C> <C> <C> <C>
Federal agencies................. $2,969 $2,976 $2,997 $3,020 $2,999 $3,049
------ ------ ------ ------ ------ ------
Total securities available
for sale....................... 2,969 2,976 2,997 3,020 2,999 3,049
------ ------ ------ ------ ------ ------
Securities held to maturity:
U.S. Treasury.................... --- --- --- --- 1,000 999
Federal agencies................. --- --- --- --- 1,000 1,000
State and municipal.............. --- --- --- --- --- ---
Mortgage-backed securites........ --- --- --- --- 3 3
Total securities held
to maturity.................... --- --- --- --- 2,003 2,002
------ ------ ------ ------ ------ ------
Real estate limited partnerships.... 3,942 (3) 4,713 (3) 4,883 (3)
------ ------ ------ ------ ------ ------
Investment in insurance
company.......................... 650 (3) 650 (3) 650 (3)
FHLB stock (2)...................... 1,655 1,655 1,164 1,164 1,134 1,134
------ ------ -------
Total investments.............. $9,216 $9,524 $11,669
====== ====== =======
</TABLE>
(1) In accordance with SFAS No. 115, securities available for sale are
recorded at market value in the financial statements.
(2) Market value approximates carrying value.
(3) Market values are not available.
The following table sets forth investment securities and FHLB stock
which mature during each of the periods indicated and the weighted average
yields for each range of maturities at June 30, 2000.
<TABLE>
<CAPTION>
Amount at June 30, 2000 which matures in
--------------------------------------------------------------------------
One One to Over
Year or less Five Years Ten Years and Stock
--------------------- ---------------------- -----------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
--------- -------- --------- -------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale (1):
Federal agencies................. $1,973 6.68% $996 6.23% $ --- ---%
------ ---- ---- ---- ------ ----
Total securities available
for sale....................... 1,973 6.68 996 6.23 --- ---
------ ---- ---- ---- ------ ----
FHLB stock.......................... --- --- --- --- 1,655 7.99
------ ---- ---- ---- ------ ----
Total investments.............. $1,973 6.68% $996 6.23% $1,655 7.99%
====== ==== ==== ==== ====== ====
</TABLE>
(1) Securities available for sale are set forth at amortized cost for purposes
of this table.
The Bank owns 99% of the limited partnership interests in Pedcor
Investments 1987-II, an Indiana limited partnership ("Pedcor-87") organized to
build, own, operate and lease a 144-unit apartment complex in Indianapolis,
Indiana. The project, operated as multi-family, low/moderate income housing
project, is complete and performing as planned. A low/moderate income housing
project qualifies for certain tax credits if (i) it is a residential rental
property, (ii) the units are used on a nontransient basis, and (iii) 20% or more
of the units in the project are occupied by tenants whose incomes are 50% or
less of the area median gross income, adjusted for family size, or,
alternatively, at least 40% of the units in the project are occupied by tenants
whose incomes are 60% of the area median gross income. Qualified low income
housing projects generally must comply with these and other rules for 15 years,
beginning with the first year the project qualifies for the tax credit, or some
or all of the tax credit together with interest may be recaptured. The tax
credit is subject to limitations on the use of the general business credit, but
no basis reduction is required for any portion of the tax credit claimed.
The Bank committed to invest approximately $3.4 million in Pedcor-87 at
inception of the project in January, 1988. The Bank has invested approximately
$3.4 million in Pedcor-87 with no additional annual capital contribution
remaining to be paid. The tax credits resulting from Pedcor-87's operation of a
low/moderate income housing project were available to the Company through 1998.
Although the Company has reduced income tax expense by the full amount of the
tax credit available each year, it has not been able to fully utilize available
tax credits to reduce income taxes payable because it is not allowed to use tax
credits that would reduce its regular corporate tax liability below its
alternative minimum tax liability. The Bank may carryforward unused tax credits
for a period of 15 years and believes it will be able to utilize available tax
credits during the carryforward period.
Pedcor-87 has incurred operating losses from its operations primarily due
to rent limitations for subsidized housing, increased operating costs and other
factors. The Bank has accounted for its investment in Pedcor-87 on the equity
method, and, accordingly, has recorded its shares of these losses, or impairment
losses, as reductions to its investment in Pedcor-87, which at June 30, 2000,
was approximately $791,000.
In August 1997, the Bank entered into another limited partnership with
Pedcor Investments organized to build, own, operate and lease a 72-unit
apartment complex in Niles, Michigan. The Bank owns 99% of the partnership, as a
limited partner, in Pedcor Investments-1997-XXIX ("Pedcor-97").
The Bank committed to invest $3.6 million in Pedcor-97 over ten years and
will receive an estimated $3.7 million in tax credits. Contributions are made on
an annual basis and amounted to $415,000 during the year ended June 30, 2000,
and $395,000 during the year ended June 30, 1999. No contributions were made
during the year ended June 30, 1998. The Bank recognized tax credits of $455,000
during the year ended June 30, 2000. The Bank did not recognize any tax credits
during the years ended June 30, 1998 and 1999. The project was substantially
completed by June 30, 1999. The tax credits from these projects have the effect
of reducing income tax expense, over a ten year period, and reducing the Bank's
federal income taxes payable, to the limits allowed by alternative minimum tax
liability rules. Although these tax credits will be beneficial to the Bank in
future periods, operating losses from the operations of the facility will
increase after the completion of the apartment complex. These increased
operating losses will have an effect of decreasing the overall return to the
Bank on Pedcor-97. The Bank has also accounted for its investment in Pedcor-97
on the equity method, and, accordingly, has recorded its share of these losses
as reductions to its investment in Pedcor-97, which at June 30, 2000, was
approximately $3,150,000. The unrelated general partners in Pedcor-87 are two
individuals, and the unrelated general partner in Pedcor-97 is Berrien Woods
Housing Company, LLC. Such partners are affiliated with Pedcor Investments.
The following summarizes the Bank's equity in Pedcor-87's and Pedcor-97's
losses and tax credits recognized in the Company's consolidated financial
statements:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------
2000 1999 1998 1997 1996
-------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Investment in Pedcor-87............................ $ 791 $ 1,116 $ 1,275 $ 1,449 $ 1,624
======= ======== ======= ======= =======
Losses, net of income tax effect................... (196) $ (96) $ (105) $ (184) $ (117)
Tax credit......................................... --- 11 326 405 405
------- -------- ------- ------- -------
Increase (decrease) in after-tax net income
from Pedcor-87 investment..................... $ (196) $ (85) $ 221 $ 221 $ 288
======= ======== ======= ======= =======
Investment in Pedcor-97............................ $3,150 $ 3,596 $ 3,608
Losses, net of income tax effect................... (269) $ (7) $ (16)
Tax credit......................................... 455 --- ---
------- -------- -------
Increase (decrease) in after-tax net income
from Pedcor-97 investment..................... $ 186 $ (7) $ (16)
======= ======== =======
</TABLE>
In June 1998, the Company capitalized on a unique opportunity to focus
and energize its life insurance product offerings through an equity
participation in Family Financial Life Insurance Company. Family Financial Life
is a fully chartered life insurance company owned by a group of savings banks.
In operation since 1984, Family Financial Life has had an impressive track
record of growth, profits and returns to its financial institution owners. We
are now offering credit life and annuity products with a most advantageous
method to increase insurance earnings and exercise complete control over the
quality of insurance products and services.
Federal regulations require an FHLB-member savings association to maintain
an average daily balance of liquid assets equal to a monthly average of not less
than a specified percentage of its net withdrawable savings deposits plus
short-term borrowings. Liquid assets include cash, certain time deposits,
certain bankers' acceptances, specified U.S. government, state or federal agency
obligations, certain corporate debt securities, commercial paper, certain mutual
funds, certain mortgage-related securities, and certain first lien residential
mortgage loans. This liquidity requirement may be changed from time to time by
the OTS to any amount within the range of 4% to 10%, and is currently 5%,
although the OTS has proposed a reduction of the percentage to 4%. Also, a
savings association currently must maintain short-term liquid assets
constituting at least 1% of its average daily balance of net withdrawable
deposit accounts and current borrowings. Monetary penalties may be imposed for
failure to meet these liquidity requirements. At June 30, 2000, the Bank had
liquid assets of $7.9 million, and a regulatory liquidity ratio of 8.5%.
Sources of Funds
General. Deposits with the Bank have traditionally been the Company's
primary source of funds for use in lending and investment activities. In
addition to deposits, the Company derives funds from loan amortization,
prepayments, retained earnings and income on earning assets. While loan
amortization and income on earning assets are relatively stable sources of
funds, deposit inflows and outflows can vary widely and are influenced by
prevailing interest rates, market conditions and levels of competition. The
Company also relies on borrowings from the Federal Home Loan Bank ("FHLB") of
Indianapolis to support the Bank's loan originations and to assist in
asset/liability management.
Deposits. Deposits are attracted, principally from within Grant and
contiguous counties, through the offering of a broad selection of deposit
instruments including NOW and other transaction accounts, fixed-rate
certificates of deposit, individual retirement accounts, and savings accounts.
The Bank does not actively solicit or advertise for deposits outside of Grant
and surrounding counties. Substantially all of the Bank's depositors are
residents of those counties. Deposit account terms vary, with the principal
differences being the minimum balance required, the amount of time the funds
remain on deposit and the interest rate. The Bank also has approximately
$453,000 of brokered deposits.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Bank on a periodic basis. Determination of
rates and terms are predicated on funds acquisition and liquidity requirements,
rates paid by competitors, growth goals, and federal regulations. The Bank
relies, in part, on customer service and long-standing relationships with
customers to attract and retain its deposits, but also aggressively prices its
deposits in relation to rates offered by its competitors.
An analysis of the Bank deposit accounts by type, maturity, and rate at
June 30, 2000, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening June 30, % of Average
Type of Account Balance 2000 Deposits Rate
--------------- ------- ---- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Withdrawable:
Savings accounts....................... $ 10.00 $12,622 9.66% 2.25%
NOW and other transactions accounts.... 10.00 25,232 19.31 2.84
------ ----- ----
Total withdrawable........................ 37,854 28.97 2.64
------ ----- ----
Certificates (original terms):
28 days................................ 500 125 0.10 3.51
91 days................................ 500 459 0.35 4.54
182 days............................... 500 7,179 5.49 4.92
9 months............................... 10,000 6,430 4.92 5.51
12 months.............................. 500 10,156 7.77 5.49
18 months.............................. 500 6,116 4.68 5.85
19 months.............................. 500 2,242 1.71 5.37
24 months.............................. 500 12,109 9.27 5.85
30 months.............................. 500 2,740 2.10 5.41
36 months.............................. 500 2,988 2.29 5.66
48 months.............................. 500 2,649 2.03 5.40
60 months.............................. 500 10,321 7.89 6.34
72 months.............................. 500 34 0.03 5.39
96 months.............................. 500 327 0.25 6.47
Special term CDs....................... 500 12 0.01 4.91
IRAs
28 days................................ 500 30 0.02 3.25
91 days................................ 500 6 0.00 4.41
182 days............................... 500 132 0.10 4.97
9 months............................... 500 103 0.08 5.16
12 months.............................. 500 764 0.58 5.58
18 months.............................. 500 722 0.55 5.81
19 months.............................. 500 114 0.09 5.38
24 months.............................. 500 1,363 1.04 5.76
30 months.............................. 500 701 0.54 5.42
36 months.............................. 500 810 0.62 5.67
48 months.............................. 500 839 0.64 5.31
60 months.............................. 500 22,307 17.07 6.41
72 months.............................. 500 310 0.24 5.39
96 months.............................. 500 732 0.56 6.44
Special term IRAs...................... 500 9 0.01 6.00
Total certificates (1).................... 92,829 71.03 5.90
-------- ------ ----
Total deposits............................ $130,683 100.00% 4.96%
======== ====== ====
</TABLE>
(1) Including $14.4 million in certificates of deposit of $100,000 or more.
The following table sets forth by various interest rate categories the
composition of time deposits of the Bank at the dates indicated:
At June 30,
-------------------------------------
2000 1999 1998
------- -------- -------
(In Thousands)
Under 5%........................... $12,070 $ 26,368 $17,135
5.00 - 6.99%....................... 76,069 62,589 52,365
7.00 - 8.99%....................... 4,690 11,514 21,116
------- -------- -------
Total.............................. $92,829 $100,471 $90,616
======= ======== =======
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years indicated, and
the total maturing thereafter. Matured certificates which have not been renewed
as of June 30, 2000, have been allocated based upon certain rollover
assumptions.
Amounts At
June 30, 2000, Maturing in
-----------------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
------- ----- ----- -----------
(In Thousands)
Under 5%....... $ 10,537 $ 693 $ 163 $ 677
5.00 - 6.99% .. 28,852 16,029 8,634 22,554
7.00 - 8.99% .. 300 216 546 3,628
-------- ------- ------- -------
Total ......... $ 39,689 $16,938 $ 9,343 $26,859
======== ======= ======= =======
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
2000.
Maturity Period (In Thousands)
----------------- --------------
Three months or less...................................... $ 1,514
Greater than three months through six months.............. 3,172
Greater than six months through twelve months............. 700
Over twelve months........................................ 9,052
-------
Total..................................................... $14,438
=======
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Bank at the dates
indicated, and the amount of increase or decrease in such deposits as compared
to the previous period.
<TABLE>
<CAPTION>
DEPOSIT ACTIVITY
----------------------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
Balance at from Balance at from
June 30, % of June 30, June 30, % of June 30,
2000 Deposits 1999 1999 Deposits 1998
---------- -------- ---------- ---------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Withdrawable:
Savings accounts.............. $ 12,622 9.66% $(2,169) $14,791 10.41% $(1,917)
NOW and other transactions
accounts.................... 25,232 19.31 (1,593) 26,825 18.88 (266)
-------- ------ -------- -------- ------ ------
Total withdrawable............... 37,854 28.97 (3,762) 41,616 29.29 (2,183)
-------- ------ -------- -------- ------ ------
Certificates (original terms):
28 days....................... 125 0.10 (245) 370 .26 (175)
91 days....................... 459 0.35 (282) 741 .52 (301)
182 days...................... 7,179 5.49 572 6,607 4.65 (4,625)
9 months...................... 6,430 4.92 (2,089) 8,519 6.00 7,095
12 months..................... 10,156 7.77 (4,624) 14,780 10.40 8,388
18 months..................... 6,116 4.68 3,541 2,575 1.81 (1,144)
19 months..................... 2,242 1.71 2,242 --- --- ---
24 months..................... 12,109 9.27 (5,337) 17,446 12.28 3,437
30 months..................... 2,740 2.10 (838) 3,578 2.52 (896)
36 months..................... 2,988 2.29 2,118 870 .61 (215)
48 months..................... 2,649 2.03 (592) 3,241 2.28 (3,214)
60 months..................... 10,321 7.89 333 9,988 7.03 384
72 months..................... 34 0.03 2 32 .02 1
96 months..................... 327 0.25 (24) 351 .25 (2)
Special term CDs.............. 12 0.01 (1) 13 .01 (584)
IRAs
28 days....................... 30 0.02 28 2 --- ---
91 days....................... 6 0.00 (4) 10 .01 (33)
182 days...................... 132 0.10 57 75 .05 35
9 months...................... 103 0.08 64 39 .03 (15)
12 months..................... 764 0.58 (513) 1,277 .90 982
18 months..................... 722 0.55 597 125 .09 (169)
19 months..................... 114 0.09 114 --- --- ---
24 months..................... 1,363 1.04 (895) 2,258 1.59 253
30 months..................... 701 0.54 (73) 774 .54 4
36 months..................... 810 0.62 701 109 .08 (1)
48 months..................... 839 0.64 (1,909) 2,748 1.93 (2,446)
60 months..................... 22,307 17.07 (242) 22,549 15.87 3,259
72 months..................... 310 0.24 (201) 511 .36 (10)
96 months..................... 732 0.56 (141) 873 .61 (97)
Special term IRAs............. 9 0.01 (1) 10 .01 (56)
-------- ------ -------- -------- ------ ------
Total certificates.......... 92,829 71.03 (7,642) 100,471 70.71 9,855
-------- ------ -------- -------- ------ ------
Total deposits.............. $130,683 100.00% $(11,404) $142,087 100.00% $7,672
======== ====== ======== ======== ====== ======
<PAGE>
DEPOSIT ACTIVITY
-----------------------------------------------------------------------
Increase
(Decrease)
Balance at from Balance at
June 30, % of June 30, June 30, % of
1998 Deposits 1997 1997 Deposits
---------- -------- ---------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Withdrawable:
Savings accounts............... $16,708 12.43% $1,025 $15,683 12.88%
NOW and other transaction
accounts..................... 27,091 20.15 5,861 21,230 17.43
-------- ------ ------- -------- ------
Total withdrawable................ 43,799 32.58 6,886 36,913 30.31
-------- ------ ------- -------- ------
Certificates (original terms):
28 days........................ 545 .41 448 97 .08
91 days........................ 1,042 .78 (47) 1,089 .89
182 days....................... 11,232 8.36 1,925 9,307 7.64
9 months....................... 1,424 1.06 1,424 --- ---
12 months...................... 6,392 4.76 (8,092) 14,484 11.90
18 months...................... 3,719 2.77 1,938 1,781 1.46
24 months...................... 14,009 10.42 11,977 2,032 1.67
30 months...................... 4,474 3.33 (3,229) 7,703 6.33
36 months...................... 1,085 .81 (340) 1,425 1.17
48 months...................... 6,455 4.80 709 5,746 4.72
60 months...................... 9,604 7.15 (1,478) 11,082 9.10
72 months...................... 31 .02 3 28 .02
96 months...................... 353 .26 (24) 377 .31
Special term CDs............... 597 .44 597 --- ---
IRAs
28 days........................ 2 --- --- 2 .00
91 days........................ 43 .03 20 23 .02
182 days....................... 40 .03 (134) 174 .14
9 months....................... 54 .04 54 --- ---
12 months...................... 295 .22 (322) 617 .51
18 months...................... 294 .22 56 238 .20
24 months...................... 2,005 1.49 471 1,534 1.26
30 months...................... 770 .57 (110) 880 .72
36 months...................... 110 .08 72 38 .03
48 months...................... 5,194 3.86 379 4,815 3.95
60 months...................... 19,290 14.35 (627) 19,917 16.36
72 months...................... 521 .39 (64) 585 .48
96 months...................... 970 .72 87 883 .73
Special term IRAs................. 66 .05 66 --- ---
-------- ------ ------- -------- ------
Total certificates................ 90,616 67.42 5,759 84,857 69.69
-------- ------ ------- -------- ------
Total deposits.................... $134,415 100.00% $12,645 $121,770 100.00%
======== ====== ======= ======== ======
</TABLE>
Borrowings. Although deposits are the Company's primary source of
funds, the Company's policy has been to utilize borrowings when they are a less
costly source of funds than deposits (taking into consideration the FDIC
insurance premiums payable on deposits) or can be invested at a positive spread.
