FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended June 30, 1996
or
[ ] Transaction Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to ___________
Commission File Number 0-21108
MARION CAPITAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1872393
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
100 West Third Street, P.O. Box 367, Marion, Indiana 46952
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code:
(317) 664-0556
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405,
Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of August 23, 1996, was $33,979,017.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of August 23, 1996, was 1,838,442 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended June 30, 1996
are incorporated into Part II. Portions of the Proxy Statement for the 1996
Annual Meeting of Shareholders are incorporated into Part III.
Exhibit Index on Page 36
Page 1 of 41 Pages
MARION CAPITAL HOLDINGS, INC.
Form 10-K
INDEX
PART 1 Page
Item 1. Business................................................... 1
Item 2. Properties................................................. 31
Item 3. Legal Proceedings.......................................... 31
Item 4. Submission of Matters to a Vote of Security Holders........ 31
Item 4.5. Executive Officers of MCHI................................. 31
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................... 32
Item 6. Selected Consolidated Financial Data....................... 33
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 33
Item 8. Financial Statements and Supplementary Data................ 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 33
PART III
Item 10. Directors and Executive Officers of the Registrant......... 33
Item 11. Executive Compensation..................................... 33
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................... 33
Item 13. Certain Relationships and Related Transactions............. 33
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K............................................ 34
Signatures ....................................................... 35
PART I
Item 1. Business.
General
Marion Capital Holdings, Inc. ("MCHI") is an Indiana corporation
organized on November 23, 1992, to become a unitary savings and loan holding
company. MCHI became a unitary savings and loan holding company upon the
conversion (the "Conversion") of First Federal Savings Bank of Marion (the
"Bank" and together with MCHI, the "Company") from a federal mutual savings bank
to a federal stock savings bank on March 18, 1993. The principal asset of MCHI
consists of 100% of the issued and outstanding shares of common stock, $0.01 par
value per share, of the Bank. The Bank began operations in Marion, Indiana, as a
federal savings and loan association in 1936, and converted to a federal mutual
savings bank in 1986.
The Bank offers a number of consumer and commercial financial services.
These services include: (i) residential and commercial real estate loans; (ii)
multi-family loans; (iii) construction loans; (iv) installment loans; (v) loans
secured by deposits; (vi) auto loans; (vii) NOW accounts; (viii) consumer and
commercial demand deposit accounts; (ix) individual retirement accounts; and (x)
tax deferred annuities and mutual funds through its service corporation
subsidiary, First Marion Service Corporation ("First Marion"). The Bank provides
these services at two-full service offices, one in Marion and one in Decatur,
Indiana. The Bank's market area for loans and deposits consists of Grant and
surrounding counties and Adams County in Indiana.
The Company's primary source of revenue is interest income from the
Bank's lending activities. The Bank's principal lending activity is the
origination of conventional mortgage loans to enable borrowers to purchase or
refinance one- to four-family residential real property. At June 30, 1996, 58.3%
of the Company's total loan and mortgage-backed securities portfolio consisted
of conventional mortgage loans on residential real property. These loans are
generally secured by first mortgages on the property. Substantially all of the
residential real estate loans originated by the Bank are secured by properties
located in Grant and Adams Counties. The Bank also offers secured and unsecured
consumer-related loans (including installment loans, loans secured by deposits,
home equity loans, and auto loans). The Company has a significant commercial
real estate portfolio, with a balance of $36.2 million at June 30, 1996, or
24.2% of total loans and mortgage-backed securities. The Bank also makes a
limited number of construction loans, which constituted $5.0 million or 3.3% of
the Company's total loans and mortgage-backed securities at June 30, 1996, and a
limited number of commercial loans which are not secured by real estate.
In the early 1980s most savings institutions' loan portfolios consisted
of long-term fixed-rate loans which then carried low interest rates. At the same
time, most savings associations had to pay competitive and high market interest
rates in order to maintain deposits. This resulted in a "negative" interest
spread. The Bank experienced these problems, but responded to them as changes in
regulations over the period permitted, and has been quite successful in managing
its interest rate risk. Among its strategies has been an emphasis on originating
adjustable-rate mortgage loans ("ARMs") which permit the Bank to better match
the interest it earns on mortgage loans with the interest it pays on deposits,
with interest rate minimums. As of June 30, 1996, ARMs constituted 89.6% of the
Company's total mortgage loan portfolio. Additionally, the Bank attempts to
lengthen liability repricing by aggressively pricing longer term certificates of
deposit during periods of relatively low interest rates and investing in
intermediate-term or variable-rate investment securities.
Lending Activities
Loan Portfolio Data. The following table sets forth the composition of
the Company's loan portfolio by loan type and security type as of the dates
indicated, including a reconciliation of gross loans receivable after
consideration of the allowance for possible loan losses and deferred net loan
fees on loans. Because the Conversion did not occur until March 18, 1993, the
information at June 30, 1992 represents loan data for the Bank only.
At June 30,
---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------- ------------------ ----------------- -------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
--------- -------- -------- -------- ------- -------- ------- -------- ------- --------
(Dollars In Thousands)
TYPE OF LOAN
Mortgage loans:
Residential.................. $ 87,106 58.26% $ 81,651 56.21% $ 76,573 55.72% $ 76,806 54.41% $ 74,545 53.12%
Commercial real estate....... 36,170 24.19 35,937 24.74 35,003 25.47 39,348 27.87 44,505 31.70
Multi-family................. 15,573 10.42 14,495 9.98 12,039 8.76 12,686 8.99 12,360 8.81
Construction:
Residential.................. 3,904 2.61 3,448 2.37 3,164 2.30 2,479 1.76 2,240 1.60
Commercial real
estate..................... 506 .34 1,257 .87 1,159 .84 1,479 1.05 1,135 .81
Multi-family................. 584 .39 2,627 1.81 3,809 2.77 2,784 1.97 446 .32
Consumer loans:
Installment loans............ 2,725 1.82 1,897 1.30 1,340 .98 1,557 1.10 1,909 1.36
Loans secured by deposits.... 883 .59 797 .55 822 .60 806 .57 1,030 .73
Home equity loans............ 399 .27 405 .27 494 .36 584 .42 725 .52
Auto loans................... 169 .11 120 .08 113 .08 130 .09 187 .13
Home improvement loans....... --- --- --- --- 1 .00 4 .00 11 .01
Education loans.............. --- --- --- --- --- --- 1 .00 3 .00
Commercial loans................ 7 .00 9 .01 14 .01 57 .04 107 .08
Mortgage-backed securities...... 1,491 1.00 2,630 1.81 2,905 2.11 2,446 1.73 1,131 .81
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans receivable and
mortgage-backed
securities................ $149,517 100.00% $145,273 100.00% $137,436 100.00% $141,167 100.00% $140,334 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
TYPE OF SECURITY
Residential (1).............. $ 92,888 62.13% $ 88,109 60.65% $ 83,108 60.47% $ 81,636 57.83% $ 78,410 55.86%
Commercial real estate....... 36,688 24.54 37,219 25.62 36,191 26.33 40,922 28.99 45,871 32.69
Multi-family................. 16,157 10.81 17,122 11.79 15,848 11.53 15,470 10.96 12,806 9.13
Autos........................ 169 .11 120 .08 113 .08 130 .09 187 .13
Deposits..................... 883 .59 797 .55 822 .60 806 .57 1,030 .73
Other security............... 7 .00 9 .01 14 .01 12 .01 25 .03
Unsecured.................... 2,725 1.82 1,897 1.30 1,340 98 2,191 1.55 2,005 1.43
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans receivable and
mortgage-backed
securities.............. 149,517 100.00 145,273 100.00 137,436 100.00 141,167 100.00 140,334 100.00
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Deduct:
Allowance for possible losses
on loans..................... 2,009 1.34 2,013 1.39 2,050 1.49 2,051 1.45 2,305 1.64
Deferred net loan fees.......... 313 .21 303 .21 333 .24 435 .31 523 .38
Loans in process................ 2,539 1.70 4,004 2.75 5,056 3.68 3,235 2.29 3,118 2.22
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Net loans receivable including
mortgage-backed securities. $144,656 96.75% $138,953 95.65% $129,997 94.59% $135,446 95.95% $134,388 95.76%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
Mortgage Loans
Adjustable rate.............. $128,811 89.55% $120,496 86.43% $113,184 85.91% $116,872 86.20% $113,686 84.07%
Fixed rate................... 15,032 10.45 18,919 13.57 18,563 14.09 18,710 13.80% 21,545 15.93
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total...................... $143,843 100.00% $139,415 100.00% $131,747 100.00% $135,582 100.00% $135,231 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
- -----------------
(1) Includes majority of mortgage-backed securities, home equity loans and home
improvement loans.
The following table sets forth certain information at June 30, 1996,
regarding the dollar amount of loans maturing in the Company's loan portfolio
based on the date that final payment is due under the terms of the loan. Demand
loans having no stated schedule of repayments and no stated maturity and
overdrafts are reported as due in one year or less. This schedule does not
reflect the effects of possible prepayments or enforcement of due-on-sale
clauses. Management expects prepayments will cause actual maturities to be
shorter.
Due During Years Ended June 30,
Balance ------------------------------------------------------------------------
Outstanding 2000 2002 2007 2012
At June 30, to to to and
1996 1997 1998 1999 2001 2006 2011 following
----------- -------- ------- ------- ------- ------- ------- ---------
(In Thousands)
Mortgage loans:
Residential............ $ 91,010 $ 671 $ 258 $ 743 $1,660 $14,496 $35,419 $37,763
Multi-family........... 16,157 727 671 2,105 --- 1,290 5,795 5,569
Commercial real
estate............... 36,676 388 2,137 6,416 3,395 8,325 7,873 8,142
Consumer loans:
Home improvement ...... --- --- --- --- --- --- --- ---
Home equity............ 399 121 135 68 16 --- --- 59
Auto................... 169 12 33 41 83 --- --- ---
Installment............ 2,725 1,389 352 257 465 166 96 ---
Loans secured
by deposits.......... 883 611 93 76 91 12 --- ---
Mortgage-backed
securities ............ 1,491 27 817 --- --- 647 --- ---
Commercial loans ..... 7 7 --- --- --- --- --- ---
-------- ------ ------ ------ ------ ------- ------- -------
Total.................. $149,517 $3,953 $4,496 $9,706 $5,710 $24,936 $49,183 $51,533
======== ====== ====== ====== ====== ======= ======= =======
The following table sets forth, as of June 30, 1996, the dollar amount of
all loans due after one year which have fixed interest rates and floating or
adjustable interest rates.
Due After June 30, 1997
----------------------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- ----------
(In Thousands)
Mortgage loans:
Residential............................... $ 7,753 $ 82,586 $ 90,339
Multi-family.............................. 925 14,505 15,430
Commercial real estate.................... 5,983 30,305 36,288
Consumer loans:
Home improvement ......................... --- --- ---
Home equity............................... --- 278 278
Auto...................................... 139 18 157
Installment............................... 534 802 1,336
Loan secured by deposits.................. --- 272 272
Mortgage-backed securties .................... 1,452 12 1,464
Commercial loans .............................. --- --- ---
------- -------- --------
Total..................................... $16,786 $128,778 $145,564
======= ======== ========
Residential Loans. Residential loans consist of one-to-four family
loans. Approximately $87.1 million, or 58.3%, of the Company's portfolio of
loans and mortgage-backed securities at June 30, 1996, consisted of one- to
four-family mortgage loans, of which approximately 91.4% had adjustable rates.
During the past year, the Company sold to the Federal Home Loan Mortgage
Corporation (the "FHLMC") 95% of the principal balance of substantially all
fixed rate loans originated with terms in excess of 15 years or with annual
interest rates lower than 8.5% and retained all of the servicing rights on all
such loans. Currently, the Company is opting to keep these fixed rate loans in
its portfolio since the value of fixed rate loans remains low. The option to
retain or sell fixed rate loans will be evaluated from time to time.
The Bank originates fixed-rate loans with terms of up to 25 years. Such
loans are originated in accordance with guidelines established by FHLMC to
facilitate the sale of such loans to FHLMC in the secondary market. These loans
amortize on a monthly basis with principal and interest due each month. As
mentioned above, ninety-five percent of such loans originated during the 1996
fiscal year with terms in excess of 15 years, or annual interest rates below
8.5%, were sold to FHLMC promptly after they were originated. The Bank retained
5% of the principal balance of such sold loans as well as the servicing on all
of such sold loans. Recently, the Bank has decided to retain these fixed rate
loans in its portfolio. At June 30, 1996, the Company had $7.8 million of fixed
rate residential mortgage loans which were originated in prior years in its
portfolio, none of which were held for sale.
Most ARMs adjust on an annual basis, although the Bank currently offers
a 5-year ARM which has a fixed rate for five years, and adjusts annually
thereafter. Currently, the ARMs have an interest rate average minimum of 6% and
average maximum of 12%. The interest rate adjustment for substantially all of
the Bank's ARMs is indexed to the One-Year Treasury Constant Maturity Index. On
new residential mortgage loans, the margin above such index currently is 2.75%.
