FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 30, 1997
or
[ ] Transaction Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to ___________
Commission File Number 0-21108
MARION CAPITAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1872393
(State or other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
100 West Third Street, P.O. Box 367, Marion, Indiana 46952
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (765) 664-0556
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of August 22, 1997, was $36,798,758.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of August 22, 1997, was 1,773,356 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended June 30, 1997
are incorporated into Part II. Portions of the Proxy Statement for the 1997
Annual Meeting of Shareholders are incorporated into Part III.
Exhibit Index on Page 39
Page 1 of 39 Pages
MARION CAPITAL HOLDINGS, INC.
Form 10-K
INDEX
Page
Forward Looking Statements................................................. 1
PART 1
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 7A. Quantitative and Qualtative Disclosures About Market Risk.... 33
Item 8. Financial Statements and Supplementary Data.................. 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 34
PART III
Item 10. Directors and Executive Officers of the Registrant........... 34
Item 11. Executive Compensation....................................... 34
Item 12. Security Ownership of Certain Beneficial Owners
and Management........................................... 34
Item 13. Certain Relationships and Related Transactions............... 34
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.............................................. 35
Signatures ......................................................... 36
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Company. Readers of this Form 10-K are cautioned
that any such forward looking statements are not guarantees of future events or
performance and involve risks and uncertainties, and that actual results may
differ materially from those in the forward looking statements as a result of
various factors. The accompanying information contained in this Form 10-K
identifies important factors that could cause such differences. These factors
include changes in interest rates; loss of deposits and loan demand to other
savings and financial institutions; substantial changes in financial markets;
changes in real estate values and the real estate market; regulatory changes; or
unanticipated results in pending legal proceedings.
PART I
Item 1. Business.
General
Marion Capital Holdings, Inc. ("MCHI") is an Indiana corporation
organized on November 23, 1992, to become a unitary savings and loan holding
company. MCHI became a unitary savings and loan holding company upon the
conversion (the "Conversion") of First Federal Savings Bank of Marion (the
"Bank" and together with MCHI, the "Company") from a federal mutual savings bank
to a federal stock savings bank on March 18, 1993. The principal asset of MCHI
consists of 100% of the issued and outstanding shares of common stock, $0.01 par
value per share, of the Bank. The Bank began operations in Marion, Indiana, as a
federal savings and loan association in 1936, and converted to a federal mutual
savings bank in 1986.
The Bank offers a number of consumer and commercial financial services.
These services include: (i) residential and commercial real estate loans; (ii)
multi-family loans; (iii) construction loans; (iv) installment loans; (v) loans
secured by deposits; (vi) auto loans; (vii) NOW accounts; (viii) consumer and
commercial demand 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 Bank will open a branch
office in the Marion Wal-Mart Supercenter in October, 1997 and acquire an NBD
branch facility in Gas City, Indiana in December, 1997.
The Company's primary source of revenue is interest income from the
Bank's lending activities. The Bank's principal lending activity is the
origination of conventional mortgage loans to enable borrowers to purchase or
refinance one- to four-family residential real property. At June 30, 1997, 63.3%
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 $31.1 million at June 30, 1997, or
20.3% of total loans and mortgage-backed securities. The Bank also makes a
limited number of construction loans, which constituted $4.7 million or 3.1% of
the Company's total loans and mortgage-backed securities at June 30, 1997, 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, 1997, ARMs constituted 89.3% of the
Company's total mortgage loan portfolio. Additionally, the Bank attempts to
lengthen liability repricing by aggressively pricing longer term certificates of
deposit during periods of relatively low interest rates and investing in
intermediate-term or variable-rate investment securities.
Lending Activities
Loan Portfolio Data. The following table sets forth the composition of
the Company's loan portfolio by loan type and security type as of the dates
indicated, including a reconciliation of gross loans receivable after
consideration of the allowance for possible loan losses and deferred net loan
fees on loans.
At June 30,
---------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ------------------ ---------------- ---------------- -------------------
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.................. $ 97,017 63.33% $ 87,106 58.26% $ 81,651 56.21%$ 76,573 55.72%$ 76,806 54.41%
Commercial real estate....... 31,122 20.31 36,170 24.19 35,937 24.74 35,003 25.47 39,348 27.87
Multi-family................. 11,394 7.44 15,573 10.42 14,495 9.98 12,039 8.76 12,686 8.99
Construction:
Residential.................. 3,555 2.32 3,904 2.61 3,448 2.37 3,164 2.30 2,479 1.76
Commercial real
estate..................... 1,144 .75 506 .34 1,257 .87 1,159 .84 1,479 1.05
Multi-family................. --- --- 584 .39 2,627 1.81 3,809 2.77 2,784 1.97
Consumer loans:
Installment loans............ 3,613 2.36 2,725 1.82 1,897 1.30 1,340 .98 1,557 1.10
Loans secured by deposits.... 895 .58 883 .59 797 .55 822 .60 806 .57
Home equity loans............ 1,376 .90 399 .27 405 .27 494 .36 584 .42
Auto loans................... 325 .21 169 .11 120 .08 113 .08 130 .09
Home improvement loans....... --- --- --- --- --- --- 1 .00 4 .00
Education loans.............. --- --- --- --- --- --- --- --- 1 .00
Commercial loans................ 2,525 1.65 7 .00 9 .01 14 .01 57 .04
Mortgage-backed securities...... 237 .15 1,491 1.00 2,630 1.81 2,905 2.11 2,446 1.73
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans receivable and
mortgage-backed securities $153,203 100.00% $149,517 100.00% $145,273 100.00% $137,436 100.00% $141,167 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
TYPE OF SECURITY
Residential (1).............. $102,185 66.70% $ 92,888 62.13% $ 88,109 60.65% $ 83,108 60.47%$ 81,636 57.83%
Commercial real estate....... 32,266 21.06 36,688 24.54 37,219 25.62 36,191 26.33 40,922 28.99
Multi-family................. 11,394 7.44 16,157 10.81 17,122 11.79 15,848 11.53 15,470 10.96
Autos........................ 325 .21 169 .11 120 .08 113 .08 130 .09
Deposits..................... 895 .58 883 .59 797 .55 822 .60 806 .57
Other security............... 2,525 1.65 7 .00 9 .01 14 .01 12 .01
Unsecured.................... 3,613 2.36 2,725 1.82 1,897 1.30 1,340 .98 2,191 1.55
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans receivable
and mortgage-backed
securities.............. 153,203 100.00 149,517 100.00 145,273 100.00 137,436 100.00 141,167 100.00
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Deduct:
Allowance for possible losses
on loans..................... 2,032 1.33 2,009 1.34 2,013 1.39 2,050 1.49 2,051 1.45
Deferred net loan fees.......... 277 .18 313 .21 303 .21 333 .24 435 .31
Loans in process................ 2,626 1.71 2,539 1.70 4,004 2.75 5,056 3.68 3,235 2.29
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Net loans receivable including
mortgage-backed securities. $148,268 96.78 % $144,656 96.75% $138,953 95.65% $129,997 94.59% $135,446 95.95%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Mortgage Loans
Adjustable rate.............. $128,799 89.30 % $128,811 89.55 $120,496 86.43% $113,184 85.91% $116,872 86.20%
Fixed rate................... 15,433 10.70 15,032 10.45 18,919 13.57 18,563 14.09 18,710 13.80
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total...................... $144,232 100.00% $143,843 100.00% $139,415 100.00% $131,747 100.00% $135,582 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
- -----------------
(1) Includes majority of mortgage-backed securities, home equity loans and home
improvement loans.
The following table sets forth certain information at June 30, 1997,
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,
Outstanding
Balance 2001 2003 2008 2013
At June 30, to to to and
1997 1998 1999 2000 2002 2007 2012 following
---------- ------ ------ ------ ------ ------- ------- ----------
(In Thousands)
Mortgage loans:
Residential............ $ 100,572 $ 965 $ 693 $ 269 $2,105 $13,847 $34,783 $47,910
Multi-family........... 11,394 640 476 --- 195 883 6,351 2,849
Commercial real
estate............... 32,266 194 6,149 636 1,700 7,540 6,848 9,199
Consumer loans:
Home improvement ...... --- --- --- --- --- --- --- ---
Home equity............ 1,376 122 30 5 --- 1,219 --- ---
Auto................... 325 38 53 105 129 --- --- ---
Installment............ 3,613 2,181 319 194 553 291 75 ---
Loans secured
by deposits.......... 895 666 75 60 50 44 --- ---
Mortgage-backed
securities ............ 237 108 --- --- 129 --- --- ---
Commercial loans.......... 2,525 25 --- --- --- 2,500 --- ---
---------- ------ ------ ------ ------ ------- ------- -------
Total.................. $ 153,203 $4,939 $7,795 $1,269 $4,861 $26,324 $48,057 $59,958
========== ====== ====== ====== ====== ======= ======= =======
The following table sets forth, as of June 30, 1997, 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, 1998
Fixed Rates Variable Rates Total
----------- -------------- -----
(In Thousands)
Mortgage loans:
Residential................... $ 8,829 $ 90,778 $ 99,607
Multi-family....................... 864 9,890 10,754
Commercial real estate........ 4,574 27,498 32,072
Consumer loans:
Home improvement ............. --- --- ---
Home equity................... --- 1,254 1,254
Auto.......................... 287 --- 287
Installment................... 938 494 1,432
Loan secured by deposits...... --- 229 229
Mortgage-backed securties ........ 129 --- 129
Commercial loans .................. 2,500 --- 2,500
------- -------- --------
Total......................... $18,121 $130,143 $148,264
======= ======== ========
Residential Loans. Residential loans consist of one-to-four family
loans. Approximately $97.0 million, or 63.3%, of the Company's portfolio of
loans and mortgage-backed securities at June 30, 1997, consisted of one- to
four-family mortgage loans, of which approximately 89.3% had adjustable rates.
