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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, 1999
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 23, 1999, was $28,090,725.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of August 23, 1999, was 1,440,550 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended June 30, 1999
are incorporated into Part II. Portions of the Proxy Statement for the 1999
Annual Meeting of Shareholders are incorporated into Part III.
Exhibit Index on Page E-1
Page 1 of 37 Pages
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MARION CAPITAL HOLDINGS, INC.
Form 10-K
INDEX
Page
Forward Looking Statements................................................ 3
PART 1
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 34
Item 3. Legal Proceedings........................................... 34
Item 4. Submission of Matters to a Vote of Security Holders......... 34
Item 4.5. Executive Officers of MCHI.................................. 34
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..................................... 35
Item 6. Selected Consolidated Financial Data........................ 35
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 35
Item 7A. Quantitative and Qualtative Disclosures About Market Risk... 36
Item 8. Financial Statements and Supplementary Data................. 36
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 36
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 36
Item 11. Executive Compensation...................................... 36
Item 12. Security Ownership of Certain Beneficial Owners
and Management.......................................... 36
Item 13. Certain Relationships and Related Transactions.............. 36
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K............................................. 37
Signatures ........................................................ 38
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief,
outlook, estimate or expectations of the Corporation (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Corporation. Readers of this Form 10-K are
cautioned that any such forward looking statements are not guarantees of future
events or performance and involve risks and uncertainties, and that actual
results may differ materially from those in the forward looking statements as a
result of various factors. The accompanying information contained in this Form
10-K identifies important factors that could cause such differences. These
factors include changes in interest rates; loss of deposits and loan demand to
other savings and financial institutions; substantial changes in financial
markets; changes in real estate values and the real estate market; regulatory
changes; or unanticipated results in pending legal proceedings.
PART I
Item 1. Business.
General
Marion Capital Holdings, Inc. ("MCHI") is an Indiana corporation
organized on November 23, 1992, to become a unitary savings and loan holding
company. MCHI became a unitary savings and loan holding company upon the
conversion (the "Conversion") of First Federal Savings Bank of Marion (the
"Bank" and together with MCHI, the "Company") from a federal mutual savings bank
to a federal stock savings bank on March 18, 1993. The principal asset of MCHI
consists of 100% of the issued and outstanding shares of common stock, $0.01 par
value per share, of the Bank. The Bank began operations in Marion, Indiana, as a
federal savings and loan association in 1936, and converted to a federal mutual
savings bank in 1986.
The Bank offers a number of consumer and commercial financial services.
These services include: (i) residential and commercial real estate loans; (ii)
multi-family loans; (iii) construction loans; (iv) installment loans; (v) loans
secured by deposits; (vi) auto loans; (vii) NOW accounts; (viii) consumer and
commercial demand and time deposit accounts; (ix) individual retirement
accounts; and (x) tax deferred annuities and mutual funds through its service
corporation subsidiary, First Marion Service Corporation ("First Marion"). The
Bank provides these services at four full-service offices, two in Marion, one in
Decatur, Indiana (which will be sold to another financial institution in
September 1999) and one in Gas City, Indiana. The Bank's market area for loans
and deposits consists of Grant and surrounding counties and Adams County in
Indiana.
The 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, 1999, 59.2%
of the Company's total loan portfolio consisted of conventional mortgage loans
on residential real property. These loans are generally secured by first
mortgages on the property. Substantially all of the residential real estate
loans originated by the Bank are secured by properties located in Grant and
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 $32.9 million at June 30, 1999, or 19.2% of total
loans. The Bank also makes construction loans, which constituted $6.3 million or
3.7% of the Company's total loans at June 30, 1999, and commercial loans, which
are generally not secured by real estate, of $10.9 million, or 6.4%.
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
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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, 1999, ARMs constituted 85.7% of the
Company's total mortgage loan portfolio. Additionally, the Bank attempts to
lengthen liability repricing by aggressively pricing longer term certificates of
deposit during periods of relatively low interest rates and investing in
intermediate-term or variable-rate investment securities.
Lending Activities
Loan Portfolio Data. The following table sets forth the composition of
the Company's loan portfolio by loan type and security type as of the dates
indicated, including a reconciliation of gross loans receivable after
consideration of the allowance for loan losses and deferred net loan fees on
loans.
At June 30,
------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ----------------- ---------------- ---------------- ----------------
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.................. $101,512 59.18% $103,719 61.14% $ 97,017 63.42%$ 87,106 58.85% $ 81,651 57.24%
Commercial real estate....... 32,918 19.19 31,857 18.78 31,122 20.35 36,170 24.43 35,937 25.19
Multi-family................. 9,295 5.42 11,014 6.49 11,394 7.45 15,573 10.52 14,495 10.16
Construction:
Residential.................. 3,674 2.14 2,742 1.62 3,555 2.32 3,904 2.64 3,448 2.42
Commercial real estate....... 2,658 1.55 4,542 2.68 1,144 .75 506 .34 1,257 .88
Multi-family................. --- --- --- --- --- --- 584 .39 2,627 1.84
Consumer loans:
Installment loans............ 3,957 2.31 2,417 1.42 3,613 2.37 2,725 1.85 1,897 1.33
Loans secured by deposits.... 867 .50 1,027 .61 895 .58 883 .60 797 .56
Home equity loans............ 3,665 2.14 2,496 1.47 1,376 .90 399 .27 405 .28
Auto loans................... 2,075 1.21 1,323 .78 325 .21 169 .11 120 .09
Commercial loans................ 10,914 6.36 8,511 5.01 2,525 1.65 7 .00 9 .01
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans receivable....... $171,535 100.00% $169,648 100.00% $152,966 100.00% $148,026 100.00% $142,643 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
TYPE OF SECURITY
Residential (1).............. $108,851 63.46% $108,957 64.23% $101,948 66.65%$ 91,409 61.75% $ 85,504 59.94%
Commercial real estate....... 35,576 20.74 36,399 21.46 32,266 21.09 36,688 24.78 37,219 26.08
Multi-family................. 9,295 5.42 11,014 6.49 11,394 7.45 16,157 10.91 17,122 12.00
Autos........................ 2,075 1.21 1,323 .78 325 .21 169 .11 120 .08
Deposits..................... 867 .50 1,027 .61 895 .58 883 .60 797 .56
Other security............... 10,914 6.36 8,511 5.01 2,525 1.65 7 .00 9 .01
Unsecured.................... 3,957 2.31 2,417 1.42 3,613 2.37 2,725 1.85 1,897 1.33
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans receivable....... 171,535 100.00 169,648 100.00 152,966 100.00 148,026 100.00 142,643 100.00
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Deduct:
Allowance for loan losses ...... 2,272 1.32 2,087 1.23 2,032 1.33 2,009 1.36 2,013 1.41
Deferred net loan fees.......... 270 .15 300 .18 277 .18 313 .21 303 .21
Loans in process................ 3,196 1.86 3,663 2.16 2,626 1.72 2,539 1.71 4,004 2.81
Net loans receivable......... $165,797 96.65% $163,598 96.43% $148,031 96.77% $143,165 96.72% $136,323 95.57%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Mortgage Loans
Adjustable rate.............. $128,554 85.67% $130,100 84.55% $128,799 89.30% $128,811 89.55% $120,496 86.43%
Fixed rate................... 21,503 14.33 23,774 15.45 15,433 10.70 15,032 10.45 18,919 13.57
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total...................... $150,057 100.00% $153,874 100.00% $144,232 100.00% $143,843 100.00% $139,415 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
- ---------
(1) Includes home equity loans.
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The following table sets forth certain information at June 30, 1999,
regarding the dollar amount of loans maturing in the Company's loan portfolio
based on the date that final payment is due under the terms of the loan. Demand
loans having no stated schedule of repayments and no stated maturity and
overdrafts are reported as due in one year or less. This schedule does not
reflect the effects of possible prepayments or enforcement of due-on-sale
clauses. Management expects prepayments will cause actual maturities to be
shorter.
Due During Years Ended June 30,
Balance ----------------------------------------------------------------------
Outstanding 2003 2005 2010 2015
At June to to to and
1999 2000 2001 2002 2004 2009 2014 following
---------- ----- ----- ------ ------ ------- -------- ---------
(In Thousands)
Mortgage loans:
Residential............ $105,186 $990 $337 $387 $2,051 $14,516 $34,448 $52,457
Multi-family........... 9,295 462 --- 126 499 3,463 2,723 2,022
Commercial real
estate............... 35,576 3,166 834 347 1,338 7,821 12,313 9,757
Consumer loans:
Home equity............ 3,665 10 --- --- --- 29 --- 3,626
Auto................... 2,075 69 168 455 1,361 22 --- ---
Installment............ 3,957 638 247 488 1,938 483 92 71
Loans secured
by deposits.......... 867 675 169 10 13 --- --- ---
Commercial loans.......... 10,914 3,080 300 344 1,602 5,248 340 ---
-------- ------ ------ ------ ------ ------- ------- -------
Total.................. $171,535 $9,090 $2,055 $2,157 $8,802 $31,582 $49,916 $67,933
======== ====== ====== ====== ====== ======= ======= =======
The following table sets forth, as of June 30, 1999, 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, 2000
--------------------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- ---------
(In Thousands)
Mortgage loans:
Residential............................... $10,971 $93,225 $104,196
Multi-family.............................. 1,661 7,172 8,833
Commercial real estate.................... 2,243 30,167 32,410
Consumer loans:
Home equity............................... --- 3,655 3,655
Auto...................................... 2,006 --- 2,006
Installment............................... 3,272 47 3,319
Loan secured by deposits.................. 192 --- 192
Commercial loans .............................. 6,001 1,833 7,834
------- -------- --------
Total..................................... $26,346 $136,099 $162,445
======= ======== ========
Residential Loans. Residential loans consist of one-to-four family
loans. Approximately $101.5 million, or 59.2%, of the Company's portfolio of
loans at June 30, 1999, consisted of one- to four-family mortgage loans, of
which approximately 85.7% had adjustable rates. The Company is currently selling
to the Federal Home Loan Mortgage Corporation (the "FHLMC") 95% of the principal
balance on fixed rate loans originated with terms in excess of 15 years and
retaining all of the servicing rights on these loans. The option to retain or
sell fixed rate loans will be evaluated from time to time. During the year ended
June 30, 1999, $9.0 million in loans were sold to FHLMC.
The Bank originates fixed-rate loans with terms of up to 30 years. Some
loans are originated in accordance with guidelines established by FHLMC to
facilitate the sale of such loans to FHLMC in the secondary market. These loans
amortize on a monthly basis with principal and interest due each month. As
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mentioned above, a few of these loans originated with terms in excess of 15
years, or annual interest rates below 8.5%, were sold to FHLMC promptly after
they were originated. The Bank retained 5% of the principal balance of such sold
loans as well as the servicing on all of such sold loans. At June 30, 1999, the
Company had $11.0 million of fixed rate residential mortgage loans which were
originated in prior years in its portfolio, none of which were held for sale.
Most ARMs adjust on an annual basis, although the Bank currently offers
a five-year ARM which has a fixed rate for five years, and a three-year ARM
which has a fixed rate for three years. Both of these ARMs adjust annually after
the initial period is over. Currently, the ARMs have an interest rate average
minimum of 6.5% and average maximum of 13.5%. The interest rate adjustment for
substantially all of the Bank's ARMs is indexed to the One-Year Treasury
Constant Maturity Index. On new residential mortgage loans, the margin above
such index currently is 3.00%. The Bank offers ARMs with maximum rate changes of
2% per adjustment, and an average of 6.0% over the life of the loan. Generally
made for terms of up to 25 years, the Bank's ARMs are not made on terms that
conform with the standard underwriting criteria of FHLMC or the Federal National
Mortgage Association (the "FNMA"), thereby making resale of such loans
difficult. To better protect the Company against rising interest rates, the Bank
underwrites its residential ARMs based on the borrower's ability to repay the
loan assuming a rate equal to approximately 2% above the initial rate payable if
the loan remained constant during the loan term.
Although the Bank's residential mortgage loans are generally amortized
over a 25-year period, residential mortgage loans generally are paid off before
maturity. Substantially all of the residential mortgage loans that the Bank has
originated include "due on sale" clauses, which give the Bank the right to
declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid.