The Bank offers ARMs with maximum rate changes of 2% per adjustment, and an
average of 6% over the life of the loan. Generally made for terms of up to 25
years, the Bank's ARMs are not made on terms that conform with the standard
underwriting criteria of FHLMC or the Federal National Mortgage Association (the
"FNMA"), thereby making resale of such loans difficult. To better protect the
Company against rising interest rates, the Bank underwrites its residential ARMs
based on the borrower's ability to repay the loan assuming a rate equal to
approximately 4% above the initial rate payable if the loan remained constant
during the loan term.
Although the Bank's residential mortgage loans are generally amortized
over a 20-year period, residential mortgage loans generally are paid off before
maturity. Substantially all of the residential mortgage loans that the Bank has
originated include "due on sale" clauses, which give the Bank the right to
declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid.
The Bank generally requires private mortgage insurance on all
conventional residential single-family mortgage loans with loan-to-value ratios
in excess of 80%. The Bank generally will not lend more than 95% of the lower of
current cost or appraised value of a residential single family property. In July
1995, the Bank's wholly-owned subsidiary, First Marion, began a 100% financing
program pursuant to which the Bank would originate an 80% loan-to-value first
mortgage loan using its normal underwriting standard and First Marion would
finance the remaining 20%. The loans apply only to the purchase or construction
of a single family residence and the borrower is required to have "above
average" credit. The second mortgage loan originated by First Marion is a fixed
rate mortgage loan with an interest rate of 12% and a term not to exceed 15
years. At June 30, 1996, these loans amounted to $540,000.
Residential mortgage loans in excess of $250,000 must be approved in
advance by the Bank's Board of Directors. Such loans under that amount must be
approved by the Bank's Loan Committee.
At June 30, 1996, residential mortgage loans amounting to $1.7 million,
or 1.2% of total loans, were included in non-performing assets. See
"--Non-performing and Problem Assets."
Commercial Real Estate Loans. At June 30, 1996, $36.2 million, or
24.2%, of the Company's total loan and mortgage-backed securities portfolio
consisted of mortgage loans secured by commercial real estate. The properties
securing these loans consist primarily of nursing homes, office buildings,
hotels, churches, warehouses and shopping centers. The commercial real estate
loans, substantially all adjustable rate, are made for terms not exceeding 25
years, and generally require an 80% or lower loan-to-value ratio. Some require
balloon payments after 5, 10 or 15 years. A number of different indices,
including the prime rate as announced by NBD Bank, Indianapolis, Indiana, are
used as the interest rate index for these loans. The commercial real estate
loans generally have minimum interest rates of 8% and maximum interest rates of
14%. Most of these loans adjust annually, but the Company has some 3-year and
5-year commercial real estate adjustable rate loans in its portfolio. The
largest commercial real estate loan as of June 30, 1996, had a balance of $2.7
million.
Because of certain credit problems it was experiencing in its
commercial real estate and multi-family loan portfolio, the Bank has since the
summer of 1991 limited the size of any commercial real estate or multi-family
loan or participation originated or purchased to $500,000, wherever practicable.
The Company held in its portfolio 25 commercial and multi-family real estate
loans with balances in excess of $500,000 at June 30, 1996. The average loan
balance for all such loans was $1.1 million. A significant proportion of the
Company's commercial real estate loan portfolio consists of loans secured by
nursing home properties. The balance of such loans totaled $16.6 million at June
30, 1996.
Current federal law limits a savings association's investment in
commercial real estate loans to 400% of its capital. In addition, the
application of the Qualified Thrift Lender Test has had the effect of limiting
the aggregate investment in commercial real estate loans made by the Bank. See
"Regulation -- Qualified Thrift Lender." The Bank currently complies with the
limitations on investments in commercial real estate loans.
Commercial real estate loans involve greater risk than residential
mortgage loans because payments on loans secured by income properties are often
dependent on the successful operation or management of the properties and are
generally larger. As a result, repayment of such loans may be subject to a
greater extent than residential real estate loans to adverse conditions in the
real estate market or the economy. At June 30, 1996, the Company had not
classified any of its commercial real estate and multi-family portfolio as
substandard and no loans were classified as special mention.
The Company has a high concentration of loans secured by nursing homes.
Like other commercial real estate loans, nursing home loans often involve large
loan balances to single borrowers or groups of related borrowers, and have a
higher degree of credit risk than residential mortgage lending. Loan payments
are often dependent on the operation of the nursing home, the success of which
is dependent upon the long-term health care industry. The risks inherent in such
industry include the federal, state and local licensure and certification laws
which regulate, among other things, the number of beds for which nursing care
can be provided and the construction, acquisition and operation of such nursing
facilities. The failure to obtain or maintain a required regulatory approval or
license could prevent the nursing home from being reimbursed for costs incurred
in offering its services or expanding its business. Moreover, a large percentage
of nursing home revenues is derived from reimbursement by third party payors.
Both governmental and other third party payors have adopted and are continuing
to adopt cost containment measures designed to limit payment to health care
providers, and changes in federal and state regulations in these areas could
adversely affect such homes. Because of the Company's concentration in this
area, a decline in the nursing home industry could have a substantial adverse
effect on the Company's commercial real estate portfolio and, therefore, a
substantial adverse effect on its operating results.
Commercial real estate loans in excess of $200,000 must be approved in
advance by the Bank's Board of Directors. Commercial real estate loans under
that amount must be approved by the Bank's Loan Committee.
Multi-Family Loans. At June 30, 1996, $15.6 millon, or 10.4%, of the
Company's total loan and mortgage-backed securities portfolio consisted of
mortgage loans secured by multi-family dwellings (those consisting of more than
four units). All of the Company's multi-family loans are secured by apartment
complexes located in Indiana or Ohio. The average balance of all such
multi-family mortgage loans was $336,000 as of June 30, 1996. The largest such
multi-family mortgage loan as of June 30, 1996, had a balance of $1.6 million.
As with the Bank's commercial real estate loans, multi-family mortgage loans are
substantially all adjustable-rate loans, are written for terms not exceeding 25
years, and require at least an 80% loan-to-value ratio. At June 30, 1996, the
Company had no loans secured by multi-family dwellings which were classified as
substandard or included in non-performing assets.
Multi-family loans, like commercial real estate loans, involve a
greater risk than do residential loans. Also, the more stringent loans-to-one
borrower limitation limits the ability of the Bank to make loans to developers
of apartment complexes and other multi-family units.
Construction Loans. The Bank offers construction loans with respect to
owner-occupied residential and commercial real estate property and, in certain
cases, to builders or developers constructing such properties on an investment
basis (i.e., before the builder/developer obtains a commitment from a buyer).
Most construction loans are made to owners who occupy the premises.
At June 30, 1996, $5.0 million, or 3.3%, of the Company's total loan
and mortgage-backed securities portfolio consisted of construction loans, of
which approximately $584,000 were investment residential construction loans and
$506,000 related to construction of commercial real estate projects. The largest
construction loan on June 30, 1996, was $431,000. No construction loans were
included in non-performing assets on that date.
For most construction loans, the loan is actually a 20-year mortgage
loan, but interest only is payable during the construction phase of the loan up
to 18 months, and such interest is charged only on the money disbursed under the
loan. After the construction phase (typically 6 to 12 months), regular mortgage
loan payments of principal and interest are due. Appraisals for these loans are
completed, subject to completion of building plans and specifications.
Interest rates and fees vary for these loans. While construction is
progressing, periodic inspections are performed for which the Bank assesses a
fee.
While providing the Company with a higher yield than a conventional
mortgage loan, construction loans involve a higher level of risk. For example,
if a project is not completed and the borrower defaults, the Bank may have to
hire another contractor to complete the project at a higher cost. Also, a house
may be completed, but may not be salable, resulting in the borrower defaulting
and the Bank taking title to the house.
Consumer Loans. Federal laws and regulations permit federally chartered
savings associations to make secured and unsecured consumer loans in an
aggregate amount of up to 35% of the association's total assets. In addition, a
federally chartered savings association has lending authority above the 35%
limit for certain consumer loans, such as property improvement loans and deposit
account secured loans. However, the Qualified Thrift Lender test places
additional limitations on a savings association's ability to make consumer
loans.
The Company's consumer loans, consisting primarily of installment
loans, loans secured by deposits, and auto loans, aggregated $4.2 million as of
June 30, 1996, or 2.8% of the Company's total loan and mortgage-backed
securities portfolio. Although consumer loans are currently only a small portion
of its lending business, the Bank consistently originates consumer loans to meet
the needs of its customers, and the Bank intends to originate more such loans to
assist in meeting its asset/liability management goals.
The Bank makes installment loans of up to three years, which consisted
of $2.7 million, or 1.8% of the Company's total loan and mortgage-backed
securities portfolio at June 30, 1996. Loans secured by deposits, totaling
$883,000 at June 30, 1996, are made up to 90% of the original account balance
and accrue at a rate of 2% over the underlying certificate of deposit rate.
Variable rate home equity loans of up to 10 years, secured by second mortgages
on the underlying residential property totaled $399,000, or 0.3% of the
Company's total loan and mortgage-backed securities portfolio at June 30, 1996.
Automobile loans totaled only $169,000 and are made at variable and fixed rates
for terms of up to five years depending on the age of the automobile and the
loan-to-value ratio for the loan. The Bank does not make indirect automobile
loans.
Although consumer loans generally involve a higher level of risk than
one- to four-family residential mortgage loans, their relatively higher yields
and shorter terms to maturity are believed to be helpful in reducing the
interest-rate risk of the loan portfolio. The Bank has thus far been successful
in managing consumer loan risk. As of June 30, 1996, $11,000 of consumer loans
were included in non-performing assets.
Mortgage-Backed Securities. At June 30, 1996, the Company had $1.5
million of mortgage-backed securities outstanding, or 1.0% of the Company's
total loan and mortgage-backed securities portfolio. These mortgage-backed
securities have an average estimated remaining life of approximately 4 years,
and may be used as collateral for borrowings and as a source of liquidity.
Origination, Purchase and Sale of Loans. The Bank currently does not
originate its ARMs in conformity with the standard criteria of the FHLMC or
FNMA. The Bank would therefore experience some difficulty selling such loans in
the secondary market, although most loans could be brought into conformity. The
Bank has no intention, however, of attempting to sell such loans. The Bank's
ARMs vary from secondary market criteria because the Bank does not use the
standard loan form, does not require current property surveys in most cases, and
does not permit the conversion of those loans to fixed-rate loans in the first
three years of their term. These practices allow the Bank to keep the loan
closing costs down.
Although the Bank currently has authority to lend anywhere in the
United States, it has confined its loan origination activities primarily in
Grant and contiguous counties and in Adams County. The Bank's loan originations
are generated from referrals from builders, developers, real estate brokers and
existing customers, newspaper, radio and periodical advertising, and walk-in
customers. Loans are originated at either the main or branch office. All loan
applications are processed and underwritten at the Bank's main office.
Under current federal law, a savings association generally may not make
any loan to a borrower or its related entities if the total of all such loans by
the savings association exceeds 15% of its capital (plus up to an additional 10%
of capital in the case of loans fully collateralized by readily marketable
collateral); provided, however, that loans up to $500,000 regardless of the
percentage limitations may be made and certain housing development loans of up
to $30 million or 30% of capital, whichever is less, are permitted. The maximum
amount which the Bank could have loaned to one borrower and the borrower's
related entities under the 15% of capital limitation was $5.3 million at June
30, 1996. The Bank's portfolio of loans currently contains one borrower that
exceeds the 15% of capital limitation. As of July 31, 1996, these loans exceed
the limitation by $312,000. One property is currently in the process of being
refinanced, and when complete, will reduce the total loans below the applicable
requirements.
The Bank's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. To assess the borrower's
ability to repay, the Bank studies the employment and credit history and
information on the historical and projected income and expenses of its
individual and corporate mortgagors.
The Bank uses independent appraisers to appraise the property securing
its loans and requires title insurance or an abstract and a valid lien on its
mortgaged real estate. Appraisals on real estate securing most real estate loans
in excess of $250,000, are performed by either state-licensed or state-certified
appraisers, depending on the type and size of the loan. The Bank requires fire
and extended coverage insurance in amounts at least equal to the principal
amount of the loan. It also requires flood insurance to protect the property
securing its interest if the property is in a flood plain. Tax and insurance
payments are required to be escrowed by the Bank on all loans subject to private
mortgage insurance, but this service is offered to all borrowers. Annual site
visitations are made by licensed architects with respect to all commercial real
estate loans in excess of $500,000.
The Bank's Executive Committee approves all consumer loans and its Loan
Committee approves all mortgage loans. Commercial real estate loans in excess of
$200,000 and residential mortgage loans in excess of $250,000 must be approved
in advance by the Bank's Board of Directors.
