-----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, LkYxyJZtBtGO3G5I4rCTQ0hJmU+kJb+NoLHrVsUIyGkaklA5oHt/xGGwHowd9gzb mb+ArUEVNRn6rIxia9iTGg== 0000908834-98-000250.txt : 19980925 0000908834-98-000250.hdr.sgml : 19980925 ACCESSION NUMBER: 0000908834-98-000250 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980924 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: SEC FILE NUMBER: 000-21108 FILM NUMBER: 98714342 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 1998 or [ ] Transaction Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ___________ to ___________ Commission File Number 0-21108 MARION CAPITAL HOLDINGS, INC. (Exact name of registrant as specified in its charter) INDIANA 35-1872393 (State or other Jurisdiction (I.R.S. Employer Identification of Incorporation or Organization) Number) 100 West Third Street, P.O. Box 367, Marion, Indiana 46952 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (765) 664-0556 Securities Registered Pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered NONE NONE Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, without par value (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the issuer's voting stock held by non-affiliates, as of August 21, 1998, was $37,268,072. The number of shares of the Registrant's Common Stock, without par value, outstanding as of August 21, 1998, was 1,638,157 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended June 30, 1998 are incorporated into Part II. Portions of the Proxy Statement for the 1998 Annual Meeting of Shareholders are incorporated into Part III. Exhibit Index on Page 35 Page 1 of 36 Pages MARION CAPITAL HOLDINGS, INC. Form 10-K INDEX Page Forward Looking Statements.................................................. 3 PART 1 Item 1. Business...................................................... 3 Item 2. Properties.................................................... 32 Item 3. Legal Proceedings............................................. 33 Item 4. Submission of Matters to a Vote of Security Holders........... 33 Item 4.5. Executive Officers of MCHI.................................... 33 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 33 Item 6. Selected Consolidated Financial Data.......................... 34 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 34 Item 7A. Quantitative and Qualtative Disclosures About Market Risk..... 34 Item 8. Financial Statements and Supplementary Data................... 35 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................... 35 PART III Item 10. Directors and Executive Officers of the Registrant............ 35 Item 11. Executive Compensation........................................ 35 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................ 35 Item 13. Certain Relationships and Related Transactions................ 35 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................... 35 Signatures .......................................................... 36 FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K ("Form 10-K") contains statements which constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Form 10-K and include statements regarding the intent, belief, outlook, estimate or expectations of the Corporation (as defined below), its directors or its officers primarily with respect to future events and the future financial performance of the Corporation. Readers of this Form 10-K are cautioned that any such forward looking statements are not guarantees of future events or performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward looking statements as a result of various factors. The accompanying information contained in this Form 10-K identifies important factors that could cause such differences. These factors include changes in interest rates; loss of deposits and loan demand to other savings and financial institutions; substantial changes in financial markets; changes in real estate values and the real estate market; regulatory changes; or unanticipated results in pending legal proceedings. PART I Item 1. Business. General Marion Capital Holdings, Inc. ("MCHI") is an Indiana corporation organized on November 23, 1992, to become a unitary savings and loan holding company. MCHI became a unitary savings and loan holding company upon the conversion (the "Conversion") of First Federal Savings Bank of Marion (the "Bank" and together with MCHI, the "Company") from a federal mutual savings bank to a federal stock savings bank on March 18, 1993. The principal asset of MCHI consists of 100% of the issued and outstanding shares of common stock, $0.01 par value per share, of the Bank. The Bank began operations in Marion, Indiana, as a federal savings and loan association in 1936, and converted to a federal mutual savings bank in 1986. The Bank offers a number of consumer and commercial financial services. These services include: (i) residential and commercial real estate loans; (ii) multi-family loans; (iii) construction loans; (iv) installment loans; (v) loans secured by deposits; (vi) auto loans; (vii) NOW accounts; (viii) consumer and commercial demand and time deposit accounts; (ix) individual retirement accounts; and (x) tax deferred annuities and mutual funds through its service corporation subsidiary, First Marion Service Corporation ("First Marion"). The Bank provides these services at four full-service offices, two in Marion, one in Decatur, Indiana and one in Gas City, Indiana. The Bank's market area for loans and deposits consists of Grant and surrounding counties and Adams County in Indiana. The Bank opened a branch office in the Marion Wal-Mart Supercenter in October, 1997 and acquired an NBD branch facility in Gas City, Indiana in December, 1997. 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, 1998, 61.1% 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 $31.9 million at June 30, 1998, or 18.8% of total loans and mortgage-backed securities. The Bank also makes a limited number of construction loans, which constituted $7.3 million or 4.3% of the Company's total loans and mortgage-backed securities at June 30, 1998, 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, 1998, ARMs constituted 84.6% 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.
At June 30, -------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 --------------- ---------------- ---------------- ---------------- ---------------- 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..................$103,719 61.14% $ 97,017 63.33% $ 87,106 58.26%$ 81,651 56.21%$ 76,573 55.72% Commercial real estate....... 31,857 18.78 31,122 20.31 36,170 24.19 35,937 24.74 35,003 25.47 Multi-family................. 11,014 6.49 11,394 7.44 15,573 10.42 14,495 9.98 12,039 8.76 Construction: Residential.................. 2,742 1.62 3,555 2.32 3,904 2.61 3,448 2.37 3,164 2.30 Commercial real estate..................... 4,542 2.68 1,144 .75 506 .34 1,257 .87 1,159 .84 Multi-family................. --- --- --- --- 584 .39 2,627 1.81 3,809 2.77 Consumer loans: Installment loans............ 2,417 1.42 3,613 2.36 2,725 1.82 1,897 1.30 1,340 .98 Loans secured by deposits.... 1,027 .61 895 .58 883 .59 797 .55 822 .60 Home equity loans............ 2,496 1.47 1,376 .90 399 .27 405 .27 494 .36 Auto loans................... 1,323 .78 325 .21 169 .11 120 .08 113 .08 Home improvement loans....... --- --- --- --- --- --- --- --- 1 .00 Education loans.............. --- --- --- --- --- --- --- --- --- --- Commercial loans................ 8,511 5.01 2,525 1.65 7 .00 9 .01 14 .01 Mortgage-backed securities...... 3 --- 237 .15 1,491 1.00 2,630 1.81 2,905 2.11 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Gross loans receivable and mortgage-backed securities................$169,651 100.00% $153,203 100.00% $149,517 100.00% $145,273 100.00% $137,436 100.00% ======== ====== ======== ====== ======== ====== ======== ====== ======== ====== TYPE OF SECURITY Residential (1)..............$108,960 64.23% $102,185 66.70% $ 92,888 62.13%$ 88,109 60.65% $ 83,108 60.47% Commercial real estate....... 36,399 21.46 32,266 21.06 36,688 24.54 37,219 25.62 36,191 26.33 Multi-family................. 11,014 6.49 11,394 7.44 16,157 10.81 17,122 11.79 15,848 11.53 Autos........................ 1,323 .78 325 .21 169 .11 120 .08 113 .08 Deposits..................... 1,027 .61 895 .58 883 .59 797 .55 822 .60 Other security............... 8,511 5.01 2,525 1.65 7 .00 9 .01 14 .01 Unsecured.................... 2,417 1.42 3,613 2.36 2,725 1.82 1,897 1.30 1,340 .98 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Gross loans receivable and mortgage-backed securities.............. 169,651 100.00 153,203 100.00 149,517 100.00 145,273 100.00 137,436 100.00 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Deduct: Allowance for possible losses on loans..................... 2,087 1.23 2,032 1.33 2,009 1.34 2,013 1.39 2,050 1.49 Deferred net loan fees.......... 300 .18 277 .18 313 .21 303 .21 333 .24 Loans in process................ 3,663 2.16 2,626 1.71 2,539 1.70 4,004 2.75 5,056 3.68 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Net loans receivable including mortgage-backed securities.................$163,601 96.43% $148,268 96.78% $144,656 96.75% $138,953 95.65% $129,997 94.59% ======= ====== ======= ====== ======= ====== ======= ====== ======= ====== Mortgage Loans Adjustable rate..............$130,100 84.55% $128,799 89.30% $128,811 89.55 $120,496 86.43% $113,184 85.91% Fixed rate................... 23,774 15.45 15,433 10.70 15,032 10.45 18,919 13.57 18,563 14.09 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total......................$153,874 100.00% $144,232 100.00% $143,843 100.00% $139,415 100.00% $131,747 100.00% ======= ====== ======= ====== ======= ====== ======= ====== ======= ====== - -----------------
(1) Includes majority of mortgage-backed securities, home equity loans and home improvement loans. The following table sets forth certain information at June 30, 1998, 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 2002 2004 2009 2014 At June 30, to to to and 1998 1999 2000 2001 2003 2008 2013 following -------------------------------------------------------------------------------------- (In Thousands) Mortgage loans: Residential............ $106,461 $1,152 $102 $470 $1,954 $14,263 $34,526 $53,994 Multi-family........... 11,014 1,098 --- --- 162 2,165 5,549 2,040 Commercial real estate............... 36,399 4,088 470 952 991 7,372 11,954 10,572 Consumer loans: Home improvement ...... --- --- --- --- --- --- --- --- Home equity............ 2,496 92 6 --- --- --- --- 2,398 Auto................... 1,323 54 105 307 817 40 --- --- Installment............ 2,417 1,089 207 189 616 242 74 --- Loans secured by deposits.......... 1,027 663 320 --- 44 --- --- --- Mortgage-backed securities ............ --- --- --- --- --- --- --- --- Commercial loans ..... 8,511 1,532 244 214 843 2,880 2,798 --- -------- ------ ------ ------ ------ ------- ------- ------- Total.................. $169,648 $9,768 $1,454 $2,132 $5,427 $26,962 $54,901 $69,004 ======== ====== ====== ====== ====== ======= ======= =======
The following table sets forth, as of June 30, 1998, 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, 1999 ------------------------------------------------- Fixed Rates Variable Rates Total ----------- -------------- -------- (In Thousands) Mortgage loans: Residential............................... $12,233 $93,076 $105,309 Multi-family................................... 752 9,164 9,916 Commercial real estate.................... 1,628 30,683 32,311 Consumer loans: Home improvement ......................... --- --- --- Home equity............................... 4 2,400 2,404 Auto...................................... 1,269 --- 1,269 Installment............................... 1,328 --- 1,328 Loan secured by deposits.................. 364 --- 364 Mortgage-backed securities ................... --- --- --- Commercial loans .............................. 5,677 1,302 6,979 ------- -------- -------- Total..................................... $23,255 $136,625 $159,880 ======= ======== ========
Residential Loans. Residential loans consist of one-to-four family loans. Approximately $103.7 million, or 61.1%, of the Company's portfolio of loans and mortgage-backed securities at June 30, 1998, consisted of one- to four-family mortgage loans, of which approximately 84.6% had adjustable rates. The Company is currently selling to the Federal Home Loan Mortgage Corporation (the "FHLMC") 95% of the principal balance on fixed rate loans originated with terms in excess of 15 years and retaining all of the servicing rights on these loans. The option to retain or sell fixed rate loans will be evaluated from time to time. During the year ended June 30, 1998, $1.4 million in loans were sold to FHLMC. The Bank originates fixed-rate loans with terms of up to 30 years. Some loans are originated in accordance with guidelines established by FHLMC to facilitate the sale of such loans to FHLMC in the secondary market. These loans amortize on a monthly basis with principal and interest due each month. As mentioned above, a few of these loans originated with terms in excess of 15 years, or annual interest rates below 8.5%, were sold to FHLMC promptly after they were originated. The Bank retained 5% of the principal balance of such sold loans as well as the servicing on all of such sold loans. At June 30, 1998, the Company had $12.2 million of fixed rate residential mortgage loans which were originated in prior years in its portfolio, none of which were held for sale. Most ARMs adjust on an annual basis, although the Bank currently offers a five-year ARM which has a fixed rate for five years, and a three-year ARM which has a fixed rate for three years. Both of these ARMs adjust annually after the initial period is over. Currently, the ARMs have an interest rate average minimum of 6.5% and average maximum of 13.5%. The interest rate adjustment for substantially all of the Bank's ARMs is indexed to the One-Year Treasury Constant Maturity Index. On new residential mortgage loans, the margin above such index currently is 2.75%. The Bank offers ARMs with maximum rate changes of 2% per adjustment, and an average of 6.5% 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 25-year period, residential mortgage loans generally are paid off before maturity. Substantially all of the residential mortgage loans that the Bank has originated include "due on sale" clauses, which give the Bank the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid. The Bank generally requires private mortgage insurance on all conventional residential single-family mortgage loans with loan-to-value ratios in excess of 90%. The Bank generally will not lend more than 95% of the lower of current cost or appraised value of a residential single family property. In July 1995, the Bank's wholly-owned subsidiary, First Marion, began a 100% financing program pursuant to which the Bank would originate an 80% loan-to-value first mortgage loan using its normal underwriting standard and First Marion would finance the remaining 20%. The second mortgage loan originated by First Marion is a fixed rate mortgage loan with an interest rate of 12% and a term not to exceed 15 years. At June 30, 1998, these loans amounted to $2.3 million. Residential mortgage loans in excess of $500,000 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, 1998, residential mortgage loans amounting to $1.5 million, or .9% of total loans, were included in non-performing assets. See "--Non-performing and Problem Assets." Commercial Real Estate Loans. At June 30, 1998, $31.9 million, or 18.8%, 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 9% and maximum interest rates of 15%. Most of these loans adjust annually, but the Company has some 3-year and 5-year commercial real estate adjustable rate loans in its portfolio. The largest commercial real estate loan as of June 30, 1998, had a balance of $2.6 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 22 commercial and multi-family real estate loans with balances in excess of $500,000 at June 30, 1998. The average loan balance for all such loans was $1.0 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 $13.2 million at June 30, 1998. 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, 1998, the Company had classified no commercial real estate loans as substandard and $1.0 million as special mention. The Company has a high concentration of loans secured by nursing homes. Like other commercial real estate loans, nursing home loans often involve large loan balances to single borrowers or groups of related borrowers, and have a higher degree of credit risk than residential mortgage lending. Loan payments are often dependent on the operation of the nursing home, the success of which is dependent upon the long-term health care industry. The risks inherent in such industry include the federal, state and local licensure and certification laws which regulate, among other things, the number of beds for which nursing care can be provided and the construction, acquisition and operation of such nursing facilities. The failure to obtain or maintain a required regulatory approval or license could prevent the nursing home from being reimbursed for costs incurred in offering its services or expanding its business. Moreover, a large percentage of nursing home revenues is derived from reimbursement by third party payors. Both governmental and other third party payors have adopted and are continuing to adopt cost containment measures designed to limit payment to health care providers, and changes in federal and state regulations in these areas could adversely affect such homes. Because of the Company's concentration in this area, a decline in the nursing home industry could have a substantial adverse effect on the Company's commercial real estate portfolio and, therefore, a substantial adverse effect on its operating results. Commercial real estate loans in excess of $500,000 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, 1998, $11.0 millon, or 6.5%, 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 $287,000 as of June 30, 1998. The largest such multi-family mortgage loan as of June 30, 1998, had a balance of $1.2 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, 1998, the Company had $493,000 in loans secured by multi-family dwellings which were classified as substandard or included in non-performing assets and $3.1 million as special mention. Multi-family loans, like commercial real estate loans, involve a greater risk than do residential loans. Also, the more stringent loans-to-one borrower limitation limits the ability of the Bank to make loans to developers of apartment complexes and other multi-family units. Construction Loans. The Bank offers construction loans with respect to owner-occupied residential and commercial real estate property and, in certain cases, to builders or developers constructing such properties on an investment basis (i.e., before the builder/developer obtains a commitment from a buyer). Most construction loans are made to owners who occupy the premises. At June 30, 1998, $7.3 million, or 4.3%, of the Company's total loan and mortgage-backed securities portfolio consisted of construction loans, of which approximately $2.7 million were residential construction loans and $4.6 million related to construction of commercial real estate projects. The largest construction loan on June 30, 1998, was $1.4 million. No construction loans were included in non-performing assets on that date. For most construction loans, the loan is actually a 25-year mortgage loan, but interest only is payable during the construction phase of the loan up to 18 months, and such interest is charged only on the money disbursed under the loan. After the construction phase (typically 6 to 12 months), regular mortgage loan payments of principal and interest are due. Appraisals for these loans are completed, subject to completion of building plans and specifications. Interest rates and fees vary for these loans. While construction is progressing, periodic inspections are performed for which the Bank assesses a fee. While providing the Company with a higher yield than a conventional mortgage loan, construction loans involve a higher level of risk. For example, if a project is not completed and the borrower defaults, the Bank may have to hire another contractor to complete the project at a higher cost. Also, a house may be completed, but may not be salable, resulting in the borrower defaulting and the Bank taking title to the house. Consumer Loans. Federal laws and regulations permit federally chartered savings associations to make secured and unsecured consumer loans in an aggregate amount of up to 35% of the association's total assets. In addition, a federally chartered savings association has lending authority above the 35% limit for certain consumer loans, such as property improvement loans and deposit account secured loans. However, the Qualified Thrift Lender test places additional limitations on a savings association's ability to make consumer loans. The Company's consumer loans, consisting primarily of installment loans, loans secured by deposits, and auto loans, aggregated $7.3 million as of June 30, 1998, or 4.3% 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 five years, which consisted of $2.4 million, or 1.4% of the Company's total loan and mortgage-backed securities portfolio at June 30, 1998. Loans secured by deposits, totaling $1.0 at June 30, 1998, 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 $2.5 million, or 1.5% of the Company's total loan and mortgage-backed securities portfolio at June 30, 1998. Automobile loans totaled only $1.3 million or .8% and are made at fixed rates for terms of up to five years depending on the age of the automobile and the loan-to-value ratio for the loan. The Bank does not make indirect automobile loans. Although consumer loans generally involve a higher level of risk than one- to four-family residential mortgage loans, their relatively higher yields and shorter terms to maturity are believed to be helpful in reducing the interest-rate risk of the loan portfolio. The Bank has thus far been successful in managing consumer loan risk. As of June 30, 1998, $18,000 of consumer loans were included in non-performing assets. Mortgage-Backed Securities. At June 30, 1998, the Company had $3,000 in mortgage-backed securities outstanding. The Company has purchased mortgage-backed securities in the past and will continue to consider them in the future as a means of investing available funds. Origination, Purchase and Sale of Loans. The Bank currently does not originate its ARMs in conformity with the standard criteria of the FHLMC or FNMA. The Bank would therefore experience some difficulty selling such loans in the secondary market, although most loans could be brought into conformity. The Bank has no intention, however, of attempting to sell such loans. The Bank's ARMs vary from secondary market criteria because the Bank does not use the standard loan form, does not require current property surveys in most cases, and does not permit the conversion of those loans to fixed-rate loans in the first three years of their term. These practices allow the Bank to keep the loan closing costs down. Although the Bank currently has authority to lend anywhere in the United States, it has confined its loan origination activities primarily in Grant and contiguous counties and in Adams County. The Bank's loan originations are generated from referrals from builders, developers, real estate brokers and existing customers, newspaper, radio and periodical advertising, and walk-in customers. Loans are originated at either the main or branch offices. All loan applications are processed and underwritten at the Bank's main office. Under current federal law, a savings association generally may not make any loan or extend credit to a borrower or its related entities if the total of all such loans by the savings association exceeds 15% of its unimpaired capital and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired capital and surplus, if such loans or extensions of credit are fully secured by readily marketable collateral, including certain debt and equity securities but not including real estate. In some cases, a savings association may lend up to 30% of unimpaired capital and surplus to one borrower for purposes of developing domestic residential housing, provided that the association meets its regulatory capital requirements and the OTS authorizes the association to use this expanded lending authority. The maximum amount which the Bank could have loaned to one borrower and the borrower's related entities under the 15% of capital limitation was $5.0 million at June 30, 1998. 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 unsecured consumer loans greater than $15,000 and all secured consumer loans greater than $40,000. The Bank's Loan Committee approves all mortgage loans. Commercial real estate loans in excess of $500,000 and residential mortgage loans in excess of $500,000 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, 1998, the Bank sold $1.4 million of its fixed-rate mortgage loans, and at June 30, 1998, held $877,000 of such loans for sale. The Bank obtains commitments from investors for the sale of such loans at their outstanding principal balance and these commitments are obtained prior to origination of the loans. When it sells mortgage loans, the Bank generally retains the responsibility for collecting and remitting loan payments, inspecting the properties that secure the loans, making certain that monthly principal and interest payments and real estate tax and insurance payments are made on behalf of borrowers, and otherwise servicing the loans. The Company receives a servicing fee for performing these services. The amount of fees received by the Company varies, but is generally calculated as an amount equal to a rate of .25% per annum for commercial loans and .375% per annum for residential loans on the outstanding principal amount of the loans serviced. At June 30, 1998, the Company serviced $32.8 million of loans sold to other parties of which $6.8 million or 20.7% 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, 1998, the Company held in its loan portfolio, participations in mortgage loans aggregating $6.6 million that it had purchased, all of which were serviced by others. The largest such participation it held at June 30, 1998, was in a loan secured by an apartment complex. The Company's portion of the outstanding balance on that date was approximately $1.2 million. The following table shows loan origination, purchase, sale and repayment activity for the Bank during the periods indicated:
Year Ended June 30, ------------------------------------------- 1998 1997 1996 -------- -------- -------- (In Thousands) Gross loans receivable and mortgage-backed securities at beginning of period...................... $153,203 $149,517 $145,273 Originations: Mortgage loans: Residential.......................................... 37,309 33,646 28,841 Commercial real estate and multi-family.............. 13,949 11,483 8,655 -------- -------- -------- Total mortgage loans................................. 51,258 45,129 37,496 -------- -------- -------- Consumer loans: Installment loans.................................... 7,170 4,528 3,492 Loans secured by deposits............................ 807 449 763 -------- -------- -------- Total consumer loans................................ 7,977 4,977 4,255 -------- -------- -------- Commercial loans....................................... 6,664 2,558 146 -------- -------- -------- Total originations................................... 65,899 52,664 41,897 -------- -------- -------- Purchases: Mortgage-backed securities............................. --- --- --- Mortgage loans: Residential.......................................... --- --- 500 Commercial real estate and multi-family.................................... 500 --- 1,508 -------- -------- -------- Total originations and purchases..................... 66,399 52,664 43,905 -------- -------- -------- Sales: Mortgage loans: Residential.......................................... 1,429 76 1,426 Commercial real estate and multi-family.............. 3,443 7,133 4,239 Mortgage-backed securities........................... --- --- --- -------- -------- -------- Total sales........................................ 4,872 7,209 5,665 -------- -------- -------- Repayments and other deductions........................... 45,082 41,769 33,996 -------- -------- -------- Gross loans receivable and mortgage-backed securities at end of period.......................... $169,648 $153,203 $149,517 ======== ======== ========
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, 1998, $2.0 million, or 1.0% of the Company's total assets, were non-performing assets (non-accrual loans, real estate owned and troubled debt restructurings), compared to $5.4 million, or 3.2% of the Company's total assets, at June 30, 1994. At June 30, 1998, residential loans, commercial real estate loans, commercial loans, consumer loans, and real estate owned, accounted for 73.8%, 10.1%, 13.6%, .9% and 1.6%, respectively, of non-performing assets. At June 30, 1998, non-performing assets included $31,000 of real estate acquired as a result of foreclosure, voluntary deed, or other means, compared to $0.8 million at June 30, 1994. 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). 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, ----------------------------------------------------------- 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ (Dollars in Thousands) Accruing loans delinquent more than 90 days ........................ $ --- $ --- $ --- $ --- $ --- Non-accruing loans (1): Residential............................... 1,454 1,238 1,658 1,698 2,054 Multi-family.............................. --- --- --- --- --- Commercial real estate......................... 198 139 47 --- 2,580 Commercial loans.......................... 268 --- --- --- --- Consumer.................................. 18 34 11 54 3 Troubled debt restructurings .................. --- --- --- --- --- ------ ------ ------ ------ ------ Total non-performing loans................ 1,938 1,411 1,716 1,752 4,637 ------ ------ ------ ------ ------ Real estate owned, net......................... 31 --- 183 206 830 ------ ------ ------ ------ ------ Total non-performing assets .............. $1,969 $1,411 $1,899 $1,958 $5,467 ====== ====== ====== ====== ====== Non-performing loans to total loans, net (2) ........................... 1.16% .94% 1.18% 1.27% 3.59% Non-performing assets to total assets ......... 1.02% .81% 1.07% 1.13% 3.20%
(1) The Company generally places mortgage loans on a nonaccrual status when the loans become contractually past due 90 days or more. Interest income previously accrued but not deemed collectible is reversed and charged against current income. Interest on these loans is then recognized as income when collected. At June 30, 1998, $1.5 million of nonaccrual loans were residential loans, $198,000 were commercial real estate loans, $268,000 were commercial loans, and $18,000 were consumer loans. For the year ended June 30, 1998, the income that would have been recorded had the non-accrual loans not been in a non-performing status totaled 159,000 compared to actual income recorded of $71,000. (2) Total loans less deferred net loan fees and loans in process. Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the Office of Thrift Supervision ("OTS") to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated "special mention" by management. When an insured institution classifies problem assets as either substandard or doubtful, it must establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the institution's principal supervisory agent, who may order the establishment of additional general or specific loss allowances. In connection with the filing of its periodic reports with the OTS and in accordance with its classification of assets policy, the Company regularly reviews the problem loans in its portfolio to determine whether any loans require classification in accordance with applicable regulations. Total classified assets at June 30, 1998, were $6.4 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.