The Bank often funds originations of its commercial real estate loans with a
simultaneous borrowing from the FHLB of Indianapolis to assure a profit above
its cost of funds.
The Company's borrowings consist of advances from the FHLB of
Indianapolis upon the security of FHLB stock and certain mortgage loans. Such
advances are made pursuant to several different credit programs each of which
has its own interest rate and range of maturities. The maximum amount that the
FHLB-Indianapolis will advance to member associations, including the Bank, for
purposes other than meeting withdrawals, fluctuates from time to time in
accordance with policies of the FHLB of Indianapolis. At June 30, 2000, FHLB of
Indianapolis advances totaled $29.0 million, representing 14.6% of total assets.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances for the periods indicated, and weighted average
interest rates paid during the periods indicated and as of the end of each of
the periods indicated.
At or for the Year
Ended June 30,
------------------------------
2000 1999 1998
------- ------- --------
(Dollars in Thousands)
FHLB Advances:
Average balance outstanding..................... $23,313 $15,132 $10,840
Maximum amount outstanding at any month-end
during the period.......................... 29,526 16,272 13,684
Weighted average interest rate
during the period.......................... 6.25% 6.07% 6.01%
Weighted average interest rate at
end of period.............................. 6.42% 6.02% 6.08%
There are regulatory restrictions on advances from the FHLBs. See
"Regulation - Federal Home Loan Bank System" and "- Qualified Thrift Leader."
These limitations are not expected to have any impact on the Company's ability
to borrow from the FHLB of Indianapolis. MCHI does not anticipate any problem
obtaining advances appropriate to meet its requirements in the future, if such
advances should become necessary.
Selected Ratios
Year Ended June 30,
-------------------------------
2000 1999 1998
------- -------- ------
Return on assets.............................. 1.25% 1.09% 1.25%
Return on equity.............................. 7.78 6.15 5.94
Dividend payout ratio (based on diluted
earnings per share)................... 49.44 64.71 68.22
Average equity to average assets ratio........ 16.13 17.63 21.00
Service Corporation Subsidiary
OTS regulations permit federal savings associations to invest in the
capital stock, obligations, or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants in
an aggregate amount not exceeding 2% of an association's assets, plus an
additional 1% of assets if the amount over 2% is used for specified community or
inner-city development purposes. In addition, federal regulations permit
associations to make specified types of loans to such subsidiaries (other than
special-purpose finance subsidiaries), in which the association owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the association's
regulatory capital if the association's regulatory capital is in compliance with
applicable regulations. Current law requires a savings association that acquires
a non-savings association subsidiary, or that elects to conduct a new activity
within a subsidiary, to give the FDIC and the OTS at least 30 days advance
written notice. The FDIC may, after consultation with the OTS, prohibit specific
activities if it determines such activities pose a serious threat to the Savings
Association Insurance Fund ("SAIF").
The Bank's only subsidiary, First Marion Service Corporation ("First
Marion") was organized in 1971 and currently is engaged in the sale of tax
deferred annuities pursuant to an arrangement with One System, Inc., a licensed
insurance broker, in Indianapolis and other direct carriers, to a lesser extent.
It also sells mutual funds through an arrangement with Lincoln Financial
Advisors, a licensed securities broker, in Fort Wayne, Indiana. First Marion has
one licensed employee engaged in such sales of tax deferred annuities and mutual
funds. In addition, beginning in July 1995, First Marion began providing 100%
financing to borrowers of the Bank by providing a 20% second mortgage behind the
Bank's 80% mortgage. Such loans amounted to $2.7 million at June 30, 2000.
At June 30, 2000, the Bank's investment in First Marion totaled $2.7
million. During the year ended June 30, 2000, First Marion had net income of
$98,800.
Employees
As of June 30, 2000, the Bank employed 44 persons on a full-time basis
and five persons on a part-time basis. None of the Bank's employees are
represented by a collective bargaining group. Management considers its employee
relations to be good.
Competition
The Bank originates most of its loans to and accepts most of its
deposits from residents of Grant and surrounding counties in Indiana. The
Decatur branch was sold to another financial institution in September 1999.
The Bank is subject to competition from various financial institutions,
including state and national banks, state and federal savings institutions,
credit unions, certain non-banking consumer lenders, and other companies or
firms, including brokerage houses and mortgage brokers, that provide similar
services in Grant and surrounding counties. The Bank must also compete with
money market funds and with insurance companies with respect to its individual
retirement accounts.
Under current law, bank holding companies may acquire savings
associations. Savings associations may also acquire banks under federal law. To
date, several bank holding company acquisitions of savings associations in
Indiana have been completed. Affiliations between banks and healthy savings
associations based in Indiana may also increase the competition faced by the
Bank and MCHI.
Because of recent changes in Federal law, interstate acquisitions of
banks are less restricted than they were under prior law. Savings associations
have certain powers to acquire savings associations based in other states, and
Indiana law expressly permits reciprocal acquisition of Indiana savings
associations. In addition, Federal savings associations are permitted to branch
on an interstate basis. See "Regulation -- Acquisitions or Dispositions and
Branching."
The primary factors in competing for deposits are interest rates and
convenience of office locations. The Bank competes for loan originations
primarily through the efficiency and quality of services it provides borrowers
through interest rates and loan fees it charges. Competition is affected by,
among other things, the general availability of lendable funds, general and
local economic conditions, current interest rate levels, and other factors which
are not readily predictable.
REGULATION
General
The Bank, as a federally chartered savings bank, is a member of the
Federal Home Loan Bank System ("FHLB System") and its deposits are insured by
the FDIC and it is a member of the Savings Association Insurance Fund (the
"SAIF") which is administered by the FDIC. The Bank is subject to extensive
regulation by the OTS. Federal associations may not enter into certain
transactions unless certain regulatory tests are met or they obtain prior
governmental approval and the associations must file reports with the OTS about
their activities and their financial condition. Periodic compliance examinations
of the Bank are conducted by the OTS which has, in conjunction with the FDIC in
certain situations, examination and enforcement powers. This supervision and
regulation are intended primarily for the protection of depositors and federal
deposit insurance funds. The Bank is also subject to certain reserve
requirements under regulations of the Board of Governors of the Federal Reserve
System ("FRB").
An OTS regulation establishes a schedule for the assessment of fees
upon all savings associations to fund the operations of the OTS. The regulation
also establishes a schedule of fees for the various types of applications and
filings made by savings associations with the OTS. The general assessment, to be
paid on a semiannual basis, is based upon the savings association's total
assets, including consolidated subsidiaries, as reported in a recent quarterly
thrift financial report. Currently, the quarterly assessment rates range from
.015424% of assets for associations with assets of $67 million or less to
.003388% for associations with assets in excess of $35 billion. The Bank's
semiannual assessment under this assessment scheme, based upon its total assets
at March 31, 2000, was $24,434.
The Bank is also subject to federal and state regulation as to such
matters as loans to officers, directors, or principal shareholders, required
reserves, limitations as to the nature and amount of its loans and investments,
regulatory approval of any merger or consolidation, issuance or retirements of
their own securities, and limitations upon other aspects of banking operations.
In addition, the activities and operations of the Bank are subject to a number
of additional detailed, complex and sometimes overlapping federal and state laws
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and anti-trust
laws.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Indianapolis, which is one of
twelve regional FHLBs. Each FHLB serves as a reserve or central bank for its
member savings associations and other financial institutions within its assigned
region. It is funded primarily from funds deposited by savings associations and
proceeds derived from the sale of consolidated obligations of the FHLB System.
It makes loans to members (i.e., advances) in accordance with policies and
procedures established by the Board of Directors of the FHLB. All FHLB advances
must be fully secured by sufficient collateral as determined by the FHLB. The
Federal Housing Finance Board ("FHFB"), an independent agency, controls the FHLB
System, including the FHLB of Indianapolis.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Indianapolis in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts, or similar obligations at
the beginning of each year. The Bank is currently in compliance with this
requirement. At June 30, 2000, the Bank's investment in stock of the FHLB of
Indianapolis was $1,654,900. The FHLB imposes various limitations on advances
such as limiting the amount of certain types of real estate-related collateral
to 30% of a member's capital and limiting total advances to a member. Interest
rates charged for advances vary depending upon maturity, the cost of funds to
the FHLB of Indianapolis and the purpose of the borrowing.
In past years, the Bank received dividends on its FHLB stock. All
twelve FHLBs are required by law to provide funds for the resolution of troubled
savings associations and to establish affordable housing programs through direct
loans or interest subsidies on advances to members to be used for lending at
subsidized interest rates for low- and moderate-income, owner-occupied housing
projects, affordable rental housing, and certain other community projects. These
contributions and obligations have adversely affected the level of FHLB
dividends paid and could continue to do so in the future. For the year ending
June 30, 2000, dividends paid to the Bank totaled $112,000, for an annual rate
of 8%.
All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. Current law prescribes eligible collateral as first
mortgage loans less than 90 days delinquent or securities evidencing interests
therein, securities (including mortgage-backed securities) issued, insured or
guaranteed by the federal government or any agency thereof, FHLB deposits and,
to a limited extent, real estate with readily ascertainable value in which a
perfected security interest may be obtained. Other forms of collateral may be
accepted as over collateralization or, under certain circumstances, to renew
outstanding advances. All long-term advances are required to provide funds for
residential home financing and the FHLB has established standards of community
service that members must meet to maintain access to long-term advances.
Liquidity
Federal regulations require the Bank to maintain minimum levels of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of mutual
funds and certain corporate debt securities and commercial paper) equal to an
amount not less than a specified percentage of its net withdrawable deposit
accounts plus short-term borrowings. This liquidity requirement may be changed
from time to time by the OTS to an amount within the range of 4% to 10%
depending upon economic conditions and savings flows of member institutions. The
OTS recently lowered the level of liquid assets that must be held by a savings
association from 5% to 4% of the association's net withdrawable accounts plus
short-term borrowings based upon the average daily balance of such liquid assets
for each quarter of the association's fiscal year. The Bank has historically
maintained its liquidity ratio at a level in excess of that required. At June
30, 2000, the Bank's liquidity ratio was 8.5% and has averaged 8.6% over the
past three years. The Bank has never been subject to monetary penalties for
failure to meet its liquidity requirements.
Insurance of Deposits
The FDIC is an independent federal agency that insures the deposits, up
to prescribed statutory limits, of banks and thrifts and safeguards the safety
and soundness of the banking and thrift industries. The FDIC administers two
separate insurance funds, the Bank Insurance Fund (the "BIF") for commercial
banks and state savings banks and the SAIF for savings associations such as the
Bank and banks that have acquired deposits from savings associations. The FDIC
is required to maintain designated levels of reserves in each fund. As of
September 30, 1996, the reserves of the SAIF were below the level required by
law, primarily because a significant portion of the assessments paid into the
SAIF have been used to pay the cost of prior thrift failures, while the reserves
of the BIF met the level required by law in May, 1995. However, on September 30,
1996, provisions designed to recapitalize the SAIF and eliminate the premium
disparity between the BIF and SAIF were signed into law as further described
below.
The FDIC is authorized to establish separate annual assessment rates
for deposit insurance for members of the BIF and members of the SAIF. The FDIC
may increase assessment rates for either fund if necessary to restore the fund's
ratio of reserves to insured deposits to the target level within a reasonable
time and may decrease these rates if the target level has been met. The FDIC has
established a risk-based assessment system for both SAIF and BIF members. Under
this system, assessments vary depending on the risk the institution poses to its
deposit insurance fund. An institution's risk level is determined based on its
capital level and the FDIC's level of supervisory concern about the institution.
On September 30, 1996, President Clinton signed into law legislation which
included provisions designed to recapitalize the SAIF and eliminate the
significant premium disparity between the BIF and the SAIF. Under the new law,
the Bank was charged a one-time special assessment equal to $.657 per $100 in
assessable deposits at March 31, 1995. The Bank recognized this one-time
assessment as a non-recurring operating expense of $777,000 ($469,000 after tax)
during the three-month period ending September 30, 1996. The assessment was
fully deductible for both federal and state income tax purposes. Beginning
January 1, 1997, the Bank's annual deposit insurance premium was reduced from
.23% to .0648% of total assessable deposits. BIF institutions pay lower
assessments than comparable SAIF institutions because BIF institutions pay only
20% of the rate being paid by SAIF institutions on their deposits with respect
to obligations issued by the federally-chartered corporation which provided some
of the financing to resolve the thrift crisis in the 1980's ("FICO"). The 1996
law also provides for the merger of the SAIF and the BIF by 1999, but not until
such time as bank and thrift charters are combined. Until the charters are
combined, savings associations with SAIF deposits may not transfer deposits into
the BIF system without paying various exit and entrance fees, and SAIF
institutions will continue to pay higher FICO assessments. Such exit and
entrance fees need not be paid if a SAIF institution converts to a bank charter
or merges with a bank, as long as the resulting bank continues to pay applicable
insurance assessments to the SAIF, and as long as certain other conditions are
met.
Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. The OTS recently adopted a regulation, which became effective
April 1, 1999, that requires savings associations that receive the highest
supervisory rating for safety and soundness to maintain "core capital" of at
least 3% of total assets. All other savings associations must maintain core
capital of at least 4% of total assets. Core capital is generally defined as
common shareholders' equity (including retained income), noncumulative perpetual
preferred stock and related surplus, certain minority equity interests in
subsidiaries, qualifying supervisory goodwill, purchased mortgage servicing
rights and purchased credit card relationships (subject to certain limits) less
nonqualifying intangibles. Under the tangible capital requirement, a savings
association must maintain tangible capital (core capital less all intangible
assets except purchased mortgage servicing rights which may be included after
making the above-noted adjustment in an amount up to 100% of tangible capital)
of at least 1.5% of total assets. Under the risk-based capital requirements, a
minimum amount of capital must be maintained by a savings association to account
for the relative risks inherent in the type and amount of assets held by the
savings association. The risk-based capital requirement requires a savings
association to maintain capital (defined generally for these purposes as core
capital plus general valuation allowances and permanent or maturing capital
instruments such as preferred stock and subordinated debt less assets required
to be deducted) equal to 8.0% of risk-weighted assets. Assets are ranked as to
risk in one of four categories (0-100%). A credit risk-free asset, such as cash,
requires no risk-based capital, while an asset with a significant credit risk,
such as a non-accrual loan, requires a risk factor of 100%. Moreover, a savings
association must deduct from capital, for purposes of meeting the core capital,
tangible capital and risk-based capital requirements, its entire investment in
and loans to a subsidiary engaged in activities not permissible for a national
bank (other than exclusively agency activities for its customers or mortgage
banking subsidiaries). At June 30, 2000, the Bank was in compliance with all
capital requirements imposed by law.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. The OTS has delayed the implementation of
this rule, however. The rule requires savings associations with "above normal"
interest rate risk (institutions whose portfolio equity would decline in value
by more than 2% of assets in the event of a hypothetical 200-basis-point move in
interest rates) to maintain additional capital for interest rate risk under the
risk-based capital framework. If the OTS were to implement this regulation, the
Bank would be exempt from its provisions because it has less than $300 million
in assets and its risk-based capital ratio exceeds 12%. The Bank nevertheless
measures its interest rate risk in conformity with the OTS regulation and, as of
June 30, 2000, the Bank's interest rate risk was within the parameters set forth
in the regulation.
If an association is not in compliance with the capital requirements,
the OTS is required to prohibit asset growth and to impose a capital directive
that may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements. These actions may include restricting the operations activities of
the association, imposing a capital directive, cease and desist order, or civil
money penalties, or imposing harsher measures such as appointing a receiver or
conservator or forcing the association to merge into another institution.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991, as
amended ("FedICIA") requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions that do
not meet minimum capital requirements. For these purposes, FedICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At June 30,
2000, the Bank was categorized as "well capitalized," meaning that its total
risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio
exceeded 6%, its leverage ratio exceeded 5%, and it was not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure.