The Bank applies consistent underwriting standards to the several types
of consumer loans it makes to protect the Bank against the risks inherent in
making such loans. Borrower character, credit history, net worth and underlying
collateral are important considerations.
The Bank has historically participated in the secondary market as a
seller of 95% of the principal balance of its long-term fixed rate mortgage
loans, as described above, although the Bank has recently begun retaining such
loans in the Company's portfolio. The loans the Bank sells are designated for
sale when originated. During the fiscal year ended June 30, 1996, the Bank sold
$1.4 million of its fixed-rate mortgage loans, and at June 30, 1996, held no
such loans for sale. The Bank obtains commitments from investors for the sale of
such loans at their outstanding principal balance and these commitments are
obtained prior to origination of the loans. The borrower's interest rate is
equal to the rate required by the investor plus 0.375% servicing, and therefore
no gains or losses are recorded at the time of the sale.
When it sells mortgage loans, the Bank generally retains the
responsibility for collecting and remitting loan payments, inspecting the
properties that secure the loans, making certain that monthly principal and
interest payments and real estate tax and insurance payments are made on behalf
of borrowers, and otherwise servicing the loans. The Company receives a
servicing fee for performing these services. The amount of fees received by the
Company varies, but is generally calculated as an amount equal to a rate of .25%
per annum for commercial loans and .375% per annum for residential loans on the
outstanding principal amount of the loans serviced. The servicing fee is
recognized as income over the life of the loans. At June 30, 1996, the Company
serviced $33.6 million of loans sold to other parties of which $7.8 million or
23.2% were for loans sold to FHLMC.
The Company occasionally purchases participations to diversify its
portfolio, to supplement local loan demand and to obtain more favorable yields.
The participations purchased normally represent a portion of residential or
commercial real estate loans originated by other Indiana financial institutions,
most of which are secured by property located in Indiana. As of June 30, 1996,
the Company held in its loan portfolio, participations in mortgage loans
aggregating $10.9 million that it had purchased, all of which were serviced by
others. The largest such participation it held at June 30, 1996, was in a loan
secured by an apartment complex. The Company's portion of the outstanding
balance on that date was approximately $1.6 million.
The following table shows loan origination, purchase, sale and repayment
activity for the Bank during the periods indicated:
Year Ended June 30,
-------------------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
Gross loans receivable and mortgage-backed
securities at beginning of period...................... $145,273 $137,436 $141,167
-------- -------- --------
Originations:
Mortgage loans:
Residential.......................................... 28,841 21,489 30,561
Commercial real estate and multi-family.............. 8,655 10,758 13,122
-------- -------- --------
Total mortgage loans................................. 37,496 32,247 43,683
-------- -------- --------
Consumer loans:
Installment loans.................................... 3,492 2,206 1,505
Loans secured by deposits............................ 763 521 670
-------- -------- --------
Total consumer loans................................ 4,255 2,727 2,175
-------- -------- --------
Commercial loans....................................... 146 21 31
-------- -------- --------
Total originations................................... 41,897 34,995 45,889
-------- -------- --------
Purchases:
Mortgage-backed securities............................. --- --- 1,010
Mortgage loans:
Residential.......................................... 500 --- ---
Commercial real estate and
multi-family.................................... 1,508 1,200 ---
-------- -------- --------
Total originations and purchases..................... 43,905 36,195 46,899
-------- -------- --------
Sales:
Mortgage loans:
Residential.......................................... 1,426 464 4,800
Commercial real estate and multi-family.............. 4,239 1,950 5,260
Mortgage-backed securities........................... --- --- ---
-------- -------- --------
Total sales........................................ 5,665 2,414 10,060
-------- -------- --------
Repayments and other deductions........................... 33,996 25,944 40,570
-------- -------- --------
Gross loans receivable and mortgage-backed
securities at end of period.......................... $149,517 $145,273 $137,436
======== ======== ========
Origination and Other Fees. The Company realizes income from fees for
originating commercial real estate loans (equal to one or one-half of a
percentage of the total principal amount of the loan), late charges, checking
and NOW account service charges, fees for the sale of mortgage life insurance by
the Bank, fees for servicing loans, rental income from the lease of space to
Director W. Gordon Coryea, and fees for other miscellaneous services including
money orders and travelers checks. In order to increase its competitive position
with respect to other mortgage lenders, the Bank does not charge points on
residential mortgage loans, but does so on its commercial real estate loans.
Late charges are assessed if payment is not received within 15 days after it is
due.
The Bank charges miscellaneous fees for appraisals, inspections
(including an inspection fee for construction loans), obtaining credit reports,
certain loan applications, recording and similar services. The Company also
collects fees for Visa applications which it refers to another financial
institution. The Company does not underwrite any of these credit card loans.
Non-Performing and Problem Assets
Mortgage loans are reviewed by the Company on a regular basis and are
generally placed on a non-accrual status when the loans become contractually
past due 90 days or more. Once a mortgage loan is fifteen days past due, a
reminder is mailed to the borrower requesting payment by a specified date. At
the end of each month, late notices are sent with respect to all mortgage loans
at least 20 days delinquent. When loans are 30 days in default, a third notice
imposing a late charge equal to 5% of the late principal and interest payment is
imposed. Contact by phone or in person is made, if feasible, with respect to all
mortgage loans 30 days or more in default.
By the time a mortgage loan is 90 days past due, a letter is sent to the
borrower demanding payment by a certain date and indicating that a foreclosure
suit will be filed if this deadline is not met. The Board of Directors normally
confers foreclosure authority at that time, but management may continue to work
with the borrower if circumstances warrant.
Consumer and commercial loans other than mortgage loans are treated
similarly. Interest income on consumer and other nonmortgage loans is accrued
over the term of the loan except when serious doubt exists as to the
collectibility of a loan, in which case the accrual of interest is discontinued.
It is the Company's policy to recognize losses on these loans as soon as they
become apparent.
Non-performing assets. At June 30, 1996, $1.9 million, or 1.1% of the
Company's total assets, were non-performing assets (non-accrual loans, real
estate owned and troubled debt restructurings), compared to $8.9 million, or
5.5% of the Company's total assets, at June 30, 1992. At June 30, 1996,
residential loans, commercial real estate loans, consumer loans and REO
accounted for 87.3%, 2.5%, 0.6% and 9.6%, respectively, of non-performing
assets.
The June 30, 1996, non-performing assets included approximately
$183,000 of real estate acquired as a result of foreclosure, voluntary deed, or
other means, compared to $1.6 million at June 30, 1992. Such real estate
acquired is classified by the Company as "real estate owned" or "REO" until it
is sold. When property is so acquired, the value of the asset is recorded on the
books of the Company at the lower of the unpaid principal balance at the date of
acquisition plus foreclosure and other related costs or at fair value. Interest
accrual ceases when the collection of interest becomes doubtful, usually after
the loan has been delinquent for 90 days or more. All costs incurred from the
date of acquisition in maintaining the property are expensed.
The following table sets forth the amounts and categories of the
Company's non-performing assets (non-accrual loans, real estate owned and
troubled debt restructurings). Information at June 30, 1992 represents
non-performing assets data for the Bank only. It is the policy of the Company
that all earned but uncollected interest on all loans be reviewed monthly to
determine if any portion thereof should be classified as uncollectible for any
loan past due in excess of 90 days.
At June 30,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---------- --------- ---------- -------- ----------
(Dollars in Thousands)
Accruing loans delinquent
more than 90 days ........................ $ --- $ --- $ --- $ --- $ ---
Non-accruing loans (1):
Residential............................... 1,658 1,698 2,054 2,362 2,637
Multi-family.............................. --- --- --- --- ---
Commercial real estate.................... 47 --- 2,580 2,870 4,654
Consumer.................................. 11 54 3 104 71
Troubled debt restructurings .................. --- --- --- --- ---
------ ------ ------ ------ ------
Total non-performing loans................ 1,716 1,752 4,637 5,336 7,362
------ ------ ------ ------ ------
Real estate owned, net......................... 183 206 830 1,795 1,550
------ ------ ------ ------ ------
Total non-performing assets .............. $1,899 $1,958 $5,467 $7,131 $8,912
====== ====== ====== ====== ======
Non-performing loans to total
loans, net (2) ........................... 1.18% 1.27% 3.59% 3.95% 5.43%
Non-performing assets to total assets ......... 1.07% 1.13% 3.20% 4.10% 5.52%
(1) The Company generally places mortgage loans on a nonaccrual status when the
loans become contractually past due 90 days or more. Interest income
prevously accrued but not deemed collectible is reversed and charged
against current income. Interest on these loans is then recognized as
income when collected. At June 30, 1996, $1.7 million of nonaccrual loans
were residential loans, $47,000 were commercial real estate loans, and
$11,000 were consumer loans. For the year ended June 30, 1996, the income
that would have been recorded had the non-accrual loans not been in a
non-performing status totaled $153,000 compared to actual income recorded
of $110,000.
(2) Total loans less deferred net loan fees and loans in process.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
Office of Thrift Supervision ("OTS") to be of lesser quality, as "substandard,"
"doubtful" or "loss." An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to sufficient risk to
warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "special mention" by management.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the institution's Principal Supervisory Agent, who may
order the establishment of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Company regularly
reviews the problem loans in its portfolio to determine whether any loans
require classification in accordance with applicable regulations. Total
classified assets at June 30, 1996, were $1.2 million.
The following table sets forth the aggregate amount of the Company's
classified assets, and of the general and specific loss allowances as of the
dates indicated. Information at June 30, 1992 represents classified assets data
for the Bank only.
At June 30,
------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands)
Substandard assets (1).................. $1,226 $1,574 $5,111 $7,375 $ 9,468
Doubtful assets ........................ --- --- --- --- ---
Loss assets............................. --- --- --- --- 213
Special mention......................... --- --- --- 2,500 3,700
------ ------ ------ ------ -------
Total classified assets.............. $1,226 $1,574 $5,111 $9,875 $13,381
====== ====== ====== ====== =======
General loss allowances................. $2,009 $2,013 $2,050 $2,051 $ 2,305
Specific loss allowances................ --- --- --- --- ---
------ ------ ------ ------ -------
Total allowances..................... $2,009 $2,013 $2,050 $2,051 $ 2,305
====== ====== ====== ====== =======
- ---------------
(1) Includes REO, net, of $0.2, $0.2, $0.8, $1.8, and $1.6 million,
respectively.
The Company regularly reviews its loan portfolio to determine whether any
loans require classification in accordance with applicable regulations. Not all
assets classified by the Company as substandard, doubtful or loss are included
as non-performing assets, and not all of the Company's non-performing assets
constitute classified assets.
Substandard Assets. At June 30, 1996, the Company had 65 loans classified
as substandard totaling approximately $1.0 million. Included in substandard
assets are certain loans to facilitate the sale of the real estate owned,
totaling 152,000 at June 30, 1996. These are former REO properties sold on
contract that are included as substandard assets to the extent the loan balance
exceeds the appraised value of the property.
Also included in substandard assets at June 30, 1996, are slow mortgage
loans (loans or contracts delinquent for generally 90 days or more) aggregating
$880,000, slow consumer loans totaling $11,000 and REO of $183,000.
Special Mention Assets. The Company classified no assets as special
mention at June 30, 1996, 1995 and 1994. The Company's assets subject to special
mention at June 30, 1993, and 1992 totaled $2.5 million and $3.7 million,
respectively.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for
losses on loans, which is charged to earnings. The provision is determined in
conjunction with management's review and evaluation of current economic
conditions (including those of the Bank's lending area), changes in the
character and size of the loan portfolio, loan delinquencies (current status as
well as past and anticipated trends) and adequacy of collateral securing loan
delinquencies, historical and estimated net charge-offs, and other pertinent
information derived from a review of the loan portfolio. The Company has
increased the provision for losses on loans partly in recognition of changing
economic conditions and its increased perception of risks inherent in its
commercial real estate and multi-family loan portfolio. Loans or portions
thereof are charged to the allowance when losses are considered probable. In
management's opinion, the Company's allowance for possible loan losses is
adequate to absorb anticipated future losses from loans at June 30, 1996.
Summary of Loan Loss Experience. The following table analyzes changes
in the allowance for loan losses during the past five years ended June 30, 1996.
Information for the year ended June 30, 1992 represents data for the Bank only.
Year Ended
June 30,
-----------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in Thousands)
Balance of allowance at
beginning of period....................... $2,013 $2,050 $2,051 $2,305 $1,981
------ ------ ------ ------ ------
Add Recoveries of loans previously
charged off -- residential real
estate loans.............................. 2 12 17 1 ---
Less charge-offs:
Residential real estate loans............. 37 93 82 22 48
Commercial real estate loans.............. 3 2 --- 598 778
Consumer loans............................ --- 22 1 2 ---
------ ------ ------ ------ ------
Net charge-offs.............................. 38 105 66 621 826
------ ------ ------ ------ ------
Provisions for losses on loans............... 34 68 65 367 1,150
------ ------ ------ ------ ------
Balance of allowance at end
of period................................. $2,009 $2,013 $2,050 $2,051 $2,305
====== ====== ====== ====== ======
Net charge-offs to total average
loans outstanding for period.............. .03% .08% .05% .46% .60%
Allowance at end of period to
loans receivable at end of period......... 1.38 1.45 1.59 1.52 1.70
Allowance to total non-performing
loans at end of period.................... 117.07 114.87 44.21 38.44 31.31
Allocation of Allowance for Loan Losses. The following table presents
an analysis of the allocation of the Company's allowance for loan losses at the
dates indicated. Information for the year ended June 30, 1992 represents
allowance data for the Bank only.