The Bank generally requires private mortgage insurance on all
conventional residential single-family mortgage loans with loan-to-value ratios
in excess of 90%. The Bank generally will not lend more than 95% of the lower of
current cost or appraised value of a residential single family property. In July
1995, the Bank's wholly-owned subsidiary, First Marion, began a 100% financing
program pursuant to which the Bank would originate an 80% loan-to-value first
mortgage loan using its normal underwriting standard and First Marion would
finance the remaining 20%. The second mortgage loan originated by First Marion
is a fixed rate mortgage loan with an interest rate of 10% and a term not to
exceed 15 years. At June 30, 1999, these loans amounted to $2.4 million.
Residential mortgage loans under $250,000 are approved by one of three
senior officers given authority by the Board of Directors. Residential loans
between $250,000 and $600,000 can be approved by two of these three senior
officers. All loan requests above $600,000 are approved by the Bank's Executive
Committee.
At June 30, 1999, residential mortgage loans amounting to $1.1 million,
or .6% of total loans, were included in non-performing assets. See
"--Non-performing and Problem Assets."
Commercial Real Estate Loans. At June 30, 1999, $32.9 million, or
19.2%, of the Company's total loan portfolio consisted of mortgage loans secured
by commercial real estate. The properties securing these loans consist primarily
of nursing homes, office buildings, hotels, churches, warehouses and shopping
centers. The commercial real estate loans, substantially all adjustable rate,
are made for terms not exceeding 25 years, and generally require an 80% or lower
loan-to-value ratio. Some require balloon payments after 5, 10 or 15 years. A
number of different indices, including the 1, 3, and 5 year Treasury Bills, are
used as the interest rate index for these loans. The commercial real estate
loans generally have minimum interest rates of 9% and maximum interest rates of
15%. Most of these loans adjust annually, but the Company has some 3-year and
5-year commercial real estate adjustable rate loans in its portfolio. The
largest commercial real estate loan as of June 30, 1999, had a balance of $2.5
million.
The Company held in its portfolio 21 commercial and multi-family real
estate loans with balances in excess of $500,000 at June 30, 1999. The average
loan balance for all such loans was $997,000. A significant proportion of the
Company's commercial real estate loan portfolio consists of loans secured by
nursing home properties. The balance of such loans totaled $12.3 million at June
30, 1999.
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.
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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, 1999, the Company had classified
$1.0 million as substandard, $147,000 as doubtful, $93,000 as loss and $2.1
million as special mention.
The Company has a high concentration of loans secured by nursing homes.
Like other commercial real estate loans, nursing home loans often involve large
loan balances to single borrowers or groups of related borrowers, and have a
higher degree of credit risk than residential mortgage lending. Loan payments
are often dependent on the operation of the nursing home, the success of which
is dependent upon the long-term health care industry. The risks inherent in such
industry include the federal, state and local licensure and certification laws
which regulate, among other things, the number of beds for which nursing care
can be provided and the construction, acquisition and operation of such nursing
facilities. The failure to obtain or maintain a required regulatory approval or
license could prevent the nursing home from being reimbursed for costs incurred
in offering its services or expanding its business. Moreover, a large percentage
of nursing home revenues is derived from reimbursement by third party payors.
Both governmental and other third party payors have adopted and are continuing
to adopt cost containment measures designed to limit payment to health care
providers, and changes in federal and state regulations in these areas could
adversely affect such homes. Because of the Company's concentration in this
area, a decline in the nursing home industry could have a substantial adverse
effect on the Company's commercial real estate portfolio and, therefore, a
substantial adverse effect on its operating results.
Commercial real estate loans in excess of $1.5 million must be approved
in advance by the Bank's Board of Directors. Commercial real estate loans
between $600,000 and $1.5 million can be approved by the Bank's Executive
Committee. Commercial real estate requests between $250,000 and $600,000 require
approval from two of three senior officers authorized by the Bank's Board of
Directors and a similar request below $250,000 requires approval from any one of
these three same senior officers.
Multi-Family Loans. At June 30, 1999, $9.3 million, or 5.4%, of the
Company's total loan portfolio consisted of mortgage loans secured by
multi-family dwellings (those consisting of more than four units). All of the
Company's multi-family loans are secured by apartment complexes located in
Indiana or Ohio. The average balance of all such multi-family mortgage loans was
$252,000 as of June 30, 1999. The largest such multi-family mortgage loan as of
June 30, 1999, had a balance of $1.1 million. As with the Bank's commercial real
estate loans, multi-family mortgage loans are substantially all adjustable-rate
loans, are written for terms not exceeding 25 years, and require at least an 80%
loan-to-value ratio. At June 30, 1999, the Company had $462,000 in loans secured
by multi-family dwellings which were included in non-performing assets and $2.3
million as special mention.
Multi-family loans, like commercial real estate loans, involve a
greater risk than do residential loans. Also, the more stringent loans-to-one
borrower limitation limits the ability of the Bank to make loans to developers
of apartment complexes and other multi-family units.
Construction Loans. The Bank offers construction loans with respect to
owner-occupied residential and commercial real estate property and, in certain
cases, to builders or developers constructing such properties on an investment
basis (i.e., before the builder/developer obtains a commitment from a buyer).
Most construction loans are made to owners who occupy the premises.
At June 30, 1999, $6.3 million, or 3.7%, of the Company's total loan
portfolio consisted of construction loans, of which approximately $3.7 million
were residential construction loans and $2.6 million related to construction of
commercial real estate projects. The largest construction loan on June 30, 1999,
was $570,000, which is included in a total of such loans classified as
substandard of $1.5 million.
For most construction loans, the loan is actually a 25-year mortgage
loan, but interest only is payable during the construction phase of the loan up
to 18 months, and such interest is charged only on the money disbursed under the
loan. After the construction phase (typically 6 to 12 months), regular mortgage
loan payments of principal and interest are due. Appraisals for these loans are
completed, subject to completion of building plans and specifications.
- 7 -
Interest rates and fees vary for these loans. While construction is
progressing, periodic inspections are performed for which the Bank assesses a
fee.
While providing the Company with a higher yield than a conventional
mortgage loan, construction loans involve a higher level of risk. For example,
if a project is not completed and the borrower defaults, the Bank may have to
hire another contractor to complete the project at a higher cost. Also, a house
may be completed, but may not be salable, resulting in the borrower defaulting
and the Bank taking title to the house.
Consumer Loans. Federal laws and regulations permit federally chartered
savings associations to make secured and unsecured consumer loans in an
aggregate amount of up to 35% of the association's total assets. In addition, a
federally chartered savings association has lending authority above the 35%
limit for certain consumer loans, such as property improvement loans and deposit
account secured loans. However, the Qualified Thrift Lender test places
additional limitations on a savings association's ability to make consumer
loans.
The Company's consumer loans, consisting primarily of installment
loans, loans secured by deposits, and auto loans, aggregated $10.6 million as of
June 30, 1999, or 6.2% of the Company's total loan portfolio. Although consumer
loans are currently only a small portion of its lending business, the Bank
consistently originates consumer loans to meet the needs of its customers, and
the Bank intends to originate more such loans to assist in meeting its
asset/liability management goals.
The Bank makes installment loans of up to five years, which consisted
of $4.0 million, or 2.3% of the Company's total loan portfolio at June 30, 1999.
Loans secured by deposits, totaling $867,000 at June 30, 1999, 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 $3.7 million, or 2.1% of the Company's total loan portfolio at June 30,
1999. Automobile loans totaled only $2.1 million, or 1.2% and are made at fixed
rates for terms of up to five years depending on the age of the automobile and
the loan-to-value ratio for the loan. The Bank does not make indirect automobile
loans.
Although consumer loans generally involve a higher level of risk than
one- to four-family residential mortgage loans, their relatively higher yields
and shorter terms to maturity are believed to be helpful in reducing the
interest-rate risk of the loan portfolio. The Bank has thus far been successful
in managing consumer loan risk. As of June 30, 1999, $21,000 of consumer loans
were included in non-performing assets.
Commercial Business Lending. At June 30, 1999, commercial business
loans comprised $10.9 million, or 6.4% of the Bank's gross loan portfolio. Most
of the commercial business loans have been extended to finance local businesses
and include short term loans to finance machinery and equipment purchases,
inventory and accounts receivable.
Unlike residential mortgage loans, commercial business loans are
typically made on the basis of the borrower's ability to make repayment from the
cash flow of the borrower's business. As a result, the availability of funds the
repayment of commercial business loans may be substantially dependent on the
success of the business itself, which, in turn, is often dependent in part upon
general economic conditions. Commercial business loans are usually, but not
always, secured by business assets. However, the collateral securing the loans
may depreciate over time, may be difficult to appraise, and may fluctuate in
value based on the success of the business.
The Bank's commercial business lending policy includes credit file
documentation and analysis of the borrower's background and the capacity to
repay the loan, the accuracy of the borrower's capital and collateral as well as
an evaluation of other conditions effecting the borrower. Analysis of the
borrower's past, present and future cash flows is also an important aspect of
the Bank's credit analysis. The Bank generally obtains personal guarantees on
commercial business loans. Nonetheless, these loans are believed to carry higher
credit risk than more traditional single family loans.
Loans to One Borrower. The Bank occasionally receives multiple loan
requests from a single borrower. These requests are prudently underwritten based
on the Bank's historical experience with the borrower, the loan amount compared
to the collateral's value, the borrower's credit risk, and the financial
position of the borrower, among other things. At June 30, 1999, the largest
aggregate amount of loans to a single borrower totaled $4.6 million. These loans
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are primarily secured by nursing homes located in Indiana; however, one of these
loans is secured by a residential property owned by the borrower in Southern
Indiana. As of the report date, all of the aforementioned loans were performing
in accordance with the original terms extended by the Bank. In addition, the
Bank reviews both the operating statements from the individual projects and the
financial position of the borrower on an annual basis.
Origination, Purchase and Sale of Loans. The Bank currently does not
originate its ARMs in conformity with the standard criteria of the FHLMC or
FNMA. The Bank would therefore experience some difficulty selling such loans in
the secondary market, although most loans could be brought into conformity. The
Bank has no intention, however, of attempting to sell such loans. The Bank's
ARMs vary from secondary market criteria because the Bank does not use the
standard loan form, does not require current property surveys in most cases, and
does not permit the conversion of those loans to fixed-rate loans in the first
three years of their term. These practices allow the Bank to keep the loan
closing costs down.
Although the Bank currently has authority to lend anywhere in the
United States, it has confined its loan origination activities primarily in
Grant and contiguous counties and in Adams County. The Bank's loan originations
are generated from referrals from builders, developers, real estate brokers and
existing customers, newspaper, radio and periodical advertising, and walk-in
customers. Loans are originated at either the main or branch offices. All loan
applications are processed and underwritten at the Bank's main office.
Under current federal law, a savings association generally may not make
any loan or extend credit to a borrower or its related entities if the total of
all such loans by the savings association exceeds 15% of its unimpaired capital
and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired
capital and surplus, if such loans or extensions of credit are fully secured by
readily marketable collateral, including certain debt and equity securities but
not including real estate. In some cases, a savings association may lend up to
30% of unimpaired capital and surplus to one borrower for purposes of developing
domestic residential housing, provided that the association meets its regulatory
capital requirements and the OTS authorizes the association to use this expanded
lending authority. The maximum amount which the Bank could have loaned to one
borrower and the borrower's related entities under the 15% of capital limitation
was $4.4 million at June 30, 1999.
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 Board of Directors has given mortgage lending authority to
three senior officers of the Bank. Each of these individuals can approve
mortgage requests up to $250,000. Loan requests between $250,000 and $600,000
require authorization from two of these three officers. The Bank's Executive
Committee approves all consumer loans greater than $50,000 and mortgage requests
between $600,000 and $1.5 million. Commercial real estate loans in excess of
$1.5 million 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, 1999, the Bank sold
- 9 -
$9.0 million of its fixed-rate mortgage loans, and at June 30, 1999, held
$327,000 of such loans for sale. The Bank obtains commitments from investors for
the sale of such loans at their outstanding principal balance and these
commitments are obtained prior to origination of the loans.