At June 30, ------------------------------------------------------------ 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ (In Thousands) Substandard assets (1)...... $2,296 $1,546 $1,226 $1,574 $5,111 Doubtful assets ............ --- --- --- --- --- Loss assets................. --- --- --- --- --- Special mention............. 4,081 --- --- --- --- ------ ------ ------ ------ ------ Total classified assets.. $6,377 $1,546 $1,226 $1,574 $5,111 ====== ====== ====== ====== ====== General loss allowances..... $2,087 $2,032 $2,009 $2,013 $2,050 Specific loss allowances.... --- --- --- --- --- ------ ------ ------ ------ ------ Total allowances......... $2,087 $2,032 $2,009 $2,013 $2,050 ====== ====== ====== ====== ======
- -------------- (1) Includes REO, net of $0.03, $0.0, $0.2, $0.2, and $0.8 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, 1998, the Company had 83 loans classified as substandard totaling approximately $2.3 million. Included in substandard assets are certain loans to facilitate the sale of the real estate owned, totaling $73,000 at June 30, 1998. 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, 1998, are slow mortgage loans (loans or contracts delinquent for generally 90 days or more) aggregating $1,416,000, multi-family loans equal to $493,000, slow consumer loans totaling $283,000 and real estate owned of $31,000. Special Mention Assets. At June 30, 1998, the Bank's assets subject to special mention totaled $4.1 million. Included are two multi-family loans totaling $2.1 million, two unfunded letter-of-credit commitments on multi-family loans totaling $1.0 million, and three nursing home loans totaling $1.0 million. All loans were classified as special mention due to financial statements indicating insufficient cash flow to meet all expenses. All of the above loans were current at June 30, 1998. The Company classified no assets as special mention at June 30, 1997, 1996, 1995 and 1994. Subsequent to June 30, 1998, the Board received notification from another financial institution that it classified a portion of two multi-family loans of which the Bank holds a participation interest. As a result, $885,000 of these loans were classified substandard, and $98,000 was classified doubtful. Both of these loans are current on payments, but financial statements indicate insufficient cash flows. 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, 1998. Summary of Loan Loss Experience. The following table analyzes changes in the allowance for loan losses during the past five years ended June 30, 1998.
Year Ended June 30, ---------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Dollars in Thousands) Balance of allowance at beginning of period....................... $2,032 $2,009 $2,013 $2,050 $2,051 ------ ------ ------ ------ ------ Add recoveries of loans previously charged off -- residential real estate loans.............................. 18 --- 2 12 17 Less charge-offs: Residential real estate loans............. 7 35 37 93 82 Commercial real estate loans.............. 14 --- 3 2 --- Consumer loans............................ 1 --- --- 22 1 ------ ------ ------ ------ ------ Net charge-offs.............................. 4 35 38 105 66 ------ ------ ------ ------ ------ Provisions for losses on loans............... 59 58 34 68 65 ------ ------ ------ ------ ------ Balance of allowance at end of period................................. $2,087 $2,032 $2,009 $2,013 $2,050 ====== ====== ====== ====== ====== Net charge-offs to total average loans outstanding for period.............. ---% .02% .03% .08% .05% Allowance at end of period to loans receivable at end of period......... 1.25 1.35 1.38 1.45 1.59 Allowance to total non-performing loans at end of period.................... 107.69 143.98 117.07 114.87 44.21
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.
June 30, -------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 --------------- ---------------- ---------------- ---------------- ----------------- 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.................. $ --- 61.14% $ --- 63.42% $ --- 59.11% $ 10 57.53% $ 48 57.29% Commercial real estate....... --- 18.78 --- 20.35 29 24.44 30 25.19 438 26.02 Multi-family................. 72 6.49 72 7.45 264 10.52 264 10.16 264 8.95 Construction loans........... --- 4.30 --- 3.07 --- 3.37 --- 5.14 --- 6.04 Commercial loans............. --- 5.01 --- 1.65 --- .01 --- .01 --- .01 Consumer loans............... 86 4.28 33 4.06 24 2.55 20 1.97 39 1.69 Unallocated.................. 1,929 --- 1,927 --- 1,692 --- 1,689 --- 1,261 --- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total................... $2,087 100.00% $2,032 100.00% $2,009 100.00% $2,013 100.00% $2,050 100.00% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
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 U.S. Treasury and agency securities, investment in two Indiana limited partnerships, investment in an insurance company and FHLB stock. At June 30, 1998, approximately $11.7 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 6.0% 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, ------------------------------------------------------------------------- 1998 1997 1996 -------------------- --------------------- -------------------- Carrying Market Carrying Market Carrying Market Value Value Value Value Value Value ----- ----- ----- ----- ----- ----- (In Thousands) Securities available for sale (1): Federal agencies................. $2,999 $3,049 $ 3,001 $2,998 $ 1,000 $1,000 Marketable equity securities..... --- --- --- --- --- --- ------ ------ -------- ------ -------- ------ Total securities available for sale....................... 2,999 3,049 3,001 2,998 1,000 1,000 ------ ------ -------- ------ -------- ------ Securities held to maturity (2): U.S. Treasury.................... 1,000 999 2,001 1,988 3,015 2,975 Federal agencies................. 1,000 1,000 2,000 1,991 6,954 6,917 State and municipal.............. --- --- 610 610 610 605 Other ........................... --- --- --- --- 988 1,000 ------ ------ -------- ------ -------- ------ Total securities held to maturity.................... 2,000 1,999 4,611 4,589 11,567 11,497 ------ ------ -------- ------ -------- ------ Real estate limited partnerships.... 4,883 (4) 1,449 (4) 1,624 (4) Investment in insurance company.......................... 650 (4) --- --- --- --- FHLB stock (3)...................... 1,134 1,134 1,047 1,047 988 988 ------- ------- ------- Total investments.............. $11,666 $10,108 $15,179 ======= ======= =======
(1) In accordance with SFAS No. 115, securities available for sale are recorded at market value in the financial statements. (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. 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, 1998.
Amount at June 30, 1998 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................. $ --- ---% $2,999 6.42% $ --- ---% ------ ---- ------ ---- ------ ---- Total securities available for sale....................... --- --- 2,999 6.42 --- --- ------ ---- ------ ---- ------ ---- Securities held to maturity (2): U.S. Treasury.................... 1,000 5.13 --- --- --- --- Federal agencies................. 1,000 5.53 --- --- --- --- State and municipal.............. --- --- --- --- --- --- Other ........................... --- --- --- --- --- --- ------ ---- ------ ---- ------ ---- Total securities held to maturity.................... 2,000 5.33 --- --- --- --- ------ ---- ------ ---- ------ ---- FHLB stock.......................... --- --- --- --- 1,134 7.96 ------ ---- ------ ---- ------ ---- Total investments.............. $2,000 5.33% $2,999 6.42% $1,134 7.96% ====== ==== ====== ==== ====== ====
(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-87") organized to build, own, operate and lease a 144-unit apartment complex in Indianapolis, Indiana. The project, operated as multi-family, low/moderate income housing project, is complete and performing as planned. A low/moderate income housing project qualifies for certain tax credits if (i) it is a residential rental property, (ii) the units are used on a nontransient basis, and (iii) 20% or more of the units in the project are occupied by tenants whose incomes are 50% or less of the area median gross income, adjusted for family size, or, alternatively, at least 40% of the units in the project are occupied by tenants whose incomes are 60% of the area median gross income. Qualified low income housing projects generally must comply with these and other rules for 15 years, beginning with the first year the project qualifies for the tax credit, or some or all of the tax credit together with interest may be recaptured. The tax credit is subject to limitations on the use of the general business credit, but no basis reduction is required for any portion of the tax credit claimed. The Bank committed to invest approximately $3.41 million in Pedcor-87 at inception of the project in January, 1988. The Bank has invested approximately $3.41 million in Pedcor-87 with no additional annual capital contribution remaining to be paid. The tax credits resulting from Pedcor-87's operation of a low/moderate income housing project 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-87 has incurred operating losses from its operations primarily due to rent limitations for subsidized housing, increased operating costs and other factors. Certain fees to the general partner not recorded or estimable to date by the partnership under provisions of the partnership agreement could adversely affect future operating results when accrued or paid. The Bank has accounted for its investment in Pedcor-87 on the equity method, and, accordingly, has recorded its shares of these losses as reductions to its investment in Pedcor-87, which at June 30, 1998, was approximately $1.3 million. In August 1997, the Bank entered into another limited partnership with Pedcor Investments organized to build, own, operate and lease a 72 unit apartment complex in Berrien Springs, Michigan. The Bank owns 99% of the limited partnership interest in Pedcor Investments-1997-XXIX ("Pedcor-97"). The Bank will contribute $3.6 million over 10 years and will receive an estimated $3.7 million in tax credits. The following summarizes the Bank's equity in Pedcor-87's and Pedcor-97's losses and tax credits recognized in the Company's consolidated financial statements:
Year Ended June 30, --------------------------------------------------------- 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ Investment in Pedcor-87.......... $1,275 $1,449 $1,624 $1,527 $1,422 ====== ====== ====== ====== ====== Equity in losses, net of income tax effect........ $ (105) $ (184) $ (117) $ (111) $ (137) Tax credit....................... 326 405 405 405 405 ------ ------ ------ ------ ------ Increase in after-tax net income from Pedcor-87 investment... $ 221 $ 221 $ 288 $ 294 $ 268 ====== ======= ======= ======= ======= Investment in Pedcor-97.......... $3,608 ====== Equity in losses, net of income tax effect........ $ (16) Tax credit....................... --- ------ Decrease in after-tax net income from Pedcor-97 investment... $ (16) ======
In June 1998, the Company capitalized on a unique opportunity to focus and energize its life insurance product offerings through an equity participation in Family Financial Life Insurance Company. Family Financial Life is a fully chartered life insurance company owned by a group of savings banks. In operation since 1984, Family Financial Life has had an impressive track record of growth, profits and returns to its financial institution owners. We are now offering a full range of life and annuity products with a most advantageous method to increase insurance earnings and exercise complete control over the quality of insurance products and services. Federal regulations require an FHLB-member savings association to maintain an average daily balance of liquid assets equal to a monthly average of not less than a specified percentage of its net withdrawable savings deposits plus short-term borrowings. Liquid assets include cash, certain time deposits, certain bankers' acceptances, specified U.S. government, state or federal agency obligations, certain corporate debt securities, commercial paper, certain mutual funds, certain mortgage-related securities, and certain first lien residential mortgage loans. This liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4% to 10%, and is currently 5%, although the OTS has proposed a reduction of the percentage to 4%. Also, a savings association currently must maintain short-term liquid assets constituting at least 1% of its average daily balance of net withdrawable deposit accounts and current borrowings. Monetary penalties may be imposed for failure to meet these liquidity requirements. At June 30, 1998, the Bank had liquid assets of $9.8 million, and a regulatory liquidity ratio of 7.3%, of which 4.6% 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 also has approximately $2.5 million of brokered deposits. Interest rates paid, maturity terms, service fees and withdrawal penalties are established by the Bank on a periodic basis. Determination of rates and terms are predicated on funds acquisition and liquidity requirements, rates paid by competitors, growth goals, and federal regulations. The Bank relies, in part, on customer service and long-standing relationships with customers to attract and retain its deposits, but also aggressively prices its deposits in relation to rates offered by its competitors. An analysis of the Bank deposit accounts by type, maturity, and rate at June 30, 1998, is as follows:
Minimum Balance at Weighted Opening June 30, % of Average Type of Account Balance 1998 Deposits Rate - --------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Withdrawable: Savings accounts....................... $ 10.00 $16,708 12.43% 2.81% NOW and other transactions accounts.... 10.00 27,091 20.15 3.19 -------- ------ Total withdrawable........................ 43,799 32.58 3.05 -------- ------ Certificates (original terms):............ 28 days................................ 500 545 .41 4.27 91 days................................ 500 1,042 .78 4.31 182 days............................... 500 11,232 8.36 4.92 9 months............................... 10,000 1,424 1.06 5.28 12 months.............................. 500 6,392 4.76 4.83 18 months.............................. 500 3,719 2.77 5.37 24 months.............................. 500 14,009 10.42 5.92 30 months.............................. 500 4,474 3.33 5.01 36 months.............................. 500 1,085 .81 5.47 48 months.............................. 500 6,455 4.80 7.31 60 months.............................. 500 9,604 7.15 6.30 72 months.............................. 500 31 .02 5.45 96 months.............................. 500 353 .26 6.50 Special term CDs....................... 500 597 .44 5.63 IRAs 28 days................................ 500 2 --- 3.71 91 days................................ 500 43 .03 4.31 182 days............................... 500 40 .03 4.81 9 months............................... 500 54 .04 5.35 12 months.............................. 500 295 .22 4.72 18 months.............................. 500 294 .22 5.52 24 months.............................. 500 2,005 1.49 6.00 30 months.............................. 500 770 .57 5.05 36 months.............................. 500 110 .08 5.09 48 months.............................. 500 5,194 3.86 7.85 60 months.............................. 500 19,290 14.35 6.67 72 months.............................. 500 521 .39 5.54 96 months.............................. 500 970 .72 6.53 Special term IRAs...................... 500 66 .05 5.81 -------- ------ Total certificates (1).................... 90,616 67.42 6.01 -------- ------ Total deposits............................ $134,415 100.00% 5.04 ======== ======
(1) Including $11.3 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, ---------------------------------------------- 1998 1997 1996 ------- ------- -------- (In Thousands) Under 5%........... $17,135 $15,970 $14,088 5.00 - 6.99%....... 52,365 45,722 50,836 7.00 - 8.99%....... 21,116 23,165 22,961 9.00% and over..... --- --- --- ------- ------- ------- Total.............. $90,616 $84,857 $87,885 ======= ======= ======= 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, 1998, have been allocated based upon certain rollover assumptions. Amounts At June 30, 1998, Maturing in ------------------------------------------------------------ One Year Two Three Greater Than or Less Years Years Three Years ------- ----- ----- ----------- (In Thousands) Under 5%....... $15,685 $ 699 $ 751 $ --- 5.00 - 6.99%... 16,650 23,884 7,987 3,844 7.00 - 8.99%... 9,747 10,923 --- 446 ------- ------- -------- ------ Total ......... $42,082 $35,506 $ 8,738 $4,290 ======= ======= ======== ====== 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, 1998. Maturity Period (In Thousands) - ------------------------ -------------- Three months of less........................................ $ 868 Greater than three months through six months................ 500 Greater than six months through twelve months............... 2,020 Over twelve months.......................................... 7,950 ------- Total....................................................... $11,338 ======= 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, 1998 Deposits 1997 1997 Deposits 1996 -------- ------ ------- -------- ------ ------- (Dollars in Thousands) Withdrawable: Savings accounts.............. $16,708 12.43% $1,025 $15,683 12.88% $(1,889) NOW and other transactions accounts.................... 27,091 20.15 5,861 21,230 17.43 427 -------- ------ ------- -------- ------ ------- Total withdrawable............... 43,799 32.58 6,886 36,913 30.31 (1,462) -------- ------ ------- -------- ------ ------- Certificates (original terms): 28 days....................... 545 .41 448 97 .08 (224) 91 days....................... 1,042 .78 (47) 1,089 .89 119 182 days...................... 11,232 8.36 1,925 9,307 7.64 (260) 9 months...................... 1,424 1.06 1,242 --- --- --- 12 months..................... 6,392 4.76 (8,092) 14,484 11.89 (499) 18 months..................... 3,719 2.77 1,938 1,781 1.46 522 24 months..................... 14,009 10.42 11,977 2,032 1.67 470 30 months..................... 4,474 3.33 (3,229) 7,703 6.33 (2,239) 36 months..................... 1,085 .81 (340) 1,425 1.17 (349) 48 months..................... 6,455 4.80 709 5,746 4.72 (385) 60 months..................... 9,604 7.15 (1,478) 11,082 9.10 (778) 72 months..................... 31 .02 3 28 .02 (11) 96 months..................... 353 .26 (24) 377 .31 8 Special term CDs.............. 597 .44 597 --- --- --- IRAs 28 days....................... 2 --- --- 2 .00 1 91 days....................... 43 .03 20 23 .02 (159) 182 days...................... 40 .03 (134) 174 .14 13 9 months...................... 54 .04 54 --- --- --- 12 months..................... 295 .22 (322) 617 .51 151 18 months..................... 294 .22 56 238 .20 182 24 months..................... 2,005 1.49 471 1,534 1.26 1,496 30 months..................... 770 .57 (110) 880 .72 (103) 36 months..................... 110 .08 72 38 .03 (25) 48 months..................... 5,194 3.86 379 4,815 3.95 47 60 months..................... 19,290 14.35 (627) 19,917 16.36 (858) 72 months..................... 521 .39 (64) 585 .48 (30) 96 months..................... 970 .72 87 883 .72 (117) Special term IRAs............. 66 .05 66 --- --- --- -------- ------ ------- -------- ------ ------- Total certificates.......... 90,616 67.42 5,759 84,857 69.69 (3,028) -------- ------ ------- -------- ------ ------- Total deposits.............. $134,415 100.00% $12,645 $121,770 100.00% $(4,490) ======== ====== ======= ======== ====== =======
DEPOSIT ACTIVITY Increase (Decrease) Balance at from Balance at June 30, % of June 30, June 30, % of 1996 Deposits 1996 1995 Deposits --------------------------------------------------------------------------- (Dollars in Thousands) Withdrawable: Savings accounts............... $ 17,572 13.92% $(1,207) $ 18,779 15.57% NOW and other transaction accounts..................... 20,803 16.47 2,365 18,438 15.29 -------- ------ ------- -------- ------ Total withdrawable................ 38,375 30.39 1,158 37,217 30.86 -------- ------ ------- -------- ------ Certificates (original terms): 28 days........................ 321 .25 18 303 .25 91 days........................ 970 .77 (72) 1,042 .86 182 days....................... 9,567 7.58 (2,062) 11,629 9.64 12 months...................... 14,983 11.87 5,842 9,141 7.58 18 months...................... 1,259 1.00 (486) 1,745 1.45 24 months...................... 1,562 1.24 (420) 1,982 1.64 30 months...................... 9,942 7.87 (1,029) 10,971 9.10 36 months...................... 1,774 1.41 302 1,472 1.22 48 months...................... 6,131 4.86 (60) 6,191 5.13 60 months...................... 11,860 9.39 619 11,241 9.32 72 months...................... 39 .03 (1) 40 .03 96 months...................... 369 .29 (15) 384 .32 IRAs 28 days........................ 1 .00 (24) 25 .02 91 days........................ 182 .14 208 162 .13 182 days....................... 161 .13 (88) 249 .21 12 months...................... 466 .37 132 334 .28 18 months...................... 56 .04 (78) 134 .11 24 months...................... 38 .03 --- 38 .03 30 months...................... 983 .78 (170) 1,153 .96 36 months...................... 63 .05 29 34 .03 48 months...................... 4,768 3.78 325 4,443 3.68 60 months...................... 20,775 16.45 1,721 19,054 15.80 72 months...................... 615 .49 (8) 623 .52 96 months...................... 1,000 .79 (6) 1,006 .83 -------- ------ ------- -------- ------ Total certificates................ 87,885 69.61 4,489 83,396 69.14 -------- ------ ------- -------- ------ Total deposits.................... $126,260 100.00% $ 5,647 $120,613 100.00% ======== ====== ======= ======== ======
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, 1998, FHLB of Indianapolis advances totaled $13.7 million, representing 7.1% 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, 1998 1997 1996 --------------------------------------- (Dollars in Thousands) FHLB Advances: Average balance outstanding.................. $10,840 $7,382 $6,694 Maximum amount outstanding at any month-end during the period....................... 13,684 8,233 6,963 Weighted average interest rate during the period....................... 6.01% 6.27% 6.83% Weighted average interest rate at end of period........................... 6.08% 6.14% 6.50%