In the past, the Company sold to the Federal Home Loan Mortgage Corporation (the
"FHLMC") 95% of the principal balance on a few 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 most of 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. No loans were sold to FHLMC during
the year ended June 30, 1997.
The Bank originates fixed-rate loans with terms of up to 25 years. Some
loans are originated in accordance with guidelines established by FHLMC to
facilitate the sale of such loans to FHLMC in the secondary market. These loans
amortize on a monthly basis with principal and interest due each month. As
mentioned above, a few of these loans originated with terms in excess of 15
years, or annual interest rates below 8.5%, were sold to FHLMC promptly after
they were originated. The Bank retained 5% of the principal balance of such sold
loans as well as the servicing on all of such sold loans. Recently, the Bank has
decided to selectively retain these fixed rate loans in its portfolio. At June
30, 1997, the Company had $8.8 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 five-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 13.5%. The interest rate adjustment for substantially all of
the Bank's ARMs is indexed to the One-Year Treasury Constant Maturity Index. On
new residential mortgage loans, the margin above such index currently is 2.75%.
The Bank offers ARMs with maximum rate changes of 2% per adjustment, and an
average of 6% 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 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, 1997, these loans amounted to $1.4 million.
Residential mortgage loans in excess of $500,000 must be approved in
advance by the Bank's Board of Directors. Such loans under that amount must be
approved by the Bank's Loan Committee.
At June 30, 1997, residential mortgage loans amounting to $1.2 million,
or 0.8% of total loans, were included in non-performing assets. See
"--Non-performing and Problem Assets."
Commercial Real Estate Loans. At June 30, 1997, $31.1 million, or
20.3%, of the Company's total loan and mortgage-backed securities portfolio
consisted of mortgage loans secured by commercial real estate. The properties
securing these loans consist primarily of nursing homes, office buildings,
hotels, churches, warehouses and shopping centers. The commercial real estate
loans, substantially all adjustable rate, are made for terms not exceeding 25
years, and generally require an 80% or lower loan-to-value ratio. Some require
balloon payments after 5, 10 or 15 years. A number of different indices,
including the prime rate as announced by NBD Bank, Indianapolis, Indiana, are
used as the interest rate index for these loans. The commercial real estate
loans generally have minimum interest rates of 9% and maximum interest rates of
15%. Most of these loans adjust annually, but the Company has some 3-year and
5-year commercial real estate adjustable rate loans in its portfolio. The
largest commercial real estate loan as of June 30, 1997, had a balance of $2.6
million.
Because of certain credit problems it was experiencing in its
commercial real estate and multi-family loan portfolio, the Bank has since the
summer of 1991 limited the size of any commercial real estate or multi-family
loan or participation originated or purchased to $500,000, wherever practicable.
The Company held in its portfolio 23 commercial and multi-family real estate
loans with balances in excess of $500,000 at June 30, 1997. The average loan
balance for all such loans was $1.0 million. A significant proportion of the
Company's commercial real estate loan portfolio consists of loans secured by
nursing home properties. The balance of such loans totaled $13.0 million at June
30, 1997.
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, 1997, 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 $500,000 must be approved in
advance by the Bank's Board of Directors. Commercial real estate loans under
that amount must be approved by the Bank's Loan Committee.
Multi-Family Loans. At June 30, 1997, $11.4 millon, or 7.4%, 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 $279,000 as of June 30, 1997. The largest such
multi-family mortgage loan as of June 30, 1997, had a balance of $1.2 million.
As with the Bank's commercial real estate loans, multi-family mortgage loans are
substantially all adjustable-rate loans, are written for terms not exceeding 25
years, and require at least an 80% loan-to-value ratio. At June 30, 1997, 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, 1997, $4.7 million, or 3.1%, of the Company's total loan
and mortgage-backed securities portfolio consisted of construction loans, of
which approximately $3.6 million were residential construction loans and $1.1
million related to construction of commercial real estate projects. The largest
construction loan on June 30, 1997, was $600,000. 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 $6.2 million as of
June 30, 1997, or 4.1% 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 $3.6 million, or 2.4% of the Company's total loan and mortgage-backed
securities portfolio at June 30, 1997. Loans secured by deposits, totaling
$895,000 at June 30, 1997, 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 $1.4 million, or 0.9% of the
Company's total loan and mortgage-backed securities portfolio at June 30, 1997.
Automobile loans totaled only $325,000 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, 1997, $34,000 of consumer loans
were included in non-performing assets.
Mortgage-Backed Securities. At June 30, 1997, the Company had $237,000
of mortgage-backed securities outstanding, or 0.2% of the Company's total loan
and mortgage-backed securities portfolio. These mortgage-backed securities have
an average estimated remaining life of approximately three 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 or extend credit to a borrower or its related entities if the total of
all such loans by the savings association exceeds 15% of its unimpaired capital
and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired
capital and surplus, if such loans or extensions of credit are fully secured by
readily marketable collateral, including certain debt and equity securities but
not including real estate. In some cases, a savings association may lend up to
30% of unimpaired capital and surplus to one borrower for purposes of developing
domestic residential housing, provided that the association meets its regulatory
capital requirements and the OTS authorizes the association to use this expanded
lending authority. The maximum amount which the Bank could have loaned to one
borrower and the borrower's related entities under the 15% of capital limitation
was $5.2 million at June 30, 1997.
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
$500,000 and residential mortgage loans in excess of $500,000 must be approved
in advance by the Bank's Board of Directors.
The Bank applies consistent underwriting standards to the several types
of consumer loans it makes to protect the Bank against the risks inherent in
making such loans. Borrower character, credit history, net worth and underlying
collateral are important considerations.
The Bank has historically participated in the secondary market as a
seller of 95% of the principal balance of its long-term fixed rate mortgage
loans, as described above, although the Bank has recently begun retaining such
loans in the Company's portfolio. The loans the Bank sells are designated for
sale when originated. During the fiscal year ended June 30, 1997, the Bank sold
none of its fixed-rate mortgage loans, and at June 30, 1997, 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.
When it sells mortgage loans, the Bank generally retains the
responsibility for collecting and remitting loan payments, inspecting the
properties that secure the loans, making certain that monthly principal and
interest payments and real estate tax and insurance payments are made on behalf
of borrowers, and otherwise servicing the loans. The Company receives a
servicing fee for performing these services. The amount of fees received by the
Company varies, but is generally calculated as an amount equal to a rate of .25%
per annum for commercial loans and .375% per annum for residential loans on the
outstanding principal amount of the loans serviced. At June 30, 1997, the
Company serviced $34.6 million of loans sold to other parties of which $6.6
million or 19.1% 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, 1997,
the Company held in its loan portfolio, participations in mortgage loans
aggregating $6.5 million that it had purchased, all of which were serviced by
others. The largest such participation it held at June 30, 1997, was in a loan
secured by an apartment complex.
The Company's portion of the outstanding balance on that date was approximately
$1.2 million.
Also during the year ended June 30, 1997, MCHI extended a $2.5 million
loan to a non-related bank holding company.
The following table shows loan origination, purchase, sale and
repayment activity for the Bank during the periods indicated:
Year Ended June 30,
1997 1996 1995
---------------------------------------
(In Thousands)
Gross loans receivable and mortgage-backed
securities at beginning of period...................... $149,517 $145,273 $137,436
-------- -------- --------
Originations:
Mortgage loans:
Residential.......................................... 33,646 28,841 21,489
Commercial real estate and multi-family.............. 11,483 8,655 10,758
-------- -------- --------
Total mortgage loans................................. 45,129 37,496 32,247
-------- -------- --------
Consumer loans:
Installment loans.................................... 4,528 3,492 2,206
Loans secured by deposits............................ 449 763 521
-------- -------- --------
Total consumer loans................................ 4,977 4,255 2,727
-------- -------- --------
Commercial loans....................................... 2,558 146 21
-------- -------- --------
Total originations................................... 52,664 41,897 34,995
-------- -------- --------
Purchases:
Mortgage-backed securities............................. --- --- ---
Mortgage loans:
Residential.......................................... --- 500 ---
Commercial real estate and
multi-family.................................... --- 1,508 1,200
-------- -------- --------
Total originations and purchases..................... 52,664 43,905 36,195
-------- -------- --------
Sales:
Mortgage loans:
Residential.......................................... 76 1,426 464
Commercial real estate and multi-family.............. 7,133 4,239 1,950
Mortgage-backed securities........................... --- --- ---
-------- -------- --------
Total sales........................................ 7,209 5,665 2,414
-------- -------- --------
Repayments and other deductions........................... 41,769 33,996 25,944
-------- -------- --------
Gross loans receivable and mortgage-backed
securities at end of period.......................... $153,203 $149,517 $145,273
======== ======== ========
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, 1997, $1.4 million, or 0.8% of the
Company's total assets, were non-performing assets (non-accrual loans, real
estate owned and troubled debt restructurings), compared to $7.1 million, or
4.1% of the Company's total assets, at June 30, 1993. At June 30, 1997,
residential loans, commercial real estate loans and consumer loans accounted for
87.7%, 9.9% and 2.4%, respectively, of non-performing assets.
The June 30, 1997, non-performing assets included no real estate
acquired as a result of foreclosure, voluntary deed, or other means, compared to
$1.8 million at June 30, 1993. Such real estate acquired is classified by the
Company as "real estate owned" or "REO" until it is sold. When property is so
acquired, the value of the asset is recorded on the books of the Company at the
lower of the unpaid principal balance at the date of acquisition plus
foreclosure and other related costs or at fair value. Interest accrual ceases
when the collection of interest becomes doubtful, usually after the loan has
been delinquent for 90 days or more. All costs incurred from the date of
acquisition in maintaining the property are expensed.
The following table sets forth the amounts and categories of the
Company's non-performing assets (non-accrual loans, real estate owned and
troubled debt restructurings). It is the policy of the Company that all earned
but uncollected interest on all loans be reviewed monthly to determine if any
portion thereof should be classified as uncollectible for any loan past due in
excess of 90 days.
