-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G+MZzgyjioa5j8VGtJyObtzizTgDBx/GgNxezNYkyRBKqr1AgHHVoBnlFzmxSBIn yNwXv762mLWhIpdOjjrjiQ== 0000908834-96-000181.txt : 19960930 0000908834-96-000181.hdr.sgml : 19960930 ACCESSION NUMBER: 0000908834-96-000181 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960927 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARION CAPITAL HOLDINGS INC CENTRAL INDEX KEY: 0000894372 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 351872393 STATE OF INCORPORATION: IN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-21108 FILM NUMBER: 96635418 BUSINESS ADDRESS: STREET 1: 100 WEST THIRD ST STREET 2: P O BOX 367 CITY: MARION STATE: IN ZIP: 46952 BUSINESS PHONE: 3176640556 MAIL ADDRESS: STREET 1: 100 WEST THIRD ST STREET 2: P O BOX 367 CITY: MARION STATE: IN ZIP: 46952 10-K 1 FORM 10-K FOR MARION CAPITAL HOLDINGS, INC. FORM 10-K 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, 1996 or [ ] Transaction Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ___________ to ___________ Commission File Number 0-21108 MARION CAPITAL HOLDINGS, INC. (Exact name of registrant as specified in its charter) INDIANA 35-1872393 (State or other Jurisdiction (I.R.S. Employer 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: (317) 664-0556 Securities Registered Pursuant to Section 12(b) of the Act: 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, Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the issuer's voting stock held by non-affiliates, as of August 23, 1996, was $33,979,017. The number of shares of the Registrant's Common Stock, without par value, outstanding as of August 23, 1996, was 1,838,442 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended June 30, 1996 are incorporated into Part II. Portions of the Proxy Statement for the 1996 Annual Meeting of Shareholders are incorporated into Part III. Exhibit Index on Page 36 Page 1 of 41 Pages MARION CAPITAL HOLDINGS, INC. Form 10-K INDEX PART 1 Page Item 1. Business................................................... 1 Item 2. Properties................................................. 31 Item 3. Legal Proceedings.......................................... 31 Item 4. Submission of Matters to a Vote of Security Holders........ 31 Item 4.5. Executive Officers of MCHI................................. 31 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................... 32 Item 6. Selected Consolidated Financial Data....................... 33 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 33 Item 8. Financial Statements and Supplementary Data................ 33 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................... 33 PART III Item 10. Directors and Executive Officers of the Registrant......... 33 Item 11. Executive Compensation..................................... 33 Item 12. Security Ownership of Certain Beneficial Owners and Management......................................... 33 Item 13. Certain Relationships and Related Transactions............. 33 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................ 34 Signatures ....................................................... 35 PART I Item 1. Business. General Marion Capital Holdings, Inc. ("MCHI") is an Indiana corporation organized on November 23, 1992, to become a unitary savings and loan holding company. MCHI became a unitary savings and loan holding company upon the conversion (the "Conversion") of First Federal Savings Bank of Marion (the "Bank" and together with MCHI, the "Company") from a federal mutual savings bank to a federal stock savings bank on March 18, 1993. The principal asset of MCHI consists of 100% of the issued and outstanding shares of common stock, $0.01 par value per share, of the Bank. The Bank began operations in Marion, Indiana, as a federal savings and loan association in 1936, and converted to a federal mutual savings bank in 1986. The Bank offers a number of consumer and commercial financial services. These services include: (i) residential and commercial real estate loans; (ii) multi-family loans; (iii) construction loans; (iv) installment loans; (v) loans secured by deposits; (vi) auto loans; (vii) NOW accounts; (viii) consumer and commercial demand 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 two-full service offices, one in Marion and one in Decatur, Indiana. The Bank's market area for loans and deposits consists of Grant and surrounding counties and Adams County in Indiana. The Company's primary source of revenue is interest income from the Bank's lending activities. The Bank's principal lending activity is the origination of conventional mortgage loans to enable borrowers to purchase or refinance one- to four-family residential real property. At June 30, 1996, 58.3% of the Company's total loan and mortgage-backed securities portfolio consisted of conventional mortgage loans on residential real property. These loans are generally secured by first mortgages on the property. Substantially all of the residential real estate loans originated by the Bank are secured by properties located in Grant and Adams Counties. The Bank also offers secured and unsecured consumer-related loans (including installment loans, loans secured by deposits, home equity loans, and auto loans). The Company has a significant commercial real estate portfolio, with a balance of $36.2 million at June 30, 1996, or 24.2% of total loans and mortgage-backed securities. The Bank also makes a limited number of construction loans, which constituted $5.0 million or 3.3% of the Company's total loans and mortgage-backed securities at June 30, 1996, and a limited number of commercial loans which are not secured by real estate. In the early 1980s most savings institutions' loan portfolios consisted of long-term fixed-rate loans which then carried low interest rates. At the same time, most savings associations had to pay competitive and high market interest rates in order to maintain deposits. This resulted in a "negative" interest spread. The Bank experienced these problems, but responded to them as changes in regulations over the period permitted, and has been quite successful in managing its interest rate risk. Among its strategies has been an emphasis on originating adjustable-rate mortgage loans ("ARMs") which permit the Bank to better match the interest it earns on mortgage loans with the interest it pays on deposits, with interest rate minimums. As of June 30, 1996, ARMs constituted 89.6% of the Company's total mortgage loan portfolio. Additionally, the Bank attempts to lengthen liability repricing by aggressively pricing longer term certificates of deposit during periods of relatively low interest rates and investing in intermediate-term or variable-rate investment securities. Lending Activities Loan Portfolio Data. The following table sets forth the composition of the Company's loan portfolio by loan type and security type as of the dates indicated, including a reconciliation of gross loans receivable after consideration of the allowance for possible loan losses and deferred net loan fees on loans. Because the Conversion did not occur until March 18, 1993, the information at June 30, 1992 represents loan data for the Bank only.
At June 30, --------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 --------------------------------------- ------------------ ----------------- ------------------- 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: Residential.................. $ 87,106 58.26% $ 81,651 56.21% $ 76,573 55.72% $ 76,806 54.41% $ 74,545 53.12% Commercial real estate....... 36,170 24.19 35,937 24.74 35,003 25.47 39,348 27.87 44,505 31.70 Multi-family................. 15,573 10.42 14,495 9.98 12,039 8.76 12,686 8.99 12,360 8.81 Construction: Residential.................. 3,904 2.61 3,448 2.37 3,164 2.30 2,479 1.76 2,240 1.60 Commercial real estate..................... 506 .34 1,257 .87 1,159 .84 1,479 1.05 1,135 .81 Multi-family................. 584 .39 2,627 1.81 3,809 2.77 2,784 1.97 446 .32 Consumer loans: Installment loans............ 2,725 1.82 1,897 1.30 1,340 .98 1,557 1.10 1,909 1.36 Loans secured by deposits.... 883 .59 797 .55 822 .60 806 .57 1,030 .73 Home equity loans............ 399 .27 405 .27 494 .36 584 .42 725 .52 Auto loans................... 169 .11 120 .08 113 .08 130 .09 187 .13 Home improvement loans....... --- --- --- --- 1 .00 4 .00 11 .01 Education loans.............. --- --- --- --- --- --- 1 .00 3 .00 Commercial loans................ 7 .00 9 .01 14 .01 57 .04 107 .08 Mortgage-backed securities...... 1,491 1.00 2,630 1.81 2,905 2.11 2,446 1.73 1,131 .81 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Gross loans receivable and mortgage-backed securities................ $149,517 100.00% $145,273 100.00% $137,436 100.00% $141,167 100.00% $140,334 100.00% ======== ====== ======== ====== ======== ====== ======== ====== ======== ====== TYPE OF SECURITY Residential (1).............. $ 92,888 62.13% $ 88,109 60.65% $ 83,108 60.47% $ 81,636 57.83% $ 78,410 55.86% Commercial real estate....... 36,688 24.54 37,219 25.62 36,191 26.33 40,922 28.99 45,871 32.69 Multi-family................. 16,157 10.81 17,122 11.79 15,848 11.53 15,470 10.96 12,806 9.13 Autos........................ 169 .11 120 .08 113 .08 130 .09 187 .13 Deposits..................... 883 .59 797 .55 822 .60 806 .57 1,030 .73 Other security............... 7 .00 9 .01 14 .01 12 .01 25 .03 Unsecured.................... 2,725 1.82 1,897 1.30 1,340 98 2,191 1.55 2,005 1.43 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Gross loans receivable and mortgage-backed securities.............. 149,517 100.00 145,273 100.00 137,436 100.00 141,167 100.00 140,334 100.00 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Deduct: Allowance for possible losses on loans..................... 2,009 1.34 2,013 1.39 2,050 1.49 2,051 1.45 2,305 1.64 Deferred net loan fees.......... 313 .21 303 .21 333 .24 435 .31 523 .38 Loans in process................ 2,539 1.70 4,004 2.75 5,056 3.68 3,235 2.29 3,118 2.22 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Net loans receivable including mortgage-backed securities. $144,656 96.75% $138,953 95.65% $129,997 94.59% $135,446 95.95% $134,388 95.76% ======== ====== ======== ====== ======== ====== ======== ====== ======== ====== Mortgage Loans Adjustable rate.............. $128,811 89.55% $120,496 86.43% $113,184 85.91% $116,872 86.20% $113,686 84.07% Fixed rate................... 15,032 10.45 18,919 13.57 18,563 14.09 18,710 13.80% 21,545 15.93 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total...................... $143,843 100.00% $139,415 100.00% $131,747 100.00% $135,582 100.00% $135,231 100.00% ======== ====== ======== ====== ======== ====== ======== ====== ======== ====== - -----------------
(1) Includes majority of mortgage-backed securities, home equity loans and home improvement loans. The following table sets forth certain information at June 30, 1996, 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.
Due During Years Ended June 30, Balance ------------------------------------------------------------------------ Outstanding 2000 2002 2007 2012 At June 30, to to to and 1996 1997 1998 1999 2001 2006 2011 following ----------- -------- ------- ------- ------- ------- ------- --------- (In Thousands) Mortgage loans: Residential............ $ 91,010 $ 671 $ 258 $ 743 $1,660 $14,496 $35,419 $37,763 Multi-family........... 16,157 727 671 2,105 --- 1,290 5,795 5,569 Commercial real estate............... 36,676 388 2,137 6,416 3,395 8,325 7,873 8,142 Consumer loans: Home improvement ...... --- --- --- --- --- --- --- --- Home equity............ 399 121 135 68 16 --- --- 59 Auto................... 169 12 33 41 83 --- --- --- Installment............ 2,725 1,389 352 257 465 166 96 --- Loans secured by deposits.......... 883 611 93 76 91 12 --- --- Mortgage-backed securities ............ 1,491 27 817 --- --- 647 --- --- Commercial loans ..... 7 7 --- --- --- --- --- --- -------- ------ ------ ------ ------ ------- ------- ------- Total.................. $149,517 $3,953 $4,496 $9,706 $5,710 $24,936 $49,183 $51,533 ======== ====== ====== ====== ====== ======= ======= =======
The following table sets forth, as of June 30, 1996, the dollar amount of all loans due after one year which have fixed interest rates and floating or adjustable interest rates.
Due After June 30, 1997 ---------------------------------------------------- Fixed Rates Variable Rates Total ----------- -------------- ---------- (In Thousands) Mortgage loans: Residential............................... $ 7,753 $ 82,586 $ 90,339 Multi-family.............................. 925 14,505 15,430 Commercial real estate.................... 5,983 30,305 36,288 Consumer loans: Home improvement ......................... --- --- --- Home equity............................... --- 278 278 Auto...................................... 139 18 157 Installment............................... 534 802 1,336 Loan secured by deposits.................. --- 272 272 Mortgage-backed securties .................... 1,452 12 1,464 Commercial loans .............................. --- --- --- ------- -------- -------- Total..................................... $16,786 $128,778 $145,564 ======= ======== ========
Residential Loans. Residential loans consist of one-to-four family loans. Approximately $87.1 million, or 58.3%, of the Company's portfolio of loans and mortgage-backed securities at June 30, 1996, consisted of one- to four-family mortgage loans, of which approximately 91.4% had adjustable rates. During the past year, the Company sold to the Federal Home Loan Mortgage Corporation (the "FHLMC") 95% of the principal balance of substantially all fixed rate loans originated with terms in excess of 15 years or with annual interest rates lower than 8.5% and retained all of the servicing rights on all such loans. Currently, the Company is opting to keep these fixed rate loans in its portfolio since the value of fixed rate loans remains low. The option to retain or sell fixed rate loans will be evaluated from time to time. The Bank originates fixed-rate loans with terms of up to 25 years. Such 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, ninety-five percent of such loans originated during the 1996 fiscal year 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. Recently, the Bank has decided to retain these fixed rate loans in its portfolio. At June 30, 1996, the Company had $7.8 million of fixed rate residential mortgage loans which were originated in prior years in its portfolio, none of which were held for sale. Most ARMs adjust on an annual basis, although the Bank currently offers a 5-year ARM which has a fixed rate for five years, and adjusts annually thereafter. Currently, the ARMs have an interest rate average minimum of 6% and average maximum of 12%. The interest rate adjustment for substantially all of the Bank's ARMs is indexed to the One-Year Treasury Constant Maturity Index. On new residential mortgage loans, the margin above such index currently is 2.75%. The Bank offers ARMs with maximum rate changes of 2% per adjustment, and an average of 6% over the life of the loan. Generally made for terms of up to 25 years, the Bank's ARMs are not made on terms that conform with the standard underwriting criteria of FHLMC or the Federal National Mortgage Association (the "FNMA"), thereby making resale of such loans difficult. To better protect the Company against rising interest rates, the Bank underwrites its residential ARMs based on the borrower's ability to repay the loan assuming a rate equal to approximately 4% above the initial rate payable if the loan remained constant during the loan term. Although the Bank's residential mortgage loans are generally amortized over a 20-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 80%. 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 loans apply only to the purchase or construction of a single family residence and the borrower is required to have "above average" credit. The second mortgage loan originated by First Marion is a fixed rate mortgage loan with an interest rate of 12% and a term not to exceed 15 years. At June 30, 1996, these loans amounted to $540,000. Residential mortgage loans in excess of $250,000 must be approved in advance by the Bank's Board of Directors. Such loans under that amount must be approved by the Bank's Loan Committee. At June 30, 1996, residential mortgage loans amounting to $1.7 million, or 1.2% of total loans, were included in non-performing assets. See "--Non-performing and Problem Assets." Commercial Real Estate Loans. At June 30, 1996, $36.2 million, or 24.2%, of the Company's total loan and mortgage-backed securities portfolio consisted of mortgage loans secured by commercial real estate. The properties securing these loans consist primarily of nursing homes, office buildings, hotels, churches, warehouses and shopping centers. The commercial real estate loans, substantially all adjustable rate, are made for terms not exceeding 25 years, and generally require an 80% or lower loan-to-value ratio. Some require balloon payments after 5, 10 or 15 years. A number of different indices, including the prime rate as announced by NBD Bank, Indianapolis, Indiana, are used as the interest rate index for these loans. The commercial real estate loans generally have minimum interest rates of 8% and maximum interest rates of 14%. 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, 1996, had a balance of $2.7 million. Because of certain credit problems it was experiencing in its commercial real estate and multi-family loan portfolio, the Bank has since the summer of 1991 limited the size of any commercial real estate or multi-family loan or participation originated or purchased to $500,000, wherever practicable. The Company held in its portfolio 25 commercial and multi-family real estate loans with balances in excess of $500,000 at June 30, 1996. The average loan balance for all such loans was $1.1 million. A significant proportion of the Company's commercial real estate loan portfolio consists of loans secured by nursing home properties. The balance of such loans totaled $16.6 million at June 30, 1996. 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, 1996, the Company had not classified any of its commercial real estate and multi-family portfolio as substandard and no loans were classified 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 $200,000 must be approved in advance by the Bank's Board of Directors. Commercial real estate loans under that amount must be approved by the Bank's Loan Committee. Multi-Family Loans. At June 30, 1996, $15.6 millon, or 10.4%, of the Company's total loan and mortgage-backed securities portfolio consisted of mortgage loans secured by multi-family dwellings (those consisting of more than four units). All of the Company's multi-family loans are secured by apartment complexes located in Indiana or Ohio. The average balance of all such multi-family mortgage loans was $336,000 as of June 30, 1996. The largest such multi-family mortgage loan as of June 30, 1996, had a balance of $1.6 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, 1996, the Company had no loans secured by multi-family dwellings which were classified as substandard or included in non-performing assets. 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, 1996, $5.0 million, or 3.3%, of the Company's total loan and mortgage-backed securities portfolio consisted of construction loans, of which approximately $584,000 were investment residential construction loans and $506,000 related to construction of commercial real estate projects. The largest construction loan on June 30, 1996, was $431,000. No construction loans were included in non-performing assets on that date. For most construction loans, the loan is actually a 20-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 $4.2 million as of June 30, 1996, or 2.8% of the Company's total loan and mortgage-backed securities portfolio. Although consumer loans are currently only a small portion of its lending business, the Bank consistently originates consumer loans to meet the needs of its customers, and the Bank intends to originate more such loans to assist in meeting its asset/liability management goals. The Bank makes installment loans of up to three years, which consisted of $2.7 million, or 1.8% of the Company's total loan and mortgage-backed securities portfolio at June 30, 1996. Loans secured by deposits, totaling $883,000 at June 30, 1996, 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 $399,000, or 0.3% of the Company's total loan and mortgage-backed securities portfolio at June 30, 1996. Automobile loans totaled only $169,000 and are made at variable and 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, 1996, $11,000 of consumer loans were included in non-performing assets. Mortgage-Backed Securities. At June 30, 1996, the Company had $1.5 million of mortgage-backed securities outstanding, or 1.0% of the Company's total loan and mortgage-backed securities portfolio. These mortgage-backed securities have an average estimated remaining life of approximately 4 years, and may be used as collateral for borrowings and as a source of liquidity. Origination, Purchase and Sale of Loans. The Bank currently does not originate its ARMs in conformity with the standard criteria of the FHLMC or FNMA. The Bank would therefore experience some difficulty selling such loans in the secondary market, although most loans could be brought into conformity. The Bank has no intention, however, of attempting to sell such loans. The Bank's ARMs vary from secondary market criteria because the Bank does not use the standard loan form, does not require current property surveys in most cases, and does not permit the conversion of those loans to fixed-rate loans in the first three years of their term. These practices allow the Bank to keep the loan closing costs down. Although the Bank currently has authority to lend anywhere in the United States, it has confined its loan origination activities primarily in Grant and contiguous counties and in Adams County. The Bank's loan originations are generated from referrals from builders, developers, real estate brokers and existing customers, newspaper, radio and periodical advertising, and walk-in customers. Loans are originated at either the main or branch office. 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 to a borrower or its related entities if the total of all such loans by the savings association exceeds 15% of its capital (plus up to an additional 10% of capital in the case of loans fully collateralized by readily marketable collateral); provided, however, that loans up to $500,000 regardless of the percentage limitations may be made and certain housing development loans of up to $30 million or 30% of capital, whichever is less, are permitted. The maximum amount which the Bank could have loaned to one borrower and the borrower's related entities under the 15% of capital limitation was $5.3 million at June 30, 1996. The Bank's portfolio of loans currently contains one borrower that exceeds the 15% of capital limitation. As of July 31, 1996, these loans exceed the limitation by $312,000. One property is currently in the process of being refinanced, and when complete, will reduce the total loans below the applicable requirements. The Bank's loan approval process is intended to assess the borrower's ability to repay the loan, the viability of the loan and the adequacy of the value of the property that will secure the loan. To assess the borrower's ability to repay, the Bank studies the employment and credit history and information on the historical and projected income and expenses of its individual and corporate mortgagors. The Bank uses independent appraisers to appraise the property securing its loans and requires title insurance or an abstract and a valid lien on its mortgaged real estate. Appraisals on real estate securing most real estate loans in excess of $250,000, are performed by either state-licensed or state-certified appraisers, depending on the type and size of the loan. The Bank requires fire and extended coverage insurance in amounts at least equal to the principal amount of the loan. It also requires flood insurance to protect the property securing its interest if the property is in a flood plain. Tax and insurance payments are required to be escrowed by the Bank on all loans subject to private mortgage insurance, but this service is offered to all borrowers. Annual site visitations are made by licensed architects with respect to all commercial real estate loans in excess of $500,000. The Bank's Executive Committee approves all consumer loans and its Loan Committee approves all mortgage loans. Commercial real estate loans in excess of $200,000 and residential mortgage loans in excess of $250,000 must be approved in advance by the Bank's Board of Directors. The Bank applies consistent underwriting standards to the several types of consumer loans it makes to protect the Bank against the risks inherent in making such loans. Borrower character, credit history, net worth and underlying collateral are important considerations. The Bank has historically participated in the secondary market as a seller of 95% of the principal balance of its long-term fixed rate mortgage loans, as described above, although the Bank has recently begun retaining such loans in the Company's portfolio. The loans the Bank sells are designated for sale when originated. During the fiscal year ended June 30, 1996, the Bank sold $1.4 million of its fixed-rate mortgage loans, and at June 30, 1996, held no such loans for sale. The Bank obtains commitments from investors for the sale of such loans at their outstanding principal balance and these commitments are obtained prior to origination of the loans. The borrower's interest rate is equal to the rate required by the investor plus 0.375% servicing, and therefore no gains or losses are recorded at the time of the sale. 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. The servicing fee is recognized as income over the life of the loans. At June 30, 1996, the Company serviced $33.6 million of loans sold to other parties of which $7.8 million or 23.2% were for loans sold to FHLMC. The Company occasionally purchases participations to diversify its portfolio, to supplement local loan demand and to obtain more favorable yields. The participations purchased normally represent a portion of residential or commercial real estate loans originated by other Indiana financial institutions, most of which are secured by property located in Indiana. As of June 30, 1996, the Company held in its loan portfolio, participations in mortgage loans aggregating $10.9 million that it had purchased, all of which were serviced by others. The largest such participation it held at June 30, 1996, was in a loan secured by an apartment complex. The Company's portion of the outstanding balance on that date was approximately $1.6 million. The following table shows loan origination, purchase, sale and repayment activity for the Bank during the periods indicated:
Year Ended June 30, ------------------------------------------- 1996 1995 1994 -------- -------- -------- (In Thousands) Gross loans receivable and mortgage-backed securities at beginning of period...................... $145,273 $137,436 $141,167 -------- -------- -------- Originations: Mortgage loans: Residential.......................................... 28,841 21,489 30,561 Commercial real estate and multi-family.............. 8,655 10,758 13,122 -------- -------- -------- Total mortgage loans................................. 37,496 32,247 43,683 -------- -------- -------- Consumer loans: Installment loans.................................... 3,492 2,206 1,505 Loans secured by deposits............................ 763 521 670 -------- -------- -------- Total consumer loans................................ 4,255 2,727 2,175 -------- -------- -------- Commercial loans....................................... 146 21 31 -------- -------- -------- Total originations................................... 41,897 34,995 45,889 -------- -------- -------- Purchases: Mortgage-backed securities............................. --- --- 1,010 Mortgage loans: Residential.......................................... 500 --- --- Commercial real estate and multi-family.................................... 1,508 1,200 --- -------- -------- -------- Total originations and purchases..................... 43,905 36,195 46,899 -------- -------- -------- Sales: Mortgage loans: Residential.......................................... 1,426 464 4,800 Commercial real estate and multi-family.............. 4,239 1,950 5,260 Mortgage-backed securities........................... --- --- --- -------- -------- -------- Total sales........................................ 5,665 2,414 10,060 -------- -------- -------- Repayments and other deductions........................... 33,996 25,944 40,570 -------- -------- -------- Gross loans receivable and mortgage-backed securities at end of period.......................... $149,517 $145,273 $137,436 ======== ======== ========
Origination and Other Fees. The Company realizes income from fees for originating commercial real estate loans (equal to one or one-half of a percentage of the total principal amount of the loan), late charges, checking and NOW account service charges, fees for the sale of mortgage life insurance by the Bank, fees for servicing loans, rental income from the lease of space to Director W. Gordon Coryea, and fees for other miscellaneous services including money orders and travelers checks. In order to increase its competitive position with respect to other mortgage lenders, the Bank does not charge points on residential mortgage loans, but does so on its commercial real estate loans. Late charges are assessed if payment is not received within 15 days after it is due. The Bank charges miscellaneous fees for appraisals, inspections (including an inspection fee for construction loans), obtaining credit reports, certain loan applications, recording and similar services. The Company also collects fees for Visa applications which it refers to another financial institution. The Company does not underwrite any of these credit card loans. Non-Performing and Problem Assets Mortgage loans are reviewed by the Company on a regular basis and are generally placed on a non-accrual status when the loans become contractually past due 90 days or more. Once a mortgage loan is fifteen days past due, a reminder is mailed to the borrower requesting payment by a specified date. At the end of each month, late notices are sent with respect to all mortgage loans at least 20 days delinquent. When loans are 30 days in default, a third notice imposing a late charge equal to 5% of the late principal and interest payment is imposed. Contact by phone or in person is made, if feasible, with respect to all mortgage loans 30 days or more in default. By the time a mortgage loan is 90 days past due, a letter is sent to the borrower demanding payment by a certain date and indicating that a foreclosure suit will be filed if this deadline is not met. The Board of Directors normally confers foreclosure authority at that time, but management may continue to work with the borrower if circumstances warrant. Consumer and commercial loans other than mortgage loans are treated similarly. Interest income on consumer and other nonmortgage loans is accrued over the term of the loan except when serious doubt exists as to the collectibility of a loan, in which case the accrual of interest is discontinued. It is the Company's policy to recognize losses on these loans as soon as they become apparent. Non-performing assets. At June 30, 1996, $1.9 million, or 1.1% of the Company's total assets, were non-performing assets (non-accrual loans, real estate owned and troubled debt restructurings), compared to $8.9 million, or 5.5% of the Company's total assets, at June 30, 1992. At June 30, 1996, residential loans, commercial real estate loans, consumer loans and REO accounted for 87.3%, 2.5%, 0.6% and 9.6%, respectively, of non-performing assets. The June 30, 1996, non-performing assets included approximately $183,000 of real estate acquired as a result of foreclosure, voluntary deed, or other means, compared to $1.6 million at June 30, 1992. Such real estate acquired is classified by the Company as "real estate owned" or "REO" until it is sold. When property is so acquired, the value of the asset is recorded on the books of the Company at the lower of the unpaid principal balance at the date of acquisition plus foreclosure and other related costs or at fair value. Interest accrual ceases when the collection of interest becomes doubtful, usually after the loan has been delinquent for 90 days or more. All costs incurred from the date of acquisition in maintaining the property are expensed. The following table sets forth the amounts and categories of the Company's non-performing assets (non-accrual loans, real estate owned and troubled debt restructurings). Information at June 30, 1992 represents non-performing assets data for the Bank only. It is the policy of the Company that all earned but uncollected interest on all loans be reviewed monthly to determine if any portion thereof should be classified as uncollectible for any loan past due in excess of 90 days.