When it sells mortgage loans, the Bank generally retains the
responsibility for collecting and remitting loan payments, inspecting the
properties that secure the loans, making certain that monthly principal and
interest payments and real estate tax and insurance payments are made on behalf
of borrowers, and otherwise servicing the loans. The Company receives a
servicing fee for performing these services. The amount of fees received by the
Company varies, but is generally calculated as an amount equal to a rate of .25%
per annum for commercial loans and .375% per annum for residential loans on the
outstanding principal amount of the loans serviced. At June 30, 1999, the
Company serviced $38.3 million of loans sold to other parties of which $13.8
million, or 36.0%, were for loans sold to FHLMC; other service loans are
participation loans sold to other financial institutions.
The Company occasionally purchases participations to diversify its
portfolio, to supplement local loan demand and to obtain more favorable yields.
The participations purchased normally represent a portion of residential or
commercial real estate loans originated by other Indiana financial institutions,
most of which are secured by property located in Indiana. As of June 30, 1999,
the Company held in its loan portfolio, participations in mortgage loans
aggregating $5.7 million that it had purchased, all of which were serviced by
others. The largest such participation it held at June 30, 1999, was in a loan
secured by an apartment complex. The Company's portion of the outstanding
balance on that date was approximately $1.1 million.
The following table shows loan origination, purchase, sale and
repayment activity for the Bank during the periods indicated:
Year Ended June 30,
----------------------------------
1999 1998 1997
-------- -------- --------
(In Thousands)
Gross loans receivable at beginning of period $169,648 $153,203 $149,517
Originations:
Mortgage loans:
Residential ............................ 41,622 37,309 33,646
Commercial real estate and multi-family 6,923 13,949 11,483
-------- -------- --------
Total mortgage loans ................... 48,545 51,258 45,129
-------- -------- --------
Consumer loans:
Installment loans ...................... 7,534 7,170 4,528
Loans secured by deposits .............. 642 807 449
-------- -------- --------
Total consumer loans ................... 8,176 7,977 4,977
-------- -------- --------
Commercial loans ......................... 12,784 6,664 2,558
-------- -------- --------
Total originations ..................... 69,505 65,899 52,664
-------- -------- --------
Purchases:
Mortgage loans:
Commercial real estate and
multi-family ...................... -- 500 --
-------- -------- --------
Total originations and purchases ....... 69,505 66,399 52,664
-------- -------- --------
Sales:
Mortgage loans:
Residential ............................ 9,104 1,429 76
Commercial real estate and multi-family 909 3,443 7,133
-------- -------- --------
Total sales .......................... 10,013 4,872 7,209
-------- -------- --------
Repayments and other deductions ............. 57,605 45,082 41,769
-------- -------- --------
Gross loans receivable at end of period ..... $171,535 $169,648 $153,203
======== ======== ========
Origination and Other Fees. The Company realizes income from fees for
originating commercial real estate loans (equal to one or one-half of a
percentage of the total principal amount of the loan), late charges, checking
and NOW account service charges, fees for the sale of mortgage life insurance by
the Bank, fees for servicing loans and fees for other miscellaneous services
including money orders and travelers checks. In order to increase its
competitive position with respect to other mortgage lenders, the Bank does not
charge points on residential mortgage loans, but does so on its commercial real
estate loans. Late charges are assessed if payment is not received within 15
days after it is due.
- 10 -
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. Collateralized and noncollateralized consumer loans after 180
and 120 days of delinquency, respectively, are charged off.
Non-performing assets. At June 30, 1999, $3.3 million, or 1.7% of the
Company's total assets, were non-performing assets (non-accrual loans, real
estate owned and troubled debt restructurings), compared to $2.0 million, or
1.1% of the Company's total assets, at June 30, 1995. At June 30, 1999,
residential loans, multi-family, commercial real estate loans, commercial loans,
consumer loans, and repossessed assets accounted for 33.2%, 13.9%, 47.6%, 4.6%,
.6% and .1%, respectively, of non-performing assets.
At June 30, 1999, non-performing assets included $2,000 of repossessed
assets compared to real estate acquired as a result of foreclosure, voluntary
deed, or other means, of $206,000 at June 30, 1995. Real estate acquired is
classified by the Company as "real estate owned" or "REO" until it is sold. When
property is so acquired, the value of the asset is recorded on the books of the
Company at the lower of the unpaid principal balance at the date of acquisition
plus foreclosure and other related costs or at fair value. Interest accrual
ceases when the collection of interest becomes doubtful, usually after the loan
has been delinquent for 90 days or more. All costs incurred from the date of
acquisition in maintaining the property are expensed.
The following table sets forth the amounts and categories of the
Company's non-performing assets (non-accrual loans, repossessed assets and
troubled debt restructurings).
- 11 -
At June 30,
------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in Thousands)
Accruing loans delinquent
more than 90 days .............. $ -- $ -- $ -- $ -- $ --
Non-accruing loans .................. (1):
Residential .................... 1,108 1,454 1,238 1,658 1,698
Multi-family ................... 462 -- -- -- --
Commercial real estate ......... 1,585 198 139 47 --
Commercial loans ............... 153 268 -- -- --
Consumer ....................... 21 18 34 11 54
Troubled debt restructurings ........ -- -- -- -- --
------ ------ ------ ------ ------
Total non-performing loans ..... 3,229 1,938 1,411 1,716 1,752
------ ------ ------ ------ ------
Repossessed assets, net ............. 2 31 -- 183 206
------ ------ ------ ------ ------
Total non-performing assets .... $3,331 $1,969 $1,411 $1,899 $1,958
====== ====== ====== ====== ======
Non-performing loans to total
loans, net (2) ................. 1.98% 1.16% .94% 1.18% 1.27%
Non-performing assets to total assets 1.69% 1.02% .81% 1.07% 1.13%
(1) The Company generally places mortgage loans on a nonaccrual status when the
loans become contractually past due 90 days or more. Interest income
previously accrued but not deemed collectible is reversed and charged
against current income. Interest on these loans is then recognized as
income when collected. For the year ended June 30, 1999, the income that
would have been recorded had the non-accrual loans not been in a
non-performing status totaled $236,000 compared to actual income recorded
of $117,000.
(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, 1999, were $7.7 million.
- 12 -
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,
------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(In Thousands)
Substandard assets (1)............ $3,060 $2,296 $1,546 $1,226 $1,574
Doubtful assets .................. 147 --- --- --- ---
Loss assets....................... 93 --- --- --- ---
Special mention................... 4,394 4,081 --- --- ---
------ ------ ------ ------ ------
Total classified assets........ $7,694 $6,377 $1,546 $1,226 $1,574
====== ====== ====== ====== ======
General loss allowances........... $2,032 $2,087 $2,032 $2,009 $2,013
Specific loss allowances.......... 240 --- --- --- ---
------ ------ ------ ------ ------
Total allowances............... $2,272 $2,087 $2,032 $2,009 $2,013
====== ====== ====== ====== ======
(1) Includes REO, net of $0.0, $0.03, $0.0, $0.2, and $0.2 million,
respectively.
The Company regularly reviews its loan portfolio to determine whether any
loans require classification in accordance with applicable regulations. Not all
assets classified by the Company as substandard, doubtful or loss are included
as non-performing assets, and not all of the Company's non-performing assets
constitute classified assets.
Substandard Assets. At June 30, 1999, the Company had 36 loans classified
as substandard totaling approximately $3.1 million. Of the $3.1 million
classified as substandard, $1.8 million is attributable to one borrower
involving five loans secured by commercial real estate in various stages of
completion. The loans were made as construction/permanent financing. Foreclosure
has been filed and calculations performed to determine the net realizable value.
To the extent that a loss appears probable, such loss has been included in the
allowance for loan losses. Also included in substandard assets are certain loans
to facilitate the sale of the real estate owned, totaling $85,000 at June 30,
1999. 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, 1999, are slow
mortgage loans (loans or contracts delinquent for generally 90 days or more)
aggregating $273,000, and slow consumer loans totaling $187,000.
Doubtful and Loss Assets. At June 30,1999, $240,000 of the Bank's assets
were classified as doubtful or loss. Two loans, in which a participating
interest was purchased from another financial institution, were reviewed by
regulatory authorities examining the other financial institution, and part of
the outstanding balances of these loans were classified as doubtful and loss.
The regulatory authorities notified the Bank of these classifications and the
Bank in turn classified its respective portion as doubtful and loss. The loans
continue to pay as agreed and have no history of late payments. The Bank
believes that it will suffer little or no loss on these loans due to the
principals involved behind the loans and other collateral which secures the
loans.
Special Mention Assets. At June 30, 1999, the Bank's assets subject to
special mention totaled $4.4 million. Included are three multi-family loans
totaling $1.3 million, two unfunded letter-of-credit commitments on multi-family
loans totaling $1.0 million, and three nursing home loans totaling $2.1 million.
All loans were classified as special mention due to financial statements
indicating insufficient cash flow to meet all expenses. All of the above loans
were current at June 30, 1999. The Company classified $4.1 million as special
mention at June 30, 1998. No assets were classified as special mention at June
30, 1997, 1996 and 1995.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for
losses on loans, which is charged to earnings. The provision is used to adjust
the level of the allowance from period to period based upon estimated losses and
losses actually incurred. Loans or portions thereof are charged to the allowance
when losses are determinable and considered probable. The provision is
determined in conjunction with management's review and evaluation of current
economic conditions (including those of the Bank's lending area), changes in the
character and size of the loan portfolio, loan delinquencies (current status as
well as past and anticipated trends) and adequacy of collateral securing loan
delinquencies, non-performing and other classified loans, historical and
estimated net charge-offs, and other pertinent information derived from a review
of the loan portfolio. The Company maintains the current level of the allowance
partly in recognition of its increased risks inherent in its commercial real
estate, construction, multi-family and commercial loan portfolios.
- 13-
The allowance for loan losses computation includes assigning estimated
loss percentage to loans outstanding in each category of loans held in the
portfolio. All categories of loans, including multi-family, commercial real
estate, construction, and other commercial and consumer loans, are assigned a
loss percentage based on risk factors inherent in these types of loans. These
loss percentages are based on risk estimate losses inherent in the portfolio,
which the Bank believes are greater than historical loss percentages; historical
losses are considered, but may not necessarily be indicative of future
charge-offs in the entire portfolio. Residential mortgages are generally subject
to lesser risk except during periods of economic downturns or unemployment.
Other real estate loans are subject to risks of inadequate cash flows,
concentrations in industries, size of individual loans and declining collateral
values. Commercial loans are also subject to cash flow dependence, size of
individual loans, industry conditions and borrower operations, and financial
strength and character of borrower. Risk elements for consumer loans include
economic conditions, employment factors, and character and adequacy of
collateral. Estimated loss amounts by loan types are reviewed for reasonableness
based on economic and business conditions at the time.
In addition to maintaining the allowance as a percentage of the
outstanding loans in the portfolio, additional reserves are provided for
non-performing loans and other classified loans based on management's assessment
of impairment, if any. Individual loans are specifically analyzed to determine
an estimate of loss, and those specific allocations are then included as part of
the loan loss allowance.
The overall appropriateness of the allowance determined by management is
based on its evaluation of then- existing economic and business conditions
related to the loan portfolio, volumes and concentrations in commercial real
estate type loans and in other categories with greater risk and non-performing
and classified loans. If evaluation of loss has not more specifically been
identified to a loan category or individual loans, evaluation of loss has been
reflected in the unallocated portion of the allowance. In management's opinion,
the Company's allowance for loan losses is adequate at June 30, 1999, to absorb
anticipated losses on loans in the portfolio.
- 14 -
Summary of Loan Loss Experience. The following table analyzes changes
in the allowance for loan losses during the past five years ended June 30, 1999.