At June 30,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in Thousands)
Accruing loans delinquent
more than 90 days ........................ $ --- $ --- $ --- $ --- $ ---
Non-accruing loans (1):
Residential............................... 1,238 1,658 1,698 2,054 2,362
Multi-family.............................. --- --- --- --- ---
Commercial real estate......................... 139 47 --- 2,580 2,870
Consumer.................................. 34 11 54 3 104
Troubled debt restructurings .................. --- --- --- --- ---
------ ------ ------ ------ ------
Total non-performing loans................ 1,411 1,716 1,752 4,637 5,336
------ ------ ------ ------ ------
Real estate owned, net......................... --- 183 206 830 1,795
------ ------ ------ ------ ------
Total non-performing assets .............. $1,411 $1,899 $1,958 $5,467 $7,131
====== ====== ====== ====== ======
Non-performing loans to total
loans, net (2) ........................... .94% 1.18% 1.27% 3.59% 3.95%
Non-performing assets to total assets ......... .81% 1.07% 1.13% 3.20% 4.10%
(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, 1997, $1.2 million of
nonaccrual loans were residential loans, $139,000 were commercial real
estate loans, and $34,000 were consumer loans. For the year ended June
30, 1997, the income that would have been recorded had the non-accrual
loans not been in a non-performing status totaled $118,000 compared to
actual income recorded of $76,000.
(2) Total loans less deferred net loan fees and loans in process.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
Office of Thrift Supervision ("OTS") to be of lesser quality, as "substandard,"
"doubtful" or "loss." An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to sufficient risk to
warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "special mention" by management.
When an insured institution classifies problem assets as either
substandard or doubtful, it must establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the institution's principal supervisory agent, who may
order the establishment of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Company regularly
reviews the problem loans in its portfolio to determine whether any loans
require classification in accordance with applicable regulations. Total
classified assets at June 30, 1997, were $1.5 million.
The following table sets forth the aggregate amount of the Company's
classified assets, and of the general and specific loss allowances as of the
dates indicated.
At June 30,
1997 1996 1995 1994 1993
------------------ ---- ---- ----
(In Thousands)
Substandard assets (1)......... $1,546 $1,226 $1,574 $5,111 $7,375
Doubtful assets ............... --- --- --- --- ---
Loss assets.................... --- --- --- --- ---
Special mention................ --- --- --- --- 2,500
------ ------ ------ ------ ------
Total classified assets..... $1,546 $1,226 $1,574 $5,111 $9,875
====== ====== ====== ====== ======
General loss allowances........ $2,032 $2,009 $2,013 $2,050 $2,051
Specific loss allowances....... --- --- --- --- ---
------ ------ ------ ------ ------
Total allowances............ $2,032 $2,009 $2,013 $2,050 $2,051
====== ====== ====== ====== ======
- --------------
(1) Includes REO, net, of $0.0, $0.2, $0.2, $0.8, and $1.8 million,
respectively.
The Company regularly reviews its loan portfolio to determine whether any
loans require classification in accordance with applicable regulations. Not all
assets classified by the Company as substandard, doubtful or loss are included
as non-performing assets, and not all of the Company's non-performing assets
constitute classified assets.
Substandard Assets. At June 30, 1997, the Company had 85 loans classified
as substandard totaling approximately $1.5 million. Included in substandard
assets are certain loans to facilitate the sale of the real estate owned,
totaling $157,000 at June 30, 1997. 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, 1997, are slow mortgage
loans (loans or contracts delinquent for generally 90 days or more) aggregating
$1,347,000, and slow consumer loans totaling $42,000.
Special Mention Assets. The Company classified no assets as special
mention at June 30, 1997, 1996, 1995 and 1994. The Company's assets subject to
special mention at June 30, 1993 totaled $2.5 million.
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, 1997.
Summary of Loan Loss Experience. The following table analyzes changes
in the allowance for loan losses during the past five years ended June 30, 1997.
Year Ended June 30,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(In Thousands)
Balance of allowance at
beginning of period....................... $2,009 $2,013 $2,050 $2,051 $2,305
------ ------ ------ ------ ------
Add Recoveries of loans previously
charged off -- residential real
estate loans.............................. --- 2 12 17 1
Less charge-offs:
Residential real estate loans............. 35 37 93 82 22
Commercial real estate loans.............. --- 3 2 --- 598
Consumer loans............................ --- --- 22 1 2
------ ------ ------ ------ ------
Net charge-offs.............................. 35 38 105 66 621
------ ------ ------ ------ ------
Provisions for losses on loans............... 58 34 68 65 367
------ ------ ------ ------ ------
Balance of allowance at end
of period................................. $2,032 $2,009 $2,013 $2,050 $2,051
====== ====== ====== ====== ======
Net charge-offs to total average
loans outstanding for period.............. .02% .03% .08% .05% .46%
Allowance at end of period to
loans receivable at end of period......... 1.35 1.38 1.45 1.59 1.52
Allowance to total non-performing
loans at end of period.................... 143.98 117.07 114.87 44.21 38.44
Allocation of Allowance for Loan Losses. The following table presents
an analysis of the allocation of the Company's allowance for loan losses at the
dates indicated.
June 30,
1997 1996 1995 1994 1993
---------------- ---------------- ---------------- ---------------- ----------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
to total to total to total to total to total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Balance at end of period
applicable to:
Residential..................$ --- 63.42% $ --- 59.11% $ 10 57.53% $ 48 57.29% $ 194 55.79%
Commercial real estate....... --- 20.35 29 24.44 30 25.19 438 26.02 478 28.36
Multi-family................. 72 7.45 264 10.52 264 10.16 264 8.95 264 9.15
Construction loans........... --- 3.07 --- 3.37 --- 5.14 --- 6.04 --- 4.86
Commercial loans............. --- 1.65 --- .01 --- .01 --- .01 --- 0.04
Consumer loans............... 33 4.06 24 2.55 20 1.97 39 1.69 37 1.80
Unallocated.................. 1,927 --- 1,692 --- 1,689 --- 1,261 --- 1,078 ---
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total................... $2,032 100.00% $2,009 100.00% $2,013 100.00% $2,050 100.00% $2,051 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
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, 1997,
approximately $10.1 million, including securities at market value for those
classified as available for sale and at amortized cost for those classified as
held to maturity, or 5.8% of the Company's total assets, consisted of such
investments.
The following tables set forth the carrying value and market value of
the Company's investments at the dates indicated.
At June 30,
-------------------------------------------------------------------------
1997 1996 1995
-------------------- --------------------- ----------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- ------ -------- ------ -------- --------
(In Thousands)
Securities available for sale (1):
Federal agencies.................$ 3,001 $2,998 $ 1,000 $1,000 $ 3,000 $ 2,985
Marketable equity securities..... --- --- --- --- --- ---
-------- ------ -------- ------ -------- --------
Total securities available
for sale....................... 3,001 2,998 1,000 1,000 3,000 2,985
-------- ------ -------- ------ -------- --------
Securities held to maturity (2):
U.S. Treasury.................... 2,001 1,988 3,015 2,975 3,035 2,978
Federal agencies................. 2,000 1,991 6,954 6,917 11,000 10,744
State and municipal.............. 610 610 610 605 610 592
Other ........................... --- --- 988 1,000 --- ---
-------- ------ -------- ------ -------- --------
Total securities held
to maturity.................... 4,611 4,589 11,567 11,497 14,645 14,314
-------- ------ -------- ------ -------- --------
Real estate limited partnerships.... 1,449 (4) 1,624 (4) 1,527 (4)
FHLB stock (3)...................... 1,047 1,047 988 988 909 909
------- ------- -------
Total investments.............. $10,108 $15,179 $20,081
======= ======= =======
(1) In accordance with SFAS No. 115, securities available for sale are
recorded at market value in the financial statements.
(2) Mortgage-backed securities included in securities held to maturity in
the financial statements are included in the gross loans receivable
table on page 2 of this Form 10-K.
(3) Market value approximates carrying value.
(4) Market values are not available, nor have there been recent appraisals
of the apartment complexes invested in by the partnerships.
The following table sets forth investment securities and FHLB stock
which mature during each of the periods indicated and the weighted average
yields for each range of maturities at June 30, 1997.
Amount at June 30, 1997 which matures in
--------------------------------------------------------------------------
One One to Over
Year or less Five Years Ten Years and Stock
--------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Securities available for sale (1):
Federal agencies.................$ --- ---% $3,001 6.43% $ --- ---%
------ ---- ------ ---- ------ ----
Total securities available
for sale....................... --- --- 3,001 6.43 --- ---
------ ---- ------ ---- ------ ----
Securities held to maturity (2):
U.S. Treasury.................... 1,002 5.19 999 5.13 --- ---
Federal agencies................. --- --- 2,000 6.36 --- ---
State and municipal.............. 610 4.85 --- --- --- ---
Other ........................... --- --- --- --- --- ---
------ ---- ------ ---- ------ ----
Total securities held
to maturity.................... 1,612 5.06 2,999 5.95 --- ---
------ ---- ------ ---- ------ ----
FHLB stock.......................... --- --- --- --- 1,047 7.81
------ ---- ------ ---- ------ ----
Total investments.............. $1,612 5.06% $6,000 6.19% $1,047 7.81%
====== ==== ====== ==== ====== ====
(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, 1997, the Bank has
invested approximately $3.41 million in Pedcor with no additional annual capital
contribution remaining to be paid. 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
rent limitations for subsidized housing, increased operating costs and other
factors. Certain fees to the general partner not recorded or estimable to date
by the partnership under provisions of the partnership agreement could adversely
affect future operating results when accrued or paid. The Bank has accounted for
its investment in Pedcor on the equity method, and, accordingly, has recorded
its shares of these losses as reductions to its investment in Pedcor, which at
June 30, 1997, was $1.4 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,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Investment in Pedcor:
Accumulated contributions....... $3,410 $3,280 $2,990 $2,700 $2,405
Net of equity in losses......... 1,449 1,624 1,527 1,422 1,354
Equity in losses, net
of income tax effect............ (184) (117) (111) (137) (104)
Tax credit........................... 405 405 405 405 405
------ ------ ------ ------ ------
Increase in after-tax net income
from Pedcor investment.......... $221 $ 288 $ 294 $ 268 $ 301
====== ====== ====== ====== ======
In August 1997, the Bank entered into another limited partnership with
Pedcor Investments organized to build, own, operate and lease a 72 unit
apartment complex in Berrien Springs, Michigan. The Bank will contribute $3.6
million over 10 years and will receive an estimated $3.7 million in tax credits.