At June 30, -------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- --------- ---------- -------- ---------- (Dollars in Thousands) Accruing loans delinquent more than 90 days ........................ $ --- $ --- $ --- $ --- $ --- Non-accruing loans (1): Residential............................... 1,658 1,698 2,054 2,362 2,637 Multi-family.............................. --- --- --- --- --- Commercial real estate.................... 47 --- 2,580 2,870 4,654 Consumer.................................. 11 54 3 104 71 Troubled debt restructurings .................. --- --- --- --- --- ------ ------ ------ ------ ------ Total non-performing loans................ 1,716 1,752 4,637 5,336 7,362 ------ ------ ------ ------ ------ Real estate owned, net......................... 183 206 830 1,795 1,550 ------ ------ ------ ------ ------ Total non-performing assets .............. $1,899 $1,958 $5,467 $7,131 $8,912 ====== ====== ====== ====== ====== Non-performing loans to total loans, net (2) ........................... 1.18% 1.27% 3.59% 3.95% 5.43% Non-performing assets to total assets ......... 1.07% 1.13% 3.20% 4.10% 5.52%
(1) The Company generally places mortgage loans on a nonaccrual status when the loans become contractually past due 90 days or more. Interest income prevously accrued but not deemed collectible is reversed and charged against current income. Interest on these loans is then recognized as income when collected. At June 30, 1996, $1.7 million of nonaccrual loans were residential loans, $47,000 were commercial real estate loans, and $11,000 were consumer loans. For the year ended June 30, 1996, the income that would have been recorded had the non-accrual loans not been in a non-performing status totaled $153,000 compared to actual income recorded of $110,000. (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 may 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, 1996, were $1.2 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. Information at June 30, 1992 represents classified assets data for the Bank only.
At June 30, ------------------------------------------------------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (In Thousands) Substandard assets (1).................. $1,226 $1,574 $5,111 $7,375 $ 9,468 Doubtful assets ........................ --- --- --- --- --- Loss assets............................. --- --- --- --- 213 Special mention......................... --- --- --- 2,500 3,700 ------ ------ ------ ------ ------- Total classified assets.............. $1,226 $1,574 $5,111 $9,875 $13,381 ====== ====== ====== ====== ======= General loss allowances................. $2,009 $2,013 $2,050 $2,051 $ 2,305 Specific loss allowances................ --- --- --- --- --- ------ ------ ------ ------ ------- Total allowances..................... $2,009 $2,013 $2,050 $2,051 $ 2,305 ====== ====== ====== ====== =======
- --------------- (1) Includes REO, net, of $0.2, $0.2, $0.8, $1.8, and $1.6 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, 1996, the Company had 65 loans classified as substandard totaling approximately $1.0 million. Included in substandard assets are certain loans to facilitate the sale of the real estate owned, totaling 152,000 at June 30, 1996. 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, 1996, are slow mortgage loans (loans or contracts delinquent for generally 90 days or more) aggregating $880,000, slow consumer loans totaling $11,000 and REO of $183,000. Special Mention Assets. The Company classified no assets as special mention at June 30, 1996, 1995 and 1994. The Company's assets subject to special mention at June 30, 1993, and 1992 totaled $2.5 million and $3.7 million, respectively. Allowance for Loan Losses The allowance for loan losses is maintained through the provision for losses on loans, which is charged to earnings. The provision is determined in conjunction with management's review and evaluation of current economic conditions (including those of the Bank's lending area), changes in the character and size of the loan portfolio, loan delinquencies (current status as well as past and anticipated trends) and adequacy of collateral securing loan delinquencies, historical and estimated net charge-offs, and other pertinent information derived from a review of the loan portfolio. The Company has increased the provision for losses on loans partly in recognition of changing economic conditions and its increased perception of risks inherent in its commercial real estate and multi-family loan portfolio. Loans or portions thereof are charged to the allowance when losses are considered probable. In management's opinion, the Company's allowance for possible loan losses is adequate to absorb anticipated future losses from loans at June 30, 1996. Summary of Loan Loss Experience. The following table analyzes changes in the allowance for loan losses during the past five years ended June 30, 1996. Information for the year ended June 30, 1992 represents data for the Bank only.
Year Ended June 30, ----------------------------------------------------------- 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ (Dollars in Thousands) Balance of allowance at beginning of period....................... $2,013 $2,050 $2,051 $2,305 $1,981 ------ ------ ------ ------ ------ Add Recoveries of loans previously charged off -- residential real estate loans.............................. 2 12 17 1 --- Less charge-offs: Residential real estate loans............. 37 93 82 22 48 Commercial real estate loans.............. 3 2 --- 598 778 Consumer loans............................ --- 22 1 2 --- ------ ------ ------ ------ ------ Net charge-offs.............................. 38 105 66 621 826 ------ ------ ------ ------ ------ Provisions for losses on loans............... 34 68 65 367 1,150 ------ ------ ------ ------ ------ Balance of allowance at end of period................................. $2,009 $2,013 $2,050 $2,051 $2,305 ====== ====== ====== ====== ====== Net charge-offs to total average loans outstanding for period.............. .03% .08% .05% .46% .60% Allowance at end of period to loans receivable at end of period......... 1.38 1.45 1.59 1.52 1.70 Allowance to total non-performing loans at end of period.................... 117.07 114.87 44.21 38.44 31.31
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. Information for the year ended June 30, 1992 represents allowance data for the Bank only.
June 30, ---------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------------- ----------------- ---------------- ----------------- ----------------- Percent Percent Percent Percent Percent of loans of loans of loans of loans of loans in each in each in each in each in each category category category category category to total to total to total to total to total Amount loans Amount loans Amount loans Amount loans Amount loans ------ --------- ------- -------- ------- ------- ------- -------- ------- -------- (Dollars in Thousands) Balance at end of period applicable to: Residential $ --- 59.11% $ 10 57.53% $ 48 57.29% $ 194 55.79% $ 165 53.55% Commercial real estate 29 24.44 30 25.19 438 26.02 478 28.36 476 31.97 Multi-family 264 10.52 264 10.16 264 8.95 264 9.15 136 8.88 Construction loans --- 3.37 --- 5.14 --- 6.04 --- 4.86 --- 2.74 Commercial loans --- .01 --- .01 --- .01 --- 0.04 --- 0.08 Consumer loans 24 2.55 20 1.97 39 1.69 37 1.80 38 2.78 Unallocated 1,692 --- 1,689 --- 1,261 --- 1,078 --- 1,490 --- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total $2,009 100.00% $2,013 100.00% $2,050 100.00% $2,051 100.00% $2,305 100.00% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Investments Federally chartered savings associations have the authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers' acceptances, repurchase agreements and federal funds sold. Subject to various restrictions, federally chartered savings associations may also invest a portion of their assets in commercial paper, corporate debt securities and asset-backed securities. The investment policy of MCHI, which is established by the Board of Directors and is implemented by the Executive Committee, is designed primarily to maximize the yield on the investment portfolio subject to minimal liquidity risk, default risk, interest rate risk, and prudent asset/liability management. Specifically, MCHI's policies generally limit investments in corporate debt obligations to those which are rated in the two highest rating categories by a nationally recognized rating agency at the time of the investment and such obligations must continue to be rated in one of the four highest rating categories. Commercial bank obligations, such as certificates of deposit, brokers acceptances, and federal funds must be rated "C" or better by a major rating service. Commercial paper must be rated A-1 by Standard and Poor's and P-1 by Moody's. The policies also allow investments in obligations of federal agencies such as the Government National Mortgage Association ("GNMA"), FNMA, and FHLMC, and obligations issued by state and local governments. MCHI does not utilize options or financial or futures contracts. The Company's investment portfolio consists of marketable equity securities, U.S. Treasury and agency securities, state and municipal bonds, investment in two Indiana limited partnerships and FHLB stock. At June 30, 1996, approximately $14.2 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 7.79% of the Company's total assets, consisted of such investments. The following tables set forth the carrying value and market value of the Company's investments at the dates indicated.
At June 30, ------------------------------------------------------------------------- 1996 1995 1994 ---------------------- ---------------------- --------------------- Carrying Market Carrying Market Carrying Market Value Value Value Value Value Value -------- ------ -------- ------ -------- ------ (In Thousands) Securities available for sale (1): Federal agencies................. $ 1,000 $ 1,000 $ 3,000 $ 2,985 $ --- $ --- Marketable equity securities..... --- --- --- --- --- --- ------ ------ ------ ------ ------ ------ Total securities available for sale....................... 1,000 1,000 3,000 2,985 --- --- ------ ------ ------ ------ ------ ------ Securities held to maturity (2): U.S. Treasury.................... 3,015 2,975 3,035 2,978 3,055 2,908 Federal agencies................. 6,954 6,917 11,000 10,744 17,986 17,598 State and municipal.............. 610 605 610 592 900 862 Other ........................... 988 1,000 --- --- --- --- ------ ------ ------ ------ ------ ------ Total securities held to maturity.................... 11,567 11,497 14,645 14,314 21,941 21,368 ------ ------ ------ ------ ------ ------ Real estate limited partnerships.... 1,624 (4) 1,527 (4) 1,422 (4) FHLB stock (3)...................... 988 988 909 909 909 909 ------- ------- ------- Total investments.............. $15,179 $20,081 $24,272 ======= ======= =======
- ------------- (1) Upon adoption of SFAS No. 115 as of July 1, 1994, securities available for sale are recorded at market value in the financial statements. Prior to the adoption of SFAS No. 115, the marketable equity securities currently classified as available for sale were carried at the lower cost or market. (2) Mortgage-backed securities included in securities held to maturity in the financial statements are included in the gross loans receivable table on page 2 of this Form 10-K. (3) Market value approximates carrying value. (4) Market values are not available, nor have there been recent appraisals of the apartment complexes invested in by the partnerships. 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, 1996.
Amount at June 30, 1996 which matures in ------------------------------------------------------------------------- One One to Over Year or less Five Years Ten Years and Stock -------------------- ----------------------- ---------------------- Weighted Weighted Weighted Carrying Average Carrying Average Carrying Average Value Yield Value Yield Value Yield -------- ------- -------- ------- -------- ------- (Dollars in Thousands) Securities available for sale (1): Federal agencies................. $1,000 4.20% $ --- ---% $ --- ---% ------ ---- ------ ---- ------ ---- Total securities available for sale....................... 1,000 4.20 --- --- --- --- ------ ---- ------ ---- ------ ---- Securities held to maturity (2): U.S. Treasury.................... 1,011 4.84 2,004 5.16 --- --- Federal agencies................. 5,954 5.17 1,000 5.53 --- --- State and municipal.............. --- --- 610 4.85 --- --- Other ........................... 988 5.32 --- --- --- --- ------ ---- ------ ---- ------ ---- Total securities held to maturity.................... 7,953 5.15 3,614 5.21 --- --- ------ ---- ------ ---- ------ ---- FHLB stock.......................... --- --- --- --- 988 7.53 ------ ---- ------ ---- ------ ---- Total investments.............. $8,953 5.04% $3,614 5.21% $ 988 7.53% ====== ==== ====== ==== ====== ====
- ---------------- (1) Securities available for sale are set forth at amortized cost for purposes of this table. (2) Mortgage-backed securities included in securities held to maturity in the financial statements are included in the gross loans receivable table on page 2. The Bank owns 99% of the limited partnership interests in Pedcor Investments 1987-II, an Indiana limited partnership ("Pedcor") organized to build, own, operate and lease a 144-unit apartment complex in Indianapolis, Indiana. The project, operated as multi-family, low/moderate income housing project, is complete and performing as planned. A low/moderate income housing project qualifies for certain tax credits if (i) it is a residential rental property, (ii) the units are used on a nontransient basis, and (iii) 20% or more of the units in the project are occupied by tenants whose incomes are 50% or less of the area median gross income, adjusted for family size, or, alternatively, at least 40% of the units in the project are occupied by tenants whose incomes are 60% of the area median gross income. Qualified low income housing projects generally must comply with these and other rules for 15 years, beginning with the first year the project qualifies for the tax credit, or some or all of the tax credit together with interest may be recaptured. The tax credit is subject to limitations on the use of the general business credit, but no basis reduction is required for any portion of the tax credit claimed. The Bank committed to invest approximately $3.41 million in Pedcor at inception of the project in January, 1988. Through June 30, 1996, the Bank has invested approximately $3.28 million in Pedcor with 1 additional annual capital contribution remaining to be paid in January, 1997 totaling $130,000. The additional contribution will be used for operating and other expenses of the partnership. This payment is contingent upon the Bank not exercising a put option which would require the general partners to buy out the Bank's interest in the partnership for $5,000. The tax credits resulting from Pedcor's operation of a low/moderate income housing project will be available to the Company through 1998. Although the Company has reduced income tax expense by the full amount of the tax credit available each year, it has not been able to fully utilize available tax credits to reduce income taxes payable because it is not allowed to use tax credits that would reduce its regular corporate tax liability below its alternative minimum tax liability. The Bank may carryforward unused tax credits for a period of 15 years and believes it will be able to utilize available tax credits during the carryforward period. Pedcor has incurred operating losses from its operations primarily due to accelerated depreciation of assets and other factors. Certain fees to the general partner not recorded or estimable to date by the partnership under provisions of the partnership agreement could adversely affect future operating results when accrued or paid. The Bank has accounted for its investment in Pedcor on the equity method, and, accordingly, has recorded its shares of these losses as reductions to its investment in Pedcor, which at June 30, 1996, was $1.6 million. The following summarizes the Bank's equity in Pedcor's losses and tax credits recognized in the Company's consolidated financial statements:
Year Ended June 30, ------------------------------------------------------------ 1996 1995 1994 1993 1992 -------- ------- ------- ------- ------- Investment in Pedcor: Accumulated contributions..................... $3,280 $2,990 $2,700 $2,405 $1,995 Net of equity in losses....................... 1,624 1,527 1,422 1,354 1,156 Equity in losses, net of income tax effect.......................... (117) (111) (137) (104) (101) Tax credit......................................... 405 405 405 405 405 ------ ------ ------ ------ ------ Increase in after-tax net income from Pedcor investment........................ $ 288 $ 294 $ 268 $ 301 $ 304 ====== ====== ====== ====== ======
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%. 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, 1996, the Bank had liquid assets of $15.1 million, and a regulatory liquidity ratio of 12.2%, of which 7.8% constituted short-term investments. Sources of Funds General. Deposits with the Bank have traditionally been the Company's primary source of funds for use in lending and investment activities. In addition to deposits, the Company derives funds from loan amortization, prepayments, retained earnings and income on earning assets. While loan amortization and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition. The Company also relies on borrowings from the Federal Home Loan Bank ("FHLB") of Indianapolis to support the Bank's loan originations and to assist in asset/liability management. Deposits. Deposits are attracted, principally from within Grant and contiguous counties and Adams County, through the offering of a broad selection of deposit instruments including NOW and other transaction accounts, fixed-rate certificates of deposit, individual retirement accounts, and savings accounts. The Bank does not actively solicit or advertise for deposits outside of Grant and Adams Counties. Substantially all of the Bank's depositors are residents of those counties. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds remain on deposit and the interest rate. The Bank has no 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, 1996, is as follows:
Minimum Balance at Weighted Opening June 30, % of Average Type of Account Balance 1996 Deposits Rate - --------------- ---------- ----------- -------- --------- (Dollars in Thousands) Withdrawable: Savings accounts....................... $ 10.00 $ 17,572 13.92% 3.25% NOW and other transactions accounts.... 10.00 20,803 16.47 3.33 -------- ------ Total withdrawable........................ 38,375 30.39 3.29 -------- ------ Certificates (original terms):............ 28 days................................ 1,000 321 .25 3.76 91 days................................ 1,000 970 .77 4.36 182 days............................... 1,000 9,567 7.58 4.84 12 months.............................. 1,000 14,983 11.87 5.35 18 months.............................. 1,000 1,259 1.00 5.46 24 months.............................. 1,000 1,562 1.24 5.37 30 months.............................. 1,000 9,942 7.87 5.75 36 months.............................. 1,000 1,774 1.41 5.27 48 months.............................. 1,000 6,131 4.86 7.01 60 months.............................. 1,000 11,860 9.39 6.20 72 months.............................. 1,000 39 .03 5.77 96 months.............................. 1,000 369 .29 6.39 IRA's 28 days................................ 500 1 .00 3.70 91 days................................ 500 182 .14 4.37 182 days............................... 500 161 .13 4.88 12 months.............................. 500 466 .37 5.12 18 months.............................. 500 56 .04 5.57 24 months.............................. 500 38 .03 4.79 30 months.............................. 500 983 .78 5.55 36 months.............................. 500 63 .05 5.06 48 months.............................. 500 4,768 3.78 7.51 60 months.............................. 500 20,775 16.45 6.50 72 months.............................. 500 615 .49 5.63 96 months.............................. 500 1,000 .79 6.12 -------- ------ Total certificates (1).................... 87,885 69.61 5.96 -------- ------ Total deposits............................ $126,260 100.00% 5.15 ======== ======
- ------------ (1) Including $11.8 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, --------------------------------------------- 1996 1995 1994 ------- ------- ------- (In Thousands) Under 5%............... $14,088 $15,072 $38,221 5.00 - 6.99%........... 50,836 41,070 23,258 7.00 - 8.99%........... 22,961 27,254 14,529 9.00% and over......... --- --- --- ------- ------- ------- Total.................. $87,885 $83,396 $76,008 ======= ======= ======= 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, 1996, have been allocated based upon certain rollover assumptions.
Amounts At June 30, 1996, Maturing in ------------------------------------------------------------ One Year Two Three Greater Than or Less Years Years Three Years ------- ----- ----- ----------- (In Thousands) Under 5%....................... $13,546 $ 542 $ --- $ --- 5.00 - 6.99% .................. 19,715 9,223 6,843 15,055 7.00 - 8.99% .................. 363 3,304 8,278 11,016 ------- ------- ------- ------- Total ......................... $33,624 $13,069 $15,121 $26,071 ======= ======= ======= =======
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, 1996. Maturity Period (In Thousands) ------------------------ -------------- Three months of less................................. $ 907 Greater than three months through six months......... 333 Greater than six months through twelve months........ 1,176 Over twelve months................................... 9,345 ------- Total................................................ $11,761 ======= 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.
DEPOSIT ACTIVITY --------------------------------------------------------------------------- Increase Increase (Decrease) (Decrease) Balance at from Balance at from June 30, % of June 30, June 30, % of June 30, 1996 Deposits 1995 1995 Deposits 1994 ---------- -------- --------- ---------- -------- --------- (Dollars in Thousands) Withdrawable: Savings accounts.............. $ 17,572 13.92% $(1,207) $ 18,779 15.57% $(6,620) NOW and other transactions accounts.................... 20,803 16.47 2,365 18,438 15.29 (1,120) -------- ------ ------- -------- ------ -------- Total withdrawable............... 38,375 30.39 1,158 37,217 30.86 (7,740) -------- ------ ------- -------- ------ -------- Certificates (original terms): 28 days.......................... 321 .25 18 303 .25 235 91 days.......................... 970 .77 (72) 1,042 .86 (47) 182 days......................... 9,567 7.58 (2,062) 11,629 9.64 (452) 12 months........................ 14,983 11.87 5,842 9,141 7.58 1,015 18 months........................ 1,259 1.00 (486) 1,745 1.45 (442) 24 months........................ 1,562 1.24 (420) 1,982 1.64 (698) 30 months........................ 9,942 7.87 (1,029) 10,971 9.10 1,471 36 months........................ 1,774 1.41 302 1,472 1.22 (113) 48 months........................ 6,131 4.86 (60) 6,191 5.13 3,229 60 months........................ 11,860 9.39 619 11,241 9.32 1,866 72 months........................ 39 .03 (1) 40 .03 3 96 months........................ 369 .29 (15) 384 .32 (483) IRA's 28 days.......................... 1 .00 (24) 25 .02 9 91 days.......................... 182 .14 20 162 .13 68 182 days......................... 161 .13 (88) 249 .21 9 12 months........................ 466 .37 132 334 .28 (126) 18 months........................ 56 .04 (78) 134 .11 (89) 24 months........................ 38 .03 --- 38 .03 (14) 30 months........................ 983 .78 (170) 1,153 .96 (158) 36 months........................ 63 .05 29 34 .03 (26) 48 months........................ 4,768 3.78 325 4,443 3.68 4,024 60 months........................ 20,775 16.45 1,721 19,054 15.80 (1,358) 72 months........................ 615 .49 (8) 623 .52 (18) 96 months........................ 1,000 .79 (6) 1,006 .83 (517) -------- ------ ------- -------- ------ -------- Total certificates............... 87,885 69.61 4,489 83,396 69.14 7,388 -------- ------ ------- -------- ------ -------- Total deposits................... $126,260 100.00% $ 5,647 $120,613 100.00% $ (352) ======== ====== ======= ======== ====== ========
DEPOSIT ACTIVITY -------------------------------------------------------------------------- Increase (Decrease) Balance at from Balance at June 30, % of June 30, June 30, % of 1994 Deposits 1993 1993 Deposits --------- -------- -------- ---------- -------- (Dollars in Thousands) Withdrawable: Savings accounts............... $ 25,399 21.00% $ 1,342 $ 24,057 19.73% NOW and other transaction accounts..................... 19,558 16.17 1,372 18,186 14.91 -------- ------ ------- -------- ------ Total withdrawable................ 44,957 37.17 2,714 42,243 34.64 -------- ------ ------- -------- ------ Certificates (original terms): 28 days........................ 68 .06 (63) 131 .11 91 days........................ 1,089 .90 117 972 .80 182 days....................... 12,081 9.99 (2,889) 14,970 12.28 12 months...................... 8,126 6.72 (1,462) 9,588 7.86 18 months...................... 2,187 1.81 (301) 2,488 2.04 24 months...................... 2,680 2.22 511 2,169 1.78 30 months...................... 9,500 7.85 (864) 10,364 8.50 36 months...................... 1,585 1.31 (216) 1,801 1.48 48 months...................... 2,962 2.45 (604) 3,566 2.92 60 months...................... 9,375 7.75 2,303 7,072 5.80 72 months...................... 37 .03 (7) 44 .04 96 months...................... 867 .72 (77) 944 .77 IRA's 28 days........................ 16 .01 1 15 .01 91 days........................ 94 .07 (29) 123 .10 182 days....................... 240 .20 (75) 315 .26 12 months...................... 460 .38 (31) 491 .40 18 months...................... 223 .18 8 215 .18 24 months...................... 52 .04 11 41 .03 30 months...................... 1,311 1.08 (160) 1,471 1.21 36 months...................... 60 .05 (21) 81 .07 48 months...................... 419 .35 (90) 509 .42 60 months...................... 20,412 16.87 375 20,037 16.43 72 months...................... 641 .53 4 637 .52 96 months...................... 1,523 1.26 (134) 1,657 1.35 -------- ------ ------- -------- ------ Total certificates................ 76,008 62.83 (3,693) 79,701 65.36 -------- ------ ------- -------- ------ Total deposits.................... $120,965 100.00% $ (979) $121,944 100.00% ======== ====== ======= ======== ======
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, 1996, FHLB of Indianapolis advances totaled $6.2 million, representing 3.5% 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, --------------------------------------- 1996 1995 1994 ------ ------ ------ (Dollars in Thousands) FHLB Advances: Average balance outstanding........................................... $6,694 $5,574 $3,331 Maximum amount outstanding at any month-end during the period................................................ 6,963 7,963 3,825 Weighted average interest rate during the period................................................ 6.83% 6.85% 7.33% Weighted average interest rate at end of period.................................................... 6.50% 6.78% 6.83%
There are regulatory restrictions on advances from the FHLBs. See "Regulation - Federal Home Loan Bank System" and "- Qualified Thrift Leader." These limitations are not expected to have any impact on the Company's ability to borrow from the FHLB of Indianapolis. The Company does not anticipate any problem obtaining advances appropriate to meet its requirements in the future, if such advances should become necessary. Service Corporation Subsidiary OTS regulations permit federal savings associations to invest in the capital stock, obligations, or other specified types of securities of subsidiaries (referred to as "service corporations") and to make loans to such subsidiaries and joint ventures in which such subsidiaries are participants in an aggregate amount not exceeding 2% of an association's assets, plus an additional 1% of assets if the amount over 2% is used for specified community or inner-city development purposes. In addition, federal regulations permit associations to make specified types of loans to such subsidiaries (other than special-purpose finance subsidiaries), in which the association owns more than 10% of the stock, in an aggregate amount not exceeding 50% of the association's regulatory capital if the association's regulatory capital is in compliance with applicable regulations. Current law requires a savings association that acquires a non-savings association subsidiary, or that elects to conduct a new activity within a subsidiary, to give the FDIC and the OTS at least 30 days advance written notice. The FDIC may, after consultation with the OTS, prohibit specific activities if it determines such activities pose a serious threat to the Savings Association Insurance Fund ("SAIF"). The Bank's only subsidiary, First Marion Service Corporation ("First Marion") was organized in 1971 and currently is engaged in the sale of tax deferred annuities pursuant to an arrangement with One System, Inc., a licensed insurance broker, in Indianapolis. It also sells mutual funds through an arrangement with Independent Financial Securities, Inc., a licensed securities broker, in White Plains, New York. First Marion has one licensed employee engaged in such sales of tax deferred annuities and mutual funds. In addition, beginning in July 1995, First Marion began providing 100% financing to borrowers of the Bank by providing a 20% second mortgage behind the Bank's 80% mortgage. Such loans amounted to $540,000 at June 30, 1996. At June 30, 1996, the Bank's investment in First Marion totaled $58,000. During the year ended June 30, 1996, First Marion had net income of $14,000. Employees As of June 30, 1996, the Bank employed 29 persons on a full-time basis and 2 persons on a part-time basis. None of the Bank's employees are represented by a collective bargaining group. Management considers its employee relations to be good. Competition The Bank originates most of its loans to and accepts most of its deposits from residents of Grant and Adams Counties, Indiana. The Bank is subject to competition from various financial institutions, including state and national banks, state and federal savings associations, credit unions, certain nonbanking consumer lenders, and other companies or firms, including brokerage houses and mortgage brokers, that provide similar services in Grant and Adams Counties with significantly larger resources than the Bank. In particular, three commercial banks and one savings association compete with the Bank in its market area. The Bank also competes 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 healthy savings associations in Indiana have been completed. Affiliations between banks and healthy savings associations based in Indiana may also increase the competition faced by the Bank and MCHI. In addition, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in other states and, with state consent and subject to certain limitations, allows banks to acquire out-of-state branches either through merger or de novo expansion. The State of Indiana recently passed a law establishing interstate branching provisions for Indiana state chartered banks consistent with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana Branching Law authorizes Indiana banks to branch interstate by merger or de novo expansion and authorizes out-of-state banks meeting certain requirements to branch into Indiana by merger or de novo expansion. The Indiana Branching Law became effective March 15, 1996, provided that prior to June 1, 1997, interstate mergers and de novo branches are not permitted to out-of-state banks unless the laws of their home states permit Indiana banks to merger or establish de novo branches on a reciprocal basis. This new legislation may also result in increased competition for the Company. 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. The primary factors influencing competition for deposits are interest rates, service and convenience of office locations. The Bank competes for loan originations primarily through the efficiency and quality of services it provides borrowers, builders and realtors and 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 that 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. 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 these governmental agencies 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"). Congress is considering legislation that would consolidate the supervision and regulation of all U.S. financial institutions in one administrative body (the "Legislation"). It cannot be predicted with certainty whether or when the Legislation will be enacted or the extent to which the Bank would be affected thereby. 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 assessment rates range from .0172761% of assets for associations with assets of $67 million or less to .0045864% 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, 1996, was $26,217. 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 System, which consists of 12 regional banks. The Federal Housing Finance Board ("FHFB"), an independent agency, controls the FHLB System including the FHLB of Indianapolis. The FHLB System provides a central credit facility primarily for member savings associations and other member financial institutions. The Bank is required to hold shares of capital stock in the FHLB of Indianapolis in an amount at least equal to the greater of 1% of the aggregate principal amount of its unpaid residential mortgage loans, home purchase contracts and similar obligations at the end of each calendar year, .3% of its assets or 1/20 (or such greater fraction established by the FHLB) of outstanding FHLB advances, commitments, lines of credit and letters of credit. The Bank is currently in compliance with this requirement. At June 30, 1996, the Bank's investment in stock of the FHLB of Indianapolis was $988,400. In past years, the Bank received dividends on its FHLB stock. All 12 FHLB's are required by law to provide funds for the resolution of troubled savings associations and to establish affordable housing programs through direct loans or interest subsidies on advances to members to be used for lending at subsidized interest rates for low- and moderate-income, owner-occupied housing projects, affordable rental housing, and certain other community projects. These contributions and obligations could adversely affect the value of FHLB stock in the future. For the year ending June 30, 1996, dividends paid to the Bank totaled $73,000, for an annual rate of 7.87%. A reduction in value of such stock may result in a corresponding reduction in the Bank's capital. The FHLB of Indianapolis serves as a reserve or central bank for member institutions within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes advances to members in accordance with policies and procedures established by the FHLB and the Board of Directors of the FHLB of Indianapolis. All FHLB advances must be fully secured by sufficient collateral as determined by the FHLB. Eligible collateral includes first mortgage loans less than 90 days delinquent or securities evidencing interests therein, securities (including mortgage-backed securities) issued, insured or guaranteed by the federal government or any agency thereof, FHLB deposits and, to a limited extent, real estate with readily ascertainable value in which a perfected security interest may be obtained. Other forms of collateral may be accepted as over collateralization or, under certain circumstances, to renew outstanding advances. All long-term advances are required to provide funds for residential home financing and the FHLB has established standards of community service that members must meet to maintain access to long-term advances. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the borrowing. Under current law, savings associations which cease to be Qualified Thrift Lenders are ineligible to receive advances from their FHLB. Insurance of Deposits Deposit Insurance. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance funds, the BIF for commercial banks and state savings banks and the SAIF for savings associations and banks that have acquired deposits from savings associations. The FDIC is required to maintain designated levels of reserves in each fund. The reserves of the SAIF are currently 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. Thrifts are generally prohibited from converting from one insurance fund to the other until the SAIF meets its designated reserve level, except with the prior approval of the FDIC in certain limited cases, and provided certain fees are paid. The insurance fund conversion provisions do not prohibit a SAIF member from converting to a bank charter or merging with a bank during the moratorium as long as the resulting bank continues to pay the applicable insurance assessments to the SAIF during such period and as long as certain other conditions are met. Assessments. The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the BIF and members of the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to the target level within a reasonable time and may decrease such rates if such target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary depending on the risk the institution poses to its deposit insurance fund. Such risk level is determined based on the institution's capital level and the FDIC's level of supervisory concern about the institution. Because of the differing reserve levels of the SAIF and the BIF, deposit insurance assessments paid by well-capitalized BIF-insured institutions were recently reduced significantly below the level paid by well-capitalized SAIF-insured institutions. Assessments paid by well-capitalized SAIF-insured institutions exceeded those paid by well-capitalized BIF-insured institutions by approximately $0.19 per $100 in deposits in late 1995 and exceeded them by $0.23 per $100 in deposits beginning in 1996. Such premium disparity could have a negative competitive impact on the Bank and other institutions with SAIF deposits. Congress has recently considered many proposals designed to recapitalize the SAIF and eliminate the significant premium disparity between the BIF and the SAIF. Among those considered is a recapitalization plan providing for a special assessment, currently estimated at approximately $0.68 per $100 of SAIF deposits, in order to increase SAIF reserves to the level required by law. Certain BIF-insured banks holding SAIF-insured deposits would pay a lower special assessment. In addition, the cost of prior thrift failures would be shared by both the SAIF and the BIF. Such cost sharing might increase BIF assessments. SAIF assessments for well-capitalized SAIF-insured institutions would be set at a significantly lower level after the legislation is adopted and could never be reduced below the level set for well-capitalized BIF-insured institutions. The recapitalization plan also provides for the merger of the SAIF and BIF on January 1, 1998, subject to certain conditions. It has also been proposed that the savings association charter be eliminated in connection with the proposed merger of the BIF and SAIF. The Bank had $126.3 million in deposits at June 30, 1996. If the one-time special assessment in the legislative proposal is enacted into law, the Bank will pay an additional after-tax assessment of approximately $520,000 (based upon deposits at June 30, 1996), which will reduce capital and earnings for the quarter in which any such assessment is recorded. However, it is expected that quarterly SAIF assessments would be reduced significantly sometime after adoption of the legislation. No assurances can be given that the SAIF recapitalization plan discussed above or any other plan will be enacted into law or in what form it may be enacted. In addition, the Company can give no assurances that the disparity between BIF and SAIF assessments will be eliminated. If the proposed legislation is not adopted, SAIF premiums may increase and the disparity between BIF and SAIF premiums may become greater, with a resulting adverse effect on the Company's operations. Regulatory Capital Currently, savings associations are subject to three separate minimum capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital requirement, and (iii) a risk-based capital requirement. The leverage limit requires that savings associations maintain "core capital" of at least 3% of total assets. Core capital is generally defined as common stockholders' equity (including retained income), noncumulative perpetual preferred stock and related surplus, certain minority equity interests in subsidiaries, qualifying supervisory goodwill (on a declining basis until 1995), purchased mortgage servicing rights (which may be included in an amount up to 50% of core capital, but which are to be reported on an association's balance sheet at the lesser of 90% of their fair market value, 90% of their original purchase price, or 100% of their remaining unamortized book value), and purchased credit card relationships (which may be included in an amount up to 25% of core capital) less nonqualifying intangibles. Under the tangible capital requirement, a savings association must maintain tangible capital (core capital less all intangible assets except purchased mortgage servicing rights which may be included after making the above-noted adjustments) of at least 1.5% of total assets. Under the risk-based capital requirements, a minimum amount of capital must be maintained by a savings association to account for the relative risks inherent in the type and amount of assets held by the savings association. The risk-based capital requirement requires a savings association to maintain capital (defined generally for these purposes as core capital plus general valuation allowances and permanent or maturing capital instruments such as preferred stock and subordinated debt less assets required to be deducted) equal to 8.0% of risk-weighted assets. Assets are ranked as to risk in one of four categories (0-100%) with a credit risk-free asset such as cash requiring no risk-based capital and an asset with a significant credit risk such as a non-accrual loan being assigned a factor of 100%. At June 30, 1996, based on the capital standards then in effect, the Bank was in compliance with the fully phased-in capital requirements. The OTS has delayed implementation of a rule which sets forth the methodology for calculating an interest rate risk component to be incorporated into the OTS regulatory capital rule. Under the rule, only savings associations with "above normal" interest rate risk (institutions whose portfolio equity would decline in value by more than 2% of assets in the event of a hypothetical 200-basis-point move in interest rates) will be required to maintain additional capital for interest rate risk under the risk-based capital framework. In addition, most institutions with less than $300 million in assets and a risk-based capital ratio in excess of 12%, such as the Bank, are subject to less stringent reporting requirements relating to the interest rate component of the new rule. Although the OTS has decided to delay implementation of this rule, it will continue to monitor the level of interest rate risk at individual institutions and it retains the authority, on a case-by-case basis, to impose additional capital requirements for individual institutions with significant interest rate risk. If an association is not in compliance with its capital requirements, the OTS is required to prohibit asset growth and to impose a capital directive that may restrict, among other things, the payment of dividends and officers' compensation. In addition, the OTS and the FDIC generally are authorized to take enforcement actions against a savings association that fails to meet its capital requirements, which actions may include restrictions on operations and banking activities, the imposition of a capital directive, a cease and desist order, civil money penalties or harsher measures such as the appointment of a receiver or conservator or a forced merger into another institution. Prompt Corrective Action FedICIA requires, among other things, federal bank regulatory authorities to take "prompt corrective action" with respect to institutions that do not meet minimum capital requirements. For these purposes, FedICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At June 30, 1996, the Bank was categorized as "well capitalized." An institution is deemed to be "well capitalized" if it has a total risk-based capital ratio of 10% or greater, a Tier I risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater, and is not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. An institution is deemed to be "adequately capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier I risk-based capital ratio of 4% or greater, and generally a leverage ratio 4% or greater. An institution is deemed to be "undercapitalized" if it has a total risk-based capital ratio of less than 8%, a Tier I risk-based capital ratio of less than 4%, or generally a leverage ratio of less than 4%; and (d) "significantly undercapitalized" if it has a total risk-based capital ratio of less than 6%, a Tier I risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%. An institution is deemed to be "critically undercapitalized" if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2%. "Undercapitalized" institutions are subject to growth limitations and are required to submit a capital restoration plan. If an "undercapitalized" institution fails to submit, or fails to implement in a material respect, an acceptable plan, it is treated as if it is "significantly undercapitalized." "Significantly undercapitalized" institutions are subject to one or more of a number of requirements and restrictions, including an order by the FDIC to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cease receipt of deposits from correspondent banks, and restrictions on compensation of executive officers. "Critically undercapitalized" institutions may not, beginning 60 days after becoming "critically undercapitalized," make any payment of principal or interest on certain subordinated debt or extend credit for a highly leveraged transaction or enter into any transaction outside the ordinary course of business. In addition, "critically undercapitalized" institutions are subject to appointment of a receiver or conservator. Capital Distributions Regulation An OTS regulation imposes limitations upon all "capital distributions" by savings associations, including cash dividends, payments by an institution to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger and other distributions charged against capital. The regulation establishes a three-tiered system of regulation, with the greatest flexibility being afforded to well-capitalized institutions. A savings association which has total capital (immediately prior to and after giving effect to the capital distribution) that is at least equal to its fully phased-in capital requirements would be a Tier 1 institution ("Tier 1 Institution"). An institution that has total capital at least equal to its minimum capital requirements, but less than its fully phased-in capital requirements, would be a Tier 2 institution ("Tier 2 Institution"). An institution having total capital that is less than its minimum capital requirements would be a Tier 3 institution ("Tier 3 Institution"). However, an institution which otherwise qualifies as a Tier 1 institution may be designated by the OTS as a Tier 2 or Tier 3 institution if the OTS determines that the institution is "in need of more than normal supervision." The Bank is currently a Tier 1 Institution. A Tier 1 Institution could, after prior notice but without the approval of the OTS, make capital distributions during a calendar year up to 100% of its net income to date during the calendar year plus an amount that would reduce by one-half its "surplus capital ratio" (the excess over its Fully Phased-in Capital Requirements) at the beginning of the calendar year. Any additional amount of capital distributions would require prior regulatory approval. The OTS has proposed revisions to these regulations which would permit savings associations to declare dividends in amounts which would assure that they remain adequately capitalized following the dividend declaration. Savings associations in a holding company system which are rated Camel 1 or 2 and which are not in troubled condition would need to file a prior notice with the OTS concerning such dividend declaration. 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. 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. Additional standards on earnings and classified assets are expected to be issued in the near future. Federal Reserve System Under FRB regulations, the Bank is required to maintain reserves against its transaction accounts (primarily checking and NOW accounts) and non-personal money market deposit accounts. A federal savings association, like other depository institutions maintaining reservable accounts, may borrow from the Federal Reserve Bank "discount window," but the FRB's regulations require the savings association to exhaust other reasonable alternative sources, including borrowing from its regional FHLB, before borrowing from the Federal Reserve Bank. FedICIA imposes certain limitations on the ability of undercapitalized depository institutions to borrow from Federal Reserve Banks. Holding Company Regulation MCHI is regulated as a "non-diversified unitary savings and loan holding company" within the meaning of the Home Owners' Loan Act, as amended ("HOLA"), and subject to regulatory oversight of the Director of the OTS. As such, MCHI is registered with the OTS and thereby subject to OTS regulations, examinations, supervision and reporting requirements. As a subsidiary of a savings and loan holding company, the Bank is subject to certain restrictions in its dealings with MCHI and with other companies affiliated with MCHI. HOLA generally prohibits a savings and loan holding company, without prior approval of the Director of the OTS, from (i) acquiring control of any other savings association or savings and loan holding company or controlling the assets thereof or (ii) acquiring or retaining more than 5 percent of the voting shares of a savings association or holding company thereof which is not a subsidiary. Additionally, under certain circumstances a savings and loan holding company is permitted to acquire, with the approval of the Director of the OTS, up to 15 percent of previously unissued voting shares of an under-capitalized savings association for cash without that savings association being deemed controlled by the holding company. 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. There are generally no restrictions on the permissible business activities of a unitary savings and loan holding company. However, if the Director of OTS determines that there is reasonable case to believe that the continuation by a savings and loan holding company of an activity constitutes a serious risk to the financial safety, soundness, or stability of its subsidiary savings association, the Director of the OTS may impose such restrictions as deemed necessary to address such risk and limiting (i) payment of dividends by the savings association, (ii) transactions between the savings association and its affiliates, and (iii) any activities of the savings association that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings association. 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, 1996, the Bank's asset composition was in excess of that required to qualify the Bank as a Qualified Thrift Lender. If MCHI were to acquire control of another savings institution other than through a merger or other business combination with the Bank, MCHI would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings association meets the QTL test, the activities of MCHI and any of its subsidiaries (other than the Bank or other subsidiary savings associations) would thereafter be subject to further restrictions. HOLA provides that, among other things, no multiple savings and loan holding company or subsidiary thereof which is not a savings association shall commence or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, any business activity other than (i) furnishing or performing management services for a subsidiary savings association, (ii) conducting an insurance agency or escrow business, (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings institution, (iv) holding or managing properties used or occupied by a subsidiary savings institution, (v) acting as trustee under deeds of trust, (vi) those activities previously directly authorized by the FSLIC by regulation as of March 5, 1987, to be engaged in by multiple holding companies or (vii) those activities authorized by the FRB as permissible for bank holding companies, unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above must also be approved by the Director of the OTS prior to being engaged in by a multiple holding company. The Director of the OTS may also approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings associations in more than one state, if the multiple savings and loan holding company involved controls a savings association which operated a home or branch office in the state of the association to be acquired as of March 5,1987, or if the laws of the state in which the institution to be acquired is located specifically permit institutions to be acquired by state-chartered institutions or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions). Also, the Director of the OTS may approve an acquisition resulting in a multiple savings and loan holding company controlling savings associations in more than one state in the case of certain emergency thrift acquisitions. 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. After the third anniversary of the Bank's conversion to stock form, if MCHI has fewer than 300 shareholders, it may deregister its 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 the two-year holding period and those that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of MCHI or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Qualified Thrift Lender Under current OTS regulations, the QTL test requires that a savings association have at least 65% of its portfolio assets invested in "qualified thrift investments" on a monthly average basis in 9 out of every 12 months. Qualified thrift investments under the QTL test include: (i) loans made to purchase, refinance, construct, improve or repair domestic residential housing or manufactured housing; (ii) home equity loans; (iii) mortgage-backed securities; (iv) direct or indirect existing obligations of either the FDIC or the FSLIC for ten years from the date of issuance, if issued prior to July 1, 1989; (v) obligations of the FDIC, FSLIC, FSLIC Resolution Fund and the Resolution Trust Corporation for a five year period from July 1, 1989, if issued after such date; (vi) FHLB stock; (vii) 50% of the dollar amount of residential mortgage loans originated and sold within 90 days of origination; (viii) investments in service corporations that derive at least 80% of their gross revenues from activities directly related to purchasing, refinancing, constructing, improving or repairing domestic residential real estate or manufactured housing; (ix) 200% of the dollar amount of loans and investments made to acquire, develop and construct one- to four-family residences that are valued at no more than 60% of the median value of homes constructed in the area; (x) 200% of the dollar amount of loans for the acquisition or improvement of residential real property, churches, schools, and nursing homes located within, and loans for any purpose to any small business located within, an area where credit needs of its low and moderate income residents are determined not to have been adequately met; (xi) loans for the purchase, construction, improvement or upkeep of churches, schools, nursing homes and hospitals not qualified under (x); (xii) up to 10% of portfolio assets held in consumer loans or loans for educational purposes; and (xiii) FHLMC and FNMA stock. However, the aggregate amount of investments in categories (vii)-(xiii) which may be taken into account for the purpose of whether an institution meets the QTL test cannot exceed 15% of portfolio assets. Portfolio assets under the QTL test include all of an association's assets less (i) goodwill and other intangibles, (ii) the value of property used by the association to conduct its business, and (iii) its liquid assets as required to be maintained under law up to 20% of total assets. A savings association which fails to meet the QTL test must either convert to a bank (but its deposit insurance assessments and payments will be those of and paid to SAIF) or be subject to the following penalties: (i) it may not enter into any new activity except for those permissible for a national bank and for a savings association; (ii) its branching activities shall be limited to those of a national bank; (iii) it shall not be eligible for any new FHLB advances; and (iv) it shall be bound by regulations applicable to national banks respecting payment of dividends. Three years after failing the QTL test the association must (i) dispose of any investment or activity not permissible for a national bank and a savings association and (ii) repay all outstanding FHLB advances. If such a savings association is controlled by a savings and loan holding company, then such holding company must, within a prescribed time period, become registered as a bank holding company and become subject to all rules and regulations applicable to bank holding companies (including restrictions as to the scope of permissible business activities). A savings association failing to meet the QTL test may requalify as a QTL if it thereafter meets the QTL test. In the event of such requalification it shall not be subject to the penalties described above. A savings association which subsequently again fails to qualify under the QTL test shall become subject to all of the described penalties without application of any waiting period. At June 30, 1996, 83.17% 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, and therefore expects to continue to qualify as a QTL, although there can be no such assurance. Community Reinvestment Act Matters Under current law, ratings of depository institutions under the Community Reinvestment Act of 1977 ("CRA") must be disclosed. The disclosure includes both a four-unit descriptive rating -- using terms such as satisfactory and unsatisfactory -- 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 FHLBs have established an "Affordable Housing Program" to subsidize the interest rate of advances to member associations engaged in lending for long-term, low- and moderate-income, owner-occupied and affordable rental housing at subsidized rates. The Bank is participating in this program. The examiners have determined that the Bank has an outstanding record of meeting community credit needs. TAXATION Federal Taxation Historically, savings associations, such as the Bank, have been permitted to compute bad debt deductions using either the bank experience method or the percentage of taxable income method. However, for years beginning after December 31, 1995, the Bank will no longer be 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. For federal income tax purposes, MCHI reports its income and expenses on the accrual method of accounting. MCHI and the Bank file a consolidated federal income tax return for each fiscal year ending June 30. The federal income tax returns filed by MCHI (or previously by the Bank) have not been audited in the last five years. The consolidated federal income tax return filed by MCHI and the Bank has the effect of eliminating intercompany distributions, including dividends, in the computation of consolidated taxable income. Income of MCHI generally will not be taken into account in determining the bad debt deduction allowed to the Bank, regardless whether a consolidated tax return is filed. State Taxation For its taxable period beginning January 1, 1990, the Bank became 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. Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes. MCHI's (or previously the Bank's) state income tax returns have not been audited in the last five years. Item 2. Properties. At June 30, 1996, the Company conducted its business from its main office at 100 West Third Street, Marion, Indiana, and one branch office. Both offices are full-service offices owned by the Company. The following table provides certain information with respect to the Company's offices as of June 30, 1996:
Net Book Value Total Deposits of Property, at Furniture Owned or Year June 30, & Approximate Description and Address Leased Opened 1996 Fixtures Square Footage - ----------------------- ------------------- ---- -------- -------------- (Dollars in Thousands) Main Office in Marion 100 West Third Street............ Owned 1936 $117,210 $1,326 17,949 Location in Decatur 1045 South 13th Street........... Owned 1974 9,050 120 3,611
The Company opened its first automated teller machine in May, 1995 at its Marion branch. 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 $38,000 at June 30, 1996. 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 $11,000 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, 1996. Item 4.5. Executive Officers of MCHI. Presented below is certain information regarding the executive officers of MCHI: Name Position ------------------ ------------------------------------------- John M. Dalton President Steven L. Banks Executive Vice President Larry G. Phillips Sr. Vice President, Secretary and Treasurer Tim D. Canode Vice President John M. Dalton (age 62) has been employed by MCHI since November, 1992. He became President of the Bank in 1996 and Executive Vice President of First Marion in 1996. Mr. Dalton served as Executive Vice President of the Bank from 1983 to 1996. Larry G. Phillips (age 48) has been employed by MCHI since November, 1992. He became Sr. Vice President of the Bank in 1996 and has served as Treasurer of the Bank since 1983, Secretary of the Bank since 1989 and Secretary and Treasurer of First Marion since 1989. Mr. Phillips served as Vice President and Treasurer of the Bank from 1983 to 1996. Steven L. Banks (age 46) became Executive Vice President of both MCHI and the Bank on September 1, 1996. Prior to his affiliation with MCHI and the Bank, Mr. Banks served as President and CEO of Fidelity Federal Savings Bank of Marion. Tim D. Canode (age 51) became Vice President of MCHI in 1996 and has been Vice President of the Bank since 1983. Mr. Canode has also served as Assistant Vice President of First Marion since 1983. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The Bank converted from a federally charted mutual savings bank to a federally charted stock savings bank effective March 18, 1993 (the "Conversion") and simultaneously formed a savings and loan holding company, MCHI. MCHI's common stock, without par value ("Common Stock"), is quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), National Market System, under the symbol "MARN." The following table sets forth the high and low prices, as reported by NASDAQ, and dividends paid per share for Common Stock for the quarter indicated. Such over-the-counter quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. Quarter Dividends Ended High Low Declared --------- -------- -------- --------- June 30, 1996............... $20 3/4 $ 21 $ 19 3/4 $.20 March 31, 1996.............. 20 7/16 20 3/4 19 1/4 .18 December 31, 1995........... 20 20 5/8 19 1/4 .18 September 30, 1995.......... 19 3/4 20 5/8 18 1/2 .18 June 30, 1995............... 19 1/4 20 17 1/4 .18 March 31, 1995.............. 17 1/2 17 3/4 15 1/4 .15 December 31, 1994........... 15 3/4 18 15 .15 September 30, 1994.......... 18 18 3/4 15 3/4 .15 As of August 23, 1996, there were 538 record holders of MCHI's Common Stock. MCHI estimates that, as of that date, there were approximately 900 additional shareholders in "street" name. The Company's percentage of dividends per share to net income per share was 60.7%, 56.8% and 53.0% for the years ended June 30, 1996, 1995 and 1994, respectively. Since MCHI has no independent operations or other subsidiaries to generate income, its ability to accumulate earnings for the payment of cash dividends to its shareholders is directly dependent upon the earnings on its investment securities and ability of the Bank to pay dividends to MCHI. Under OTS regulations, a converted savings association may not declare or pay a cash dividend if the effect would be to reduce its net worth below the amount required for the liquidation account created at the time it converted. In addition, under OTS regulations, the extent to which a savings association may make a "capital distribution," which includes, among other things, cash dividends, will depend upon in which one of three categories, based upon levels of capital, that savings association is classified. The Bank is now and expects to continue to be a "tier one institution" and therefore would be able to pay cash dividends to MCHI during any calendar year up to 100% of its net income during that calendar year plus the amount that would reduce by one half its "surplus capital ratio" (the excess over its fully phased-in capital requirements) at the beginning of the calendar year. Prior notice of any dividend to be paid by the Bank will have to be given to the OTS. Under current federal income tax law, dividend distributions with respect to the Common Stock, to the extent that such dividends paid are from the current or accumulated earnings and profits of the Bank (as calculated for federal income tax purposes), will be taxable as ordinary income to the recipient and will not be deductible by the Bank. Any dividend distributions in excess of current or accumulated earnings and profits will be treated for federal income tax purposes as a distribution from the Bank's accumulated bad debt reserves, which could result in increased federal income taxes liability for the Bank. Unlike the Bank, generally there is no regulatory restriction on the payment of dividends by MCHI, subject to the determination of the director of the OTS that there is reasonable cause to believe that the payment of dividends constitutes a serious risk to the financial safety, soundness or stability of the Bank. Indiana law, however, would prohibit MCHI from paying a dividend if, after giving effect to the payment of that dividend, MCHI would not be able to pay its debts as they become due in the ordinary course of business or if MCHI's total assets would be less that the sum of its total liabilities plus preferential rights of holders of preferred stock, if any. Item 6. Selected Consolidated Financial Data The information required by this item is incorporated by reference to the material under the heading "Selected Consolidated Financial Information" on page 3 of MCHI's Shareholder Annual Report for its fiscal year ended June 30, 1996 (the "Shareholder Annual Report"). Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information required by this item is incorporated by reference to pages 4 through 15 of the Shareholder Annual Report. Item 8. Financial Statements and Supplementary Data. MCHI's Consolidated Financial Statements and Notes thereto contained on pages 16 through 41 in the Shareholder Annual Report are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant. The information required by this item with respect to directors is incorporated by reference to pages 3 and 4 of MCHI's Proxy Statement for its 1996 Annual Shareholder Meeting (the "1996 Proxy Statement"). Information concerning MCHI's executive officers is included in Item 4.5 in Part I of this report. Information concerning compliance by such persons with Section 16(a) of the 1934 Act is incorporated by reference to page 7 of the 1996 Proxy Statement. Item 11. Executive Compensation. The information required by this item with respect to executive compensation is incorporated by reference to pages 4 through 6 of the 1996 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this item is incorporated by reference to pages 2 and 3 of the 1996 Proxy Statement. Item 13. Certain Relationships and Related Transactions. The information required by this item is incorporated by reference to page 6 of the 1996 Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) The following financial statements are filed as part of this report: Financial Statements Consolidated Statement of Financial Condition at June 30, 1996, and 1995 Consolidated Statement of Income for the Fiscal Years Ended June 30, 1996, 1995 and 1994 Consolidated Statement of Changes in Shareholders' Equity for the Fiscal Years ended June 30, 1996, 1995 and 1994 Consolidated Statement of Cash Flows for the Fiscal Years ended June 30, 1996, 1995, and 1994 Notes to Consolidated Financial Statements (b) MCHI filed no reports on Form 8-K during the fourth quarter ended June 30, 1996. (c) The exhibits filed herewith or incorporated by reference herein are set forth on the Exhibit Index on page E-1. (d) All schedules are omitted as the required information either is not applicable or is included in the Consolidated Financial Statements or related notes. SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant had duly caused this report to be signed on behalf of the undersigned, thereto duly authorized. MARION CAPITAL HOLDINGS, INC. Date: September 27, 1996 By: /s/ John M. Dalton ------------------------- John M. Dalton, President Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on this 27th day of September, 1996. /s/ John M. Dalton /s/ Steven L. Banks - ------------------------------ ----------------------------- John M. Dalton Steven L. Banks, Director President, Director (Principal Executive Officer) /s/ Larry G. Phillips /s/ Robert D. Burchard - ------------------------------ ----------------------------- Larry G. Phillips Robert D. Burchard, Chairman Senior Vice President, Secretary and Treasurer of the Board (Principal Financial and Accounting Officer) /s/ W. Gordon Coryea ----------------------------- W. Gordon Coryea, Director /s/ Jerry D. McVicker ----------------------------- Jerry D. McVicker, Director /s/ Jack O. Murrell ----------------------------- Jack O. Murrell, Director /s/ George L. Thomas ----------------------------- George L. Thomas, Director EXHIBIT INDEX Exhibit Index* Page 3(1) The Articles of Incorporation of the Registrant is incorporated by reference to Exhibit 3(1) to the Registration Statement on Form S-1 (Registration No. 33-55052). 3(2) The Code of By-Laws of the Registrant is incorporated by reference to Exhibit 3(2) to Registration Statement on Form S-I (Registration No. 33-55052). 