SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31,
1997 OR
[ ] TRANSITION 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 specified in its charter)
Indiana 35-1872393
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 West Third Street
P.O. Box 367
Marion, Indiana 46952
(Address of principal executive offices,
including Zip Code)
(317) 664-0556
(Registrant's telephone number, including area code)
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 report), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the Registrant's common stock, without par value,
outstanding as of February 11, 1998 was 1,781,661.
Marion Capital Holdings, Inc.
Form 10-Q
Index
Page No.
Forward Looking Statements...................................................1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.............................................2
Consolidated Condensed Statement of
Financial Condition as of
December 31, 1997 and June 30, 1997........................2
Consolidated Condensed Statement of
Income for the three-month
and six-month periods ended
December 31, 1997 and 1996.................................3
Consolidated Condensed Statement of
Changes in Shareholders' Equity
for the six months ended December 31, 1997.................4
Consolidated Condensed Statement of
Cash Flows for the six months
ended December 31, 1997 and 1996...........................5
Notes to Consolidated Financial Statements.................7
Item 2. Management's Discussion and Analysis of
Financial Condition and
Results of Operations......................................8
Item 3. Quantitative and Qualitative
Disclosures About Market Risk.............................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................17
Item 6. Exhibits and Reports on Form 8-K................................17
SIGNATURES..................................................................18
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-Q ("Form 10-Q") 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-Q and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Company. Readers of this Form 10-Q 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-Q
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.
1
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL CONDITION
December 31, June 30,
1997 1997
--------------------------- ---------------------------
ASSETS
Cash $3,730,125 $2,328,605
Short-term interest bearing deposits 7,699,884 1,294,134
---------------- ----------------
Total cash and cash equivalents 11,430,009 3,622,739
Investment securities available for sale 3,041,450 2,997,500
Investment securities held to maturity
(market value $3,014,591 and $4,824,464) 3,021,192 4,847,519
Loans receivable, net 155,203,638 148,030,991
Real estate owned, net 805,648 0
Premises and equipment 1,951,435 1,520,381
Stock in Federal Home Loan Bank (at cost
which approximates market) 1,047,300 1,047,300
Investment in limited partnerships 4,928,175 1,448,869
Core deposit intangibles and goodwill 856,693 0
Other assets 9,568,833 9,788,410
---------------- ----------------
Total assets $191,854,373 $173,303,709
================ ================
LIABILITIES
Deposits $133,641,622 $121,770,013
Advances from FHLB 10,689,069 8,228,976
Note payable 3,604,406 0
Advances by borrowers for taxes and
insurance 182,289 223,520
Other liabilities 3,868,039 4,015,381
---------------- ----------------
Total liabilities 151,985,425 134,237,890
SHAREHOLDERS' EQUITY
Preferred Stock:
Authorized and unissued--2,000,000 shares 0 0
Common stock, without par value:
Authorized--5,000,000 shares
Issued and outstanding--1,781,661 and
1,768,099 shares 10,337,778 10,126,365
Retained earnings 29,550,819 29,074,055
Unrealized gain (loss) on securities available for sale 25,079 (1,961)
Unearned compensation (44,728) (132,640)
----------------- -----------------
Total shareholders' equity 39,868,948 39,065,819
---------------- ----------------
Total liabilities and shareholders' equity $191,854,373 $173,303,709
================ ================
2
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK
CONSOLIDATED CONDENSED STATEMENT OF INCOME
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------------- --------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
Interest Income
Loans $ 3,380,286 $ 3,202,867 $6,638,386 $6,386,241
Mortgage-backed securities 392 11,202 2,334 27,889
Interest-bearing deposits 62,621 69,794 121,048 142,337
Investment securities 86,688 127,295 178,770 266,339
Other interest and dividend
income 21,118 19,504 42,896 39,007
------ ------ ------ ------
Total interest income 3,551,105 3,430,662 6,983,434 6,861,813
Interest expense