Federal regulations require an FHLB-member savings association to maintain
an average daily balance of liquid assets equal to a monthly average of not less
than a specified percentage of its net withdrawable savings deposits plus
short-term borrowings. Liquid assets include cash, certain time deposits,
certain bankers' acceptances, specified U.S. government, state or federal agency
obligations, certain corporate debt securities, commercial paper, certain mutual
funds, certain mortgage-related securities, and certain first lien residential
mortgage loans. This liquidity requirement may be changed from time to time by
the OTS to any amount within the range of 4% to 10%, and is currently 5%,
although the OTS has proposed a reduction of the percentage to 4%. Also, a
savings association currently must maintain short-term liquid assets
constituting at least 1% of its average daily balance of net withdrawable
deposit accounts and current borrowings. Monetary penalties may be imposed for
failure to meet these liquidity requirements. At June 30, 1997, the Bank had
liquid assets of $10.9 million, and a regulatory liquidity ratio of 8.8%, of
which 3.7% 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, 1997, is as follows:
Minimum Balance at Weighted
Opening June 30, % of Average
Type of Account Balance 1997 Deposits Rate
- --------------- ------- ---- -------- ----
(Dollars in Thousands)
Withdrawable:
Savings accounts....................... $ 10.00 $ 15,683 12.88% 2.75%
NOW and other transactions accounts.... 10.00 21,230 17.43 3.19
------ ----- ----
Total withdrawable........................ 36,913 30.31 3.00
------ ----- ----
Certificates (original terms):............
28 days................................ 1,000 97 .08 3.74
91 days................................ 1,000 1,089 .89 4.40
182 days............................... 1,000 9,307 7.64 4.83
12 months.............................. 1,000 14,484 11.89 5.10
18 months.............................. 1,000 1,781 1.46 5.42
24 months.............................. 1,000 2,032 1.67 5.85
30 months.............................. 1,000 7,703 6.33 5.95
36 months.............................. 1,000 1,425 1.17 5.52
48 months.............................. 1,000 5,746 4.72 7.21
60 months.............................. 1,000 11,082 9.10 6.16
72 months.............................. 1,000 28 .02 5.45
96 months.............................. 1,000 377 .31 6.43
IRAs
28 days................................ 500 2 .00 3.76
91 days................................ 500 23 .02 4.39
182 days............................... 500 174 .14 4.74
12 months.............................. 500 617 .51 5.01
18 months.............................. 500 238 .20 5.62
24 months.............................. 500 1,534 1.26 6.04
30 months.............................. 500 880 .72 5.83
36 months.............................. 500 38 .03 5.84
48 months.............................. 500 4,815 3.95 7.58
60 months.............................. 500 19,917 16.36 6.45
72 months.............................. 500 585 .48 5.44
96 months.............................. 500 883 .72 6.32
-------- ------ ----
Total certificates (1).................... 84,857 69.69 5.97
-------- ------ ----
Total deposits............................ $121,770 100.00% 5.07
======== ====== ====
(1) Including $11.7 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,
---------------------------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
Under 5%............. $15,970 $14,088 $15,072
5.00 - 6.99%......... 45,722 50,836 41,070
7.00 - 8.99%......... 23,165 22,961 27,254
9.00% and over....... --- --- ---
------- ------- -------
Total................ $84,857 $87,885 $83,396
======= ======= =======
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, 1997, have been allocated based upon certain rollover
assumptions.
Amounts At
June 30, 1997, Maturing in
---------------------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
------- ------- ------- -------------
(In Thousands)
Under 5%......... $15,686 $ 284 $ --- $ ---
5.00 - 6.99% .... 18,100 9,127 9,018 9,477
7.00 - 8.99% .... 3,305 8,550 10,944 366
------- ------- ------- ------
Total ........... $37,091 $17,961 $19,962 $9,843
======= ======= ======= ======
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,
1997.
Maturity Period (In Thousands)
- ------------------ --------------
Three months of less............................. $ 1,850
Greater than three months through six months..... 719
Greater than six months through twelve months.... 528
Over twelve months............................... 8,612
-------
Total............................................ $11,709
=======
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,
1997 Deposits 1996 1996 Deposits 1995
---- -------- ---- ---- -------- ----
(Dollars in Thousands)
Withdrawable:
Savings accounts.............. $15,683 12.88% $(1,889) $ 17,572 13.92% $(1,207)
NOW and other transactions
accounts.................... 21,230 17.43 427 20,803 16.47 2,365
------- ----- ------- --------- ----- -------
Total withdrawable............... 36,913 30.31 (1,462) 38,375 30.39 1,158
------- ----- ------- --------- ----- -------
Certificates (original terms):
28 days....................... 97 .08 (224) 321 .25 18
91 days....................... 1,089 .89 119 970 .77 (72)
182 days...................... 9,307 7.64 (260) 9,567 7.58 (2,062)
12 months..................... 14,484 11.89 (499) 14,983 11.87 5,842
18 months..................... 1,781 1.46 522 1,259 1.00 (486)
24 months..................... 2,032 1.67 470 1,562 1.24 (420)
30 months..................... 7,703 6.33 (2,239) 9,942 7.87 (1,029)
36 months..................... 1,425 1.17 (349) 1,774 1.41 302
48 months..................... 5,746 4.72 (385) 6,131 4.86 (60)
60 months..................... 11,082 9.10 (778) 11,860 9.39 619
72 months..................... 28 .02 (11) 39 .03 (1)
96 months..................... 377 .31 8 369 .29 (15)
IRAs
28 days....................... 2 .00 1 1 .00 (24)
91 days....................... 23 .02 (159) 182 .14 208
182 days...................... 174 .14 13 161 .13 (88)
12 months..................... 617 .51 151 466 .37 132
18 months..................... 238 .20 182 56 .04 (78)
24 months..................... 1,534 1.26 1,496 38 .03 ---
30 months..................... 880 .72 (103) 983 .78 (170)
36 months..................... 38 .03 (25) 63 .05 29
48 months..................... 4,815 3.95 47 4,768 3.78 325
60 months..................... 19,917 16.36 (858) 20,775 16.45 1,721
72 months..................... 585 .48 (30) 615 .49 (8)
96 months..................... 883 .72 (117) 1,000 .79 (6)
-------- ------ ------- -------- ------ -------
Total certificates............... 84,857 69.69 (3,028) 87,885 69.61 4,489
-------- ------ ------- -------- ------ -------
Total deposits................... $121,770 100.00% $(4,490) $126,260 100.00% $ 5,647
======== ====== ======= ======== ====== =======
DEPOSIT ACTIVITY
Increase
(Decrease)
Balance at from Balance at
June 30, % of June 30, June 30, % of
1995 Deposits 1994 1994 Deposits
----------------------------------------------------------------------------
(Dollars in Thousands)
Withdrawable:
Savings accounts............... $ 18,779 15.57% $(6,620) $ 25,399 21.00%
NOW and other transaction
accounts..................... 18,438 15.29 (1,120) 19,558 16.17
-------- ------ -------- -------- ------
Total withdrawable................ 37,217 30.86 (7,740) 44,957 37.17
-------- ------ -------- -------- ------
Certificates (original terms):
28 days........................ 303 .25 235 68 .06
91 days........................ 1,042 .86 (47) 1,089 .90
182 days....................... 11,629 9.64 (452) 12,081 9.99
12 months...................... 9,141 7.58 1,015 8,126 6.72
18 months...................... 1,745 1.45 (442) 2,187 1.81
24 months...................... 1,982 1.64 (698) 2,680 2.22
30 months...................... 10,971 9.10 1,471 9,500 7.85
36 months...................... 1,472 1.22 (113) 1,585 1.31
48 months...................... 6,191 5.13 3,229 2,962 2.45
60 months...................... 11,241 9.32 1,866 9,375 7.75
72 months...................... 40 .03 3 37 .03
96 months...................... 384 .32 (483) 867 .72
IRAs
28 days........................ 25 .02 9 16 .01
91 days........................ 162 .13 68 94 .07
182 days....................... 249 .21 9 240 .20
12 months...................... 334 .28 (126) 460 .38
18 months...................... 134 .11 (89) 223 .18
24 months...................... 38 .03 (14) 52 .04
30 months...................... 1,153 .96 (158) 1,311 1.08
36 months...................... 34 .03 (26) 60 .05
48 months...................... 4,443 3.68 4,024 419 .35
60 months...................... 19,054 15.80 (1,358) 20,412 16.87
72 months...................... 623 .52 (18) 641 .53
96 months...................... 1,006 .83 (517) 1,523 1.26
-------- ------ -------- -------- ------
Total certificates................ 83,396 69.14 7,388 76,008 62.83
-------- ------ -------- -------- ------
Total deposits.................... $120,613 100.00% $ (352) $120,965 100.00%
======== ====== ======== ======== ======
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, 1997, FHLB of
Indianapolis advances totaled $8.2 million, representing 4.7% 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,
1997 1996 1995
---------------------------------------
(Dollars in Thousands)
FHLB Advances:
Average balance outstanding.................... $7,382 $6,694 $5,574
Maximum amount outstanding at any month-end
during the period......................... 8,233 6,963 7,963
Weighted average interest rate
during the period......................... 6.27% 6.83% 6.85%
Weighted average interest rate at
end of period............................. 6.14% 6.50% 6.78%
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 $1.4 million at June 30, 1997.