10(1) Marion Capital Holdings, Inc. Stock Option Plan is incorporated by reference to Exhibit A to the Registrants definitive Proxy Statement in respect of its 1993 Annual Shareholder meeting. (2) Recognition and Retention Plans and Trusts are incorporated by reference to Exhibit B to the Registrants definitive Proxy Statement in respect of its 1993 Annual Shareholder meeting. (3) Director Deferred Compensation Agreement effective May 1, 1992, between the Bank and Merritt B. McVicker is incorporated by reference to Exhibit 10(6) to the Registration Statement on Form S-1 (Registration No. 33-55052). (4) Director Deferred Compensation Agreement effective May 1, 1992, between the Bank and John M. Dalton is incorporated by reference to Exhibit 10(7) to the Registration Statement on Form S-1 (Registration No. 33-55052). First Amendment to Deferred Compensation Agreement of John Dalton dated May 19, 1994. (5) Director Deferred Compensation Agreement effective May 1, 1992, between the Bank and Robert D. Burchard is incorporated by reference to Exhibit 10(8) to the Registration Statement on Form S-1 (Registration No. 33-55052). First Amendment to Deferred Compensation Agreement of Robert Burchard dated May 19, 1994. (6) Director Deferred Compensation Agreement effective May 1, 1992, between the Bank and James O. Murrell is incorporated by reference to Exhibit 10(9) to the Registration Statement on Form S-1 (Registration No. 33-55052). First Amendment to Deferred Compensation Agreement of James Murrell dated May 23, 1994. (7) Director Deferred Compensation Agreement effective May 1, 1992, between the Bank and Gordon Coryea is incorporated by reference to Exhibit 10(10) to the Registration Statement on Form S-1 (Registration No. 33-55052). First Amendment to Deferred Compensation Agreement of Gordon Coryea dated May 23, 1994. (8) Director Deferred Compensation Agreement effective May 1, 1992, between the Bank and George Thomas is incorporated by reference to Exhibit 10(11) to the Registration Statement on Form S-1 (Registration No. 33-55052). First Amendment to Deferred Compensation Agreement of George Thomas dated May 24, 1994. Exhibit Index Page (9) Director Deferred Compensation Agreement effective May 1, 1992, between the Bank and James Gartland is incorporated by reference to Exhibit 10(12) to the Registration Statement on Form S-1 (Registration No. 33-55052). First Amendment to Deferred Compensation Agreement of James Gartland dated May 23, 1994. (10) 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). (11) Deferred Compensation Agreement between the Bank and Merritt V. McVicker dated April 30, 1988, as amended as of May 1, 1992, is incorporated by reference to Exhibit 10(14) to the Registration Statement on Form S-1 (Registration No. 33-55052). (12) Deferred Compensation Agreement between the Bank and John M. Dalton dated April 30, 1988, as amended April 15, 1991, as amended May 1, 1992, and as amended October 5, 1992, is incorporated by reference to Exhibit 10(15) to the Registration Statement on Form S-1 (Registration No. 33-55052). (13) Deferred Compensation Agreement between the Bank and Robert D. Burchard dated April 30, 1988, as amended April 15, 1991, as amended May 1, 1992, and as amended October 5, 1992, is incorporated by reference to Exhibit 10(16) to the Registration Statement on Form S-1 (Registration No. 33-55052). (14) Deferred Compensation Agreement between the Bank and Jacquelin Ann Noble dated April 30, 1988, as amended April 15, 1991, and as amended October 5, 1992, is incorporated by reference to Exhibit 10(17) to the Registration Statement on Form S-1 (Registration No. 33-55052). (15) Deferred Compensation Agreement between the Bank and Nora K. Kuntz dated October 8, 1991, as amended October 5, 1992, is incorporated by reference to Exhibit 10(18) to the Registration Statement on Form S-1 (Registration No. 33-55052). (16) Death Benefit Agreement between the Bank and Tim Canode dated August 25, 1992, is incorporated by reference to Exhibit 10(19) to the Registration Statement on Form S-1 (Registration No. 33-55052). (17) 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). (18) Excess Benefit Agreement dated as of Februry 28, 1996 between the Bank and John M. Dalton. (19) Excess Benefit Agreement dated as of February 28, 1996 between the Bank and Robert D. Burchard. Exhibit Index Page 11 Statement regarding computation of per share earnings. 13 1996 Shareholder Annual Report. 21 Subsidiaries of the Registrant is incorporated by reference to Exhibit 22 to the Registration Statement on Form S-1 (Registration No. 33-55052). 23 Consent of Geo. S. Olive & Co. LLC 27 Financial Data Schedule - ----------------- * Management contracts and plans required to be filed as exhibits are included as Exhibits 10(1)-10(19). EX-10.18 2 EXCESS BENEFIT AGREEMENT: MR. JOHN M. DALTON EXCESS BENEFIT AGREEMENT This Excess Benefit Agreement (the "Agreement"), effective as of the 28th day of February, 1996, formalizes the understanding by and between First Federal Savings Bank of Marion (the "Bank"), a federally chartered savings bank, and John M. Dalton, hereinafter referred to as "Executive". WITNESSETH: WHEREAS, the Executive is employed by the Bank; and WHEREAS, the Bank recognizes the valuable services heretofore performed for it by such Executive and wishes to encourage continued employment; and WHEREAS, the Bank wishes to provide the Executive with retirement benefits to which he would otherwise be entitled under the Bank's tax-qualified pension plan but for the changes made to Section 401(a)(17) of the Code by the Omnibus Budget Reconciliation Act of 1993 ("OBRA `93") and to Section 415 of the Code by the General Agreement on Tariffs and Trade of `94 ("GATT `94"); and WHEREAS, the Bank and the Executive wish to provide the terms and conditions upon which the Bank shall pay such additional compensation to the Executive after retirement or other termination of employment and/or death benefits to his beneficiaries after death; and WHEREAS, the Bank and the Executive intend this Agreement to be considered an unfunded arrangement, maintained primarily to provide supplemental retirement income for such Executive, a member of a select group of management or a highly compensated employee of the Bank, for tax purposes and for purposes of the Employee Retirement Income Security Act of 1974, as amended; and WHEREAS, the Bank has adopted this Excess Benefit Agreement which controls all issues relating to the Excess Benefit as described herein; NOW, THEREFORE, in consideration of the premises and of the mutual promises herein contained, the Bank and the Executive agree as follows: SECTION I DEFINITIONS When used herein, the following words and phrases shall have the meanings below unless the context clearly indicates otherwise: 1.1 "Accrued Benefit" means that portion of the Excess Benefit which is required to be expensed and accrued under generally accepted accounting principles (GAAP) by any appropriate method which the Bank's Board of Directors may require in the exercise of its sole discretion. 1.2 "Act" means the Employee Retirement Income Security Act of 1974, as amended from time to time. 1.3 "Bank" means First Federal Savings Bank of Marion and any successor thereto. -2- 1.4 "Beneficiary" means the person or persons (and their heirs) designated as Beneficiary in Exhibit A of this Agreement to whom the deceased Executive's benefits are payable. If no Beneficiary is so designated, then the Executive's Spouse, if living, will be deemed the Beneficiary. If the Executive's Spouse is not living, then the Children of the Executive will be deemed the Beneficiaries and will take on a per stirpes basis. If there are no Children, then the Estate of the Executive will be deemed the Beneficiary. 1.5 "Benefit Age" means the Executive's sixty-fifth (65th) birthday. 1.6 "Benefit Eligibility Date" means the date on which the Executive is entitled to receive any benefit(s) pursuant to Subsection 2.1, 2.3 or 2.4 of this Agreement. It shall be the first day of the month following the month in which the Executive attains his Benefit Age. 1.7 "Cause" means personal dishonesty, willful misconduct, willful malfeasance, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than traffic violations or similar offenses), or final cease-and-desist order, material breach of any provision of this Agreement, or gross negligence in matters of material importance to the Bank. 1.8 "Change in Control" of the Bank shall mean and include the following: -3- (1) a Change in Control of a nature that would be required to be reported in response to Item 1 (a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (2) a change in control of the Bank within the meaning of 12 C.F.R. 574.4; or (3) a Change in Control at such time as (i) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Bank representing Twenty (20.0%) Percent or more of the combined voting power of the Bank's outstanding securities ordinarily having the right to vote at the election of Directors, except for any stock purchased by the Bank's Employee Stock Ownership Plan and/or trust; or (ii) individuals who constitute the board of directors on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Bank's shareholders was approved by the Bank's nominating committee which is comprised of members of the Incumbent Board, shall be, for purposes of this -4- clause (ii), considered as though he were a member of the Incumbent Board; or (iii) merger, consolidation, or sale of all or substantially all of the assets of the Bank occurs; or (iv) a proxy statement is issued soliciting proxies from the stockholders of the Bank by someone other than the current management of the Bank, seeking stockholder approval of a plan of reorganization, merger, or consolidation of the Bank with one or more corporations as a result of which the outstanding shares of the class of the Bank's securities are exchanged for or converted into cash or property or securities not issued by the Bank. 1.9 "Children" means all natural and adopted children of the Executive, and issue of any predeceased child or children. 1.10 "Code" means the Internal Revenue Code of 1986, as amended from time to time. 1.11 "Disability Benefit" means the monthly benefit payable to the Executive following a determination, in accordance with Subsection 2.6, that he is no longer able, properly and satisfactorily, to perform his duties as Executive. 1.12 "Effective Date" of this Agreement shall be February 28th, 1996. 1.13 "Estate" means the estate of the Executive. 1.14 "Excess Benefit" means an annual amount equal to Forty One Thousand Six Hundred Eighty One Dollars ($41,681.00). -5- 1.15 "Interest Factor" means monthly compounding, discounting, or annuitizing as applicable, at Seven and 89/100th's Percent (7.89%) per annum. 1.16 "Payout Period" means the time frame during which certain benefits payable hereunder shall be distributed. Payments shall be made in equal monthly installments commencing on the first day of the month following the occurrence of the event which triggers distribution and continuing for a period of one hundred eighty (180) months. 1.17 "Spouse" means the individual to whom the Executive is legally married at the time of the Executive's death. 1.18 "Survivor's Benefit" means an annual amount equal to Forty One Thousand Six Hundred Eighty One Dollars ($41,681.00), payable to the Beneficiary in monthly installments throughout the Payout Period. SECTION II BENEFITS 2.1 Retirement Benefit. If the Executive is in service with the Bank until reaching his Benefit Age, the Executive shall be entitled to the Excess Benefit. Such benefit shall commence on the Executive's Benefit Eligibility Date and shall be payable in monthly installments throughout the Payout Period. In the event the Executive dies at any time after attaining his Benefit Age, but prior to completion of all such payments due and owing hereunder, the Bank shall pay to the Executive's Beneficiary a continuation of the monthly installments for the remainder of the Payout Period. -6- 2.2 Death During Employment. If the Executive dies while employed at the Bank, the Executive's Beneficiary shall be entitled to the Survivor's Benefit. The Survivor's Benefit shall commence on the first day of the month following the Executive's death and shall be payable in monthly installments throughout the Payout Period. 2.3 Termination Other Than for Cause. If the Executive voluntarily or involuntarily terminates employment at the Bank before reaching his Benefit Age, for any reason other than for (i) Cause (which is covered in Subsection 2.5) or (ii) related to a Change in Control (which is covered in Subsection 2.4), the Executive (or his Beneficiary) shall be entitled to a stream of monthly installments based on the Executive's Accrued Benefit. (a) If, after such termination, the Executive dies prior to attaining his Benefit Age, the stream of monthly installments payable to the Beneficiary shall commence within thirty (30) days of the Executive's death. The Accrued Benefit, measured as of the date of termination, shall be increased monthly (using the Interest Factor) from the date of termination until the Executive's death. The Accrued Benefit, measured as of the date of the Executive's death, shall be annuitized into monthly installments using the Interest Factor and shall be payable for the Payout Period. (b) If, after such termination, the Executive lives until attaining his Benefit Age, the stream of monthly installments payable to the Executive shall commence on the Executive's Benefit Eligibility Date. The Accrued Benefit, measured as of the date of termination, shall be increased monthly (using the Interest Factor) from the date -7- of termination until the Executive's Benefit Age. The Accrued Benefit measured as of the Executive's Benefit Age shall be annuitized into monthly installments using the Interest Factor and shall be payable for the Payout Period. In the event the Executive dies prior to completion of all such monthly installments, the Bank shall pay to the Executive's Beneficiary a continuation of the monthly installments for the remainder of the Payout Period. 2.4 Termination of Service Related to a Change in Control. (a) If the Executive's termination of service (as defined in this Subsection) is related to a Change in Control, the Executive shall be entitled to receive his Excess Benefit upon attainment of his Benefit Age, payment of which shall commence on his Benefit Eligibility Date. In the event the Executive dies at any time after attaining his Benefit Age, but prior to completion of all such payments due and owing hereunder, the Bank shall pay to the Executive's Beneficiary a continuation of the monthly installments for the remainder of the Payout Period. (b) For purposes of this Subsection, "termination of service" shall include the following: If, at any time following said Change in Control, (i) the employment of the Executive is involuntarily terminated by the Bank, or (ii) voluntarily terminated by the Executive after: (A) a material change -8- in the Executive's function, duties, or responsibilities, which change would cause the Executive's position to become one of lesser responsibility, importance, or scope from the position the Executive held at the time of the Change in Control, (B) a relocation of the Executive's principal place of employment by more than thirty (30) miles from its location prior to the Change in Control, or (C) a material reduction in the benefits and perquisites to the Executive from those being provided at the time of the Change in Control. (c) Should the Executive die after being terminated following a Change in Control, but prior to commencement of the Excess Benefit, his Beneficiary shall be entitled to receive the Survivor's Benefit, payment of which shall commence within thirty (30) days following the Executive's death. 2.5 Termination for Cause. If the Executive is terminated for Cause, all benefits under this Agreement shall be forfeited and this Agreement shall become null and void. 2.6 Disability Benefit. If the Executive's service is terminated prior to Benefit Age due to a disability which meets the criteria set forth below, the Executive may request to receive the Disability Benefit in lieu of the retirement benefit described in Section 2.1 (which is not available prior to the Executive's Benefit Eligibility Date). -9- Notwithstanding any other provision hereof, if requested by the Executive and approved by the Board of Directors, the Executive shall receive the Disability Benefit hereunder, in any case in which it is determined by a duly licensed physician selected by the Bank, that the Executive is no longer able, properly and satisfactorily, to perform his regular duties as an Executive, because of ill health, accident, disability or general inability due to age. The monthly benefit shall not begin more than thirty (30) days following the above-mentioned disability determination. The amount of the monthly benefit shall be the annuitized value of the Executive's Accrued Benefit measured as of the date of such disability determination. The Accrued Benefit shall be annuitized using the Interest Factor and shall be payable over the Payout Period. In the event the Executive dies while receiving payments pursuant to this Subsection, or after becoming eligible for such payments but before the actual commencement of such payments, his Beneficiary shall be entitled to receive the Survivor's Benefit for the balance of the Payout Period. Furthermore, if (i) Board of Director approval is obtained, and (ii) the total dollar amount of disability payments received by the Executive under the provisions of this Subsection is less than the total dollar amount of payments that would have been received had the Survivor's Benefit been paid in lieu of the Disability Benefit during the Executive's life, the Bank shall pay the Executive's Beneficiary a lump sum payment for the difference. This lump sum payment shall be made within thirty (30) days of the Executive's death. -10- 2.7 Non-Competition During and After Employment. (a) In consideration of the agreements of the Bank contained herein and of the payments to be made by the Bank pursuant hereto, the Executive hereby agrees that, so long as he remains employed by the Bank, he will devote substantially all of his time, skill, diligence and attention to the business of the Bank, and will not actively engage, either directly or indirectly, in any business or other activity which is or may be deemed to be in any way competitive with or adverse to the best interests of the business of the Bank. (b) The Executive expressly agrees that, as consideration for the covenants of the Bank contained herein and as a condition to the performance by the Bank of its obligations hereunder, from and after any voluntary or involuntary termination of service, other than a termination of service pursuant to Subsection 2.4, and continuing throughout the entire Payout Period, as provided herein, he will not, without the prior written consent of the Bank, engage in, become interested, directly or indirectly, as a sole proprietor, as a partner in a partnership, or as a substantial shareholder in a corporation, nor become associated with, in the capacity of an employee, director, officer, principal, agent, trustee or in any other capacity whatsoever, any enterprise conducted in the trading area of the business of the Bank which enterprise is, or may be deemed to be, competitive with any business carried on by the Bank as of the date of the termination of the Executive's employment or his retirement. -11- (c) In the event of a termination of the Executive's service related to a Change in Control pursuant to Subsection 2.4, paragraph (b) of this Subsection shall cease to be a condition to the performance by the Bank of its obligations under this Agreement. 2.8 Breach. In the event of any breach by the Executive of the agreements and covenants contained herein, the Board of Directors of the Bank shall direct that any unpaid balance of any payments to the Executive under this Agreement be suspended, and shall thereupon notify the Executive of such suspensions, in writing. Thereupon, if the Board of Directors of the Bank shall determine that said breach by the Executive has continued for a period of one (1) month following notification of such suspension, all rights of the Executive and his Beneficiaries under this Agreement, including rights to further payments hereunder, shall thereupon terminate. SECTION III BENEFICIARY DESIGNATION The Executive shall make an initial designation of primary and secondary Beneficiaries upon execution of this Agreement and shall have the right to change such designation, at any subsequent time, by submitting to the Administrator in substantially the form attached as Exhibit to this Agreement, a written designation of primary and secondary Beneficiaries. Any Beneficiary designation made subsequent to execution of this Agreement -12- shall become effective only when receipt thereof is acknowledged in writing by the Administrator. SECTION IV EXECUTIVE'S RIGHT TO ASSETS The rights of the Executive, any Beneficiary, or any other person claiming through the Executive under this Agreement, shall be solely those of an unsecured general creditor of the Bank. The Executive, the Beneficiary, or any other person claiming through the Executive, shall only have the right to receive from the Bank those payments so specified under this Agreement. The Executive agrees that he, his Beneficiary, or any other person claiming through him shall have no rights or interests whatsoever in any asset of the Bank, including any insurance policies or contracts which the Bank may possess or obtain to informally fund this Agreement. Any asset used or acquired by the Bank in connection with the liabilities it has assumed under this Agreement, unless expressly provided herein, shall not be deemed to be held under any trust for the benefit of the Executive or his Beneficiaries, nor shall any asset be considered security for the performance of the obligations of the Bank. Any such asset shall be and remain, a general, unpledged, and unrestricted asset of the Bank. -13- SECTION V RESTRICTIONS UPON FUNDING The Bank shall have no obligation to set aside, earmark or entrust any fund or money with which to pay its obligations under this Agreement. The Executive, his Beneficiaries or any successor in interest to him shall be and remain simply a general unsecured creditor of the Bank in the same manner as any other creditor having a general claim for matured and unpaid compensation. The Bank reserves the absolute right in its sole discretion to either purchase assets to meet its obligations undertaken by this Agreement or to refrain from the same and to determine the extent, nature, and method of such asset purchases. Should the Bank decide to purchase assets such as life insurance, mutual funds, disability policies or annuities, the Bank reserves the absolute right, in its sole discretion, to terminate such assets at any time, in whole or in part. At no time shall the Executive be deemed to have any lien, right, title or interest in or to any specific investment or to any assets of the Bank. If the Bank elects to invest in a life insurance, disability or annuity policy upon the life of the Executive, then the Executive shall assist the Bank by freely submitting to a physical examination and by supplying such additional information necessary to obtain such insurance or annuities. -14- SECTION VI ALIENABILITY AND ASSIGNMENT PROHIBITION Neither the Executive nor any Beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify or otherwise encumber in advance any of the benefits payable hereunder, nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance owed by the Executive or his Beneficiary, nor be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. In the event the Executive or any Beneficiary attempts assignment, communication, hypothecation, transfer or disposal of the benefits hereunder, the Bank's liabilities shall forthwith cease and terminate. SECTION VII ACT PROVISIONS 7.1 Named Fiduciary and Administrator. The Bank shall be the Named Fiduciary and Administrator (the "Administrator") of this Agreement. As Administrator, the Bank shall be responsible for the management, control and administration of the Agreement as established herein. The Administrator may delegate to others certain aspects of the management and operational responsibilities of the Agreement, including the employment of advisors and the delegation of ministerial duties to qualified individuals. -15- 7.2 Claims Procedure and Arbitration. In the event that benefits under this Agreement are not paid to the Executive (or to his Beneficiary in the case of the Executive's death) and such claimants feel they are entitled to receive such benefits, then a written claim must be made to the Administrator within sixty (60) days from the date payments are refused. The Bank and its Board of Directors shall review the written claim and, if the claim is denied, in whole or in part, they shall provide in writing, within ninety (90) days of receipt of such claim, their specific reasons for such denial, reference to the provisions of this Agreement upon which the denial is based, and any additional material or information necessary to perfect the claim. Such writing by the Bank and its Board of Directors shall further indicate the additional steps which must be undertaken by claimants if an additional review of the claim denial is desired. If claimants desire a second review, they shall notify the Administrator in writing within sixty (60) days of the first claim denial. Claimants may review this Agreement or any documents relating thereto and submit any issues and comments, in writing, they may feel appropriate. In its sole discretion, the Administrator shall then review the second claim and provide a written decision within sixty (60) days of receipt of such claim. This decision shall state the specific reasons for the decision and shall include reference to specific provisions of this Agreement upon which the decision is based. -16- If claimants continue to dispute the benefit denial based upon completed performance of this Agreement or the meaning and effect of the terms and conditions thereof, then claimants may submit the dispute to a Board of Arbitration for final arbitration. Said Board of Arbitration shall consist of one member selected by the claimant, one member selected by the Bank, and the third member selected by the first two members. The Board of Arbitration shall operate under any generally recognized set of arbitration rules. The parties hereto agree that they, their heirs, personal representatives, successors and assigns shall be bound by the decision of such Board of Arbitration with respect to any controversy properly submitted to it for determination. SECTION VIII MISCELLANEOUS 8.1 No Effect on Employment Rights. Nothing contained herein will confer upon the Executive the right to be retained in the service of the Bank nor limit the right of the Bank to discharge or otherwise deal with the Executive without regard to the existence of the Agreement. Pursuant to 12 C.F.R. ss. 563.39(b), the following conditions shall apply to this Agreement: (1) The Bank's Board of Directors may terminate the Executive at any time, but any termination by the Bank's Board of Directors other than termination for -17- Cause shall not prejudice the Executive's vested right to compensation or other benefits under the contract. As provided in Section 2.5, the Executive shall forfeit his right to all benefits provided for in the Agreement in the event he is terminated for Cause. He shall have no right to receive additional compensation or other benefits for any period after termination for Cause. (2) If the Executive is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3) and (g)(1)) the Bank's obligations under the contract shall be suspended (except vested rights) as of the date of termination of service unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay the Executive all or part of the compensation withheld while its contract obligations were suspended and (ii) reinstate (in whole or in part) any of its obligations which were suspended. (3) If the Executive is terminated and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(4) or (g)(1)), all non-vested obligations of the Bank under the contract shall terminate as of the effective date of the order. -18- (4) If the Bank is in default (as defined in Section 3(x)(1) of the Federal Deposit Insurance Act), all non-vested obligations under the contract shall terminate as of the date of default. (5) All non-vested obligations under the contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the Bank: (i) by the Director [of the Federal Deposit Insurance Corporation or the Resolution Trust Corporation] or his designee at the time the Federal Deposit Insurance Corporation or the Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in ss. 13(c) of the Federal Deposit Insurance Act; or (ii) by the Director [of the Federal Deposit Insurance Corporation or the Resolution Trust Corporation] or his designee, at the time the Director or his designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, (i.e., the Executive's Accrued Benefit), however, shall not be affected by such action. -19- 8.2 State Law. The Agreement is established under, and will be construed according to, the laws of the State of Indiana, to the extent such laws are not preempted by the Act and valid regulations published thereunder. 8.3 Severability. In the event that any of the provisions of this Agreement or portion thereof, are held to be inoperative or invalid by any court of competent jurisdiction, then: (1) insofar as is reasonable, effect will be given to the intent manifested in the provisions held invalid or inoperative, and (2) the validity and enforceability of the remaining provisions will not be affected thereby. 8.4 Incapacity of Recipient. In the event the Executive is declared incompetent and a conservator or other person legally charged with the care of his person or Estate is appointed, any benefits under the Agreement to which such Executive is entitled shall be paid to such conservator or other person legally charged with the care of his person or Estate. 8.5 Unclaimed Benefit. The Executive shall keep the Bank informed of his current address and the current address of his Beneficiaries. If the location of the Executive is not made known to the Bank within three (3) years after the date on which any payment of the Excess Benefit may first be made, payment may be made as though the Executive had died at the end of the three (3) year period. If, within one (1) additional year after such three (3) year period has elapsed, or, within three (3) years -20- after the actual death of the Executive, whichever comes first, the Bank is unable to locate any Beneficiary of the Executive, the Bank may fully discharge its obligation by payment to the Estate. 8.6 Limitations on Liability. Notwithstanding any of the preceding provisions of the Agreement, no individual acting as an employee or agent of the Bank, or as a member of the Board of Directors shall be personally liable to the Executive or any other person for any claim, loss, liability or expense incurred in connection with the Agreement. 8.7 Gender. Whenever in this Agreement words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply. 8.8 Effect on Other Corporate Benefit Agreements. Nothing contained in this Agreement shall affect the right of the Executive to participate in or be covered by any qualified or nonqualified pension, profit sharing, group, bonus or other supplemental compensation or fringe benefit agreement constituting a part of the Bank's existing or future compensation structure. -21- 8.9 Inurement. This Agreement shall be binding upon and shall inure to the benefit of the Bank, its successors and assigns, and the Executive, his successors, heirs, executors, administrators, and Beneficiaries. 8.10 Tax Withholding. The Bank may withhold from any benefits payable under this Agreement all federal, state, city, or other taxes as shall be required pursuant to any law or governmental regulation then in effect. 8.11 Headings. Headings and sub-headings in this Agreement are inserted for reference and convenience only and shall not be deemed a part of this Agreement. SECTION IX AMENDMENT/REVOCATION This Agreement shall not be amended, modified or revoked at any time, in whole or part, without the mutual written consent of the Executive and the Bank, and such mutual written consent shall be required even if the Executive is no longer employed by the Bank. SECTION X EXECUTION -22- 10.1 This Agreement sets forth the entire understanding of the parties hereto with respect to the transactions contemplated hereby, and any previous agreements or understandings between the parties hereto regarding the subject matter hereof are merged into and superseded by this Agreement. 10.2 This Agreement shall be executed in triplicate, each copy of which, when so executed and delivered, shall be an original, but all three copies shall together constitute one and the same instrument. [Remainder of Page Intentionally Left Blank] -23- IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed on this 28th day of February, 1996 FIRST FEDERAL SAVINGS BANK OF MARION By: /s/ Larry G. Phillips Larry G. Phillips Vice President & Secretary-Treasuer Title -24- EXCESS BENEFIT AGREEMENT BENEFICIARY DESIGNATION The Executive, under the terms of the Excess Benefit Agreement executed by the Bank, of Marion, Indiana, dated February 28th,1996, hereby designates the following Beneficiary to receive any guaranteed payments or death benefits under such Agreement, following his death: PRIMARY BENEFICIARY: Nancy H. Dalton SECONDARY BENEFICIARY: Daphne D. Hess & Sidney D. Collier This Beneficiary Designation hereby revokes any prior Beneficiary Designation which may have been in effect. Such Beneficiary Designation is revocable. DATE: February 28, 1996 /s/ Chris Bradford /s/ John Dalton (WITNESS) (EXECUTIVE) /s/ Sondra Rabb (WITNESS) -25- EX-10.19 3 EXCESS BENEFIT AGREEMENT: MR. ROBERT D. BURCHARD EXCESS BENEFIT AGREEMENT This Excess Benefit Agreement (the "Agreement"), effective as of the 28th day of February, 1996, formalizes the understanding by and between First Federal Savings Bank of Marion (the "Bank"), a federally chartered savings bank, and Robert D. Burchard, hereinafter referred to as "Executive". W I T N E S S E T H : WHEREAS, the Executive is employed by the Bank; and WHEREAS, the Bank recognizes the valuable services heretofore performed for it by such Executive and wishes to encourage continued employment; and WHEREAS, the Bank wishes to provide the Executive with retirement benefits to which he would otherwise be entitled under the Bank's tax-qualified pension plan but for the changes made to Section 401(a)(17) of the Code by the Omnibus Budget Reconciliation Act of 1993 ("OBRA `93") and to Section 415 of the Code by the General Agreement on Tariffs and Trade of `94 ("GATT `94"); and WHEREAS, the Bank and the Executive wish to provide the terms and conditions upon which the Bank shall pay such additional compensation to the Executive after retirement or other termination of employment and/or death benefits to his beneficiaries after death; and WHEREAS, the Bank and the Executive intend this Agreement to be considered an unfunded arrangement, maintained primarily to provide supplemental retirement income for such Executive, a member of a select group of management or a highly compensated employee of the Bank, for tax purposes and for purposes of the Employee Retirement Income Security Act of 1974, as amended; and WHEREAS, the Bank has adopted this Excess Benefit Agreement which controls all issues relating to the Excess Benefit as described herein; NOW, THEREFORE, in consideration of the premises and of the mutual promises herein contained, the Bank and the Executive agree as follows: SECTION I DEFINITIONS When used herein, the following words and phrases shall have the meanings below unless the context clearly indicates otherwise: -2- 1.1 "Accrued Benefit" means that portion of the Excess Benefit which is required to be expensed and accrued under generally accepted accounting principles (GAAP) by any appropriate method which the Bank's Board of Directors may require in the exercise of its sole discretion. 1.2 "Act" means the Employee Retirement Income Security Act of 1974, as amended from time to time. 1.3 "Bank" means First Federal Savings Bank of Marion and any successor thereto. 