Deposits 1,588,499 1,574,216 3,150,765 3,188,454
Advances from FHLB 167,537 109,064 314,462 209,097
------- ------- ------- -------
Total interest expense 1,756,036 1,683,280 3,465,227 3,397,551
--------- --------- --------- ---------
Net interest income 1,795,069 1,747,382 3,518,207 3,464,262
Provision for losses on loans 6,729 5,759 15,554 9,949
----- ----- ------ -----
Net interest income after
provision for losses on loans 1,788,340 1,741,623 3,502,653 3,454,313
--------- --------- --------- ---------
Other income
Net loan servicing fees 19,467 22,886 39,038 45,093
Annuity and other commissions 29,562 45,387 67,459 89,903
Equity in losses of limited
partnerships (36,000) (60,000) (125,100) (120,000)
Gain on sale of other assets 0 51,376 0 51,376
Life insurance income and death
benefits 43,750 34,975 92,543 214,762
Other income 42,171 19,120 77,325 37,712
------ ------ ------ ------
Total other income 98,950 113,744 151,265 318,846
------ ------- ------- -------
Other expenses
Salaries and employee benefits 637,059 607,915 1,221,020 1,473,306
Occupancy expense 59,281 36,817 106,668 80,765
Equipment expense 23,616 14,021 41,490 28,322
Deposit insurance expense 31,652 85,129 63,290 946,780
Real estate operations, net 131,713 2,881 130,780 10,991
Data processing expense 47,260 34,023 86,739 68,681
Advertising 50,819 29,745 77,503 65,989
Other expenses 193,407 145,602 350,194 291,813
------- ------- ------- -------
Total other expenses 1,174,807 956,133 2,077,684 2,966,647
--------- ------- --------- ---------
Income before income taxes 712,483 899,234 1,576,234 806,512
Income tax expense 209,865 236,015 413,423 15,805
------- ------- ------- ------
Net income $502,618 $663,219 $1,162,811 $790,707
======== ======== ========== ========
Per Share
Basic earnings per share $ 0.28 $ 0.37 $ 0.66 $ 0.43
Diluted earnings per share $ 0.28 $ 0.36 $ 0.64 $ 0.42
Dividends $ 0.22 $ 0.20 $ 0.44 $ 0.40
3
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Unrealized Gain Unearned Total
Common Stock Retained (Loss) on Compensation Shareholders'
Shares Amount Earnings Securities RRP Equity
-------------------------------------------------------------------------------------------------
Balances, July 1, 1997 1,768,099 $10,126,365 $29,074,055 ($1,961) ($132,640) $39,065,819
Exercise of stock options 13,562 211,413 211,413
Amortization of unearned
compensation 87,912 87,912
Net change in unrealized
gain (loss) on
securities available for sale 27,040 27,040
Net income for the six months
ended December 31, 1997 1,162,811 1,162,811
Tax Benefit
on compensation plans 96,186 96,186
Cash dividends (782,233) (782,233)
Balances, December 31, 1997 1,781,661 $10,337,778 $29,550,819 $25,079 ($44,728) $39,868,948
========= =========== =========== ======= ======== ===========
4
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
Six Months Ended
December 31,
---------------------------
1997 1996
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $1,162,811 $790,707
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 15,554 9,949
Equity in loss of limited partnerships 125,100 120,000
Amortization of net loan origination fees (98,561) (131,683)
Net amortization (accretion) of investment
securities' premiums and discounts 2,226 10,317
Net amortization (accretion) of mortgage-
backed securities and CMO premiums 0 750
Amortization of unearned compensation 87,912 167,258
Amortization of core deposits and goodwill 9,018 0
Depreciation 50,127 39,021
Deferred income tax (13,582) (147,260)
Origination of loans for sale (2,844,192) (3,696,650)
Proceeds from sale of loans 2,844,192 3,696,650
Change in:
Interest receivable 170,545 (50,796)
Interest payable and other liabilities (147,342) 128,638
Cash value of insurance (92,543) (214,762)
Prepaid expense and other assets 57,546 61,942
---------- -----------
Net cash provided by operating 1,328,811 784,081
---------- -----------
activities
INVESTING ACTIVITIES
Purchase of investment securities 0 (1,007,031)
available for sale
Proceeds from maturity of investment
securities available for sale 0 1,000,000
Purchase of investment securities
held to maturity 0 (3,000,000)
Proceeds from maturity of investment
securities held to maturity 1,610,000 5,937,161
Payments on mortgage-backed securities 214,928 860,812
Cash received in branch acquisition 11,544,302 0
Net change in loans (7,900,288) (3,385,417)
Proceeds from real estate owned sales 0 30,722
Purchases of premises and equipment (481,181) (85,117)
Premiums paid on life insurance 0 (860,000)
Death benefits received on life insurance 553,793 352,687
---------- -----------
Net cash provided (used) by investing
activities 5,541,554 (156,183)
---------- ------------
5