At June 30, 1997, the Bank's investment in First Marion totaled $1.3
million. During the year ended June 30, 1997, First Marion had net income of
$33,000.
Employees
As of June 30, 1997, the Bank employed 31 persons on a full-time basis
and three persons on a part-time basis. None of the Bank's employees are
represented by a collective bargaining group. Management considers its employee
relations to be good.
Competition
The Bank originates most of its loans to and accepts most of its
deposits from residents of Grant and Adams Counties, Indiana.
The Bank is subject to competition from various financial institutions,
including state and national banks, state and federal savings institutions,
credit unions, certain non-banking consumer lenders, and other companies or
firms, including brokerage houses and mortgage brokers, that provide similar
services in Grant and Adams Counties. The Bank must also compete with money
market funds and with insurance companies with respect to its individual
retirement accounts.
Under current law, bank holding companies may acquire savings
associations. Savings associations may also acquire banks under federal law. To
date, several bank holding company acquisitions of savings associations in
Indiana have been completed. Affiliations between banks and healthy savings
associations based in Indiana may also increase the competition faced by the
Bank and MCHI.
In addition, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to
acquire banks in other states and, with state consent to certain limitations,
allows banks to acquire out-of-state branches either through merger or de novo
expansion. The State of Indiana recently passed a law establishing interstate
branching provisions for Indiana state chartered banks consistent with those
established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana
Branching Law authorizes Indiana banks to branch interstate by merger or de novo
expansion and authorizes out-of-state banks meeting certain requirements to
branch into Indiana by merger or de novo expansion. The Indiana Branching Law
became effective March 15, 1996, provided that interstate mergers and de novo
branches are not permitted to out-of-state banks unless the laws of their home
states permit Indiana banks to merge or establish de novo branches on a
reciprocal basis. This new legislation may also result in increased competition
for the Bank and MCHI.
Because of recent changes in Federal law, interstate acquisitions of
banks are less restricted than they were under prior law. Savings associations
have certain powers to acquire savings associations based in other states, and
Indiana law expressly permits reciprocal acquisition of Indiana savings
associations. In addition, Federal savings associations are permitted to branch
on an interstate basis. See "Regulation -- Acquisitions or Dispositions and
Branching."
The primary factors in competing for deposits are interest rates and
convenience of office locations. The Bank competes for loan originations
primarily through the efficiency and quality of services it provides borrowers
through interest rates and loan fees it charges. Competition is affected by,
among other things, the general availability of lendable funds, general and
local economic conditions, current interest rate levels, and other factors which
are not readily predictable.
REGULATION
General
The Bank, as a federally chartered savings bank, is a member of the
Federal Home Loan Bank System ("FHLB System") and its deposits are insured by
the FDIC and it is a member of the Savings Association Insurance Fund (the
"SAIF") which is adminsitered by the FDIC. The Bank is subject to extensive
regulation by the OTS. Federal associations may not enter into certain
transactions unless certain regulatory tests are met or they obtain prior
governmental approval and the associations must file reports with the OTS about
their activities and their financial condition. Periodic compliance examinations
of the Bank are conducted by the OTS which has, in conjunction with the FDIC in
certain situations, examination and enforcement powers. This supervision and
regulation are intended primarily for the protection of depositors and federal
deposit insurance funds. The Bank is also subject to certain reserve
requirements under regulations of the Board of Governors of the Federal Reserve
System ("FRB").
An OTS regulation establishes a schedule for the assessment of fees
upon all savings associations to fund the operations of the OTS. The regulation
also establishes a schedule of fees for the various types of applications and
filings made by savings associations with the OTS. The general assessment, to be
paid on a semiannual basis, is based upon the savings association's total
assets, including consolidated subsidiaries, as reported in a recent quarterly
thrift financial report. Currently, the 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, 1997, was $25,168.
The Bank is also subject to federal and state regulation as to such
matters as loans to officers, directors, or principal shareholders, required
reserves, limitations as to the nature and amount of its loans and investments,
regulatory approval of any merger or consolidation, issuance or retirements of
their own securities, and limitations upon other aspects of banking operations.
In addition, the activities and operations of the Bank are subject to a number
of additional detailed, complex and sometimes overlapping federal and state laws
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and anti-trust
laws.
The United States Congress is considering legislation that would
require all federal savings associations, such as the Bank, to either convert to
a national bank or a state-chartered financial institution by a specified date
to be determined. In addition, under the legislation, the Holding Company likely
would not be regulated as a savings and loan holding company, but rather as a
bank holding company. The OTS would also be abolished and its functions
transferred among the other federal banking regulators. Certain aspects of the
legislation remain to be resolved and therefore no assurance can be given as to
whether or in what form the legislation will be enacted or its effect on the
Holding Company and the Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
banks. The Federal Housing Finance Board ("FHFB"), an independent agency,
controls the FHLB System including the FHLB of Indianapolis. The FHLB System
provides a central credit facility primarily for member savings associations and
other member financial institutions. The Bank is required to hold shares of
capital stock in the FHLB of Indianapolis in an amount at least equal to the
greater of 1% of the aggregate principal amount of its unpaid residential
mortgage loans, home purchase contracts and similar obligations at the 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, 1997, the Bank's investment in stock of the FHLB of
Indianapolis was $1,047,300.
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 FHLB's ability to pay
dividends and the value of FHLB stock in the future. For the year ending June
30, 1997, dividends paid to the Bank totaled $79,000, for an annual rate of
7.88%.
The FHLB of Indianapolis serves as a reserve or central bank for member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHLB and the Board of Directors of the FHLB of Indianapolis.
All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. Current law prescribes eligible collateral as first
mortgage loans less than 90 days delinquent or securities evidencing interests
therein, securities (including mortgage-backed securities) issued, insured or
guaranteed by the federal government or any agency thereof, FHLB deposits and,
to a limited extent, real estate with readily ascertainable value in which a
perfected security interest may be obtained. Other forms of collateral may be
accepted as over collateralization or, under certain circumstances, to renew
outstanding advances. All long-term advances are required to provide funds for
residential home financing and the FHLB has established standards of community
service that members must meet to maintain access to long-term advances.
Interest rates charged for advances vary depending upon maturity, the
cost of funds to the FHLB of Indianapolis and the purpose of the borrowing.
Under current law, savings associations which cease to be Qualified Thrift
Lenders are ineligible to receive advances from their FHLB.
Liquidity
For each calendar month, the Bank is required to maintain an average
daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances, specified United States Government, state or federal agency
obligations, shares of certain mutual funds and certain corporate debt
securities and commercial paper) equal to an amount not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings
during the preceding calendar month. This liquidity requirement may be changed
from time to time by the OTS to any amount within the range of 4% to 10%
depending upon economic conditions and the savings flows of member institutions,
and is currently 5%, although the OTS has proposed a reduction of the percentage
to 4%. OTS regulations also require each member savings institution to maintain
an average daily balance of short-term liquid assets at a specified percentage
(currently 1%) of the total of its net withdrawable deposit accounts and
short-term borrowings during the preceding calendar month. Monetary penalties
may be imposed for failure to meet these liquidity requirements. The daily
average liquidity of the Bank for June, 1997, was 8.8% which exceeded the then
applicable 5% liquidity requirement. Its average short-term liquidity ratio for
June, 1997, was 3.7%. The Bank has never been subject to monetary penalties for
failure to meet its liquidity requirements.
Insurance of Deposits
The FDIC is an independent federal agency that insures the deposits, up
to prescribed statutory limits, of banks and thrifts and safeguards the safety
and soundness of the banking and thrift industries. The FDIC administers two
separate insurance funds, the BIF for commercial banks and state savings banks
and the SAIF for savings associations and banks that have acquired deposits from
savings associations. The FDIC is required to maintain designated levels of
reserves in each fund. Currently, thrifts may convert from one insurance fund to
the other upon payment of certain exit and entrance fees. Such fees need not be
paid if a SAIF member converts to a bank charter or merges with a bank, as long
as the resulting bank continues to pay the applicable insurance assessments to
the SAIF during such period and as long as certain other conditions are met.
The FDIC is authorized to establish separate annual assessment rates
for deposit insurance for members of the BIF and members of the SAIF. The FDIC
may increase assessment rates for either fund if necessary to restore the fund's
ratio of reserves to insured deposits to the target level within a reasonable
time and may decrease such rates if such target level has been met. The FDIC has
established a risk-based assessment system for both SAIF and BIF members. Under
this system, assessments vary depending on the risk the institution poses to its
deposit insurance fund. Such risk level is determined based on the institution's
capital level and the FDIC's level of supervisory concern about the institution.
For the first six months of 1995, the assessment schedule for BIF
members and SAIF members ranged from .23% to .31% of deposits. As is the case
with the SAIF, the FDIC is authorized to adjust the insurance premium rates for
banks that are insured by the BIF of the FDIC in order to maintain the reserve
ratio of the BIF at 1.25% of BIF-insured deposits. As a result of the BIF
reaching its statutory reserve ratio, the FDIC in 1995 revised the premium
schedule for BIF insured institutions to provide a range of .04% to .31% of
deposits. The revisions became effective in the third quarter of 1995. At that
time, healthy BIF-insured banks paid premiums of approximately $.04 per $100 in
deposits compared to $.23 per $100 in deposits paid by healthy SAIF-insured
institutions. The BIF rates were further revised, effective January 1996, to
provide a range of 0% to .27%, eliminating insurance premiums for healthy
BIF-insured banks. The SAIF rates, however, were not adjusted. At the time the
FDIC revised the BIF premium schedule, it noted that, absent legislative action
(as discussed below), the SAIF would not attain its designated reserve ratio
until the year 2002. As a result, SAIF-insured members would continue to be
generally subject to higher deposit insurance premiums than BIF-insured
institutions until, all things being equal, the SAIF attained its required
reserve ratio of 1.25% of BIF-insured deposits.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provided for a one time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provided for the merger of the BIF and the SAIF on January 1,
1999, if no savings associations then exist. The special assessment rate was
established by the FDIC at .657% of deposits, and the resulting assessment of
$776,717 on the Bank was accrued in September, 1996. This special assessment
significantly increased noninterest expense and adversely affected the MCHI's
results of operations for the three months ended September 30, 1996. As a result
of the special assessment, the Bank's deposit insurance premiums were reduced to
6.48 basis points based upon its current risk classification and the new
assessment schedule for SAIF-insured institutions. These premiums are subject to
change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC has equalized the SAIF
assessment schedule with the BIF assessment schedule, SAIF-insured institutions
remain subject to a FICO assessment as a result of this continuing obligation.