The FDIC may order savings associations which have insufficient capital
to take corrective actions. For example, a savings association which is
categorized as "undercapitalized" would be subject to growth limitations and
would be required to submit a capital restoration plan, and a holding company
that controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
Capital Distributions Regulation
The OTS recently adopted a regulation, which became effective on April
1, 1999, that revised the restrictions that apply to "capital distributions" by
savings associations. The amended regulation defines a capital distribution as a
distribution of cash or other property to a savings association's owners, made
on account of their ownership. This definition includes a savings association's
payment of cash dividends to shareholders, or any payment by a savings
association to repurchase, redeem, retire, or otherwise acquire any of its
shares or debt instruments that are included in total capital, and any extension
of credit to finance an affiliate's acquisition of those shares or interests.
The amended regulation does not apply to dividends consisting only of a savings
association's shares or rights to purchase such shares.
The amended regulation exempts certain savings associations from the
requirement under the previous regulation that all savings associations file
either a notice or an application with the OTS before making any capital
distribution. As revised, the regulation requires a savings association to file
an application for approval of a proposed capital distribution with the OTS if
the association is not eligible for expedited treatment under OTS's application
processing rules, or the total amount of all capital distributions, including
the proposed capital distribution, for the applicable calendar year would exceed
an amount equal to the savings association's net income for that year to date
plus the savings association's retained net income for the preceding two years
(the "retained net income standard"). Application is required by the Bank to pay
dividends in excess of this restriction, and, as of June 30, 2000, the Bank had
approval to pay dividends up to $1,500,000. A savings association must also file
an application for approval of a proposed capital distribution if, following the
proposed distribution, the association would not be at least adequately
capitalized under the OTS prompt corrective action regulations, or if the
proposed distribution would violate a prohibition contained in any applicable
statute, regulation, or agreement between the association and the OTS or the
FDIC.
The amended regulation requires a savings association to file a notice
of a proposed capital distribution in lieu of an application if the association
or the proposed capital distribution do not meet the conditions described above,
and: (1) the savings association will not be at least well capitalized (as
defined under the OTS prompt corrective action regulations) following the
capital distribution; (2) the capital distribution would reduce the amount of,
or retire any part of the savings association's common or preferred stock, or
retire any part of debt instruments such as notes or debentures included in the
association's capital under the OTS capital regulation; or (3) the savings
association is a subsidiary of a savings and loan holding company. Because the
Bank is a subsidiary of a savings and loan holding company, this latter
provision requires that, at a minimum, the Bank must file a notice with the OTS
thirty days before making any capital distributions to the Holding Company.
In addition to these regulatory restrictions, the Bank's Plan of
Conversion imposes additional limitations on the amount of capital distributions
it may make to the Holding Company. The Plan of Conversion requires the Bank to
establish and maintain a liquidation account for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders and prohibits the Bank from
making capital distributions to the Holding Company if its net worth would be
reduced below the amount required for the liquidation account.
Limitations on Rates Paid for Deposits
Regulations promulgated by the FDIC pursuant to FedICIA place limitations
on the ability of insured depository institutions to accept, renew or roll over
deposits by offering rates of interest which are significantly higher than the
prevailing rates of interest on deposits offered by other insured depository
institutions having the same type of charter in the institution's normal market
area. Under these regulations, "well-capitalized" depository institutions may
accept, renew or roll such deposits over without restriction, "adequately
capitalized" depository institutions may accept, renew or roll such deposits
over with a waiver from the FDIC (subject to certain restrictions on payments of
rates) and "undercapitalized" depository institutions may not accept, renew or
roll such deposits over. The regulations contemplate that the definitions of
"well capitalized," "adequately capitalized" and "undercapitalized" will be the
same as the definition adopted by the agencies to implement the corrective
action provisions of FedICIA. The Bank does not believe that these regulations
will have a materially adverse effect on its current operations.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety
and soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. On August 27, 1996, the federal banking agencies added asset
quality and earning standards to the safety and soundness guidelines.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies. The association's written real
estate lending policies must be reviewed and approved by the association's board
of directors at least annually. Further, each association is expected to monitor
conditions in its real estate market to ensure that its lending policies
continue to be appropriate for current market conditions.
Loans to One Borrower
Under OTS regulations, the Bank may not make a loan or extend credit to
a single or related group of borrowers in excess of 15% of its unimpaired
capital and surplus. Additional amounts may be lent, not in excess of 10% of
unimpaired capital and surplus, if such loans or extensions of credit are fully
secured by readily marketable collateral, including certain debt and equity
securities but not including real estate. In some cases, a savings association
may lend up to 30 percent of unimpaired capital and surplus to one borrower for
purposes of developing domestic residential housing, provided that the
association meets its regulatory capital requirements and the OTS authorizes the
association to use this expanded lending authority. At June 30, 2000, the Bank
did not have any loans or extensions of credit to a single or related group of
borrowers not in compliance with OTS regulations. The Bank does not believe that
the loans-to-one-borrower limits will have a significant impact on its business
operations or earnings.
Transactions with Affiliates
The Bank and MCHI are subject to Sections 22(h), 23A and 23B of the
Federal Reserve Act, which restrict financial transactions between banks and
affiliated companies. The statute limits credit transactions between a bank and
its executive officers and its affiliates, prescribes terms and conditions for
bank affiliate transactions deemed to be consistent with safe and sound banking
practices, and restricts the types of collateral security permitted in
connection with a bank's extension of credit to an affiliate.
Holding Company Regulation
MCHI is regulated as a "non-diversified unitary savings and loan
holding company" within the meaning of the Home Owners' Loan Act, as amended
("HOLA"), and subject to regulatory oversight of the Director of the OTS. As
such, MCHI is registered with the OTS and thereby subject to OTS regulations,
examinations, supervision and reporting requirements. As a subsidiary of a
savings and loan holding company, the Bank is subject to certain restrictions in
its dealings with MCHI and with other companies affiliated with MCHI.
The HOLA generally prohibits a savings and loan holding company,
without prior approval of the Director of the OTS, from (i) acquiring control of
any other savings association or savings and loan holding company or controlling
the assets thereof or (ii) acquiring or retaining more than 5 percent of the
voting shares of a savings association or holding company thereof which is not a
subsidiary. Except with the prior approval of the Director of the OTS, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock may also
acquire control of any savings institution, other than a subsidiary institution,
or any other savings and loan holding company.
MCHI's Board of Directors presently intends to continue to operate MCHI
as a unitary savings and loan holding company. Under current OTS regulations,
there are generally no restrictions on the permissible business activities of a
unitary savings and loan holding company.
Notwithstanding the above rules as to permissible business activities
of unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. (Additional
restrictions on securing advances from the FHLB also apply). See "--Qualified
Thrift Lender." At June 30, 2000, the Bank's asset composition was in excess of
that required to qualify the Bank as a Qualified Thrift Lender.
If MCHI were to acquire control of another savings institution other
than through a merger or other business combination with the Bank, MCHI would
thereupon become a multiple savings and loan holding company. Except where such
acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings association meets the QTL test,
the activities of MCHI and any of its subsidiaries (other than the Bank or other
subsidiary savings associations) would thereafter be subject to further
restrictions. The HOLA provides that, among other things, no multiple savings
and loan holding company or subsidiary thereof which is not a savings
association shall commence or continue for a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof, any
business activity other than (i) furnishing or performing management services
for a subsidiary savings association, (ii) conducting an insurance agency or
escrow business, (iii) holding, managing, or liquidating assets owned by or
acquired from a subsidiary savings institution, (iv) holding or managing
properties used or occupied by a subsidiary savings institution, (v) acting as
trustee under deeds of trust, (vi) those activities previously directly
authorized by the FSLIC by regulation as of March 5, 1987, to be engaged in by
multiple holding companies or (vii) those activities authorized by the FRB as
permissible for bank holding companies, unless the Director of the OTS by
regulation prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above must also be approved by
the Director of the OTS prior to being engaged in by a multiple holding company.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5,1987, or if
the laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state-chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
Indiana law permits federal and state savings association holding
companies with their home offices located outside of Indiana to acquire savings
associations whose home offices are located in Indiana and savings association
holding companies with their principal place of business in Indiana ("Indiana
Savings Association Holding Companies") upon receipt of approval by the Indiana
Department of Financial Institutions. Moreover, Indiana Savings Association
Holding Companies may acquire savings associations with their home offices
located outside of Indiana and savings associations holding companies with their
principal place of business located outside of Indiana upon receipt of approval
by the Indiana Department of Financial Institutions.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days advance notice of such
declaration and payment. Any dividend declared during such period or without the
giving of such notice shall be invalid.
Federal Securities Law
The shares of Common Stock of MCHI are registered with the SEC under
the 1934 Act. MCHI is subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the 1934 Act and the rules of the
SEC thereunder. If MCHI has fewer than 300 shareholders, it may deregister the
shares under the 1934 Act and cease to be subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of MCHI may
not be resold without registration or unless sold in accordance with the resale
restrictions of Rule 144 under the 1933 Act. If MCHI meets the current public
information requirements under Rule 144, each affiliate of MCHI who complies
with the other conditions of Rule 144 (including conditions that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of MCHI or (ii) the average weekly volume of trading in such shares
during the preceding four calendar weeks.
Qualified Thrift Lender
Savings associations must meet a QTL test. If the Bank maintains an
appropriate level of qualified thrift investments ("QTIs") (primarily
residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualifies as a QTL, the Bank will
continue to enjoy full borrowing privileges from the FHLB of Indianapolis. The
required percentage of QTIs is 65% of portfolio assets (defined as all assets
minus intangible assets, property used by the association in conducting its
business and liquid assets equal to 10% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, FNMA, and FHLMC
as QTIs. Compliance with the QTL test is determined on a monthly basis in nine
out of every twelve months.
A savings association which fails to meet the QTL test must either
convert to a bank (but its deposit insurance assessments and payments will be
those of and paid to SAIF) or be subject to the following penalties: (i) it may
not enter into any new activity except for those permissible for a national bank
and for a savings association; (ii) its branching activities shall be limited to
those of a national bank; (iii) it shall not be eligible for any new FHLB
advances; and (iv) it shall be bound by regulations applicable to national banks
respecting payment of dividends. Three years after failing the QTL test the
association must (i) dispose of any investment or activity not permissible for a
national bank and a savings association and (ii) repay all outstanding FHLB
advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
A savings association failing to meet the QTL test may requalify as a
QTL if it thereafter meets the QTL test. In the event of such requalification it
shall not be subject to the penalties described above. A savings association
which subsequently again fails to qualify under the QTL test shall become
subject to all of the described penalties without application of any waiting
period.
At June 30, 2000, 74.28% of the Bank's portfolio assets (as defined on
that date) were invested in qualified thrift investments (as defined on that
date), and therefore the Bank's asset composition was in excess of that required
to qualify the Bank as a QTL. Also, the Bank does not expect to significantly
change its lending or investment activities in the near future. The Bank expects
to continue to qualify as a QTL, although there can be no such assurance.
Acquisitions or Dispositions and Branching
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to
the extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in ss.7701(a)(19) of the Code or the asset
composition test of ss.7701(c) of the Code. Branching that would result in the
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state- chartered
associations or their holding companies in the state where the acquiring
association or holding company is located. Moreover, Indiana banks and savings
associations are permitted to acquire other Indiana banks and savings
associations and to establish branches throughout Indiana.
Finally, the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire
banks in other states and, with state consent and subject to certain
limitations, allows banks to acquire out-of-state branches either through merger
or de novo expansion. The State of Indiana enacted legislation establishing
interstate branching provisions for Indiana state-chartered banks consistent
with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The
Indiana Branching Law authorizes Indiana banks to branch interstate by merger or
de novo expansion, provided that such transactions are not permitted to
out-of-state banks unless the laws of their home states permit Indiana banks to
merge or establish de novo banks on a reciprocal basis. The Indiana Branching
Law became effective March 15, 1996.
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- outstanding, satisfactory, unsatisfactory
and needs improvement -- and a written evaluation of each institution's
performance. Each FHLB is required to establish standards of community
investment or service that its members must maintain for continued access to
long-term advances from the FHLBs. The standards take into account a member's
performance under the CRA and its record of lending to first-time home buyers.
The examiners have determined that the Bank has a satisfactory record of meeting
community credit needs.
TAXATION
Federal Taxation
Historically, savings associations, such as the Bank, have been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method. However, for years beginning after
December 31, 1995, the Bank is not able to use the percentage of taxable income
method of computing its allowable tax bad debt deduction. The Bank will be
required to compute its allowable deduction using the experience method. As a
result of the repeal of the percentage of taxable income method, reserves taken
after 1987 using the percentage of taxable income method generally must be
included in future taxable income over a six-year period, although a two-year
delay may be permitted for institutions meeting a residential mortgage loan
origination test. In addition, the pre-1988 reserve, for which no deferred taxes
have been recorded, will not have to be recaptured into income unless (i) the
Bank no longer qualifies as a bank under the Code, or (ii) excess dividends are
paid out by the Bank.
Depending on the composition of its items of income and expense, a
savings association may be subject to the alternative minimum tax. A savings
association must pay an alternative minimum tax equal to the amount (if any) by
which 20% of alternative minimum taxable income ("AMTI"), as reduced by an
exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular
taxable income increased or decreased by certain tax preferences and
adjustments, including depreciation deductions in excess of that allowable for
alternative minimum tax purposes, tax-exempt interest on most private activity
bonds issued after August 7, 1986 (reduced by any related interest expense
disallowed for regular tax purposes), the amount of the bad debt reserve
deduction claimed in excess of the deduction based on the experience method and
75% of the excess of adjusted current earnings over AMTI (before this adjustment
and before any alternative tax net operating loss). AMTI may be reduced only up
to 90% by net operating loss carryovers, but alternative minimum tax paid that
is attributable to most preferences can be credited against regular tax due in
later years.
State Taxation
The Bank is subject to Indiana's Financial Institutions Tax ("FIT"),
which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted
gross income," for purposes of FIT, begins with taxable income as defined by
Section 63 of the Code and, thus, incorporates federal tax law to the extent
that it affects the computation of taxable income. Federal taxable income is
then adjusted by several Indiana modifications the most notable of which is the
required addback of interest that is tax-free for federal income tax purposes.
Other applicable state taxes include generally applicable sales and use taxes
plus real and personal property taxes.
MCHI's state income tax returns have not been audited in the last five
years.
Other
The Securities and Exchange Commission maintains a Web site that
contains reports, proxy information statements, and other information regarding
registrants that file electronically with the Commission, including MCHI. The
address is (http://www.sec.gov).
Item 2. Properties.
At June 30, 2000, the Bank conducted its business from its main office
at 100 West Third Street, Marion, Indiana, and two branch offices. Two of the
full-service offices are owned by the Bank.
The following table provides certain information with respect to the
Bank's offices as of June 30, 2000:
<TABLE>
<CAPTION>
Net Book Value
Total Deposits of Property,
at Furniture
Owned or Year June 30, & Approximate
Description and Address Leased Opened 2000 Fixtures Square Footage
----------------------- ------ ------ ---- -------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Main Office in Marion
100 West Third Street.................. Owned 1936 $113,458 $1,395 17,949
Walmart Supercenter in Marion
3240 S. Western........................ Leased 1997 4,320 138 540
Location in Gas City
1010 E. Main Street.................... Owned 1997 12,905 162 2,276
</TABLE>
The Company opened its first automated teller machine in May, 1995 at
its Marion branch and now maintains an ATM at each branch location.
The Company owns computer and data processing equipment which is used
for transaction processing and accounting. The net book value of electronic data
processing equipment owned by the Company was $190,000 at June 30, 2000.
The Company also has contracted for the data processing and reporting
services of BISYS, Inc. in Houston, Texas. The cost of these data processing
services is approximately $26,500 per month.
Item 3. Legal Proceedings.
The Company is not a party to any material pending legal proceeding.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of MCHI's shareholders during the
quarter ended June 30, 2000.
Item 4.5. Executive Officers of MCHI.
Presented below is certain information regarding the executive officers
of MCHI:
Name Position
----------------- -------------------------------------------
Steven L. Banks President
Larry G. Phillips Sr. Vice President, Secretary and Treasurer
Cynthia M. Fortney Vice President and Assistant Secretary
Steven L. Banks (age 50) became President of both MCHI and the Bank on
April 1, 1999. He has also served as executive Vice President of First Marion
since 1996. Prior to his affiliation with MCHI and the Bank, Mr. Banks served as
President and CEO of Fidelity Federal Savings Bank of Marion.
Larry G. Phillips (age 51) has been employed by MCHI since November,
1992. He became Sr. Vice President of the Bank in 1996 and has served as
Treasurer of the Bank since 1983, Secretary of the Bank since 1989 and Secretary
and Treasurer of First Marion since 1989. Mr. Phillips served as Vice President
and Treasurer of the Bank from 1983 to 1996.
Cynthia M. Fortney (age 43) became Vice President and Assistant
Secretary of MCHI in 1998 and has been Vice President of the Bank since 1998.
Ms. Fortney has also served as Assistant Vice President of First Marion since
1998.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Bank converted from a federally charted mutual savings bank to a
federally charted stock savings bank effective March 18, 1993 (the "Conversion")
and simultaneously formed a savings and loan holding company, MCHI. MCHI's
common stock, without par value ("Common Stock"), is quoted on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"),
National Market System, under the symbol "MARN." The following table sets forth
the high and low prices, as reported by NASDAQ, and dividends paid per share for
Common Stock for the quarter indicated. Such over-the-counter quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions.