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (continued)
Six Months Ended
December 31,
1997 1996
------------ -----------
FINANCING ACTIVITIES
Net change in:
Noninterest-bearing deposits, NOW
passbook and money market savings
accounts 2,688,133 (473,687)
Certificates of deposit (3,681,801) (1,874,757)
Proceeds from FHLB advances 6,656,069 5,000,000
Repayment of FHLB advances (4,195,907) (3,008,084)
Net change in advances by borrowers for
taxes and insurance 41,231 (192,575)
Proceeds from exercise of stock options 211,413 70,090
Stock repurchases 0 (1,965,480)
Dividends paid (782,233) (737,116)
------------ -----------
Net cash provided (used) by
financing activities 936,905 (3,181,609)
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 7,807,270 (2,553,711)
Cash and Cash Equivalents,
Beginning of Period 3,622,739 7,520,323
----------- ----------
Cash and Cash Equivalents,
End of Period $11,430,009 $4,966,612
=========== ==========
ADDITIONAL CASH FLOWS AND
SUPPLEMENTARY INFORMATION
Interest paid $3,417,949 $3,392,443
Income tax paid 543,139 305,879
Loan balances transferred to real
estate owned 875,342 96,896
Loans to finance the sale of real
estate owned 68,500 210,000
6
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK OF MARION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE A. Basis of Presentation
The unaudited interim consolidated condensed financial statements include the
accounts of Marion Capital Holdings, Inc. (the "Company") and its subsidiary
First Federal Savings Bank of Marion (the "Bank").
The unaudited interim consolidated condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all information and disclosures required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the financial statements reflect all adjustments, comprising only
normal recurring accruals, necessary to present fairly the Company's financial
position as of December 31, 1997, results of operations for the three month and
six month periods ended December 31, 1997 and 1996, and cash flows for the six
mouth periods ended December 31, 1997 and 1996.
NOTE B: Dividends and Earnings Per Share
On November 17, 1997, the Board of Directors declared a quarterly cash dividend
of $.22 per share. This dividend was paid on December 15, 1997 to shareholders
of record as of November 28, 1997.
Earnings per share (EPS) were computed as follows:
Six Months Ended Six Months Ended
December 31, 1997 December 31, 1996
----------------- -----------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Income available to
common shareholders $1,162,811 1,762,492 $ .66 $790,707 1,817,852 $ .43
========= =========
Effect of dilutive securities
RRP program -- 3,435 -- 6,122
Stock options -- 43,332 -- 47,368
----------------- ------ ------------ ------
Diluted earnings per share
Income available to
common shareholders and
assumed conversions $1,162,811 1,809,259 $ .64 $790,707 1,871,342 $ .42
========== ========= ========= ======= ========= =========
7
Three Months Ended Three Months Ended
December 31, 1997 December 31, 1996
----------------- -----------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Income available to common
shareholders $502,618 1,766,427 $ .28 $663,219 1,811,757 $ .37
========= =========
Effect of dilutive securities
RRP program -- 3,702 -- 6,071
Stock options -- 44,000 -- 46,827
-------------- ------ ------------- ------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $502,618 1,814,129 $ .28 $663,219 1,864,655 $ .36
======== ========= ========= ======= ========= =========
Item. 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General:
The Company's total assets were $191.9 million at December 31, 1997 compared to
$173.3 million at June 30, 1997. Cash and cash equivalents increased $7.8
million and investment securities decreased $1.8 million or 22.7% from June 30,
1997 to December 31, 1997. Loans receivable were $155.2 million at December 31,
1997, an increase of $7.2 million, or 4.9%, from June 30, 1997. This increase is
due in part to an origination of a $2.7 million loan to a limited partnership
described below. Real estate owned increased to $805,648 at December 31, 1997,
as the Company accepted a deed in lieu of foreclosure on a nursing home
property. The Company has operated the home since acquiring it in October 1997
and has entered into an agreement to sell the property subsequent to December
31, 1997.
Investment in limited partnerships increased by $3.5 million at December 31,
1997 compared to June 30, 1997. This increase is related to another limited
partnership agreement entered into by the Company on a low income multi-family
housing project, which benefits the Company in the form of tax credits.