Although the legislation also now requires assessments to be made on
BIF-assessable deposits for this purpose, effective January 1, 1997, that
assessment is limited to 20% of the rate imposed on SAIF assessable deposits
until the earlier of September 30, 1999, or when no savings association
continues to exist, thereby imposing a greater burden on SAIF member
institutions such as the Bank. Thereafter, however, assessments on BIF-member
institutions are expected to be made on the same basis as SAIF-member
institutions.
Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common stockholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill (on a declining basis until 1995), purchased mortgage
servicing rights (which may be included in an amount up to 50% of core capital,
but which are to be reported on an association's balance sheet at the lesser of
90% of their fair market value, 90% of their original purchase price, or 100% of
their remaining unamortized book value), and purchased credit card relationships
(which may be included in an amount up to 25% of core capital) less
nonqualifying intangibles. Under the tangible capital requirement, a savings
association must maintain tangible capital (core capital less all intangible
assets except purchased mortgage servicing rights which may be included after
making the above-noted adjustments up to 100% of tangible capital) of at least
1.5% of total assets. Under the risk-based capital requirements, a minimum
amount of capital must be maintained by a savings association to account for the
relative risks inherent in the type and amount of assets held by the savings
association. The risk-based capital requirement requires a savings association
to maintain capital (defined generally for these purposes as core capital plus
general valuation allowances and permanent or maturing capital instruments such
as preferred stock and subordinated debt less assets required to be deducted)
equal to 8.0% of risk-weighted assets. Assets are ranked as to risk in one of
four categories (0-100%) with a credit risk-free asset such as cash requiring no
risk-based capital and an asset with a significant credit risk such as a
non-accrual loan being assigned a factor of 100%. At June 30, 1997, the Bank was
in compliance with all capital requirements.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. Under the rule, only savings associations
with "above normal" interest rate risk (institutions whose portfolio equity
would decline in value by more than 2% of assets in the event of a hypothetical
200-basis-point move in interest rates) will be required to maintain additional
capital for interest rate risk under the risk-based capital framework. An
institution with an "above normal" level of exposure will have to maintain
additional capital equal to one-half the difference between its measured
interest rate risk (the most adverse change in the market value of its portfolio
resulting from a 200-basis point move in interest rates divided by the estimated
market value of its assets) and 2%, multiplied by the market value of its
assets. That dollar amount of capital is in addition to an institution's
existing risk-based capital requirement. Although the OTS has decided to delay
implementation of this rule, it will continue to closely monitor the level of
interest rate risk at individual institutions and it retains the authority, on a
case-by-case basis, to impose additional capital requirements for individual
institutions with significant interest rate risk.
If an association is not in compliance with its capital requirements,
the OTS is required to prohibit asset growth and to impose a capital directive
that may restrict, among other things, the payment of dividends and officers'
compensation. In addition to specific sanctions provided in Financial
Institutions Reform, Recovery, and Enforcement Act ("FIRREA") for failing to
meet capital requirements, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements, which actions may include restrictions on operations and banking
activities, the imposition of a capital directive, a cease and desist order,
civil money penalties or harsher measures such as the appointment of a receiver
or conservator or a forced merger into another institution.
Prompt Corrective Action
Federal Deposit Insurance Corporation Improvement Act of 1991, as
amended ("FedICIA") requires, among other things, federal bank regulatory
authorities to take "prompt corrective action" with respect to institutions that
do not meet minimum capital requirements. For these purposes, FedICIA
establishes five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. At June 30, 1997, the Bank was categorized as "well
capitalized."
An institution is deemed to be "well capitalized" if it has a total
risk-based capital ratio of 10% or greater, a Tier I risk-based capital ratio of
6% or greater, and a leverage ratio of 5% or greater, and is not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure.
"Undercapitalized" institutions are subject to growth limitations and
are required to submit a capital restoration plan. If an "undercapitalized"
institution fails to submit, or fails to implement in a material respect, an
acceptable plan, it is treated as if it is "significantly undercapitalized."
"Significantly undercapitalized" institutions are subject to one or more of a
number of requirements and restrictions, including an order by the FDIC to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cease receipt of deposits from correspondent banks, and
restrictions on compensation of executive officers. "Critically
undercapitalized" institutions may not, beginning 60 days after becoming
"critically undercapitalized," make any payment of principal or interest on
certain subordinated debt or extend credit for a highly leveraged transaction or
enter into any transaction outside the ordinary course of business. In addition,
"critically undercapitalized" institutions are subject to appointment of a
receiver or conservator.
Capital Distributions Regulation
An OTS regulation imposes restrictions upon all "capital distributions"
by savings associations, including cash dividends, payments by an institution to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system of regulation, with
the greatest flexibility being afforded to well-capitalized institutions. A
savings association which has total capital (immediately prior to and after
giving effect to the capital distribution) that is at least equal to its fully
phased-in capital requirements would be a Tier 1 institution ("Tier 1
Institution"). An institution that has total capital at least equal to its
minimum capital requirements, but less than its fully phased-in capital
requirements, would be a Tier 2 institution ("Tier 2 Institution"). An
institution having total capital that is less than its minimum capital
requirements would be a Tier 3 institution ("Tier 3 Institution"). However, an
institution which otherwise qualifies as a Tier 1 institution may be designated
by the OTS as a Tier 2 or Tier 3 institution if the OTS determines that the
institution is "in need of more than normal supervision." The Bank is currently
a Tier 1 Institution.
A Tier 1 Institution could, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to the greater
of (a) 100% of its net income to date during the calendar year plus an amount
that would reduce by one-half its "surplus capital ratio" (the excess over its
capital requirements) at the beginning of the calendar year; or (b) 75% of its
net income for the most recent four quarter period. Any additional amount of
capital distributions would require prior regulatory approval.
The OTS has proposed revisions to these regulations which would permit
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.
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.
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.
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. The effects of these reserve
requirements is to increase the Bank's cost of funds. The Bank is in compliance
with its reserve requirements. 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. Current law imposes certain limitations on the ability of undercapitalized
depository institutions to borrow from Federal Reserve Banks.
Transactions with Affiliates
The Bank and MCHI are subject to Sections 22(h), 23A and 23B of the
Federal Reserve Act, which restrict financial transactions between banks and
affiliated companies. The statute limits credit transactions between a bank and
its executive officers and its affiliates, prescribes terms and conditions for
bank affiliate transactions deemed to be consistent with safe and sound banking
practices, and restricts the types of collateral security permitted in
connection with a bank's extension of credit to an affiliate.
Holding Company Regulation
MCHI is regulated as a "non-diversified unitary savings and loan
holding company" within the meaning of the Home Owners' Loan Act, as amended
("HOLA"), and subject to regulatory oversight of the Director of the OTS. As
such, MCHI is registered with the OTS and thereby subject to OTS regulations,
examinations, supervision and reporting requirements. As a subsidiary of a
savings and loan holding company, the Bank is subject to certain restrictions in
its dealings with MCHI and with other companies affiliated with MCHI.
HOLA generally prohibits a savings and loan holding company, without
prior approval of the Director of the OTS, from (i) acquiring control of any
other savings association or savings and loan holding company or controlling the
assets thereof or (ii) acquiring or retaining more than 5 percent of the voting
shares of a savings association or holding company thereof which is not a
subsidiary. 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% 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, 1997, the Bank's asset composition was in excess of
that required to qualify the Bank as a Qualified Thrift Lender.
If MCHI were to acquire control of another savings institution other
than through a merger or other business combination with the Bank, MCHI would
thereupon become a multiple savings and loan holding company. Except where such
acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings association meets the QTL test,
the activities of MCHI and any of its subsidiaries (other than the Bank or other
subsidiary savings associations) would thereafter be subject to further
restrictions. HOLA provides that, among other things, no multiple savings and
loan holding company or subsidiary thereof which is not a savings association
shall commence or continue for a limited period of time after becoming a
multiple savings and loan holding company or subsidiary thereof, any business
activity other than (i) furnishing or performing management services for a
subsidiary savings association, (ii) conducting an insurance agency or escrow
business, (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary savings institution, (iv) holding or managing properties used
or occupied by a subsidiary savings institution, (v) acting as trustee under
deeds of trust, (vi) those activities previously directly authorized by the
FSLIC by regulation as of March 5, 1987, to be engaged in by multiple holding
companies or (vii) those activities authorized by the FRB as permissible for
bank holding companies, unless the Director of the OTS by regulation prohibits
or limits such activities for savings and loan holding companies. Those
activities described in (vii) above must also be approved by the Director of the
OTS prior to being engaged in by a multiple holding company.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5,1987, or if
the laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state-chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
Indiana law permits federal and state savings association holding
companies with their home offices located outside of Indiana to acquire savings
associations whose home offices are located in Indiana and savings association
holding companies with their principal place of business in Indiana ("Indiana
Savings Association Holding Companies") upon receipt of approval by the Indiana
Department of Financial Institutions. Moreover, Indiana Savings Association
Holding Companies may acquire savings associations with their home offices
located outside of Indiana and savings associations holding companies with their
principal place of business located outside of Indiana upon receipt of approval
by the Indiana Department of Financial Institutions.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days advance notice of such
declaration and payment. Any dividend declared during such period or without the
giving of such notice shall be invalid.