June 30,
----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ----------------- ---------------- ----------------- -----------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
to total to total to total to total to total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ --------- ------- -------- ------- ------- ------- -------- ------- --------
(Dollars in Thousands)
Balance at end of period
applicable to:
Residential $ --- 59.11% $ 10 57.53% $ 48 57.29% $ 194 55.79% $ 165 53.55%
Commercial real estate 29 24.44 30 25.19 438 26.02 478 28.36 476 31.97
Multi-family 264 10.52 264 10.16 264 8.95 264 9.15 136 8.88
Construction loans --- 3.37 --- 5.14 --- 6.04 --- 4.86 --- 2.74
Commercial loans --- .01 --- .01 --- .01 --- 0.04 --- 0.08
Consumer loans 24 2.55 20 1.97 39 1.69 37 1.80 38 2.78
Unallocated 1,692 --- 1,689 --- 1,261 --- 1,078 --- 1,490 ---
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $2,009 100.00% $2,013 100.00% $2,050 100.00% $2,051 100.00% $2,305 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Investments
Federally chartered savings associations have the authority to invest
in various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds sold. Subject to various restrictions, federally
chartered savings associations may also invest a portion of their assets in
commercial paper, corporate debt securities and asset-backed securities. The
investment policy of MCHI, which is established by the Board of Directors and is
implemented by the Executive Committee, is designed primarily to maximize the
yield on the investment portfolio subject to minimal liquidity risk, default
risk, interest rate risk, and prudent asset/liability management.
Specifically, MCHI's policies generally limit investments in corporate
debt obligations to those which are rated in the two highest rating categories
by a nationally recognized rating agency at the time of the investment and such
obligations must continue to be rated in one of the four highest rating
categories. Commercial bank obligations, such as certificates of deposit,
brokers acceptances, and federal funds must be rated "C" or better by a major
rating service. Commercial paper must be rated A-1 by Standard and Poor's and
P-1 by Moody's. The policies also allow investments in obligations of federal
agencies such as the Government National Mortgage Association ("GNMA"), FNMA,
and FHLMC, and obligations issued by state and local governments. MCHI does not
utilize options or financial or futures contracts.
The Company's investment portfolio consists of marketable equity
securities, U.S. Treasury and agency securities, state and municipal bonds,
investment in two Indiana limited partnerships and FHLB stock. At June 30, 1996,
approximately $14.2 million, including securities at market value for those
classified as available for sale and at amortized cost for those classified as
held to maturity, or 7.79% of the Company's total assets, consisted of such
investments.
The following tables set forth the carrying value and market value of
the Company's investments at the dates indicated.
At June 30,
-------------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ---------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- ------ -------- ------ -------- ------
(In Thousands)
Securities available for sale (1):
Federal agencies................. $ 1,000 $ 1,000 $ 3,000 $ 2,985 $ --- $ ---
Marketable equity securities..... --- --- --- --- --- ---
------ ------ ------ ------ ------ ------
Total securities available
for sale....................... 1,000 1,000 3,000 2,985 --- ---
------ ------ ------ ------ ------ ------
Securities held to maturity (2):
U.S. Treasury.................... 3,015 2,975 3,035 2,978 3,055 2,908
Federal agencies................. 6,954 6,917 11,000 10,744 17,986 17,598
State and municipal.............. 610 605 610 592 900 862
Other ........................... 988 1,000 --- --- --- ---
------ ------ ------ ------ ------ ------
Total securities held
to maturity.................... 11,567 11,497 14,645 14,314 21,941 21,368
------ ------ ------ ------ ------ ------
Real estate limited partnerships.... 1,624 (4) 1,527 (4) 1,422 (4)
FHLB stock (3)...................... 988 988 909 909 909 909
------- ------- -------
Total investments.............. $15,179 $20,081 $24,272
======= ======= =======
- -------------
(1) Upon adoption of SFAS No. 115 as of July 1, 1994, securities available
for sale are recorded at market value in the financial statements.
Prior to the adoption of SFAS No. 115, the marketable equity securities
currently classified as available for sale were carried at the lower
cost or market.
(2) Mortgage-backed securities included in securities held to maturity in
the financial statements are included in the gross loans receivable
table on page 2 of this Form 10-K.
(3) Market value approximates carrying value.
(4) Market values are not available, nor have there been recent appraisals
of the apartment complexes invested in by the partnerships.
The following table sets forth investment securities and FHLB stock which mature
during each of the periods indicated and the weighted average yields for each
range of maturities at June 30, 1996.
Amount at June 30, 1996 which matures in
-------------------------------------------------------------------------
One One to Over
Year or less Five Years Ten Years and Stock
-------------------- ----------------------- ----------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- ------- -------- ------- -------- -------
(Dollars in Thousands)
Securities available for sale (1):
Federal agencies................. $1,000 4.20% $ --- ---% $ --- ---%
------ ---- ------ ---- ------ ----
Total securities available
for sale....................... 1,000 4.20 --- --- --- ---
------ ---- ------ ---- ------ ----
Securities held to maturity (2):
U.S. Treasury.................... 1,011 4.84 2,004 5.16 --- ---
Federal agencies................. 5,954 5.17 1,000 5.53 --- ---
State and municipal.............. --- --- 610 4.85 --- ---
Other ........................... 988 5.32 --- --- --- ---
------ ---- ------ ---- ------ ----
Total securities held
to maturity.................... 7,953 5.15 3,614 5.21 --- ---
------ ---- ------ ---- ------ ----
FHLB stock.......................... --- --- --- --- 988 7.53
------ ---- ------ ---- ------ ----
Total investments.............. $8,953 5.04% $3,614 5.21% $ 988 7.53%
====== ==== ====== ==== ====== ====
- ----------------
(1) Securities available for sale are set forth at amortized cost for
purposes of this table.
(2) Mortgage-backed securities included in securities held to maturity in
the financial statements are included in the gross loans receivable
table on page 2.
The Bank owns 99% of the limited partnership interests in Pedcor
Investments 1987-II, an Indiana limited partnership ("Pedcor") organized to
build, own, operate and lease a 144-unit apartment complex in Indianapolis,
Indiana. The project, operated as multi-family, low/moderate income housing
project, is complete and performing as planned. A low/moderate income housing
project qualifies for certain tax credits if (i) it is a residential rental
property, (ii) the units are used on a nontransient basis, and (iii) 20% or more
of the units in the project are occupied by tenants whose incomes are 50% or
less of the area median gross income, adjusted for family size, or,
alternatively, at least 40% of the units in the project are occupied by tenants
whose incomes are 60% of the area median gross income. Qualified low income
housing projects generally must comply with these and other rules for 15 years,
beginning with the first year the project qualifies for the tax credit, or some
or all of the tax credit together with interest may be recaptured. The tax
credit is subject to limitations on the use of the general business credit, but
no basis reduction is required for any portion of the tax credit claimed.
The Bank committed to invest approximately $3.41 million in Pedcor at
inception of the project in January, 1988. Through June 30, 1996, the Bank has
invested approximately $3.28 million in Pedcor with 1 additional annual capital
contribution remaining to be paid in January, 1997 totaling $130,000. The
additional contribution will be used for operating and other expenses of the
partnership. This payment is contingent upon the Bank not exercising a put
option which would require the general partners to buy out the Bank's interest
in the partnership for $5,000. The tax credits resulting from Pedcor's operation
of a low/moderate income housing project will be available to the Company
through 1998. Although the Company has reduced income tax expense by the full
amount of the tax credit available each year, it has not been able to fully
utilize available tax credits to reduce income taxes payable because it is not
allowed to use tax credits that would reduce its regular corporate tax liability
below its alternative minimum tax liability. The Bank may carryforward unused
tax credits for a period of 15 years and believes it will be able to utilize
available tax credits during the carryforward period.
Pedcor has incurred operating losses from its operations primarily due to
accelerated depreciation of assets and other factors. Certain fees to the
general partner not recorded or estimable to date by the partnership under
provisions of the partnership agreement could adversely affect future operating
results when accrued or paid. The Bank has accounted for its investment in
Pedcor on the equity method, and, accordingly, has recorded its shares of these
losses as reductions to its investment in Pedcor, which at June 30, 1996, was
$1.6 million.
The following summarizes the Bank's equity in Pedcor's losses and tax
credits recognized in the Company's consolidated financial statements:
Year Ended June 30,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- -------
Investment in Pedcor:
Accumulated contributions..................... $3,280 $2,990 $2,700 $2,405 $1,995
Net of equity in losses....................... 1,624 1,527 1,422 1,354 1,156
Equity in losses, net
of income tax effect.......................... (117) (111) (137) (104) (101)
Tax credit......................................... 405 405 405 405 405
------ ------ ------ ------ ------
Increase in after-tax net income
from Pedcor investment........................ $ 288 $ 294 $ 268 $ 301 $ 304
====== ====== ====== ====== ======
Federal regulations require an FHLB-member savings association to maintain
an average daily balance of liquid assets equal to a monthly average of not less
than a specified percentage of its net withdrawable savings deposits plus
short-term borrowings. Liquid assets include cash, certain time deposits,
certain bankers' acceptances, specified U.S. government, state or federal agency
obligations, certain corporate debt securities, commercial paper, certain mutual
funds, certain mortgage-related securities, and certain first lien residential
mortgage loans. This liquidity requirement may be changed from time to time by
the OTS to any amount within the range of 4% to 10%, and is currently 5%. Also,
a savings association currently must maintain short-term liquid assets
constituting at least 1% of its average daily balance of net withdrawable
deposit accounts and current borrowings. Monetary penalties may be imposed for
failure to meet these liquidity requirements. At June 30, 1996, the Bank had
liquid assets of $15.1 million, and a regulatory liquidity ratio of 12.2%, of
which 7.8% constituted short-term investments. Sources of Funds
General. Deposits with the Bank have traditionally been the Company's
primary source of funds for use in lending and investment activities. In
addition to deposits, the Company derives funds from loan amortization,
prepayments, retained earnings and income on earning assets. While loan
amortization and income on earning assets are relatively stable sources of
funds, deposit inflows and outflows can vary widely and are influenced by
prevailing interest rates, market conditions and levels of competition. The
Company also relies on borrowings from the Federal Home Loan Bank ("FHLB") of
Indianapolis to support the Bank's loan originations and to assist in
asset/liability management.
Deposits. Deposits are attracted, principally from within Grant and
contiguous counties and Adams County, through the offering of a broad selection
of deposit instruments including NOW and other transaction accounts, fixed-rate
certificates of deposit, individual retirement accounts, and savings accounts.
The Bank does not actively solicit or advertise for deposits outside of Grant
and Adams Counties. Substantially all of the Bank's depositors are residents of
those counties. Deposit account terms vary, with the principal differences being
the minimum balance required, the amount of time the funds remain on deposit and
the interest rate. The Bank has no brokered deposits.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Bank on a periodic basis. Determination of
rates and terms are predicated on funds acquisition and liquidity requirements,
rates paid by competitors, growth goals, and federal regulations. The Bank
relies, in part, on customer service and long-standing relationships with
customers to attract and retain its deposits, but also aggressively prices its
deposits in relation to rates offered by its competitors.
An analysis of the Bank deposit accounts by type, maturity, and rate at
June 30, 1996, is as follows:
Minimum Balance at Weighted
Opening June 30, % of Average
Type of Account Balance 1996 Deposits Rate
- --------------- ---------- ----------- -------- ---------
(Dollars in Thousands)
Withdrawable:
Savings accounts....................... $ 10.00 $ 17,572 13.92% 3.25%
NOW and other transactions accounts.... 10.00 20,803 16.47 3.33
-------- ------
Total withdrawable........................ 38,375 30.39 3.29
-------- ------
Certificates (original terms):............