Quarter Dividends
Ended High Low Declared
----- ---- --- --------
June 30, 2000......... $20 3/4 $21 $15 1/8 $.22
March 31, 2000........ 15 7/8 16 15 1/8 .22
December 31, 1999..... 16 3/8 18 7/8 14 3/8 .22
September 30, 1999.... 17 15/16 20 3/4 17 7/16 .22
June 30, 1999......... 20 3/4 21 1/2 20 1/16 .22
March 31, 1999........ 22 22 3/4 19 3/4 .22
December 31, 1998..... 20 23 3/4 17 7/8 .22
September 30, 1998.... 23 1/2 29 1/2 22 1/4 .22
As of June 30, 2000, there were 355 record holders of MCHI's Common
Stock. MCHI estimates that, as of that date, there were approximately 750
additional shareholders in "street" name.
Since MCHI has no material independent operations or other subsidiaries
to generate income, its ability to accumulate earnings for the payment of cash
dividends to its shareholders is directly dependent upon the earnings on its
investment securities and ability of the Bank to pay dividends to MCHI. The
Bank's ability to pay dividends is subject to certain regulatory restrictions.
See "Regulation -- Capital Distributions Regulation."
Under current federal income tax law, dividend distributions with
respect to the Common Stock, to the extent that such dividends paid are from the
current or accumulated earnings and profits of the Bank (as calculated for
federal income tax purposes), will be taxable as ordinary income to the
recipient and will not be deductible by the Bank. Any dividend distributions in
excess of current or accumulated earnings and profits will be treated for
federal income tax purposes as a distribution from the Bank's accumulated bad
debt reserves, which could result in increased federal income tax liability for
the Bank.
Unlike the Bank, generally there is no regulatory restriction on the
payment of dividends by MCHI. Indiana law, however, would prohibit MCHI from
paying a dividend if, after giving effect to the payment of that dividend, MCHI
would not be able to pay its debts as they become due in the ordinary course of
business or if MCHI's total assets would be less than the sum of its total
liabilities plus preferential rights of holders of preferred stock, if any.
Item 6. Selected Consolidated Financial Data
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,
-------------------------------------------------------------
2000 1999 1998 1997 1996
-------- ---------- -------- -------- ---------
(In Thousands)
Summary of Financial Condition:
<S> <C> <C> <C> <C> <C>
Total assets......................................... $198,867 $197,101 $193,963 $173,304 $177,767
Loans, net........................................... 164,978 165,797 163,598 148,031 143,165
Loans held for sale.................................. --- 327 877 --- ---
Cash and investment securities....................... 9,521 11,873 10,186 11,468 21,578
Cash value of life insurance......................... 11,422 5,887 5,616 5,994 5,588
Real estate limited partnerships..................... 3,942 4,713 4,883 1,449 1,624
Deposits............................................. 130,683 142,087 134,415 121,770 126,260
Borrowings........................................... 31,834 18,774 17,319 8,229 6,241
Shareholders' equity................................. 31,785 31,744 37,657 39,066 41,511
YEAR ENDED JUNE 30,
-------------------------------------------------------------
2000 1999 1998 1997 1996
-------- ---------- -------- -------- ---------
Summary of Operating Results:
Interest income...................................... $ 14,696 $ 14,981 $ 14,333 $ 13,733 $ 13,740
Interest expense..................................... 7,773 7,656 7,093 6,707 6,853
------- --------- ------- -------- --------
Net interest income............................... 6,923 7,325 7,240 7,026 6,887
Provision for losses on loans........................ 495 227 59 58 34
------- --------- ------- -------- --------
Net interest income after
provision for losses on loans................... 6,428 7,098 7,181 6,968 6,853
------- --------- ------- -------- --------
Other income:
Net loan servicing fees........................... 80 81 78 86 81
Annuity and other commissions..................... 194 150 142 153 147
Losses from limited partnerships.................. (771) (171) (200) (305) (193)
Life insurance income and death benefits.......... 1,005 272 175 808 117
Other income...................................... 705 457 209 181 95
------- --------- ------- -------- --------
Total other income................................ 1,213 789 404 923 247
------- --------- ------- -------- --------
Other expense:
Salaries and employee benefits.................... 2,783 2,686 2,556 2,881 2,413
Other................................................ 2,102 1,894 1,846 2,170 1,293
------- --------- ------- -------- --------
Total other expense............................. 4,885 4,580 4,402 5,051 3,706
------- --------- ------- -------- --------
Income before income tax ............................ 2,756 3,307 3,183 2,840 3,394
Income tax expense................................... 291 1,183 859 400 913
------- --------- ------- -------- --------
Net Income........................................ $ 2,465 $ 2,124 $ 2,324 $ 2,440 $ 2,481
======= ========= ======= ======== ========
Supplemental Data:
Basic earnings per share............................. $ 1.79 $ 1.38 $ 1.32 $ 1.35 $ 1.27
Diluted earnings per share........................... 1.78 1.36 1.29 1.31 1.23
Book value per common share at end of year........... 23.29 22.28 22.16 22.09 21.47
Return on assets (1)................................. 1.25% 1.09% 1.25% 1.40% 1.41%
Return on equity (2)................................. 7.78 6.15 5.94 6.09 5.86
Interest rate spread (3)............................. 3.34 3.42 3.37 3.21 3.01
Net yield on interest earning assets (4)............. 3.91 4.12 4.28 4.29 4.17
Operating expenses to average assets (5)............. 2.49 2.34 2.36 2.89 2.11
Net interest income to operating expenses (6)........ 1.42x 1.60x 1.64x 1.39x 1.86x
Equity-to-assets at end of year (7).................. 15.98 16.11 19.41 22.54 23.35
Average equity to average total assets............... 16.13 17.63 21.00 22.89 24.09
Average interest-earning assets to average
interest-bearing liabilities...................... 113.06 116.21 121.82 126.34 127.93
Non-performing assets to total assets................ 1.06 1.69 1.02 .81 1.07
Non-performing loans to total loans (8).............. 1.22 1.98 1.16 .94 1.18
Loan loss reserve to total loans (8)................. 1.36 1.35 1.25 1.35 1.38
Loan loss reserve to non-performing loans............ 112.11 68.24 107.71 143.98 117.07
Net charge-offs to average loans..................... .29 .03 .--- .02 .03
Number of full service offices....................... 3 4 4 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.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The principal business of thrift institutions, including the Bank, has
historically consisted of attracting deposits from the general public and making
loans secured by residential and commercial real estate. The Bank 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.
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,
------------------------------------------------------------------------------
2000 1999 1998
------------------------- ------------------------ -------------------------
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........$ 4,680 $ 235 5.02% $ 4,458 $ 211 4.73% $ 4,020 $ 287 7.14%
Investment securities............ 2,981 189 6.34 3,690 230 6.23 5,739 333 5.80
Loans (1) .................... 168,027 14,160 8.43 168,542 14,448 8.57 158,212 13,627 8.61
Stock in FHLB of Indianapolis.... 1,399 112 8.01 1,141 92 8.06 1,067 86 8.06
------- ------ ------ ------ ------ -------
Total interest-earning assets. 177,087 14,696 8.30 177,831 14,981 8.42 169,038 14,333 8.48
Cash value of life insurance.......... 8,203 --- 5,708 --- 5,616 ---
Other non-interest earning assets..... 11,279 --- 12,196 --- 11,641 ---
------- ------ ------ ------ ------ -------
Total assets................... $196,569 $14,696 $195,735 14,981 $186,295 14,333
======== ------ ======== ----- ======== -------
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts................. $13,368$ 297 2.22 $ 15,663 402 2.57 $ 15,983 447 2.80
NOW and money market accounts.... 25,278 693 2.74 26,232 768 2.93 25,071 830 3.31
Certificates of deposit.......... 94,675 5,326 5.63 96,005 5,567 5.80 86,867 5,164 5.94
------- ------ ------ ------ ------ -------
Total deposits................ 133,321 6,316 4.74 137,900 6,737 4.89 127,921 6,441 5.04
FHLB borrowings.................. 23,313 1,457 6.25 15,132 919 6.07 10,840 652 6.01
------- ------ ------ ------ ------ -------
Total interest-bearing
liabilities................... 156,634 7,773 4.96 153,032 7,656 5.00 138,761 7,093 5.11
Other liabilities .................... 8,233 --- 8,187 --- 8,409 ---
------ ------ ------ ------ ------ -------
Total liabilities.............. 164,867 7,773 161,219 --- 147,170 ---
Shareholders' equity.................. 31,702 --- 34,516 --- 39,125 ---
------ ------ ------ ------ ------ -------
Total liabilities and
shareholders' equity......... $196,569 7,773 $195,735 7,656 $186,295 7,093
======== ------ ======== ----- ======== -------
Net interest-earning assets........... $20,453 $ 24,799 $ 30,277
Net interest income................... $6,923 $ 7,325 $ 7,240
====== ======= =======
Interest rate spread (2).............. 3.34 3.42 3.37
Net yield on weighted average
interest-earning assets (3)...... 3.91 4.12 4.28
Average interest-earning
assets to average
interest-bearing liabilities..... 113.06% 116.21% 121.82%
====== ====== ======
</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. 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.
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, 2000 2000 1999 1998
------------- ---- ---- ----
Weighted average interest rate earned on:
<S> <C> <C> <C> <C>
Interest-earning deposits................. 6.11% 5.02 4.73% 7.14%
Investment securities..................... 6.62 6.34 6.23 5.80
Loans (1) ............................. 8.57 8.43 8.57 8.61
Stock in FHLB of Indianapolis............. 8.00 8.01 8.06 8.06
Total interest-earning assets......... 8.48 8.30 8.42 8.48
Weighted average interest rate cost of:
Savings accounts.......................... 2.25 2.22 2.57 2.80
NOW and money market accounts............. 2.84 2.74 2.93 3.31
Certificates of deposit................... 5.90 5.63 5.80 5.94
FHLB borrowings........................... 6.42 6.25 6.07 6.01
Total interest-bearing liabilities.... 5.24 4.96 5.00 5.11
Interest rate spread (2)....................... 3.24 3.34 3.42 3.37
Net yield on weighted average
interest-earning assets (3)............... 3.91 4.12 4.28
</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 the
Company'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, 2000, because the computation of net yield is applicable only over a
period rather than at a specific date.
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, 2000
compared to year
ended June 30, 1999
<S> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits................... $ 24 $ 13 $ 11
Investment securities....................... (41) 4 (45)
Loans....................................... (288) (244) (44)
Stock in FHLB of Indianapolis............... 20 (1) 21
------ ------- ------
Total..................................... (285) (228) (57)
------ ------- ------
Interest-bearing liabilities:
Savings accounts............................ (105) (50) (55)
NOW and money market accounts............... (75) (48) (27)
Certificates of deposit..................... (241) (165) (76)
FHLB advances............................... 538 27 511
------ ------- ------
Total..................................... 117 (236) 353
------ ------- ------
Change in net interest income................... $ (402) $ 8 $ (410)
====== ======= ======
Year ended June 30, 1999
compared to year
ended June 30, 1998
Interest-earning assets:
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)
====== ======= =======
</TABLE>
Changes in Financial Position and Results of Operations for Year Ended June 30,
2000, Compared to June 30, 1999
General. The Company's total assets were $198.9 million at June 30,
2000, an increase of $1.8 million or 0.9% from June 30, 1999. Cash and cash
equivalents and investment securities decreased $2.4 million, or 19.8%. Net
loans, including loans held for sale, decreased $1.1 million, or 0.7%, as
principal repayments exceeded originations. 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, 2000, no loans were held for
sale pending settlement. At June 30, 2000, cash value of life insurance
increased by $5.5 million primarily as the result of purchasing life insurance
on key directors and a key employee in connection with new supplemental
retirement agreements. Effective February 1, 2000, these agreements were
designed to provide benefits at retirement age as set forth in the agreements.
During 2000, average interest-earning assets decreased $0.7 million, or 0.4%,
while average interest-bearing liabilities increased $3.6 million, or 2.4%,
compared to June 30, 1999. The average balance of cash value of life insurance
for 2000 increased to $8.2 million from $5.7 million for 1999.
Deposits decreased $11.4 million, to $130.7 million, or 8.0%, at June
30, 2000, from the amount at June 30, 1999. Approximately $9.0 million of
deposits were sold to another financial institution as of September 3, 1999, as
part of the Decatur Branch sale. To fund assets and with the decrease in
deposits, Federal Home Loan Bank advances increased from $15.5 million to June
30, 1999, to $29.0 million at June 30, 2000.
The Company's net income for the year ended June 30, 2000 was $2.5
million, an increase of $340,000, or 16.0% from the results for the year ended
June 30, 1999. This increase in net income resulted substantially from a
decreased effective tax rate from 36% to 11%. This decrease in the effective tax
rate was primarily the result of the commencement of federal income tax credits
generated from an investment in a limited partnership and the receipt of
non-taxable death benefit proceeds of $767,000. Net interest income decreased
$402,000, or 5.5% from the previous year. The provision for losses on loans was
$495,000 for 2000 compared to $227,000 for 1999. Other income increased by
$424,000 for 2000 over 1999.
Interest Income. The Company's total interest income for the year ended
June 30, 2000 was $14.7 million, which was a 1.9% decrease, or $285,000, from
interest income for the year ended June 30, 1999. This decrease was a result of
volume and rate decreases in interest-earning assets.
Interest Expense. Total interest expense for the year ended June 30,
2000, was $7.8 million, which was an increase of $117,000, or 1.5% from interest
expense for the year ended June 30, 1999. This increase resulted principally
from an increase in interest-bearing liabilities while average interest costs
declined from 5.00% to 4.96%.
Provision for Losses on Loans. The provision for the year ended June
30, 2000, was $495,000, compared to $227,000 in 1999. The 2000 net chargeoffs
totaled $484,000, compared to the prior year net chargeoffs of $42,000.
Chargeoffs for 2000 include $327,000 for a partial loan chargeoff attributable
to one borrower involving loans secured by commercial real estate. The ratio of
the allowance for loan losses to total loans increased from 1.35% at June 30,
1999, to 1.36% at June 30, 2000. The ratio of allowance for loan losses to
nonperforming loans increased from 68.24% at June 30, 1999, to 121.14% at June
30, 2000, as a result of a decrease in nonperforming loans. The 2000 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 or
problem 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 a percentage of
loans outstanding to 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 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, the Company 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. The Company's other income for the year ended June 30,
2000, totaled $1,231,000, compared to $789,000 for 1999, an increase of
$442,000. This increase was due primarily to receipt of death benefit proceeds
resulting in additional income of $767,000, the gain on sale of the Decatur
Branch of $232,000, and an increase in annuity and other commissions of $43,000,
which were partially offset by an increase in operating and impairment losses
from limited partnership investments. Losses from limited partnerships increased
as operations commenced on a new low-income housing tax credit project. This new
project is performing in accordance with the original pro forma statements.
Other Expenses. The Company's other expenses for the year ended June
30, 2000, totaled $4.9 million, an increase of $305,000, or 6.7%, from the year
ended June 30, 1999. Salaries and employee benefits expense increased $96,000 or
3.6% from the previous year. Operations for 2000 included $120,000 in merger
related expenses from preliminary professional services rendered in connection
with the strategic alliance with MutualFirst Financial, Inc. scheduled to be
completed by calendar year end.
Income Tax Expense. Income tax expense for the year ended June 30,
2000, totaled $291,000, a decrease of $891,000 from the expense recorded in
1999, as low-income housing credits increased for 2000 compared to 1999.
Low-income housing tax credits totaled $455,000 and $11,000 for the years ended
June 30, 2000, and 1999, respectively.
Changes in Financial Position and Results of Operations for Year Ended June 30,
1999, Compared to June 30, 1998
General. The Company'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.
The Company'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. The Company'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, the Company 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. The Company'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 the Company of $96,000.
Other Expenses. The Company'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 the Company 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.
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. The Bank attempts to price its deposits to meet its
asset/liability management objectives consistent with local market conditions.
The Bank's access to FHLB advances is limited to approximately 62% of the Bank's
available collateral. At June 30, 2000, such available collateral totaled $99.8
million. Based on existing FHLB lending policies, the Company could have
obtained approximately $29.1 million in additional advances.
The Bank's deposits have remained relatively stable, with balances between
$143 and $130 million, for the three years in the period ended June 30, 2000.
The percentage of IRA deposits to total deposits has decreased from 24.4% ($29.7
million) at June 30, 1997, to 22.0% ($28.9 million) at June 30, 2000. During the
same period, deposits in withdrawable accounts have decreased from 30.3% ($36.9
million) of total deposits at June 30, 1997, to 29.0% ($37.9 million) at June
30, 2000. This change in deposit composition has not had a significant effect on
the Bank's liquidity. The impact on results of operations from this change in
deposit composition has been a reduction in interest expense on deposits due to
a decrease in the average cost of funds. It is estimated that yields and net
interest margin would increase in periods of rising interest rates since
short-term assets reprice more rapidly than short-term liabilities. In periods
of falling interest rates, little change in yields or net interest margin is
expected since the Bank has interest rate minimums on a significant portion of
its interest-earning assets.
Federal regulations require the Bank to maintain minimum levels of liquid
assets (cash, certain time deposits, bankers' acceptances, specified United
States Government, state or federal agency obligations, shares of mutual funds
and certain corporate debt securities and commercial paper) equal to an amount
not less than a specified percentage of its net withdrawable deposit accounts
plus short-term borrowings. This liquidity requirement may be changed from time
to time by the OTS to an amount within the range of 4% to 10% depending upon
economic conditions and savings flows of member institutions. The OTS recently
lowered the level of liquid assets that must be held by a savings association
from 5% to 4% of the association's net withdrawable accounts plus short-term
borrowings based upon the average daily balance of such liquid assets for each
quarter of the association's fiscal year. The Bank has historically maintained
its liquidity ratio at a level in excess of that required. At June 30, 2000, the
Bank's liquidity ratio was 8.5% and has averaged 8.6% over the past three years.