Federal Securities Law
The shares of Common Stock of MCHI are registered with the SEC under
the 1934 Act. MCHI is subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the 1934 Act and the rules of the
SEC thereunder. If MCHI has fewer than 300 shareholders, it may deregister the
shares under the 1934 Act and cease to be subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of MCHI may
not be resold without registration or unless sold in accordance with the resale
restrictions of Rule 144 under the 1933 Act. If MCHI meets the current public
information requirements under Rule 144, each affiliate of MCHI who complies
with the other conditions of Rule 144 (including conditions that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of MCHI or (ii) the average weekly volume of trading in such shares
during the preceding four calendar weeks.
Qualified Thrift Lender
Under current OTS regulations, the QTL test requires that a savings
association have at least 65% of its portfolio assets invested in "qualified
thrift investments" on a monthly average basis in 9 out of every 12 months.
Qualified thrift investments under the QTL test consist primarily of housing
related loans and investments.
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, 1997, 83.48% of the Bank's portfolio assets (as defined on
that date) were invested in qualified thrift investments (as defined on that
date), and therefore the Bank's asset composition was in excess of that required
to qualify the Bank as a QTL. Also, the Bank does not expect to significantly
change its lending or investment activities in the near future. The Bank expects
to continue to qualify as a QTL, although there can be no such assurance.
Acquisitions or Dispositions and Branching
Bank holding companies, upon receipt of appropriate approvals from the
FRB and the Director of the OTS, may acquire control of any savings association
or holding company thereof wherever located. Similarly, a savings and loan
holding company may now acquire control of a bank. Moreover, federal savings
associations may acquire or be acquired by any insured depository institution.
Pursuant to rules promulgated by the FRB, a savings association acquired by a
bank holding company (i) may, so long as the savings association continues to
meet the QTL test, continue to branch to the same extent as permitted to other
non-affiliated savings associations similarly chartered in the state, and (ii)
cannot continue any non-banking activities not authorized for bank holding
companies. Saving associations acquired by a bank holding company may, if
located in a state where the bank holding company is legally authorized to
acquire a bank, be converted to the status of a bank but deposit insurance
assessments and payments continue to be paid by the association to the SAIF. A
savings association so converted to a bank becomes subject to the branching
restrictions applicable to banks. Also any insured depository institution may
merge with, acquire the assets of, or assume the liabilities of any other
insured depository institution with the appropriate regularity approvals if (i)
continued payments of deposit insurance are made on the acquired depository
institution's deposits (including an assumed rate of growth in such deposits) to
SAIF (if the acquired institution was a SAIF member) or to BIF (if the acquired
institution was a BIF member), and (ii) the acquiring institution and any
holding company in control thereof meet all applicable capital requirements at
the time of the transaction.
Subject to certain exceptions, commonly controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to
the extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in ss.7701(a)(19) of the Code or the asset
composition test of ss.7701(c) of the Code. Branching that would result in the
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state- chartered
associations or their holding companies in the state where the acquiring
association or holding company is located.
Moreover, Indiana banks and savings associations are permitted to
acquire other Indiana banks and savings associations and to establish branches
throughout Indiana.
In addition, The Riegle-Neal 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. The Indiana Branching Law became effective March 15, 1996,
provided that interstate mergers and de novo branches are not permitted to
out-of-state banks unless the laws of their home states permit Indiana banks to
merge or establish de novo branches on a reciprocal basis.
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- outstanding, statisfactory,
unsatisfactory and needs imporvement -- 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 is not able to use the percentage of taxable income
method of computing its allowable tax bad debt deduction. The Bank will be
required to compute its allowable deduction using the experience method. As a
result of the repeal of the percentage of taxable income method, reserves taken
after 1987 using the percentage of taxable income method generally must be
included in future taxable income over a six-year period, although a two-year
delay may be permitted for institutions meeting a residential mortgage loan
origination test. In addition, the pre-1988 reserve, for which no deferred taxes
have been recorded, will not have to be recaptured into income unless (i) the
Bank no longer qualifies as a bank under the Code, or (ii) excess dividends are
paid out by the Bank.
Depending on the composition of its items of income and expense, a
savings association may be subject to the alternative minimum tax. A savings
association must pay an alternative minimum tax equal to the amount (if any) by
which 20% of alternative minimum taxable income ("AMTI"), as reduced by an
exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular
taxable income increased or decreased by certain tax preferences and
adjustments, including depreciation deductions in excess of that allowable for
alternative minimum tax purposes, tax-exempt interest on most private activity
bonds issued after August 7, 1986 (reduced by any related interest expense
disallowed for regular tax purposes), the amount of the bad debt reserve
deduction claimed in excess of the deduction based on the experience method and
75% of the excess of adjusted current earnings over AMTI (before this adjustment
and before any alternative tax net operating loss). AMTI may be reduced only up
to 90% by net operating loss carryovers, but alternative minimum tax paid that
is attributable to most preferences can be credited against regular tax due in
later years.
State Taxation
The Bank is subject to Indiana's Financial Institutions Tax ("FIT"),
which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted
gross income," for purposes of FIT, begins with taxable income as defined by
Section 63 of the Code and, thus, incorporates federal tax law to the extent
that it affects the computation of taxable income. Federal taxable income is
then adjusted by several Indiana modifications the most notable of which is the
required addback of interest that is tax-free for federal income tax purposes.
Other applicable state taxes include generally applicable sales and use taxes
plus real and personal property taxes.
MCHI's (or previously the Bank's) state income tax returns have not
been audited in the last five years.
Item 2. Properties.
At June 30, 1997, 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, 1997:
Net Book Value
Total Deposits of Property,
at Furniture
Owned or Year June 30, & Approximate
Description and Address Leased Opened 1997 Fixtures Square Footage
- ----------------------- ------------------- ---- -------- --------------
(Dollars in Thousands)
Main Office in Marion
100 West Third Street.................. Owned 1936 $112,929 $1,375 17,949
Location in Decatur
1045 South 13th Street................. Owned 1974 8,841 145 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 $136,000 at June 30, 1997.
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 $12,800 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, 1997.
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 63) 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 49) 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 47) 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 52) 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, 1997......... $23 1/4 $23 1/4 $22 1/2 $.22
March 31, 1997........ 22 22 19 1/4 .20
December 31, 1996..... 19 1/4 21 1/2 19 1/4 .20
September 30, 1996.... 20 1/2 21 20 .20
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
As of August 22, 1997, there were 447 record holders of MCHI's Common
Stock. MCHI estimates that, as of that date, there were approximately 1,062
additional shareholders in "street" name. The Company's percentage of dividends
per share to net income per share was 63.1%, 60.7% and 56.8% for the years ended
June 30, 1997, 1996 and 1995, 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
2 of MCHI's Shareholder Annual Report for its fiscal year ended June 30, 1997
(the "Shareholder Annual Report").
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required by this item is incorporated by reference to pages
3 through 15 of the Shareholder Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Bank is subject to interest rate risk to the degree that its
interest-bearing liabilities, primarily deposits with short- and medium-term
maturities, mature or reprice at different rates than our interest-earning
assets. Although having liabilities that mature or reprice less frequently on
average than assets will be beneficial in times of rising interest rates, such
an asset/liability structure will result in lower net income during periods of
declining interest rates, unless offset by other factors.
The Bank protects against problems arising in a falling interest rate
environment by requiring interest rate miniums on its residential and commercial
real estate adjustable-rate mortgages and against problems arising in a rising
interest rate environment by having in excess of 89% of its mortgage loans with
adjustable rate features. Management believes that these minimums, which
establish floors below which the loan interest rate cannot decline, will
continue to reduce its interest rate vulnerability in a declining interest rate
environment. For the loans which do not adjust because of the interest rate
minimums, there is an increased risk of prepayment.
The Bank believes it is critical to manage the relationship between
interest rates and the effect on its net portfolio value ("NPV"). This approach
calculates the difference between the present value of expected cash flows from
assets and the present value of expected cash flows from liabilities, as well as
cash flows from off-balance sheet contracts. The Bank manages assets and
liabilities within the context of the marketplace, regulatory limitations and
within its limits on the amount of change in NPV which is acceptable given
certain interest rate changes.
The OTS issued a regulation, which uses a net market value methodology to
measure the interest rate risk exposure of savings associations. Under this OTS
regulation, an institution's "normal" level of interest rate risk in the event
of an assumed change in interest rates is a decrease in the institution's NPV in
an amount not exceeding 2% of the present value of its assets. Savings
associations with over $300 million in assets or less than a 12% risk-based
capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is
used by the OTS to calculate changes in NPV (and the related "normal" level of
interest rate risk) based upon certain interest rate changes (discussed below).
Associations which do not meet either of the filing requirements are not
required to file OTS Schedule CMR, but may do so voluntarily. As the Bank does
not meet either of these requirements, it is not required to file Schedule CMR,
although it does so voluntarily. Under the regulation, associations which must
file are required to take a deduction (the interest rate risk capital component)
from their total capital available to calculate their risk based capital
requirement if their interest rate exposure is greater than "normal." The amount
of that deduction is one-half of the difference between (a) the institution's
actual calculated exposure to a 200 basis point interest rate increase or
decrease (whichever results in the greater pro forma decrease in NPV) and (b)
its "normal" level of exposure which is 2% of the present value of its assets.
Presented below, as of June 30, 1997, is an analysis performed by the OTS
of the Bank's interest rate risk as measured by changes in NPV for instantaneous
and sustained parallel shifts in the yield curve, in 100 basis point increments,
up and down 400 basis points. At June 30, 1997, 2% of the present value of the
Bank's assets was approximately $3.5 million. Because the interest rate risk of
a 200 basis point decrease in market rates (which was greater than the interest
rate risk of a 200 basis point increase) was $1.6 million at June 30, 1997, the
Bank would not have been required to make a deduction from its total capital
available to calculate its risk based capital requirement if it had been subject
to the OTS's reporting requirements under this methodology.