Year Ended
June 30,
-----------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in Thousands)
Balance of allowance at
beginning of period ............. $2,087 $2,032 $2,009 $2,013 $2,050
------ ------ ------ ------ ------
Add recoveries of loans previously
charged off -- residential real
estate loans .................... -- 18 -- 2 12
Less charge-offs:
Residential real estate loans ... 21 7 35 37 93
Commercial real estate loans .... -- 14 -- 3 2
Consumer loans .................. 21 1 -- -- 22
------ ------ ------ ------ ------
Net charge-offs .................... 42 4 35 38 105
------ ------ ------ ------ ------
Provisions for losses on loans ..... 227 59 58 34 68
------ ------ ------ ------ ------
Balance of allowance at end
of period ....................... $2,272 $2,087 $2,032 $2,009 $2,013
====== ====== ====== ====== ======
Net charge-offs to total average
loans outstanding for period .... .03% ---% .02% .03% .08%
Allowance at end of period to
loans receivable at end of period 1.35 1.25 1.35 1.38 1.45
Allowance to total non-performing
loans at end of period .......... 68.24 107.71 143.98 117.07 114.87
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,
----------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- ----------------- ----------------- ---------------- -----------------
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.................. $280 59.18% $ --- 61.14% $ --- 63.42% $ --- 59.11% $ 10 57.53%
Commercial real estate....... 583 19.19 --- 18.78 --- 20.35 29 24.44 30 25.19
Multi-family................. 393 5.42 72 6.49 72 7.45 264 10.52 264 10.16
Construction loans........... 335 3.69 --- 4.30 --- 3.07 --- 3.37 --- 5.14
Commercial loans............. 102 6.36 --- 5.01 --- 1.65 --- .01 --- .01
Consumer loans............... 145 6.16 86 4.28 33 4.06 24 2.55 20 1.97
Unallocated.................. 434 --- 1,929 --- 1,927 --- 1,692 --- 1,689 ---
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total................... $2,272 100.00% $2,087 100.00% $2,032 100.00% $2,009 100.00% $2,013 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
For 1999, the Bank presented allocations computed by assigning
estimated loss percentages to loans outstanding and allocations for other
estimated losses by loan category, compared to previous years when such amounts
were generally included in the unallocated portion of the allowance.
Investments
Federally chartered savings associations have the authority to invest
in various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds sold. Subject to various restrictions, federally
chartered savings associations may also invest a portion of their assets in
commercial paper, corporate debt securities and asset-backed securities. The
investment policy of 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.
- 15 -
Specifically, MCHI's policies generally limit investments in corporate
debt obligations to those which are rated in the two highest rating categories
by a nationally recognized rating agency at the time of the investment and such
obligations must continue to be rated in one of the four highest rating
categories. Commercial bank obligations, such as certificates of deposit,
brokers acceptances, and federal funds must be rated "C" or better by a major
rating service. Commercial paper must be rated A-1 by Standard and Poor's and
P-1 by Moody's. The policies also allow investments in obligations of federal
agencies such as the Government National Mortgage Association ("GNMA"), FNMA,
and FHLMC, and obligations issued by state and local governments. MCHI does not
utilize options or financial or futures contracts.
The Company's investment portfolio consists of U.S. Treasury and agency
securities, investment in two Indiana limited partnerships, investment in an
insurance company and FHLB stock. At June 30, 1999, approximately $9.5 million,
including securities at market value for those classified as available for sale
and at amortized cost for those classified as held to maturity, or 4.8% 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,
--------------------------------------------------------------------------
1999 1998 1997
----------------------- --------------------- ----------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
(In Thousands)
Securities available for sale (1):
Federal agencies................. $2,993 $3,020 $2,999 $3,049 $ 3,001 $2,998
Total securities available
for sale....................... 2,993 3,020 2,999 3,049 3,001 2,998
Securities held to maturity:
U.S. Treasury.................... --- --- 1,000 999 2,001 1,988
Federal agencies................. --- --- 1,000 1,000 2,000 1,991
State and municipal.............. --- --- --- --- 610 610
Mortgage-backed securites........ --- --- 3 3 237 237
------ ------ ------- ------ ------- ------
Total securities held
to maturity.................... --- --- 2,003 2,002 4,848 4,826
------ ------ ------- ------ ------- ------
Real estate limited partnerships.... 4,713 (3) 4,883 (3) 1,449 (3)
Investment in insurance
company.......................... 675 (3) 650 (3) --- ---
FHLB stock (2)...................... 1,164 1,164 1,134 1,134 1,047 1,047
------ ------- -------
Total investments.............. $9,545 $11,669 $10,345
====== ======= =======
(1) In accordance with SFAS No. 115, securities available for sale are recorded
at market value in the financial statements.
(2) Market value approximates carrying value.
(3) Market values are not available.
- 16 -
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, 1999.
Amount at June 30, 1999 which matures in
-----------------------------------------------------------------------------
One One to Over
Year or less Five Years Ten Years and Stock
---------------------- ---------------------- ------------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
--------- -------- -------- --------- ---------- ----------
(Dollars in Thousands)
Securities available for sale (1):
Federal agencies................. $1,000 6.17% $1,993 6.47% $ --- ---%
------ ---- ------ ---- ------ ----
Total securities available
for sale....................... 1,000 6.17 1,993 6.47 --- ---
------ ---- ------ ---- ------ ----
FHLB stock.......................... --- --- --- --- 1,164 8.00
------ ---- ------ ---- ------ ----
Total investments.............. $1,000 6.17% $1,993 6.47% $1,164 8.00%
====== ==== ====== ==== ====== ====
(1) Securities available for sale are set forth at amortized cost for purposes
of this table.
The Bank owns 99% of the limited partnership interests in Pedcor
Investments 1987-II, an Indiana limited partnership ("Pedcor-87") organized to
build, own, operate and lease a 144-unit apartment complex in Indianapolis,
Indiana. The project, operated as multi-family, low/moderate income housing
project, is complete and performing as planned. A low/moderate income housing
project qualifies for certain tax credits if (i) it is a residential rental
property, (ii) the units are used on a nontransient basis, and (iii) 20% or more
of the units in the project are occupied by tenants whose incomes are 50% or
less of the area median gross income, adjusted for family size, or,
alternatively, at least 40% of the units in the project are occupied by tenants
whose incomes are 60% of the area median gross income. Qualified low income
housing projects generally must comply with these and other rules for 15 years,
beginning with the first year the project qualifies for the tax credit, or some
or all of the tax credit together with interest may be recaptured. The tax
credit is subject to limitations on the use of the general business credit, but
no basis reduction is required for any portion of the tax credit claimed.
The Bank committed to invest approximately $3.4 million in Pedcor-87 at
inception of the project in January, 1988. The Bank has invested approximately
$3.4 million in Pedcor-87 with no additional annual capital contribution
remaining to be paid. The tax credits resulting from Pedcor-87's operation of a
low/moderate income housing project were available to the Company through 1999.
Although the Company has reduced income tax expense by the full amount of the
tax credit available each year, it has not been able to fully utilize available
tax credits to reduce income taxes payable because it is not allowed to use tax
credits that would reduce its regular corporate tax liability below its
alternative minimum tax liability. The Bank may carryforward unused tax credits
for a period of 15 years and believes it will be able to utilize available tax
credits during the carryforward period.
Pedcor-87 has incurred operating losses from its operations primarily due
to rent limitations for subsidized housing, increased operating costs and other
factors. Certain fees to the general partner not recorded or estimable to date
by the partnership under provisions of the partnership agreement could adversely
affect future operating results when accrued or paid. The Bank has accounted for
its investment in Pedcor-87 on the equity method, and, accordingly, has recorded
its shares of these losses or impairment losses as reductions to its investment
in Pedcor-87, which at June 30, 1999, was approximately $1.1 million.
In August 1997, the Bank entered into another limited partnership with
Pedcor Investments organized to build, own, operate and lease a 72-unit
apartment complex in Niles, Michigan. The Bank owns 99% of the partnership, as a
limited partner, in Pedcor Investments-1997-XXIX ("Pedcor-97").
The Bank committed to invest $3.6 million in Pedcor-97 over ten years and
will receive an estimated $3.7 million in tax credits. Contributions are made on
an annual basis and amounted to $395,000 during the year ended June 30, 1999. No
contributions wer made during the year ended June 30, 1998. The Bank did not
recognize any tax credits during the years ended June 30, 1998 and 1999. The
project was substantially completed by June 30, 1999. The Bank expects to begin
- 17 -
using the tax credits available from Pedcor-97 during the fiscal year ending
June 30, 2000. These tax credits will have an effect of reducing income tax
expense, over a ten year period, and reducing the Bank's federal income taxes
payable, to the limits allowed by alternative minimum tax liability rules.
Although these tax credits will be beneficial to the Bank in future periods,
operating losses from the operations of the facility will increase after the
completion of the apartment complex. These increased operating losses will have
an effect of decreasing the overall return to the Bank on Pedcor-97. The Bank
has also accounted for its investment in Pedcor-97 on the equity method, and,
accordingly, has recorded its share of these losses as reductions to its
investment in Pedcor-97, which at June 30, 1999, was approximately $3.6 million.
The unrelated general partners in Pedcor-87 are two individuals, and the
unrelated general partner in Pedcor-97 is Berrien Woods Housing Company, LLC.
Such partners are affiliated with Pedcor Investments.
The following summarizes the Bank's equity in Pedcor-87's and Pedcor-97's
losses and tax credits recognized in the Company's consolidated financial
statements:
Year Ended June 30,
------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- ------- ------- --------
Investment in Pedcor-87............................ $ 1,116 $ 1,275 $ 1,449 $ 1,624 $ 1,527
======== ======= ======= ======= =======
Losses, net of income tax effect................... $ (96) $ (105) $ (184) $ (117) $ (111)
Tax credit......................................... 11 326 405 405 405
-------- ------- ------- ------- -------
Increase (decrease) in after-tax net income
from Pedcor-87 investment..................... $ (85) $ 221 $ 221 $ 288 $ 294
======== ======= ======= ======= =======
Investment in Pedcor-97............................ $ 3,596 $ 3,608
======== =======
Losses, net of income tax effect................... $ (7) $ (16)
Tax credit......................................... --- ---
-------- -------
Decrease in after-tax net income
from Pedcor-97 investment..................... $ (7) $ (16)
======== =======
In June 1998, the Company capitalized on a unique opportunity to focus
and energize its life insurance product offerings through an equity
participation in Family Financial Life Insurance Company. Family Financial Life
is a fully chartered life insurance company owned by a group of savings banks.
In operation since 1984, Family Financial Life has had an impressive track
record of growth, profits and returns to its financial institution owners. We
are now offering a full range of life and annuity products with a most
advantageous method to increase insurance earnings and exercise complete control
over the quality of insurance products and services.
Federal regulations require an FHLB-member savings association to maintain
an average daily balance of liquid assets equal to a monthly average of not less
than a specified percentage of its net withdrawable savings deposits plus
short-term borrowings. Liquid assets include cash, certain time deposits,
certain bankers' acceptances, specified U.S. government, state or federal agency
obligations, certain corporate debt securities, commercial paper, certain mutual
funds, certain mortgage-related securities, and certain first lien residential
mortgage loans. This liquidity requirement may be changed from time to time by
the OTS to any amount within the range of 4% to 10%, and is currently 5%,
although the OTS has proposed a reduction of the percentage to 4%. Also, a
savings association currently must maintain short-term liquid assets
constituting at least 1% of its average daily balance of net withdrawable
deposit accounts and current borrowings. Monetary penalties may be imposed for
failure to meet these liquidity requirements. At June 30, 1999, the Bank had
liquid assets of $11.8 million, and a regulatory liquidity ratio of 8.4%, of
which 6.5% 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.
- 18 -
Deposits. Deposits are attracted, principally from within Grant and
contiguous counties and Adams County, through the offering of a broad selection
of deposit instruments including NOW and other transaction accounts, fixed-rate
certificates of deposit, individual retirement accounts, and savings accounts.
The Bank does not actively solicit or advertise for deposits outside of Grant
and Adams Counties. Substantially all of the Bank's depositors are residents of
those counties. Deposit account terms vary, with the principal differences being
the minimum balance required, the amount of time the funds remain on deposit and
the interest rate. The Bank also has approximately $1.0 million of brokered
deposits.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Bank on a periodic basis. Determination of
rates and terms are predicated on funds acquisition and liquidity requirements,
rates paid by competitors, growth goals, and federal regulations. The Bank
relies, in part, on customer service and long-standing relationships with
customers to attract and retain its deposits, but also aggressively prices its
deposits in relation to rates offered by its competitors.