Liquidity management is both a daily and long-term responsibility of
management. The Bank 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
the Bank 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, 2000:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------
2000 1999 1998
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Operating activites.......................... $ 2,645 $3,069 $ 1,436
------- ------ --------
Investing activities:
Investment purchases.................... (1,928) --- (737)
Investment maturities................... 2,000 2,003 2,844
Net change in loans..................... 261 (2,164) (15,375)
Cash received in branch acquisition..... --- --- 11,873
Premiums paid on life insurance......... (5,950) --- ---
Proceeds from life insurance............ 1,420 --- 554
Cash disbursed in branch sale........... (8,593) --- ---
Other investing activities.............. (336) (297) (420)
------- ------ --------
(13,126) (458) (1,261)
------- ------ --------
Financing activities:
Deposit increases (decreases)........... (2,473) 7,672 (220)
Borrowings.............................. 20,200 4,267 10,656
Payments on borrowings.................. (7,140) (2,811) (5,201)
Repurchase of common stock.............. (1,308) (6,891) (2,707)
Dividends paid.......................... (1,211) (1,346) (1,557)
Other financing activities.............. 106 216 366
------- ------ --------
8,174 1,107 1,337
------- ------ --------
Net change in cash and cash equivalents...... $(2,307) $3,718 $ 1,512
======= ====== ========
</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
fund or refinance, on a timely basis, its other material commitments and
long-term liabilities. At June 30, 2000, the Company had outstanding commitments
to originate mortgage loans of $1.6 million. In addition, the Company had
consumer and commercial loan commitments of $6.8 million. Certificates of
deposit scheduled to mature in one year or less at June 30, 2000, totalled $39.7
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,
2000, the Company had $15.9 million of FHLB advances which mature in one year or
less.
Since the Bank's conversion in March 1993, the Company 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, 2000.
During the year ended June 30, 2000, the Company repurchased 70,700 shares
of common stock in the open market at an average cost of $18.51, or 81% of
average book value. This repurchase amounted to 5% of the oustanding stock.
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, the Company 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, the Company has reduced its capital ratio from 24.24% at
June 30, 1995, to 15.98% at June 30, 2000. At the same time, the liquidity ratio
has been reduced from 18.2% at June 30, 1995, to 8.5% at June 30, 2000. Although
these repurchases have reduced the liquidity ratios, the Company still maintains
an adequate level of liquid assets averaging 8.6% over the past three years in
view of current OTS requirements of 5%. By completing these repurchase programs,
the Company 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
the Company.
The Bank 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 the Bank on the lives of the officers
and directors. If the insurance companies issuing the policies are not able to
perform under the contracts at the dates of death of the officers or directors,
there would be an adverse effect on the Company's operating results, financial
condition and liquidity. Under currently effective capital regulations, savings
associations currently must meet a 4.0% core capital requirement and a total
risk-based capital to risk-weighted assets ratio of 8.0%. At June 30, 2000, the
Bank's core capital ratio was 14.2% and its total risk-based capital to
risk-weighted assets ratio was 20.4%. Therefore, the Bank'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 the Bank
are monetary in nature. As a result, interest rates have a more significant
impact on the Bank'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 the Bank's assets and
liabilities are critical to the maintenance of acceptable performance levels.
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of other expense. Such expense items as
employee compensation, employee benefits, and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans made by the Bank.
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.
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Asset/Liability Management
The Bank 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.
The Bank 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.
The Bank 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. The Bank 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 related is a decrease in the institution's NPV
in an amount not exceeding 2% of the present value of its assets. Savings
associations with over $300 million in assets or less than a 12% risk-based
capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is
used by the OTS to calculate changes in NPV (and the related "normal" level of
interest rate risk) based upon certain interest rate changes (discussed below).
Associations which do not meet either of the filing requirements are not
required to file OTS Schedule CMR, but may do so voluntarily. As the Bank 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, 2000 and 1999, is an analysis performed by
the OTS of the Bank'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, 2000 and 1999, 2% of
the present value of the Bank's assets were approximately $3.9 million and $3.9
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 $1.2 million at June 30, 2000 and $1.8 million at June 30, 1999,
the Bank 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, 2000
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>
+ 300 bp * $30,465 $(1,736) (5)% 16.33% (27) bp
+ 200 bp 31,504 (697) (2) 16.63 3 bp
+ 100 bp 32,134 (67) 0 16.74 14 bp
0 bp 32,201 16.60
- 100 bp 31,771 (429) (1) 16.24 (36) bp
- 200 bp 30,993 (1,207) (4) 15.73 (86) bp
- 300 bp 30,499 (1,702) (5) 15.35 (125) bp
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)
+ 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
</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 the
Bank'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 7.5%. 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 the Bank 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>
Item 8. Financial Statements and Supplementary Data.
Marion Capital Holdings, Inc. and Subsidiaries
Consolidated Financial Statements
June 30, 2000 and 1999
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, 2000 and 1999,
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended June 30, 2000. 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, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2000, in conformity with generally accepted accounting
principles.
/s/ Olive LLP
Indianapolis, Indiana
July 21, 2000
<PAGE>
Marion Capital Holdings, Inc. and Subsidiaries
Consolidated Statement of Financial Condition
<TABLE>
<CAPTION>
June 30 2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 3,064,789 $ 2,225,804
Short-term interest-bearing deposits 3,480,337 6,626,884
-------------------------------------
Total cash and cash equivalents 6,545,126 8,852,688
Investment securities available for sale 2,975,750 3,020,000
Loans held for sale 326,901
Loans, net of allowance for loan losses
of $2,282,634 and $2,271,701 164,977,577 165,797,406
Premises and equipment 1,694,771 2,008,157
Federal Home Loan Bank of Indianapolis stock, at cost 1,654,900 1,163,600
Cash value of life insurance 11,422,443 5,887,166
Investment in limited partnerships 3,941,675 4,712,675
Other assets 5,654,682 5,332,896
-------------------------------------
Total assets $198,866,924 $197,101,489
-------------------------------------
Liabilities
Deposits $130,683,323 $142,087,269
Borrowings 31,834,055 18,774,076
Other liabilities 4,564,348 4,496,577
-------------------------------------
Total liabilities 167,081,726 165,357,922
-------------------------------------
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--1,364,695 and 1,424,550 shares 8,107,140 8,001,048
Retained earnings 23,673,789 23,728,895
Accumulated other comprehensive income 4,269 13,624
-------------------------------------
Total shareholders' equity 31,785,198 31,743,567
-------------------------------------
Total liabilities and shareholders' equity $198,866,924 $197,101,489
=====================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Marion Capital Holdings, Inc. and Subsidiaries
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Ended June 30 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------
Interest Income
<S> <C> <C> <C>
Loans $14,160,539 $14,447,985 $13,627,462
Investment securities 188,572 230,054 332,864
Deposits with financial institutions 234,605 211,059 286,565
Dividend income 111,723 91,407 86,124
--------------------------------------------------
Total interest income 14,695,439 14,980,505 14,333,015
--------------------------------------------------
Interest Expense
Deposits 6,316,023 6,736,962 6,440,939
Borrowings 1,456,808 918,674 651,859
--------------------------------------------------
Total interest expense 7,772,831 7,655,636 7,092,798
--------------------------------------------------
Net Interest Income 6,922,608 7,324,869 7,240,217
Provision for loan losses 494,528 227,184 59,223
--------------------------------------------------
Net Interest Income After Provision for Loan Losses 6,428,080 7,097,685 7,180,994
--------------------------------------------------
Other Income
Net loan servicing fees 80,096 81,732 78,063
Annuity and other commissions 193,625 150,272 141,717
Losses from limited partnerships (771,000) (170,500) (200,100)
Service charges on deposit accounts 348,560 283,241 132,656
Net gains on loan sales 26,615 83,855 22,962
Gain on sale of branch office 231,626
Life insurance income and death benefits 1,005,079 271,500 175,043
Other income 97,831 88,677 53,268
--------------------------------------------------
Total other income 1,212,432 788,777 403,609
--------------------------------------------------
Other Expenses
Salaries and employee benefits 2,782,613 2,686,330 2,555,869
Net occupancy expenses 254,602 269,719 246,544
Equipment expenses 140,272 133,697 98,923
Deposit insurance expense 102,513 131,746 128,868
Foreclosed real estate expenses and losses (gains), net 96,096 (3,582) 190,199
Data processing expense 316,345 313,528 226,936
Advertising 70,457 112,760 156,208
Merger expenses 120,453
Other expenses 1,001,526 935,603 797,968
--------------------------------------------------
Total other expenses 4,884,877 4,579,801 4,401,515
--------------------------------------------------
Income Before Income Tax 2,755,635 3,306,661 3,183,088
Income tax expense 291,028 1,182,235 858,755
--------------------------------------------------
Net Income $ 2,464,607 $ 2,124,426 $ 2,324,333
==================================================
Basic Earnings Per Share $1.79 $1.38 $1.32
==================================================
Diluted Earnings Per Share $1.78 $1.36 $1.29
==================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Marion Capital Holdings, Inc. and Subsidiaries
Consolidated Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Accumulated Other
Common Stock Comprehensive Retained Unearned Comprehensive
Shares Amount Income Earnings Compensation Income (Loss) Total
------ ------ ------ -------- ------------ ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, July 1, 1997 1,768,099 $10,126,365 $29,074,055 $(132,640) $(1,961) $39,065,819
Comprehensive income, net of tax
Net income $2,324,333 2,324,333 2,324,333
Unrealized gains on securities 32,293 32,293 32,293
----------
$2,356,626
==========
Cash dividends ($.88 per share) (1,557,284) (1,557,284)
Repurchase of common stock (96,979) (2,706,834) (2,706,834)
Exercise of stock options 28,187 176,126 176,126
Amortization of unearned
compensation expense 132,640 132,640
Tax benefit of stock
options exercised and RRP 189,534 189,534
------------------------- ------------------------------------------------------
Balances, June 30, 1998 1,699,307 7,785,191 29,841,104 0 30,332 37,656,627
Comprehensive income, net of tax
Net income $2,124,426 2,124,426 2,124,426
Unrealized losses on securities (16,708) (16,708) (16,708)
----------
$2,107,718
==========
Cash dividends ($.88 per share) (1,345,651) (1,345,651)
Repurchase of common stock (292,550) (6,890,984) (6,890,984)
Exercise of stock options 17,793 108,875 108,875
Tax benefit of stock options
exercised and RRP 106,982 106,982
------------------------- ------------------------------------------------------
Balances, June 30, 1999 1,424,550 8,001,048 23,728,895 0 13,624 31,743,567
Comprehensive income, net of tax
Net income $2,464,607 2,464,607 2,464,607
Unrealized losses on securities (9,355) (9,355) (9,355)
----------
$2,455,252
==========
Cash dividends ($.88 per share) (1,211,300) (1,211,300)
Repurchase of common stock (70,700) (1,308,413) (1,308,413)
Exercise of stock options 10,845 85,741 85,741
Tax benefit of stock options
exercised and RRP 20,351 20,351
------------------------- -------------------------------------------------------
Balances, June 30, 2000 1,364,695 $ 8,107,140 $23,673,789 $ 0 $4,269 $31,785,198
========================= =======================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Marion Capital Holdings, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C> <C>
Net income $2,464,607 $2,124,426 $2,324,333
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for loan losses 494,528 227,184 59,223
Provision (adjustment) for losses of foreclosed real estate 26,229 (27,325)
Losses from limited partnerships 771,000 170,500 200,100
Amortization of net loan origination fees (193,961) (232,036) (194,372)
Depreciation and amortization 192,228 183,292 133,743
Amortization of unearned compensation 132,640
Amortization of core deposits and goodwill 96,791 104,006 63,124
Gain on sale of branch office (231,626)
Loans sold gains (26,615) (83,855) (22,962)
Deferred income tax (450,864) 235,357 (55,341)
Origination of loans for sale (1,225,920) (8,402,745) (5,749,103)
Proceeds from sale of loans 1,579,436 8,953,153 4,871,794
Changes in
Interest receivable (41,409) 77,633 (258,702)
Interest payable and other liabilities 117,841 (64,569) 314,647
Cash value of life insurance (1,005,079) (271,500) (175,043)
Prepaid expense and other assets 150,135 53,363 (146,037)
Other (72,280) (4,669) (34,643)
------------------------------------------------
Net cash provided by operating activities 2,645,041 3,069,540 1,436,076
------------------------------------------------
Investing Activities
Purchase of securities available for sale (1,927,862)
Proceeds from maturities of securities available for sale 2,000,000
Proceeds from maturities of securities held to maturity 2,002,770 2,843,964
Net changes in loans 261,426 (2,164,099) (15,375,499)
Proceeds from real estate owned sales 193,679
Purchase of FHLB stock (491,300) (29,200) (87,100)
Purchase of premises and equipment (38,855) (267,477) (419,583)
Proceeds from life insurance 1,419,803 553,793
Premiums paid on life insurance (5,950,000)
Investment in insurance company (650,000)
Cash received in branch acquisition 11,873,327
Net cash disbursed in sale of branch office (8,593,288)
------------------------------------------------
Net cash used by investing activities (13,126,397) (458,006) (1,261,098)
------------------------------------------------
Financing Activities
Net change in
Demand and savings deposits 5,169,311 (2,183,283) 1,325,530
Certificates of deposit (7,641,875) 9,855,083 (1,545,351)
Proceeds from Federal Home Loan Bank advances 20,200,000 4,266,580 10,656,000
Repayment of borrowings (7,140,021) (2,811,212) (5,200,674)
Dividends paid (1,211,300) (1,345,651) (1,557,284)
Exercise of stock options 106,092 215,857 365,660
Repurchase of common stock (1,308,413) (6,890,984) (2,706,834)
------------------------------------------------
Net cash provided by financing activities 8,173,794 1,106,390 1,337,047
------------------------------------------------
Net Change in Cash and Cash Equivalents (2,307,562) 3,717,924 1,512,025
Cash and Cash Equivalents, Beginning of Year 8,852,688 5,134,764 3,622,739
------------------------------------------------
Cash and Cash Equivalents, End of Year $6,545,126 $8,852,688 $5,134,764
================================================
Additional Cash Flows and Supplementary Information
Interest paid $7,722,033 $7,338,583 $7,034,447
Income tax paid 679,000 845,000 856,139
Loan balances transferred to foreclosed real estate 349,968 1,137,759
Loans to finance the sale of foreclosed real estate 99,500 1,171,881
Loan payable to limited partnership 3,634,406
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Marion Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 1-- Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of Marion Capital Holdings, Inc. (Company)
and its wholly owned subsidiary, First Federal Savings Bank of Marion (Bank) and
the Bank's wholly owned subsidiary, First Marion Service Corporation (FMSC),
conform to generally accepted accounting principles and reporting practices
followed by the thrift industry. The more significant of the policies are
described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company is a thrift holding company whose principal activity is the
ownership and management of the Bank. The Bank operates under a federal thrift
charter and provides full banking services. As a federally chartered thrift, the
Bank is subject to regulation by the Office of Thrift Supervision and the
Federal Deposit Insurance Corporation.
The Bank generates residential and commercial mortgage and consumer loans and
receives deposits from customers located primarily in central Indiana. The
Bank's loans are generally secured by specific items of collateral including
real property and consumer assets. FMSC is engaged in the selling of financial
services.
Consolidation--The consolidated financial statements include the accounts of the
Company, the Bank and the Bank's subsidiary after elimination of all material
intercompany transactions and accounts.
Investment Securities--Debt securities are classified as held to maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost. Debt
securities not classified as held to maturity are classified as available for
sale. Securities available for sale are carried at fair value with unrealized
gains and losses reported separately 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>
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, 2000, 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.
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.
<PAGE>
Marion Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 2 -- Merger Information
In June 2000, the Company entered into a definitive agreement (agreement) to
merge with MutualFirst Financial, Inc. (Mutual), Muncie, Indiana. Under the
agreement, shareholders of the Company would receive 1.862 shares of Mutual
common stock for each share of Company common stock owned. The merger will be
accounted for using the purchase method of accounting. The merger is subject to
approval by the Company shareholders and regulatory agencies and is expected to
be consummated before the end of the calendar year 2000.
The Company agreed to pay a transaction fee to an investment banking firm of
1.00% of the total fair market value of any securities issued and any non-cash
and cash consideration received as of closing of the merger. The Company paid
$25,000 of the transaction fee during the year ended June 30, 2000. An
additional $25,000 is due upon mailing of proxy material to shareholders with
the balance due at closing. In addition, the Company agreed to pay $35,000 to a
separate investment banking firm for a fairness opinion (opinion). The Company
has paid $26,250 of the fee during the year ended June 30, 2000, with the
balance due upon delivery of the opinion. Both of the fees paid during the year
ended June 30, 2000 are included in merger expenses and charged against net
income for the year ended June 30, 2000.
Note 3 -- Investment Securities
<TABLE>
<CAPTION>
2000
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Federal agencies $2,969 $19 $12 $2,976
------------------------------------------------------------
Total investment securities $2,969 $19 $12 $2,976
============================================================
1999
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
--------------------------------------------------------------------------------------------
Available for sale
Federal agencies $2,997 $23 $3,020
------------------------------------------------------------
Total investment securities $2,997 $23 $0 $3,020
============================================================
</TABLE>
The amortized cost and fair value of securities available for sale at June 30,
2000, 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.