28 days................................ 1,000 321 .25 3.76
91 days................................ 1,000 970 .77 4.36
182 days............................... 1,000 9,567 7.58 4.84
12 months.............................. 1,000 14,983 11.87 5.35
18 months.............................. 1,000 1,259 1.00 5.46
24 months.............................. 1,000 1,562 1.24 5.37
30 months.............................. 1,000 9,942 7.87 5.75
36 months.............................. 1,000 1,774 1.41 5.27
48 months.............................. 1,000 6,131 4.86 7.01
60 months.............................. 1,000 11,860 9.39 6.20
72 months.............................. 1,000 39 .03 5.77
96 months.............................. 1,000 369 .29 6.39
IRA's
28 days................................ 500 1 .00 3.70
91 days................................ 500 182 .14 4.37
182 days............................... 500 161 .13 4.88
12 months.............................. 500 466 .37 5.12
18 months.............................. 500 56 .04 5.57
24 months.............................. 500 38 .03 4.79
30 months.............................. 500 983 .78 5.55
36 months.............................. 500 63 .05 5.06
48 months.............................. 500 4,768 3.78 7.51
60 months.............................. 500 20,775 16.45 6.50
72 months.............................. 500 615 .49 5.63
96 months.............................. 500 1,000 .79 6.12
-------- ------
Total certificates (1).................... 87,885 69.61 5.96
-------- ------
Total deposits............................ $126,260 100.00% 5.15
======== ======
- ------------
(1) Including $11.8 million in certificates of deposit of $100,000 or more.
The following table sets forth by various interest rate categories the
composition of time deposits of the Bank at the dates indicated:
At June 30,
---------------------------------------------
1996 1995 1994
------- ------- -------
(In Thousands)
Under 5%............... $14,088 $15,072 $38,221
5.00 - 6.99%........... 50,836 41,070 23,258
7.00 - 8.99%........... 22,961 27,254 14,529
9.00% and over......... --- --- ---
------- ------- -------
Total.................. $87,885 $83,396 $76,008
======= ======= =======
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years indicated, and
the total maturing thereafter. Matured certificates which have not been renewed
as of June 30, 1996, have been allocated based upon certain rollover
assumptions.
Amounts At
June 30, 1996, Maturing in
------------------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
------- ----- ----- -----------
(In Thousands)
Under 5%....................... $13,546 $ 542 $ --- $ ---
5.00 - 6.99% .................. 19,715 9,223 6,843 15,055
7.00 - 8.99% .................. 363 3,304 8,278 11,016
------- ------- ------- -------
Total ......................... $33,624 $13,069 $15,121 $26,071
======= ======= ======= =======
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1996.
Maturity Period (In Thousands)
------------------------ --------------
Three months of less................................. $ 907
Greater than three months through six months......... 333
Greater than six months through twelve months........ 1,176
Over twelve months................................... 9,345
-------
Total................................................ $11,761
=======
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Bank at the dates
indicated, and the amount of increase or decrease in such deposits as compared
to the previous period.
DEPOSIT ACTIVITY
---------------------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
Balance at from Balance at from
June 30, % of June 30, June 30, % of June 30,
1996 Deposits 1995 1995 Deposits 1994
---------- -------- --------- ---------- -------- ---------
(Dollars in Thousands)
Withdrawable:
Savings accounts.............. $ 17,572 13.92% $(1,207) $ 18,779 15.57% $(6,620)
NOW and other transactions
accounts.................... 20,803 16.47 2,365 18,438 15.29 (1,120)
-------- ------ ------- -------- ------ --------
Total withdrawable............... 38,375 30.39 1,158 37,217 30.86 (7,740)
-------- ------ ------- -------- ------ --------
Certificates (original terms):
28 days.......................... 321 .25 18 303 .25 235
91 days.......................... 970 .77 (72) 1,042 .86 (47)
182 days......................... 9,567 7.58 (2,062) 11,629 9.64 (452)
12 months........................ 14,983 11.87 5,842 9,141 7.58 1,015
18 months........................ 1,259 1.00 (486) 1,745 1.45 (442)
24 months........................ 1,562 1.24 (420) 1,982 1.64 (698)
30 months........................ 9,942 7.87 (1,029) 10,971 9.10 1,471
36 months........................ 1,774 1.41 302 1,472 1.22 (113)
48 months........................ 6,131 4.86 (60) 6,191 5.13 3,229
60 months........................ 11,860 9.39 619 11,241 9.32 1,866
72 months........................ 39 .03 (1) 40 .03 3
96 months........................ 369 .29 (15) 384 .32 (483)
IRA's
28 days.......................... 1 .00 (24) 25 .02 9
91 days.......................... 182 .14 20 162 .13 68
182 days......................... 161 .13 (88) 249 .21 9
12 months........................ 466 .37 132 334 .28 (126)
18 months........................ 56 .04 (78) 134 .11 (89)
24 months........................ 38 .03 --- 38 .03 (14)
30 months........................ 983 .78 (170) 1,153 .96 (158)
36 months........................ 63 .05 29 34 .03 (26)
48 months........................ 4,768 3.78 325 4,443 3.68 4,024
60 months........................ 20,775 16.45 1,721 19,054 15.80 (1,358)
72 months........................ 615 .49 (8) 623 .52 (18)
96 months........................ 1,000 .79 (6) 1,006 .83 (517)
-------- ------ ------- -------- ------ --------
Total certificates............... 87,885 69.61 4,489 83,396 69.14 7,388
-------- ------ ------- -------- ------ --------
Total deposits................... $126,260 100.00% $ 5,647 $120,613 100.00% $ (352)
======== ====== ======= ======== ====== ========
DEPOSIT ACTIVITY
--------------------------------------------------------------------------
Increase
(Decrease)
Balance at from Balance at
June 30, % of June 30, June 30, % of
1994 Deposits 1993 1993 Deposits
--------- -------- -------- ---------- --------
(Dollars in Thousands)
Withdrawable:
Savings accounts............... $ 25,399 21.00% $ 1,342 $ 24,057 19.73%
NOW and other transaction
accounts..................... 19,558 16.17 1,372 18,186 14.91
-------- ------ ------- -------- ------
Total withdrawable................ 44,957 37.17 2,714 42,243 34.64
-------- ------ ------- -------- ------
Certificates (original terms):
28 days........................ 68 .06 (63) 131 .11
91 days........................ 1,089 .90 117 972 .80
182 days....................... 12,081 9.99 (2,889) 14,970 12.28
12 months...................... 8,126 6.72 (1,462) 9,588 7.86
18 months...................... 2,187 1.81 (301) 2,488 2.04
24 months...................... 2,680 2.22 511 2,169 1.78
30 months...................... 9,500 7.85 (864) 10,364 8.50
36 months...................... 1,585 1.31 (216) 1,801 1.48
48 months...................... 2,962 2.45 (604) 3,566 2.92
60 months...................... 9,375 7.75 2,303 7,072 5.80
72 months...................... 37 .03 (7) 44 .04
96 months...................... 867 .72 (77) 944 .77
IRA's
28 days........................ 16 .01 1 15 .01
91 days........................ 94 .07 (29) 123 .10
182 days....................... 240 .20 (75) 315 .26
12 months...................... 460 .38 (31) 491 .40
18 months...................... 223 .18 8 215 .18
24 months...................... 52 .04 11 41 .03
30 months...................... 1,311 1.08 (160) 1,471 1.21
36 months...................... 60 .05 (21) 81 .07
48 months...................... 419 .35 (90) 509 .42
60 months...................... 20,412 16.87 375 20,037 16.43
72 months...................... 641 .53 4 637 .52
96 months...................... 1,523 1.26 (134) 1,657 1.35
-------- ------ ------- -------- ------
Total certificates................ 76,008 62.83 (3,693) 79,701 65.36
-------- ------ ------- -------- ------
Total deposits.................... $120,965 100.00% $ (979) $121,944 100.00%
======== ====== ======= ======== ======
Borrowings. Although deposits are the Company's primary source of
funds, the Company's policy has been to utilize borrowings when they are a less
costly source of funds than deposits (taking into consideration the FDIC
insurance premiums payable on deposits) or can be invested at a positive spread.
The Bank often funds originations of its commercial real estate loans with a
simultaneous borrowing from the FHLB of Indianapolis to assure a profit above
its cost of funds.
The Company's borrowings consist of advances from the FHLB of
Indianapolis upon the security of FHLB stock and certain mortgage loans. Such
advances are made pursuant to several different credit programs each of which
has its own interest rate and range of maturities. The maximum amount that the
FHLB-Indianapolis will advance to member associations, including the Bank, for
purposes other than meeting withdrawals, fluctuates from time to time in
accordance with policies of the FHLB of Indianapolis. At June 30, 1996, FHLB of
Indianapolis advances totaled $6.2 million, representing 3.5% of total assets.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances for the periods indicated, and weighted average
interest rates paid during the periods indicated and as of the end of each of
the periods indicated.
At or for the Year
Ended June 30,
---------------------------------------
1996 1995 1994
------ ------ ------
(Dollars in Thousands)
FHLB Advances:
Average balance outstanding........................................... $6,694 $5,574 $3,331
Maximum amount outstanding at any month-end
during the period................................................ 6,963 7,963 3,825
Weighted average interest rate
during the period................................................ 6.83% 6.85% 7.33%
Weighted average interest rate at
end of period.................................................... 6.50% 6.78% 6.83%
There are regulatory restrictions on advances from the FHLBs. See
"Regulation - Federal Home Loan Bank System" and "- Qualified Thrift Leader."
These limitations are not expected to have any impact on the Company's ability
to borrow from the FHLB of Indianapolis. The Company does not anticipate any
problem obtaining advances appropriate to meet its requirements in the future,
if such advances should become necessary.
Service Corporation Subsidiary
OTS regulations permit federal savings associations to invest in the
capital stock, obligations, or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants in
an aggregate amount not exceeding 2% of an association's assets, plus an
additional 1% of assets if the amount over 2% is used for specified community or
inner-city development purposes. In addition, federal regulations permit
associations to make specified types of loans to such subsidiaries (other than
special-purpose finance subsidiaries), in which the association owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the association's
regulatory capital if the association's regulatory capital is in compliance with
applicable regulations. Current law requires a savings association that acquires
a non-savings association subsidiary, or that elects to conduct a new activity
within a subsidiary, to give the FDIC and the OTS at least 30 days advance
written notice. The FDIC may, after consultation with the OTS, prohibit specific
activities if it determines such activities pose a serious threat to the Savings
Association Insurance Fund ("SAIF").
The Bank's only subsidiary, First Marion Service Corporation ("First
Marion") was organized in 1971 and currently is engaged in the sale of tax
deferred annuities pursuant to an arrangement with One System, Inc., a licensed
insurance broker, in Indianapolis. It also sells mutual funds through an
arrangement with Independent Financial Securities, Inc., a licensed securities
broker, in White Plains, New York. First Marion has one licensed employee
engaged in such sales of tax deferred annuities and mutual funds. In addition,
beginning in July 1995, First Marion began providing 100% financing to borrowers
of the Bank by providing a 20% second mortgage behind the Bank's 80% mortgage.
Such loans amounted to $540,000 at June 30, 1996.
At June 30, 1996, the Bank's investment in First Marion totaled
$58,000. During the year ended June 30, 1996, First Marion had net income of
$14,000.
Employees
As of June 30, 1996, the Bank employed 29 persons on a full-time basis
and 2 persons on a part-time basis. None of the Bank's employees are represented
by a collective bargaining group. Management considers its employee relations to
be good.
Competition
The Bank originates most of its loans to and accepts most of its
deposits from residents of Grant and Adams Counties, Indiana.
The Bank is subject to competition from various financial institutions,
including state and national banks, state and federal savings associations,
credit unions, certain nonbanking consumer lenders, and other companies or
firms, including brokerage houses and mortgage brokers, that provide similar
services in Grant and Adams Counties with significantly larger resources than
the Bank. In particular, three commercial banks and one savings association
compete with the Bank in its market area. The Bank also competes with money
market funds and with insurance companies with respect to its individual
retirement accounts.
Under current law, bank holding companies may acquire savings
associations. Savings associations may also acquire banks under federal law. To
date, several bank holding company acquisitions of healthy savings associations
in Indiana have been completed. Affiliations between banks and healthy savings
associations based in Indiana may also increase the competition faced by the
Bank and MCHI.
In addition, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to
acquire banks in other states and, with state consent and subject to certain
limitations, allows banks to acquire out-of-state branches either through merger
or de novo expansion. The State of Indiana recently passed a law establishing
interstate branching provisions for Indiana state chartered banks consistent
with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The
Indiana Branching Law authorizes Indiana banks to branch interstate by merger or
de novo expansion and authorizes out-of-state banks meeting certain requirements
to branch into Indiana by merger or de novo expansion. The Indiana Branching Law
became effective March 15, 1996, provided that prior to June 1, 1997, interstate
mergers and de novo branches are not permitted to out-of-state banks unless the
laws of their home states permit Indiana banks to merger or establish de novo
branches on a reciprocal basis. This new legislation may also result in
increased competition for the Company.
Because of recent changes in Federal law, interstate acquisitions of
banks are less restricted than they were under prior law. Savings associations
have certain powers to acquire savings associations based in other states, and
Indiana law expressly permits reciprocal acquisition of Indiana savings
associations. In addition, Federal savings associations are permitted to branch
on an interstate basis.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. The Bank competes for loan
originations primarily through the efficiency and quality of services it
provides borrowers, builders and realtors and through interest rates and loan
fees it charges. Competition is affected by, among other things, the general
availability of lendable funds, general and local economic conditions, current
interest rate levels, and other factors that are not readily predictable.