An analysis of the Bank deposit accounts by type, maturity, and rate at
June 30, 1999, is as follows:
Minimum Balance at Weighted
Opening June 30, % of Average
Type of Account Balance 1999 Deposits Rate
- --------------- ------- ---- -------- ----
(Dollars in Thousands)
Withdrawable:
Savings accounts....................... $ 10.00 $14,791 10.41% 2.26%
NOW and other transactions accounts.... 10.00 26,825 18.88 2.80
-------- ------ ----
Total withdrawable........................ 41,616 29.29 2.61
-------- ------ ----
Certificates (original terms):............
28 days................................ 500 370 .26 3.87
91 days................................ 500 741 .52 4.06
182 days............................... 500 6,607 4.65 4.32
9 months............................... 10,000 8,519 6.00 4.71
12 months.............................. 500 14,780 10.40 4.81
18 months.............................. 500 2,575 1.81 5.15
24 months.............................. 500 17,446 12.28 5.85
30 months.............................. 500 3,578 2.52 4.88
36 months.............................. 500 870 .61 5.10
48 months.............................. 500 3,241 2.28 5.40
60 months.............................. 500 9,988 7.03 6.26
72 months.............................. 500 32 .02 5.44
96 months.............................. 500 351 .25 5.52
Special term CDs....................... 500 13 .01 4.96
IRAs
28 days................................ 500 2 .01 3.12
91 days................................ 500 10 .01 4.12
182 days............................... 500 75 .05 4.38
9 months............................... 500 39 .03 4.67
12 months.............................. 500 1,277 .90 4.82
18 months.............................. 500 125 .09 4.69
24 months.............................. 500 2,258 1.59 5.79
30 months.............................. 500 774 .54 4.82
36 months.............................. 500 109 .07 4.95
48 months.............................. 500 2,748 1.93 5.34
60 months.............................. 500 22,549 15.87 6.38
72 months.............................. 500 511 .36 5.44
96 months.............................. 500 873 .61 6.54
Special term IRAs...................... 500 10 .01 5.94
-------- ------ ----
Total certificates (1).................... 100,471 70.71 5.59
-------- ------ ----
Total deposits............................ $142,087 100.00% 4.71%
======== ====== ====
(1) Including $14.6 million in certificates of deposit of $100,000 or more.
- 19 -
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,
----------------------------------------------
1999 1998 1997
-------- ------- -------
(In Thousands)
Under 5%................ $ 26,368 $17,135 $15,970
5.00 - 6.99%............ 62,589 52,365 45,722
7.00 - 8.99%............ 11,514 21,116 23,165
-------- ------- -------
Total................... $100,471 $90,616 $84,857
======== ======= =======
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, 1999, have been allocated based upon certain rollover
assumptions.
Amounts At
June 30, 1999, Maturing in
---------------------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
--------- -------- --------- ------------
(In Thousands)
Under 5%....................... $ 22,179 $ 2,289 $ 857 $ 1,043
5.00 - 6.99% .................. 33,328 13,099 2,541 13,621
7.00 - 8.99% .................. 11,052 --- --- 462
------- ------- ------ -------
Total ......................... $66,559 $15,388 $3,398 $15,126
======= ======= ====== =======
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,
1999.
Maturity Period (In Thousands)
------------------ --------------
Three months of less.............................. $845
Greater than three months through six months...... 1,508
Greater than six months through twelve months..... 5,816
Over twelve months................................ 6,392
-------
Total............................................. $14,561
=======
- 20 -
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,
1999 Deposits 1998 1998 Deposits 1997
---- -------- ---- ---- -------- ----
(Dollars in Thousands)
Withdrawable:
Savings accounts.............. $14,791 10.41% $(1,917) $16,708 12.43% $1,025
NOW and other transactions
accounts.................... 26,825 18.88 (265) 27,091 20.15 5,861
-------- ------ ------ -------- ------ -------
Total withdrawable............... 41,616 29.29 2,183 43,799 32.58 6,886
-------- ------ ------ -------- ------ -------
Certificates (original terms):
28 days....................... 370 .26 (175) 545 .41 448
91 days....................... 741 .52 (301) 1,042 .78 (47)
182 days...................... 6,607 4.65 (4,625) 11,232 8.36 1,925
9 months...................... 8,519 6.00 7,095 1,424 1.06 1,242
12 months..................... 14,780 10.40 8,388 6,392 4.76 (8,092)
18 months..................... 2,575 1.81 (1,144) 3,719 2.77 1,938
24 months..................... 17,446 12.28 3,437 14,009 10.42 11,977
30 months..................... 3,578 2.52 (896) 4,474 3.33 (3,229)
36 months..................... 870 .61 (215) 1,085 .81 (340)
48 months..................... 3,241 2.28 (3,214) 6,455 4.80 709
60 months..................... 9,988 7.03 384 9,604 7.15 (1,478)
72 months..................... 32 .02 1 31 .02 3
96 months..................... 351 .25 (2) 353 .26 (24)
Special term CDs.............. 13 .01 (584) 597 .44 597
IRAs
28 days....................... 2 --- --- 2 --- ---
91 days....................... 10 .01 (33) 43 .03 20
182 days...................... 75 .05 35 40 .03 (134)
9 months...................... 39 .03 (15) 54 .04 54
12 months..................... 1,277 .90 982 295 .22 (322)
18 months..................... 125 .09 (169) 294 .22 56
24 months..................... 2,258 1.59 253 2,005 1.49 471
30 months..................... 774 .54 4 770 .57 (110)
36 months..................... 109 .08 (1) 110 .08 72
48 months..................... 2,748 1.93 (2,446) 5,194 3.86 379
60 months..................... 22,549 15.87 3,259 19,290 14.35 (627)
72 months..................... 511 .36 (10) 521 .39 (64)
96 months..................... 873 .61 (97) 970 .72 87
Special term IRAs............. 10 .01 (56) 66 .05 66
-------- ------ ------ -------- ------ -------
Total certificates.......... 100,471 70.71 9,855 90,616 67.42 5,759
-------- ------ ------ -------- ------ -------
Total deposits.............. $142,087 100.00% $7,672 $134,415 100.00% $12,645
======== ====== ====== ======== ====== =======
- 21 -
DEPOSIT ACTIVITY
------------------------------------------------------------------------
Increase
(Decrease)
Balance at from Balance at
June 30, % of June 30, June 30, % of
1997 Deposits 1996 1996 Deposits
---- -------- ---- ---- --------
(Dollars in Thousands)
Withdrawable:
Savings accounts............... $15,683 12.88% $(1,889) $ 17,572 13.92%
NOW and other transaction
accounts..................... 21,230 17.43 427 20,803 16.47
-------- ------ ------- -------- ------
Total withdrawable................ 36,913 30.31 (1,462) 38,375 30.39
-------- ------ ------- -------- ------
Certificates (original terms):
28 days........................ 97 .08 (224) 321 .25
91 days........................ 1,089 .89 119 970 .77
182 days....................... 9,307 7.64 (260) 9,567 7.58
12 months...................... 14,484 11.89 (499) 14,983 11.87
18 months...................... 1,781 1.46 522 1,259 1.00
24 months...................... 2,032 1.67 470 1,562 1.24
30 months...................... 7,703 6.33 (2,239) 9,942 7.87
36 months...................... 1,425 1.17 (349) 1,774 1.41
48 months...................... 5,746 4.72 (385) 6,131 4.86
60 months...................... 11,082 9.10 (778) 11,860 9.39
72 months...................... 28 .02 (11) 39 .03
96 months...................... 377 .31 8 369 .29
IRAs
28 days........................ 2 .00 1 1 .00
91 days........................ 23 .02 (159) 182 .14
182 days....................... 174 .14 13 161 .13
12 months...................... 617 .51 151 466 .37
18 months...................... 238 .20 182 56 .04
24 months...................... 1,534 1.26 1,496 38 .03
30 months...................... 880 .72 (103) 983 .78
36 months...................... 38 .03 (25) 63 .05
48 months...................... 4,815 3.95 47 4,768 3.78
60 months...................... 19,917 16.36 (858) 20,775 16.45
72 months...................... 585 .48 (30) 615 .49
96 months...................... 883 .72 (117) 1,000 .79
-------- ------ ------- -------- ------
Total certificates................ 84,857 69.69 (3,028) 87,885 69.61
-------- ------ ------- -------- ------
Total deposits.................... $121,770 100.00% $(4,490) $126,260 100.00%
======== ====== ======= ======== ======
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, 1999, FHLB of
Indianapolis advances totaled $15.5 million, representing 7.9% of total assets.
- 22 -
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,
---------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
FHLB Advances:
Average balance outstanding............................ $15,132 $10,840 $7,382
Maximum amount outstanding at any month-end
during the period................................. 16,272 13,684 8,233
Weighted average interest rate
during the period................................. 6.07% 6.01% 6.27%
Weighted average interest rate at
end of period..................................... 6.02% 6.08% 6.14%
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.
Selected Ratios
Year Ended June 30,
---------------------------------------
1999 1998 1997
----- ------ -----
Return on assets....................................................... 1.09% 1.25% 1.40%
Return on equity....................................................... 6.15 5.94 6.09
Dividend payout ratio (based on diluted earnings per share)............ 64.71 68.22 62.60
Average equity to average assets ratio................................. 17.63 21.00 22.89
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 Lincoln Financial Advisors, a licensed securities broker, in
Fort Wayne, Indiana. First Marion has one licensed employee engaged in such
sales of tax deferred annuities and mutual funds. In addition, beginning in July
1995, First Marion began providing 100% financing to borrowers of the Bank by
providing a 20% second mortgage behind the Bank's 80% mortgage. Such loans
amounted to $2.3 million at June 30, 1999.
At June 30, 1999, the Bank's investment in First Marion totaled $2.3
million. During the year ended June 30, 1999, First Marion had net income of
$81,000.
- 23 -
Employees
As of June 30, 1999, the Bank employed 49 persons on a full-time basis and
seven 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 Adams County
branch is being sold to another financial institution in September 1999.
The Bank is subject to competition from various financial institutions,
including state and national banks, state and federal savings institutions,
credit unions, certain non-banking consumer lenders, and other companies or
firms, including brokerage houses and mortgage brokers, that provide similar
services in Grant and 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.
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.
- 24 -
REGULATION
General
The Bank, as a federally chartered savings bank, is a member of the
Federal Home Loan Bank System ("FHLB System") and its deposits are insured by
the FDIC and it is a member of the Savings Association Insurance Fund (the
"SAIF") which is adminsitered by the FDIC. The Bank is subject to extensive
regulation by the OTS. Federal associations may not enter into certain
transactions unless certain regulatory tests are met or they obtain prior
governmental approval and the associations must file reports with the OTS about
their activities and their financial condition. Periodic compliance examinations
of the Bank are conducted by the OTS which has, in conjunction with the FDIC in
certain situations, examination and enforcement powers. This supervision and
regulation are intended primarily for the protection of depositors and federal
deposit insurance funds. The Bank is also subject to certain reserve
requirements under regulations of the Board of Governors of the Federal Reserve
System ("FRB").
An OTS regulation establishes a schedule for the assessment of fees
upon all savings associations to fund the operations of the OTS. The regulation
also establishes a schedule of fees for the various types of applications and
filings made by savings associations with the OTS. The general assessment, to be
paid on a semiannual basis, is based upon the savings association's total
assets, including consolidated subsidiaries, as reported in a recent quarterly
thrift financial report. Currently, the quarterly assessment rates range from
.01164% of assets for associations with assets of $67 million or less to .00308%
for associations with assets in excess of $35 billion. The Bank's semiannual
assessment under this assessment scheme, based upon its total assets at March
31, 1999, was $24,095.