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 $2.3 million at June 30, 1998. At June 30, 1998, the Bank's investment in First Marion totaled $2.2 million. During the year ended June 30, 1998, First Marion had net income of $50,000. Employees As of June 30, 1998, the Bank employed 44 persons on a full-time basis and nine 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 institutions, credit unions, certain non-banking consumer lenders, and other companies or firms, including brokerage houses and mortgage brokers, that provide similar services in Grant and Adams Counties. The Bank must also compete with money market funds and with insurance companies with respect to its individual retirement accounts. Under current law, bank holding companies may acquire savings associations. Savings associations may also acquire banks under federal law. To date, several bank holding company acquisitions of savings associations in Indiana have been completed. Affiliations between banks and healthy savings associations based in Indiana may also increase the competition faced by the Bank and MCHI. 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 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 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 merge or establish de novo branches on a reciprocal basis. This new legislation may also result in increased competition for the Bank and MCHI. Because of recent changes in Federal law, interstate acquisitions of banks are less restricted than they were under prior law. Savings associations have certain powers to acquire savings associations based in other states, and Indiana law expressly permits reciprocal acquisition of Indiana savings associations. In addition, Federal savings associations are permitted to branch on an interstate basis. See "Regulation -- Acquisitions or Dispositions and Branching." The primary factors in competing for deposits are interest rates and convenience of office locations. The Bank competes for loan originations primarily through the efficiency and quality of services it provides borrowers through interest rates and loan fees it charges. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels, and other factors which are not readily predictable. REGULATION General The Bank, as a federally chartered savings bank, is a member of the Federal Home Loan Bank System ("FHLB System") and its deposits are insured by the FDIC and it is a member of the Savings Association Insurance Fund (the "SAIF") which is adminsitered by the FDIC. The Bank is subject to extensive regulation by the OTS. Federal associations may not enter into certain transactions unless certain regulatory tests are met or they obtain prior governmental approval and the associations must file reports with the OTS about their activities and their financial condition. Periodic compliance examinations of the Bank are conducted by the OTS which has, in conjunction with the FDIC in certain situations, examination and enforcement powers. This supervision and regulation are intended primarily for the protection of depositors and federal deposit insurance funds. The Bank is also subject to certain reserve requirements under regulations of the Board of Governors of the Federal Reserve System ("FRB"). An OTS regulation establishes a schedule for the assessment of fees upon all savings associations to fund the operations of the OTS. The regulation also establishes a schedule of fees for the various types of applications and filings made by savings associations with the OTS. The general assessment, to be paid on a semiannual basis, is based upon the savings association's total assets, including consolidated subsidiaries, as reported in a recent quarterly thrift financial report. Currently, the quarterly assessment rates range from .01164% of assets for associations with assets of $67 million or less to .00308% for associations with assets in excess of $35 billion. The Bank's semiannual assessment under this assessment scheme, based upon its total assets at March 31, 1998, was $27,235. The Bank is also subject to federal and state regulation as to such matters as loans to officers, directors, or principal shareholders, required reserves, limitations as to the nature and amount of its loans and investments, regulatory approval of any merger or consolidation, issuance or retirements of their own securities, and limitations upon other aspects of banking operations. In addition, the activities and operations of the Bank are subject to a number of additional detailed, complex and sometimes overlapping federal and state laws and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Community Reinvestment Act, anti-redlining legislation and anti-trust laws. The United States Congress is considering legislation that would require all federal savings associations, such as the Bank, to either convert to a national bank or a state-chartered financial institution by a specified date to be determined. In addition, under the legislation, the Holding Company likely would not be regulated as a savings and loan holding company, but rather as a bank holding company. The proposed legislation would abolish the OTS and transfer its functions among the other federal banking regulators. Certain aspects of the legislation remain to be resolved and therefore no assurance can be given as to whether or in what form the legislation will be enacted or its effect on the Holding Company and the Bank. 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 beginning of each year. The Bank is currently in compliance with this requirement. At June 30, 1998, the Bank's investment in stock of the FHLB of Indianapolis was $1,134,400. In past years, the Bank received dividends on its FHLB stock. All 12 FHLBs are required by law to provide funds for the resolution of troubled savings associations and to establish affordable housing programs through direct loans or interest subsidies on advances to members to be used for lending at subsidized interest rates for low- and moderate-income, owner-occupied housing projects, affordable rental housing, and certain other community projects. These contributions and obligations could adversely affect the FHLB's ability to pay dividends and the value of FHLB stock in the future. For the year ending June 30, 1998, dividends paid to the Bank totaled $86,000, for an annual rate of 8.06%. 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. Current law prescribes eligible collateral as first mortgage loans less than 90 days delinquent or securities evidencing interests therein, securities (including mortgage-backed securities) issued, insured or guaranteed by the federal government or any agency thereof, FHLB deposits and, to a limited extent, real estate with readily ascertainable value in which a perfected security interest may be obtained. Other forms of collateral may be accepted as over collateralization or, under certain circumstances, to renew outstanding advances. All long-term advances are required to provide funds for residential home financing and the FHLB has established standards of community service that members must meet to maintain access to long-term advances. 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. Liquidity Federal regulations require the Bank to maintain minimum levels of liquid assets (cash, certain time deposits, bankers' acceptances, specified United States Government, state or federal agency obligations, shares of mutual funds and certain corporate debt securities and commercial paper) equal to an amount not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement may be changed from time to time by the OTS to an amount within the range of 4% to 10% depending upon economic conditions and savings flows of member institutions. The OTS recently lowered the level of liquid assets that must be held by a savings association from 5% to 4% of the association's net withdrawable accounts plus short-term borrowings based upon the average daily balance of such liquid assets for each quarter of the association's fiscal year. The Bank has historically maintained its liquidity ratio at a level in excess of that required. At June 30, 1998, the Bank's liquidity ratio was 7.3% and has averaged ____% over the past three years. The Bank has never been subject to monetary penalties for failure to meet its liquidity requirements. Insurance of Deposits The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance funds, the 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. Currently, thrifts may convert from one insurance fund to the other upon payment of certain exit and entrance fees. Such fees need not be paid if a SAIF member converts to a bank charter or merges with a bank, 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. 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. For the first six months of 1995, the assessment schedule for BIF members and SAIF members ranged from .23% to .31% of deposits. As is the case with the SAIF, the FDIC is authorized to adjust the insurance premium rates for banks that are insured by the BIF of the FDIC in order to maintain the reserve ratio of the BIF at 1.25% of BIF-insured deposits. As a result of the BIF reaching its statutory reserve ratio, the FDIC in 1995 revised the premium schedule for BIF insured institutions to provide a range of .04% to .31% of deposits. The revisions became effective in the third quarter of 1995. At that time, healthy BIF-insured banks paid premiums of approximately $.04 per $100 in deposits compared to $.23 per $100 in deposits paid by healthy SAIF-insured institutions. The BIF rates were further revised, effective January 1996, to provide a range of 0% to .27%, eliminating insurance premiums for healthy BIF-insured banks. The SAIF rates, however, were not adjusted. At the time the FDIC revised the BIF premium schedule, it noted that, absent legislative action (as discussed below), the SAIF would not attain its designated reserve ratio until the year 2002. As a result, SAIF-insured members would continue to be generally subject to higher deposit insurance premiums than BIF-insured institutions until, all things being equal, the SAIF attained its required reserve ratio of 1.25% of BIF-insured deposits. In order to eliminate this disparity and any competitive disadvantage between BIF and SAIF member institutions with respect to deposit insurance premiums, legislation to recapitalize the SAIF was enacted in September 1996. The legislation provided for a one time assessment to be imposed on all deposits assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the SAIF. It also provided for the merger of the BIF and the SAIF on January 1, 1999, if no savings associations then exist. The special assessment rate was established by the FDIC at .657% of deposits, and the resulting assessment of $776,717 on the Bank was accrued in September, 1996. This special assessment significantly increased noninterest expense and adversely affected the MCHI's results of operations for the three months ended September 30, 1996. As a result of the special assessment, the Bank's deposit insurance premiums were reduced to 6.48 basis points based upon its current risk classification and the new assessment schedule for SAIF-insured institutions. These premiums are subject to change in future periods. Prior to the enactment of the legislation, a portion of the SAIF assessment imposed on savings associations was used to repay obligations issued by a federally chartered corporation to provide financing ("FICO") for resolving the thrift crisis in the 1980s. Although the FDIC has equalized the SAIF assessment schedule with the BIF assessment schedule, SAIF-insured institutions remain subject to a FICO assessment as a result of this continuing obligation. Although the legislation also now requires assessments to be made on BIF-assessable deposits for this purpose, effective January 1, 1997, that assessment is limited to 20% of the rate imposed on SAIF assessable deposits until the earlier of September 30, 1999, or when no savings association continues to exist, thereby imposing a greater burden on SAIF member institutions such as the Bank. Thereafter, however, assessments on BIF-member institutions are expected to be made on the same basis as SAIF-member institutions. 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 up to 100% of tangible capital) of at least 1.5% of total assets. Under the risk-based capital requirements, a minimum amount of capital must be maintained by a savings association to account for the relative risks inherent in the type and amount of assets held by the savings association. The risk-based capital requirement requires a savings association to maintain capital (defined generally for these purposes as core capital plus general valuation allowances and permanent or maturing capital instruments such as preferred stock and subordinated debt less assets required to be deducted) equal to 8.0% of risk-weighted assets. Assets are ranked as to risk in one of four categories (0-100%) 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, 1998, the Bank was in compliance with all capital requirements. The OTS has promulgated a rule which sets forth the methodology for calculating an interest rate risk component to be used by savings associations in calculating regulatory capital. 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. An institution with an "above normal" level of exposure will have to maintain additional capital equal to one-half the difference between its measured interest rate risk (the most adverse change in the market value of its portfolio resulting from a 200-basis point move in interest rates divided by the estimated market value of its assets) and 2%, multiplied by the market value of its assets. That dollar amount of capital is in addition to an institution's existing risk-based capital requirement. Although the OTS has decided to delay implementation of this rule, it will continue to closely 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 to specific sanctions provided in Financial Institutions Reform, Recovery, and Enforcement Act ("FIRREA") for failing to meet capital requirements, 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 Federal Deposit Insurance Corporation Improvement Act of 1991, as amended ("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, 1998, 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. "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 restrictions 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 may, after prior notice but without the approval of the OTS, make capital distributions during a calendar year up to the greater of (a) 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 smallest excess over its capital requirements) at the beginning of the calendar year; or (b) 75% of its net income for the most recent four quarter period. Any additional amount of capital distributions would require prior regulatory approval. The OTS has proposed revisions to these regulations which would permit a savings association, without filing a prior notice or application with the OTS, to make a capital distribution to its shareholders in a maximum amount that does not exceed the association's undistributed net income for the prior two years plus the amount of its undistributed income from the current year. This proposed rule would require a savings association, such as the Bank, that is a subsidiary of a savings and loan holding company to file a notice with the OTS before making a capital distribution up to the "maximum amount" described above. The proposed rule would also require all savings associations, whether under a holding company or not, to file an application with the OTS prior to making any capital distribution where the association is not eligible for "expedited processing" under the OTS "Expedited Processing Regulation," or where the proposed distribution, together with any other distributions made in the same year, would exceed the maximum amount described above. Safety and Soundness Standards On February 2, 1995, the federal banking agencies adopted final safety and soundness standards for all insured depository institutions. The standards, which were issued in the form of guidelines rather than regulations, relate to internal controls, information systems, internal audit systems, loan underwriting and documentation, compensation and interest rate exposure. In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before capital becomes impaired. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan may result in enforcement proceedings. On August 27, 1996, the federal banking agencies added asset quality and earning standards to the safety and soundness guidelines. Real Estate Lending Standards OTS regulations require savings associations to establish and maintain written internal real estate lending policies. Each association's lending policies must be consistent with safe and sound banking practices and appropriate to the size of the association and the nature and scope of its operations. The policies must establish loan portfolio diversification standards; establish prudent underwriting standards, including loan-to-value limits, that are clear and measurable; establish loan administration procedures for the association's real estate portfolio; and establish documentation, approval, and reporting requirements to monitor compliance with the association's real estate lending policies. The association's written real estate lending policies must be reviewed and approved by the association's board of directors at least annually. Further, each association is expected to monitor conditions in its real estate market to ensure that its lending policies continue to be appropriate for current market conditions. Transactions with Affiliates The Bank and MCHI are subject to Sections 22(h), 23A and 23B of the Federal Reserve Act, which restrict financial transactions between banks and affiliated companies. The statute limits credit transactions between a bank and its executive officers and its affiliates, prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restricts the types of collateral security permitted in connection with a bank's extension of credit to an affiliate. Holding Company Regulation MCHI is regulated as a "non-diversified unitary savings and loan holding company" within the meaning of the Home Owners' Loan Act, as amended ("HOLA"), and subject to regulatory oversight of the Director of the OTS. As such, MCHI is registered with the OTS and thereby subject to OTS regulations, examinations, supervision and reporting requirements. As a subsidiary of a savings and loan holding company, the Bank is subject to certain restrictions in its dealings with MCHI and with other companies affiliated with MCHI. HOLA generally prohibits a savings and loan holding company, without prior approval of the Director of the OTS, from (i) acquiring control of any other savings association or savings and loan holding company or controlling the assets thereof or (ii) acquiring or retaining more than 5 percent of the voting shares of a savings association or holding company thereof which is not a subsidiary. Except with the prior approval of the Director of the OTS, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such company's stock may also acquire control of any savings institution, other than a subsidiary institution, or any other savings and loan holding company. MCHI's Board of Directors presently intends to continue to operate MCHI as a unitary savings and loan holding company. Under current law, there are generally no restrictions on the permissible business activities of a unitary savings and loan holding company. Notwithstanding the above rules as to permissible business activities of unitary savings and loan holding companies, if the savings association subsidiary of such a holding company fails to meet the Qualified Thrift Lender ("QTL") test, then such unitary holding company would become subject to the activities restrictions applicable to multiple holding companies. (Additional restrictions on securing advances from the FHLB also apply). See "--Qualified Thrift Lender." At June 30, 1998, 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. Indiana law permits federal and state savings association holding companies with their home offices located outside of Indiana to acquire savings associations whose home offices are located in Indiana and savings association holding companies with their principal place of business in Indiana ("Indiana Savings Association Holding Companies") upon receipt of approval by the Indiana Department of Financial Institutions. Moreover, Indiana Savings Association Holding Companies may acquire savings associations with their home offices located outside of Indiana and savings associations holding companies with their principal place of business located outside of Indiana upon receipt of approval by the Indiana Department of Financial Institutions. No subsidiary savings association of a savings and loan holding company may declare or pay a dividend on its permanent or nonwithdrawable stock unless it first gives the Director of the OTS 30 days advance notice of such declaration and payment. Any dividend declared during such period or without the giving of such notice shall be invalid. Federal Securities Law The shares of Common Stock of MCHI are registered with the SEC under the 1934 Act. MCHI is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the 1934 Act and the rules of the SEC thereunder. If MCHI has fewer than 300 shareholders, it may deregister the shares under the 1934 Act and cease to be subject to the foregoing requirements. Shares of Common Stock held by persons who are affiliates of MCHI may not be resold without registration or unless sold in accordance with the resale restrictions of Rule 144 under the 1933 Act. If MCHI meets the current public information requirements under Rule 144, each affiliate of MCHI who complies with the other conditions of Rule 144 (including conditions that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of MCHI or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Qualified Thrift Lender 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 consist primarily of housing related loans and investments. Certain assets are subject to a percentage limitation of 20% of portfolio 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, 1998, 79.75% of the Bank's portfolio assets (as defined on that date) were invested in qualified thrift investments (as defined on that date), and therefore the Bank's asset composition was in excess of that required to qualify the Bank as a QTL. Also, the Bank does not expect to significantly change its lending or investment activities in the near future. The Bank expects to continue to qualify as a QTL, although there can be no such assurance. Acquisitions or Dispositions and Branching The Bank Holding Company Act specifically authorizes a bank holding company, upon receipt of appropriate regulatory approvals, to acquire control of any savings association or holding company thereof wherever located. Similarly, a savings and loan holding company may acquire control of a bank. Moreover, federal savings associations may acquire or be acquired by any insured depository institution. Regulations promulgated by the FRB restrict the branching authority of savings associations acquired by bank holding companies. Savings associations acquired by bank holding companies may be converted to banks if they continue to pay SAIF premiums, but as such they become subject to branching and activity restrictions applicable to banks. Subject to certain exceptions, commonly controlled banks and savings associations must reimburse the FDIC for any losses suffered in connection with a failed bank or savings association affiliate. Institutions are commonly controlled if one is owned by another or if both are owned by the same holding company. Such claims by the FDIC under this provision are subordinate to claims of depositors, secured creditors, and holders of subordinated debt, other than affiliates. The OTS has adopted regulations which permit nationwide branching to the extent permitted by federal statute. Federal statutes permit federal savings associations to branch outside of their home state if the association meets the domestic building and loan test in ss.7701(a)(19) of the Code or the asset composition test of ss.7701(c) of the Code. Branching that would result in the formation of a multiple savings and loan holding company controlling savings associations in more than one state is permitted if the law of the state in which the savings association to be acquired is located specifically authorizes acquisitions of its state-chartered associations by state- chartered associations or their holding companies in the state where the acquiring association or holding company is located. Moreover, Indiana banks and savings associations are permitted to acquire other Indiana banks and savings associations and to establish branches throughout Indiana. In addition, 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 Indiana Branching Law authorizes Indiana banks to branch interstate by merger or de novo expansion. The Indiana Branching Law, effective March 15, 1996, provided that 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 merge or establish de novo branches on a reciprocal basis. Community Reinvestment Act Matters Federal law requires that ratings of depository institutions under the Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes both a four-unit descriptive rating -- outstanding, satisfactory, unsatisfactory and needs improvement -- and a written evaluation of each institution's performance. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member's performance under the CRA and its record of lending to first-time home buyers. The examiners have determined that the Bank has an outstanding record of meeting community credit needs. TAXATION Federal Taxation Historically, savings associations, such as the Bank, have been permitted to compute bad debt deductions using either the bank experience method or the percentage of taxable income method. However, for years beginning after December 31, 1995, the Bank is not able to use the percentage of taxable income method of computing its allowable tax bad debt deduction. The Bank will be required to compute its allowable deduction using the experience method. As a result of the repeal of the percentage of taxable income method, reserves taken after 1987 using the percentage of taxable income method generally must be included in future taxable income over a six-year period, although a two-year delay may be permitted for institutions meeting a residential mortgage loan origination test. In addition, the pre-1988 reserve, for which no deferred taxes have been recorded, will not have to be recaptured into income unless (i) the Bank no longer qualifies as a bank under the Code, or (ii) excess dividends are paid out by the Bank. Depending on the composition of its items of income and expense, a savings association may be subject to the alternative minimum tax. A savings association must pay an alternative minimum tax equal to the amount (if any) by which 20% of alternative minimum taxable income ("AMTI"), as reduced by an exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular taxable income increased or decreased by certain tax preferences and adjustments, including depreciation deductions in excess of that allowable for alternative minimum tax purposes, tax-exempt interest on most private activity bonds issued after August 7, 1986 (reduced by any related interest expense disallowed for regular tax purposes), the amount of the bad debt reserve deduction claimed in excess of the deduction based on the experience method and 75% of the excess of adjusted current earnings over AMTI (before this adjustment and before any alternative tax net operating loss). AMTI may be reduced only up to 90% by net operating loss carryovers, but alternative minimum tax paid that is attributable to most preferences can be credited against regular tax due in later years. State Taxation The Bank is subject to Indiana's Financial Institutions Tax ("FIT"), which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross income," for purposes of FIT, begins with taxable income as defined by Section 63 of the Code and, thus, incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several Indiana modifications the most notable of which is the required addback of interest that is tax-free for federal income tax purposes. Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes. MCHI's (or previously the Bank's) state income tax returns have not been audited in the last five years. Other The Securities and Exchange Commission maintains a Web site that contains reports, proxy information statements, and other information regarding registrants that file electronically with the Commission, including the Company. The address is (http://www.sec.gov). Item 2. Properties. At June 30, 1998, 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, 1998:
Net Book Value Total Deposits of Property, at Furniture Owned or Year June 30, & Approximate Description and Address Leased Opened 1998 Fixtures Square Footage - ----------------------- ------ ------ ---- -------- -------------- (Dollars in Thousands) Main Office in Marion 100 West Third Street.................. Owned 1936 $112,039 $1,382 17,949 Location in Decatur 1045 South 13th Street................. Owned 1974 10,409 146 3,611 Walmart Supercenter in Marion 3240 S. Western........................ Leased 1997 1,104 249 540 Location in Gas City 1010 E. Main Street.................... Owned 1997 10,863 152 2,276