REGULATION
General
The Bank, as a federally chartered savings bank, is a member of the
Federal Home Loan Bank System ("FHLB System") and its deposits are insured by
the FDIC. The Bank is subject to extensive regulation by the OTS. Federal
associations may not enter into certain transactions unless certain regulatory
tests are met or they obtain prior governmental approval and the associations
must file reports with these governmental agencies about their activities and
their financial condition. Periodic compliance examinations of the Bank are
conducted by the OTS which has, in conjunction with the FDIC in certain
situations, examination and enforcement powers. This supervision and regulation
are intended primarily for the protection of depositors and federal deposit
insurance funds. The Bank is also subject to certain reserve requirements under
regulations of the Board of Governors of the Federal Reserve System ("FRB").
Congress is considering legislation that would consolidate the
supervision and regulation of all U.S. financial institutions in one
administrative body (the "Legislation"). It cannot be predicted with certainty
whether or when the Legislation will be enacted or the extent to which the Bank
would be affected thereby.
An OTS regulation establishes a schedule for the assessment of fees
upon all savings associations to fund the operations of the OTS. The regulation
also establishes a schedule of fees for the various types of applications and
filings made by savings associations with the OTS. The general assessment, to be
paid on a semiannual basis, is based upon the savings association's total
assets, including consolidated subsidiaries, as reported in a recent quarterly
thrift financial report. Currently, the assessment rates range from .0172761% of
assets for associations with assets of $67 million or less to .0045864% for
associations with assets in excess of $35 billion. The Bank's semiannual
assessment under this assessment scheme, based upon its total assets at March
31, 1996, was $26,217.
The Bank is also subject to federal and state regulation as to such
matters as loans to officers, directors, or principal shareholders, required
reserves, limitations as to the nature and amount of its loans and investments,
regulatory approval of any merger or consolidation, issuance or retirements of
their own securities, and limitations upon other aspects of banking operations.
In addition, the activities and operations of the Bank are subject to a number
of additional detailed, complex and sometimes overlapping federal and state laws
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and anti-trust
laws.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
banks. The Federal Housing Finance Board ("FHFB"), an independent agency,
controls the FHLB System including the FHLB of Indianapolis. The FHLB System
provides a central credit facility primarily for member savings associations and
other member financial institutions. The Bank is required to hold shares of
capital stock in the FHLB of Indianapolis in an amount at least equal to the
greater of 1% of the aggregate principal amount of its unpaid residential
mortgage loans, home purchase contracts and similar obligations at the end of
each calendar year, .3% of its assets or 1/20 (or such greater fraction
established by the FHLB) of outstanding FHLB advances, commitments, lines of
credit and letters of credit. The Bank is currently in compliance with this
requirement. At June 30, 1996, the Bank's investment in stock of the FHLB of
Indianapolis was $988,400.
In past years, the Bank received dividends on its FHLB stock. All 12
FHLB's are required by law to provide funds for the resolution of troubled
savings associations and to establish affordable housing programs through direct
loans or interest subsidies on advances to members to be used for lending at
subsidized interest rates for low- and moderate-income, owner-occupied housing
projects, affordable rental housing, and certain other community projects. These
contributions and obligations could adversely affect the value of FHLB stock in
the future. For the year ending June 30, 1996, dividends paid to the Bank
totaled $73,000, for an annual rate of 7.87%. A reduction in value of such stock
may result in a corresponding reduction in the Bank's capital.
The FHLB of Indianapolis serves as a reserve or central bank for member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB
System. It makes advances to members in accordance with policies and procedures
established by the FHLB and the Board of Directors of the FHLB of Indianapolis.
All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. Eligible collateral includes first mortgage loans less
than 90 days delinquent or securities evidencing interests therein, securities
(including mortgage-backed securities) issued, insured or guaranteed by the
federal government or any agency thereof, FHLB deposits and, to a limited
extent, real estate with readily ascertainable value in which a perfected
security interest may be obtained. Other forms of collateral may be accepted as
over collateralization or, under certain circumstances, to renew outstanding
advances. All long-term advances are required to provide funds for residential
home financing and the FHLB has established standards of community service that
members must meet to maintain access to long-term advances.
Interest rates charged for advances vary depending upon maturity, the
cost of funds to the FHLB of Indianapolis and the purpose of the borrowing.
Under current law, savings associations which cease to be Qualified Thrift
Lenders are ineligible to receive advances from their FHLB.
Insurance of Deposits
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of banks and thrifts
and safeguards the safety and soundness of the banking and thrift industries.
The FDIC administers two separate insurance funds, the BIF for commercial banks
and state savings banks and the SAIF for savings associations and banks that
have acquired deposits from savings associations. The FDIC is required to
maintain designated levels of reserves in each fund. The reserves of the SAIF
are currently below the level required by law, primarily because a significant
portion of the assessments paid into the SAIF have been used to pay the cost of
prior thrift failures, while the reserves of the BIF met the level required by
law in May, 1995. Thrifts are generally prohibited from converting from one
insurance fund to the other until the SAIF meets its designated reserve level,
except with the prior approval of the FDIC in certain limited cases, and
provided certain fees are paid. The insurance fund conversion provisions do not
prohibit a SAIF member from converting to a bank charter or merging with a bank
during the moratorium as long as the resulting bank continues to pay the
applicable insurance assessments to the SAIF during such period and as long as
certain other conditions are met.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time and may decrease such rates if such target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. Such risk level is determined
based on the institution's capital level and the FDIC's level of supervisory
concern about the institution.
Because of the differing reserve levels of the SAIF and the BIF,
deposit insurance assessments paid by well-capitalized BIF-insured institutions
were recently reduced significantly below the level paid by well-capitalized
SAIF-insured institutions. Assessments paid by well-capitalized SAIF-insured
institutions exceeded those paid by well-capitalized BIF-insured institutions by
approximately $0.19 per $100 in deposits in late 1995 and exceeded them by $0.23
per $100 in deposits beginning in 1996. Such premium disparity could have a
negative competitive impact on the Bank and other institutions with SAIF
deposits.
Congress has recently considered many proposals designed to
recapitalize the SAIF and eliminate the significant premium disparity between
the BIF and the SAIF. Among those considered is a recapitalization plan
providing for a special assessment, currently estimated at approximately $0.68
per $100 of SAIF deposits, in order to increase SAIF reserves to the level
required by law. Certain BIF-insured banks holding SAIF-insured deposits would
pay a lower special assessment. In addition, the cost of prior thrift failures
would be shared by both the SAIF and the BIF. Such cost sharing might increase
BIF assessments. SAIF assessments for well-capitalized SAIF-insured institutions
would be set at a significantly lower level after the legislation is adopted and
could never be reduced below the level set for well-capitalized BIF-insured
institutions. The recapitalization plan also provides for the merger of the SAIF
and BIF on January 1, 1998, subject to certain conditions. It has also been
proposed that the savings association charter be eliminated in connection with
the proposed merger of the BIF and SAIF.
The Bank had $126.3 million in deposits at June 30, 1996. If the
one-time special assessment in the legislative proposal is enacted into law, the
Bank will pay an additional after-tax assessment of approximately $520,000
(based upon deposits at June 30, 1996), which will reduce capital and earnings
for the quarter in which any such assessment is recorded. However, it is
expected that quarterly SAIF assessments would be reduced significantly sometime
after adoption of the legislation.
No assurances can be given that the SAIF recapitalization plan
discussed above or any other plan will be enacted into law or in what form it
may be enacted. In addition, the Company can give no assurances that the
disparity between BIF and SAIF assessments will be eliminated. If the proposed
legislation is not adopted, SAIF premiums may increase and the disparity between
BIF and SAIF premiums may become greater, with a resulting adverse effect on the
Company's operations.
Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common stockholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill (on a declining basis until 1995), purchased mortgage
servicing rights (which may be included in an amount up to 50% of core capital,
but which are to be reported on an association's balance sheet at the lesser of
90% of their fair market value, 90% of their original purchase price, or 100% of
their remaining unamortized book value), and purchased credit card relationships
(which may be included in an amount up to 25% of core capital) less
nonqualifying intangibles. Under the tangible capital requirement, a savings
association must maintain tangible capital (core capital less all intangible
assets except purchased mortgage servicing rights which may be included after
making the above-noted adjustments) of at least 1.5% of total assets. Under the
risk-based capital requirements, a minimum amount of capital must be maintained
by a savings association to account for the relative risks inherent in the type
and amount of assets held by the savings association. The risk-based capital
requirement requires a savings association to maintain capital (defined
generally for these purposes as core capital plus general valuation allowances
and permanent or maturing capital instruments such as preferred stock and
subordinated debt less assets required to be deducted) equal to 8.0% of
risk-weighted assets. Assets are ranked as to risk in one of four categories
(0-100%) with a credit risk-free asset such as cash requiring no risk-based
capital and an asset with a significant credit risk such as a non-accrual loan
being assigned a factor of 100%. At June 30, 1996, based on the capital
standards then in effect, the Bank was in compliance with the fully phased-in
capital requirements.
The OTS has delayed implementation of a rule which sets forth the
methodology for calculating an interest rate risk component to be incorporated
into the OTS regulatory capital rule. Under the rule, only savings associations
with "above normal" interest rate risk (institutions whose portfolio equity
would decline in value by more than 2% of assets in the event of a hypothetical
200-basis-point move in interest rates) will be required to maintain additional
capital for interest rate risk under the risk-based capital framework. In
addition, most institutions with less than $300 million in assets and a
risk-based capital ratio in excess of 12%, such as the Bank, are subject to less
stringent reporting requirements relating to the interest rate component of the
new rule. Although the OTS has decided to delay implementation of this rule, it
will continue to monitor the level of interest rate risk at individual
institutions and it retains the authority, on a case-by-case basis, to impose
additional capital requirements for individual institutions with significant
interest rate risk.
If an association is not in compliance with its capital requirements,
the OTS is required to prohibit asset growth and to impose a capital directive
that may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements, which actions may include restrictions on operations and banking
activities, the imposition of a capital directive, a cease and desist order,
civil money penalties or harsher measures such as the appointment of a receiver
or conservator or a forced merger into another institution.
Prompt Corrective Action
FedICIA requires, among other things, federal bank regulatory
authorities to take "prompt corrective action" with respect to institutions that
do not meet minimum capital requirements. For these purposes, FedICIA
establishes five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. At June 30, 1996, the Bank was categorized as "well
capitalized."
An institution is deemed to be "well capitalized" if it has a total
risk-based capital ratio of 10% or greater, a Tier I risk-based capital ratio of
6% or greater, and a leverage ratio of 5% or greater, and is not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure. An institution is deemed to be "adequately
capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier
I risk-based capital ratio of 4% or greater, and generally a leverage ratio 4%
or greater. An institution is deemed to be "undercapitalized" if it has a total
risk-based capital ratio of less than 8%, a Tier I risk-based capital ratio of
less than 4%, or generally a leverage ratio of less than 4%; and (d)
"significantly undercapitalized" if it has a total risk-based capital ratio of
less than 6%, a Tier I risk-based capital ratio of less than 3%, or a leverage
ratio of less than 3%. An institution is deemed to be "critically
undercapitalized" if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than 2%.
"Undercapitalized" institutions are subject to growth limitations and
are required to submit a capital restoration plan. If an "undercapitalized"
institution fails to submit, or fails to implement in a material respect, an
acceptable plan, it is treated as if it is "significantly undercapitalized."
"Significantly undercapitalized" institutions are subject to one or more of a
number of requirements and restrictions, including an order by the FDIC to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cease receipt of deposits from correspondent banks, and
restrictions on compensation of executive officers. "Critically
undercapitalized" institutions may not, beginning 60 days after becoming
"critically undercapitalized," make any payment of principal or interest on
certain subordinated debt or extend credit for a highly leveraged transaction or
enter into any transaction outside the ordinary course of business. In addition,
"critically undercapitalized" institutions are subject to appointment of a
receiver or conservator.
Capital Distributions Regulation
An OTS regulation imposes limitations upon all "capital distributions"
by savings associations, including cash dividends, payments by an institution to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system of regulation, with
the greatest flexibility being afforded to well-capitalized institutions. A
savings association which has total capital (immediately prior to and after
giving effect to the capital distribution) that is at least equal to its fully
phased-in capital requirements would be a Tier 1 institution ("Tier 1
Institution"). An institution that has total capital at least equal to its
minimum capital requirements, but less than its fully phased-in capital
requirements, would be a Tier 2 institution ("Tier 2 Institution"). An
institution having total capital that is less than its minimum capital
requirements would be a Tier 3 institution ("Tier 3 Institution"). However, an
institution which otherwise qualifies as a Tier 1 institution may be designated
by the OTS as a Tier 2 or Tier 3 institution if the OTS determines that the
institution is "in need of more than normal supervision." The Bank is currently
a Tier 1 Institution.
A Tier 1 Institution could, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to 100% of its
net income to date during the calendar year plus an amount that would reduce by
one-half its "surplus capital ratio" (the excess over its Fully Phased-in
Capital Requirements) at the beginning of the calendar year. Any additional
amount of capital distributions would require prior regulatory approval.