Deposits increased to $133.6 million at December 31, 1997 compared to $121.8
million at June 30, 1997, a 9.8% increase. This $11.9 million increase
represented a $7,132,000 increase in passbook and transaction accounts and an
approximate $4,740,000 increase in certificate of deposit accounts. This
increase in total deposits results primarily from the acquisition of a new
branch in Gas City, Indiana from NBD First Chicago Bank. The branch was acquired
on December 5, 1997 and deposits, net of public funds, amounted to $11 million
on that date.
Note payable was increased to $3.6 million at December 31, 1997. The note
payable is for amounts due under a limited partnership agreement entered into by
the Company on a low income multi-family
8
housing project. This agreement calls for the Company to disburse $3.6 million,
in the form of annual installments, over a ten-year period in exchange for tax
credits.
Other liabilities decreased from $4.0 million at June 30, 1997 to $3.9 million
at December 31, 1997 as a result of normal operational decreases.
In October 1997, the Company opened its second Grant County office at the new
Wal-Mart SuperCenter in Marion, Indiana The other branch office is located in
Decatur, Indiana. This second Marion, Indiana location is a full-service branch
and the area's first seven-day-a-week banking facility. The high volume shopping
traffic and repeat weekly visits of customers, makes this an attractive location
to provide financial services. The new branch, operates approximately 57 hours
per week with a staff of 6-7 individuals. The Company believes that the
long-term prospects for growth from this new branch location are excellent.
On December 5, 1997, the Company acquired a new branch in Gas City, Indiana from
NBD First Chicago Bank. Deposits were acquired at a premium of $865,710, as well
as the branch facilities and equipment. Existing staff was also retained. The
deposits amounted to $11,015,017, net of public funds. The Gas City market,
which is approximately eight miles from our main office location, has the
Company's second largest existing customer base prior to the acquisition; so in
addition to acquiring new customers, we can now better serve our existing
customer base.
Shareholders' equity was $39.9 million at December 31, 1997, compared to $39.1
million at June 30, 1997. As of December 31, 1997, the Company was in the
process of repurchasing an additional 5% of its outstanding shares. The current
repurchase program was announced in May 1997, totaling 87,905 shares of which no
shares had been repurchased by December 31, 1997, leaving the entire amount to
be repurchased under the current program.
Net income for the six months ended December 31, 1997 of $1,162,811 represents a
47.1% increase in income reported for the same period in the prior year.
Earnings for the six months ended December 31, 1996 included a FDIC special
assessment for all institutions with SAIF-insured deposits. This assessment
amounted to $776,717 and is included in deposit insurance expense for the six
months ended December 31, 1996. The after-tax effect on net income was $469,059
for the six months ended December 31, 1997. SAIF-insured institutions, like the
Company, are also benefiting from a reduction of FDIC premiums beginning January
1, 1997.
For the six months ended December 31, 1997, the Bank made a provision of $15,554
for general loan losses compared to $9,949 in loss provisions for the same
period in the prior year. Management continues to review its current portfolio
to ensure that total loss reserves remain adequate.
9
Results of Operations Comparison of Three Months Ended December 31. 1997 and
December 31,1996
Net interest income for the quarter ended December 31, 1997, equaled $1,795,069,
an increase of 2.7% over the quarter ended December 31, 1996 of $1,747,382. Net
income for the three months ended December 31, 1997 of $502,618 was a 24.2%
decrease from the three months ended December 31, 1996 of $663,219. A
significant portion of the decrease in net income is related to an increase in
real estate operations expense and start-up expenses related to two new branch
facilities. The Company acquired a nursing home by voluntary dead in lieu of
foreclosure during the quarter ended December 31, 1997. As a result, the Company
incurred additional expenses to maintain the continued operations of the
facilities, since the cash flow from the nursing home was insufficient to meet
all expenses. These expenses had an after tax effect of approximately $80,000
for the three months ended December 31, 1997. An offer to purchase was received
and accepted subsequent to December 31, 1997 which should result in no further
significant loss to the Company. Also during the quarter, the company incurred
start-up expenses for its new branch in Wal-Mart, which opened in October 1997,
and in the acquisition of the Gas City Branch in December 1997.
A provision of $6,729 for losses on loans was made for the three months ended
December 31, 1997, compared to a $5,759 provision in the same period last year.
Total other income decreased by $14,794 for the three months ended December 31,
1997, compared to the same period in the prior year. This decrease was
attributed to a gain on the sale of other assets of $51,376 for the three-month
period ended December 31, 1996.