The Company opened its first automated teller machine in May, 1995 at its Marion branch and now maintains a ATM at each branch location. The Company owns computer and data processing equipment which is used for transaction processing and accounting. The net book value of electronic data processing equipment owned by the Company was $235,000 at June 30, 1998. 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 $24,500 per month. Item 3. Legal Proceedings. The Company is not a party to any material pending legal proceeding. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of MCHI's shareholders during the quarter ended June 30, 1998. 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 64) 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 50) has been employed by MCHI since November, 1992. He became Sr. Vice President of the Bank in 1996 and has served as Treasurer of the Bank since 1983, Secretary of the Bank since 1989 and Secretary and Treasurer of First Marion since 1989. Mr. Phillips served as Vice President and Treasurer of the Bank from 1983 to 1996. Steven L. Banks (age 48) 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 53) 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, 1998.......... $28 1/2 $29 1/2 $28 $.22 March 31, 1998......... 28 1/2 29 25 7/8 .22 December 31, 1997...... 27 1/8 28 1/8 26 1/4 .22 September 30, 1997..... 28 28 22 .22 June 30, 1997.......... 28 23 1/4 22 1/2 .22 March 31, 1997......... 22 22 19 1/4 .20 December 31, 1996...... 19 1/4 21 1/2 19 1/4 .20 September 30, 1996..... 20 1/2 21 20 .20
As of July 31, 1998, there were 426 record holders of MCHI's Common Stock. MCHI estimates that, as of that date, there were approximately 850 additional shareholders in "street" name. The Company's percentage of dividends per share to net income per share on a diluted basis was 68.2%, 62.6% and 60.2% for the years ended June 30, 1998, 1997 and 1996, 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 (a) 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 (the smallest excess over its capital requirements), or (b) 75% of its net income over the most recent four-quarter period. Any additional amount of capital distributions would require prior regulatory approval. The OTS has proposed revisions to these regulations which would permit a savings association, without filing a prior notice or application with the OTS, to make a capital distribution to its shareholders in a maximum amount that does not exceed the association's undistributed net income for the prior two years plus the amount of its undistributed income from the current year. This proposed rule would require a savings association, such as the Bank, that is a subsidiary of a savings and loan holding company to file a notice with the OTS before making a capital distribution up to the "maximum amount" described above. The proposed rule would also require all savings associations, whether under a holding company or not, to file an application with the OTS prior to making any capital distribution where the association is not eligible for "expedited processing" under the OTS "Expedited Processing Regulation," or where the proposed distribution, together with any other distributions made in the same year, would exceed the "maximum amount" described above. Under current federal income tax law, dividend distributions with respect to the Common Stock, to the extent that such dividends paid are from the current or accumulated earnings and profits of the Bank (as calculated for federal income tax purposes), will be taxable as ordinary income to the recipient and will not be deductible by the Bank. Any dividend distributions in excess of current or accumulated earnings and profits will be treated for federal income tax purposes as a distribution from the Bank's accumulated bad debt reserves, which could result in increased federal income taxes liability for the Bank. Unlike the Bank, generally there is no regulatory restriction on the payment of dividends by MCHI. Indiana law, however, would prohibit MCHI from paying a dividend if, after giving effect to the payment of that dividend, MCHI would not be able to pay its debts as they become due in the ordinary course of business or if MCHI's total assets would be less that the sum of its total liabilities plus preferential rights of holders of preferred stock, if any. Item 6. Selected Consolidated Financial Data The information required by this item is incorporated by reference to the material under the heading "Selected Consolidated Financial Information" on page 2 of MCHI's Shareholder Annual Report for its fiscal year ended June 30, 1998 (the "Shareholder Annual Report"). Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information required by this item is incorporated by reference to pages 3 through 16 of the Shareholder Annual Report. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The information required by this item is incorporated by reference to pages 3 through 5 of the Shareholder Annual Report. Item 8. Financial Statements and Supplementary Data. MCHI's Consolidated Financial Statements and Notes thereto contained on pages 17 through 44 in the Shareholder Annual Report are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. There were no such changes or disagreements during the applicable period. 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 1998 Annual Shareholder Meeting (the "1998 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 1998 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 1998 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this item is incorporated by reference to page 3 of the 1998 Proxy Statement. Item 13. Certain Relationships and Related Transactions. The information required by this item is incorporated by reference to page 6 of the 1998 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, 1998, and 1997 Consolidated Statement of Income for the Fiscal Years ended June 30, 1998, 1997 and 1996 Consolidated Statement of Changes in Shareholders' Equity for the Fiscal Years ended June 30, 1998, 1997 and 1996 Consolidated Statement of Cash Flows for the Fiscal Years ended June 30, 1998, 1997, and 1996 Notes to Consolidated Financial Statements (b) MCHI filed no reports on Form 8-K during the fourth quarter ended June 30, 1998. (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 24, 1998 /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 24th day of September, 1998. /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/ W. Gordon Coryea - ------------------------------ ----------------------------- Larry G. Phillips W. Gordon Coryea, Director Senior Vice President, Secretary and Treasurer (Principal Financial and Accounting Officer) /s/ Jerry D. McVicker ----------------------------- Jerry D. McVicker, Director /s/ Jack O. Murrell ----------------------------- Jack O. Murrell, Director /s/ George L. Thomas ----------------------------- George L. Thomas, Director /s/ Jon R. Marler ----------------------------- Jon R. Marler, 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 Registrant's definitive Proxy Statement in respect of its 1993 Annual Shareholder meeting. 10(2) Recognition and Retention Plans and Trusts are incorporated by reference to Exhibit B to the Registrant's definitive Proxy Statement in respect of its 1993 Annual Shareholder meeting. 10(3) Director Deferred Compensation Agreement effective May 1, 1992, between the Bank and Merritt B. McVicker is incorporated by reference to Exhibit 10(6) to the Registration Statement on Form S-1 (Registration No. 33-55052). First Amendment to Director Deferred Compensation Agreement of Merritt B. McVicker dated December 1, 1996 is incorporated by reference to Exhibit 10(3) of the Registrant's Form 10-K for the period ended June 30, 1997. 10(4) Director Deferred Compensation Agreement effective May 1, 1992, between the Bank and John M. Dalton is incorporated by reference to Exhibit 10(7) to the Registration Statement on Form S-1 (Registration No. 33-55052). First Amendment to Director Deferred Compensation Agreement of John M. Dalton dated December 1, 1996 is incorporated by reference to Exhibit 10(4) of the Registrant's Form 10-K for the period ended June 30, 1997. 10(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 Director Deferred Compensation Agreement of Robert D. Burchard dated December 1, 1996 is incorporated by reference to Exhibit 10(5) of the Registrant's Form 10-K for the period ended June 30, 1997. 10(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 Director Deferred Compensation Agreement of James (Jack ) O. Murrell dated December 1, 1996 is incorporated by reference to Exhibit 10(6) of the Registrant's Form 10-K for the period ended June 30, 1997. 10(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 Director Deferred Compensation Agreement of W. Gordon Coryea dated December 1, 1996 is incorporated by reference to Exhibit 10(7) of the Registrant's Form 10-K for the period ended June 30, 1997. Exhibit Index Page 10(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 Director Deferred Compensation Agreement of George L. Thomas dated December 1, 1996 is incorporated by reference to Exhibit 10(8) of the Registrant's Form 10-K for the period ended June 30, 1997. 10(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 is incorporated by reference to Exhibit 10(9) to the Annual Report on Form 10-K for fiscal year ended June 30, 1994. 10(10) Defered Compensation Agreement between the Bank and Gordon Coryea dated April 30, 1988, as amended as of May 1, 1992, is incorporated by reference to Exhibit 10(13) to the Registration Statement on Form S-1 (Registration No. 33-55052). 10(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). 10(12) Restated Executive Supplemental Retirement Agreement effective December 1, 1996 between the Bank and John M. Dalton is incorporated by reference to Exhibit 10(12) of the Registrant's Form 10-K for the period ended June 30, 1997. 10(13) Restated Executive Supplemental Retirement Agreement effective December 1, 1996 between the Bank and Robert D. Burchard is incorporated by reference to Exhibit 10(13) of the Registrant's Form 10-K for the period ended June 30, 1997. 10(14) Restated Executive Supplemental Retirement Agreement effective December 1, 1996 between the Bank and Jackie Noble is incorporated by reference to Exhibit 10(14) of the Registrant's Form 10-K for the period ended June 30, 1997. 10(15) Restated Executive Supplemental Retirement Agreement effective December 1, 1996 between the Bank and Nora Kuntz is incorporated by reference to Exhibit 10(15) of the Registrant's Form 10-K for the period ended June 30, 1997. 10(16) Executive Supplemental Retirement Agreement effective December 1, 1996 between the Bank and Larry G. Phillips is incorporated by reference to Exhibit 10(16) of the Registrant's Form 10-K for the period ended June 30, 1997. 10(17) 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). 10(18) Death Benefit Agreement between the Bank and Steven L. Banks dated December 1, 1996 is incorporated by reference to Exhibit 10(18) of the Registrant's Form 10-K for the period ended June 30, 1997 . 10(19) Excess Benefit Agreement dated as of Februry 28, 1996 between the Bank and John M. Dalton is incorporated by reference to Exhibit 10(18) to the Annual Report on Form 10-K for the fiscal year ended June 30, 1996. First Amendment to Excess Benefit Agreement of John M. Dalton dated December 1, 1996 is incorporated by reference to Exhibit 10(19) of the Registrant's Form 10-K for the period ended June 30, 1997. Exhibit Index Page 10(20) Excess Benefit Agreement dated as of Februry 28, 1996 between the Bank and Robert D. Burchard is incorporated by reference to Exhibit 10(19) to the Annual Report on Form 10-K for the fiscal year ended June 30, 1996. First Amendment to Excess Benefit Agreement of Robert D. Burchard dated December 1, 1996 is incorporated by reference to Exhibit 10(20) of the Registrant's Form 10-K for the period ended June 30, 1997. 10(21) Director Emeritus Agreement dated March 1, 1996 between the Bank and W. Gordon Coryea and First Amendment to such agreement dated December 1, 1996 is incorporated by reference to Exhibit 10(21) of the Registrant's Form 10-K for the period ended June 30, 1997. 10(22) Director Emeritus Agreement dated March 1, 1996 between the Bank and George L. Thomas and First Amendment to such agreement dated December 1, 1996 is incorporated by reference to Exhibit 10(22) of the Registrant's Form 10-K for the period ended June 30, 1997. 10(23) Director Emeritus Agreement dated March 1, 1996 between the Bank and John M. Dalton and First Amendment to such agreement dated December 1, 1996 is incorporated by reference to Exhibit 10(23) of the Registrant's Form 10-K for the period ended June 30, 1997. 10(24) Director Emeritus Agreement dated March 1, 1996 between the Bank and Jack O. Murrell and First Amendment to such agreement dated December 1, 1996 is incorporated by reference to Exhibit 10(24) of the Registrant's Form 10-K for the period ended June 30, 1997. 10(25) Contingent Executive Supplemental Retirement Income Agreement between the Bank and Steven L. Banks dated December 1, 1996 is incorporated by reference to Exhibit 10(25) of the Registrant's Form 10-K for the period ended June 30, 1997. 10(26) Rabbi Trust for the Director Deferred Compensation Master Agreement and Director Emeritus Plan dated December 1, 1996 is incorporated by reference to Exhibit 10(26) of the Registrant's Form 10-K for the period ended June 30, 1997. 10(27) Rabbi Trust for the Executive Supplemental Retirement Income Plans and Excess Benefit Plans dated December 1, 1996 is incorporated by reference to Exhibit 10(27) of the Registrant's Form 10-K for the period ended June 30, 1997. 13 1998 Shareholder Annual Report. ____ 21 Subsidiaries of the Registrant is incorporated by reference to Exhibit 22 to the Registration Statement on Form S-1 (Registration No. 33-55052). 23 Consent of Auditors ____ 27.1 Financial Data Schedule for Period Ended June 30, 1998 ____ 27.2 Restated Financial Data Schedule for Period Ended June 30, 1997 ____ 27.3 Restated Financial Data Schedule for Period Ended June 30, 1996 ____ - ----------------- * Management contracts and plans required to be filed as exhibits are included as Exhibits 10(1)-10(27). EX-13 2 ANNUAL REPORT Message to Shareholders...................................................... 1 Selected Consolidated Financial Data......................................... 2 Management's Discussion and Analysis......................................... 3 Independent Auditor's Report.................................................17 Consolidated Statement of Financial Condition................................18 Consolidated Statement of Income.............................................19 Consolidated Statement of Changes in Shareholders' Equity....................20 Consolidated Statement of Cash Flows.........................................21 Notes to Consolidated Financial Statements...................................23 Directors and Officers.......................................................45 Shareholder Information......................................................47 Marion Capital Holdings, Inc. ("MCHI"), an Indiana corporation, became a unitary savings and loan holding company upon the conversion of First Federal Savings Bank of Marion ("First Federal" and, together with MCHI, the "Company") from a federally chartered mutual savings bank to a federally chartered stock savings bank in March, 1993. The Company conducts business from a single office in Marion, Grant County, Indiana, and First Federal has three branch offices--one in Decatur, Indiana, one inside the Wal-Mart Supercenter in Marion, Indiana and one in Gas City, Grant County, Indiana. First Federal is and historically has been among the top real estate mortgage lenders in Grant County and is the largest independent financial institution headquartered in Grant County. First Federal offers a variety of lending, deposit and other financial services to its retail and commercial customers. MCHI has no other business activity than being the holding company for First Federal, except that during the years ended June 30, 1997 and 1998, MCHI extended $3.0 million in loans, and during the year ended June 30, 1998, MCHI invested $650,000 into an insurance company affiliate. MCHI is the sole shareholder of First Federal. To Our Shareholders It has now been over five years since Marion Capital Holdings, Inc. began operations in March 1993 as a result of the conversion of First Federal Marion to a federal stock savings Bank. First Federal has been in existence since July 1936. During the year ended June 30, 1998 loans, including loans held for sale, increased to $164,475,000 or 11.2%. This was by far the largest dollar and percentage increase in the history of this organization. The net yield on weighted average interest-earning assets decreased from 4.29% to 4.28% reflecting lower overall interest rates, but also reflecting the increase in commercial and consumer loans. Assets and deposits grew by 11.9% and 10.4%, respectively, during the year ended June 30, 1998. These increases were primarily due to the acquisition of our Gas City, Indiana office and the start-up of our sales office in the Marion Wal-Mart Supercenter. Both operations, as well as the Decatur office, have done well. Gas City has exceeded our expectations, with the Wal-Mart office slightly above our hopes. During the fiscal year ending June 30, 1998, net income was $2,324,000, a decrease of $116,000, or 4.8%. This decrease was primarily the result of: (1) costs for two new branches established in the past year; and (2) an operating loss as a result of a deed in lieu of foreclosure on a nursing home. Basic earnings per share for the year ended June 30, 1998 were $1.32, a decrease of 2.2%. Net interest income increased to $7,240,000 or 3.0% in the past year. Interest rate spread increased to 3.37% for the year ended June 30, 1998 from 3.21% for the year ended June 30, 1997. As we approach the year 2000 we wish to inform you that we are placing great emphasis on making sure our systems are ready for the year 2000 change. We have adopted a plan and are expected to have critical steps completed well before the end of this century. At the end of October, 1998, George L. Thomas will be retiring from our Board of Directors. Mr. Thomas has been an outstanding director and has served First Federal for over 36 years and Marion Capital since its beginning in 1993. In June 1998, we capitalized on a unique opportunity to focus and energize our life insurance product offerings through an equity participation in Family Financial Life Insurance Company. Family Financial Life is a fully chartered life insurance company owned by a group of savings banks. In operation since 1984, Family Financial Life has an impressive track record of growth, profits and returns to its financial institution owners. We are now offering a full range of life and annuity products with a most advantageous method to increase insurance earnings and exercise complete control over the quality of insurance products and services. As the Board of Directors continues to focus on opportunities to enhance stockholder value for the future, our primary objective is to grow the current retail franchise. This includes increasing the asset size of First Federal by capturing more business from our current customer base in addition to increasing the services that we provide. In late 1997, we successfully completed the acquisition of a branch and its deposit base in Gas City, and established a retail sales office in the Marion Wal-Mart. We will continue to actively review and pursue acquisition opportunities with a continued focus on the ultimate long-term effect on our shareholders and franchise value. With our high level of capital, it is difficult to generate a strong return on equity. Your Board will continue to pursue steps to profitably leverage this capital position. Included in the capital use plan is the intention to continue the payment of above market dividends to our shareholders. During the last thirteen months, through July 31, 1998, we also successfully completed the repurchase of 158,129 shares or 9% of the outstanding stock. It is our belief that the continued repurchasing of stock, in addition to an increased retail presence, are the most viable methods to enhance shareholder value. Your continued support and confidence are appreciated as we strive to improve this financial institution. Very truly yours, /s/ John M. Dalton John M. Dalton Chairman of the Board & President 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, -------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In Thousands) Summary of Financial Condition: Total assets......................................... $193,963 $173,304 $177,767 $172,711 $170,799 Loans, net........................................... 163,598 148,031 143,165 136,323 127,092 Loans held for sale.................................. 877 --- --- --- --- Cash and investment securities....................... 10,186 11,468 21,578 23,743 30,863 Real estate limited partnerships..................... 4,883 1,449 1,624 1,527 1,422 Deposits............................................. 134,415 121,770 126,260 120,613 120,965 Borrowings........................................... 17,319 8,229 6,241 6,963 3,200 Shareholders' equity................................. 37,657 39,066 41,511 41,864 44,331
YEAR ENDED JUNE 30, -------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In Thousands) Summary of Operating Results: Interest income...................................... $ 14,333 $13,733 $13,740 $ 12,786 $ 12,391 Interest expense..................................... 7,093 6,707 6,853 5,922 5,872 --------- ------- ------- --------- --------- Net interest income............................... 7,240 7,026 6,887 6,864 6,519 Provision for losses on loans........................ 59 58 34 68 65 --------- ------- ------- --------- --------- Net interest income after provision for losses on loans................... 7,181 6,968 6,853 6,796 6,454 --------- ------- ------- --------- --------- Other income: Net loan servicing fees........................... 78 86 81 69 62 Annuity and other commissions..................... 142 153 147 144 211 Other income...................................... 209 181 95 76 83 Equity in losses of limited partnerships.......... (200) (305) (193) (185) (236) Gains (losses) on sale of investments ............ --- -- -- -- 15 Life insurance income and death benefits.......... 175 808 117 108 21 --------- ------- ------- --------- --------- Total other income................................ 404 923 247 213 155 --------- ------- ------- --------- --------- Other expense: Salaries and employee benefits.................... 2,556 2,881 2,413 2,447 1,991 Other............................................. 1,846 2,170 1,293 1,216 1,634 --------- ------- ------- --------- --------- Total other expense............................. 4,402 5,051 3,706 3,663 3,625 --------- ------- ------- --------- --------- Income before income tax ............................ 3,183 2,840 3,394 3,346 2,984 Income tax expense................................... 859 400 913 916 715 --------- ------- ------- --------- --------- Net Income........................................ $ 2,324 $ 2,440 $ 2,481 $ 2,430 $ 2,269 ========= ========= ======= ========= =========
Supplemental Data: Basic earnings per share.............................$ 1.32 $ 1.35 $ 1.27 $ 1.18 $ 1.02 Diluted earnings per share........................... 1.29 1.31 1.23 1.14 .99 Book value per common share at end of year........... 22.16 22.09 21.47 21.08 20.20 Return on assets (1)................................. 1.25% 1.40% 1.41% 1.41% 1.29% Return on equity (2)................................. 5.94 6.09 5.86 5.58 5.00 Interest rate spread (3)............................. 3.37 3.21 3.01 3.20 2.96 Net yield on interest earning assets (4)............. 4.28 4.29 4.17 4.28 3.97 Operating expenses to average assets (5)............. 2.36 2.89 2.11 2.12 2.05 Net interest income to operating expenses (6)........ 1.64x 1.39x 1.86x 1.87x 1.80x Equity-to-assets at end of year (7).................. 19.41 22.54 23.35 24.24 25.96 Average equity to average total assets............... 21.00 22.89 24.09 25.27 25.72 Average interest-earning assets to average interest-bearing liabilities...................... 121.82 126.34 127.93 129.08 128.37 Non-performing assets to total assets................ 1.02 .81 1.07 1.13 3.20 Non-performing loans to total loans (8).............. 1.16 .94 1.18 1.27 3.59 Loan loss reserve to total loans (8)................. 1.25 1.35 1.38 1.45 1.59 Loan loss reserve to non-performing loans............ 107.71 143.98 117.07 114.87 44.21 Net charge-offs to average loans..................... --- .02 .03 .08 .05 Number of full service offices....................... 4 2 2 2 2