1.4 "Beneficiary" means the person or persons (and their heirs) designated as Beneficiary in Exhibit A of this Agreement to whom the deceased Executive's benefits are payable. If no Beneficiary is so designated, then the Executive's Spouse, if living, will be deemed the Beneficiary. If the Executive's Spouse is not living, then the Children of the Executive will be deemed the Beneficiaries and will take on a per stirpes basis. If there are no Children, then the Estate of the Executive will be deemed the Beneficiary. 1.5 "Benefit Age" means the Executive's sixty-fifth (65th) birthday. 1.6 "Benefit Eligibility Date" means the date on which the Executive is entitled to receive any benefit(s) pursuant to Subsection 2.1, 2.3 or 2.4 of this Agreement. It shall be -3- the first day of the month following the month in which the Executive attains his Benefit Age. 1.7 "Cause" means personal dishonesty, willful misconduct, willful malfeasance, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than traffic violations or similar offenses), or final cease-and-desist order, material breach of any provision of this Agreement, or gross negligence in matters of material importance to the Bank. 1.8 "Change in Control" of the Bank shall mean and include the following: (1) a Change in Control of a nature that would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (2) a change in control of the Bank within the meaning of 12 C.F.R. 574.4; or (3) a Change in Control at such time as (i) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Bank representing Twenty (20.0%) Percent or more of the combined voting power of the Bank's outstanding securities ordinarily -4- having the right to vote at the election of Directors, except for any stock purchased by the Bank's Employee Stock Ownership Plan and/or trust; or (ii) individuals who constitute the board of directors on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Bank's shareholders was approved by the Bank's nominating committee which is comprised of members of the Incumbent Board, shall be, for purposes of this clause (ii), considered as though he were a member of the Incumbent Board; or (iii) merger, consolidation, or sale of all or substantially all of the assets of the Bank occurs; or (iv) a proxy statement is issued soliciting proxies from the stockholders of the Bank by someone other than the current management of the Bank, seeking stockholder approval of a plan of reorganization, merger, or consolidation of the Bank with one or more corporations as a result of which the outstanding shares of the class of the Bank's securities are exchanged for or converted into cash or property or securities not issued by the Bank. -5- 1.9 "Children" means all natural and adopted children of the Executive, and issue of any predeceased child or children. 1.10 "Code" means the Internal Revenue Code of 1986, as amended from time to time. 1.11 "Disability Benefit" means the monthly benefit payable to the Executive following a determination, in accordance with Subsection 2.6, that he is no longer able, properly and satisfactorily, to perform his duties as Executive. 1.12 "Effective Date" of this Agreement shall be February 28th, 1996. 1.13 "Estate" means the estate of the Executive. 1.14 "Excess Benefit" means an annual amount equal to Seventeen Thousand Seven Hundred Forty Three Dollars ($17,743.00). 1.15 "Interest Factor" means monthly compounding, discounting, or annuitizing as applicable, at Seven and 89/100th's Percent (7.89%) per annum. 1.16 "Payout Period" means the time frame during which certain benefits payable hereunder shall be distributed. Payments shall be made in equal monthly installments commencing on the first day of the month following the occurrence of -6- the event which triggers distribution and continuing for a period of one hundred eighty (180) months. 1.17 "Spouse" means the individual to whom the Executive is legally married at the time of the Executive's death. 1.18 "Survivor's Benefit" means an annual amount equal to Seventeen Thousand Seven Hundred Forty Three Dollars ($17,743.00), payable to the Beneficiary in monthly installments throughout the Payout Period. SECTION II BENEFITS 2.1 Retirement Benefit. If the Executive is in service with the Bank until reaching his Benefit Age, the Executive shall be entitled to the Excess Benefit. Such benefit shall commence on the Executive's Benefit Eligibility Date and shall be payable in monthly installments throughout the Payout Period. In the event the Executive dies at any time after attaining his Benefit Age, but prior to completion of all such payments due and owing hereunder, the Bank shall pay to the Executive's Beneficiary a continuation of the monthly installments for the remainder of the Payout Period. -7- 2.2 Death During Employment. If the Executive dies while employed at the Bank, the Executive's Beneficiary shall be entitled to the Survivor's Benefit. The Survivor's Benefit shall commence on the first day of the month following the Executive's death and shall be payable in monthly installments throughout the Payout Period. 2.3 Termination Other Than for Cause. If the Executive voluntarily or involuntarily terminates employment at the Bank before reaching his Benefit Age, for any reason other than for (i) Cause (which is covered in Subsection 2.5) or (ii) related to a Change in Control (which is covered in Subsection 2.4), the Executive (or his Beneficiary) shall be entitled to a stream of monthly installments based on the Executive's Accrued Benefit. (a) If, after such termination, the Executive dies prior to attaining his Benefit Age, the stream of monthly installments payable to the Beneficiary shall commence within thirty (30) days of the Executive's death. The Accrued Benefit, measured as of the date of termination, shall be increased monthly (using the Interest Factor) from the date of termination until the Executive's death. The Accrued Benefit, measured as of the date of the Executive's death, shall be annuitized into monthly installments using the Interest Factor and shall be payable for the Payout Period. -8- (b) If, after such termination, the Executive lives until attaining his Benefit Age, the stream of monthly installments payable to the Executive shall commence on the Executive's Benefit Eligibility Date. The Accrued Benefit, measured as of the date of termination, shall be increased monthly (using the Interest Factor) from the date of termination until the Executive's Benefit Age. The Accrued Benefit measured as of the Executive's Benefit Age shall be annuitized into monthly installments using the Interest Factor and shall be payable for the Payout Period. In the event the Executive dies prior to completion of all such monthly installments, the Bank shall pay to the Executive's Beneficiary a continuation of the monthly installments for the remainder of the Payout Period. 2.4 Termination of Service Related to a Change in Control. (a) If the Executive's termination of service (as defined in this Subsection) is related to a Change in Control, the Executive shall be entitled to receive his Excess Benefit upon attainment of his Benefit Age, payment of which shall commence on his Benefit Eligibility Date. In the event the Executive dies at any time after attaining his Benefit Age, but prior to completion of all such payments due and owing hereunder, the Bank shall pay to the Executive's Beneficiary a continuation of the monthly installments for the remainder of the Payout Period. -9- (b) For purposes of this Subsection, "termination of service" shall include the following: If, at any time following said Change in Control, (i) the employment of the Executive is involuntarily terminated by the Bank, or (ii) voluntarily terminated by the Executive after: (A) a material change in the Executive's function, duties, or responsibilities, which change would cause the Executive's position to become one of lesser responsibility, importance, or scope from the position the Executive held at the time of the Change in Control, (B) a relocation of the Executive's principal place of employment by more than thirty (30) miles from its location prior to the Change in Control, or (C) a material reduction in the benefits and perquisites to the Executive from those being provided at the time of the Change in Control. (c) Should the Executive die after being terminated following a Change in Control, but prior to commencement of the Excess Benefit, his Beneficiary shall be entitled to receive the Survivor's Benefit, payment of which shall commence within thirty (30) days following the Executive's death. 2.5 Termination for Cause. If the Executive is terminated for Cause, all benefits under this Agreement shall be forfeited and this Agreement shall become null and void. -10- 2.6 Disability Benefit. If the Executive's service is terminated prior to Benefit Age due to a disability which meets the criteria set forth below, the Executive may request to receive the Disability Benefit in lieu of the retirement benefit described in Section 2.1 (which is not available prior to the Executive's Benefit Eligibility Date). Notwithstanding any other provision hereof, if requested by the Executive and approved by the Board of Directors, the Executive shall receive the Disability Benefit hereunder, in any case in which it is determined by a duly licensed physician selected by the Bank, that the Executive is no longer able, properly and satisfactorily, to perform his regular duties as an Executive, because of ill health, accident, disability or general inability due to age. The monthly benefit shall not begin more than thirty (30) days following the above-mentioned disability determination. The amount of the monthly benefit shall be the annuitized value of the Executive's Accrued Benefit measured as of the date of such disability determination. The Accrued Benefit shall be annuitized using the Interest Factor and shall be payable over the Payout Period. In the event the Executive dies while receiving payments pursuant to this Subsection, or after becoming eligible for such payments but before the actual commencement of such payments, his Beneficiary shall be entitled to receive the Survivor's Benefit for the balance of the Payout Period. Furthermore, if (i) Board of Director approval is obtained, and (ii) the total dollar amount of disability payments received by the Executive under the provisions of this -11- Subsection is less than the total dollar amount of payments that would have been received had the Survivor's Benefit been paid in lieu of the Disability Benefit during the Executive's life, the Bank shall pay the Executive's Beneficiary a lump sum payment for the difference. This lump sum payment shall be made within thirty (30) days of the Executive's death. 2.7 Non-Competition During and After Employment. (a) In consideration of the agreements of the Bank contained herein and of the payments to be made by the Bank pursuant hereto, the Executive hereby agrees that, so long as he remains employed by the Bank, he will devote substantially all of his time, skill, diligence and attention to the business of the Bank, and will not actively engage, either directly or indirectly, in any business or other activity which is or may be deemed to be in any way competitive with or adverse to the best interests of the business of the Bank. (b) The Executive expressly agrees that, as consideration for the covenants of the Bank contained herein and as a condition to the performance by the Bank of its obligations hereunder, from and after any voluntary or involuntary termination of service, other than a termination of service pursuant to Subsection 2.4, and continuing throughout the entire Payout Period, as provided herein, he will not, without the prior written consent of the Bank, engage in, become interested, directly or indirectly, as a sole proprietor, as a -12- partner in a partnership, or as a substantial shareholder in a corporation, nor become associated with, in the capacity of an employee, director, officer, principal, agent, trustee or in any other capacity whatsoever, any enterprise conducted in the trading area of the business of the Bank which enterprise is, or may be deemed to be, competitive with any business carried on by the Bank as of the date of the termination of the Executive's employment or his retirement. (c) In the event of a termination of the Executive's service related to a Change in Control pursuant to Subsection 2.4, paragraph (b) of this Subsection shall cease to be a condition to the performance by the Bank of its obligations under this Agreement. 2.8 Breach. In the event of any breach by the Executive of the agreements and covenants contained herein, the Board of Directors of the Bank shall direct that any unpaid balance of any payments to the Executive under this Agreement be suspended, and shall thereupon notify the Executive of such suspensions, in writing. Thereupon, if the Board of Directors of the Bank shall determine that said breach by the Executive has continued for a period of one (1) month following notification of such suspension, all rights of the Executive and his Beneficiaries under this Agreement, including rights to further payments hereunder, shall thereupon terminate. -13- SECTION III BENEFICIARY DESIGNATION The Executive shall make an initial designation of primary and secondary Beneficiaries upon execution of this Agreement and shall have the right to change such designation, at any subsequent time, by submitting to the Administrator in substantially the form attached as Exhibit to this Agreement, a written designation of primary and secondary Beneficiaries. Any Beneficiary designation made subsequent to execution of this Agreement shall become effective only when receipt thereof is acknowledged in writing by the Administrator. SECTION IV EXECUTIVE'S RIGHT TO ASSETS The rights of the Executive, any Beneficiary, or any other person claiming through the Executive under this Agreement, shall be solely those of an unsecured general creditor of the Bank. The Executive, the Beneficiary, or any other person claiming through the Executive, shall only have the right to receive from the Bank those payments so specified under this Agreement. The Executive agrees that he, his Beneficiary, or any other person claiming through him shall have no rights or interests whatsoever in any asset of the Bank, including any insurance policies or contracts which the Bank may possess or obtain to informally fund this Agreement. Any asset used or acquired by the Bank in connection with -14- the liabilities it has assumed under this Agreement, unless expressly provided herein, shall not be deemed to be held under any trust for the benefit of the Executive or his Beneficiaries, nor shall any asset be considered security for the performance of the obligations of the Bank. Any such asset shall be and remain, a general, unpledged, and unrestricted asset of the Bank. SECTION V RESTRICTIONS UPON FUNDING The Bank shall have no obligation to set aside, earmark or entrust any fund or money with which to pay its obligations under this Agreement. The Executive, his Beneficiaries or any successor in interest to him shall be and remain simply a general unsecured creditor of the Bank in the same manner as any other creditor having a general claim for matured and unpaid compensation. The Bank reserves the absolute right in its sole discretion to either purchase assets to meet its obligations undertaken by this Agreement or to refrain from the same and to determine the extent, nature, and method of such asset purchases. Should the Bank decide to purchase assets such as life insurance, mutual funds, disability policies or annuities, the Bank reserves the absolute right, in its sole discretion, to terminate such assets at any time, in whole or in part. At no time shall the Executive be deemed to have any lien, right, title or interest in or to any specific investment or to any assets of the Bank. If the Bank elects to invest in a life insurance, disability or annuity policy upon the life of the Executive, then the Executive shall assist the Bank by freely submitting to a physical examination and by supplying such additional information necessary to obtain such insurance or annuities. -15- SECTION VI ALIENABILITY AND ASSIGNMENT PROHIBITION Neither the Executive nor any Beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify or otherwise encumber in advance any of the benefits payable hereunder, nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance owed by the Executive or his Beneficiary, nor be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. In the event the Executive or any Beneficiary attempts assignment, communication, hypothecation, transfer or disposal of the benefits hereunder, the Bank's liabilities shall forthwith cease and terminate. SECTION VII ACT PROVISIONS 7.1 Named Fiduciary and Administrator. The Bank shall be the Named Fiduciary and Administrator (the "Administrator") of this Agreement. As Administrator, the Bank shall be responsible for the management, control and administration of the Agreement as established herein. The Administrator may delegate to others certain -16- aspects of the management and operational responsibilities of the Agreement, including the employment of advisors and the delegation of ministerial duties to qualified individuals. 7.2 Claims Procedure and Arbitration. In the event that benefits under this Agreement are not paid to the Executive (or to his Beneficiary in the case of the Executive's death) and such claimants feel they are entitled to receive such benefits, then a written claim must be made to the Administrator within sixty (60) days from the date payments are refused. The Bank and its Board of Directors shall review the written claim and, if the claim is denied, in whole or in part, they shall provide in writing, within ninety (90) days of receipt of such claim, their specific reasons for such denial, reference to the provisions of this Agreement upon which the denial is based, and any additional material or information necessary to perfect the claim. Such writing by the Bank and its Board of Directors shall further indicate the additional steps which must be undertaken by claimants if an additional review of the claim denial is desired. If claimants desire a second review, they shall notify the Administrator in writing within sixty (60) days of the first claim denial. Claimants may review this Agreement or any documents relating thereto and submit any issues and comments, in writing, they may feel appropriate. In its sole discretion, the Administrator shall then review the second claim and provide a written decision within sixty (60) days of receipt of -17- such claim. This decision shall state the specific reasons for the decision and shall include reference to specific provisions of this Agreement upon which the decision is based. If claimants continue to dispute the benefit denial based upon completed performance of this Agreement or the meaning and effect of the terms and conditions thereof, then claimants may submit the dispute to a Board of Arbitration for final arbitration. Said Board of Arbitration shall consist of one member selected by the claimant, one member selected by the Bank, and the third member selected by the first two members. The Board of Arbitration shall operate under any generally recognized set of arbitration rules. The parties hereto agree that they, their heirs, personal representatives, successors and assigns shall be bound by the decision of such Board of Arbitration with respect to any controversy properly submitted to it for determination. -18- SECTION VIII MISCELLANEOUS 8.1 No Effect on Employment Rights. Nothing contained herein will confer upon the Executive the right to be retained in the service of the Bank nor limit the right of the Bank to discharge or otherwise deal with the Executive without regard to the existence of the Agreement. Pursuant to 12 C.F.R. ss. 563.39(b), the following conditions shall apply to this Agreement: (1) The Bank's Board of Directors may terminate the Executive at any time, but any termination by the Bank's Board of Directors other than termination for Cause shall not prejudice the Executive's vested right to compensation or other benefits under the contract. As provided in Section 2.5, the Executive shall forfeit his right to all benefits provided for in the Agreement in the event he is terminated for Cause. He shall have no right to receive additional compensation or other benefits for any period after termination for Cause. (2) If the Executive is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3) and (g)(1)) the Bank's obligations under the contract shall be suspended (except vested rights) as of the date of termination of service unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay the Executive all or part of the compensation withheld while its contract obligations were suspended and (ii) reinstate (in whole or in part) any of its obligations which were suspended. -19- (3) If the Executive is terminated and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(4) or (g)(1)), all non-vested obligations of the Bank under the contract shall terminate as of the effective date of the order. (4) If the Bank is in default (as defined in Section 3(x)(1) of the Federal Deposit Insurance Act), all non-vested obligations under the contract shall terminate as of the date of default. (5) All non-vested obligations under the contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the Bank: (i) by the Director [of the Federal Deposit Insurance Corporation or the Resolution Trust Corporation] or his designee at the time the Federal Deposit Insurance Corporation or the Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in ss. 13(c) of the Federal Deposit Insurance Act; or -20- (ii) by the Director [of the Federal Deposit Insurance Corporation or the Resolution Trust Corporation] or his designee, at the time the Director or his designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, (i.e., the Executive's Accrued Benefit), however, shall not be affected by such action. 8.2 State Law. The Agreement is established under, and will be construed according to, the laws of the State of Indiana, to the extent such laws are not preempted by the Act and valid regulations published thereunder. 8.3 Severability. In the event that any of the provisions of this Agreement or portion thereof, are held to be inoperative or invalid by any court of competent jurisdiction, then: (1) insofar as is reasonable, effect will be given to the intent manifested in the provisions held invalid or inoperative, and (2) the validity and enforceability of the remaining provisions will not be affected thereby. 8.4 Incapacity of Recipient. In the event the Executive is declared incompetent and a conservator or other person legally charged with the care of his person or Estate is appointed, any benefits under the Agreement to which such Executive is entitled -21- shall be paid to such conservator or other person legally charged with the care of his person or Estate. 8.5 Unclaimed Benefit. The Executive shall keep the Bank informed of his current address and the current address of his Beneficiaries. If the location of the Executive is not made known to the Bank within three (3) years after the date on which any payment of the Excess Benefit may first be made, payment may be made as though the Executive had died at the end of the three (3) year period. If, within one (1) additional year after such three (3) year period has elapsed, or, within three (3) years after the actual death of the Executive, whichever comes first, the Bank is unable to locate any Beneficiary of the Executive, the Bank may fully discharge its obligation by payment to the Estate. 8.6 Limitations on Liability. Notwithstanding any of the preceding provisions of the Agreement, no individual acting as an employee or agent of the Bank, or as a member of the Board of Directors shall be personally liable to the Executive or any other person for any claim, loss, liability or expense incurred in connection with the Agreement. 8.7 Gender. Whenever in this Agreement words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply. -22- 8.8 Effect on Other Corporate Benefit Agreements. Nothing contained in this Agreement shall affect the right of the Executive to participate in or be covered by any qualified or nonqualified pension, profit sharing, group, bonus or other supplemental compensation or fringe benefit agreement constituting a part of the Bank's existing or future compensation structure. 8.9 Inurement. This Agreement shall be binding upon and shall inure to the benefit of the Bank, its successors and assigns, and the Executive, his successors, heirs, executors, administrators, and Beneficiaries. 8.10 Tax Withholding. The Bank may withhold from any benefits payable under this Agreement all federal, state, city, or other taxes as shall be required pursuant to any law or governmental regulation then in effect. 8.11 Headings. Headings and sub-headings in this Agreement are inserted for reference and convenience only and shall not be deemed a part of this Agreement. -23- SECTION IX AMENDMENT/REVOCATION This Agreement shall not be amended, modified or revoked at any time, in whole or part, without the mutual written consent of the Executive and the Bank, and such mutual written consent shall be required even if the Executive is no longer employed by the Bank. SECTION X EXECUTION 10.1 This Agreement sets forth the entire understanding of the parties hereto with respect to the transactions contemplated hereby, and any previous agreements or understandings between the parties hereto regarding the subject matter hereof are merged into and superseded by this Agreement. 10.2 This Agreement shall be executed in triplicate, each copy of which, when so executed and delivered, shall be an original, but all three copies shall together constitute one and the same instrument. [Remainder of Page Intentionally Left Blank] -24- IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed on this 28th day of February, 1996. First Federal Savings Bank of Marion By: /s/ Larry G. Phillips Larry G. Phillips Vice President & Secretary-Treasurer (Title) -25- EXCESS BENEFIT AGREEMENT BENEFICIARY DESIGNATION The Executive, under the terms of the Excess Benefit Agreement executed by the Bank, of Marion, Indiana, dated February 28th, 1996, hereby designates the following Beneficiary to receive any guaranteed payments or death benefits under such Agreement, following his death: PRIMARY BENEFICIARY: Marge Burchard SECONDARY BENEFICIARY: Estate This Beneficiary Designation hereby revokes any prior Beneficiary Designation which may have been in effect. Such Beneficiary Designation is revocable. DATE: February 28 , 1996 ---------------------------------------------- /s/ Sondra Rabb /s/ Robert Burchard (WITNESS) EXECUTIVE /s/ Chris Bradford (WITNESS) Exhibit A EX-11 4 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS Statement re: Computation of Per Share Earnings
Year Ended June 30, --------------------------------------------- 1996 1995 1994 ----------- ---------- ----------- Average Shares Outstanding Net income $2,269,257 Average number of common shares outstanding 2,297,853 Earnings per average shares outstanding $ 0.99 ========== Primary Net income $2,481,414 $2,429,948 Average number of common shares outstanding 1,986,376 2,090,600 Add incremental shares for stock options 47,579 95,537 --------- --------- Adjusted average shares 2,033,955 2,186,137 Primary earnings per share $ 1.22 $ 1.11 ========== ========== Fully Diluted Net income $2,481,414 $2,429,948 Average number of common shares outstanding 1,986,376 2,090,600 Add incremental shares for stock options 49,624 97,129 --------- --------- Adjusted average shares 2,036,000 2,187,729 Fully diluted earnings per share $ 1.22 $ 1.11 ========== ==========
For 1994, the computation of primary and fully diluted earnings per share reflected no dilution. EX-13 5 MCHI 1996 ANNUAL REPORT [FRONT COVER OF 1996 ANNUAL REPORT] 96 ANNUAL REPORT MARION CAPITAL HOLDINGS, INC. and Subsidiary First Federal Savings Bank of Marion TABLE OF CONTENTS Message to Shareholders.............................................. 1 Selected Consolidated Financial Data................................. 3 Management's Discussion and Analysis................................. 4 Independent Auditor's Report......................................... 16 Consolidated Statement of Financial Condition........................ 17 Consolidated Statement of Income..................................... 18 Consolidated Statement of Changes in Shareholders' Equity............ 19 Consolidated Statement of Cash Flows................................. 20 Notes to Consolidated Financial Statements........................... 22 Directors and Officers............................................... 42 Shareholder Information.............................................. 44 DESCRIPTON OF BUSINESS Marion Capital Holdings, Inc. ("MCHI"), an Indiana corporation, became a unitary savings and loan holding company upon the conversion of First Federal Savings Bank of Marion ("First Federal" and, together with MCHI, the "Company") from a federally chartered mutual savings bank to a federally chartered stock savings bank in March, 1993. The Company conducts business from a single office in Marion, Grant County, Indiana, and First Federal has a branch office in Decatur, Indiana. First Federal is and historically has been among the top real estate mortgage lenders in Grant County and is the largest independent financial institution headquartered in Grant County. First Federal offers a variety of lending, deposit and other financial services to its retail and commercial customers. MCHI has no other business activity than being the holding company for First Federal. MCHI is the sole shareholder of First Federal. To our Shareholders: The year ended June 30, 1996 marked the third full year of operations for Marion Capital Holdings, Inc. as a unitary savings and loan holding company which began operations on March 18, 1993 when First Federal Savings Bank of Marion converted to a federal stock savings bank. First Federal Savings Bank of Marion will complete its 60th year of financial service to the community in 1996. Our net income for the year ended June 30, 1996 was $2,481,414, which was a 2.1% increase over the 1995 net income of $2,429,948. This represents the fourth consecutive year the Company has been able to increase its net income. Earnings per share for the year ended June 30, 1996 amounted to $1.22, an increase of 9.9% over earnings per share of $1.11 reported in the prior year. In June 1996, we increased our quarterly dividend to $.20 per share which was an 11% increase over the dividend paid in each of the previous four quarters. Marion Capital Holdings, Inc. was able to increase net income even though the interest rate spread declined slightly. The interest rate spread for the year ended June 30, 1996 decreased to 3.01% from 3.20% for the year ended June 30, 1995. The Company showed improvement in many financial ratios. The ratio of nonperforming assets to total assets at June 30, 1996 was 1.07%, which compares to 1.13% at June 30, 1995. Real estate owned declined by 11%. Nonperforming loans to total loans was 1.18% at June 30, 1996 compared to 1.27% at June 30, 1995. Return on assets for the year ended June 30, 1996 was 1.41% which was unchanged from the previous year. Return on equity improved from 5.58% for the year ended June 30, 1995 to 5.86% for the current year. Shareholders' equity decreased during the year as the Company continued to repurchase common stock in the open market. During the year ended June 30, 1996, 100,658 shares were retired at an average cost of $20.53 or approximately 96% of average book value. Book value per share increased to $21.47 per share from $21.08 per share last year. In July 1996, the Company repurchased 96,680 shares at an average cost of $20.33, or approximately 95% of book value. These repurchases are intended to enhance the potential for growth in earnings per share and increase the return on equity. Loan originations remained strong for the year ended June 30, 1996, and repayments remained stable as interest rates stabilized and refinancing became less popular. This resulted in net loans receivable increasing by $6.8 million, or 5%, from June 30, 1995. This helped improve the yield on assets as funds were reallocated from lower yielding investments to higher yielding mortgage loans. The yield on mortgage loans increased from 8.52% for the year ended June 30, 1995 to 8.78% for the year ended June 30, 1996. Deposits increased by $5.6 million, or 4.7%, from June 30, 1995, and the cost of those funds increased as well from 4.66% for the year ended June 30, 1995 to 5.22% for the year ended June 30, 1996. On March 1, 1996 John M. Dalton became President and CEO of Marion Capital Holdings, Inc. and First Federal Savings Bank of Marion upon the retirement of Robert D. Burchard. Mr. Dalton began his career at First Federal in 1962, has been a director since 1974, and was Executive Vice President of First Federal from 1983 until his recent promotion. He was also Executive Vice President and director of Marion Capital Holdings, Inc. from its beginning until March 1, 1996. He was elected Vice Chairman of the boards of Marion Capital Holdings, Inc. and First Federal on August 12, 1996. Mr. Burchard was employed at First Federal beginning in 1959, and became a director in 1969 and President and CEO from 1983 until his retirement. In addition, he was President and CEO of Marion Capital Holdings, Inc. from March 18, 1993 until his retirement and had been Vice Chairman of First Federal and Marion Capital Holdings, Inc. He became Chairman on August 12, 1996 of both organizations. In July 1996, we were all saddened by the death of Merritt B. McVicker, Chairman of the Board of Directors since 1974 and former President of First Federal Savings Bank from 1967 to 1983. Mr. McVicker first joined the bank in 1959, and was very instrumental in making First Federal into the area's premier mortgage lender. Mr. McVicker was past Chairman of the Indiana League of Savings Institutions, director of the Federal Home Loan Bank of Indianapolis, Trustee of the Advertising Council of the U.S. League, and served on the boards of various community organizations. He will be sadly missed by his family, friends and business associates. He was a real "Team Player!" On August 12, 1996, the boards of Marion Capital Holdings, Inc. and First Federal Savings Bank were expanded from six (6) to seven (7) members effective September 1, 1996. At those board meetings, Jerry D. McVicker was appointed to fill the unexpired term of Merritt B. McVicker which expires in 1997. Steven L. Banks was appointed to the new board position. He will be nominated for re-election at Marion Capital's annual meeting on October 17, 1996, for a three-year term expiring in 1999. Mr. McVicker, 51 years of age, is currently Director of Operations for Marion Community Schools and has served in various capacities throughout many years with the school. Mr. Banks, 46 years of age, was President and CEO of Fidelity Federal Savings Bank of Marion. On September 1, 1996, he assumed the duties of Executive Vice President of both Marion Capital Holdings, Inc. and First Federal Savings Bank of Marion. We believe the Company has enjoyed a good and profitable year, and we are thankful for the continued support and confidence of our customers and shareholders. /s/ John M. Dalton /s/ Robert Burchard President Chairman of the Board SELECTED CONSOLIDATED FINANCIAL DATA OF MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES The following selected consolidated financial data of MCHl and its subsidiaries is qualified in its entirety by, and should be read in conjunction with, the consolidated financial statements, including notes thereto, included elsewhere in this Annual Report.