Total other expenses increased by $218,674, or 22.9% for the three months ended
December 31, 1997, compared to the same period in the prior year. Real estate
operations expense increased $128,832 as the result of operating the nursing
home described above. Occupancy expense, equipment expense and data processing
expense increased as the result of adding the two new branch locations. Certain
of these expenses can be attributed to one-time start-up costs, and not
recurring expenses. Other expense increases were normal operational increases.
Income tax expense for the three months ended December 31, 1997 amounted to
$209,865, a decrease of $26,150 over the three months ended December 31, 1996,
as the result of decreased income. The Company's effective tax rate for the
three months ended December 31, 1997 was 29.5% compared to 26.3% for the
comparable period in 1996.
Results of Operations Comparison of Six Months Ended December 31, 1997 and
December 31, 1996.
Net income for the six months ended December 31, 1997 was $1,162,811 compared
with $790,707 for the six months ended December 31,1996, an increase of $372,104
or 47.1%. Net income for the six months ended December 31, 1996, included the
FDIC special assessment previously described. Interest income for the six months
ended December 31, 1997 increased $121,621 or 1. 8% compared to the same period
in the prior year, while interest expense for the six months ended December 31,
10
1997 increased $67,676 or 2.0% compared to the same period in the prior year. As
a result, net interest income for the six months ended December 31, 1997
amounted to $3,518,207, an increase of $53,945 or 1.4% compared to the same
period in the prior year.
A $15,554 provision for loss on loans for the six months ended December 31, 1997
was made compared to $9,949 provision reported in the same period last year.
Total other income decreased by $167,581 for the six months ended December 31,
1997, compared to the same period in the prior year. The prior year period
included a significant amount of death benefits received on key man insurance
policies. Annuity and security product sales commissions were down $22,444, or
25.0% for the six months ended December 31, 1997, compared to the same period in
the prior year.
Total other expenses decreased by $888,963 or 30.0% for the six months ended
December 31, 1997, compared to the same period in the prior year. The FDIC
special assessment amounts for $776,717 of the decrease. Salaries and employee
benefits decreased $252,286, or 17.1%, primarily as a result of inclusion of
expense for the vesting of remaining shares under the RRP program of a deceased
director in the prior period. Real estate operation expense increased by
$119,789 for the six months ended December 31, 1997, compared to the same period
in the prior year as a result of operating the nursing home property discussed
above. Other expense increases were normal operational increases and increased
expenses attributed to start-up costs for the two new branch offices opened in
October and December of 1997.
Income tax expense for the six months ended December 31, 1997, amounted to
$413,423, an increase of $397,618 from the six months ended December 31,1996 as
a result of increased income before income taxes.
Allowance for loan losses amounted to $2.0 million at December 31, 1997, which
was unchanged from June 30, 1997 after adjusting for charge-offs and recoveries.
Management considered the allowances for loan and real estate losses at December
31, 1997, to be adequate to cover estimated losses inherent in those portfolios
at that date, and its consideration included probable losses that could be
reasonably estimated. Such belief is based upon an analysis of loans currently
outstanding, real estate owned, past loss experience, current economic
conditions and other factors and estimates which are subject to change over
time. The following table illustrates the changes affecting the allowance
accounts for the six months ended December 31, 1997.
11
Allowance For Allowance For Total
Loan Losses REO Losses Allowances
Balances at July 1, 1997........ $2,031,535 $ 0 $2,031,535
Provision for losses............ 15,554 857 16,411
Recoveries...................... 0 0 0
Loans and REO charged off....... (4,694) (857) (5,551)
---------- ----- ----------
Balances at December 31, 1997... $2,042,395 $ 0 $2,042,395
========== ============ ==========
The loan loss reserves to total loans at December 31, 1997 equaled 1.30% of
total loans outstanding compared to 1.35% of total loans outstanding at June 30,
1997. Total non-performing assets increased during the six months ended December
31, 1997, from $1.4 million at June 30, 1997 to $2.8 million at December 31,
1997. Non-performing assets at December 31, 1997 consisted of $806,000 in real
estate owned and loans delinquent greater than 90 days of $2.0 million.
Total non-performing loans totaled 1.24% of total loans outstanding at December
31, 1997 compared to .94% of total loans at June 30, 1997.
The following table further depicts the amounts and categories of the Bank's
non-performing assets. It is the policy of the Bank that all earned but
uncollected interest on all loans be reviewed monthly to determine if any
portion thereof should be classified as uncollectible for any loan past due in
excess of 90 days.