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 U.S. Congress is currently considering broad financial reform
legislation intended to modernize the financial services industry. Under the
pending legislation, bank holding companies may be authorized, subject to
certain conditions, to acquire manufacturing and other nonfinancial companies,
and nonfinancial companies may be authorized to acquire banks. Other provisions
of the pending legislation could affect the types of activities in which a
unitary savings and loan holding company, such as the Holding Company, may
engage. In addition, previous versions of banking reform legislation considered
by Congress included provisions that would require all federal savings
associations, including the Bank, to convert to either a state bank or a
national bank and would require savings and loan holding companies to become
bank holding companies. Because Congress is currently considering different
versions of the proposed legislation, it cannot be determined which of these
conflicting provisions might be included in any final legislation approved by
Congress or how such legislation, if enacted, would affect the activities of the
Holding Company or the Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Indianapolis, which is one of
twelve regional FHLBs. Each FHLB serves as a reserve or central bank for its
member savings associations and other financial insititutions within its
assigned region. It is funded primarily from funds deposited by savings
associations and proceeds derived from the sale of consolidated obligations of
the FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB. All
FHLB advances must be fully secured by sufficient collateral as determined by
the FHLB. The Federal Housing Finance Board ("FHFB"), an independent agency,
controls the FHLB System, including the FHLB of Indianapolis.
- 25 -
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Indianapolis in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts, or similar obligations at
the beginning of each year. The Bank is currently in compliance with this
requirement. At June 30, 1999, the Bank's investment in stock of the FHLB of
Indianapolis was $1,163,600. The FHLB imposes various limitations on advances
such as limiting the amount of certain types of real estate-related collateral
to 30% of a member's capital and limiting total advances to a member. Interest
rates charged for advances vary depending upon maturity, the cost of funds to
the FHLB of Indianapolis and the purpose of the borrowing.
In past years, the Bank received dividends on its FHLB stock. All
twelve FHLBs are required by law to provide funds for the resolution of troubled
savings associations and to establish affordable housing programs through direct
loans or interest subsidies on advances to members to be used for lending at
subsidized interest rates for low- and moderate-income, owner-occupied housing
projects, affordable rental housing, and certain other community projects. These
contributions and obligations have adversely affected the level of FHLB
dividends paid and could continue to do so in the future. For the year ending
June 30, 1999, dividends paid to the Bank totaled $92,000, for an annual rate of
8.06%.
All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. Current law prescribes eligible collateral as first
mortgage loans less than 90 days delinquent or securities evidencing interests
therein, securities (including mortgage-backed securities) issued, insured or
guaranteed by the federal government or any agency thereof, FHLB deposits and,
to a limited extent, real estate with readily ascertainable value in which a
perfected security interest may be obtained. Other forms of collateral may be
accepted as over collateralization or, under certain circumstances, to renew
outstanding advances. All long-term advances are required to provide funds for
residential home financing and the FHLB has established standards of community
service that members must meet to maintain access to long-term advances.
Liquidity
Federal regulations require the Bank to maintain minimum levels of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of mutual
funds and certain corporate debt securities and commercial paper) equal to an
amount not less than a specified percentage of its net withdrawable deposit
accounts plus short-term borrowings. This liquidity requirement may be changed
from time to time by the OTS to an amount within the range of 4% to 10%
depending upon economic conditions and savings flows of member institutions. The
OTS recently lowered the level of liquid assets that must be held by a savings
association from 5% to 4% of the association's net withdrawable accounts plus
short-term borrowings based upon the average daily balance of such liquid assets
for each quarter of the association's fiscal year. The Bank has historically
maintained its liquidity ratio at a level in excess of that required. At June
30, 1999, the Bank's liquidity ratio was 8.4% and has averaged 9.4% over the
past three years. The Bank has never been subject to monetary penalties for
failure to meet its liquidity requirements.
Insurance of Deposits
The FDIC is an independent federal agency that insures the deposits, up
to prescribed statutory limits, of banks and thrifts and safeguards the safety
and soundness of the banking and thrift industries. The FDIC administers two
separate insurance funds, the Bank Insurance Fund (the "BIF") for commercial
banks and state savings banks and the SAIF for savings associations such as the
Bank and banks that have acquired deposits from savings associations. The FDIC
is required to maintain designated levels of reserves in each fund. As of
September 30, 1996, the reserves of the SAIF were below the level required by
law, primarily because a significant portion of the assessments paid into the
SAIF have been used to pay the cost of prior thrift failures, while the reserves
of the BIF met the level required by law in May, 1995. However, on September 30,
1996, provisions designed to recapitalize the SAIF and eliminate the premium
disparity between the BIF and SAIF were signed into law as further described
below.
The FDIC is authorized to establish separate annual assessment rates
for deposit insurance for members of the BIF and members of the SAIF. The FDIC
may increase assessment rates for either fund if necessary to restore the fund's
ratio of reserves to insured deposits to the target level within a reasonable
time and may decrease these rates if the target level has been met. The FDIC has
established a risk-based assessment system for both SAIF and BIF members. Under
- 26 -
this system, assessments vary depending on the risk the institution poses to its
deposit insurance fund. An institution's risk level is determined based on its
capital level and the FDIC's level of supervisory concern about the institution.
On September 30, 1996, President Clinton signed into law legislation
which included provisions designed to recapitalize the SAIF and eliminate the
significant premium disparity between the BIF and the SAIF. Under the new law,
the Bank was charged a one-time special assessment equal to $.657 per $100 in
assessable deposits at March 31, 1995. The Bank recognized this one-time
assessment as a non-recurring operating expense of $777,000 ($469,000 after tax)
during the three-month period ending September 30, 1996. The assessment was
fully deductible for both federal and state income tax purposes. Beginning
January 1, 1997, the Bank's annual deposit insurance premium was reduced from
.23% to .0648% of total assessable deposits. BIF institutions pay lower
assessments than comparable SAIF institutions because BIF institutions pay only
20% of the rate being paid by SAIF institutions on their deposits with respect
to obligations issued by the federally-chartered corporation which provided some
of the financing to resolve the thrift crisis in the 1980's ("FICO"). The 1996
law also provides for the merger of the SAIF and the BIF by 1999, but not until
such time as bank and thrift charters are combined. Until the charters are
combined, savings associations with SAIF deposits may not transfer deposits into
the BIF system without paying various exit and entrance fees, and SAIF
institutions will continue to pay higher FICO assessments. Such exit and
entrance fees need not be paid if a SAIF institution converts to a bank charter
or merges with a bank, as long as the resulting bank continues to pay applicable
insurance assessments to the SAIF, and as long as certain other conditions are
met.
Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. The OTS recently adopted a regulation, which became effective
April 1, 1999, that requires savings associations that receive the highest
supervisory rating for safety and soundness to maintain "core capital" of at
least 3% of total assets. All other savings associations must maintain core
capital of at least 4% of total assets. Core capital is generally defined as
common shareholders' equity (including retained income), noncumulative perpetual
preferred stock and related surplus, certain minority equity interests in
subsidiaries, qualifying supervisory goodwill, purchased mortgage servicing
rights and purchased credit card relationships (subject to certain limits) less
nonqualifying intangibles. Under the tangible capital requirement, a savings
association must maintain tangible capital (core capital less all intangible
assets except purchased mortgage servicing rights which may be included after
making the above-noted adjustment in an amount up to 100% of tangible capital)
of at least 1.5% of total assets. Under the risk-based capital requirements, a
minimum amount of capital must be maintained by a savings association to account
for the relative risks inherent in the type and amount of assets held by the
savings association. The risk-based capital requirement requires a savings
association to maintain capital (defined generally for these purposes as core
capital plus general valuation allowances and permanent or maturing capital
instruments such as preferred stock and subordinated debt less assets required
to be deducted) equal to 8.0% of risk-weighted assets. Assets are ranked as to
risk in one of four categories (0-100%). A credit risk-free asset, such as cash,
requires no risk-based capital, while an asset with a significant credit risk,
such as a non-accrual loan, requires a risk factor of 100%. Moreover, a savings
association must deduct from capital, for purposes of meeting the core capital,
tangible capital and risk-based capital requirements, its entire investment in
and loans to a subsidiary engaged in activities not permissible for a national
bank (other than exclusively agency activities for its customers or mortgage
banking subsidiaries). At June 30, 1999, the Bank was in compliance with all
capital requirements imposed by law.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. The OTS has delayed the implementation of
this rule, however. The rule requires savings associations with "above normal"
interest rate risk (institutions whose portfolio equity would decline in value
by more than 2% of assets in the event of a hypothetical 200-basis-point move in
interest rates) to maintain additional capital for interest rate risk under the
risk-based capital framework. If the OTS were to implement this regulation, the
Bank would be exempt from its provisions because it has less than $300 million
in assets and its risk-based capital ratio exceeds 12%. The Bank nevertheless
- 27 -
measures its interest rate risk in conformity with the OTS regulation and, as of
June 30, 1999, the Bank's interest rate risk was within the parameters set forth
in the regulation.
If an association is not in compliance with the capital requirements,
the OTS is required to prohibit asset growth and to impose a capital directive
that may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements. These actions may include restricting the operations activities of
the association, imposing a capital directive, cease and desist order, or civil
money penalties, or imposing harsher measures such as appointing a receiver or
conservator or forcing the association to merge into another institution.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991, as
amended ("FedICIA") requires, among other things,that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions that do
not meet minimum capital requirements. For these purposes, FedICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At June 30,
1999, the Bank was categorized as "well capitalized," meaning that its total
risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio
exceeded 6%, its leverage ratio exceeded 5%, and it was not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure.
The FDIC may order savings associations which have insufficient capital
to take corrective actions. For example, a savings association which is
categorized as "undercapitalized" would be subject to growth limitations and
would be required to submit a capital restoration plan, and a holding company
that controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
Capital Distributions Regulation
The OTS recently adopted a regulation, which became effective on April
1, 1999, that revised the restrictions that apply to "capital distributions" by
savings associations. The amended regulation defines a capital distribution as a
distribution of cash or other property to a savings association's owners, made
on account of their ownership. This definition includes a savings association's
payment of cash dividends to shareholders, or any payment by a savings
association to repurchase, redeem, retire, or otherwise acquire any of its
shares or debt instruments that are included in total capital, and any extension
of credit to finance an affiliate's acquisition of those shares or interests.
The amended regulation does not apply to dividends consisting only of a savings
association's shares or rights to purchase such shares.
The amended regulation exempts certain savings associations from the
requirement under the previous regulation that all savings associations file
either a notice or an application with the OTS before making any capital
distribution. As revised, the regulation requires a savings association to file
an application for approval of a proposed capital distribution with the OTS if
the association is not eligible for expedited treatment under OTS's application
processing rules, or the total amount of all capital distributions, including
the proposed capital distribution, for the applicable calendar year would exceed
an amount equal to the savings association's net income for that year to date
plus the savings association's retained net income for the preceding two years
(the "retained net income standard"). Application is required by the Bank to pay
dividends in excess of this restriction, and, as of June 30, 1999, the Bank had
approval to pay dividends up to $1,000,000. A savings association must also file
an application for approval of a proposed capital distribution if, following the
proposed distribution, the association would not be at least adequately
capitalized under the OTS prompt corrective action regulations, or if the
proposed distribution would violate a prohibition contained in any applicable
statute, regulation, or agreement between the association and the OTS or the
FDIC.
- 28 -
The amended regulation requires a savings association to file a notice
of a proposed capital distribution in lieu of an application if the association
or the proposed capital distribution do not meet the conditions described above,
and: (1) the savings association will not be at least well capitalized (as
defined under the OTS prompt corrective action regulations) following the
capital distribution; (2) the capital distribution would reduce the amount of,
or retire any part of the savings association's common or preferred stock, or
retire any part of debt instruments such as notes or debentures included in the
association's capital under the OTS capital regulation; or (3) the savings
association is a subsidiary of a savings and loan holding company. Because the
Bank is a subsidiary of a savings and loan holding company, this latter
provision requires that, at a minimum, the Bank must file a notice with the OTS
thirty days before making any capital distributions to the Holding Company.
In addition to these regulatory restrictions, the Bank's Plan of
Conversion imposes additional limitations on the amount of capital distributions
it may make to the Holding Company. The Plan of Conversion requires the Bank to
establish and maintain a liquidation account for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders and prohibits the Bank from
making capital distributions to the Holding Company if its net worth would be
reduced below the amount required for the liquidation account.