AT JUNE 30, ------------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (In Thousands) Summary of Financial Condition: Total assets......................................... $177,767 $172,711 $170,799 $173,861 $161,308 Loans, net........................................... 143,165 136,323 127,092 133,000 133,257 Cash and investment securities....................... 21,578 23,743 30,863 27,531 15,257 Real estate limited partnerships..................... 1,624 1,527 1,422 1,363 1,182 Deposits............................................. 126,260 120,613 120,965 121,944 131,174 Advances from FHLB of Indianapolis................... 6,241 6,963 3,200 3,075 5,175 Shareholders' equity................................. 41,511 41,864 44,331 46,773 23,256 YEAR ENDED JUNE 30, ------------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (In Thousands) Summary of Operating Results: Interest income...................................... $13,740 $ 12,786 $ 12,391 $ 12,885 $ 13,927 Interest expense..................................... 6,853 5,922 5,872 6,936 9,109 -------- -------- -------- -------- -------- Net interest income............................... 6,887 6,864 6,519 5,949 4,818 Provision for losses on loans........................ 34 68 65 367 1,150 -------- -------- -------- -------- -------- Net interest income after provision for losses on loans................... 6,853 6,796 6,454 5,582 3,668 -------- -------- -------- -------- -------- Other income: Net loan servicing fees........................... 81 69 62 51 33 Annuity and other commissions..................... 147 144 211 194 166 Other income...................................... 95 76 83 91 82 Equity in losses of limited partnerships.......... (193) (185) (236) (190) (195) Gains (losses) on sale of investments ............ -- -- 15 (16) -- -------- -------- -------- -------- -------- Total other income................................ 130 105 134 130 86 -------- -------- -------- -------- -------- Other expense: Salaries and employee benefits.................... 2,296 2,339 1,970 1,574 1,874(8) Other............................................. 1,293 1,216 1,634 1,470 1,359 -------- -------- -------- -------- -------- Total other expense............................. 3,589 3,555 3,604 3,044 3,233 -------- -------- -------- -------- -------- Income before income tax and accounting method changes.................................... 3,394 3,346 2,984 2,668 521 Income tax expense (benefit)......................... 913 916 715 578 (230) Accounting method changes............................ -- -- -- 98 -- -------- -------- -------- -------- -------- Net Income........................................ $ 2,481 $ 2,430 $ 2,269 $ 1,992 $ 751 ======== ======== ======== ======== ======== Supplemental Data: Book value per common share at end of year........... $21.47 $ 21.08 $ 20.20 $ 19.37 N/A Return on assets (1)................................. 1.41% 1.41% 1.29% 1.19% .46% Return on equity (2)................................. 5.86 5.58 5.00 6.45 3.28 Interest rate spread (3)............................. 3.01 3.20 2.96 3.08 2.61 Net yield on interest earning assets (4)............. 4.17 4.28 3.97 3.82 3.19 Operating expenses to average assets (5)............. 2.04 2.06 2.04 1.82 1.97(8) Net interest income to operating expenses (6)........ 1.92x 1.93x 1.81x 1.95x l.49x(8) Equity-to-assets at end of year (7).................. 23.35 24.24 25.96 26.90 14.42 Average equity to average total assets............... 24.09 25.27 25.72 18.52 13.94 Average interest-earning assets to average interest-bearing liabilities...................... 127.93 129.08 128.37 116.65 109.69 Non-performing assets to total assets................ 1.07 1.13 3.20 4.10 5.52 Non-performing loans to total loans.................. 1.18 1.27 3.59 3.95 5.43 Loan loss reserve to total loans..................... 1.38 1.45 1.59 1.52 1.70 Loan loss reserve to non-performing loans............ 117.07 114.87 44.21 38.44 31.31 Net charge-offs to average loans..................... .03 .08 .05 .46 .60 Number of full service offices....................... 2 2 2 2 2
- ---------- (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) Other expense was adversely affected during the year ended June 30, 1992, by $549,000 because of a change in the accounting treatment for a supplemental retirement program for certain officers and directors. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The principal business of thrift institutions, including First Federal, has historically consisted of attracting deposits from the general public and making loans secured by residential and commercial real estate. First Federal and all other savings associations are significantly affected by prevailing economic conditions, as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, housing and financial institutions. Deposit flows are influenced by a number of factors, including interest rates paid on competing investments, account maturities and level of personal income and savings. In addition, deposit growth is affected by how customers perceive the stability of the financial services industry amid various current events such as regulatory changes, failures of other financial institutions and financing of the deposit insurance fund. Lending activities are influenced by the demand for and supply of housing lenders, the availability and cost of funds and various other items. Sources of funds for lending activities include deposits, payments on loans, proceeds from sale of loans, borrowings, and funds provided from operations. The Company's earnings are primarily dependent upon net interest income, the difference between interest income and interest expense. Interest income is a function of the balances of loans and investments outstanding during a given period and the yield earned on such loans and investments. Interest expense is a function of the amounts of deposits and borrowings outstanding during the same period and rates paid on such deposits and borrowings. The Company's earnings are also affected by provisions for loan and real estate losses, service charges, income from subsidiary activities, operating expenses and income taxes. Asset/Liability Management First Federal, like other savings associations, 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. Since the early 1980's, First Federal's asset/liability management strategy has been directed toward reducing its exposure to a rise in interest rates. At June 30, 1996, First Federal's cumulative One-Year Gap, based on total assets, was a positive 16.81% and has been positive at the end of each quarter since September 30, 1988. A positive interest rate gap can be expected to have a favorable effect on the Company's earnings in periods of rising interest rates because during such periods interest income earned on assets will generally increase more rapidly than the interest expense paid on liabilities. Conversely, in a falling interest rate environment, the interest earned on assets will generally decline more rapidly than the total expense paid on liabilities. A negative interest rate gap will have the opposite effects. First Federal protects against problems arising in a falling interest rate environment by requiring interest rate minimums on its residential and commercial real estate adjustable-rate mortgages ("ARMs") and against problems arising in a rising interest rate environment by having in excess of 89% of its mortgage loans with adjustable rate features. Due to the interest rate minimums, the Company has not experienced a significant decline in net interest yield in recent periods of declining interest rates. First Federal's management believes that the interest rate gap measurement does not accurately depict its interest sensitivity due to its success in utilizing interest rate minimums. As noted in the table on the following page, $78.7 million, or 50.2%, of the Company's interest-earning assets reprice or mature in the 12 months ending June 30, 1997, which could have a significant impact on future yields and net interest margin. First Federal includes interest rate minimums on almost all loans originated, and 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. In periods of rising interest rates, the impact on the Company's yields and net interest margin should be favorable because interest income earned on its assets will generally increase more rapidly than interest paid on its liabilities. Loan prepayments increased in the year ended June 30, 1996, compared to the prior fiscal year. Although less than 11% of the Company's residential mortgage portfolio consists of fixed-rate loans, prepayments could have an impact on yields and net interest margins in periods of falling interest rates. The net yield on loans for the year ended June 30, 1996, was 8.78%, an increase from 8.52% for the the year ended June 30, 1995. While loan yields increased during these periods, the net interest margin decreased to 4.17% for the year ended June 30, 1996, from 4.28% in the prior fiscal year. First Federal believes its asset/liability strategy of maintaining over 89% of the Company's residential portfolio in ARMs and requiring interest rate minimums on these loans will continue to protect net interest margins. The Company's mortgage-backed security portfolio is subject to prepayments, and for those mortgage-backed securities with variable interest rates, to changing yields. These prepayments have increased in recent years as the underlying mortgages have been refinanced at lower interest rates, and interest rate changes on adjustable-rate mortgage-backed securities could have an effect on First Federal's asset/liability management strategy. Since the Company's mortgage-backed security portfolio only represents 0.8% of the Company's total assets at June 30, 1996, management believes that such impact would be insignificant. The following table illustrates the projected maturities and the repricing of the major asset and liability categories of First Federal as of June 30, 1996. Maturity and repricing dates have been projected by applying the assumptions set forth below to contractual maturity and repricing dates. Classifications of such items in the table below are different from those presented in other schedules and financial statements included herein and do not reflect non-performing loans.
At June 30, 1996 Maturing or Repricing Within ----------------------------------------------------------------------------- 6 Months 0 to 3 3 to 6 to 1 to 3 3 to 5 5 to 10 10 to 20 Over 20 Months Months 1 Year Years Years Years Years Years Total ------ ------ ------ ----- ----- ----- ----- ----- ----- (Dollars in Thousands) Assets: Adjustable-rate mortgages $16,180 $21,869 $27,071 $20,209 $32,581 $ 7,135 $ 84 $ 98 $125,227 Fixed-rate mortgages 724 607 872 4,873 2,541 3,345 1,418 270 14,650 Nonmortgage loans 2,965 86 24 349 271 -- 78 -- 3,773 Nonmortgage investments 5,126 1,000 2,000 4,414 -- 648 -- -- 13,188 Mortgage investments 52 47 79 68 (23) (18) (5) (1) 199 Off balance sheet assets (1) (5,899) 196 5,703 -- -- -- -- -- -- Unamortized yield adjustments (8) (8) (15) (59) (29) (70) (124) -- (313) ------ ------ ------ ------ ------ ----- ----- ----- ------- Total interest-earning assets 19,140 23,797 35,734 29,854 35,341 11,040 1,451 367 156,724 ------ ------ ------ ------ ------ ----- ----- ----- ------- Interest-bearing liabilities Fixed maturity deposits 12,684 9,504 11,437 28,190 24,477 1,594 -- -- 87,886 Other deposits 4,430 3,524 5,259 9,794 4,648 5,892 3,797 1,060 38,404 FHLB advances 1,800 1,208 4 1,891 864 38 436 -- 6,241 ------ ------ ------ ------ ------ ----- ----- ----- ------- Total interest-bearing liabilities 18,914 14,236 16,700 39,875 29,989 7,524 4,233 1,060 132,531 ------ ------ ------ ------ ------ ----- ----- ----- ------- Excess (deficiency) of interest-earning assets over interest-bearing liabilities $ 226 $ 9,561 $19,034 $(10,021) $5,352 $3,516 $ (2,782) $ (693)$ 24,193 ======= ======= ======= ======== ====== ====== ======== ====== ======== Cumulative excess (deficiency) of interest-earning assets over interest-bearing liabilities $ 226 $ 9,787 $28,821 $18,800 $24,152 $27,668 $24,886 $24,193 $ 24,193 Cumulative interest rate gap .13% 5.71% 16.81% 10.97% 14.09% 16.14% 14.52% 14.11% 14.11%
- ---------- (1) Includes loan commitments and loans in process. In preparing the table above it has been assumed, in assessing the interest rate sensitivity of savings institutions, that (i) adjustable-rate first mortgage loans will prepay at the rate of 12% per year; (ii) fixed-rate first mortgage loans will prepay at the rate of 10% per maturity classification, and (iii) nonmortgage loans and investments will not prepay. In addition, it is assumed that fixed maturity deposits are not withdrawn prior to maturity, and that other deposits are withdrawn or repriced as follows:
0 to 3 3 to 6 6 months 1 to 3 3 to 5 5 to 10 10 to 20 Over 20 Type months months to 1 year years years years years years ------ ------ --------- ------- ------- -------- --------- ------- Passbook (1)................. 4.55% 4.34% 8.11% 25.82% 16.83% 21.37% 14.78% 4.20% Money market accounts (1).............. 32.31 21.87 24.82 11.00 5.24 4.01 .72 .03 Interest-bearing transaction accounts.................. 10.91 9.72 16.37 33.87 9.06 12.16 6.68 1.22 Noninterest-bearing transaction accounts.................. 2.60 2.53 4.87 17.10 13.85 24.18 22.71 12.16
- ---------- (1) Based on actual industry and historical experience, management has determined that these deposit rates and balances respond slowly to changes in market rates and that balances tend to remain with First Federal even when market rates rise above deposit rates. In evaluating the Company's exposure to interest rate movements, certain shortcomings inherent in the method of analysis presented in the foregoing tables must be considered. 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 ARMs, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In particular, most of First Federal's ARMs and adjustable-rate loans have interest rate minimums of 6.00% for residential loans and 7.0% for commercial real estate loans. Currently, originations of residential ARMs have interest rate minimums of 6.00%. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase although First Federal does underwrite these mortgages at approximately 4.0% above the origination rate. The Company considers all of these factors in monitoring its exposure to interest rate risk. 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.
Year Ended June 30, -------------------------------------------------------------------------------- 1996 1995 --------------------------------------- ------------------------------------ Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ------- -------- ---------- ------- -------- ---------- (Dollars in Thousands) Assets: Interest-earning assets: Interest-earning deposits ........... $ 4,972 $ 334 6.72% $ 2,531 $ 159 6.28% Investment securities ............... 17,306 877 5.07 22,674 1,111 4.90 Loans (1) ........................... 141,946 12,456 8.78 134,428 11,451 8.52 Stock in FHLB of Indianapolis ....... 927 73 7.87 909 65 7.15 ------- ------ ------- ------ Total interest-earning assets .... 165,151 13,740 8.32 160,542 12,786 7.96 Non-interest earning assets .............. 10,762 -- 11,873 --- -------- ------ -------- ------ Total assets ...................... $175,913 13,740 $172,415 12,786 ======== ------ ======== ------ Liabilities and shareholders' equity: Interest-bearing liabilities: Savings accounts .................... $ 18,127 588 3.24 $ 22,582 726 3.21 NOW and money market accounts ....... 18,718 667 3.56 18,332 593 3.23 Certificates of deposit ............. 84,650 5,089 6.01 77,884 4,221 5.42 ------- ------ -------- ------ Total deposits ................... 121,495 6,344 5.22 118,798 5,540 4.66 FHLB borrowings ..................... 6,694 457 6.83 5,574 382 6.85 Other borrowings .................... 901 52 5.77 -------- ------ -------- ------ Total interest-bearing liabilities 129,090 6,853 5.31 124,372 5,922 4.76 Other liabilities ........................ 4,451 -- 4,469 -------- ------ -------- ------ Total liabilities ................. 133,541 -- 128,841 Shareholders' equity ..................... 42,372 -- 43,574 -------- ------ -------- ------ Total liabilities and shareholders' equity .......................... $172,913 6,853 $172,415 5,922 ======== ------ ======== ------ Net interest-earning assets .............. $ 36,061 $ 36,170 Net interest income ...................... $ 6,887 $6,864 ======= ====== Interest rate spread (2) ................. 3.01 3.20 Net yield on weighted average interest-earning assets (3) ......... 4.17 4.28 Average interest-earning assets to average interest-bearing liabilities ......................... 127.93% 129.08% ====== ======
Year Ended June 30, 1994 ------------------------------------ Average Average Balance Interest Yield/Cost ------- -------- ---------- Assets: Interest-earning assets: Interest-earning deposits ........... $ 7,474 $ 312 4.17% Investment securities ............... 24,825 1,065 4.29 Loans (1) ........................... 130,897 10,961 8.37 Stock in FHLB of Indianapolis ....... 909 53 5.83 ------- ------ Total interest-earning assets .... 164,105 12,391 7.55 Non-interest earning assets .............. 12,309 -- ------- ------ Total assets ...................... $176,414 12,391 ======== ------ Liabilities and shareholders' equity: Interest-bearing liabilities: Savings accounts .................... $ 24,450 787 3.22 NOW and money market accounts ....... 18,327 522 2.85 Certificates of deposit ............. 81,734 4,319 5.28 ------- ------ Total deposits ................... 124,511 5,628 4.52 FHLB borrowings ..................... 3,331 244 7.33 Other borrowings .................... -- -- Total interest-bearing liabilities 127,842 5,872 4.59 Other liabilities ........................ 3,202 -- ------- ------ Total liabilities ................. 131,044 -- Shareholders' equity ..................... 45,370 -- ------- ------ Total liabilities and shareholders' equity .......................... $176,414 5,872 ======= ------ Net interest-earning assets .............. $ 36,263 Net interest income ...................... $6,519 ====== Interest rate spread (2) ................. 2.96 Net yield on weighted average interest-earning assets (3) ......... 3.97 Average interest-earning assets to average interest-bearing liabilities ......................... 128.37% ======
- ---------- (1) Average balances include 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.
Year Ended June 30, At ---------------------------------------- June 30, 1996 1996 1995 1994 ------------- ------ ------ ------ Weighted average interest rate earned on: Interest-earning deposits................. 5.31% 6.72% 6.28% 4.17% Investment securities..................... 5.10 5.07 4.90 4.29 Loans (1) ............................. 8.47 8.78 8.52 8.37 Stock in FHLB of Indianapolis............. 7.53 7.87 7.15 5.83 Total interest-earning assets......... 8.08 8.32 7.96 7.55 Weighted average interest rate cost of: Savings accounts.......................... 3.25 3.24 3.21 3.22 NOW and money market accounts............. 3.33 3.56 3.23 2.85 Certificates of deposit................... 5.96 6.01 5.42 5.28 FHLB borrowings........................... 6.50 6.83 6.85 7.33 Other borrowings.......................... -- 5.77 Total interest-bearing liabilities.... 5.21 5.31 4.76 4.59 Interest rate spread (2)....................... 2.87 3.01 3.20 2.96 Net yield on weighted average interest-earning assets (3)............... -- 4.17 4.28 3.97
- ---------- (1) Average balances include non-accrual loans. (2) Interest rate spread is calculated by subtracting combined weighted average interest rate cost from combined weighted average interest rate earned for the period indicated. Interest rate spread figures must be considered in light of the relationship between the amounts of interest-earning assets and interest-bearing liabilities. Since MCHI's interest-earning assets exceeded its interest-bearing liabilities for each of the three years shown above, a positive interest rate spread resulted in net interest income. (3) The net yield on weighted average interest-earning assets is calculated by dividing net interest income by weighted average interest-earning assets for the period indicated. No net yield figure is presented at June 30, 1996, 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.