(1) Net income divided by average total assets. (2) Net income divided by average total equity. (3) Interest rate spread is calculated by subtracting combincd weighted average interest rate cost from combined weighted average interest rate earned for the period indicated. (4) Net interest income divided by average interest-earnings assets. (5) Other expense divided by average total assets. (6) Net interest income divided by other expense. (7) Total equity divided by assets. (8) Total loans include loans held for sale. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The principal business of thrift institutions, including First Federal, has historically consisted of attracting deposits from the general public and making loans secured by residential and commercial real estate. First Federal and all other savings associations are significantly affected by prevailing economic conditions, as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, housing and financial institutions. Deposit flows are influenced by a number of factors, including interest rates paid on competing investments, account maturities and level of personal income and savings. In addition, deposit growth is affected by how customers perceive the stability of the financial services industry amid various current events such as regulatory changes, failures of other financial institutions and financing of the deposit insurance fund. Lending activities are influenced by the demand for and supply of housing lenders, the availability and cost of funds and various other items. Sources of funds for lending activities include deposits, payments on loans, proceeds from sale of loans, borrowings, and funds provided from operations. The Company's earnings are primarily dependent upon net interest income, the difference between interest income and interest expense. Interest income is a function of the balances of loans and investments outstanding during a given period and the yield earned on such loans and investments. Interest expense is a function of the amounts of deposits and borrowings outstanding during the same period and rates paid on such deposits and borrowings. The Company's earnings are also affected by provisions for loan and real estate losses, service charges, income from subsidiary activities, operating expenses and income taxes. Asset/Liability Management First Federal is subject to interest rate risk to the degree that its interest-bearing liabilities, primarily deposits with short- and medium-term maturities, mature or reprice at different rates than its interest-earning assets. Although having liabilities that mature or reprice less frequently on average than assets will be beneficial in times of rising interest rates, such an asset/liability structure will result in lower net income during periods of declining interest rates, unless offset by other factors. First Federal protects against problems arising in a falling interest rate environment by requiring interest rate minimums on its residential and commercial real estate adjustable-rate mortgages and against problems arising in a rising interest rate environment by having in excess of 85% of its mortgage loans with adjustable rate features. Management believes that these minimums, which establish floors below which the loan interest rate cannot decline, will continue to reduce its interest rate vulnerability in a declining interest rate environment. For the loans which do not adjust because of the interest rate minimums, there is an increased risk of prepayment. First Federal believes it is critical to manage the relationship between interest rates and the effect on its net portfolio value ("NPV"). This approach calculates the difference between the present value of expected cash flows from assets and the present value of expected cash flows from liabilities, as well as cash flows from off-balance sheet contracts. First Federal manages assets and liabilities within the context of the marketplace, regulatory limitations and within its limits on the amount of change in NPV which is acceptable given certain interest rate changes. The OTS issued a regulation, which uses a net market value methodology to measure the interest rate risk exposure of savings associations. Under this OTS regulation, an institution's "normal" level of interest rate risk in the event of an assumed change in interest related is a decrease in the institution's NPV in an amount not exceeding 2% of the present value of its assets. Savings associations with over $300 million in assets or less than a 12% risk-based capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is used by the OTS to calculate changes in NPV (and the related "normal" level of interest rate risk) based upon certain interest rate changes (discussed below). Associations which do not meet either of the filing requirements are not required to file OTS Schedule CMR, but may do so voluntarily. As First Federal does not meet either or these requirements, it is not required to file Schedule CMR, although it does so voluntarily. Under the regulation, associations which must file are required to take a deduction (the interest rate risk capital component) from their total capital available to calculate their risk-based capital requirement if their interest rate exposure is greater than "normal." The amount of that deduction is one-half of the difference between (a) the institution's actual calculated exposure to a 200 basis point interest rate increase or decrease (whichever results in the greater pro forma decrease in NPV) and (b) its "normal" level of exposure which is 2% of the present value of its assets. Presented below, as of June 30, 1998 and 1997, is an analysis performed by the OTS of First Federal's interest rate risk as measured by changes in NPV for instantaneous and sustained parallel shifts in the yield curve, in 100 basis point increments, up and down 400 basis points. At June 30, 1998 and 1997, 2% of the present value of First Federal's assets were approximately $3.8 million and $3.5 million. Because the interest rate risk of a 200 basis point decrease in market rates (which was greater than the interest rate risk of a 200 basis point increase) was $.4 million at June 30, 1998 and $1.6 million at June 30, 1997, First Federal would not have been required to make a deduction from its total capital available to calculate its risk based capital requirement if it had been subject to the OTS's reporting requirements under this methodology. The decrease in interest rate risk from 1997 to 1998 is due to an improved match of expected cash flows from assets and liabilities. Interest Rate Risk As of June 30, 1998
Change Net Portfolio Value NPV as % of Present Value of Assets In Rates $ Amount $ Change % Change NPV Ratio Change - --------------------------------------------------------------------------------------------------------------- (Dollars in thousands) + 400 bp * $34,387 $(2,124) (6)% 18.88% (35) bp + 300 bp 35,650 (861) (2) 19.30 6 bp + 200 bp 36,521 10 0 19.53 30 bp + 100 bp 36,845 333 1 19.52 29 bp 0 bp 36,511 19.23 - 100 bp 36,088 (424) (1) 18.90 (33) bp - 200 bp 36,072 (439) (1) 18.74 (49) bp - 300 bp 36,264 (247) (1) 18.67 (56) bp - 400 bp 36,694 183 1 18.69 (54) bp
Interest Rate Risk As of June 30, 1997 Change Net Portfolio Value NPV as % of Present Value of Assets In Rates $ Amount $ Change % Change NPV Ratio Change - --------------------------------------------------------------------------------------------------------------- (Dollars in thousands) + 400 bp * $37,509 $(3,023) (7)% 22.46% (64) bp + 300 bp 38,899 (1,633) (4) 22.93 (17) bp + 200 bp 40,000 (532) (1) 23.24 14 bp + 100 bp 40,606 74 0 23.32 22 bp 0 bp 40,532 --- --- 23.10 --- bp - 100 bp 39,809 (723) (2) 22.59 (51) bp - 200 bp 38,899 (1,633) (4) 21.99 (111) bp - 300 bp 38,510 (2,022) (5) 21.62 (148) bp - 400 bp 38,377 (2,155) (5) 21.37 (173) bp
- ----------- * Basis points. As with any method of measuring interest rate risk, certain shortcomings are inherent in the methods of analysis presented above. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable rate loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Most of First Federal's adjustable-rate loans have interest rate minimums of 6.00% for residential loans and 8.25% for commercial real estate loans. Currently, originations of residential adjustable-rate mortgages have interest rate minimums of 6.50%. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase although First Federal does underwrite these mortgages at approximately 4.0% above the origination rate. The company considers all of these factors in monitoring its exposure to interest rate risk. 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, ------------------------------------------------------------------------------ 1998 1997 1996 ------------------------- ------------------------ ------------------------- Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost ------- -------- ---- ------- -------- ---- ------- -------- ---- (Dollars in Thousands) Assets: Interest-earning assets: Interest-earning deposits........$ 4,020 $ 287 7.14%$ 3,937 $ 264 6.71% $ 4,972 $ 334 6.72% Investment securities............ 5,739 333 5.80 9,517 528 5.55 17,306 877 5.07 Loans (1) .................... 158,212 13,627 8.61 149,170 12,862 8.62 141,946 12,456 8.78 Stock in FHLB of Indianapolis.... 1,067 86 8.06 1,002 79 7.88 927 73 7.87 -------- ------ -------- ------ -------- ------ Total interest-earning assets. 169,038 14,333 8.48 163,626 13,733 8.39 165,151 13,740 8.32 Non-interest earning assets........... 17,257 --- 11,153 -- 10,762 -- -------- ------ -------- ------ -------- ------ Total assets................... $186,295 14,333 $174,779 13,733 $175,913 13,740 ======== ------ ======== ------ ======== ------ Liabilities and shareholders' equity: Interest-bearing liabilities: Savings accounts................. $ 15,983 447 2.80 $ 16,681 483 2.90 $18,127 588 3.24 NOW and money market accounts.... 25,071 830 3.31 19,817 657 3.32 18,718 667 3.56 Certificates of deposit.......... 86,867 5,164 5.94 85,636 5,104 5.96 84,650 5,089 6.01 -------- ------ -------- ------ -------- ------ Total deposits................ 127,921 6,441 5.04 122,134 6,244 5.11 121,495 6,344 5.22 FHLB borrowings.................. 10,840 652 6.01 7,382 463 6.27 6,694 457 6.83 Other borrowings................. --- --- -- -- 901 52 5.77 -------- ------ -------- ------ -------- ------ Total interest-bearing liabilities................... 138,761 7,093 5.11 129,516 6,707 5.18 129,090 6,853 5.31 Other liabilities .................... 8,409 --- 5,259 -- 4,451 -- Total liabilities.............. 147,170 --- 134,775 -- 133,541 -- Shareholders' equity.................. 39,125 --- 40,004 -- 42,372 -- -------- ------ -------- ------ -------- ------ Total liabilities and shareholders' equity .................... $186,295 $ 7,093 $174,779 6,707 $172,913 6,853 ======== ------ ======== ------ ======== ------ Net interest-earning assets........... $ 30,277 $ 34,110 $ 36,061 Net interest income................... $ 7,240 $ 7,026 $ 6,887 ======= ======= ======= Interest rate spread (2).............. 3.37 3.21 3.01 Net yield on weighted average interest-earning assets (3)...... 4.28 4.29 4.17 Average interest-earning assets to average interest-bearing liabilities..... 121.82% 126.34% 127.93% ====== ====== ======
(1) Average balances include loans held for sale and non-accrual loans. (2) Interest rate spread is calculated by subtracting combined weighted average interest rate cost from combined weighted average interest rate earned for the period indicated. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Interest Rate Spread." (3) The net yield on weighted average interest-earning assets is calculated by dividing net interest income by weighted average interest-earning assets for the period indicated. Interest Rate Spread The following table sets forth the weighted average effective interest rate earned by the Company on its loan and investment portfolios, the weighted average effective cost of the Company's deposits, the interest rate spread of the Company, and the net yield on weighted average interest-earning assets for the period and as of the date shown. Average balances are based on month-end average balances.
Year Ended June 30, At ---------------------------------------- June 30, 1998 1998 1997 1996 ------------- ---- ---- ---- Weighted average interest rate earned on: Interest-earning deposits................. 5.80% 7.14% 6.71% 6.72% Investment securities..................... 5.98 5.80 5.55 5.07 Loans (1) ............................. 8.45 8.61 8.62 8.78 Stock in FHLB of Indianapolis............. 7.96 8.06 7.88 7.87 Total interest-earning assets......... 8.35 8.48 8.39 8.32 Weighted average interest rate cost of: Savings accounts.......................... 2.81 2.80 2.90 3.24 NOW and money market accounts............. 3.19 3.31 3.32 3.56 Certificates of deposit................... 5.99 5.94 5.96 6.01 FHLB borrowings........................... 6.08 6.01 6.27 6.83 Other borrowings.......................... --- --- --- 5.77 Total interest-bearing liabilities.... 5.13 5.11 5.18 5.31 Interest rate spread (2)....................... 3.22 3.37 3.21 3.01 Net yield on weighted average interest-earning assets (3)............... 4.28 4.29 4.17
(1) Average balances include loans held for sale and non-accrual loans. (2) Interest rate spread is calculated by subtracting combined weighted average interest rate cost from combined weighted average interest rate earned for the period indicated. Interest rate spread figures must be considered in light of the relationship between the amounts of interest-earning assets and interest-bearing liabilities. Since MCHI's interest-earning assets exceeded its interest-bearing liabilities for each of the three years shown above, a positive interest rate spread resulted in net interest income. (3) The net yield on weighted average interest-earning assets is calculated by dividing net interest income by weighted average interest-earning assets for the period indicated. No net yield figure is presented at June 30, 1998, because the computation of net yield is applicable only over a period rather than at a specific date. 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, 1998 compared to year ended June 30, 1997 Interest-earning assets: Interest-earning deposits...................$ 23 $ 17 $ 6 Investment securities....................... (195) 23 (218) Loans....................................... 765 (14) 779 Stock in FHLB of Indianapolis............... 7 2 5 -------- -------- ------- Total..................................... 600 28 572 -------- -------- ------- Interest-bearing liabilities: Savings accounts............................ (36) (16) (20) NOW and money market accounts............... 173 (1) 174 Certificates of deposit..................... 60 (13) 73 FHLB advances............................... 189 (20) 209 -------- -------- ------- Total..................................... 386 (50) 436 -------- -------- ------- Change in net interest income................... $ 214 $ 78 $ 136 ======== ======== ======= Year ended June 30, 1997 compared to year ended June 30, 1996 Interest-earning assets: Interest-earning deposits................... $ (70) $ (1) $ (69) Investment securities....................... (349) 77 (426) Loans....................................... 406 (220) 626 Stock in FHLB of Indianapolis............... 6 --- 6 -------- -------- ------- Total..................................... (7) (144) 137 -------- -------- ------- Interest-bearing liabilities: Savings accounts............................ (105) (60) (45) NOW and money market accounts............... (10) (48) 38 Certificates of deposit..................... 15 (44) 59 FHLB advances............................... 6 (39) 45 Other borrowings............................ (52) --- (52) -------- -------- ------- Total..................................... (146) (191) 45 -------- -------- ------- Change in net interest income................... $ 139 $ 47 $ 92 ======== ======== =======
Changes in Financial Position and Results of Operations - Year Ended June 30, 1998, Compared to Year Ended June 30, 1997: General. MCHI's total assets were $194.0 million at June 30, 1998, an increase of $20.7 million or 11.9% from June 30, 1997. During 1998, average interest-earnings assets increased $5.4 million, or 3.3%, while average interest-bearing liabilities increased $9.2 million, or 7.1%, compared to June 30, 1997. Cash and cash equivalents and investment securities decreased $1.3 million, or 11.2%, primarily as a result of their use in funding increased loan originations. Net loans, including loans held for sale, increased $16.4 million, or 11.1%, primarily from originations of 1- 4 family real estate loans, and 1-4 family equity lending. Certain loans originated during the year were sold to other investors. All such loan sales were consummated at the time of origination of the loan, and at June 30, 1998, $877,000 of loans were held for sale pending settlement. There were no loans in the portfolio held for sale at June 30, 1997. Deposits increased $12.6 million, to $134.4 million, or 10.4%, at June 30, 1998 from the amount reported last year. The increase in deposits is directly attributable to the acquisition of a new branch in Gas City, Indiana from NBD First Chicago Bank. The branch was acquired on December 5, 1997 and deposits, net of public funds, amounted to $11,045,017 on that date. In addition to acquiring the deposits, the Company also acquired the branch facilities and equipment and retained the existing staff. The deposits and intangibles were acquired at a premium of $865,710. MCHI's net income for the year ended June 30, 1998 was $2.3 million, a decrease of $116,000, or 4.8% from the results for the year ended June 30, 1997. Net interest income increased $214,000, or 3.0%, from the previous year, and provision for losses on loans in the amount of $59,000 increasd $1,000 from that recorded in 1997. Salaries and employee benefits expense decreased from the prior year since the Company recorded the expenses related to certain benefit programs in 1997 upon the death of a key employee. These additional expenses were offset by the proceeds from key man insurance in 1997. During 1998, the Company incurred an increase in foreclosed real estate expenses from operating a nursing home acquired as a result of a deed in lieu of foreclosure. Occupancy expense, equipment expense, and data processing expense also increased as a result of the Company adding the two new local locations. Stock Repurchases. During the year ended June 30, 1998, MCHI repurchased 96,979 shares of common stock in the open market at an average cost of $27.91, or approximately 126.4% of average book value. This repurchase amounted to 5.5% of the outstanding stock. Subsequent to June 30, 1998, MCHI repurchased 61,150 shares to complete the current 5% buy-back program authorized by the Board of Directors. These open-market purchases are intended to enhance the book value per share and enhance potential for growth in earnings per share. Cash Dividends. Since First Federal's conversion in March 1993, MCHI has paid quarterly dividends in each quarter, amounting to $.125 for each of the first four quarters, $.15 per share for each of the second four quarters, $.18 per share for each of the third four quarters, $.20 per share for each of the fourth four quarters, and $.22 in each quarter thereafter through June 30, 1998. Interest Income. MCHI's total interest income for the year ended June 30, 1998 was $14.3 million, which was a 4.4% increase, or $600,000, from interest income for the year ended June 30, 1997. Interest Expense. Total interest expense for the year ended June 30, 1998, was $7.1 million, which was an increase of $386,000, or 5.8% from interest expense for the year ended June 30, 1997. This increase resulted principally from an increase in interest-bearing liabilities while average interest costs remained relatively unchanged. Provision for Losses on Loans. The provision for the year ended June 30, 1998, was $59,000, compared to $58,000 in 1997. The 1998 chargeoffs net of recoveries totaled $4,000, compared to the prior year of $35,000. The ratio of the allowance for loan losses to total loans decreased from 1.35% at June 30, 1997 to 1.25% at June 30, 1998, and the ratio of allowance for loan losses to nonperforming loans decreased from 143.98% at June 30, 1997, to 107.71% at June 30, 1998. The 1998 provision was to replenish the allowance for loan losses as a result of chargeoffs and to maintain management's desired reserve ratios. In determining the provision for loan losses for the years ended June 30, 1998 and 1997, MCHI considered past loan experience, changes in the composition of the loan portfolio and the current condition and amount of loans outstanding. Other Income. MCHI's other income for the year ended June 30, 1998, totaled $404,000, compared to $923,000 for 1997, a decrease of $519,000. This decrease was due primarily to a $633,000 decrease in life insurance income and death benefits. During the year ended June 30, 1997, the Company received death benefit proceeds from key man life insurance policies in excess of cash surrender value of the policies. Other Expenses. MCHI's other expenses for the year ended June 30, 1998, totaled $4.4 million, a decrease of $649,000, or 12.8%, from the year ended June 30, 1997. This decrease is directly attributable to the signing of the Omnibus Appropriations Bill September 30, 1996 which imposed a FDIC special assessment for all institutions with SAIF-insured deposits. This special assessment was recorded for the year ended in 1997. SAIF insured institutions, like the Company, are benefiting from a reduction of FDIC premiums which began January 1, 1997 and should have a positive effect on future earnings. Income Tax Expense. Income tax expense for the year ended June 30, 1998, totaled $859,000, an increase of $459,000 from the expense recorded in 1997. Tax expense on earnings was offset by certain low-income housing tax credits which totaled $338,000 and $423,000 for the years ended June 30, 1998 and 1997, respectively. During the year ended June 30, 1997, income before income tax decreased, and additional tax free income from an increase in cash value of life insurance and death benefits was recorded. As a result, the effective tax expense for the Company was reduced. Changes in Financial Position and Results of Operations - Year Ended June 30, 1997, Compared to Year Ended June 30, 1996: General. MCHI's total assets were $173.3 million at June 30, 1997, a decrease of $4.5 million or 2.5% from June 30, 1996. During 1997, average interest-earnings assets decreased $1.5 million, or .9%, while average interest-bearing liabilities increased $.4 million, or .3%, compared to June 30, 1996. Cash and cash equivalents and investment securities decreased $10.1 million, or 46.9%, primarily as a result of their use in funding increased loan originations. Net loans increased $4.9 million, or 3.4%, primarily from originations of 1- 4 family real estate loans, 1-4 family equity lending, and a $2.5 million loan to a non-related bank holding company. Certain loans originated during the year were sold to other investors. All such loan sales were consummated at the time of origination of the loan, and at June 30, 1997 and 1996, no loans in the portfolio were held for sale. Deposits decreased $4.5 million, to $121.8 million, or 3.6%, at June 30, 1997 from the amount reported last year. MCHI's net income for the year ended June 30, 1997 was $2.4 million, a decrease of $41,000, or 1.7% over the results for the year ended June 30, 1996. Net interest income increased $139,000, or 2.0%, from the previous year, and provision for losses on loans in the amount of $58,000 increasd $24,000 from that recorded in 1996. Stock Repurchases. During the year ended June 30, 1997, MCHI repurchased 188,887 shares of common stock in the open market at an average cost of $21.17, or approximately 97.5% of average book value. This repurchase amounted to 9.8% of the outstanding stock. In May, 1997, MCHI authorized another 87,905 shares, or 5% of its outstanding stock, to be repurchased. As of June 30, 1997, no shares had been repurchased. These open-market purchases are intended to enhance the book value per share and enhance potential for growth in earnings per share. Cash Dividends. Since First Federal's conversion in March 1993, MCHI has paid quarterly dividends in each quarter, amounting to $.125 for each of the first four quarters, $.15 per share for each of the second four quarters, $.18 per share for each of the third four quarters, $.20 per share for each of the fourth four quarters, and $.22 in the most recent quarter ended June 30, 1997. Interest Income. MCHI's total interest income for the year ended June 30, 1997 was $13.7 million, which was unchanged from interest income for the year ended June 30, 1996. Interest Expense. Total interest expense for the year ended June 30, 1997, was $6.7 million, which was a decrease of $146,000, or 2.1% from interest expense for the year ended June 30, 1996. This decrease resulted principally from a decrease in the cost on interest bearing liabilities from 5.3% to 5.2% while average interest earning liabilities remained relatively unchanged. Provision for Losses on Loans. The provision for the year ended June 30, 1997, was 58,000, compared to $34,000 in 1996. The 1997 chargeoffs net of recoveries totaled $35,000, compared to the prior year of $38,000. The ratio of the allowance for loan losses to total loans decreased from 1.38% at June 30, 1996 to 1.35% at June 30, 1997, and the ratio of allowance for loan losses to nonperforming loans increased from 117.07% at June 30, 1996, to 143.98% at June 30, 1997. The 1997 provision was to replenish the allowance for loan losses as a result of chargeoffs and to maintain management's desired reserve ratios. In determining the provision for loan losses for the years ended June 30, 1997 and 1996, MCHI considered past loan experience, changes in the composition of the loan portfolio and the current condition and amount of loans outstanding. Other Income. MCHI's other income for the year ended June 30, 1997, totaled $923,000, compared to $247,000 for 1996, an increase of $676,000. This increase was due primarily to a $691,000 increase in life insurance income and death benefits. During the year ended June 30, 1997, the Company received death benefit proceeds from key man life insurance policies in excess of cash surrender value of the policies. This increase was in part offset by increased losses from investment in limited partnerships. Other Expenses. MCHI's other expenses for the year ended June 30, 1997, totaled $5.1 million, an increase of $1.3 million, or 36.3%, from the year ended June 30, 1996. This increase is directly attributable to the signing of the Omnibus Appropriations Bill September 30, 1996 which imposed a FDIC special assessment for all institutions with SAIF-insured deposits. SAIF insured institutions, like the Company, are benefiting from a reduction of FDIC premiums which began January 1, 1997 and should have a positive effect on future earnings. In addition, salaries and employee benefits expense increased $468,000, or 12.6%, due to increases in deferred compensation