Limitations on Rates Paid for Deposits
Regulations promulgated by the FDIC pursuant to FedICIA place limitations
on the ability of insured depository institutions to accept, renew or roll over
deposits by offering rates of interest which are significantly higher than the
prevailing rates of interest on deposits offered by other insured depository
institutions having the same type of charter in the institution's normal market
area. Under these regulations, "well-capitalized" depository institutions may
accept, renew or roll such deposits over without restriction, "adequately
capitalized" depository institutions may accept, renew or roll such deposits
over with a waiver from the FDIC (subject to certain restrictions on payments of
rates) and "undercapitalized" depository institutions may not accept, renew or
roll such deposits over. The regulations contemplate that the definitions of
"well capitalized," "adequately capitalized" and "undercapitalized" will be the
same as the definition adopted by the agencies to implement the corrective
action provisions of FedICIA. The Bank does not believe that these regulations
will have a materially adverse effect on its current operations.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety
and soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. On August 27, 1996, the federal banking agencies added asset
quality and earning standards to the safety and soundness guidelines.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies. The association's written real
estate lending policies must be reviewed and approved by the association's board
of directors at least annually. Further, each association is expected to monitor
conditions in its real estate market to ensure that its lending policies
continue to be appropriate for current market conditions.
- 29 -
Loans to One Borrower
Under OTS regulations, the Bank may not make a loan or extend credit to
a single or related group of borrowers in excess of 15% of its unimpaired
capital and surplus. Additional amounts may be lent, not in excess of 10% of
unimpaired capital and surplus, if such loans or extensions of credit are fully
secured by readily marketable collateral, including certain debt and equity
securities but not including real estate. In some cases, a savings association
may lend up to 30 percent of unimpaired capital and surplus to one borrower for
purposes of developing domestic residential housing, provided that the
association meets its regulatory capital requirements and the OTS authorizes the
association to use this expanded lending authority. At June 30, 1999, the Bank
did not have any loans or extensions of credit to a single or related group of
borrowers in excess of its lending limits. The Bank does not believe that the
loans-to-one-borrower limits will have a significant impact on its business
operations or earnings.
Transactions with Affiliates
The Bank and MCHI are subject to Sections 22(h), 23A and 23B of the
Federal Reserve Act, which restrict financial transactions between banks and
affiliated companies. The statute limits credit transactions between a bank and
its executive officers and its affiliates, prescribes terms and conditions for
bank affiliate transactions deemed to be consistent with safe and sound banking
practices, and restricts the types of collateral security permitted in
connection with a bank's extension of credit to an affiliate.
Holding Company Regulation
MCHI is regulated as a "non-diversified unitary savings and loan
holding company" within the meaning of the Home Owners' Loan Act, as amended
("HOLA"), and subject to regulatory oversight of the Director of the OTS. As
such, MCHI is registered with the OTS and thereby subject to OTS regulations,
examinations, supervision and reporting requirements. As a subsidiary of a
savings and loan holding company, the Bank is subject to certain restrictions in
its dealings with MCHI and with other companies affiliated with MCHI.
The HOLA generally prohibits a savings and loan holding company,
without prior approval of the Director of the OTS, from (i) acquiring control of
any other savings association or savings and loan holding company or controlling
the assets thereof or (ii) acquiring or retaining more than 5 percent of the
voting shares of a savings association or holding company thereof which is not a
subsidiary. Except with the prior approval of the Director of the OTS, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock may also
acquire control of any savings institution, other than a subsidiary institution,
or any other savings and loan holding company.
MCHI's Board of Directors presently intends to continue to operate MCHI
as a unitary savings and loan holding company. Under current OTS regulations,
there are generally no restrictions on the permissible business activities of a
unitary savings and loan holding company.
Notwithstanding the above rules as to permissible business activities
of unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. (Additional
restrictions on securing advances from the FHLB also apply). See "--Qualified
Thrift Lender." At June 30, 1999, the Bank's asset composition was in excess of
that required to qualify the Bank as a Qualified Thrift Lender.
If MCHI were to acquire control of another savings institution other
than through a merger or other business combination with the Bank, MCHI would
thereupon become a multiple savings and loan holding company. Except where such
acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings association meets the QTL test,
the activities of MCHI and any of its subsidiaries (other than the Bank or other
subsidiary savings associations) would thereafter be subject to further
restrictions. The HOLA provides that, among other things, no multiple savings
and loan holding company or subsidiary thereof which is not a savings
association shall commence or continue for a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof, any
- 30 -
business activity other than (i) furnishing or performing management services
for a subsidiary savings association, (ii) conducting an insurance agency or
escrow business, (iii) holding, managing, or liquidating assets owned by or
acquired from a subsidiary savings institution, (iv) holding or managing
properties used or occupied by a subsidiary savings institution, (v) acting as
trustee under deeds of trust, (vi) those activities previously directly
authorized by the FSLIC by regulation as of March 5, 1987, to be engaged in by
multiple holding companies or (vii) those activities authorized by the FRB as
permissible for bank holding companies, unless the Director of the OTS by
regulation prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above must also be approved by
the Director of the OTS prior to being engaged in by a multiple holding company.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5,1987, or if
the laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state-chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
Indiana law permits federal and state savings association holding
companies with their home offices located outside of Indiana to acquire savings
associations whose home offices are located in Indiana and savings association
holding companies with their principal place of business in Indiana ("Indiana
Savings Association Holding Companies") upon receipt of approval by the Indiana
Department of Financial Institutions. Moreover, Indiana Savings Association
Holding Companies may acquire savings associations with their home offices
located outside of Indiana and savings associations holding companies with their
principal place of business located outside of Indiana upon receipt of approval
by the Indiana Department of Financial Institutions.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days advance notice of such
declaration and payment. Any dividend declared during such period or without the
giving of such notice shall be invalid.
Federal Securities Law
The shares of Common Stock of MCHI are registered with the SEC under
the 1934 Act. MCHI is subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the 1934 Act and the rules of the
SEC thereunder. If MCHI has fewer than 300 shareholders, it may deregister the
shares under the 1934 Act and cease to be subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of MCHI may
not be resold without registration or unless sold in accordance with the resale
restrictions of Rule 144 under the 1933 Act. If MCHI meets the current public
information requirements under Rule 144, each affiliate of MCHI who complies
with the other conditions of Rule 144 (including conditions that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of MCHI or (ii) the average weekly volume of trading in such shares
during the preceding four calendar weeks.
Qualified Thrift Lender
Savings associations must meet a QTL test. If the Bank maintains an
appropriate level of qualified thrift investments ("QTIs") (primarily
residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualifies as a QTL, the Bank will
continue to enjoy full borrowing privileges from the FHLB of Indianapolis. The
required percentage of QTIs is 65% of portfolio assets (defined as all assets
minus intangible assets, property used by the association in conducting its
business and liquid assets equal to 10% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, FNMA, and FHLMC
as QTIs. Compliance with the QTL test is determined on a monthly basis in nine
out of every twelve months.
- 31 -
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, 1999, 75.66% of the Bank's portfolio assets (as defined on
that date) were invested in qualified thrift investments (as defined on that
date), and therefore the Bank's asset composition was in excess of that required
to qualify the Bank as a QTL. Also, the Bank does not expect to significantly
change its lending or investment activities in the near future. The Bank expects
to continue to qualify as a QTL, although there can be no such assurance.
Acquisitions or Dispositions and Branching
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to
the extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in ss.7701(a)(19) of the Code or the asset
composition test of ss.7701(c) of the Code. Branching that would result in the
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located. Moreover, Indiana banks and savings associations are
permitted to acquire other Indiana banks and savings associations and to
establish branches throughout Indiana.
Finally, the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire
banks in other states and, with state consent and subject to certain
limitations, allows banks to acquire out-of-state branches either through merger
or de novo expansion. The State of Indiana enacted legislation establishing
interstate branching provisions for Indiana state-chartered banks consistent
with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The
Indiana Branching Law authorizes Indiana banks to branch interstate by merger or
de novo expansion, provided that such transactions are not permitted to
out-of-state banks unless the laws of their home states permit Indiana banks to
merge or establish de novo banks on a reciprocal basis. The Indiana Branching
Law became effective March 15, 1996.
- 32 -
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- outstanding, satisfactory, unsatisfactory
and needs improvement -- and a written evaluation of each institution's
performance. Each FHLB is required to establish standards of community
investment or service that its members must maintain for continued access to
long-term advances from the FHLBs. The standards take into account a member's
performance under the CRA and its record of lending to first-time home buyers.
The examiners have determined that the Bank has an outstanding record of meeting
community credit needs.
TAXATION
Federal Taxation
Historically, savings associations, such as the Bank, have been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method. However, for years beginning after
December 31, 1995, the Bank is not able to use the percentage of taxable income
method of computing its allowable tax bad debt deduction. The Bank will be
required to compute its allowable deduction using the experience method. As a
result of the repeal of the percentage of taxable income method, reserves taken
after 1987 using the percentage of taxable income method generally must be
included in future taxable income over a six-year period, although a two-year
delay may be permitted for institutions meeting a residential mortgage loan
origination test. In addition, the pre-1988 reserve, for which no deferred taxes
have been recorded, will not have to be recaptured into income unless (i) the
Bank no longer qualifies as a bank under the Code, or (ii) excess dividends are
paid out by the Bank.
Depending on the composition of its items of income and expense, a
savings association may be subject to the alternative minimum tax. A savings
association must pay an alternative minimum tax equal to the amount (if any) by
which 20% of alternative minimum taxable income ("AMTI"), as reduced by an
exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular
taxable income increased or decreased by certain tax preferences and
adjustments, including depreciation deductions in excess of that allowable for
alternative minimum tax purposes, tax-exempt interest on most private activity
bonds issued after August 7, 1986 (reduced by any related interest expense
disallowed for regular tax purposes), the amount of the bad debt reserve
deduction claimed in excess of the deduction based on the experience method and
75% of the excess of adjusted current earnings over AMTI (before this adjustment
and before any alternative tax net operating loss). AMTI may be reduced only up
to 90% by net operating loss carryovers, but alternative minimum tax paid that
is attributable to most preferences can be credited against regular tax due in
later years.
State Taxation
The Bank is subject to Indiana's Financial Institutions Tax ("FIT"),
which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted
gross income," for purposes of FIT, begins with taxable income as defined by
Section 63 of the Code and, thus, incorporates federal tax law to the extent
that it affects the computation of taxable income. Federal taxable income is
then adjusted by several Indiana modifications the most notable of which is the
required addback of interest that is tax-free for federal income tax purposes.
Other applicable state taxes include generally applicable sales and use taxes
plus real and personal property taxes.
MCHI's (or previously the Bank's) state income tax returns have not
been audited in the last five years.
Other
The Securities and Exchange Commission maintains a Web site that
contains reports, proxy information statements, and other information regarding
registrants that file electronically with the Commission, including the Company.
The address is (http://www.sec.gov).
- 33 -
Item 2. Properties.
At June 30, 1999, the Company conducted its business from its main
office at 100 West Third Street, Marion, Indiana, and three branch offices.
Three of the full-service offices are owned by the Company. The Company sold the
Decatur location as of September 3, 1999 to another financial institution.
The following table provides certain information with respect to the
Company's offices as of June 30, 1999:
Net Book Value
Total Deposits of Property,
at Furniture
Owned or Year June 30, & Approximate
Description and Address Leased Opened 1999 Fixtures Square Footage
- ----------------------- -------- ------ ---- -------- --------------
(Dollars in Thousands)
Main Office in Marion
100 West Third Street.................. Owned 1936 $115,336 $1,473 17,949
Location in Decatur
1045 South 13th Street................. Owned 1974 10,895 171 3,611
Walmart Supercenter in Marion
3240 S. Western........................ Leased 1997 3,350 194 540
Location in Gas City
1010 E. Main Street.................... Owned 1997 12,506 170 2,276
The Company opened its first automated teller machine in May, 1995 at its
Marion branch and now maintains a ATM at each branch location.
The Company owns computer and data processing equipment which is used
for transaction processing and accounting. The net book value of electronic data
processing equipment owned by the Company was $247,000 at June 30, 1999.