Increase (Decrease) in Net Interest Income ------------------------------------------ Total Net Due to Due to Change Rate Volume ------ ---- ------ (In Thousands) Year ended June 30, 1996 compared to year ended June 30, 1995 Interest-earning assets: Interest-earning deposits................... $ 175 $ 12 $ 163 Investment securities....................... (234) 37 (271) Loans....................................... 1,005 352 653 Stock in FHLB of Indianapolis............... 8 7 1 ------- ------ ------- Total..................................... 954 408 546 ------- ------ ------- Interest-bearing liabilities: Savings accounts............................ (138) 6 (144) NOW and money market accounts............... 74 61 13 Certificates of deposit..................... 868 484 384 FHLB advances............................... 75 (1) 76 Other borrowings............................ 52 --- 52 ------- ------ ------- Total..................................... 931 550 381 ------- ------ ------- Change in net interest income................... $ 23 $(142) $ 165 ======= ====== ======= Year ended June 30, 1995 compared to year ended June 30, 1994 Interest-earning assets: Interest-earning deposits................... $ (153) $ 112 $ (265) Investment securities....................... 46 143 (97) Loans....................................... 490 191 299 Stock in FHLB of Indianapolis............... 12 12 -- ------- ------ ------- Total..................................... 395 458 (63) ------- ------ ------- Interest-bearing liabilities: Savings accounts............................ (61) (1) (60) NOW and money market accounts............... 71 71 -- Certificates of deposit..................... (98) 109 (207) FHLB advances............................... 138 (17) 155 ------- ------ ------- Total..................................... 50 162 (112) ------- ------ ------- Change in net interest income................... $ 345 $ 296 $ 49 ======= ====== =======
Changes in Financial Position and Results of Operations - Year Ended June 30, 1996, Compared to Year Ended June 30, 1995: General. MCHI's total assets were $177.8 million at June 30, 1996, an increase of $5.1 million or 2.9% from June 30, 1995. During 1996, average interest-earnings assets increased $4.6 million, or 2.9%, while average interest-bearing liabilities increased $4.7 million, or 3.8%, compared to June 30, 1995. Cash and cash equivalents and investment securities decreased $2.2 million, or 9.1%, primarily as a result of their use in funding increased loan originations. Net loans increased $6.8 million, or 5.0%, primarily from originations of 1-4 family and multi-family real estate loans. 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, 1996 and 1995, no loans in the portfolio were held for sale. Deposits increased $5.6 million, to $126.3 million, or 4.7%, at June 30, 1996 from the amount reported last year. MCHI's net income for the year ended June 30, 1996 was $2.5 million, an increase of $51,000, or 2.1% over the results for the year ended June 30, 1995. Net interest income increased $23,000, or .3%, from the previous year, and provision for losses on loans in the amount of $34,200 decreasd $33,300 from that recorded in 1995. Stock Repurchases. During the year ended June 30, 1996, MCHI repurchased 100,658 shares of common stock in the open market at an average cost of $20.53, or approximately 96% of average book value. This repurchase amounted to 5% of the outstanding stock, the maximum amount of stock that could be repurchased prior to March 18, 1996 under Office of Thrift Supervision ("OTS") regulations then in effect, except in special circumstances. This 5% limitation expired on March 18, 1996. In July, 1996, MCHI repurchased another 96,680 shares, or 5%, at an average cost of $20.33, or approximately 95% of book value. These open-market purchases are intended to enhance the book value per share and enhance potential for growth in earnings per share. Cash Dividends. Since First Federal's conversion in March 1993, MCHI has paid quarterly dividends in each quarter, amounting to $.125 for each of the first four quarters, $.15 per share for each of the second four quarters, $.18 per share for each of the third four quarters, and $.20 per share in the most recent quarter ended June 30, 1996. Interest Income. MCHI's total interest income for the year ended June 30, 1996 was $13.7 million, an increase of $954,000, or 7.5%, from interest income for the year ended June 30, 1995. This increase resulted principally from an increase in the yield on interest earning assets from 7.96% to 8.32% and an increase in average interest earning assets of $4.6 million. Interest Expense. Total interest expense for the year ended June 30, 1996, was $6.9 million, which was an increase of $931,000, or 15.7% from interest expense for the year ended June 30, 1995. This increase resulted principally from an increase in the cost on interest bearing liabilities from 4.76% to 5.31% and an increase in average interest earning liabilities of $4.7 million. Provision for Losses on Loans. The provision for the year ended June 30, 1996, was $34,200, compared to $67,500 in 1995. The 1996 chargeoffs net of recoveries totaled $38,000, compared to the prior year of $105,000. The ratio of the allowance for loan losses to total loans decreased from 1.45% at June 30, 1995 to 1.38% at June 30, 1996, and the ratio of allowance for loan losses to nonperforming loans increased from 114.87% at June 30, 1995, to 117.07% at June 30, 1996. The 1996 provision was to replenish the allowance for loan losses as a result of chargeoffs and to maintain management's desired reserve ratios. In determining the provision for loan losses for the years ended June 30, 1996 and 1995, MCHI considered past loan experience, changes in the composition of the loan portfolio and the current condition and amount of loans outstanding. Other Income. MCHI's other income for the year ended June 30, 1996, totaled $130,000, compared to $105,000 for 1995, an increase of $25,000, or 23.8%. This increase was due in part from increased loan service fees of $12,000. Other Expenses. MCHI's other expenses for the year ended June 30, 1996, totaled $3.6 million which was unchanged from the previous year. This represents the third consecutive year where other expenses have remained relatively constant. There were no significant changes in any of the other expense categories. Income Tax Expense. Income tax expense for the year ended June 30, 1996, totaled $913,000, a decrease of $3,000 from the expense recorded in 1995. Tax expense on earnings was offset by certain low-income housing tax credits which totaled $423,000 and $406,000 for the years ended June 30, 1996 and 1995. Additional tax credits are available through the year ended June 30, 1998. Changes in Financial Position and Results of Operations - Year Ended June 30, 1995, Compared to Year Ended June 30, 1994: General. The Company's total assets were $172.7 million at June 30, 1995, an increase of $1.9 million or 1.1% from June 30, 1994. During 1995, average interest-earnings assets decreased $3.6 million, or 2.2%, while average interest-bearing liabilities declined $3.5 million, or 2.7%, compared to June 30, 1994. Average assets were lower for the year ended June 30, 1995 as a result of First Federal's decision to reduce short-term public fund deposits throughout the year. However, total assets increased during the year ended June 30, 1995 as loan originations outpaced loan repayments and funds were borrowed to meet the demand. Cash and cash equivalents and investment securities decreased $7.1 million, or 23.1%, primarily as a result of their use in funding increased loan originations. Net loans increased $9.2 million primarily from originations of 1-4 family and multi-family real estate loans. 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, 1995 and 1994, no loans were held for sale in the loan portfolio. Net real estate owned was reduced by $624,000, or 75.2%, as a result of a combination of disposals and chargeoffs. The Company's net income for the year ended June 30, 1995, was $2.4 million, an increase of $161,000, or 7.1%, over the results for the year ended June 30, 1994. Net interest income increased $345,000, or 5.3%, from the previous year, and provision for losses on loans in the amount of $67,500 increased $2,500 from that recorded in 1994. During the year ended June 30, 1995, the Company reduced its real estate owned loss reserves resulting in income of $140,000. These loss reserves were reduced when the properties were sold, resulting in fewer losses than anticipated. In the prior year, $305,000 was charged to provision for real estate owned losses. The 1995 chargeoffs of real estate owned totaled $171,000, which was $185,000 less than the allowance for real estate losses at June 30, 1994. Chargeoffs net of recoveries totalled $152,000, which was $204,000 less than the beginning allowance. The 1995 chargeoffs included additional writedowns on a commercial warehouse facility, a day care center, and certain smaller chargeoffs from sales of other properties. These chargeoffs represented recognition of additional losses in the real estate owned portfolio that were not evident when the properties were first transferred from loans to real estate owned. Properties are written down to their fair value at time of foreclosure with the loss charged to the allowance for loan losses. As circumstances change and the property or market deteriorates, additional writedowns are made by chargeoffs to the allowance for losses on real estate owned. Stock Repurchases. During the year ended June 30, 1995, MCHI repurchased 214,249 shares of common stock in the open market at an average cost of $18.15, or approximately 88% of average book value. These repurchases amounted to 5% of the outstanding stock in each six-month period, the maximum amount of stock that could be repurchased under Office of Thrift Supervision ("OTS") regulations then in effect. Current OTS regulations permit a maximum repurchase of 5% in a twelve-month period, except in special circumstances, during the first three years after converting to stock form. This 5% limitation imposed by OTS will expire in March, 1996. These open-market purchases are intended to enhance the book value per share and enhance the potential for growth in earnings per share. Cash Dividends. Since First Federal's conversion in March, 1993, MCHI has paid quarterly dividends in each quarter, amounting to $.125 per share for each of the first four quarters of operation, $.15 per share for each of the second four quarters of operation, and $.18 per share in the most recent quarter ending June 30, 1995. Interest Income. The Company's total interest income for the year ended June 30, 1995 was $12.8 million, an increase of $395,000, or 3.2%, from interest income for the year ended June 30, 1994. This increase resulted principally from an increase in the yield on interest earning assets from 7.55% to 7.96% while interest earning assets decreased by $3.6 million. Interest Expense. Total interest expense for the year ended June 30, 1995, was $5.9 million, which was unchanged from the year ended June 30, 1994. Interest expense was unchanged as the average balance of interest-bearing liabilities decreased by $3.5 million, while the average cost of funds increased from 4.59% to 4.76%. Provision for Losses on Loans. The provision for the year ended June 30, 1995, was $67,500, compared to $65,000 in 1994. During the year ended June 30, 1995, the Company acquired title by foreclosure to a nursing home property that had been included in nonperforming loans. The foreclosure and subsequent sale of this property resulted in First Federal's nonperforming loans being reduced from $4.6 million at June 30, 1994, to $1.8 million at June 30, 1995, a decrease of $2.8 million, or 62.2%. The ratio of the allowance for loan losses to total loans decreased from 1.59% at June 30, 1994, to 1.45% at June 30, 1995, and the ratio of allowance for loan losses to nonperforming loans increased from 44.2% at June 30, 1994, to 114.9% at June 30, 1995. The 1995 provision was to replenish the allowance for loan losses as a result of chargeoffs and to maintain management's desired reserve ratios. In determining the provision for loan losses for the years ended June 30, 1995 and 1994, the Company considered past loan loss experience, changes in the composition of the loan portfolio and the current condition and amount of loans outstanding. Other Income. The Company's other income for the year ended June 30, 1995, totaled $105,000, compared to $134,000 for 1994, a decrease of $29,000, or 21.6%. This decrease was caused by the Company receiving less commissions for sales of annuity and other mutual fund products by First Federal's wholly-owned subsidiary, First Marion Service Corporation. Sales of these products have declined significantly from the prior year, resulting in fewer commissions earned. Other Expenses. The Company's other expenses for the year ended June 30, 1995, totaled $3.6 million which was unchanged from the previous year. Normal operating cost increases in most categories were offset by a $472,000 decline in real estate operation expense for the year ended June 30, 1995 as compared to the prior year as a result of the Company's liquidating real estate owned properties and substantially reducing the expense incurred in holding and maintaining such properties. Increases in other categories occurred in the normal course of business. Income Tax Expense. Income tax expense for the year ended June 30, 1995 totaled $916,000, an increase of $201,000 from the expense recorded in 1994. This increase was due to higher pre-tax earnings in 1995. Tax expense on earnings was offset by certain low-income housing tax credits which totaled $406,000 and $426,000 for the years ended June 30, 1995, and June 30, 1994, 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. First Federal attempts to price its deposits to meet its asset/liability management objectives consistent with local market conditions. First Federal's access to FHLB advances is limited to approximately 62% of First Federal's available collateral. At June 30, 1996, such available collateral totaled $89.5 million. Based on existing FHLB lending policies, the Company could have obtained approximately $49.7 million in additional advances. First Federal's deposits have remained relatively stable, averaging between $126 and $121 million, for the three years in the period ended June 30, 1996. The percentage of IRA deposits to total deposits has increased from 21.4% ($26.1 million) at June 30, 1993, to 23.1% ($29.1 million) at June 30, 1996. During the same period, deposits in withdrawable accounts have decreased from 34.6% ($42.2 million) of total deposits at June 30, 1993, to 26.2% ($33.1 million) at June 30, 1996. This change in deposit composition, attributable to the higher interest rates currently paid on longer term certificates, has not had a significant effect on First Federal's liquidity. The impact on results of operations from this change in deposit composition has been a reduction in interest expense on deposits due to a decrease in the average cost of funds. It is estimated that yields and net interest margin would increase in periods of rising interest rates since short-term assets reprice more rapidly than short-term liabilities. In periods of falling interest rates, little change in yields or net interest margin is expected since First Federal has interest rate minimums on a significant portion of its interest-earning assets. Federal regulations have historically required First Federal to maintain minimum levels of liquid assets. The required percentage has varied from time to time based upon economic conditions and savings flows. At June 30, 1996, the requirement was 5.0% subject to reduction for aggregate net withdrawals provided such ratio is not reduced below 4.0%. Liquid assets for purposes of this ratio include cash, cash equivalents consisting of short-term interest earning deposits, certain other time deposits, and other obligations generally having remaining maturities of less than five years. First Federal has historically maintained its liquidity ratio at a level in excess of that required. At June 30, 1996, First Federal's liquidity ratio was12.3% and has averaged 19.9% over the past three years. Liquidity management is both a daily and long-term responsibility of management. First Federal adjusts liquid assets based upon management's assessment of (i) expected loan demand, (ii) projected loan sales, (iii) expected deposit flows, (iv) yields available on interest-bearing deposits, and (v) the objectives of its asset/liability management program. Excess liquidity is invested generally in federal funds and mutual funds investing in government obligations and adjustable-rate or short-term mortgage-related securities. If First Federal requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB of Indianapolis and collateral eligible for repurchase agreements. Cash flows for the Company are of three major types. Cash flows from operating activities consist primarily of net income generated by cash. Investing activities generate cash flows through the origination, sale and principal collections on loans as well as the purchases and sales of investments. 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, 1996: Year Ended June 30, --------------------------------- 1996 1995 1994 ------ ------- --------- (In Thousands) Operating activites........................ $ 3,232 $ 3,181 $ 2,984 Investing activities: Investment purchases.................. (11,261) (2,418) (68,592) Investment maturities................. 17,132 6,684 62,484 Net change in loans................... (6,918) (8,419) 5,442 Other investing activities............ 69 183 5,122 ------ ------- --------- (978) (3,968) 4,456 ------ ------- --------- Financing activities: Deposit increases (decreases)......... 5,647 (352) (978) Borrowings............................ 3,500 5,000 1,000 Payments on borrowings................ (4,222) (1,237) (875) Repurchase of common stock............ (2,066) (3,889) (3,931) Dividends paid........................ (1,468) (1,333) (1,198) Other financing activities............ 392 64 147 ------ ------- --------- 1,783 (1,747) (5,835) ------ ------- --------- Net change in cash and cash equivalents.... $ 4,037 $(2,534) $ 1,605 ====== ======= ========= Investing cash flows for the three years ended June 30, 1996 have resulted primarily from investment and loan activities. The Company's cash flows from investments resulted primarily from the purchases and maturities of term federal funds and securities. 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. The Company considers its liquidity and capital resources to be adequate to meet its foreseeable short and long-term needs. First Federal 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, 1996, First Federal had outstanding commitments to originate loans of $4.6 million. Certificates of deposit scheduled to mature in one year or less at June 30, 1996, totalled $33.6 million. Based upon historical deposit flow data, First Federal's competitive pricing in its market and management's experience, management believes that a significant portion of such deposits will remain with First Federal. At June 30, 1996, the Company had $3.0 million of FHLB advances which mature in one year or less. First Federal has entered into agreements with certain officers and directors which provide that, upon their death, their beneficiaries will be entitled to receive certain benefits. These benefits are to be funded primarily by the proceeds of insurance policies owned by First Federal on the lives of the officers and directors. If the insurance companies issuing the policies are not able to perform under the contracts at the dates of death of the officers or directors, there would be an adverse effect on the Company's operating results, financial condition and liquidity. Under currently effective capital regulations, savings associations currently meet a 1.5% tangible capital requirement, a 3.0% leverage ratio (or core capital) requirement and a total risk-based capital to risk-weighted assets ratio of 8.0%. At June 30, 1996, First Federal's tangible capital ratio was 20.7%, its leverage ratio was 20.7% and its risk-based capital to risk-weighted assets ratio was 32.7%. Therefore, First Federal's capital significantly exceeds all of the capital requirements currently in effect. Impact of Inflation The audited consolidated financial statements presented herein have been prepared in accordance with generally accepted accounting principles. These principles require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. The primary assets and liabilities of savings institutions such as First Federal are monetary in nature. As a result, interest rates have a more significant impact on First Federal's performance than the effects of general levels of inflation. Interest rates, however, do not necessarily move in the same direction or with the same magnitude as the price of goods and services, since such prices are affected by inflation. In a period of rapidly rising interest rates, the liquidity and maturity structures of First Federal's assets and liabilities are critical to the maintenance of acceptable performance levels. The principal effect of inflation, as distinct from levels of interest rates, on earnings is in the area of other expense. Such expense items as employee compensation, employee benefits, and occupancy and equipment costs may be subject to increases as a result of inflation. An additional effect of inflation is the possible increase in the dollar value of the collateral securing loans made by First Federal. New Accounting Pronouncements Accounting for Mortgage Servicing Rights During 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 122, entitled Accounting for Mortgage Servicing Rights. SFAS No. 122 pertains to mortgage banking enterprises and financial institutions that conduct operations that are substantially similar to the primary operations of a mortgage banking enterprise. The Statement eliminates the accounting distinction between mortgage servicing rights that are acquired through loan origination activities and those acquired through purchase transactions. Under this Statement, if a mortgage banking enterprise sells or securitizes loans and retains the mortgage servicing rights, the enterprise must allocate the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the rights) based on their relative fair values if it is practicable to estimate those fair values. If it is not practicable, the entire cost should be allocated to the mortgage loans and no cost should be allocated to the mortgage servicing rights. An entity would measure impairment of mortgage service rights and loans based on the excess of the carrying amount of the mortgage servicing rights portfolio over the fair value of that portfolio. The Statement is to be applied prospectively in fiscal years beginning after December 15, 1995, to transactions in which an entity acquires mortgage servicing rights and to impairment evaluations of all capitalized mortgage servicing rights. Retroactive application is prohibited. During 1996, the FASB issued SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement is effective for the transactions entered into after January 1, 1997 and at that date will supersede SFAS No. 122. Early adoption is not permitted. Accounting for Stock-based Compensation The FASB has issued SFAS No. 123, Accounting for Stock-based Compensation. This Statement establishes a fair value based method of accounting for stock-based compensation plans. The FASB encourages all entities to adopt this method for accounting for all arrangements under which employees receive shares of stock or other equity instruments of the employer, or the employer incurs liabilities to employees in amounts based on the price of its stock. Due to the extremely controversial nature of this project, the Statement permits a company to continue the accounting for stock-based compensation prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. If a company elects that option, proforma disclosures of net income (and EPS, if presented) are required in the footnotes as if the provisions of this Statement had been used to measure stock-based compensation. The disclosure requirements of Opinion No. 25 have been superseded by the disclosure requirements of this Statement. Once an entity adopts the fair value based method for accounting for these transactions, that election cannot be reversed. Equity instruments granted or otherwise transferred directly to an employee by a principal stockholder are stock-based employee compensation to be accounted for in accordance with either Opinion 25 or this Statement, unless the transfer clearly is for a purpose other than compensation. The accounting requirements of this Statement and related disclosure requirements are effective for transactions entered into by the Bank for the fiscal year ending June 30, 1997. Proforma disclosures required for entities that elect to continue to measure compensation cost using Opinion 25 must include the effects of all awards granted in fiscal years that begin after December 15, 1994. In general, during the initial phase-in period, the effects of applying this Statement are not likely to be representative of the effects on reported net income for future years because options vest over several years and additional awards generally are made each year. If that situation exists, the Company must include a statement to that effect. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Consolidated Financial Statements June 30, 1996 and 1995 Independent Auditor's Report Board of Directors Marion Capital Holdings, Inc. Marion, Indiana We have audited the consolidated statement of financial condition of Marion Capital Holdings, Inc. and subsidiary corporations as of June 30, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended June 30, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements described above present fairly, in all material respects, the consolidated financial position of Marion Capital Holdings, Inc. and subsidiary corporations as of June 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles. As described in the notes to the financial statements, the Company changed its method of accounting for investments in securities in 1995. Geo. S. Olive & Co. LLC Indianapolis, Indiana July 26, 1996 MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statement of Financial Condition
June 30, ---------------------------------- 1996 1995 ------------ ------------ Assets Cash $ 2,365,805 $ 2,178,493 Short-term interest-bearing deposits 5,154,518 1,304,691 ------------ ------------ Total cash and cash equivalents 7,520,323 3,483,184 Investment securities Available-for-sale 999,750 2,985,263 Held-to-maturity 13,057,722 17,274,654 ------------ ------------ Total investment securities 14,057,472 20,259,917 Loans 145,173,891 138,336,048 Allowance for loan losses (2,009,250) (2,012,602) ------------ ------------ Net loans 143,164,641 136,323,446 Foreclosed real estate 182,959 205,723 Premises and equipment 1,446,025 1,495,608 Federal Home Loan Bank of Indianapolis stock, at cost 988,400 909,100 Other assets 10,406,755 10,033,778 ------------ ------------ Total assets $177,766,575 $172,710,756 ============ ============ Liabilities Deposits $126,260,010 $120,613,003 Advances from Federal Home Loan Bank of Indianapolis 6,241,474 6,963,152 Other liabilities 3,754,017 3,270,576 Total liabilities 136,255,501 130,846,731 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--1,933,613 and 1,986,288 shares 13,814,937 15,489,336 Retained earnings--substantially restricted 28,128,458 27,114,816 Net unrealized loss on securities available-for-sale (119) (9,235) Unearned compensation (432,202) (730,892) ------------ ------------ Total shareholders' equity 41,511,074 41,864,025 ------------ ------------ Total liabilities and shareholders' equity $177,766,575 $172,710,756 ============ ============
See notes to consolidated financial statements. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statement of Income
Year Ended June 30, ---------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Interest Income Loans $12,456,465 $11,451,350 $10,961,117 Investment securities 876,326 1,110,742 1,064,746 Federal funds sold 14,234 141,682 Deposits with financial institutions 333,876 144,344 170,538 Dividend income 73,341 65,386 53,011 ----------- ----------- ----------- Total interest income 13,740,008 12,786,056 12,391,094 ----------- ----------- ----------- Interest Expense Deposits 6,344,259 5,539,915 5,627,917 Repurchase agreements 52,159 Federal Home Loan Bank advances 456,484 381,770 243,904 ----------- ----------- ----------- Total interest expense 6,852,902 5,921,685 5,871,821 ----------- ----------- ----------- Net Interest Income 6,887,106 6,864,371 6,519,273 Provision for losses on loans 34,231 67,500 65,000 ----------- ----------- ----------- Net Interest Income After Provision for Losses on Loans 6,852,875 6,796,871 6,454,273 ----------- ----------- ----------- Other Income Gains on sale of marketable equity securities 15,169 Net loan servicing fees 81,202 68,886 61,526 Annuity and other commissions 146,827 143,986 210,746 Equity in losses of limited partnerships (193,139) (184,582) (236,481) Other income 94,993 76,312 82,860 ----------- ----------- ----------- Total other income 129,883 104,602 133,820 ----------- ----------- ----------- Other Expenses Salaries and employee benefits 2,296,293 2,339,129 1,969,862 Net occupancy expenses 153,340 155,997 131,599 Equipment expenses 59,173 51,294 45,306 Deposit insurance expense 326,871 323,835 327,347 Foreclosed real estate expenses and losses, net (12,643) (98,413) 373,676 Other expenses 764,981 783,577 755,974 ----------- ----------- ----------- Total other expenses 3,588,015 3,555,419 3,603,764 ----------- ----------- ----------- Income Before Income Tax 3,394,743 3,346,054 2,984,329 Income tax expense 913,329 916,106 715,072 ----------- ----------- ----------- Net Income $ 2,481,414 $ 2,429,948 $ 2,269,257 =========== =========== =========== Primary and Fully Diluted Net Income Per Share $ 1.22 $ 1.11 $ .99 =========== =========== =========== Average Common and Equivalent Shares Outstanding 2,033,955 2,186,137 2,297,853 =========== =========== ===========
See notes to consolidated financial statements. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Shareholders' Equity
Common Stock Retained Shares Amount Earnings ------ ------ -------- Balances, July 1, 1993 2,415,000 $23,097,375 $24,946,678 Net income for 1994 2,269,257 Cash dividends ($.525 per share) (1,198,401) Repurchase of common stock (235,695) (3,931,479) Exercise of stock options 14,863 148,630 Amortization of unearned compensation expense --------- ----------- ----------- Balances, June 30, 1994 2,194,168 19,314,526 26,017,534 Net income for 1995 2,429,948 Cash dividends ($.63 per share) (1,332,666) Cumulative effect of change in accounting for securities, net of taxes of $(38,098) Net change in unrealized gain (loss) on securities available-for-sale, net of taxes of $32,041 Repurchase of common stock (214,249) (3,888,880) Exercise of stock options 6,369 63,690 Amortization of unearned compensation expense --------- ----------- ----------- Balances, June 30, 1995 1,986,288 15,489,336 27,114,816 Net income for 1996 2,481,414 Cash dividends ($.74 per share) (1,467,772) Net change in unrealized gain (loss) on securities available-for-sale, net of taxes of $5,979 Repurchase of common stock (100,658) (2,066,332) Exercise of stock options 47,983 301,855 Amortization of unearned compensation expense Tax benefit of stock options exercised and RRP 90,078 --------- ----------- ----------- Balances, June 30, 1996 1,933,613 $13,814,937 $28,128,458 ========= =========== ===========
Net Unrealized Gain (Loss) Unearned on Securities Compensation Available-for-Sale Total ----------- ------------------ -------------- Balances, July 1, 1993 $(1,270,628) $46,773,425 Net income for 1994 2,269,257 Cash dividends ($.525 per share) (1,198,401) Repurchase of common stock (3,931,479) Exercise of stock options 148,630 Amortization of unearned compensation expense 269,868 269,868 ----------- --------- ----------- Balances, June 30, 1994 (1,000,760) 44,331,300 Net income for 1995 2,429,948 Cash dividends ($.63 per share) (1,332,666) Cumulative effect of change in accounting for securities, net of taxes of $(38,098) $(58,085) (58,085) Net change in unrealized gain (loss) on securities available-for-sale, net of taxes of $32,041 48,850 48,850 Repurchase of common stock (3,888,880) Exercise of stock options 63,690 Amortization of unearned compensation expense 269,868 269,868 ----------- --------- ----------- Balances, June 30, 1995 (730,892) (9,235) 41,864,025 Net income for 1996 2,481,414 Cash dividends ($.74 per share) (1,467,772) Net change in unrealized gain (loss) on securities available-for-sale, net of taxes of $5,979 9,116 9,116 Repurchase of common stock (2,066,332) Exercise of stock options 301,855 Amortization of unearned compensation expense 298,690 298,690 Tax benefit of stock options exercised and RRP 90,078 ----------- --------- ----------- Balances, June 30, 1996 $ (432,202) $ (119) $41,511,074 =========== ========= ===========
MARION CAPITAL HOLDINGS, INC AND SUBSIDIARIES Consolidated Statement of Cash Flows
Year Ended June 30, -------------------------------------------- 1996 1995 1994 --------- --------- --------- Operating Activities Net income $2,481,414 $2,429,948 $2,269,257 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 34,231 67,500 65,000 Provision (adjustment) for losses of foreclosed real estate (19,136) (140,000) 305,000 Marketable equity security gains 15,169 Equity in losses of limited partnerships 193,139 184,582 236,481 Amortization of net loan origination costs (fees) 10,467 (30,065) (102,211) Depreciation 77,321 64,706 64,050 Amortization of unearned compensation 298,690 269,868 269,868 Deferred income tax benefit (174,865) (153,390) (139,910) Origination of loans for sale (5,664,822) (2,414,254) (10,059,717) Proceeds from sale of loans 5,664,822 2,414,254 10,059,717 Changes in Interest receivable (64,299) (72,120) (60,499) Interest payable and other liabilities 491,704 583,878 229,633 Cash value of insurance (116,500) (108,000) (21,125) Prepaid expense and other assets 73,569 85,752 (14,765) Other (53,686) (1,202) (101,967) --------- --------- --------- Net cash provided by operating activities 3,232,049 3,181,457 2,983,643 --------- --------- --------- Investing Activities Net change in interest-bearing deposits 100,000 Net change in marketable equity securities 4,025,606 Purchase of term federal funds (2,128,000) (50,945,000) Proceeds from term federal funds maturities 2,128,000 50,945,000 Proceeds from maturities of securities available-for-sale 2,000,000 2,000,000 Purchase of securities held-to-maturity (10,891,992) (17,352,386) Proceeds from maturities of securities held-to-maturity 15,131,842 2,555,938 11,539,030 Contribution to limited partnership (290,000) (290,000) (295,000) Net changes in loans (6,918,405) (8,418,943) 5,441,780 Additions to real estate owned (283,000) Proceeds from real estate owned sales 98,850 291,421 1,495,833 Purchase of FHLB stock (79,300) Purchase of premises and equipment (29,063) (106,957) (35,259) Premiums paid on life insurance (180,000) -------- ---------- --------- Net cash provided (used) by investing activities (978,068) (3,968,541) 4,456,604 -------- ---------- --------- (continued)
MARION CAPITAL HOLDINGS, INC AND SUBSIDIARIES Consolidated Statement of Cash Flows
Year Ended June 30, -------------------------------------------- 1996 1995 1994 --------- --------- --------- Financing Activities Net change in Interest-bearing demand and savings deposits 1,157,963 (7,741,237) 2,714,713 Certificates of deposit 4,489,044 7,388,768 (3,693,355) Proceeds from Federal Home Loan Bank advances 3,500,000 5,000,000 1,000,000 Repayment of Federal Home Loan Bank advances (4,221,678) (1,236,848) (875,000) Dividends paid (1,467,772) (1,332,666) (1,198,401) Exercise of stock options 391,933 63,690 148,630 Repurchase of common stock (2,066,332) (3,888,880) (3,931,479) --------- --------- --------- Net cash provided (used) by financing activities 1,783,158 (1,747,173) (5,834,892) --------- --------- --------- Net Change in Cash and Cash Equivalents 4,037,139 (2,534,257) 1,605,355 Cash and Cash Equivalents, Beginning of Year 3,483,184 6,017,441 4,412,086 --------- --------- --------- Cash and Cash Equivalents, End of Year $7,520,323 $3,483,184 $6,017,441 ========== ========== ========== Additional Cash Flows and Supplementary Information Interest paid $6,873,949 $5,875,374 $5,890,378 Income tax paid 960,958 948,959 850,000 Loan balances transferred to foreclosed real estate 447,511 2,592,839 1,496,781 Loans to finance the sale of foreclosed real estate 415,000 3,442,850 1,022,262