Change Net Portfolio Value NPV as % of Present Value of Assets
In Rates $ Amount $ Change % Change NPV Ratio Change
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
+ 400 bp * $37,509 $(3,023) (7)% 22.46% (64) bp
+ 300 bp 38,899 (1,633) (4)% 22.93% (17) bp
+ 200 bp 40,000 (532) (1)% 23.24% 14 bp
+ 100 bp 40,606 74 0% 23.32% 22 bp
0 bp 40,532 --- ---% 23.10% --- bp
- 100 bp 39,809 (723) (2)% 22.59% (51) bp
- 200 bp 38,899 (1,633) (4)% 21.99% (111) bp
- 300 bp 38,510 (2,022) (5)% 21.62% (148) bp
- 400 bp 38,377 (2,155) (5)% 21.37% (173) bp
- ----------
* Basis points.
As with any method of measuring interest rate risk, certain short comings
are inherent in the methods of analysis presented above. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable-rate loans, have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Most of the
Bank's adjustable-rate loans have interest rate minimums of 6.00% for
residential loans and 9.00% for commercial real estate loans. Currently,
originations of residential adjustable-rate-mortgages have interest rate
minimums of 6.00%. Further, in the event of a change in interest rates, expected
rates of prepayments on loans and early withdrawals from certificates could
likely deviate significantly from those assumed in calculating the table.
Finally, the ability of many borrowers to service their debt may decrease in the
event of an interest rate increase although the Bank does underwrite these
mortgages at approximately 4.0% above the origination rate. The Company
considers all of these factors in monitoring its exposure to interest rate risk.
Item 8. Financial Statements and Supplementary Data.
MCHI's Consolidated Financial Statements and Notes thereto contained on
pages 17 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.
There were no such changes or disagreements during the applicable
period.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is
incorporated by reference to pages 2 and 3 of MCHI's Proxy Statement for its
1997 Annual Shareholder Meeting (the "1997 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 6 of the 1997 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 1997 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to
page 5 of the 1997 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
page 6 of the 1997 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, 1997, and
1996
Consolidated Statement of Income for the Fiscal Years ended June 30,
1997, 1996 and 1995
Consolidated Statement of Changes in Shareholders' Equity for the
Fiscal Years ended June 30, 1997, 1996 and 1995
Consolidated Statement of Cash Flows for the Fiscal Years ended June
30, 1997, 1996, and 1995
Notes to Consolidated Financial Statements
(b) MCHI filed no reports on Form 8-K during the fourth quarter ended June 30,
1997.
(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 22, 1997 /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 22nd day of September,
1997.
/s/ John M. Dalton /s/ Steven L. Banks
- ---------------------------- -----------------------------
John M. Dalton Steven L. Banks, Director
President, Director
(Principal Executive Officer)
/s/ Larry G. Phillips /s/ W. Gordon Coryea
- ---------------------------- -----------------------------
Larry G. Phillips W. Gordon Coryea, Director
Senior Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
/s/ Jerry D. McVicker
-----------------------------
Jerry D. McVicker, Director
/s/ Jack O. Murrell
-----------------------------
Jack O. Murrell, Director
/s/ George L. Thomas
-----------------------------
George L. Thomas, Director
/s/ Jon R. Marler
-----------------------------
Jon R. Marler, Director
EXHIBIT INDEX
Exhibit Index* Page
3(1) The Articles of Incorporation of the Registrant is
incorporated by reference to Exhibit 3(1) to the
Registration Statement on Form S-1 (Registration No.
33-55052).
3(2) The Code of By-Laws of the Registrant is incorporated by
reference to Exhibit 3(2) to Registration Statement on Form
S-I (Registration No. 33-55052).
10(1) Marion Capital Holdings, Inc. Stock Option Plan is
incorporated by reference to Exhibit A to the Registrants
definitive Proxy Statement in respect of its 1993 Annual
Shareholder meeting.
10(2) Recognition and Retention Plans and Trusts are incorporated
by reference to Exhibit B to the Registrants definitive
Proxy Statement in respect of its 1993 Annual Shareholder
meeting.
10(3) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and Merritt B. McVicker is
incorporated by reference to Exhibit 10(6) to the
Registration Statement on Form S-1 (Registration No.
33-55052). First Amendment to Director Deferred Compensation
Agreement of Merritt B. McVicker dated December 1, 1996 ____
10(4) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and John M. Dalton is incorporated by
reference to Exhibit 10(7) to the Registration Statement on
Form S-1 (Registration No. 33-55052). First Amendment to
Director Deferred Compensation Agreement of John M. Dalton
dated December 1, 1996. ____
10(5) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and Robert D. Burchard is
incorporated by reference to Exhibit 10(8) to the
Registration Statement on Form S-1 (Registration No.
33-55052). First Amendment to Director Deferred Compensation
Agreement of Robert D. Burchard dated December 1, 1996. ____
10(6) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and James O. Murrell is incorporated
by reference to Exhibit 10(9) to the Registration Statement
on Form S-1 (Registration No. 33-55052). First Amendment to
Director Deferred Compensation Agreement of James (Jack ) O.
Murrell dated December 1, 1996. ____
10(7) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and Gordon Coryea is incorporated by
reference to Exhibit 10(10) to the Registration Statement on
Form S-1 (Registration No. 33-55052). First Amendment to
Director Deferred Compensation Agreement of W. Gordon Coryea
dated December 1, 1996. ____
Exhibit Index Page
10(8) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and George Thomas is
incorporated by reference to Exhibit 10(11) to the
Registration Statement on Form S-1 (Registration No.
33-55052). First Amendment to Director Deferred Compensation
Agreement of George L. Thomas dated December 1, 1996. ____
10(9) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and James Gartland is incorporated by
reference to Exhibit 10(12) to the Registration Statement on
Form S-1 (Registration No. 33-55052). First Amendment to
Deferred Compensation Agreement of James Gartland dated May
23, 1994 is incorporated by reference to Exhibit 10(9) to
the Annual Report on Form 10-K for fiscal year ended June
30, 1994.
10(10) Defered Compensation Agreement between the Bank and Gordon
Coryea dated April 30, 1988, as amended as of May 1, 1992,
is incorporated by reference to Exhibit 10(13) to the
Registration Statement on Form S-1 (Registration No.
33-55052).
10(11) Deferred Compensation Agreement between the Bank and Merritt
V. McVicker dated April 30, 1988, as amended as of May 1,
1992, is incorporated by reference to Exhibit 10(14) to the
Registration Statement on Form S-1 (Registration No.
33-55052).
10(12) Restated Executive Supplemental Retirement Agreement
effective December 1, 1996 between the Bank and John M.
Dalton. ____
10(13) Restated Executive Supplemental Retirement Agreement
effective December 1, 1996 between the Bank and Robert D.
Burchard. ____
10(14) Restated Executive Supplemental Retirement Agreement
effective December 1, 1996 between the Bank and Jackie
Noble. ____
10(15) Restated Executive Supplemental Retirement Agreement
effective December 1, 1996 between the Bank and Nora Kuntz. ____
10(16) Executive Supplemental Retirement Agreement effective
December 1, 1996 between the Bank and Larry G. Phillips. ____
10(17) Death Benefit Agreement between the Bank and Tim Canode
dated August 25, 1992, is incorporated by reference to
Exhibit 10(19) to the Registration Statement on Form S-1
(Registration No. 33-55052).
10(18) Death Benefit Agreement between the Bank and Steven L. Banks
dated December 1, 1996. ____
10(19) Excess Benefit Agreement dated as of Februry 28, 1996
between the Bank and John M. Dalton is incorporated by
reference to Exhibit 10(18) to the Annual Report on Form
10-K for the fiscal year ended June 30, 1996. First
Amendment to Excess Benefit Agreement of John M. Dalton
dated December 1, 1996. ____
Exhibit Index Page
10(20) Excess Benefit Agreement dated as of Februry 28, 1996
between the Bank and Robert D. Burchard is incorporated by
reference to Exhibit 10(19) to the Annual Report on Form
10-K for the fiscal year ended June 30, 1996. First
Amendment to Excess Benefit Agreement of Robert D. Burchard
dated December 1, 1996. ____
10(21) Director Emeritus Agreement dated March 1, 1996 between the
Bank and W. Gordon Coryea and First Amendment to such
agreement dated December 1, 1996. ____
10(22) Director Emeritus Agreement dated March 1, 1996 between the
Bank and George L. Thomas and First Amendment to such
agreement dated December 1, 1996. ____
10(23) Director Emeritus Agreement dated March 1, 1996 between the
Bank and John M. Dalton and First Amendment to such
agreement dated December 1, 1996. ____
10(24) Director Emeritus Agreement dated March 1, 1996 between the
Bank and Jack O. Murrell and First Amendment to such
agreement dated December 1, 1996. ____
10(25) Contingent Executive Supplemental Retirement Income
Agreement between the Bank and Steven L. Banks dated
December 1, 1996. ____
10(26) Rabbi Trust for the Director Deferred Compensation Master
Agreement and Director Emeritus Plan dated December 1, 1996. ____
10(27) Rabbi Trust for the Executive Supplemental Retirement Income
Plans and Excess Benefit Plans dated December 1, 1996. ____
11 Statement regarding computation of per share earnings. ____
13 1997 Shareholder Annual Report. ____
21 Subsidiaries of the Registrant is incorporated by reference
to Exhibit 22 to the Registration Statement on Form S-1
(Registration No. 33-55052).
23 Consent of Auditors ____
27 Financial Data Schedule ____
- -------------------
* Management contracts and plans required to be filed as
exhibits are included as Exhibits 10(1)-10(27).