expense and normal increases in employee compensation and related payroll taxes. Income Tax Expense. Income tax expense for the year ended June 30, 1997, totaled $400,000, a decrease of $513,000 from the expense recorded in 1996. Tax expense on earnings was offset by certain low-income housing tax credits which totaled $423,000 for the years ended June 30, 1997 and 1996. Additional tax credits are available through the year ended June 30, 1998. During the year ended June 30, 1997, income before income tax decreased, and additional tax free income from an increase in cash value of life insurance and death benefits was recorded. As a result, the effective tax expense for the Company was reduced. Liquidity and Capital Resources The Company's primary source of funds is its deposits. To a lesser extent, the Company has also relied upon loan payments and payoffs and Federal Home Loan Bank ("FHLB") advances as sources of funds. Scheduled loan payments are a relatively stable source of funds, but loan payoffs and deposit flows can fluctuate significantly, being influenced by interest rates, general economic conditions and competition. First Federal attempts to price its deposits to meet its asset/liability management objectives consistent with local market conditions. First Federal's access to FHLB advances is limited to approximately 62% of First Federal's available collateral. At June 30, 1998, such available collateral totaled $104.6 million. Based on existing FHLB lending policies, the Company could have obtained approximately $45.8 million in additional advances. First Federal's deposits have remained relatively stable, with balances between $134 and $122 million, for the three years in the period ended June 30, 1998. The percentage of IRA deposits to total deposits has increased from 22.3% ($26.9 million) at June 30, 1995, to 22.4% ($30.1 million) at June 30, 1998. During the same period, deposits in withdrawable accounts have increased from 30.9% ($37.3 million) of total deposits at June 30, 1995, to 32.6% ($43.8 million) at June 30, 1998. This change in deposit composition has not had a significant effect on First Federal's liquidity. The impact on results of operations from this change in deposit composition has been a reduction in interest expense on deposits due to a decrease in the average cost of funds. It is estimated that yields and net interest margin would increase in periods of rising interest rates since short-term assets reprice more rapidly than short-term liabilities. In periods of falling interest rates, little change in yields or net interest margin is expected since First Federal has interest rate minimums on a significant portion of its interest-earning assets. Federal regulations require First Federal to maintain minimum levels of liquid assets (cash, certain time deposits, bankers' acceptances, specified United States Government, state or federal agency obligations, shares of mutual funds and certain corporate debt securities and commercial paper) equal to an amount not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement may be changed from time to time by the OTS to an amount within the range of 4% to 10% depending upon economic conditions and savings flows of member institutions. The OTS recently lowered the level of liquid assets that must be held by a savings association from 5% to 4% of the association's net withdrawable accounts plus short-term borrowings based upon the average daily balance of such liquid assets for each quarter of the association's fiscal year. First Federal has historically maintained its liquidity ratio at a level in excess of that required. At June 30, 1998, First Federal's liquidity ratio was 7.3% and has averaged 12.4% over the past three years. Liquidity management is both a daily and long-term responsibility of management. First Federal adjusts liquid assets based upon management's assessment of (i) expected loan demand, (ii) projected loan sales, (iii) expected deposit flows, (iv) yields available on interest-bearing deposits, and (v) the objectives of its asset/liability management program. Excess liquidity is invested generally in federal funds and mutual funds investing in government obligations and adjustable-rate or short-term mortgage-related securities. If First Federal requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB of Indianapolis and collateral eligible for repurchase agreements. Cash flows for the Company are of three major types. Cash flow from operating activities consists primarily of net income. Investing activities generate cash flows through the origination and principal collections on loans as well as the purchases and sales of investments. The Gas City branch acquisition generated $11.9 million in cash flows for 1998. Cash flows from financing activities include savings deposits, withdrawals and maturities and changes in borrowings. The following table summarizes cash flows for each of the three years in the period ended June 30, 1998:
Year Ended June 30, ------------------------------------------- 1998 1997 1996 --------- ------- ------ (In Thousands) Operating activites......................................... $ 1,436 $2,149 $3,232 -------- ------- ------ Investing activities: Investment purchases................................... (737) (6,191) (11,261) Investment maturities.................................. 2,844 12,242 17,132 Net change in loans.................................... (15,375) (4,687) (6,918) Cash received in branch acquisition.................... 11,873 --- --- Other investing activities............................. 134 275 69 -------- ------- ------ (1,261) 1,639 (978) -------- ------- ------ Financing activities: Deposit increases (decreases).......................... (220) (4,490) 5,647 Borrowings............................................. 10,656 5,000 3,500 Payments on borrowings................................. (5,201) (3,012) (4,222) Repurchase of common stock............................. (2,707) (3,998) (2,066) Dividends paid......................................... (1,557) (1,495) (1,468) Other financing activities............................. 366 309 392 -------- ------- ------ 1,337 (7,686) 1,783 -------- ------- ------ Net change in cash and cash equivalents..................... $ 1,512 $(3,898) $4,037 ======== ======= ======
Loan sales during the periods are predominantly from the origination of commercial real estate loans where the principal balance in excess of the Company's retained amount is sold to a participating financial institution. These investors are obtained prior to the origination of the loan and the sale of participating interests does not result in any gain or loss to the Company. Mortgage loans are also originated and sold in the secondary market. The Company considers its liquidity and capital resources to be adequate to meet its foreseeable short and long-term needs. The Company anticipates that it will have sufficient funds available to meet current loan commitments and to fund or refinance, on a timely basis, its other material commitments and long-term liabilities. At June 30, 1998, the Company had outstanding commitments to originate loans of $1.9 million. Certificates of deposit scheduled to mature in one year or less at June 30, 1998, totalled $42.1 million. Based upon historical deposit flow data, the Company's competitive pricing in its market and management's experience, management believes that a significant portion of such deposits will remain with the Company. At June 30, 1998, the Company had $2.4 million of FHLB advances which mature in one year or less. First Federal has entered into agreements with certain officers and directors which provide that, upon their death, their beneficiaries will be entitled to receive certain benefits. These benefits are to be funded primarily by the proceeds of insurance policies owned by First Federal on the lives of the officers and directors. If the insurance companies issuing the policies are not able to perform under the contracts at the dates of death of the officers or directors, there would be an adverse effect on the Company's operating results, financial condition and liquidity. Under currently effective capital regulations, savings associations currently must meet a 4.0% core capital requirement and a total risk-based capital to risk-weighted assets ratio of 8.0%. At June 30, 1998, First Federal's core capital ratio was 17.6% and its risk-based capital to risk-weighted assets ratio was 27.1%. Therefore, First Federal's capital significantly exceeds all of the capital requirements currently in effect. Impact of Inflation The audited consolidated financial statements presented herein have been prepared in accordance with generally accepted accounting principles. These principles require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. The primary assets and liabilities of savings institutions such as First Federal are monetary in nature. As a result, interest rates have a more significant impact on First Federal's performance than the effects of general levels of inflation. Interest rates, however, do not necessarily move in the same direction or with the same magnitude as the price of goods and services, since such prices are affected by inflation. In a period of rapidly rising interest rates, the liquidity and maturity structures of First Federal's assets and liabilities are critical to the maintenance of acceptable performance levels. The principal effect of inflation, as distinct from levels of interest rates, on earnings is in the area of other expense. Such expense items as employee compensation, employee benefits, and occupancy and equipment costs may be subject to increases as a result of inflation. An additional effect of inflation is the possible increase in the dollar value of the collateral securing loans made by First Federal. Year 2000 Issue Management recognizes the possibility of certain risks associated with Year 2000 and is continuing to evaluate appropriate courses of corrective action. The Company's data processing is performed primarily by a third party servicer. The Company also uses software and hardware which are covered under maintenance agreements with third party vendors. Consequently the Company is dependent on these vendors to conduct its business. The Company has contacted each vendor to request time tables for Year 2000 compliance and the expected costs, if any, to be passed along to the Company. The Company has been informed that its primary service provider anticipates that all reprogramming efforts will be completed by December 31, 1998, allowing the Company adequate time for testing. Management does not expect these costs to have a significant impact on its financial position or results of operations. The Company has identified certain systems which it intends to replace during fiscal 1999. Although the full cost of modifications is not yet known, management does not anticipate a need to invest heavily in system improvements to achieve Year 2000 compliance. At this time, it is estimated that costs associated with Year 2000 issues will be less than $50,000 for fiscal 1999. Amounts expensed in fiscal 1997 and 1998 were immaterial. New Accounting Pronouncements Reporting Comprehensive Income. The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, in June 1997. This Statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. It does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. Upon implementing this new Statement, an enterprise will classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. This Statement is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This Statement supersedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise, but retains the requirement to report information about major customers. It amends SFAS No. 94, Consolidation of All Majority-Owned Subsidiaries, to remove the special disclosure requirements for previously unconsolidated subsidiaries. Upon implementing this Statement, a public business enterprise will be required to report the following: o Financial and descriptive information about its reportable operating segments o A measure of segment profit or loss, certain specific revenue and expense items, and segment assets. o Information about the revenues derived from the enterprise's products or services (or groups of similar products and services), about the countries in which the enterprise earns revenues and holds assets, and about major customers regardless of whether that information is used in making operating decisions. o Descriptive information about the way that the operating segments were determined, the products and services provided by the operating segments, differences between the measurements used in reporting segment information and those used in the enterprise's general-purpose financial statements, and changes in the measurement of segment amounts from period to period. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. This Statement need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. Employers' Disclosures about Pensions and Other Postretirement Benefits. SFAS No. 132, which amends FASB Statements No. 87, 88, and 106, was issued in February, 1998. While this Statement does not change the measurement or recognition of pension or other postretirement benefit plans, it revises employers' disclosures about pension and other postretirement benefit plans. Some of the provisions of the Statement include: o The standardization of the disclosure requirements for pensions and other postretirement benefits to the extent practicable. o A requirement for additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis. o The elimination of certain disclosures that are no longer as useful as they were when FASB Statements No. 87, Employers' Accounting for Pensions, No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, were issued. o Suggested combined formats for presentation of pension and other postretirement benefit disclosures. This Statement is effective for fiscal years beginning after December 15, 1997. Earlier application is encouraged. Restatement of disclosures for earlier periods provided for comparative purposes is required unless the information is not readily available, in which case the notes to the financial statements should include all available information and a description of the information not available. Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to record derivatives on the balance sheet at their fair value. SFAS No. 133 also acknowledges that the method of recording a gain or loss depends on the use of the derivative. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. o For a derivative designated as hedging the exposure to changes in the fair value of a recognized asset or liability or a firm commitment (referred to as a fair value hedge), the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. The effect of that accounting is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value. o For a derivative designated as hedging the exposure to variable cash flows of a forecasted transaction (referred to as a cash flow hedge), the effective portion of the derivative's gain or loss is initially reported as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. o For a derivative designated as hedging the foreign currency exposure of a net investment in a foreign operation, the gain or loss is reported in other comprehensive income (outside earnings) as part of the cumulative translation adjustment. The accounting for a fair value hedge described above applies to a derivative designated as a hedge of the foreign currency exposure of an unrecognized firm commitment or an available-for-sale security. Similarly, the accounting for a cash flow hedge described above applies to a derivative designated as a hedge of the foreign currency exposure of a foreign-currency-denominated forecasted transaction. o For a derivative not designated as a hedging instrument, the gain or loss is recognized in earnings in the period of change. The new Statement applies to all entities. If hedge accounting is elected by the entity, the method of assessing the effectiveness of the hedging derivative and the measurement approach of determining the hedge's ineffectiveness must be established at the inception of the hedge. SFAS No. 133 amends SFAS No. 52 and supercedes SFAS Nos. 80, 105, and 119. SFAS No. 107 is amended to include the disclosure provisions about the concentrations of credit risk from SFAS No. 105. Several Emerging Issues Task Force consensuses are also changed or nullified by the provisions of SFAS No. 133. SFAS No. 133 will be effective for all fiscal years beginning after June 15, 1999. Early application is encouraged; however, this Statement may not be applied retroactively to financial statements of prior periods. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Consolidated Financial Statements June 30, 1998 and 1997 Independent Auditor's Report Board of Directors Marion Capital Holdings, Inc. Marion, Indiana We have audited the accompanying consolidated statement of financial condition of Marion Capital Holdings, Inc. and subsidiary corporations as of June 30, 1998 and 1997, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended June 30, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements described above present fairly, in all material respects, the consolidated financial position of Marion Capital Holdings, Inc. and subsidiary corporations as of June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. /s/ Olive LLP Indianapolis, Indiana July 24, 1998 MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statement of Financial Condition
June 30, 1998 1997 ---------------------------------- Assets Cash $ 3,211,191 $ 2,328,605 Short-term interest-bearing deposits 1,923,573 1,294,134 ------------ ------------- Total cash and cash equivalents 5,134,764 3,622,739 Investment securities Available for sale 3,048,751 2,997,500 Held to maturity 2,002,917 4,847,519 ------------ ------------- Total investment securities 5,051,668 7,845,019 Loans held for sale 877,309 Loans 165,685,392 150,062,526 Allowance for loan losses (2,087,412) (2,031,535) ------------ ------------- Net loans 163,597,980 148,030,991 Foreclosed real estate 30,735 Premises and equipment 1,928,772 1,520,381 Federal Home Loan Bank of Indianapolis stock, at cost 1,134,400 1,047,300 Investment in limited partnerships 4,883,175 1,448,869 Other assets 11,324,106 9,788,410 ------------ ------------- Total assets $193,962,909 $173,303,709 ============ ============ Liabilities Deposits$134,415,469 $121,770,013 Borrowings 17,318,708 8,228,976 Other liabilities 4,572,105 4,238,901 ------------ ------------- Total liabilities 156,306,282 134,237,890 ------------ ------------- Commitments and contingent liabilities Shareholders' Equity Preferred stock Authorized and unissued--2,000,000 shares Common stock, without par value Authorized--5,000,000 shares Issued and outstanding--1,699,307 and 1,768,099 shares 7,785,191 10,126,365 Retained earnings--substantially restricted 29,841,104 29,074,055 Net unrealized gain (loss) on securities available for sale 30,332 (1,961) Unearned compensation (132,640) ------------ ------------- Total shareholders' equity 37,656,627 39,065,819 ------------ ------------- Total liabilities and shareholders' equity $193,962,909 $173,303,709 ============ ============
See notes to consolidated financial statements. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statement of Income
Year Ended June 30, 1998 1997 1996 ----------------------------------------- Interest Income Loans $13,627,462 $12,862,390 $12,456,465 Investment securities 332,864 528,070 876,326 Deposits with financial institutions 286,565 263,806 333,876 Dividend income 86,124 78,585 73,341 ----------- ----------- ----------- Total interest income 14,333,015 13,732,851 13,740,008 ----------- ----------- ----------- Interest Expense Deposits 6,440,939 6,243,723 6,344,259 Repurchase agreements 52,159 Borrowings 651,859 463,288 456,484 ----------- ----------- ----------- Total interest expense 7,092,798 6,707,011 6,852,902 ----------- ----------- ----------- Net Interest Income 7,240,217 7,025,840 6,887,106 Provision for losses on loans 59,223 58,156 34,231 ----------- ----------- ----------- Net Interest Income After Provision for Losses on Loans 7,180,994 6,967,684 6,852,875 ----------- ----------- ----------- Other Income Net loan servicing fees 78,063 85,837 81,202 Annuity and other commissions 141,717 153,464 146,827 Equity in losses of limited partnerships (200,100) (305,000) (193,139) Life insurance income and death benefits 175,043 808,424 116,500 Other income 208,886 181,261 94,993 ----------- ----------- ----------- Total other income 403,609 923,986 246,383 ----------- ----------- ----------- Other Expenses Salaries and employee benefits 2,555,869 2,880,969 2,412,793 Net occupancy expenses 246,544 168,666 153,340 Equipment expenses 98,923 61,011 59,173 Deposit insurance expense 128,868 996,303 326,871 Foreclosed real estate expenses and losses (gains), net 190,199 (21,054) (12,643) Data processing expense 226,936 147,720 134,247 Advertising 156,208 153,685 105,060 Other expenses 797,968 663,794 525,674 ----------- ----------- ----------- Total other expenses 4,401,515 5,051,094 3,704,515 ----------- ----------- ----------- Income Before Income Tax 3,183,088 2,840,576 3,394,743 Income tax expense 858,755 400,382 913,329 ----------- ----------- ----------- Net Income $2,324,333 $ 2,440,194 $ 2,481,414 ========== =========== =========== Basic Earnings Per Share $1.32 $1.35 $1.27 ========== =========== =========== Diluted Earnings Per Share $1.29 $1.31 $1.23 ========== =========== ===========
See notes to consolidated financial statements. Marion Capital Holdings, Inc. and Subsidiaries Consolidated Statement of Changes in Shareholders' Equity
Net Unrealized Gain (Loss) Common Stock Retained Unearned on Securities Shares Amount Earnings Compensation Available for Sale Total ------ ------ -------- ------------ ------------------ ----- Balances, July 1, 1995 1,986,288 $15,489,336 $27,114,816 $(730,892) $(9,235) $41,864,025 Net income for 1996 2,481,414 2,481,414 Cash dividends ($.74 per share) (1,467,772) (1,467,772) Net change in unrealized gain (loss) on securities available for sale 9,116 9,116 Repurchase of common stock (100,658) (2,066,332) (2,066,332) Exercise of stock options 47,983 301,855 301,855 Amortization of unearned compensation expense 298,690 298,690 Tax benefit of stock options exercised and RRP 90,078 90,078 --------- ----------- ----------- --------- ------- ----------- Balances, June 30, 1996 1,933,613 13,814,937 28,128,458 (432,202) (119) 41,511,074 Net income for 1997 2,440,194 2,440,194 Cash dividends ($.82 per share) (1,494,597) (1,494,597) Net change in unrealized gain (loss) on securities available for sale (1,842) (1,842) Repurchase of common stock (188,887) (3,998,270) (3,998,270) Exercise of stock options 23,373 176,210 176,210 Amortization of unearned compensation expense 299,562 299,562 Tax benefit of stock options exercised and RRP 133,488 133,488 --------- ----------- ----------- --------- ------- ----------- Balances, June 30, 1997 1,768,099 10,126,365 29,074,055 (132,640) (1,961) 39,065,819 Net income for 1998 2,324,333 2,324,333 Cash dividends ($.88 per share) (1,557,284) (1,557,284) Net change in unrealized gain (loss) on securities available for sale 32,293 32,293 Repurchase of common stock (96,979) (2,706,834) (2,706,834) Exercise of stock options 28,187 176,126 176,126 Amortization of unearned compensation expense 132,640 132,640 Tax benefit of stock options exercised and RRP 189,534 189,534 --------- ----------- ----------- --------- ------- ----------- Balances, June 30, 1998 1,699,307 $ 7,785,191 $29,841,104 $ 0 $30,332 $37,656,627 ========= ============ =========== ========= ======= ===========
See notes to consolidated financial statements. MARION CAPITAL HOLDINGS, INC AND SUBSIDIARIES Consolidated Statement of Cash Flows
Year Ended June 30, 1998 1997 1996 --------------------------------------------- Operating Activities Net income $2,324,333 $2,440,194 $2,481,414 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 59,223 58,156 34,231 Adjustment for losses of foreclosed real estate (27,325) (31,898) (19,136) Equity in losses of limited partnerships 200,100 305,000 193,139 Amortization of net loan origination costs (fees) (194,372) (262,833) (199,055) Depreciation 133,743 83,968 77,321 Amortization of unearned compensation 132,640 299,562 298,690 Amortization of core deposits and goodwill 63,124 Deferred income tax benefit (55,341) (465,185) (174,865) Origination of loans for sale (5,749,103) (7,208,207) (5,664,822) Proceeds from sale of loans 4,871,794 7,208,207 5,664,822 Changes in Interest receivable (258,702) (150,548) (64,299) Interest payable and other liabilities 314,647 484,884 491,704 Cash value of life insurance (175,043) (808,424) (116,500) Prepaid expense and other assets (168,999) 17,855 73,569 Other (34,643) (48,177) (53,686) ---------- ---------- ---------- Net cash provided by operating activities 1,436,076 1,922,554 3,022,527 Investing Activities Purchase of securities available for sale (5,002,125) Proceeds from maturities of securities available for sale 3,000,000 2,000,000 Purchase of securities held to maturity (1,000,000) (10,891,992) Proceeds from maturities of securities held to maturity 2,843,964 9,241,819 15,131,842 Contribution to limited partnership (130,000) (290,000) Net changes in loans (15,375,499) (4,459,652) (6,708,883) Proceeds from real estate owned sales 30,722 98,850 Purchase of FHLB stock (87,100) (58,900) (79,300) Purchase of premises and equipment (419,583) (158,324) (29,063) Proceeds from life insurance 553,793 1,261,987 Premiums paid on life insurance (860,000) Investment in insurance company (650,000) Cash received in branch acquisition 11,873,327 ---------- ---------- ---------- Net cash provided (used) by investing activities (1,261,098) 1,865,527 (768,546) ---------- ---------- ----------
(Continued) MARION CAPITAL HOLDINGS, INC AND SUBSIDIARIES Consolidated Statement of Cash Flows (continued)