See notes to consolidated financial statements. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) 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--The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities, on July 1, 1994, and investment securities with an approximate carrying value of $4,985,000 were reclassified as available-for-sale. This reclassification resulted in a decrease in total shareholders' equity, net of taxes, of $58,000. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Securities held-to-maturity are carried at amortized cost. Debt securities not classified as held-to-maturity are classified as available-for-sale. Securities available-for-sale are carried at fair value with unrealized gains and losses reported separately, net of tax, in shareholders' equity. Amortization of premiums and accretion of discounts are recorded using the interest method as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method. Prior to the adoption of SFAS No. 115, investment securities were carried at cost, adjusted for amortization of premiums and discounts, and securities held for sale and marketable equity securities were carried at the lower of aggregate cost or market. Realized gains and losses on sales were included in other income. Unrealized losses on securities held for sale were included in other income. Unrealized losses on marketable equity securities were charged to shareholders' equity. Gains and losses on the sale of securities were determined on the specific-identification method. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Loans are carried at the principal amount outstanding. Interest income is accrued on the principal balances of loans. Loans are placed in a nonaccrual status when the collection of interest becomes doubtful. 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. Loans are considered impaired when it becomes probable that the bank subsidiary will be unable to collect all amounts due according to the contractual terms of the loan agreement. Interest income on these loans is recognized as described above depending on the accrual status of the loan. Certain loan fees and direct costs are being deferred and the net amounts are amortized as an adjustment of yield on the loans. When a loan is paid off or sold, any unamortized loan origination fee balance is credited to income. Foreclosed real estate arises from loan foreclosure or deed in lieu of foreclosure and is carried at the lower of cost or fair value less estimated selling costs. Real estate has not been acquired for development or sale. Costs relating to development and improvement of property are capitalized, whereas costs relating to the holding of property, net of rental and other income are expensed. 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, 1996, 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. Pension plan costs are based on actuarial computations and charged to current operations. The funding policy is to pay at least the minimum amounts required by ERISA. 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. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Primary earnings per share for 1996 and 1995 are computed by dividing net income by the weighted average number of common and equivalent shares outstanding during the period. For 1996 and 1995, fully diluted earnings per share are the same as primary earnings per share. For 1994, the computation of primary and fully diluted earnings per share reflected no dilution. Reclassifications of certain amounts in the 1995 and 1994 consolidated financial statements have been made to conform to the 1996 presentation. Restriction on Cash The Bank is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at June 30, 1996, was $200,000. o Investment Securities
June 30, 1996 ---------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------- ---------- ----------- ----------- Available-for-sale Federal agencies $ 1,000 $ 1,000 ------- ------- Held-to-maturity U. S. Treasury 3,015 $ 40 2,975 Federal agencies 6,954 $ 8 45 6,917 State and municipal 610 5 605 Mortgage-backed securities 1,491 102 1,389 Other 988 12 1,000 ------- --- ---- ------- Total held-to-maturity 13,058 20 192 12,886 ------- --- ---- ------- Total investment securities $14,058 $20 $192 $13,886 ======= === ==== =======
June 30, 1995 ---------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------- ---------- ----------- ----------- Available-for-sale Federal agencies $ 3,000 $ 15 $ 2,985 ------- ---- ------- Held-to-maturity U. S. Treasury 3,035 57 2,978 Federal agencies 11,000 256 10,744 State and municipal 610 18 592 Mortgage-backed securities 2,630 52 2,578 ------- ---- ------- Total held-to-maturity 17,275 383 16,892 ------- --- ---- ------- Total investment securities $20,275 $0 $398 $19,877 ======= === ==== =======
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) The amortized cost and fair value of securities held-to-maturity and available-for-sale at June 30, 1996, 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. Maturity Distribution at June 30, 1996 --------------------------------------------- Available-for-Sale Held-to-Maturity ------------------- ---------------------- Amortized Fair Amortized Fair Cost Value Cost Value ------ ------ ------- ------- Within one year $1,000 $1,000 $ 7,953 $ 7,958 One to five years 3,614 3,539 ------ ------ ------- ------- 1,000 1,000 11,567 11,497 Mortgage-backed securities 1,491 1,389 ------ ------ ------- ------- Totals $1,000 $1,000 $13,058 $12,886 ====== ====== ======= ======= o Loans June 30, --------------------------- 1996 1995 -------- -------- Real estate mortgage loans One-to-four family $ 87,505 $ 82,056 Multi-family 15,573 14,495 Commercial real estate 36,170 35,937 Real estate construction loans 4,994 7,332 Commercial 7 9 Consumer loans 3,777 2,814 -------- -------- Total loans 148,026 142,643 Undisbursed portion of loans (2,539) (4,004) Deferred loan fees (313) (303) -------- -------- $145,174 $138,336 ======== ======== MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) 1996 1995 1994 ------ ------ ------ Allowance for loan losses Balances, July 1 $2,013 $2,050 $2,051 Provision for losses 34 68 65 Recoveries on loans 2 12 17 Loans charged off (40) (117) (83) ------ ------ ------ Balances, June 30 $2,009 $2,013 $2,050 ====== ====== ====== June 30, ------------------------- 1996 1995 -------- ------- Nonperforming loans Nonaccruing loans $1,716 $1,752 Additional interest income of $43,000, $69,000 and $157,000 for 1996, 1995 and 1994 would have been recognized on nonaccruing loans had such loans been considered collectible and accounted for on the accrual basis. On July 1, 1995, the Company adopted SFAS Nos. 114 and No. 118, Accounting for Creditors for Impairment of a Loan and Accounting for Creditors for Impairment of a Loan--Income Recognition and Disclosures. The adoption of SFAS Nos. 114 and 118 did not have a material impact on the Company's financial position or results of operations. No loans were considered impaired at June 30, 1996. Mortgage loans serviced for others are not included in the accompanying consolidated statement of financial condition. The loans are serviced primarily for the Federal Home Loan Mortgage Corporation, and the unpaid principal balances totaled $7,825,000 and $7,586,000 at June 30, 1996 and 1995. o Forclosed Real Estate June 30, ------------------------ 1996 1995 ------ ------ Real estate acquired in settlement of loans $ 199 $ 270 Allowance for losses (16) (64) ----- ----- $ 183 $ 206 ===== =====
1996 1995 1994 ------ ------ ------ Allowance for losses on foreclosed real estate Balances, July 1 $64 $356 $252 Provision (adjustment) for losses (19) (140) 305 Real estate charged off (49) (171) (426) Recoveries on real estate 20 19 225 --- ---- ---- Balances, June 30 $16 $ 64 $356 === ==== ====
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) o Premises and Equipment June 30, -------------------------- 1996 1995 --------- --------- Land $ 632 $ 633 Buildings and land improvements 1,417 1,400 Furniture and equipment 467 481 ------ ------ Total cost 2,516 2,514 Accumulated depreciation (1,070) (1,018) ------ ------ Net $1,446 $1,496 ====== ====== o Other Assets and Other Liabilities June 30, --------------------------- 1996 1995 --------- --------- Other assets Interest receivable Investment securities $ 159 $ 262 Loans 483 316 Cash value of insurance 5,588 5,471 Deferred income tax asset 2,320 2,151 Investment in limited partnership 1,624 1,527 Prepaid expenses and other 233 307 ------ ------ Total $10,407 $10,034 ======= ======= Other liabilities Interest payable Deposits $ 99 $ 117 Other borrowings 17 19 Deferred compensation and fees payable 2,072 1,886 Deferred gain on sale of real estate owned 353 362 Advances by borrowers for taxes and insurance 392 214 Other 821 673 ------ ------ Total $3,754 $3,271 ====== ====== MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) o Investment in Limited Partnership Included in other assets is an investment of $1,623,869 and $1,527,008 at June 30, 1996 and 1995 representing 99 percent equity in a limited partnership organized to build, own and operate an apartment complex. The Bank records its equity in the net income or loss of the partnership. Certain fees to the general partner not recorded or estimable to date by the partnership under provisions of the partnership agreement could adversely affect future operating results when accrued or paid. In addition to recording its equity in the losses of the partnership, the Bank has recorded the benefit of low income housing tax credits of $405,000, $405,000, and $408,000 for 1996, 1995 and 1994. At June 30, 1996, the Bank has committed to make its final annual capital contribution in January, 1997, of $130,000. Condensed financial statements of the partnership are as follows: June 30, ------------------------ 1996 1995 ------ ------ (Unaudited) Condensed statement of financial condition Assets Cash $ 306 $ 17 Land and property 3,711 3,807 Other assets 987 1,061 ----- ----- Total assets $5,004 $4,885 ====== ====== Liabilities Notes payable $3,289 $3,309 Other liabilities 61 52 ----- ----- Total liabilities 3,350 3,361 Partners' equity 1,654 1,524 ----- ----- Total liabilities and partners' equity $5,004 $4,885 ====== ====== Year Ended June 30, --------------------------------- 1996 1995 1994 ------ ------- ------- (Unaudited) Condensed statement of operations Total revenue $ 648 $ 662 $676 Total expense 808 862 869 ----- ----- ----- Net loss $(160) $(200) $(193) ===== ===== ===== MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) o Deposits June 30, --------------------------- 1996 1995 -------- -------- Interest-bearing demand $ 20,803 $ 18,438 Savings 17,572 18,779 Certificates and other time deposits of $100,000 or more 11,761 9,389 Other certificates and time deposits 76,124 74,007 -------- -------- Total deposits $126,260 $120,613 ======== ======== Certificates maturing in years ending June 30: 1997 $33,624 1998 13,069 1999 15,121 2000 16,559 2001 7,918 Thereafter 1,594 ------- $87,885 ======= o Federal Home Loan Bank Advances 1996 -------------------------- Weighted Average Years Ending June 30 Amount Rate ------ ---- Advances from FHLB Maturities 1997 $3,012 6.81% 1998 1,701 6.10 1999 190 5.93 2000 481 6.57 2001 383 5.09 Thereafter 474 7.33 ------ $6,241 ====== The FHLB advances are secured by first mortgage loans and investment securities totaling $89,509,000. Advances are subject to restrictions or penalties in the event of prepayment. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) o Income Tax Year Ended June 30, ----------------------------------------- 1996 1995 1994 ------ ------ ------ Currently payable Federal $765 $706 $574 State 323 363 281 Deferred Federal (144) (100) (101) State (31) (53) (39) ---- ---- ---- Total income tax expense $913 $916 $715 ==== ==== ====
Year Ended June 30, ------------------------------------------ 1996 1995 1994 ------- ------ ------ Reconciliation of federal statutory to actual tax expense Federal statutory income tax at 34% $1,154 $1,138 $1,014 Increase in cash value of insurance (40) (37) (7) Effect of state income taxes 193 205 160 Business income tax credits (423) (406) (426) Other 29 16 (26) ---- ---- ---- Actual tax expense $ 913 $ 916 $ 715 ======= ====== ======
The tax expense related to securities gains was $5,900 for 1994. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) A cumulative deferred tax asset of $2,320,000 and $2,151,000 is included in other assets. The components of the asset are as follows:
June 30, --------------------------- 1996 1995 ------ ------ Differences in accounting for loan losses $ 987 $ 992 Deferred compensation 880 801 Deferred loan fees 127 129 Business income tax credits 309 298 Deferred state income taxes (149) (138) Differences in accounting for pensions and other employee benefits 182 90 Differences in accounting for securities available-for-sale 6 FHLB of Indianapolis stock dividend (49) (49) Other 33 22 ------ ------ $2,320 $2,151 ====== ====== Assets $2,518 $2,338 Liabilities (198) (187) ------ ------ $2,320 $2,151 ====== ======
No valuation allowance was considered necessary at June 30, 1996 and 1995. At June 30, 1996, the Company had an unused business income tax credit carryforward of $309,000 expiring in 2011. 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 or adjustments arising from carryback of net operating losses would create income for tax purposes only, which income would be subject to the then-current corporate income tax rate. At June 30, 1996, the unrecorded deferred income tax liability on the above amount was approximately $3,300,000. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) o Restriction on Dividends The Company is not subject to any regulatory restrictions on the payment of dividends to its shareholders. The Office of Thrift Supervision ("OTS") regulations provide that a savings association which meets fully phased-in capital requirements (those in effect on December 31, 1994) and is subject only to "normal supervision" may pay out, as a dividend, 100 percent of net income to date over the calendar year and 50 percent of surplus capital existing at the beginning of the calendar year without supervisory approval, but with 30 days prior notice to the OTS. Any additional amount of capital distributions would require prior regulatory approval. At the time of the Bank's conversion to a stock savings bank, a liquidation account was established in an amount equal to the Bank's net worth as reflected in the latest statement of condition used in its final conversion offering circular. The liquidation account is maintained for the benefit of eligible deposit account holders who maintain their deposit account in the Bank after conversion. In the event of a complete liquidation (and only in such event), each eligible deposit account holder will be entitled to receive a liquidation distribution from the liquidation account in the amount of the then current adjusted subaccount balance for deposit accounts then held, before any liquidation distribution may be made to stockholders. Except for the repurchase of stock and payment of dividends, the existence of the liquidation account will not restrict the use or application of net worth. The initial balance of the liquidation account was $24,100,000. At June 30, 1996, total shareholder's equity of the Bank was $35,519,000, of which a minimum of $11,419,000 was available for the payment of dividends. 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 were made subject to market conditions in open market or block transactions. During the years ended June 30, 1996, 1995 and 1994, the Company had repurchased 100,658, 214,249 and 235,695 of its outstanding shares. Regulatory Capital The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate actions by the regulatory agencies that, if undertaken, could have a material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) At June 30, 1996, the Bank believes that it meets all capital adequacy requirements to which it is subject and the most recent notification from the regulatory agency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. The Bank's actual and required capital amounts and ratios are as follows:
June 30, 1996 ----------------------------------------------------------------------------------------- Required for Adequate To Be Well Actual Capital 1 Capitalized 1 ------------------- ------------------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- Total capital 1 (to risk weighted assets) Bank $36,940 32.7% $9,045 8.0% $11,307 10.0% Tier I capital 1 (to risk weighted assets) Bank 35,519 31.4% 4,523 4.0% 6,784 6.0% Tier I capital 1 (to total assets) Bank 35,519 20.7% 6,871 4.0% 8,588 5.0%
- ---------- 1 As defined by the regulatory agencies o Benefit Plans The Bank provides pension benefits for substantially all of the Bank's employees and is a participant in a pension fund known as the Financial Institutions Retirement Fund ("FIRF"). 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 (credit) was $211,123, $108,417, and $(464) for 1996, 1995 and 1994. The Bank contributes up to 3 percent of employees' salaries for those participating in a nonqualified thrift plan. The Bank's contribution was $23,300, $20,600, and $18,900 for 1996, 1995 and 1994. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) The Bank has purchased life insurance on certain officers and directors, which insurance had an approximate cash value of $5,588,000 and $5,471,000 at June 30, 1996 and 1995. The Bank has 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 totalled $277,000, $447,000, and $248,000 for 1996, 1995 and 1994. Certain insurance companies which have issued policies described above have been placed in conservatorship by the insurance commissioner of the state of California (the "Commissioner"). During the year ended June 30, 1994, the Bank reduced the cash value on such policies to estimated values provided by the Commissioner. The Company has a stock option plan in which 155,089 common shares were reserved at June 30, 1996 for issuance under the plan. 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 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. In March, 1993, the Company granted incentive and non-qualified stock options for 132,824 and 60,377 shares. During the years ended June 30, 1996, 1995 and 1994, options totaling 65,179 (with 17,196 shares tendered as partial payment), 6,369 and 14,863 were exercised. 48,299 shares were available for grant at June 30, 1996. The weighted option price per share for the 1996, 1995 and 1994 options exercised and at June 30, 1996, was $10. The Bank's Board of Directors has established Recognition and Retention Plans and Trusts ("RRP"). The Bank contributed $1,349,340 to the RRPs for the purchase of 96,600 shares of Company common stock, and in March, 1993, awards of grants for these shares were issued to various directors, officers and employees of the Bank. These awards generally are to vest and be earned by the recipient at a rate of 20 percent per year, commencing March, 1994. The unearned portion of these stock awards is presented as a reduction of shareholders' equity. SFAS No. 123, Stock-Based Compensation, is effective for the Company for the year ended June 30, 1997. This statement establishes a fair value based method of accounting for stock-based compensation plans. The Company has not yet determined the impact of adopting SFAS No. 123 on net income or financial position in the year of adoption. o Postretirement Plan The Bank sponsors a defined benefit postretirement plan that covers both salaried and nonsalaried employees. The plan provides postretirement health care coverage to eligible retirees. An eligible retiree is an employee who retires from the Bank on or after attaining age 65 and who has rendered at least 15 years of service. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) The Bank continues to fund benefit costs on a pay-as-you-go basis, and, for 1996, 1995 and 1994, the Bank made benefit payments totaling $3,842, $2,986 and $3,252. The following table sets forth the plan's funded status, and amounts recognized in the consolidated statement of financial condition: June 30, ------------------------ 1996 1995 ------ ------ Accumulated postretirement benefit obligation Retirees $100 $ 76 Other active plan participants 80 78 Accumulated postretirement benefit obligation 180 154 Unrecognized net gain from past experience different from that assumed and from changes in assumptions 84 98 ---- ---- Accrued postretirement benefit cost $264 $252 ==== ====
June 30, ----------------------------------------- 1996 1995 1994 ------ ------ ------ Net periodic postretirement cost included the following components Service cost--benefits attributed to service during the period $13 $21 $19 Interest cost on accumulated postretirement benefit obligation 12 16 15 Net amortization and deferral (9) --- --- --- Net periodic postretirement benefit cost $16 $37 $34 === === ===
At June 30, 1996 and 1995, there were no plan assets. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 12 percent in 1996, gradually declining to 6 percent in the year 2011. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.75 percent. If the health care cost trend rate assumptions were increased by 1 percent, the accumulated postretirement benefit obligation as of June 30, 1996 would have increased by 14 percent. The effect of this change on the sum of the service cost and interest would be an increase of 17 percent. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) o Commitments and Contingent Liabilities In the normal course of business there are outstanding commitments and contingent liabilities, such as commitments to extend credit, which are not included in the accompanying consolidated financial statements. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated statement of financial condition. Financial instruments whose contract amount represents credit risk as of June 30 were as follows: 1996 1995 ------- ------- Mortgage loan commitments at variable rates $3,211 $3,894 Consumer and commercial loan commitments 1,365 936 Standby letters of credit 3,239 1,518 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 $36,170,000 and $35,937,000 at June 30, 1996 and 1995, 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. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) The deposits of the Bank are presently insured by the Savings Association Insurance Fund (the "SAIF"). A recapitalization plan for the SAIF under consideration by Congress provides for a special assessment on all SAIF-insured institutions to enable the SAIF to achieve its required level of reserves. If the proposed assessment of .85% was effected based on deposits as of March 31, 1995 (as originally proposed), the Bank's special assessment would amount to approximately $1,008,000, before taxes. Accordingly, this special assessment would significantly increase other expenses and adversely affect results of operations. Depending upon the capital level and supervisory rating of the Bank, and assuming the insurance premium levels for commercial banks and SAIF members again equalized, future deposit insurance premiums could decrease from the .23% of deposits currently paid by the Bank. Such reduction in premiums would reduce other expenses for future periods. o Fair Values of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and Cash Equivalents--The fair value of cash and cash equivalents approximates carrying value. Investment Securities--Fair values are based on quoted market prices. Loans--The fair value for loans is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Interest Receivable/Payable--The fair values of accrued interest receivable/payable approximates carrying values. FHLB Stock--Fair value of FHLB stock is based on the price at which it may be resold to the FHLB. Deposits--Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits. Federal Home Loan Bank Advances--The fair value of these borrowings are estimated using a discounted cash flow calculation, based on current rates for similar debt. Advances by Borrowers for Taxes and Insurance--The fair value approximates carrying value. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) The estimated fair values of the Company's financial instruments are as follows:
1996 1995 ------------------------ ------------------------ Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Assets Cash and cash equivalents $7,520 $7,520 $3,483 $3,483 Securities available-for-sale 1,000 1,000 2,985 2,985 Securities held-to-maturity 13,058 12,886 17,275 16,892 Loans, net 143,165 145,788 136,323 136,746 Interest receivable 642 642 578 578 Stock in FHLB 988 988 909 909 Liabilities Deposits 126,260 127,210 120,613 120,502 FHLB advances 6,241 6,261 6,963 6,893 Interest payable 116 116 136 136 Advances by borrowers for taxes and insurance 392 392 214 214
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) o 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, --------------------------- 1996 1995 --------- --------- Assets Cash and cash equivalents $ 3,048 $ 603 Investment securities held-to-maturity 2,978 Investment in subsidiary 35,519 41,301 Other assets 5 6 ------- ------- Total assets $41,550 $41,910 ======= ======= Liabilities $ 39 $ 46 Shareholders' Equity 41,511 41,864 ------- ------- Total liabilities and shareholders' equity $41,550 $41,910 ======= =======
Condensed Statement of Income Year Ended June 30, ------------------------------------------- 1996 1995 1994 ------ ------ ------ Income Dividends from Bank $8,600 $2,000 $3,000 Other 120 96 108 Expenses 85 132 146 ------ ------ ------ Income before income tax and equity in undistributed income of subsidiary 8,635 1,964 2,962 Income tax expense (benefit) 14 (14) (15) ------ ------ ------ Income before equity in undistributed income of subsidiary 8,621 1,978 2,977 Equity in undistributed (distribution in excess of) income of subsidiary (6,140) 452 (708) ------ ------ ------ Net Income $2,481 $2,430 $2,269 ====== ====== ======
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands)
Condensed Statement of Cash Flows Year Ended June 30, ------------------------------------------ 1996 1995 1994 ------ -------- -------- Operating Activities Net income $2,481 $2,430 $2,269 Adjustments to reconcile net income to net cash provided by operating activities 6,057 (434) 653 ------ ------ ------ Net cash provided by operating activities 8,538 1,996 2,922 ------ ------ ------ Investing Activities Purchase of securities held-to-maturity (5,951) (496) Proceeds from maturities of securities held-to-maturity 3,000 6,000 ------ ------ Net cash provided (used) by investing activities (2,951) 5,504 ------ ------ Financing Activities Exercise of stock options 392 64 148 Cash dividends (1,468) (1,333) (1,198) Repurchase of common stock (2,066) (3,889) (3,931) ------ ------ ------ Net cash used by financing activities (3,142) (5,158) (4,981) ------ ------ ------ Net Increase (Decrease) in Cash and Cash Equivalents 2,445 (3,162) 3,445 ------ ------ ------ Cash and Cash Equivalents at Beginning of Year 603 3,765 320 ------ ------ ------ Cash and Cash Equivalents at End of Year $3,048 $ 603 $3,765 ====== ====== ======
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) o Quarterly Results
Year Ended June 30, 1996 ---------------------------------------------- June March December September 1996 1996 1995 1995 ---- ---- ---- ---- Interest income $3,416 $3,442 $3,465 $3,417 Interest expense 1,706 1,714 1,721 1,712 ------ ------ ------ ------ Net interest income 1,710 1,728 1,744 1,705 Provision for losses on loans 10 24 ------ ------ ------ ------ Net interest income after provisions for losses on loans 1,700 1,728 1,720 1,705 Other income 24 23 25 58 Other expenses 872 927 874 916 ------ ------ ------ ------ Income before income tax 852 824 871 847 Income tax expense 223 216 233 241 ------ ------ ------ ------ Net Income $ 629 $ 608 $ 638 $ 606 ====== ====== ====== ====== Per share Net income $.33 $.29 $.31 $.29 Dividends $.20 $.18 $.18 $.18
Year Ended June 30, 1995 ---------------------------------------------- June March December September 1995 1995 1994 1994 ---- ---- ---- ---- Interest income $3,300 $3,246 $3,149 $3,091 Interest expense 1,624 1,500 1,388 1,410 ------ ------ ------ ------ Net interest income 1,676 1,746 1,761 1,681 Provision for losses on loans 3 65 ------ ------ ------ ------ Net interest income after provisions for losses on loans 1,673 1,746 1,761 1,616 Other income 31 19 14 41 Other expenses 916 913 870 856 ------ ------ ------ ------ Income before income tax 788 852 905 801 Income tax expense 177 220 265 254 ------ ------ ------ ------ Net Income $ 611 $ 632 $ 640 $ 547 ====== ====== ====== ====== Per share Net income $.28 $.30 $.29 $.24 Dividends $.18 $.15 $.15 $.15
DIRECTORS AND OFFICERS BOARD OF DIRECTORS Robert D. Burchard W. Gordon Coryea Jack O. Murrell Chairman of the Board Attorney Retired, Murrell and Keal Retired, Former President of MCHI and First Federal Jerry D. McVicker John M. Dalton George L. Thomas Director of Operations President Retired, Foster-Forbes Marion Community Schools Vice Chairman of the Board Steven L. Banks Executive Vice President OFFICERS OF MARION CAPITAL HOLDINGS, INC. John M. Dalton Larry G. Phillips President Sr. Vice President and Secretary-Treasurer Steven L. Banks Jackie Noble Executive Vice President Assistant Secretary and Assistant Treasurer Tim D. Canode Vice President OFFICERS OF FIRST FEDERAL SAVINGS BANK OF MARION John M. Dalton Larry G. Phillips Steven L. Banks President Sr. Vice President and Executive Vice President Secretary-Treasurer Stephen A. Smithley James E. Adkins Charles N. Sponhauer Vice President Vice President Vice President Jackie Noble Chris Bradford Kathy Kuntz Assistant Secretary and Assistant Secretary Assistant Secretary Assistant Treasurer Tim D. Canode Lowell Martin Randy J. Sizemore Vice President Assistant Vice President, Assistant Treasurer Branch Manager DIRECTORS AND OFFICERS Robert D. Burchard (age 65) is a Director of Marion Capital Holdings, Inc. Mr. Burchard served as President of Marion Capital Holdings, Inc. from its formation until 1996. Mr. Burchard also served as President of First Federal from 1983 until 1996 and as President of First Marion Service Corporation in 1996. Mr. Burchard became Chairman of the Boards of Marion Captial Holdings, Inc. and First Federal in 1996. W. Gordon Coryea (age 71) is a Director of Marion Capital Holdings, Inc. He is also an attorney at law based in Marion, Indiana, and has served as attorney for First Federal since 1965. John M. Dalton (age 62) is a Director of Marion Capital Holdings, Inc. and has served as its President since 1996. Prior to that, he served as Marion Capital Holdings, Inc.'s Executive Vice President. He has also served as President of First Federal since 1996 and as Executive Vice President of First Marion Service Corporation in 1996. Mr. Dalton was the Executive Vice President of First Federal from 1983 to 1996. Merritt B. McVicker (age 77) was Chairman of the Board of Marion Captial Holdings, Inc. until his death in July 1996. He had also served as Chairman of First Federal since 1974, as President of First Marion since 1971 and became Chairman of First Marion Service Corporation in 1974. Jack O. Murrell (age 73) is a Director of Marion Capital Holdings, Inc. He has also served as President of Murrell and Keal, Inc. since 1958 (a retailer located in Marion, Indiana). George L. Thomas (age 79) is a Director of Marion Capital Holdings, Inc. He also served as Chairman of Foster-Forbes Glass Co., a division of the National Can Corporation, located in Marion, Indiana until his retirement in 1984. Larry G. Phillips (age 47) is Sr. Vice President, Secretary and Treasurer of Marion Capital Holdings, Inc. He has also served as Sr. Vice President and Treasurer of First Federal since 1996, as Secretary of First Federal since 1989, and as Secretary and Treasurer of First Marion since 1989. Mr. Phillips was Vice President and Treasurer of First Federal from 1983 to 1996. Tim D. Canode (age 51) has served as Vice President of Marion Capital Holdings, Inc. since 1996 and as Vice President of First Federal since 1983 and as Assistant Vice President of First Marion since 1983. Jacquelin Ann Noble (age 55) is Assistant Secretary and Assistant Treasurer of Marion Capital Holdings, Inc. She has served as Assistant Secretary and Assistant Treasurer of First Federal since 1967. She has also served as Assistant Secretary and Assistant Treasurer of First Marion since 1971. Steven L. Banks (age 46) was President and CEO of Fidelity Federal Savings Bank of Marion. On September 1, 1996 he assumed the duties of Executive Vice President of both Marion Capital Holdings, Inc. and First Federal, and will serve as a director of Marion Capital Holdings, Inc. and First Federal. Jerry D. McVicker (age 51) is Director of Operations for Marion Community Schools. On September 1, 1996, he assumed the duties of director of Marion Capital Holdings, Inc. and First Federal. SHAREHOLDER INFORMATION Market Information The common stock of Marion Capital Holdings, Inc. is traded on the National Association of Securities Dealers Automated Quotation System, National Market System, under the symbol "MARN," and is listed in the Wall Street Journal under the abbreviation "MarionCap." As of June 30, 1996, there were approximately 536 shareholders of record and MCHI estimates that, as of that date, there were an additional 1,000 in "street" name. The following table sets forth market price information for MCHI's common stock for the periods indicated. Fiscal Quarter Ended High Low Dividend Per Share - -------------------- ---- --- ------------------ September 30, 1994 $18.750 $15.750 $.15 December 31, 1994 18.000 15.000 .15 March 31, 1995 17.750 15.250 .15 June 30, 1995 20.000 17.250 .18 September 30, 1995 20.625 18.500 .18 December 31, 1995 20.625 19.250 .18 March 31, 1996 20.750 19.250 .18 June 30, 1996 21.000 19.750 .20 Transfer Agent and Registrar General Counsel Fifth Third Bank Barnes & Thornburg 38 Fountain Square 1313 Merchants Bank Building Cincinnati, Ohio 45263 11 South Meridian Street Indianapolis, Indiana 46204 Shareholders and General Inquiries MCHI is required to file an Annual Report on Form 10-K for its fiscal year ended June 30, 1996 with the Securities and Exchange Commission. Copies of this annual report may be obtained without charge upon written request to: Larry Phillips Sr. Vice President, Secretary and Treasurer Marion Capital Holdings, Inc. 100 West Third Street Marion, Indiana 46952 Office Location Branch Location 100 West Third Street 1045 South 13th Street Marion, Indiana 46952 Decatur, Indiana 46733 Telephone: (317) 664-0556 Telephone: (219) 728-2106 [LOGO] FIRST FEDERAL SAVINGS BANK 100 West Third Street, Marion, Indiana 46952 (317) 664-0556 EX-23 6 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the incorporation by reference in a Registration Statement on Form S-8 (Registration No. 33-69538) of our report dated July 26, 1996, on the consolidated financial statements of Marion Capital Holdings, Inc. and subsidiaries contained in the 1996 Annual Report to Shareholders of Marion Capital Holdings, Inc., which is incorporated by reference in this Form 10-K. Geo. S. Olive & Co. LLC Indianapolis, Indiana September 23, 1996 EX-27 7 FDS FOR MCHI
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000894372 Marion Capital Holdings, Inc. 1,000 U.S. Dollars 12-MOS JUN-30-1996 JUL-1-1995 JUN-30-1996 1.000 2,366 5,155 0 0 1,000 13,058 12,886 145,174 2,009 177,767 126,260 3,012 3,754 3,229 13,815 0 0 27,696 177,767 12,456 876 407 13,740 6,344 6,853 6,887 34 0 3,588 3,395 2,481 0 0 2,481 1.22 1.22 4.17 1,716 0 0 1,043 2,013 40 2 2,009 317 0 1,692
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