2000
------------------------------
Available for sale
Amortized Fair
Maturity Distribution at June 30 Cost Value
-----------------------------------------------------------------------------
Within one year $1,973 $1,988
One to five years 996 988
------------------------------
Totals $2,969 $2,976
==============================
<PAGE>
Marion Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 4 -- Loans and Allowance
June 30 2000 1999
--------------------------------------------------------------------------------
Real estate mortgage loans
One-to-four family $ 108,668 $ 105,177
Multi-family 8,549 9,295
Commercial real estate 31,231 32,918
Real estate construction loans 5,297 6,332
Commercial 10,640 10,914
Consumer loans 5,722 6,899
--------------------------------
170,107 171,535
Undisbursed portion of loans (2,611) (3,196)
Deferred loan fees (235) (270)
Allowance for loan losses (2,283) (2,272)
--------------------------------
Total loans, net of allowance $ 164,978 $ 165,797
================================
Information on impaired loans is summarized below.
<TABLE>
<CAPTION>
June 30 2000 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans with an allowance $2,055 $1,585
Impaired
loans for which the discounted cash flows
or collateral value exceeds the carrying value of the loan 95 615
----------------------------
Total impaired loans $2,150 $2,200
============================
Allowance for impaired loans (included in the
Company's allowance for loan losses) $721 $409
Year Ended June 30 2000 1999
------------------------------------------------------------------------------------------------------------------------
Average balance of impaired loans $2,196 $1,622
Interest income recognized on impaired loans 66 77
Cash-basis interest included above 66 77
2000 1999 1998
------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses
Balances, July 1 $2,272 $2,087 $2,032
Provision for losses 495 227 59
Recoveries on loans 42 18
Loans charged off (526) (42) (22)
------------------------------------------------
Balances, June 30 $2,283 $2,272 $2,087
================================================
</TABLE>
<PAGE>
Marion Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 5 -- Premises and Equipment
June 30 2000 1999
--------------------------------------------------------------------------------
Land $ 627 $ 654
Buildings and land improvements 1,493 1,719
Leasehold improvements 192 192
Furniture and equipment 692 714
-------------------------------
Total cost 3,004 3,279
Accumulated depreciation and amortization (1,309) (1,271)
-------------------------------
Net $ 1,695 $ 2,008
===============================
Note 6 -- Other Assets and Other Liabilities
June 30 2000 1999
Other assets
Interest receivable
Investment securities $ 31 $ 46
Loans 985 928
Foreclosed assets 70
Deferred income tax asset 3,053 2,597
Investment in insurance company 650 650
Core deposit intangibles and goodwill 602 698
Prepaid expenses and other 264 414
-------------------------------
Total $5,655 $5,333
===============================
Other liabilities
Interest payable
Deposits $ 119 $ 103
Other borrowings 73 38
Deferred compensation and fees payable 2,681 2,631
Deferred gain on sale of real estate owned 324 326
Advances by borrowers for taxes and insurance 187 202
Other 1,180 1,197
-------------------------------
Total $4,564 $4,497
===============================
<PAGE>
Marion Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 7 -- Investment in Limited Partnerships
The Bank has an investment of approximately $3,942,000 and $4,713,000 at June
30, 2000 and 1999 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. 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 $455,000 for 2000, $11,000 for 1999 and $338,000 for 1998. Condensed
combined financial statements of the partnerships are as follows:
June 30 2000 1999
--------------------------------------------------------------------------------
(Unaudited)
Condensed statement of financial condition
Assets
Cash $ 68 $ 167
Land and property 8,002 8,173
Other assets 353 393
-------------------------
Total assets $8,423 $8,733
=========================
Liabilities
Notes payable $7,313 $7,292
Other liabilities 306 450
-------------------------
Total liabilities 7,619 7,742
Partners' equity 804 991
-------------------------
Total liabilities and partners' equity $8,423 $8,733
=========================
Year Ended June 30 2000 1999 1998
--------------------------------------------------------------------------------
(Unaudited)
Condensed statement of operations
Total revenue $ 941 $ 704 $ 699
Total expense 1,408 854 926
----------------------------------------
Net loss $ (467) $ (150) $ (227)
========================================
<PAGE>
Marion Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 8 -- Deposits
June 30 2000 1999
--------------------------------------------------------------------------------
Demand $ 25,232 $ 26,825
Savings 12,622 14,791
Certificates and other time deposits
of $100,000 or more 14,438 14,561
Other certificates and time deposits 78,391 85,910
--------------------------------
Total deposits $130,683 $142,087
================================
Certificates and other time deposits maturing in years ending June 30:
2001 $39,689
2002 16,938
2003 9,343
2004 6,985
2005 19,869
Thereafter 5
---------
$92,829
=========
Deposits from related parties held by the Bank totaled $927,000 and $2,134,000
at June 30, 2000 and 1999.
During the year ended June 30, 2000, the Company sold its Decatur office,
including deposits of $8,931,000.
Note 9 -- Borrowings
June 30 2000 1999
--------------------------------------------------------------------------------
Federal Home Loan Bank (FHLB) advances $29,008 $15,534
Note payable to Pedcor-97, due in installments
to August 2008 2,826 3,240
---------------------------
$31,834 $18,774
===========================
<PAGE>
Marion Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
2000
--------------------------
Weighted-
Average
June 30 Amount Rate
--------------------------------------------------------------------------------
FHLB advances Maturities in years ending June 30:
2001 $15,855 6.64%
2002 3,790 6.28
2003 3,302 6.22
2004 3,320 5.73
2005 332 6.31
Thereafter 2,409 6.44
-----------
$29,008 6.42%
===========
The FHLB advances are secured by first-mortgage loans and investment securities
totaling $99,795,000 and $99,505,000 at June 30, 2000 and 1999. 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:
--------------------------------------------------------------------------------
2001 $ 388
2002 382
2003 376
2004 374
2005 366
Thereafter 940
---------
$2,826
=========
<PAGE>
Marion Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 10 -- 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 $33,534,000, $38,329,000 and $32,484,000 at June 30, 2000, 1999 and
1998.
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.
2000 1999 1998
--------------------------------------------------------------------------------
Mortgage servicing rights
Balances, July 1 $127 $ 58 $43
Servicing rights capitalized 26 83 24
Amortization of servicing rights (24) (14) (9)
------------------------------------
Balances, June 30 $129 $127 $58
====================================
Note 11 -- Income Tax
Year Ended June 30 2000 1999 1998
--------------------------------------------------------------------------------
Currently payable
Federal $ 569 $ 654 $ 645
State 173 293 269
Deferred
Federal (429) 254 (51)
State (22) (19) (4)
---------------------------------------
Total income tax expense $ 291 $ 1,182 $ 859
=======================================
<TABLE>
<CAPTION>
Year Ended June 30 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% $937 $1,124 $1,082
Increase in cash value of life insurance and death benefits (342) (92) (60)
Effect of state income taxes 100 181 175
Business income tax credits (455) (11) (338)
Other 51 (20)
--------------------------------------------
Actual tax expense $291 $1,182 $ 859
============================================
</TABLE>
<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 2000 1999
--------------------------------------------------------------------------------
Assets
Allowance for loan losses $ 1,105 $ 1,087
Deferred compensation 1,139 1,116
Loan fees 15 28
Pensions and employee benefits 381 336
Business income tax credits 601 257
Loss on limited partnerships 106 74
Other 50 34
-------------------------------
Total assets 3,397 2,932
===============================
Liabilities
State income tax (180) (166)
Securities available for sale (3) (9)
Depreciation (53) (56)
Mortgage servicing rights (55) (52)
FHLB stock dividends (49) (49)
Other (4) (3)
-------------------------------
Total liabilities (344) (335)
-------------------------------
$ 3,053 $ 2,597
===============================
No valuation allowance was considered necessary at June 30, 2000 and 1999.
At June 30, 2000, the Company had an unused business income tax credit
carryforward of $601,000, which expires in 2014.
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, 2000, the unrecorded
deferred income tax liability on the above amount was approximately $3,300,000.
<PAGE>
Marion Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 12 -- Other Comprehensive Income
<TABLE>
<CAPTION>
2000
----------------------------------------------------------
Before-Tax Tax Net-of-Tax
Year Ended June 30 Amount Benefit Amount
----------------------------------------------------------------------------------------------------------------
Unrealized losses on securities
<S> <C> <C> <C>
Unrealized holding losses arising during the year $(16) $7 $(9)
==========================================================
1999
----------------------------------------------------------
Before-Tax Tax Net-of-Tax
Year Ended June 30 Amount Benefit Amount
----------------------------------------------------------------------------------------------------------------
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 Expense Amount
----------------------------------------------------------------------------------------------------------------
Unrealized gains on securities
Unrealized holding gains arising during the year $76 $(44) $32
==========================================================
</TABLE>
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, 2000, the Bank has approval to pay dividends of $1,500,000.
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 shareholders. 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, 2000, total shareholder's
equity of the Bank was $27,976,000.
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.
<PAGE>
Marion Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
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, 2000 and 1999, the
Bank is categorized as well capitalized and met all subject capital adequacy
requirements. There are no conditions or events since June 30, 2000 that
management believes have changed the Bank's classification.
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
2000
----------------------------------------------------------------------------
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) $29,012 20.4% $11,389 8.0% $14,236 10.0%
Tier I capital 1
(to risk-weighted assets) 27,227 19.1 5,694 4.0 8,542 6.0
Core capital 1
(to adjusted total assets) 27,227 14.2 7,645 4.0 9,557 5.0
Core capital 1
(to adjusted tangible assets) 27,227 14.2 3,823 2.0 N/A
Tangible capital 1
(to adjusted total assets) 27,227 14.2 2,867 1.5 N/A
1999
----------------------------------------------------------------------------
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) $28,755 22.6% $10,169 8.0% $12,711 10.0%
Tier I capital 1
(to risk-weighted assets) 27,163 21.4 5,084 4.0 7,627 6.0
Core capital 1
(to adjusted total assets) 27,163 14.4 7,557 4.0 9,447 5.0
Core capital 1
(to adjusted tangible assets) 27,163 14.4 3,779 2.0 N/A
Tangible capital 1
(to adjusted total assets) 27,163 14.4 2,834 1.5 N/A
</TABLE>
1 As defined by regulatory agencies
<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 $38,000, $97,000 and
$117,000 for 2000, 1999 and 1998.
The Bank contributes up to 3 percent of employees' salaries for those
participating in a thrift plan. The Bank's contribution was $40,000, $40,000 and
$33,000 for 2000, 1999 and 1998.
The Bank has purchased life insurance on certain officers and directors, which
insurance had an approximate cash value of $11,422,000 and $5,887,000 at June
30, 2000 and 1999. 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 $464,000, $363,000 and $301,000 for 2000,
1999 and 1998.
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 2000 1999
--------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $203 $203
Service cost 19 21
Interest cost 13 13
Actuarial gain (5) (31)
Benefits paid (5) (3)
------------------------
Benefit obligation at end of year 225 203
Unrecognized net actuarial gain 102 107
------------------------
Accrued benefit cost $327 $310
========================
<PAGE>
Marion Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Year Ended June 30 2000 1999 1998
--------------------------------------------------------------------------------
Components of net periodic benefit cost
Service cost $19 $21 $13
Interest cost 13 13 12
Recognized net actuarial gain (9) (7) (15)
--------------------------------
Net periodic benefit cost $23 $27 $10
================================
At June 30, 2000 and 1999, there were no plan assets.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 11 percent in 2000, gradually declining to
6 percent in the year 2012.
The weighted average discount rate used in measuring the accumulated
postretirement benefit obligation was 8.0 percent in 2000.
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 30 25
</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>
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 2000 or 1999. The fair value of each option grant was estimated on
the grant date using an option-pricing model with the following assumptions:
June 30 1998
--------------------------------------------------------------------------------
Risk-free interest rates 6.0%
Dividend yields 3.3
Expected volatility factor of market price of common stock 11.0
Weighted-average expected life of the options 7 years
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this Statement are as follows:
1998
--------------------------------------------------------------------------------
Net income As reported $2,324
Pro forma 2,300
Basic earnings per share As reported 1.32
Pro forma 1.31
Diluted earnings per share As reported 1.29
Pro forma 1.28
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, 2000, 1999 and 1998.
<TABLE>
<CAPTION>
Year Ended June 30 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------
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 49,660 $16.54 73,848 $12.62 99,094 $12.09
Granted 10,083 23.00
Exercised (13,776) 10.00 (24,188) 10.00 (35,329) 10.37
------ ------ ------
Outstanding, end of year 35,884 19.05 49,660 16.54 73,848 12.62
Options exercisable at year end 35,884 49,660 73,848
====== ====== ======
Weighted-average fair value of options
granted during the year $3.94
</TABLE>
<PAGE>
Marion Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
As of June 30, 2000, options outstanding totaling 6,635 have an exercise price
of $10 and a weighted-average remaining contractual life of 2.7 years, options
outstanding totaling 20,166 have an exercise price of $20.25 and a
weighted-average remaining contractual life of 6.2 years and options outstanding
totaling 9,083 have an exercise price of $23.00 and a weighted-average remaining
contractual life of 7.1 years.
For the years ended June 30, 2000, 1999 and 1998, 2,931, 6,395 and 7,142 shares
were tendered as partial payment for options exercised. At June 30, 2000, 18,050
shares were available for grant.
Note 18 -- Earnings Per Share
Earnings per share (EPS) were computed as follows:
<TABLE>
<CAPTION>
Year Ended June 30 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------
Weighted- Per Weighted- Per Weighted- Per
Average Share Average Share Average Share
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 $2,465 1,379,068 $1.79 $2,124 1,539,569 $1.38 $2,324 1,760,166 $1.32
Effect of dilutive securities
RRP program 2,493
Stock options 6,666 19,550 39,200
------------------ ----------------- ------------------
Diluted Earnings Per Share
Income available to common
shareholders and assumed
conversions $2,465 1,385,734 $1.78 $2,124 1,559,119 $1.36 $2,324 1,801,859 $1.29
================== ================= -----------------
</TABLE>
Options to purchase 29,249 and 9,083 shares of common stock outstanding at June
30, 2000 and 1999, respectively, were not included in the computation of diluted
EPS because the options' exercise price was greater than the average market
price of the common shares.
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.
<PAGE>
Marion Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Financial instruments whose contract amount represents credit risk as of June 30
were as follows:
2000 1999
--------------------------------------------------------------------------------
Mortgage loan commitments at variable rates $1,602 $1,705
Consumer and commercial loan commitments 6,776 5,360
Standby letters of credit 3,644 3,644
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 $31,231,000 and $32,918,000 at June 30, 2000 and 1999,
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.
<PAGE>
Marion Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
2000 1999
---------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $6,545 $6,545 $8,853 $8,853
Securities available for sale 2,976 2,976 3,020 3,020
Loans, including loans held for sale, net 164,978 164,318 166,124 168,503
Interest receivable 1,016 1,016 974 974
Stock in FHLB 1,655 1,655 1,164 1,164
Liabilities
Deposits 130,683 129,176 142,087 141,838
Borrowings
FHLB advances 29,008 28,405 15,534 15,364
Note payable--limited partnership 2,826 1,983 3,240 2,334
Interest payable 192 192 141 141
Advances by borrowers for taxes and insurance 187 187 202 202
</TABLE>
<PAGE>
Marion Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 21-- Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
Condensed Balance Sheet
June 30 2000 1999
--------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 253 $ 131
Loans 2,939 2,986
Investment in subsidiary 27,976 27,960
Other assets 685 764
-----------------------
Total assets $31,853 $31,841
=======================
Liabilities $ 68 $ 97
Shareholders' Equity 31,785 31,744
-----------------------
Total liabilities and shareholders' equity $31,853 $31,841
=======================
Condensed Statement of Income
<TABLE>
<CAPTION>
Year Ended June 30 2000 1999 1998
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from Bank $ 2,400 $ 7,500 $ 4,000
Other 392 374 308
--------------------------------------
Total income 2,792 7,874 4,308
Expenses 249 119 118
--------------------------------------
Income before income tax and equity in
undistributed income of subsidiary 2,543 7,755 4,190
Income tax expense 104 111 75
--------------------------------------
Income before equity in undistributed income of subsidiary 2,439 7,644 4,115
Equity in undistributed (distribution in excess of)
income of subsidiary 26 (5,520) (1,791)
--------------------------------------
Net Income $ 2,465 $ 2,124 $ 2,324
======================================
</TABLE>
<PAGE>
Marion Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C> <C>
Net income $2,465 $2,124 $2,324
Adjustments to reconcile net income to
net cash provided by operating activities 23 5,459 1,688
-----------------------------------------------
Net cash provided by operating activities 2,488 7,583 4,012
-----------------------------------------------
Investing Activities
Net change in loans 47 45 469
Investment in insurance company (650)
-----------------------------------------------
Net cash provided (used) by investing activities 47 45 (181)
-----------------------------------------------
Financing Activities
Exercise of stock options 106 216 366
Cash dividends (1,211) (1,346) (1,557)
Repurchase of common stock (1,308) (6,891) (2,707)
-----------------------------------------------
Net cash used by financing activities (2,413) (8,021) (3,898)
-----------------------------------------------
Net Change in Cash and Cash Equivalents 122 (393) (67)
Cash and Cash Equivalents at Beginning of Year 131 524 591
-----------------------------------------------
Cash and Cash Equivalents at End of Year $ 253 $ 131 $ 524
===============================================
</TABLE>
<PAGE>
Marion Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 22-- Quarterly Results (Unaudited)
<TABLE>
<CAPTION>
Year Ended June 30, 2000
----------------------------------------------------
June March December September
2000 2000 1999 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $3,718 $3,645 $3,633 $3,700
Interest expense 2,022 1,965 1,870 1,916
----------------------------------------------------
Net interest income 1,696 1,680 1,763 1,784
Provision for losses on loans 37 253 205
----------------------------------------------------
Net interest income after provisions for losses on loans 1,659 1,680 1,510 1,579
Other income 71 104 721 317
Other expenses 1,205 1,171 1,371 1,138
----------------------------------------------------
Income before income tax 525 613 860 758
Income tax expense (benefit) 126 72 (86) 179
----------------------------------------------------
Net Income $ 399 $ 541 $ 946 $ 579
====================================================
Basic earnings per share $.29 $.40 $.69 $.41
Diluted earnings per share .29 .40 .68 .40
Dividends per share .22 .22 .22 .22
Year Ended June 30, 1999
----------------------------------------------------
June March December September
1999 1999 1998 1998
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
</TABLE>
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no such changes or disagreements during the applicable
period.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Presented below is certain information concerning the directors of
MCHI. No nominee for director is related to any other director or executive
officer of MCHI by blood, marriage, or adoption, and there are no arrangements
or understandings between any director and any other person pursuant to which
such director was selected as a director. Information concerning MCHI's
executive officers is included in Item 4.5 in Part I of this report.