The OTS has proposed revisions to these regulations which would permit
savings associations to declare dividends in amounts which would assure that
they remain adequately capitalized following the dividend declaration. Savings
associations in a holding company system which are rated Camel 1 or 2 and which
are not in troubled condition would need to file a prior notice with the OTS
concerning such dividend declaration.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies.
The association's written real estate lending policies must be reviewed
and approved by the association's board of directors at least annually. Further,
each association is expected to monitor conditions in its real estate market to
ensure that its lending policies continue to be appropriate for current market
conditions.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety
and soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. Additional standards on earnings and classified assets are expected
to be issued in the near future.
Federal Reserve System
Under FRB regulations, the Bank is required to maintain reserves
against its transaction accounts (primarily checking and NOW accounts) and
non-personal money market deposit accounts. A federal savings association, like
other depository institutions maintaining reservable accounts, may borrow from
the Federal Reserve Bank "discount window," but the FRB's regulations require
the savings association to exhaust other reasonable alternative sources,
including borrowing from its regional FHLB, before borrowing from the Federal
Reserve Bank. FedICIA imposes certain limitations on the ability of
undercapitalized depository institutions to borrow from Federal Reserve Banks.
Holding Company Regulation
MCHI is regulated as a "non-diversified unitary savings and loan
holding company" within the meaning of the Home Owners' Loan Act, as amended
("HOLA"), and subject to regulatory oversight of the Director of the OTS. As
such, MCHI is registered with the OTS and thereby subject to OTS regulations,
examinations, supervision and reporting requirements. As a subsidiary of a
savings and loan holding company, the Bank is subject to certain restrictions in
its dealings with MCHI and with other companies affiliated with MCHI.
HOLA generally prohibits a savings and loan holding company, without
prior approval of the Director of the OTS, from (i) acquiring control of any
other savings association or savings and loan holding company or controlling the
assets thereof or (ii) acquiring or retaining more than 5 percent of the voting
shares of a savings association or holding company thereof which is not a
subsidiary. Additionally, under certain circumstances a savings and loan holding
company is permitted to acquire, with the approval of the Director of the OTS,
up to 15 percent of previously unissued voting shares of an under-capitalized
savings association for cash without that savings association being deemed
controlled by the holding company. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock may also acquire control of any savings institution, other
than a subsidiary institution, or any other savings and loan holding company.
MCHI's Board of Directors presently intends to continue to operate MCHI
as a unitary savings and loan holding company. There are generally no
restrictions on the permissible business activities of a unitary savings and
loan holding company. However, if the Director of OTS determines that there is
reasonable case to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness, or stability of its subsidiary savings association, the Director of
the OTS may impose such restrictions as deemed necessary to address such risk
and limiting (i) payment of dividends by the savings association, (ii)
transactions between the savings association and its affiliates, and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association.
Notwithstanding the above rules as to permissible business activities
of unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. (Additional
restrictions on securing advances from the FHLB also apply). See "--Qualified
Thrift Lender." At June 30, 1996, the Bank's asset composition was in excess of
that required to qualify the Bank as a Qualified Thrift Lender.
If MCHI were to acquire control of another savings institution other
than through a merger or other business combination with the Bank, MCHI would
thereupon become a multiple savings and loan holding company. Except where such
acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings association meets the QTL test,
the activities of MCHI and any of its subsidiaries (other than the Bank or other
subsidiary savings associations) would thereafter be subject to further
restrictions. HOLA provides that, among other things, no multiple savings and
loan holding company or subsidiary thereof which is not a savings association
shall commence or continue for a limited period of time after becoming a
multiple savings and loan holding company or subsidiary thereof, any business
activity other than (i) furnishing or performing management services for a
subsidiary savings association, (ii) conducting an insurance agency or escrow
business, (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary savings institution, (iv) holding or managing properties used
or occupied by a subsidiary savings institution, (v) acting as trustee under
deeds of trust, (vi) those activities previously directly authorized by the
FSLIC by regulation as of March 5, 1987, to be engaged in by multiple holding
companies or (vii) those activities authorized by the FRB as permissible for
bank holding companies, unless the Director of the OTS by regulation prohibits
or limits such activities for savings and loan holding companies. Those
activities described in (vii) above must also be approved by the Director of the
OTS prior to being engaged in by a multiple holding company.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5,1987, or if
the laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state-chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days advance notice of such
declaration and payment. Any dividend declared during such period or without the
giving of such notice shall be invalid.
Federal Securities Law
The shares of Common Stock of MCHI are registered with the SEC under
the 1934 Act. MCHI is subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the 1934 Act and the rules of the
SEC thereunder. After the third anniversary of the Bank's conversion to stock
form, if MCHI has fewer than 300 shareholders, it may deregister its shares
under the 1934 Act and cease to be subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of MCHI may
not be resold without registration or unless sold in accordance with the resale
restrictions of Rule 144 under the 1933 Act. If MCHI meets the current public
information requirements under Rule 144, each affiliate of MCHI who complies
with the other conditions of Rule 144 (including the two-year holding period and
those that require the affiliate's sale to be aggregated with those of certain
other persons) would be able to sell in the public market, without registration,
a number of shares not to exceed, in any three-month period, the greater of (i)
1% of the outstanding shares of MCHI or (ii) the average weekly volume of
trading in such shares during the preceding four calendar weeks.
Qualified Thrift Lender
Under current OTS regulations, the QTL test requires that a savings
association have at least 65% of its portfolio assets invested in "qualified
thrift investments" on a monthly average basis in 9 out of every 12 months.
Qualified thrift investments under the QTL test include: (i) loans made to
purchase, refinance, construct, improve or repair domestic residential housing
or manufactured housing; (ii) home equity loans; (iii) mortgage-backed
securities; (iv) direct or indirect existing obligations of either the FDIC or
the FSLIC for ten years from the date of issuance, if issued prior to July 1,
1989; (v) obligations of the FDIC, FSLIC, FSLIC Resolution Fund and the
Resolution Trust Corporation for a five year period from July 1, 1989, if issued
after such date; (vi) FHLB stock; (vii) 50% of the dollar amount of residential
mortgage loans originated and sold within 90 days of origination; (viii)
investments in service corporations that derive at least 80% of their gross
revenues from activities directly related to purchasing, refinancing,
constructing, improving or repairing domestic residential real estate or
manufactured housing; (ix) 200% of the dollar amount of loans and investments
made to acquire, develop and construct one- to four-family residences that are
valued at no more than 60% of the median value of homes constructed in the area;
(x) 200% of the dollar amount of loans for the acquisition or improvement of
residential real property, churches, schools, and nursing homes located within,
and loans for any purpose to any small business located within, an area where
credit needs of its low and moderate income residents are determined not to have
been adequately met; (xi) loans for the purchase, construction, improvement or
upkeep of churches, schools, nursing homes and hospitals not qualified under
(x); (xii) up to 10% of portfolio assets held in consumer loans or loans for
educational purposes; and (xiii) FHLMC and FNMA stock. However, the aggregate
amount of investments in categories (vii)-(xiii) which may be taken into account
for the purpose of whether an institution meets the QTL test cannot exceed 15%
of portfolio assets. Portfolio assets under the QTL test include all of an
association's assets less (i) goodwill and other intangibles, (ii) the value of
property used by the association to conduct its business, and (iii) its liquid
assets as required to be maintained under law up to 20% of total assets.
A savings association which fails to meet the QTL test must either
convert to a bank (but its deposit insurance assessments and payments will be
those of and paid to SAIF) or be subject to the following penalties: (i) it may
not enter into any new activity except for those permissible for a national bank
and for a savings association; (ii) its branching activities shall be limited to
those of a national bank; (iii) it shall not be eligible for any new FHLB
advances; and (iv) it shall be bound by regulations applicable to national banks
respecting payment of dividends. Three years after failing the QTL test the
association must (i) dispose of any investment or activity not permissible for a
national bank and a savings association and (ii) repay all outstanding FHLB
advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
A savings association failing to meet the QTL test may requalify as a
QTL if it thereafter meets the QTL test. In the event of such requalification it
shall not be subject to the penalties described above. A savings association
which subsequently again fails to qualify under the QTL test shall become
subject to all of the described penalties without application of any waiting
period.
At June 30, 1996, 83.17% of the Bank's portfolio assets (as defined on
that date) were invested in qualified thrift investments (as defined on that
date), and therefore the Bank's asset composition was in excess of that required
to qualify the Bank as a QTL. Also, the Bank does not expect to significantly
change its lending or investment activities in the near future, and therefore
expects to continue to qualify as a QTL, although there can be no such
assurance.
Community Reinvestment Act Matters
Under current law, ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") must be disclosed. The disclosure
includes both a four-unit descriptive rating -- using terms such as satisfactory
and unsatisfactory -- and a written evaluation of each institution's
performance. Each FHLB is required to establish standards of community
investment or service that its members must maintain for continued access to
long-term advances from the FHLBs. The standards take into account a member's
performance under the CRA and its record of lending to first-time home buyers.
The FHLBs have established an "Affordable Housing Program" to subsidize the
interest rate of advances to member associations engaged in lending for
long-term, low- and moderate-income, owner-occupied and affordable rental
housing at subsidized rates. The Bank is participating in this program. The
examiners have determined that the Bank has an outstanding record of meeting
community credit needs.
TAXATION
Federal Taxation
Historically, savings associations, such as the Bank, have been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method. However, for years beginning after
December 31, 1995, the Bank will no longer be able to use the percentage of
taxable income method of computing its allowable tax bad debt deduction. The
Bank will be required to compute its allowable deduction using the experience
method. As a result of the repeal of the percentage of taxable income method,
reserves taken after 1987 using the percentage of taxable income method
generally must be included in future taxable income over a six-year period,
although a two-year delay may be permitted for institutions meeting a
residential mortgage loan origination test. In addition, the pre-1988 reserve,
for which no deferred taxes have been recorded, will not have to be recaptured
into income unless (i) the Bank no longer qualifies as a bank under the Code, or
(ii) excess dividends are paid out by the Bank.
Depending on the composition of its items of income and expense, a
savings association may be subject to the alternative minimum tax. A savings
association must pay an alternative minimum tax equal to the amount (if any) by
which 20% of alternative minimum taxable income ("AMTI"), as reduced by an
exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular
taxable income increased or decreased by certain tax preferences and
adjustments, including depreciation deductions in excess of that allowable for
alternative minimum tax purposes, tax-exempt interest on most private activity
bonds issued after August 7, 1986 (reduced by any related interest expense
disallowed for regular tax purposes), the amount of the bad debt reserve
deduction claimed in excess of the deduction based on the experience method and
75% of the excess of adjusted current earnings over AMTI (before this adjustment
and before any alternative tax net operating loss). AMTI may be reduced only up
to 90% by net operating loss carryovers, but alternative minimum tax paid that
is attributable to most preferences can be credited against regular tax due in
later years.
For federal income tax purposes, MCHI reports its income and expenses
on the accrual method of accounting. MCHI and the Bank file a consolidated
federal income tax return for each fiscal year ending June 30. The federal
income tax returns filed by MCHI (or previously by the Bank) have not been
audited in the last five years.
The consolidated federal income tax return filed by MCHI and the Bank
has the effect of eliminating intercompany distributions, including dividends,
in the computation of consolidated taxable income. Income of MCHI generally will
not be taken into account in determining the bad debt deduction allowed to the
Bank, regardless whether a consolidated tax return is filed.
State Taxation
For its taxable period beginning January 1, 1990, the Bank became
subject to Indiana's Financial Institutions Tax ("FIT"), which is imposed at a
flat rate of 8.5% on "adjusted gross income." "Adjusted gross income," for
purposes of FIT, begins with taxable income as defined by Section 63 of the Code
and, thus, incorporates federal
tax law to the extent that it affects the computation of taxable income. Federal
taxable income is then adjusted by several Indiana modifications. Other
applicable state taxes include generally applicable sales and use taxes plus
real and personal property taxes.
MCHI's (or previously the Bank's) state income tax returns have not
been audited in the last five years.
Item 2. Properties.
At June 30, 1996, the Company conducted its business from its main
office at 100 West Third Street, Marion, Indiana, and one branch office. Both
offices are full-service offices owned by the Company.
The following table provides certain information with respect to the Company's
offices as of June 30, 1996:
Net Book Value
Total Deposits of Property,
at Furniture
Owned or Year June 30, & Approximate
Description and Address Leased Opened 1996 Fixtures Square Footage
- ----------------------- ------------------- ---- -------- --------------
(Dollars in Thousands)
Main Office in Marion
100 West Third Street............ Owned 1936 $117,210 $1,326 17,949
Location in Decatur
1045 South 13th Street........... Owned 1974 9,050 120 3,611
The Company opened its first automated teller machine in May, 1995 at
its Marion branch.