Year Ended June 30, 1998 1997 1996 ----------------------------------------------- Financing Activities Net change in Interest-bearing demand and savings deposits 1,325,530 (1,461,116) 1,157,963 Certificates of deposit (1,545,351) (3,028,881) 4,489,044 Proceeds from Federal Home Loan Bank advances 10,656,000 5,000,000 3,500,000 Repayment of Federal Home Loan Bank advances (5,200,674) (3,012,498) (4,221,678) Dividends paid (1,557,284) (1,494,597) (1,467,772) Exercise of stock options 365,660 309,697 391,933 Repurchase of common stock (2,706,834) (3,998,270) (2,066,332) ---------- ---------- ---------- Net cash provided (used) by financing activities 1,337,047 (7,685,665) 1,783,158 ---------- ---------- ---------- Net Change in Cash and Cash Equivalents 1,512,025 (3,897,584) 4,037,139 Cash and Cash Equivalents, Beginning of Year 3,622,739 7,520,323 3,483,184 ---------- ---------- ---------- Cash and Cash Equivalents, End of Year $5,134,764 $3,622,739 $7,520,323 ========== ========== ========== Additional Cash Flows and Supplementary Information Interest paid $7,034,447 $6,704,766 $6,873,949 Income tax paid 856,139 676,345 960,958 Loan balances transferred to foreclosed real estate 1,137,759 119,002 447,511 Loans to finance the sale of foreclosed real estate 1,171,881 321,023 415,000 Loan payable to limited partnership 3,634,406
See notes to consolidated financial statements. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Note 1 -- Nature of Operations and Summary of Significant Accounting Policies The accounting and reporting policies of Marion Capital Holdings, Inc. ("Company") and its wholly owned subsidiary, First Federal Savings Bank of Marion ("Bank") and the Bank's wholly owned subsidiary, First Marion Service Corporation ("FMSC"), conform to generally accepted accounting principles and reporting practices followed by the thrift industry. The more significant of the policies are described below. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company is a thrift holding company whose principal activity is the ownership and management of the Bank. The Bank operates under a federal thrift charter and provides full banking services. As a federally-chartered thrift, the Bank is subject to regulation by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. The Bank generates residential and commercial mortgage and consumer loans and receives deposits from customers located primarily in central Indiana. The Bank's loans are generally secured by specific items of collateral including real property and consumer assets. FMSC is engaged in the selling of financial services. Consolidation--The consolidated financial statements include the accounts of the Company, the Bank and the Bank's subsidiary after elimination of all material intercompany transactions and accounts. Investment Securities--Debt securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Securities held to maturity are carried at amortized cost. Debt securities not classified as held to maturity are classified as available for sale. Securities available for sale are carried at fair value with unrealized gains and losses reported separately, net of tax, in shareholders' equity. Amortization of premiums and accretion of discounts are recorded using the interest method as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method. Mortgage loans held for sale are carried at the lower of aggregate cost or market. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income based on the difference between estimated sales proceeds and aggregate cost. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Loans are carried at the principal amount outstanding. A loan is impaired when, based on current information or events, it is probable that the Bank will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with insignificant delays not exceeding 90 days outstanding are not considered impaired. Certain nonaccrual and substantially delinquent loans may be considered to be impaired. The Bank considers its investment in one-to-four family residential loans and consumer loans to be homogeneous and therefore excluded from separate identification for evaluation of impairment. Interest income is accrued on the principal balances of loans. The accrual of interest on impaired and nonaccrual loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed when considered uncollectible. Interest income is subsequently recognized only to the extent cash payments are received. Certain loan fees and direct costs are being deferred and amortized as an adjustment of yield on the loans over the contractual lives of the loans. When a loan is paid off or sold, any unamortized loan origination fee balance is credited to income. Foreclosed real estate arises from loan foreclosure or deed in lieu of foreclosure and is carried at the lower of cost or fair value less estimated selling costs. When foreclosed real estate is acquired, any required adjustment is charged to the allowance for real estate. All subsequent activity is included in current operations. Realized gains and losses are recorded upon the sale of real estate, with gains deferred and recognized on the installment method for sales not qualifying for the full accrual method. Allowances for loan and real estate losses are maintained to absorb potential loan and real estate losses based on management's continuing review and evaluation of the loan and real estate portfolios and its judgment as to the impact of economic conditions on the portfolios. The evaluation by management includes consideration of past loss experience, changes in the composition of the portfolios, the current condition and amount of loans and foreclosed real estate outstanding, and the probability of collecting all amounts due. Impaired loans are measured by the present value of expected future cash flows, or the fair value of the collateral of the loan, if collateral dependent. The determination of the adequacy of the allowance for loan losses and the valuation of real estate is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. Management believes that as of June 30, 1998, the allowance for loan losses and carrying value of foreclosed real estate are adequate based on information currently available. A worsening or protracted economic decline in the area within which the Bank operates would increase the likelihood of additional losses due to credit and market risks and could create the need for additional loss reserves. Premises and equipment are carried at cost net of accumulated depreciation. Depreciation is computed using the straight-line method based principally on the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations. Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Stock options are granted for a fixed number of shares with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for and will continue to account for stock option grants in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognizes no compensation expense for the stock option grants. Income tax in the consolidated statement of income includes deferred income tax provisions or benefits for all significant temporary differences in recognizing income and expenses for financial reporting and income tax purposes. Business tax credits are deducted from federal income tax in the year the credits are used to reduce income taxes payable. The Company files consolidated income tax returns with its subsidiaries. Earnings per share have been computed based upon the weighted average common and potential common shares outstanding during each year. Earnings per share for 1997 and 1996 have been restated to conform to Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. Reclassifications of certain amounts in the 1997 and 1996 consolidated financial statements have been made to conform to the 1998 presentation. Note 2 -- Restriction on Cash The Bank is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at June 30, 1998, was $250,000. Note 3 -- Investment Securities
June 30, 1998 ------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- Available for sale Federal agencies $2,999 $50 $3,049 ------ --- -- ------ Held to maturity U. S. Treasury 1,000 $1 999 Federal agencies 1,000 1,000 Mortgage-backed securities 3 3 ------ --- -- ------ Total held to maturity 2,003 1 2,002 ------ --- -- ------ Total investment securities $5,002 $50 $1 $5,051 ====== === == ======
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands)
June 30, 1997 ----------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- Available for sale Federal agencies $3,001 $ 3 $2,998 ------ --- -- ------ Held to maturity U. S. Treasury 2,001 13 1,988 Federal agencies 2,000 9 1,991 State and municipal 610 610 Mortgage-backed securities 237 2 235 ------ --- -- ------ Total held to maturity 4,848 24 4,824 ------ --- -- ------ Total investment securities $7,849 $ 0 $27 $7,822 ====== ===== === ======
The amortized cost and fair value of securities held to maturity and available for sale at June 30, 1998, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Maturity Distribution at June 30, 1998 Available for Sale Held to Maturity ------------------ ---------------- Amortized Fair Amortized Fair Cost Value Cost Value ---- ----- ---- ----- Within one year $2,000 $1,999 One to five years $2,999 $3,049 ------ ------ ------ ------ 2,999 3,049 2,000 1,999 Mortgage-backed securities 3 3 ------ ------ ------ ------ Totals $2,999 $3,049 $2,003 $2,002 ====== ====== ====== ======
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Note 4 -- Loans June 30, 1998 1997 ----------------------- Real estate mortgage loans One-to-four family $ 106,215 $ 98,393 Multi-family 11,014 11,394 Commercial real estate 31,857 31,122 Real estate construction loans 7,284 4,699 Commercial 8,511 2,525 Consumer loans 4,767 4,833 -------- -------- Total loans 169,648 152,966 Undisbursed portion of loans (3,663) (2,626) Deferred loan fees (300) (277) -------- -------- $165,685 $150,063 ======== ======== 1998 1997 1996 ------- ------- ------- Allowance for loan losses Balances, July 1 $2,032 $ 2,009 $ 2,013 Provision for losses 59 58 34 Recoveries on loans 18 2 Loans charged off (22) (35) (40) ------- ------- ------- Balances, June 30 $ 2,087 $ 2,032 $ 2,009 ======= ======= ======= No loans were considered impaired at June 30, 1998 and 1997. Mortgage loans serviced for others are not included in the accompanying consolidated statement of financial condition. The unpaid principal balances totaled $6,775,000 and $6,643,000 at June 30, 1998 and 1997. The amount of servicing rights capitalized is not material. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Note 5 -- Forclosed Real Estate June 30, 1998 Real estate acquired in settlement of loans $ 31 Allowance for losses ---- $ 31 ==== 1998 1997 1996 ---- ---- ---- Allowance for losses on foreclosed real estate Balances, July 1 $ 0 $ 16 $ 64 Provision (adjustment) for losses (27) (32) (19) Real estate charged off (25) (49) Recoveries on real estate 27 41 20 ---- ----- ---- Balances, June 30 $ 0 $ 0 $ 16 ==== ===== ==== Note 6 -- Premises and Equipment June 30, ------------------------- 1998 1997 ------ ------ Land $ 654 $ 632 Buildings and land improvements 1,604 1,458 Leasehold improvements 192 Furniture and equipment 636 490 ------ ------ Total cost 3,086 2,580 Accumulated depreciation (1,157) (1,060) ------ ------ Net $1,929 $1,520 ====== ====== MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Note 7 -- Other Assets and Other Liabilities June 30, 1998 1997 ------- ------- Other assets Interest receivable Investment securities $ 73 $ 129 Loans 978 664 Cash value of life insurance 5,616 5,994 Deferred income tax asset 2,821 2,786 Investment in insurance company 650 Core deposit intangibles and goodwill 803 Prepaid expenses and other 383 215 ------- ------- Total $11,324 $ 9,788 ======= ======= Other liabilities Interest payable Deposits $ 146 $ 97 Other borrowings 31 21 Deferred compensation and fees payable 2,550 2,488 Deferred gain on sale of real estate owned 336 346 Advances by borrowers for taxes and insurance 208 224 Other 1,301 1,063 ------- ------- Total $ 4,572 $ 4,239 ======= ======= MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Note 8 -- Investment in Limited Partnership The Bank has is an investment of $4,883,000 and $1,448,869 at June 30, 1998 and 1997 representing equity in certain limited partnerships organized to build, own and operate apartment complexes. The Bank records its equity in the net income or loss of the partnerships based on the Bank's interest in the partnerships, which interests are 99 percent in Pedcor Investments-1987-II (Pedcor-87) and 99 percent in Pedcor Investments-1997-XXIX (Pedcor-97). During the year ended June 30, 1997, the Bank also recorded an additional loss of $170,000 on Pedcor-87 for adjustments made to partners' equity. Certain fees to the general partner not recorded or estimable to date by the partnership for Pedcor-87 under provisions of the partnership agreement could adversely affect future operating results when accrued or paid. In addition to recording its equity in the losses of the partnerships, the Bank has recorded the benefit of low income housing tax credits of $338,000 for 1998, and $423,000 for 1997 and 1996. Condensed combined financial statements of the partnerships are as follows: June 30, 1998 1997 ------ ------ (Unaudited) Condensed statement of financial condition Assets Cash $ 149 $ 72 Land and property 5,179 3,764 Other assets 1,729 527 ------ ------ Total assets $7,057 $4,363 ====== ====== Liabilities Notes payable $6,006 $3,153 Other liabilities 298 113 ------ ------ Total liabilities 6,304 3,266 Partners' equity 753 1,097 ------ ------ Total liabilities and partners' equity $7,057 $4,363 ====== ====== Year Ended June 30, 1998 1997 1996 ----- ----- ----- (Unaudited) Condensed statement of operations Total revenue $ 699 $ 670 $ 648 Total expense 926 805 808 ----- ----- ----- Net loss $(227) $(135) $(160) ===== ===== ===== MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Note 9 -- Deposits June 30, 1998 1997 -------- -------- Interest-bearing demand $ 27,091 $ 21,230 Savings 16,708 15,683 Certificates and other time deposits of $100,000 or more 11,338 11,709 Other certificates and time deposits 79,278 73,148 -------- -------- Total deposits $134,415 $121,770 ======== ======== Certificates and other time deposits maturing in years ending June 30: 1999 $42,082 2000 35,506 2001 8,738 2002 2,262 2003 1,896 Thereafter 132 ------- $90,616 ======= Note 10 -- Borrowings June 30, 1998 1997 ------- ------ Federal Home Loan Bank (FHLB) advances $13,684 $8,229 Note payable to Pedcor-97, due in installments to August 2008 3,635 ------- ------ $17,319 $8,229 ======= ====== MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) June 30, ------------------------------------------------------------ 1998 1997 ------------------------- ---------------------------- Weighted Weighted Average Average Amount Rate Amount Rate ------------------------------------------------------------ FHLB advances Maturities in years ending June 30: 1998 $ 3,201 6.07% 1999 $ 2,417 6.07% 1,190 5.74 2000 713 6.48 481 6.57 2001 3,633 5.66 383 5.09 2002 2,766 6.27 2,506 6.27 2003 2,277 6.06 7 7.33 Thereafter 1,878 6.55 461 7.33 ------- ------- $13,684 6.08% $ 8,229 6.14% ======= ======= The FHLB advances are secured by first-mortgage loans and investment securities totaling $105,000,000 and $98,034,000 at June 30, 1998 and 1997. Advances are subject to restrictions or penalties in the event of prepayment. The notes payable to Pedcor dated August 1, 1997 in the original amount of $3,635,000 bear no interest so long as there exists no event of default. In the instances where an event of default has occurred, interest shall be calculated at a rate equal to the lesser of 9% per annum or the highest amount permitted by applicable law. Maturities in years ending June 30: - ------------------------------------------------ 1999 $ 394 2000 415 2001 388 2002 382 2003 376 Thereafter 1,680 ------ $3,635 ====== MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Note 11 -- Income Tax Year Ended June 30, 1998 1997 1996 ----- ----- ----- Currently payable Federal $ 645 $ 630 $ 765 State 269 235 323 Deferred Federal (51) (418) (144) State (4) (47) (31) ----- ----- ----- Total income tax expense $ 859 $ 400 $ 913 ===== ===== =====
Year Ended June 30, --------------------------------- 1998 1997 1996 ------- ------- ------- Reconciliation of federal statutory to actual tax expense Federal statutory income tax at 34% $ 1,082 $ 966 $ 1,154 Increase in cash value of life insurance and death benefits (60) (257) (40) Effect of state income taxes 175 124 193 Business income tax credits (338) (423) (423) Other (10) 29 ------- ------- ------- Actual tax expense $ 859 $ 400 $ 913 ======= ======= =======
A cumulative net deferred tax asset is included in other assets. The components of the asset are as follows: June 30, -------------------------- 1998 1997 ------ ------ Assets Allowance for loan losses $1,005 $ 990 Deferred compensation 1,084 1,057 Loan fees 52 69 Pensions and employee benefits 300 255 Business income tax credits 592 553 Securities available for sale 1 Other 23 74 ------ ------ Total assets 3,056 2,999 ------ ------ Liabilities State income tax 166 164 Securities available for sale 20 Other 49 49 ------ ------ Total liabilities 235 213 ------ ------ $2,821 $2,786 ====== ====== MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) No valuation allowance was considered necessary at June 30, 1998 and 1997. At June 30, 1998, the Company had an unused business income tax credit carryforward of $592,000. Credits of $338,000 expire in 2013 and $254,000 expire in 2012. Retained earnings include approximately $8,300,000 for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions as of June 30, 1988 for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses including redemption of bank stock or excess dividends, or loss of "bank" status, would create income for tax purposes only, which income would be subject to the then-current corporate income tax rate. At June 30, 1998, the unrecorded deferred income tax liability on the above amount was approximately $3,300,000. Note 12 -- Dividends and Capital Restrictions The Office of Thrift Supervision ("OTS") regulations provide that savings associations which meet fully phased-in capital requirements and are subject only to "normal supervision" may pay out, as a dividend, 100 percent of net income to date over the calendar year and 50 percent of surplus capital existing at the beginning of the calendar year without supervisory approval, but with 30 days prior notice to the OTS. Any additional amount of capital distributions would require prior regulatory approval. At the time of the Bank's conversion to a stock savings bank, a liquidation account was established in an amount equal to the Bank's net worth as reflected in the latest statement of condition used in its final conversion offering circular. The liquidation account is maintained for the benefit of eligible deposit account holders who maintain their deposit accounts in the Bank after conversion. In the event of a complete liquidation (and only in such event), each eligible deposit account holder will be entitled to receive a liquidation distribution from the liquidation account in the amount of the then current adjusted subaccount balance for deposit accounts then held, before any liquidation distribution may be made to stockholders. Except for the repurchase of stock and payment of dividends, the existence of the liquidation account will not restrict the use or application of net worth. The initial balance of the liquidation account was $24,100,000. At June 30, 1998, total shareholder's equity of the Bank was $33,434,000, of which a minimum of $9,334,000 was available for the payment of dividends. Note 13 -- Stock Transactions The Company's Board of Directors has approved periodically the repurchase of up to 5 percent of the Company's outstanding shares of common stock. Such purchases are made subject to market conditions in open market or block transactions. Note 14 -- Regulatory Capital The Bank is subject to various regulatory capital requirements administered by the federal banking agencies and is assigned to a capital category. The assigned capital category is largely determined by three ratios that are calculated according to the regulations. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity. The capital category MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios. There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank's operations. At June 30, 1998 and 1997, the Bank is categorized as well capitalized and met all subject capital adequacy requirements. There are no conditions or events since June 30, 1998 that management believes have changed the Bank's classification. The Bank's actual and required capital amounts and ratios are as follows:
June 30, 1998 ------------------------------------------------------------------------------------------ Required for Adequate To Be Well Actual Capital 1 Capitalized 1 ------------------- ------------------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- Total risk-based capital 1 (to risk-weighted assets) $34,079 27.1% $10,048 8.0% $12,560 10.0% Core capital 1 (to adjusted tangible assets) 32,503 17.6% 5,546 3.0% 11,093 6.0% Core capital 1 (to adjusted total assets)32,503 17.6% 5,546 3.0% 9,244 5.0% June 30, 1997 ------------------------------------------------------------------------------------------ Required for Adequate To Be Well Actual Capital 1 Capitalized 1 ------------------- ------------------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- Total risk-based capital 1 (to risk-weighted assets) $36,341 32.3% $9,014 8.0% $11,267 10.0% Core capital 1 (to adjusted tangible assets) 34,925 20.6% 5,096 3.0% 10,193 6.0% Core capital 1 (to adjusted total assets)34,925 20.6% 5,096 3.0% 8,494 5.0% - ------------ 1 As defined by the regulatory agencies
The Bank's tangible capital at June 30, 1998 was $32,503,000, which amount was 17.6 percent of tangible assets and exceeded the required ratio of 1.5 percent. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Note 15 -- Benefit Plans The Bank provides pension benefits for substantially all of the Bank's employees and is a participant in a pension fund known as the Pentegra Group. This plan is a multi-employer plan; separate actuarial valuations are not made with respect to each participating employer. A supplemental plan provides for additional benefits for certain employees. Pension expense was $117,000, $175,000 and $211,000 for 1998, 1997 and 1996. The Bank contributes up to 3 percent of employees' salaries for those participating in a thrift plan. The Bank's contribution was $33,000, $25,000 and $23,000 for 1998, 1997 and 1996. The Bank has purchased life insurance on certain officers and directors, which insurance had an approximate cash value of $5,616,000 and $5,994,000 at June 30, 1998 and 1997. The Bank has also approved arrangements that provide retirement and death benefits to those officers and directors covered by the keyman policies. The benefits to be paid will be funded primarily by the keyman policies and are being accrued over the period of active service to eligibility dates. The accrual of benefits totaled $301,000, $625,000 and $277,000 for 1998, 1997 and 1996. The Bank's Board of Directors has established Recognition and Retention Plans and Trusts ("RRP"). The Bank contributed $1,349,340 to the RRPs for the purchase of 96,600 shares of Company common stock, and in March 1993, awards of grants for these shares were issued to various directors, officers and employees of the Bank. These awards generally are to vest and be earned by the recipient at a rate of 20 percent per year, commencing March 1994. The unearned portion of these stock awards is presented as a reduction of shareholders' equity. Note 16 -- Stock Option Plan Under the Company's stock option plan, the Company grants stock option awards to directors, selected executives and other key employees. Stock option awards vest and become fully exercisable at the end of 6 months of continued employment. The incentive stock option exercise price will not be less than the fair market value of the common stock (or 85 percent of the fair market value of common stock for non-qualified options) on the date of the grant of the option. The options granted to date were granted at the fair market value at the date of grant. The date on which the options are first exercisable is determined by the Board of Directors, and the terms of the stock options will not exceed ten years from the date of grant. The exercise price of each option was equal to the market price of the Company's stock on the date of grant; therefore, no compensation expense was recognized. Although the Company has elected to follow APB No. 25, SFAS No. 123, Stock-Based Compensation, requires pro forma disclosures of net income and earnings per share as if the Company had accounted for its employee stock options under that Statement. The fair value of each option grant was estimated on the grant date using an option-pricing model with the following assumptions: MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) June 30, --------------------- 1998 1997 ------- ------- Risk-free interest rates 6.0% 6.4% Dividend yields 3.3 3.9 Expected volatility factor of market price of common stock 11.0 11.0 Weighted-average expected life of the options 7 years 7 years Under SFAS No. 123, compensation cost is recognized in the amount of the estimated fair value of the options and amortized to expense over the options' vesting period. The pro forma effect on net income and earnings per share of this Statement are as follows: June 30, 1998 1997 --------------------- Net income As reported $2,324 $2,440 Pro forma 2,300 2,389 Basic earnings per share As reported 1.32 1.35 Pro forma 1.31 1.32 Diluted earnings per share As reported 1.29 1.31 Pro forma 1.28 1.29 The following is a summary of the status of the Company's stock option plan and changes in that plan as of and for the years ended June 30, 1998, 1997 and 1996.