Steven L. Banks (age 50) has been President and Chief Executive Officer
of MCHI and the Bank since April, 1999. Mr. Banks also became Vice Chairman of
MCHI and the Bank in January, 1999. Theretofore he served as Executive Vice
President of MCHI and the Bank since September 1, 1996. Theretofore he served as
President and Chief Executive Officer of Fidelity Federal Savings Bank, Marion,
Indiana since prior to 1991. He became a director of MCHI in 1996 and his term
as such director expires in 2002.
John M. Dalton (age 66) has served as Chairman of MCHI and the Bank
since July, 1997. He retired as President and Chief Executive Officer of MCHI
and the Bank in March, 1999 having served in those positions since February,
1996. Theretofore he served as Executive Vice President of the Bank since 1983
and of MCHI since 1992. He became a director of MCHI in 1992 and his term as
such director expires in 2001.
Jon R. Marler (age 50) 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. He became a director of MCHI in 1997 and his term
as such director expires in 2000.
Jerry D. McVicker (age 55) 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. He became a
director of MCHI in 1996 and his term as such director expires in 2000.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"1934 Act"), requires that MCHI's officers and directors and persons who own
more than 10% of MCHI'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 MCHI 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, MCHI believes that during the fiscal year ended
June 30, 2000, 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 Cynthia Fortney, an officer of
MCHI, filed a Form 3 reporting the ownership of no shares approximately nine
months late and Gordon Coryea, a former director of MCHI, was approximately 2
weeks late in reporting his sale of 1,000 shares in July, 1999 and was
approximately three weeks late in reporting his sale of 1,000 shares in October,
1999, and George Thomas, a director emeritus of the Bank, (1) filed
approximately 10 1/2 months late a Form 4 reporting his sale of 2,000 shares of
MCHI Common Stock on September 16, 1999, (2) filed approximately 9 1/2 months
late a Form 4 reporting his sale of 2,000 shares of MCHI Common Stock on October
22, 1999, (3) filed approximately 7 1/2 months late a Form 4 reporting his sale
of 2,000 shares of MCHI Common Stock on December 15, 1999, and (4) filed
approximately 4 1/2 months late a Form 4 reporting his sale of 3,238 shares of
MCHI Common Stock on March 21, 2000.
Item 11. Executive Compensation.
Remuneration of Named Executive Officers
No cash compensation is paid directly by MCHI to any of its executive
officers. Each of such officers is compensated by the Bank.
The following table sets forth information as to annual, long-term and
other compensation for services in all capacities to MCHI and its subsidiaries
for the last three fiscal years of (i) the individuals who served as the chief
executive officer of MCHI during the fiscal year ended June 30, 2000 and (ii)
each other executive officer of MCHI serving as such during the 2000 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>
Steven L. Banks 2000 $198,900 $49,000 -- -- -- --
President and Chief 1999 $155,125 $40,000 -- -- -- --
Executive Officer and 1998 $136,500 $23,000 -- -- -- --
Director
Larry G. Phillips 2000 $122,600 $26,000 -- -- -- --
Senior Vice President, 1999 $117,350 $28,600 -- -- -- --
Secretary and Treasurer 1998 $110,500 $18,000 -- -- -- --
Michael G. Fisher 2000 $ 97,500 $17,000 -- -- -- --
Vice President of First 1999 $ 33,679 $ 3,500 -- -- -- --
Federal Savings Bank 1998 $ 0 $ 0 -- -- -- --
of Marion
</TABLE>
(1) The bonus amounts were paid under the Bank's bonus plan. During the year
ended June 30, 1999, amounts were paid in December, 1998 and June, 1999
as the Bank switched from performing annual reviews and bonus payments on
a calendar year basis to a fiscal year basis.
(2) The Named Executive Officers of MCHI receive certain perquisites, but the
incremental cost of providing such perquisites does not exeed the lesser
of $50,000 or 10% of the officer's salary and bonus.
Stock Options
The following table includes the number of shares covered by
exercisable and unexercisable stock options held by the Named Executive Officers
as of June 30, 2000. Also reported are the values for "in-the-money" options
(options whose exercise price is lower than the market value of the shares at
fiscal year end) which represent the spread between the exercise price of any
such existing stock options and the fiscal year-end market price of the stock.
There were no stock options granted to the Named Executive Officers during
fiscal 2000. The Named Executive Officers did not exercise any stock options
during the last fiscal year.
Outstanding Stock Option Grants and Values Realized as of 6/30/2000
<TABLE>
<CAPTION>
Number of Value of Unexercised
Securities Underlying In-the-Money
Unexercised Options Options at
at Fiscal Year End (#) Fiscal Year End ($) (1)
---------------------- -----------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Steven L. Banks 10,083 -- $ 5,671.69 --
Larry G. Phillips -- -- -- --
</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, 2000, which was
$20.8125 per share.
Officer SERPs
Effective February 1, 2000, Steve Banks entered into an Executive
Shareholder Benefit Plan Agreement under which, upon his retirement after
attaining age 65, he will be entitled to receive the annuitized value of his
accrued benefit under the agreement, payable over a 15-year period. That benefit
is based on the benefits which are required to be expensed over not to exceed 10
years under generally accepted accounting principles. The amount to be expensed
is equal to 54.55% of the difference between (a) the Bank's aggregate after-tax
income derived from annual increases in the cash surrender value of a specified
hypothetical pool of no-load, no-surrender charge life insurance policies and
(b) a specified after-tax cost of funds expense incurred to acquire such
policies. As of June 30, 2000, the accrued benefit under this Agreement for
Steve Banks was $42,974. If Mr. Banks voluntarily terminates his employment with
the Bank before age 65 for any reason other than cause, he will be entitled to
his accrued benefit determined as of the date of his termination of employment
payable over a 15-year period commencing within 30 days following his
termination of employment. If his employment is terminated involuntarily,
including within three years following a change in control of the Bank, but
excluding termination for cause or for reasons of death or disability, or if he
terminates his employment within three years following a change in control of
the Bank, he will be entitled to receive an annual payment of $282,024 payable
over a 15-year period commencing after Mr. Banks attains age 65. Death and
disability benefits are also provided under this agreement. Upon a change in
control of the Bank, a secular trust is to be created and funded with the
present value of the annual benefit of $282,024 payable over 15 years, plus the
increased taxes resulting from the early taxation of those benefits at the time
such secular trust is created. These benefits are to be paid by the secular
trust upon Mr. Banks' attainment of age 65. The payment of benefits to Mr. Banks
under this Executive Shareholder Benefit Plan Agreement is currently secured by
a rabbi trust funded with insurance policies and other assets.
Under the previously announced merger agreement between MCHI and
MutualFirst Financial, Inc., the merger is not to be deemed a change in control
and the Agreement, subject to certain amendments, is to continue in effect
following the merger.
Effective February 29, 2000, Larry G. Phillips entered into a Second
Restated Executive Supplemental Retirement Income Agreement under which, upon
his retirement after attaining age 65, he would be eligible to receive an annual
retirement benefit of $106,782 over a 15-year period. Mr. Phillips is also
eligible to receive an actuarially reduced benefit at age 55. If Mr. Phillips
voluntarily terminates his employment before age 65 for reasons other than
cause, his death, his disability or following a change in control, he will be
entitled to receive his accrued benefit under this agreement as of the date of
his termination, increased at an annual rate of 7.89% and payable over a 15-year
period commencing at age 65. If Mr. Phillips is involuntarily terminated other
than for cause and other than after a change in control of the Bank, he will be
entitled to receive his full annual benefit of $106,782 over a 15-year period
commencing at age 55. Death and disability benefits are also provided under this
agreement, including a $10,000 burial benefit. The benefits payable under this
agreement are secured by a rabbi trust funding with insurance policies and other
assets. Upon a change in control of the Bank, a secular trust is to be created
and funded with the present value of the $106,782 annual benefit payable over 15
years plus the increased taxes resulting from the early taxation of those
benefits at the time such secular trust is created. Those benefits are to be
paid by the secular trust upon Mr. Phillips' attainment of age 65.
Under the previously announced merger agreement between MCHI and
MutualFirst Financial, Inc., Mr. Phillips will receive a cash payment in
consideration for the termination of this Agreement.
Employment Contracts
The Bank has entered into three-year employment contracts with Mr.
Banks and Mr. Phillips (the "Employees"), effective January 17, 2000. MCHI has
guaranteed the Bank's obligations under these contracts. The contracts extend
annually for an additional one-year term to maintain their three-year term if
the Bank's Board of Directors determines to so extend them, unless notice not to
extend is properly given by either party to the contracts. The Employees receive
their current salary subject to increases approved by the Board of Directors.
The contracts also provide, among other things, for participation in other
fringe benefits and benefit plans available to the Bank's employees. The
Employees may terminate their employment upon 60 days' written notice to the
Bank. The Bank may discharge the Employees for cause (generally, dishonesty,
incompetence, forms of misconduct or certain legal violations) at any time or in
certain specified events. If the Bank terminates the Employees' employment
without cause or if the Employees terminate their own employment for cause
(generally, material changes in duties or authority, breaches by the Bank of the
contract, or a relocation of the Bank's principal office by more than 25 miles),
the Employees will receive their base compensation under the contract for an
additional three years if the termination follows a change of control of MCHI,
and for the balance of the contract if the termination does not follow a change
in control. In addition, during such period, the Employees will continue to
participate in the Bank's group insurance plans and retirement plans, or receive
comparable benefits. Moreover, within a period of three months after such
termination following a change of control, the Employees will have the right to
cause the Bank to purchase any stock options they hold for a price equal to the
fair market value (as defined in the contract) of the shares subject to such
options minus their option price. If the payments provided for in the contract,
together with any other payments made to the Employees by the Bank, are deemed
to be payments in violation of the "golden parachute" rules of the Code, such
payments will be reduced to the largest amount which would not cause the Bank to
lose a tax deduction for such payments under those rules. As of the date hereof,
the cash compensation which would be paid under the contract to the Employees if
the contract were terminated after a change of control of MCHI, without cause by
the Bank or for cause by the Employees, would be $585,000 in the case of Mr.
Banks and $330,000 in the case of Mr. Phillips. For purposes of this employment
contract, a change of control of MCHI is generally an acquisition of control, as
defined in regulations issued under the Change in Bank Control Act and the
Savings and Loan Company Act.
The employment contract protects the Bank's confidential business
information and protects the Bank from competition by the Employees should they
voluntarily terminate their employment without cause or be terminated by the
Bank for cause.
The existence of these contracts may make a merger, other business
combination or change of control of the Bank more difficult or less likely. This
is because, unless the Employees are allowed to maintain their positions and
authority with the Bank, they will be entitled to payments which in the
aggregate may be deemed to be substantial. However, the employment contracts
provide security to the Employees, and the Board of Directors believe that it
will encourage their objective evaluation of opportunities for mergers, other
business combinations or other transactions involving a change of control of
MCHI or the Bank since they will be in a position to evaluate such transactions
without significant concerns about the matter in which such transactions will
affect their financial security.
The previously announced merger between MCHI and MutualFirst Financial,
Inc. will constitute a change of control of MCHI for purposes of these
agreements. Pursuant to the merger agreement between those two corporations, the
employment contracts will be terminated and specified amounts paid to the
Employees in consideration of such termination.
Compensation of Directors
All directors of the Bank receive a retainer fee of $1,300 per month.
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 the Bank, Mr. Dalton receives a
retainer fee of $1,950 per month. As Vice Chairman of the Board of the Bank, Mr.
Banks receives a retainer fee of $1,625 per month.
Directors of MCHI are paid a fee of $100 per meeting if the meeting is
held on the same day as a Bank meeting and $200 per meeting if MCHI meets on a
different day.
Supplemental Retirement Plan for Directors. Effective May 1, 1992, and
April 1, 1999, the Bank entered into deferred compensation agreements with John
M. Dalton and the former directors listed below who served as directors during
the last fiscal year. 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 10 years:
Period Remaining
Director Annual Payment Payable at June 30, 2000
-------- -------------- ------------------------
John M. Dalton $ 9,960 10 years
Jack O. Murrell $10,500 4 years, 8 months
W. Gordon Coryea (deceased) $ 8,748 4 years, 7 months
Following a change in control of the Bank, Mr. Dalton could require the
Bank to pay him certain of his benefits in a lump sum or over another payment
period. A director may also elect to receive his benefits upon attaining age 70
even if he remains on the Board of Directors. Mr. Murrell and Mr. Coryea each
had attained age 70 while on the Board and had begun receiving their benefits.
Mr. Coryea is now deceased. If service of Mr. Dalton is terminated prior to
attaining age 70, the director or his beneficiary may request acceleration of
payments based upon accruals to date.
If Mr. Dalton dies prior to attaining age 70, his beneficiary will
receive annual payments equal to the Board fees paid by the Bank in the twelve
months immediately prior to his death for a period of 15 years. If he or Mr.
Murrell dies after their benefits have commenced, their beneficiaries will be
entitled to receive the remaining payments over the balance of the applicable
payment period. Mr. Dalton's beneficiary is also entitled to a $10,000 death
benefit at his death.
The Bank for the fiscal year ended June 30, 2000, accrued an expense
for this plan of $34,080 which consisted of interest on this deferred liability
which accrues at an annual rate of 10.5%.
Death Benefit Agreements with Mr. Coryea. The Bank, as of April 30,
1998, 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. Mr. Coryea's beneficiary is currently receiving these
payments under the plan.
The Bank 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.
Excess Benefit Agreement and Director Emeritus Plan. On February 28,
1996, Mr. Dalton entered into an Excess Benefit Agreement under which he
receives, commencing with attainment of age 65 in 1999, $41,681 per year payable
over a 15-year period. He is currently receiving these payments which are
secured by a rabbi trust funded with insurance policies [and other assets]. In
the event of a change of control of the Bank, a secular trust is to be created
and funded with the present value of these benefits, plus the increased taxes
resulting from the early taxation of those benefits at the time such secular
trust is created. Under the previously announced merger agreement between MCHI
and MutualFirst Financial, Inc., MCHI is to use its best efforts to seek the
agreement of Mr. Dalton to receive a cash payment as consideration for the
termination of this agreement.
John M. Dalton and Jack O. Murrell are parties to a Director Emeritus
Plan under which they are entitled to receive benefits equal to 50% of their
regular monthly Board fees if and when they serve as a Director Emeritus of the
Bank. Under the previously announced merger agreement between MCHI and
MutualFirst Financial, Inc., MCHI is to use its best efforts to terminate these
agreements.
Dalton SERP. Effective February 29, 2000, John M. Dalton entered into a
Second Restated Executive Supplemental Retirement Income Agreement under which
he would be eligible to receive an annual retirement benefit of $99,000 over a
15-year period, commencing with his attainment of age 65. He is currently
receiving those benefits. Death and disability benefits are also provided under
this agreement, including a $10,000 burial benefit. The payment of these
benefits is secured by a rabbi trust funded with insurance policies and other
assets. Upon a change in control of the Bank a secular trust is to be created to
which the present value of the $99,000 benefit payable over 15 years plus
increased taxes resulting from the early taxation of those benefits at the time
such secular trust is created. These benefits are to continue to be paid by the
secular trust to Mr. Dalton over the remainder of his 15-year payment period.
Under the previously announced merger agreement between MCHI and MutualFirst
Financial, Inc., MCHI is to use its best efforts to cause Mr. Dalton to agree to
receive a cash payment as consideration for the termination of this agreement.
Directors Shareholder Benefit Plan. On February 1, 2000, The Bank
entered into a Directors Shareholder Benefit Plan Agreement which provides
benefits to directors John M. Dalton, Jon R. Marler, Jerry McVicker and Steven
L. Banks. Under this plan, if the director remains in the service of The Bank
until his "Benefit Age" under the plan, he will be entitled to receive an annual
retirement benefit over a 15-year period commencing within 30 days following his
retirement or other termination of service after attaining his Benefit Age. The
retirement benefit is based on a specified percentage of the difference between
the Bank's after-tax income derived from annual increases in the cash surrender
value of a hypothetical pool of life insurance policies and the after-tax cost
of funds expense which would be incurred to acquire such policies. If the
director dies prior to attaining his Benefit Age but while in the service of The
Bank, his beneficiary will be entitled to an annual Survivor's Benefit payable
over a 15-year period commencing within 30 days of his death.