The Company owns computer and data processing equipment which is used
for transaction processing and accounting. The net book value of electronic data
processing equipment owned by the Company was $38,000 at June 30, 1996.
The Company also has contracted for the data processing and reporting
services of BISYS, Inc. in Houston, Texas. The cost of these data processing
services is approximately $11,000 per month.
Item 3. Legal Proceedings.
The Company is not a party to any material pending legal proceeding.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of MCHI's shareholders during the
quarter ended June 30, 1996.
Item 4.5. Executive Officers of MCHI.
Presented below is certain information regarding the executive officers
of MCHI:
Name Position
------------------ -------------------------------------------
John M. Dalton President
Steven L. Banks Executive Vice President
Larry G. Phillips Sr. Vice President, Secretary and Treasurer
Tim D. Canode Vice President
John M. Dalton (age 62) has been employed by MCHI since November, 1992.
He became President of the Bank in 1996 and Executive Vice President of First
Marion in 1996. Mr. Dalton served as Executive Vice President of the Bank from
1983 to 1996.
Larry G. Phillips (age 48) has been employed by MCHI since November,
1992. He became Sr. Vice President of the Bank in 1996 and has served as
Treasurer of the Bank since 1983, Secretary of the Bank since 1989 and Secretary
and Treasurer of First Marion since 1989. Mr. Phillips served as Vice President
and Treasurer of the Bank from 1983 to 1996.
Steven L. Banks (age 46) became Executive Vice President of both MCHI
and the Bank on September 1, 1996. Prior to his affiliation with MCHI and the
Bank, Mr. Banks served as President and CEO of Fidelity Federal Savings Bank of
Marion.
Tim D. Canode (age 51) became Vice President of MCHI in 1996 and has
been Vice President of the Bank since 1983. Mr. Canode has also served as
Assistant Vice President of First Marion since 1983.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Bank converted from a federally charted mutual savings bank to a
federally charted stock savings bank effective March 18, 1993 (the "Conversion")
and simultaneously formed a savings and loan holding company, MCHI. MCHI's
common stock, without par value ("Common Stock"), is quoted on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"),
National Market System, under the symbol "MARN." The following table sets forth
the high and low prices, as reported by NASDAQ, and dividends paid per share for
Common Stock for the quarter indicated. Such over-the-counter quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions.
Quarter Dividends
Ended High Low Declared
--------- -------- -------- ---------
June 30, 1996............... $20 3/4 $ 21 $ 19 3/4 $.20
March 31, 1996.............. 20 7/16 20 3/4 19 1/4 .18
December 31, 1995........... 20 20 5/8 19 1/4 .18
September 30, 1995.......... 19 3/4 20 5/8 18 1/2 .18
June 30, 1995............... 19 1/4 20 17 1/4 .18
March 31, 1995.............. 17 1/2 17 3/4 15 1/4 .15
December 31, 1994........... 15 3/4 18 15 .15
September 30, 1994.......... 18 18 3/4 15 3/4 .15
As of August 23, 1996, there were 538 record holders of MCHI's Common
Stock. MCHI estimates that, as of that date, there were approximately 900
additional shareholders in "street" name. The Company's percentage of dividends
per share to net income per share was 60.7%, 56.8% and 53.0% for the years ended
June 30, 1996, 1995 and 1994, respectively.
Since MCHI has no independent operations or other subsidiaries to
generate income, its ability to accumulate earnings for the payment of cash
dividends to its shareholders is directly dependent upon the earnings on its
investment securities and ability of the Bank to pay dividends to MCHI.
Under OTS regulations, a converted savings association may not declare
or pay a cash dividend if the effect would be to reduce its net worth below the
amount required for the liquidation account created at the time it converted. In
addition, under OTS regulations, the extent to which a savings association may
make a "capital distribution," which includes, among other things, cash
dividends, will depend upon in which one of three categories, based upon levels
of capital, that savings association is classified. The Bank is now and expects
to continue to be a "tier one institution" and therefore would be able to pay
cash dividends to MCHI during any calendar year up to 100% of its net income
during that calendar year plus the amount that would reduce by one half its
"surplus capital ratio" (the excess over its fully phased-in capital
requirements) at the beginning of the calendar year. Prior notice of any
dividend to be paid by the Bank will have to be given to the OTS.
Under current federal income tax law, dividend distributions with
respect to the Common Stock, to the extent that such dividends paid are from the
current or accumulated earnings and profits of the Bank (as calculated for
federal income tax purposes), will be taxable as ordinary income to the
recipient and will not be deductible by the Bank. Any dividend distributions in
excess of current or accumulated earnings and profits will be treated for
federal income tax purposes as a distribution from the Bank's accumulated bad
debt reserves, which could result in increased federal income taxes liability
for the Bank.
Unlike the Bank, generally there is no regulatory restriction on the
payment of dividends by MCHI, subject to the determination of the director of
the OTS that there is reasonable cause to believe that the payment of dividends
constitutes a serious risk to the financial safety, soundness or stability of
the Bank. Indiana law, however, would prohibit MCHI from paying a dividend if,
after giving effect to the payment of that dividend, MCHI would not be able to
pay its debts as they become due in the ordinary course of business or if MCHI's
total assets would be less that the sum of its total liabilities plus
preferential rights of holders of preferred stock, if any.
Item 6. Selected Consolidated Financial Data
The information required by this item is incorporated by reference to
the material under the heading "Selected Consolidated Financial Information" on
page 3 of MCHI's Shareholder Annual Report for its fiscal year ended June 30,
1996 (the "Shareholder Annual Report").
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required by this item is incorporated by reference to
pages 4 through 15 of the Shareholder Annual Report.
Item 8. Financial Statements and Supplementary Data.
MCHI's Consolidated Financial Statements and Notes thereto contained on
pages 16 through 41 in the Shareholder Annual Report are incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is
incorporated by reference to pages 3 and 4 of MCHI's Proxy Statement for its
1996 Annual Shareholder Meeting (the "1996 Proxy Statement"). Information
concerning MCHI's executive officers is included in Item 4.5 in Part I of this
report. Information concerning compliance by such persons with Section 16(a) of
the 1934 Act is incorporated by reference to page 7 of the 1996 Proxy Statement.
Item 11. Executive Compensation.
The information required by this item with respect to executive
compensation is incorporated by reference to pages 4 through 6 of the 1996 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to
pages 2 and 3 of the 1996 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
page 6 of the 1996 Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following financial statements are filed as part of this report:
Financial Statements
Consolidated Statement of Financial Condition at June 30, 1996, and
1995
Consolidated Statement of Income for the Fiscal Years Ended June 30,
1996, 1995 and 1994
Consolidated Statement of Changes in Shareholders' Equity for the
Fiscal Years ended June 30, 1996, 1995 and 1994
Consolidated Statement of Cash Flows for the Fiscal Years ended June
30, 1996, 1995, and 1994
Notes to Consolidated Financial Statements
(b) MCHI filed no reports on Form 8-K during the fourth quarter ended June
30, 1996.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on page E-1.
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant had duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
MARION CAPITAL HOLDINGS, INC.
Date: September 27, 1996 By: /s/ John M. Dalton
-------------------------
John M. Dalton, President
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 27th day of September,
1996.
/s/ John M. Dalton /s/ Steven L. Banks
- ------------------------------ -----------------------------
John M. Dalton Steven L. Banks, Director
President, Director
(Principal Executive Officer)
/s/ Larry G. Phillips /s/ Robert D. Burchard
- ------------------------------ -----------------------------
Larry G. Phillips Robert D. Burchard, Chairman
Senior Vice President, Secretary and Treasurer of the Board
(Principal Financial and Accounting Officer)
/s/ W. Gordon Coryea
-----------------------------
W. Gordon Coryea, Director
/s/ Jerry D. McVicker
-----------------------------
Jerry D. McVicker, Director
/s/ Jack O. Murrell
-----------------------------
Jack O. Murrell, Director
/s/ George L. Thomas
-----------------------------
George L. Thomas, Director
EXHIBIT INDEX
Exhibit Index* Page
3(1) The Articles of Incorporation of the Registrant is
incorporated by reference to Exhibit 3(1) to the Registration
Statement on Form S-1 (Registration No. 33-55052).
3(2) The Code of By-Laws of the Registrant is incorporated by
reference to Exhibit 3(2) to Registration Statement on Form
S-I (Registration No. 33-55052).
10(1) Marion Capital Holdings, Inc. Stock Option Plan is
incorporated by reference to Exhibit A to the Registrants
definitive Proxy Statement in respect of its 1993 Annual
Shareholder meeting.
(2) Recognition and Retention Plans and Trusts are incorporated
by reference to Exhibit B to the Registrants definitive Proxy
Statement in respect of its 1993 Annual Shareholder meeting.
(3) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and Merritt B. McVicker is
incorporated by reference to Exhibit 10(6) to the
Registration Statement on Form S-1 (Registration No.
33-55052).
(4) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and John M. Dalton is incorporated by
reference to Exhibit 10(7) to the Registration Statement on
Form S-1 (Registration No. 33-55052). First Amendment to
Deferred Compensation Agreement of John Dalton dated May 19,
1994.
(5) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and Robert D. Burchard is incorporated
by reference to Exhibit 10(8) to the Registration Statement
on Form S-1 (Registration No. 33-55052). First Amendment to
Deferred Compensation Agreement of Robert Burchard dated May
19, 1994.
(6) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and James O. Murrell is incorporated
by reference to Exhibit 10(9) to the Registration Statement
on Form S-1 (Registration No. 33-55052). First Amendment to
Deferred Compensation Agreement of James Murrell dated May
23, 1994.
(7) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and Gordon Coryea is incorporated by
reference to Exhibit 10(10) to the Registration Statement on
Form S-1 (Registration No. 33-55052). First Amendment to
Deferred Compensation Agreement of Gordon Coryea dated May
23, 1994.
(8) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and George Thomas is incorporated by
reference to Exhibit 10(11) to the Registration Statement on
Form S-1 (Registration No. 33-55052). First Amendment to
Deferred Compensation Agreement of George Thomas dated May
24, 1994.
Exhibit Index Page
(9) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and James Gartland is incorporated by
reference to Exhibit 10(12) to the Registration Statement on
Form S-1 (Registration No. 33-55052). First Amendment to
Deferred Compensation Agreement of James Gartland dated May
23, 1994.
(10) Deferred Compensation Agreement between the Bank and Gordon
Coryea dated April 30, 1988, as amended as of May 1, 1992, is
incorporated by reference to Exhibit 10(13) to the
Registration Statement on Form S-1 (Registration No.
33-55052).
(11) Deferred Compensation Agreement between the Bank and Merritt
V. McVicker dated April 30, 1988, as amended as of May 1,
1992, is incorporated by reference to Exhibit 10(14) to the
Registration Statement on Form S-1 (Registration No.
33-55052).
(12) Deferred Compensation Agreement between the Bank and John M.
Dalton dated April 30, 1988, as amended April 15, 1991, as
amended May 1, 1992, and as amended October 5, 1992, is
incorporated by reference to Exhibit 10(15) to the
Registration Statement on Form S-1 (Registration No.
33-55052).
(13) Deferred Compensation Agreement between the Bank and Robert
D. Burchard dated April 30, 1988, as amended April 15, 1991,
as amended May 1, 1992, and as amended October 5, 1992, is
incorporated by reference to Exhibit 10(16) to the
Registration Statement on Form S-1 (Registration No.
33-55052).
(14) Deferred Compensation Agreement between the Bank and
Jacquelin Ann Noble dated April 30, 1988, as amended April
15, 1991, and as amended October 5, 1992, is incorporated by
reference to Exhibit 10(17) to the Registration Statement on
Form S-1 (Registration No. 33-55052).
(15) Deferred Compensation Agreement between the Bank and Nora K.
Kuntz dated October 8, 1991, as amended October 5, 1992, is
incorporated by reference to Exhibit 10(18) to the
Registration Statement on Form S-1 (Registration No.
33-55052).
(16) Death Benefit Agreement between the Bank and Tim Canode dated
August 25, 1992, is incorporated by reference to Exhibit
10(19) to the Registration Statement on Form S-1
(Registration No. 33-55052).
(17) Death Benefit Agreement between the Bank and Larry G.
Phillips dated August 25, 1992, is incorporated by reference
to Exhibit 10(20) to the Registration Statement on Form S-1
(Registration No. 33-55052).
(18) Excess Benefit Agreement dated as of Februry 28, 1996 between
the Bank and John M. Dalton.
(19) Excess Benefit Agreement dated as of February 28, 1996
between the Bank and Robert D. Burchard.
Exhibit Index Page
11 Statement regarding computation of per share earnings.
13 1996 Shareholder Annual Report.
21 Subsidiaries of the Registrant is incorporated by reference
to Exhibit 22 to the Registration Statement on Form S-1
(Registration No. 33-55052).
23 Consent of Geo. S. Olive & Co. LLC
27 Financial Data Schedule
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* Management contracts and plans required to be filed as exhibits are
included as Exhibits 10(1)-10(19).