Year Ended June 30, -------------------------------------------------------------------------------- 1997 1996 1995 ----------------------- ------------------------ ----------------------- Weighted- Weighted- Weighted- Average Average Average Options Shares Exercise Price Shares Exercise Price Shares Exercise Price ------- ------ -------------- ------ -------------- ------ -------------- Outstanding, beginning of year 99,094 $12.09 106,790 $10.00 171,969 $ 10.00 Granted 10,083 23.00 20,166 20.25 Exercised (35,329) 10.37 (27,862) 10.00 (65,179) 10.00 ------ ------ ------- Outstanding, end of year 73,848 12.62 99,094 12.09 106,790 10.00 ====== ====== ======= Options exercisable at year end 73,848 99,094 106,790 Weighted-average fair value of options granted during the year $ 3.94 $ 3.14
As of June 30, 1998, options outstanding totaling 44,599 have an exercise price of $10 and a weighted-average remaining contractual life of 4.7 years, options outstanding totaling 20,166 have an exercise price of $20.25 and a weighted-average remaining contractual life of 8.2 years and options outstanding totaling 9,083 have an exercise price of $23.00 and a weighted-average remaining contractual life of 9.1 years. For the years ended June 30, 1998, 1997 and 1996, 7,142, 4,489 and 17,196 shares were tendered as partial payment for options exercised. At June 30, 1998, 18,050 shares were available for grant. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Note 17 -- Postretirement Plan The Bank sponsors a defined benefit postretirement plan that covers both salaried and nonsalaried employees. The plan provides postretirement health care coverage to eligible retirees. An eligible retiree is an employee who retires from the Bank on or after attaining age 65 and who has rendered at least 15 years of service. The Bank continues to fund benefit costs on a pay-as-you-go basis, and, for 1998, 1997 and 1996, the Bank made benefit payments totaling $3,293, $5,619 and $3,842. The following table sets forth the plan's funded status, and amounts recognized in the consolidated statement of financial condition: June 30, ------------- 1998 1997 ---- ---- Accumulated postretirement benefit obligation Retirees $ 83 $ 62 Other active plan participants 120 91 Accumulated postretirement benefit obligation 203 153 Unrecognized net gain from past experience different from that assumed and from changes in assumptions 83 127 ---- ---- Accrued postretirement benefit cost $286 $280 ==== ====
June 30, --------------------------------------- 1998 1997 1996 ---- ---- ---- Net periodic postretirement cost included the following components Service cost--benefits attributed to service during the period $13 $15 $13 Interest cost on accumulated postretirement benefit obligation 12 14 12 Net amortization and deferral (15) (8) (9) --- -- -- Net periodic postretirement benefit cost $10 $21 $16 === === ===
At June 30, 1998 and 1997, there were no plan assets. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 12 percent in 1998, gradually declining to 6 percent in the year 2013. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 6.75 percent. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) If the health care cost trend rate assumptions were increased by 1 percent, the accumulated postretirement benefit obligation as of June 30, 1998 would have increased by 15 percent. The effect of this change on the sum of the service cost and interest would be an increase of 17 percent. Note 18 -- Earnings Per Share
Year Ended June 30, ---------------------------------------------------------------------------------------- 1998 1997 1996 ------------------------- -------------------------- ---------------------------- Weighted- Per Weighted- Per Weighted- Per Average Share Average Share Average Share Options Income Shares Amount Income Shares Amount Income Shares Amount - ------------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share Income available to common shareholders $2,324 1,760,166 $1.32 $2,440 1,806,398 $1.35 $2,481 1,949,464 $1.27 Effect of dilutive securities RRP program 2,493 5,380 13,122 Stock options 39,200 46,911 59,821 ------ --------- ------ --------- ------ --------- Diluted Earnings Per Share Income available to common shareholders and assumed conversions $2,324 1,801,859 $1.29 $2,440 1,858,689 $1.31 $2,481 2,022,407 $1.23 ====== ========= ====== ========= ====== =========
Note 19 -- Commitments and Contingent Liabilities In the normal course of business there are outstanding commitments and contingent liabilities, such as commitments to extend credit and letters of credit, which are not included in the accompanying consolidated financial statements. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated statement of financial condition. Financial instruments whose contract amount represents credit risk as of June 30 were as follows: 1998 1997 ------------------------ Mortgage loan commitments at variable rates $1,911 $4,734 Consumer and commercial loan commitments 4,346 2,564 Standby letters of credit 3,644 3,239 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation. Collateral held varies, but may include residential real estate, income-producing commercial properties, or other assets of the borrower. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of the customer to a third party. MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) A significant portion of the Bank's loan portfolio consists of commercial real estate loans, including loans secured by nursing homes. These commercial real estate loans, totaling $31,857,000 and $31,122,000 at June 30, 1998 and 1997, have a significantly higher degree of credit risk than residential mortgage loans. Loan payments on the nursing home loans are often dependent on the operation of the collateral, and risks inherent in the nursing home industry include licensure and certification laws and changes affecting payments from third party payors. The Company and subsidiaries are also subject to claims and lawsuits which arise primarily in the ordinary course of business. Based on information presently available, it is the opinion of management that the disposition or ultimate determination of such possible claims or lawsuits will not have a material adverse effect on the consolidated financial position of the Company. Note 20 -- Fair Values of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and Cash Equivalents--The fair value of cash and cash equivalents approximates carrying value. Investment Securities--Fair values are based on quoted market prices. Loans--The fair value for loans is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Interest Receivable/Payable--The fair values of accrued interest receivable/payable approximates carrying values. FHLB Stock--Fair value of FHLB stock is based on the price at which it may be resold to the FHLB. Deposits--Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits. Federal Home Loan Bank Advances--The fair value of these borrowings are estimated using a discounted cash flow calculation, based on current rates for similar debt. Note Payable3/4Limited Partnership3/4The fair value of the borrowing is estimated using a discounted cash flow calculation based on the prime interest rate. Advances by Borrowers for Taxes and Insurance--The fair value approximates carrying value. 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:
1998 1997 ----------------------- ------------------------ Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Assets Cash and cash equivalents $5,135 $5,135 $3,623 $3,623 Securities available for sale 3,049 3,049 2,998 2,998 Securities held to maturity 2,003 2,002 4,848 4,824 Loans, including loans held for sale, net 164,475 166,697 148,031 150,524 Interest receivable 1,051 1,051 793 793 Stock in FHLB 1,134 1,134 1,047 1,047 Liabilities Deposits 134,415 135,299 121,770 121,773 Borrowings FHLB advances 13,684 13,759 8,229 8,089 Note payable--limited partnership 3,635 2,453 Interest payable 177 177 118 118 Advances by borrowers for taxes and insurance 208 208 224 224
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Note 21 -- Condensed Financial Information (Parent Company Only) Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company: Condensed Balance Sheet June 30, -------------------------- 1998 1997 ------- ------- Assets Cash and cash equivalents $ 524 $ 591 Loans 3,031 3,500 Investment in subsidiary 33,434 34,963 Other assets 723 63 ------- ------- Total assets $37,712 $39,117 ======= ======= Liabilities $ 55 $ 51 Shareholders' Equity 37,657 39,066 ------- ------- Total liabilities and shareholders' equity $37,712 $39,117 ======= ======= Condensed Statement of Income
Year Ended June 30, ----------------------------------------- 1998 1997 1996 ------ ------ ------ Income Dividends from Bank $4,000 $3,250 $8,600 Other 308 300 120 ------ ------ ------ Total income 4,308 3,550 8,720 Expenses 118 114 85 ------ ------ ------ Income before income tax and equity in undistributed income of subsidiary 4,190 3,436 8,635 Income tax expense 75 74 14 ------ ------ ------ Income before equity in undistributed income of subsidiary 4,115 3,362 8,621 Distribution in excess of income of subsidiary (1,791) (922) (6,140) ------ ------ ------ Net Income $2,324 $2,440 $2,481 ====== ====== ======
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, ------------------------------------------ 1998 1997 1996 ------- ------- ------ Operating Activities Net income $2,324 $2,440 $2,481 Adjustments to reconcile net income to net cash provided by operating activities 1,688 786 6,057 ------- ------- ------ Net cash provided by operating activities 4,012 3,226 8,538 ------- ------- ------ Investing Activities Purchase of securities held to maturity (5,951) Proceeds from maturities of securities held to maturity 3,000 3,000 Net change in loans 469 (3,500) Investment in insurance company (650) ------- ------- ------ Net cash used by investing activities (181) (500) (2,951) ------- ------- ------ Financing Activities Exercise of stock options 366 310 392 Cash dividends (1,557) (1,495) (1,468) Repurchase of common stock (2,707) (3,998) (2,066) ------- ------- ------ Net cash used by financing activities (3,898) (5,183) (3,142) ------- ------- ------ Net Change in Cash and Cash Equivalents (67) (2,457) 2,445 Cash and Cash Equivalents at Beginning of Year 591 3,048 603 ------- ------- ------ Cash and Cash Equivalents at End of Year $ 524 $ 591 $3,048 ======= ======= ======
MARION CAPITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Note 22 -- Quarterly Results (Unaudited)
Year Ended June 30, 1998 June March December September 1998 1998 1997 1997 ---- ---- ---- ---- Interest income $3,740 $3,610 $3,551 $3,432 Interest expense 1,825 1,803 1,756 1,709 ------ ------ ------ ------ Net interest income 1,915 1,807 1,795 1,723 Provision for losses on loans 36 7 7 9 ------ ------ ------ ------ Net interest income after provisions for losses on loans 1,879 1,800 1,788 1,714 Other income 133 119 99 53 Other expenses 1,116 1,209 1,174 903 ------ ------ ------ ------ Income before income tax 896 710 713 864 Income tax expense 256 189 210 204 ------ ------ ------ ------ Net Income $ 640 $ 521 $ 503 $ 660 ====== ====== ====== ====== Basic earnings per share $.37 $.29 $.28 $.38 Diluted earnings per share .36 .29 .28 .37 Dividends per share .22 .22 .22 .22
Year Ended June 30, 1997 ----------------------------------------------- June March December September 1997 1997 1996 1996 ------ ------ ------ ------ Interest income $3,416 $3,455 $3,431 $3,431 Interest expense 1,652 1,658 1,683 1,714 ------ ------ ------ ------ Net interest income 1,764 1,797 1,748 1,717 Provision for losses on loans 11 37 6 4 ------ ------ ------ ------ Net interest income after provisions for losses on loans 1,753 1,760 1,742 1,713 Other income 258 346 113 206 Other expenses 1,099 985 956 2,011 ------ ------ ------ ------ Income (loss) before income tax 912 1,121 899 (92) Income tax expense (benefit) 166 218 236 (220) ------ ------ ------ ------ Net Income $ 746 $ 903 $ 663 $ 128 ======= ======= ======= ======= Basic earnings per share $ .42 $.50 $.37 $.07 Diluted earnings per share .41 .48 .36 (.07) Dividends per share .22 .20 .20 .20
Life insurance income and death benefits of $180,000, $35,000, $325,000 and $268,000 for the first through fourth quarters of 1997 have been reclassified from other expenses to other income. DIRECTORS AND OFFICERS BOARD OF DIRECTORS John M. Dalton Steven L. Banks Jack O. Murrell President Executive Vice President Retired, Murrell and Keal Chairman of the Board Jerry D. McVicker W. Gordon Coryea George L. Thomas Director of Operations Attorney Retired, Foster-Forbes Marion Community Schools Jon R. Marler Sr. Vice President Ralph M. Williams & Associates OFFICERS OF MARION CAPITAL HOLDINGS, INC. John M. Dalton Steven L. Banks President Executive Vice President Larry G. Phillips Tim D. Canode Sr. Vice President and Vice President Secretary-Treasurer Kathy Kuntz Assistant Secretary and Assistant Treasurer SENIOR OFFICERS OF FIRST FEDERAL SAVINGS BANK OF MARION John M. Dalton Larry G. Phillips Steven L. Banks President Sr. Vice President and Executive Vice President Secretary-Treasurer Stephen A. Smithley James E. Adkins Charles N. Sponhauer Vice President Vice President Vice President Cynthia M. Fortney Tim D. Canode Kathy Kuntz Vice President Vice President Vice President DIRECTORS AND OFFICERS W. Gordon Coryea (age 73) is a Director of Marion Capital Holdings, Inc. He is also an attorney at law based in Marion, Indiana, and has served as attorney for First Federal since 1965. John M. Dalton (age 64) is a Director of Marion Capital Holdings, Inc. and has served as its President since 1996. Prior to that, he served as Marion Capital Holdings, Inc.'s Executive Vice President. He has also served as President of First Federal since 1996 and as President of First Marion Service Corporation since 1997. Mr. Dalton was the Executive Vice President of First Federal from 1983 to 1996. He became Chairman of the Boards of Marion Capital Holdings, Inc. and First Federal in 1997. Jack O. Murrell (age 75) is a Director of Marion Capital Holdings, Inc. He has also served as President of Murrell and Keal, Inc. since 1958 (a retailer located in Marion, Indiana). George L. Thomas (age 81) is a Director of Marion Capital Holdings, Inc. He also served as Chairman of Foster-Forbes Glass Co., a division of the National Can Corporation, located in Marion, Indiana until his retirement in 1984. Steven L. Banks (age 48) is a Director of Marion Capital Holdings, Inc. and has served as its Executive Vice President since 1996. He has also served as Executive Vice President of First Federal since 1996 and as Executive Vice President of First Marion Service Corporation since 1997. Jerry D. McVicker (age 53) is a Director of Marion Capital Holdings, Inc. He also currently serves as Director of Operations for Marion Community Schools. Jon R. Marler (age 48) is Senior Vice President of Ralph M. Williams and Associates. He has been a Director of Marion Capital Holdings, Inc. and First Federal since 1997. Larry G. Phillips (age 49) is Sr. Vice President, Secretary and Treasurer of Marion Capital Holdings, Inc. He has also served as Sr. Vice President and Treasurer of First Federal since 1996, as Secretary of First Federal since 1989, and as Secretary and Treasurer of First Marion since 1989. Mr. Phillips was Vice President and Treasurer of First Federal from 1983 to 1996. Tim D. Canode (age 53) has served as Vice President of Marion Capital Holdings, Inc. since 1996 and as Vice President of First Federal since 1983 and as Assistant Vice President of First Marion Service Corporation since 1983. Kathy Kuntz (age 55) is Assistant Secretary and Assistant Treasurer of Marion Capital Holdings, Inc. She has served as Vice President of First Federal since 1998. She has also served as Assistant Secretary of First Marion Service Corporation since 1971. Ms. Kuntz was assistant secretary of First Federal from 1976 to 1998. Market Information The common stock of Marion Capital Holdings, Inc. is traded on the National Association of Securities Dealers Automated Quotation System, National Market System, under the symbol "MARN," and is listed in the Wall Street Journal under the abbreviation "MarionCap." As of June 30, 1998, there were 426 shareholders of record and MCHI estimates that, as of that date, there were an additional 800 in "street" name. The following table sets forth market price information for MCHI's common stock for the periods indicated. Fiscal Quarter Ended High Low Dividend Per Share September 30, 1996 $21.000 $20.000 $.20 December 31, 1996 21.500 19.250 .20 March 31, 1997 22.000 19.250 .20 June 30, 1997 23.250 22.500 .22 September 30, 1997 28.000 22.000 .22 December 31, 1997 28.125 26.250 .22 March 31, 1998 29.000 25.875 .22 June 30, 1998 29.500 28.000 .22 Transfer Agent and Registrar General Counsel Fifth Third Bank Barnes & Thornburg 38 Fountain Square 11 South Meridian Street Cincinnati, Ohio 45263 Indianapolis, Indiana 46204 Shareholders and General Inquiries MCHI is required to file an Annual Report on Form 10-K for its fiscal year ended June 30, 1998 with the Securities and Exchange Commission. Copies of this annual report may be obtained without charge upon written request to: Larry Phillips Sr. Vice President, Secretary and Treasurer Marion Capital Holdings, Inc. 100 West Third Street Marion, Indiana 46952 Office Location Branch Locations 100 West Third Street 1045 South 13th Street Marion, Indiana 46952 Decatur, Indiana 46733 Telephone: (765) 664-0556 Telephone: (219) 728-2106 3240 S. Western Marion, Indiana 46953 Telephone: (765) 671-1145 1010 East Main Street Gas City, Indiana 46933 Telephone: (765) 677-4770 EX-23 3 CONSENT OF INDEPENDENT ACCOUNTANT CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT We consent to the incorporation by reference in a Registration Statement on Form S-8 (Registration No. 33-69538) of our report dated July 24, 1998, on the consolidated financial statements of Marion Capital Holdings, Inc. and subsidiaries contained in the 1998 Annual Report to Shareholders of Marion Capital Holdings, Inc., which is incorporated by reference in this Form 10-K. Olive LLP /s/ Olive LLP Indianapolis, Indiana September 22, 1998 EX-27.1 4 1998 FDS FOR MARION CAPITAL HOLDINGS, INC.
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 1998 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-30-1998 JUL-1-1997 JUN-30-1998 1.000 3,211 1,924 0 0 3,049 2,003 2,002 165,685 2,087 193,763 134,415 2,417 4,572 11,267 7,785 0 0 29,871 193,963 13,627 333 373 14,333 6,441 7,093 7,240 59 0 4,402 3,183 2,324 0 0 2,324 1.32 1.29 4.28 1,938 0 0 0 2,032 22 18 2,087 134 0 1,953
EX-27.2 5 RESTATED 1997 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 1997 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-30-1997 JUL-1-1996 JUN-30-1997 1.000 2,329 1,294 0 0 3,000 4,848 4,824 150,063 2,032 173,304 121,770 3,201 4,239 5,028 10,126 0 0 28,940 173,304 12,862 528 343 13,733 6,244 6,707 7,026 58 0 5,051 2,841 2,440 0 0 2,440 1.35 1.31 4.29 1,411 0 0 1,546 2,009 35 0 2,032 105 0 1,927
EX-27.3 6 RESTATED 1996 FINANCIAL DATA SCHEDULE
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 1.27 1.23 4.17 1,716 0 0 1,043 2,013 40 2 2,009 317 0 1,692
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