If the director's service is voluntarily or involuntarily terminated
prior to attaining his Benefit Age for reasons other than cause, death,
disability or following a change in control, the director will receive his
accrued benefit under the plan as of the date of his termination of service,
which is to be credited with 7% annual interest per year, and is payable over a
15-year period commencing on the first day of the month coinciding with or
following the month in which he attains his Benefit Age. If the director is
terminated voluntarily or involuntarily coincident with or following a change of
control he will be entitled to receive his annual Survivor's Benefit payable
over a 15-year period beginning on the first day of the month following his
termination of service. If the director is terminated for cause, all benefits
will be forfeited by him. There are also other specified death and disability
benefits payable under the plan.
The directors covered by this plan and their Benefit Ages and
Survivor's Benefits are as follows:
Annual Survivor's Benefit
Director Benefit Age Payable Over 15 Years
-------- ----------- ---------------------
John M. Dalton 70 $ 9,167
Steven L. Banks 70 $49,528
Jon R. Marler 70 $41,391
Jerry McVicker 70 $32,431
These benefits are secured by a rabbi trust funded with insurance
policies and other assets. Upon a change of control of The Bank, a secular trust
is to be created and funded with the present value of the Survivor's Benefit.
Under the previously announced merger agreement between MCHI and MutualFirst
Financial, Inc., MCHI is to use its best efforts to obtain the consent of John
M. Dalton and Jon R. Marler to a cash payment in consideration for termination
of this Plan as to them. As to Mr. Banks and Mr. McVicker, the merger with
MutualFirst Financial, Inc. is not to be deemed a change in control and the
Plan, subject to certain amendments, is to remain in place.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the
beneficial ownership at the Common Stock as of July 31, 2000, by each person who
is known by MCHI to own beneficially 5% or more of its Common Stock. Unless
otherwise indicated, the named beneficial owner has sole voting and dispositive
power with respect to the shares.
Number of Share of
Name and Address of Common Stock Percent of
Beneficial Owner (1) Beneficially Owned Class (2)
-------------------- ------------------ ---------
Douglas T. Breeden 68,600 5.02%
Smith Breeden Associates, Inc.
100 Europa Drive, Suite 200
Chapel Hill, North Carolina 27514
(1) The information in this chart is based on a Schedule 13G Report filed
by the above-listed person with the Securities and Exchange Commission
containing information concerning shares held by him. It does not
reflect any changes in those shareholdings which may have occurred
since the date of such filing.
(2) Based upon 1,366,506 shares of Common Stock outstanding which does not
include options for 32,975 shares of Common Stock granted to certain
directors, officers and employees of MCHI and the Bank.
(3) Smith Breeden Associates, Inc. holds these shares. Douglas T. Breeden
owns 63% of the voting stock of Smith Breeden Associates, Inc.
The following table sets forth certain information regarding directors
continuing in office and the nominees for the position of director of MCHI,
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. The table also sets forth the
number of shares of MCHI Common Stock beneficially owned by Larry G. Phillips,
one of MCHI's executive officers, and by all directors and executive officers of
MCHI as a group.
Common Stock
Beneficially Owned Percentage
Name as of August 21, 2000(1) of Class
--------------------------- ------------------------ --------
Director Nominees
Steven L. Banks 10,583 (2) 0.77%
John M. Dalton 22,954 (3) 1.68%
Jon R. Marler 11,083 (4) 0.81%
Jerry D. McVicker 36,573 (5) 2.66%
Executive Officer
Larry G. Phillips,
Senior Vice President,
Secretary and Treasurer 15,228 (6) 1.12%
Michael G. Fisher
Vice President of the Bank 250 ---%
All directors and executive
officers as a group (7 persons) 96,971 (7) 6.97%
(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, 9,717 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.
(4) 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.
(5) 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.
(6) These shares are held jointly by Mr. Phillips and his wife.
(7) The total of such shares includes 29,249 shares subject to stock
options granted under the Option Plan.
On June 8, 2000, MCHI and MutualFirst Financial, Inc. (Nasdaq: MFSF)
("Muncie") based in Muncie, Indiana announced that they had entered into a
definitive agreement to merge their respective holding companies and bank
subsidiaries.
Upon completion of the merger, MCHI will be merged into the recently
renamed Company, MutualFirst Financial, Inc., and the Bank will be merged into
Mutual Federal Savings Bank. The combined banking operation will have a total of
16 branch locations throughout the counties of Delaware, Grant, Kosciusko, and
Randolph in Indiana, and will be called Mutual Federal Savings Bank.
The agreement provides that the shareholders of MCHI will receive 1.862
shares of Muncie common stock for each MCHI common share in a tax-free exchange.
Muncie will issue approximately 2.6 million shares of stock to complete the
merger, which will be accounted for under the purchase method of accounting.
Muncie intends to repurchase as many shares as possible to offset those shares
being issued to MCHI's shareholders. Following the merger, the former Muncie and
MCHI shareholders will own approximately 70% and 30% of the combined company,
respectively.
Muncie's Board of Directors will be comprised of four directors from
MCHI and seven directors from Muncie. Steven L. Banks, the current President and
Chief Executive Officer of MCHI, will serve as Senior Vice President and Chief
Operating Officer of Grant County for Mutual Federal Savings Bank and he will be
one of the four directors joining the Muncie Board of Directors. The other three
Company directors who will be joining the Muncie board are John M. Dalton, Jon
R. Marler and Jerry D. McVicker.
The merger is expected to be completed before the end of calendar 2000,
subject to regulatory approval and approval by MCHI and Muncie shareholders.
Item 13. Certain Relationships and Related Transactions.
The Bank may make available to its directors, officers, and employees
real estate mortgage loans secured by their principal residence and other loans.
The Bank, as permitted under applicable regulations, has a benefit and
compensation program which permits its officer, directors and employees to
receive loans from the Bank at an annual rate which is 1/4% lower than the rate
charged members of the public. The Bank also waives loan processing fees for
such loans. Set forth below is certain information as to loans whose aggregate
indebtedness to the Bank exceeded $60,000 at any time during the fiscal year
ended June 30, 2000, made to any of the Bank's directors and executive officers
pursuant to this program. All such loans were current as of June 30, 2000.
<TABLE>
<CAPTION>
Highest Balance Interest Rate
Outstanding in Effect on
During the Balance June 30, 2000
Position with Type of Year Ended as of or at Time
Name the Bank Loan June 30, 2000 June 30, 2000 Loan Paid Off
<S> <C> <C> <C> <C> <C>
Steven L. Banks(1) Director, President Fixed Rate $ 94,498 $ 89,272 6.375%
and Chief Executive Mortgage
Officer
John M. Dalton Chairman of Fixed Rate Mortgage $ 485,000 $484,763 7.25%
the Board Home Equity Loan $ 99,226 - 0 - 9.25%
Cynthia Fortney Vice President Fixed Rate Mortgage $ 113,912 $ 105,894 6.875%
</TABLE>
(1) 95% of the principal balance of the loan has been sold to the Federal
Home Loan Mortgage Corporation.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following financial statements are filed in Item 8 of this report:
Financial Statements
Consolidated Statement of Financial Condition at June 30, 2000, and
1999
Consolidated Statement of Income for the Fiscal Years ended June 30,
2000, 1999 and 1998
Consolidated Statement of Shareholders' Equity for the Fiscal Years
ended June 30, 2000, 1999 and 1998
Consolidated Statement of Cash Flows for the Fiscal Years ended June
30, 2000, 1999, and 1998
Notes to Consolidated Financial Statements
(b) MCHI filed no reports on Form 8-K during the fourth quarter ended June
30, 2000.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index beginning on page E-1.
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant had duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
MARION CAPITAL HOLDINGS, INC.
Date: September 25, 2000 /s/ Steven L. Banks
--------------------------------
Steven L. Banks, President
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 25th day of September,
2000.
/s/ Steven L. Banks /s/ John M. Dalton
---------------------------------- -----------------------------
Steven L. Banks John M. Dalton, Director
President, Director
(Principal Executive Officer)
/s/ Larry G. Phillips /s/ Jerry D. McVicker
---------------------------------- -----------------------------
Larry G. Phillips Jerry D. McVicker, Director
Senior Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
/s/ Jon R. Marler
-----------------------------
Jon R. Marler, Director
<PAGE>
EXHIBIT INDEX
Exhibit Index* Page
3(1) The Articles of Incorporation of the Registrant is
incorporated by reference to Exhibit 3(1) to the
Registration Statement on Form S-1 (Registration No.
33-55052).
3(2) The Code of By-Laws of the Registrant is incorporated
by reference to Exhibit 3(2) to the Registration
Statement on Form S-I (Registration No. 33-55052).
10(1) Marion Capital Holdings, Inc. Stock Option Plan is
incorporated by reference to Exhibit A to the
Registrant's definitive Proxy Statement in respect of
its 1993 Annual Shareholder meeting.
10(2) Recognition and Retention Plans and Trusts are
incorporated by reference to Exhibit B to the
Registrant's definitive Proxy Statement in respect of
its 1993 Annual Shareholder meeting.
10(3) Director Deferred Compensation Agreement effective May
1, 1992, between the Bank and John M. Dalton is
incorporated by reference to Exhibit 10(7) to the
Registration Statement on Form S-1 (Registration No.
33-55052); First Amendment thereto dated May 19, 1994;
Second (denominated First) Amendment to Director
Deferred Compensation Agreement of John M. Dalton dated
December 1, 1996 is incorporated by reference to
Exhibit 10(4) of the Registrant's Form 10-K for the
period ended June 30, 1997.
10(4) Director Deferred Compensation Agreement effective May
1, 1992, between the Bank and James O. Murrell is
incorporated by reference to Exhibit 10(9) to the
Registration Statement on Form S-1 (Registration No.
33-55052); First Amendment thereto dated May 23, 1994;
Second (denominated First). Amendment to Director
Deferred Compensation Agreement of James (Jack ) O.
Murrell dated December 1, 1996 is incorporated by
reference to Exhibit 10(6) of the Registrant's Form
10-K for the period ended June 30, 1997.
10(5) Director Deferred Compensation Agreement effective May
1, 1992, between the Bank and Gordon Coryea is
incorporated by reference to Exhibit 10(10) to the
Registration Statement on Form S-1 (Registration No.
33-55052); First Amendment thereto; Second (denominated
First) Amendment to Director Deferred Compensation
Agreement of W. Gordon Coryea dated December 1, 1996 is
incorporated by reference to Exhibit 10(7) of the
Registrant's Form 10-K for the period ended June 30,
1997.
<PAGE>
Exhibit Index Page
10(6) Director Deferred Compensation Agreement effective May
1, 1992, between the Bank and George Thomas is
incorporated by reference to Exhibit 10(11) to the
Registration Statement on Form S-1 (Registration No.
33-55052); First Amendment thereto dated May 24, 1994;
Second (denominated First) Amendment to Director
Deferred Compensation Agreement of George L. Thomas
dated December 1, 1996 is incorporated by reference to
Exhibit 10(8) of the Registrant's Form 10-K for the
period ended June 30, 1997.
10(7) Director Deferred Compensation Agreement effective May
1, 1992, between the Bank and James Gartland is
incorporated by reference to Exhibit 10(12) to the
Registration Statement on Form S-1 (Registration No.
33-55052); First Amendment thereto dated May 23, 1994;
Second (denominated First) Amendment to Deferred
Compensation Agreement of James Gartland dated May 23,
1994 is incorporated by reference to Exhibit 10(9) to
the Annual Report on Form 10-K for fiscal year ended
June 30, 1994.
10(8) Deferred Compensation Agreement between the Bank and
Gordon Coryea dated April 30, 1988, as amended as of
May 1, 1992, is incorporated by reference to Exhibit
10(13) to the Registration Statement on Form S-1
(Registration No. 33-55052).
10(9) Second Restated Executive Supplemental Retirement
Income Agreement dated February 29, 2000, between the
Bank and John M. Dalton is incorporated by reference to
Exhibit 10(3) of the Registrant's Form 10-Q for the
quarter ended March 31, 2000.
10(10) Second Restated Executive Supplemental Retirement
Income Agreement dated February 29, 2000 between the
Bank and Jackie Noble is incorporated by reference to
Exhibit 10(1) of the Registrant's Form 10-Q for the
quarter ended March 31, 2000.
10(11) Second Restated Executive Supplemental Retirement
Income Agreement dated February 29, 2000 between the
Bank and Nora Kuntz is incorporated by reference to
Exhibit 10(2) of the Registrant's Form 10-Q for the
quarter ended March 31, 2000.
10(12) Second Executive Supplemental Retirement Income
Agreement effective dated February 29, 2000 between the
Bank and Larry G. Phillips is incorporated by reference
to Exhibit 10(4) of the Registrant's Form 10-Q for the
quarter ended March 31, 2000.
10(13) Death Benefit Agreement between the Bank and Steven L.
Banks dated December 1, 1996 is incorporated by
reference to Exhibit 10(18) of the Registrant's Form
10-K for the period ended June 30, 1997 .
10(14) Excess Benefit Agreement dated as of Februry 28, 1996
between the Bank and John M. Dalton is incorporated by
reference to Exhibit 10(18) to the Annual Report on
Form 10-K for the fiscal year ended June 30, 1996;
First Amendment to Excess Benefit Agreement of John M.
Dalton dated December 1, 1996 is incorporated by
reference to Exhibit 10(19) of the Registrant's Form
10-K for the period ended June 30, 1997; Second
Amendment thereto dated March 10, 2000 is incorporated
by reference to Exhibit 10(7) of the Registrant's Form
10-Q for the quarter ended March 31, 2000.
10(15) Excess Benefit Agreement dated as of Februry 28, 1996
between the Bank and Robert D. Burchard is incorporated
by reference to Exhibit 10(19) to the Annual Report on
Form 10-K for the fiscal year ended June 30, 1996;
First Amendment to Excess Benefit Agreement of Robert
D. Burchard dated December 1, 1996 is incorporated by
reference to Exhibit 10(20) of the Registrant's Form
10-K for the period ended June 30, 1997.
<PAGE>
Exhibit Index Page
10(16) Director's Shareholder Benefit Agreement dated February
1, 2000 is incorporated by reference to Exhibit 10(6)
of the Registrant's Form 10-Q for the quarter ended
March 31, 2000.
10(17) Director Emeritus Agreement dated March 1, 1996 between
the Bank and George L. Thomas and First Amendment to
such agreement dated December 1, 1996 is incorporated
by reference to Exhibit 10(22) of the Registrant's Form
10-K for the period ended June 30, 1997.
10(18) Director Emeritus Agreement dated March 1, 1996 between
the Bank and John M. Dalton and First Amendment to such
agreement dated December 1, 1996 is incorporated by
reference to Exhibit 10(23) of the Registrant's Form
10-K for the period ended June 30, 1997.
10(19) Director Emeritus Agreement dated March 1, 1996 between
the Bank and Jack O. Murrell and First Amendment to
such agreement dated December 1, 1996 is incorporated
by reference to Exhibit 10(24) of the Registrant's Form
10-K for the period ended June 30, 1997.
10(20) Contingent Executive Supplemental Retirement Income
Agreement between the Bank and Steven L. Banks dated
December 1, 1996 is incorporated by reference to
Exhibit 10(25) of the Registrant's Form 10-K for the
period ended June 30, 1997.
10(21) Second Director Deferred Compensation Plan between the
Bank and John M. Dalton dated April 1, 1999 is
incorporated by reference to Exhibit 10(24) of the
Registrant's Form 10-K for the period ended June 30,
1999.
10(22) Rabbi Trust for the Director Deferred Compensation
Master Agreement and Director Emeritus Plan dated
December 1, 1996 is incorporated by reference to
Exhibit 10(26) of the Registrant's Form 10-K for the
period ended June 30, 1997.
10(23) Rabbi Trust for the Executive Supplemental Retirement
Income Plans and Excess Benefit Plans dated December 1,
1996 is incorporated by reference to Exhibit 10(27) of
the Registrant's Form 10-K for the period ended June
30, 1997.
10(24) Executive Shareholder Benefit Agreement between the
Bank and Steve Banks dated February 1, 2000, is
incorporated by reference to Exhibit 10(5) of the
Registrant's Form 10-Q for the quarter ended March 31,
2000.
10(25) Employment Agreement of Steven L. Banks dated January
19, 2000, is incorporated by reference to Exhibit 10(1)
of the Registrant's Form 10-Q for the quarter ended
December 31, 1999.
10(26) Employment Agreement of Larry G. Phillips dated January
19, 2000, is incorporated by reference to Exhibit 10(2)
of the Registrant's Form 10-Q for the quarter ended
December 31, 1999.
10(27) Death Benefit Agreement between the Bank and Larry G.
Phillips dated August 25, 1992 is incorporated by
reference to Exhibit 10(20) to the Registration
Statement on Form S-1 (Registration No. 33-55052).
21 Subsidiaries of the Registrant is incorporated by
reference to Exhibit 22 to the Registration Statement
on Form S-1 (Registration No. 33-55052).
23 Consent of Auditors
27 Financial Data Schedule for Period Ended June 30, 2000
* Management contracts and plans required to be filed as
exhibits are included as Exhibits 10(1)-10(27).