The Company also has contracted for the data processing and reporting
services of BISYS, Inc. in Houston, Texas. The cost of these data processing
services is approximately $26,100 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, 1999.
Item 4.5. Executive Officers of MCHI.
Presented below is certain information regarding the executive officers of
MCHI:
Name Position
---- --------
Steven L. Banks President
Larry G. Phillips Sr. Vice President, Secretary and Treasurer
Cynthia M. Fortney Vice President and Assistant Secretary
Steven L. Banks (age 49) became President of both MCHI and the Bank on
April 1, 1999. He has also served as executive Vice President of First Marion
since 1996. Prior to his affiliation with MCHI and the Bank, Mr. Banks served as
President and CEO of Fidelity Federal Savings Bank of Marion.
Larry G. Phillips (age 50) has been employed by MCHI since November,
1992. He became Sr. Vice President of the Bank in 1996 and has served as
Treasurer of the Bank since 1983, Secretary of the Bank since 1989 and Secretary
and Treasurer of First Marion since 1989. Mr. Phillips served as Vice President
and Treasurer of the Bank from 1983 to 1996.
Cynthia M. Fortney (age 42) became Vice President and Assistant
Secretary of MCHI in 1998 and has been Vice President of the Bank since 1998.
Ms. Fortney has also served as Assistant Vice President of First Marion since
1998.
- 34 -
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, 1999.................. $20 3/4 $21 1/2 $20 1/16 $.22
March 31, 1999................. 22 22 3/4 19 3/4 .22
December 31, 1998.............. 20 23 3/4 17 7/8 .22
September 30, 1998............. 23 1/2 28 9/16 22 1/4 .22
June 30, 1998.................. 28 1/2 29 1/2 28 .22
March 31, 1998................. 28 1/2 29 25 7/8 .22
December 31, 1997.............. 27 1/8 28 1/8 26 1/4 .22
September 30, 1997............. 28 28 22 .22
As of July 31, 1999, there were 393 record holders of MCHI's Common
Stock. MCHI estimates that, as of that date, there were approximately 750
additional shareholders in "street" name.
Since MCHI has no material independent operations or other subsidiaries
to generate income, its ability to accumulate earnings for the payment of cash
dividends to its shareholders is directly dependent upon the earnings on its
investment securities and ability of the Bank to pay dividends to MCHI. The
Bank's ability to pay dividends is subject to certain regulatory restrictions.
See "Regulation -- Capital Distributions Regulation."
Under current federal income tax law, dividend distributions with
respect to the Common Stock, to the extent that such dividends paid are from the
current or accumulated earnings and profits of the Bank (as calculated for
federal income tax purposes), will be taxable as ordinary income to the
recipient and will not be deductible by the Bank. Any dividend distributions in
excess of current or accumulated earnings and profits will be treated for
federal income tax purposes as a distribution from the Bank's accumulated bad
debt reserves, which could result in increased federal income taxes liability
for the Bank.
Unlike the Bank, generally there is no regulatory restriction on the
payment of dividends by MCHI. Indiana law, however, would prohibit MCHI from
paying a dividend if, after giving effect to the payment of that dividend, MCHI
would not be able to pay its debts as they become due in the ordinary course of
business or if MCHI's total assets would be less that the sum of its total
liabilities plus preferential rights of holders of preferred stock, if any.
- 35 -
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,
1999 (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 14 of the Shareholder Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this item is incorporated by reference to
pages 3 through 4 of the Shareholder Annual Report.
Item 8. Financial Statements and Supplementary Data.
MCHI's Consolidated Financial Statements and Notes thereto contained on
pages 15 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.
- 36 -
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 1 through 3 of MCHI's Proxy Statement for its
1999 Annual Shareholder Meeting (the "1999 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 pages 6 through 7 of the 1999 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 1999 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to
pages1 through 2 of the 1999 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
page 6 of the 1999 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:
Shareholder
Annual Report
Financial Statements Page No.
-------------------- --------
Consolidated Statement of Financial Condition
at June 30, 1999, and 1998 16
Consolidated Statement of Income for the
Fiscal Years ended June 30,
1999, 1998 and 1997 17
Consolidated Statement of Shareholders' Equity
for the Fiscal Years ended
June 30, 1999, 1998 and 1997 18
Consolidated Statement of Cash Flows
for the Fiscal Years ended
June 30, 1999, 1998, and 1997 19
Notes to Consolidated Financial Statements 20
(b) MCHI filed no reports on Form 8-K during the fourth quarter ended June
30, 1999.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index beginning on page E-1.
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
- 37 -
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant had duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
MARION CAPITAL HOLDINGS, INC.
Date: September 27, 1999 /s/ Steven L. Banks
-----------------------------
Steven L. Banks, President
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 27th day of September,
1999.
/s/ Steven L. Banks /s/ John M. Dalton
- -------------------------------------- -----------------------------
Steven L. Banks John M. Dalton, Director
President, Director
(Principal Executive Officer)
/s/ Larry G. Phillips /s/ 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/ Jon R. Marler
-----------------------------
Jon R. Marler, Director
- 38 -
EXHIBIT INDEX
3(1) The Articles of Incorporation of the Registrant is
incorporated by reference to Exhibit 3(1) to the Registration
Statement on Form S-1 (Registration No. 33-55052).
3(2) The Code of By-Laws of the Registrant is incorporated by
reference to Exhibit 3(2) to Registration Statement on Form
S-I (Registration No. 33-55052).
10(1) Marion Capital Holdings, Inc. Stock Option Plan is
incorporated by reference to Exhibit A to the Registrant's
definitive Proxy Statement in respect of its 1993 Annual
Shareholder meeting.
10(2) Recognition and Retention Plans and Trusts are incorporated
by reference to Exhibit B to the Registrant's definitive
Proxy Statement in respect of its 1993 Annual Shareholder
meeting.
10(3) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and John M. Dalton is incorporated by
reference to Exhibit 10(7) to the Registration Statement on
Form S-1 (Registration No. 33-55052). First Amendment to
Director Deferred Compensation Agreement of John M. Dalton
dated December 1, 1996 is incorporated by reference to
Exhibit 10(4) of the Registrant's Form 10-K for the period
ended June 30, 1997.
10(4) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and Robert D. Burchard is incorporated
by reference to Exhibit 10(8) to the Registration Statement
on Form S-1 (Registration No. 33-55052). First Amendment to
Director Deferred Compensation Agreement of Robert D.
Burchard dated December 1, 1996 is incorporated by reference
to Exhibit 10(5) of the Registrant's Form 10-K for the period
ended June 30, 1997.
10(5) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and James O. Murrell is incorporated
by reference to Exhibit 10(9) to the Registration Statement
on Form S-1 (Registration No. 33-55052). First Amendment to
Director Deferred Compensation Agreement of James (Jack ) O.
Murrell dated December 1, 1996 is incorporated by reference
to Exhibit 10(6) of the Registrant's Form 10-K for the period
ended June 30, 1997.
10(6) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and Gordon Coryea is incorporated by
reference to Exhibit 10(10) to the Registration Statement on
Form S-1 (Registration No. 33-55052). First Amendment to
Director Deferred Compensation Agreement of W. Gordon Coryea
dated December 1, 1996 is incorporated by reference to
Exhibit 10(7) of the Registrant's Form 10-K for the period
ended June 30, 1997.
E-1
Exhibit Index Page
10(7) Director Deferred Compensation Agreement effective May 1,
1992, between the Bank and George Thomas is incorporated by
reference to Exhibit 10(11) to the Registration Statement on
Form S-1 (Registration No. 33-55052). First Amendment to
Director Deferred Compensation Agreement of George L. Thomas
dated December 1, 1996 is incorporated by reference to
Exhibit 10(8) of the Registrant's Form 10-K for the period
ended June 30, 1997.
10(8) 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(9) 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(10) 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(11) Restated Executive Supplemental Retirement Agreement
effective December 1, 1996 between the Bank and John M.
Dalton is incorporated by reference to Exhibit 10(12) of the
Registrant's Form 10-K for the period ended June 30, 1997.
10(12) Restated Executive Supplemental Retirement Agreement
effective December 1, 1996 between the Bank and Robert D.
Burchard is incorporated by reference to Exhibit 10(13) of
the Registrant's Form 10-K for the period ended June 30,
1997.
10(13) Restated Executive Supplemental Retirement Agreement
effective December 1, 1996 between the Bank and Jackie Noble
is incorporated by reference to Exhibit 10(14) of the
Registrant's Form 10-K for the period ended June 30, 1997.
10(14) Restated Executive Supplemental Retirement Agreement
effective December 1, 1996 between the Bank and Nora Kuntz is
incorporated by reference to Exhibit 10(15) of the
Registrant's Form 10-K for the period ended June 30, 1997.
10(15) Executive Supplemental Retirement Agreement effective
December 1, 1996 between the Bank and Larry G. Phillips is
incorporated by reference to Exhibit 10(16) of the
Registrant's Form 10-K for the period ended June 30, 1997.
10(16) Death Benefit Agreement between the Bank and Steven L. Banks
dated December 1, 1996 is incorporated by reference to
Exhibit 10(18) of the Registrant's Form 10-K for the period
ended June 30, 1997 .
10(17) Excess Benefit Agreement dated as of Februry 28, 1996 between
the Bank and John M. Dalton is incorporated by reference to
Exhibit 10(18) to the Annual Report on Form 10-K for the
fiscal year ended June 30, 1996. First Amendment to Excess
Benefit Agreement of John M. Dalton dated December 1, 1996 is
incorporated by reference to Exhibit 10(19) of the
Registrant's Form 10-K for the period ended June 30, 1997.
E-2
Exhibit Index Page
10(18) Excess Benefit Agreement dated as of Februry 28, 1996 between
the Bank and Robert D. Burchard is incorporated by reference
to Exhibit 10(19) to the Annual Report on Form 10-K for the
fiscal year ended June 30, 1996. First Amendment to Excess
Benefit Agreement of Robert D. Burchard dated December 1,
1996 is incorporated by reference to Exhibit 10(20) of the
Registrant's Form 10-K for the period ended June 30, 1997.
10(19) Director Emeritus Agreement dated March 1, 1996 between the
Bank and W. Gordon Coryea and First Amendment to such
agreement dated December 1, 1996 is incorporated by reference
to Exhibit 10(21) of the Registrant's Form 10-K for the
period ended June 30, 1997.
10(20) Director Emeritus Agreement dated March 1, 1996 between the
Bank and George L. Thomas and First Amendment to such
agreement dated December 1, 1996 is incorporated by reference
to Exhibit 10(22) of the Registrant's Form 10-K for the
period ended June 30, 1997.
10(21) Director Emeritus Agreement dated March 1, 1996 between the
Bank and John M. Dalton and First Amendment to such agreement
dated December 1, 1996 is incorporated by reference to
Exhibit 10(23) of the Registrant's Form 10-K for the period
ended June 30, 1997.
10(22) Director Emeritus Agreement dated March 1, 1996 between the
Bank and Jack O. Murrell and First Amendment to such
agreement dated December 1, 1996 is incorporated by reference
to Exhibit 10(24) of the Registrant's Form 10-K for the
period ended June 30, 1997.
10(23) Contingent Executive Supplemental Retirement Income Agreement
between the Bank and Steven L. Banks dated December 1, 1996
is incorporated by reference to Exhibit 10(25) of the
Registrant's Form 10-K for the period ended June 30, 1997.
10(24) Second Director Deferred Compensation Plan between the Bank
and John M. Dalton as of April 1, 1999. ____
10(25) Rabbi Trust for the Director Deferred Compensation Master
Agreement and Director Emeritus Plan dated December 1, 1996
is incorporated by reference to Exhibit 10(26) of the
Registrant's Form 10-K for the period ended June 30, 1997.
10(26) Rabbi Trust for the Executive Supplemental Retirement Income
Plans and Excess Benefit Plans dated December 1, 1996 is
incorporated by reference to Exhibit 10(27) of the
Registrant's Form 10-K for the period ended June 30, 1997.
13 1999 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 for Period Ended June 30, 1999
- ----------------
* Management contracts and plans required to be filed as exhibits
are included as Exhibits 10(1)-10(26).
E-3