December 31, June 30,
1997 1997
(Dollars in Thousands)
Accruing loans delinquent
more than 90 days............ $ --- $ ---
Non-accruing loans:
Residential.................. 1,746 1,238
Multi-family................. --- ---
Commercial................... 133 139
Consumer..................... 68 34
Troubled debt restructurings.......... --- ---
-------- --------
Total non-performing loans... 1,947 1,411
Real estate owned, net................ 806 0
-------- ----
Total non-performing assets.. $2,753 $1,411
====== ======
Non-performing loans to
total loans, net............. 1.24% .94%
Non-performing assets to
total assets................. 1.43% .81%
12
Average Balances and Interest
The following table presents for the periods indicated the monthly average
balances of the Company's interest-earning assets and interest-bearing
liabilities, the interest earned or paid on such amounts, and the average yields
earned and rates paid. Such yields and costs are determined by dividing income
or expense by the average balance of assets or liabilities for the periods
presented.
Three Months Ended December 31,
1997 1996
(Dollars in thousands)
Average Average Average Average
Balance Interest Rate Balance Interest Rate
Total interest-
earnings assets.............. $167,954 $3,551 8.46% $163,623 $3,430 8.39%
Total interest-
bearing liabilities.......... 134,199 1,756 5.23% 129,603 1,783 5.19%
Net interest income/
Interest Rate Spread............ 1,795 3.23% 1,747 3.20%
Six Months Ended December 31,
1997 1996
(Dollars in thousands)
Average Average Average Average
Balance Interest Rate Balance Interest Rate
Total interest-
earnings assets.............. $166,379 $6,983 8.39% $164,215 $6,862 8.36%
Total interest-
bearing liabilities.......... 132,429 3,465 5.23% 129,242 3,398 5.26%
Net interest income/
Interest Rate Spread............ 3,518 3.16% 3,464 3.10%
Financial Condition
Shareholders' equity at December 31, 1997 was $39,868,948, an increase of
$803,129 or 2.1% from June 30,1997. The Company's equity to asset ratio was
20.78% at December 31, 1997 compared to 22.54% at June 30, 1997. All fully
phased-in capital requirements are currently met. The
13
following table depicts the amounts and ratios of the Bank's capital as of
December 31, 1997, under each of the three regulatory capital requirements
(tangible, core, and fully phased-in risk based):
Tangible Core Risk-Based
Capital Capital Capital
(Dollars in thousands)
Amount........................................... $35,357 $ 35,357 $36,948
As a percent of assets, as defined............... 18.9% 18.9% 29.1%
Required amount.................................. 2,806 5,612 10,145
As a percent of assets, as defined............... 1.5% 3.0% 8.0%
Capital in excess of
required amount.............................. $ 32,551 $ 29,745 $ 26,803
Liquidity and Capital Resources
The standard measure of liquidity for savings associations is the ratio of cash
and eligible investments to a certain percentage of net withdrawable savings
accounts and borrowings due within one year. The minimum required ratio is
currently set by the Office of Thrift Supervision regulation at 5%, of which
1%must be comprised of short-term investments. At December 31, 1997, the Bank's
liquidity ratio was 14.3% of which 9.71% was comprised of short-term
investments.
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).
Year 2000
Based on a preliminary study, the Company expects to spend approximately $25,000
to $50,000 from 1998 through 1999 to modify its computer information systems
enabling proper processing of transactions relating to the year 2000 and beyond.
The Company continues to evaluate appropriate courses of corrective action,
including replacement of certain systems whose associated costs would be
recorded as assets and amortized. Accordingly, the Company does not expect the
amounts required to be expended over the next three years to have a material
effect on its financial position or results of operations. The amount expensed
in 1997 was immaterial.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Bank is subject to interest rate risk to the degree that its
interest-bearing liabilities, primarily deposits with short- and medium-term
maturities, mature or reprice at different rates than our interest-earning
assets. Although having liabilities that mature or reprice less frequently on
average
14
than assets will be beneficial in times of rising interest rates, such an asset
liability structure will result in lower net income during periods of declining
interest rates, unless offset by other factors.
The Bank protects against problems arising in a falling interest rate
environment by requiring interest rate minimums on its residential and
commercial real estate adjustable-rate mortgages and against problems arising in
a rising interest rate environment by having in excess of 89% of its mortgage
loans with adjustable rate features. Management believes that these minimums,
which establish floors below which the loan interest rate cannot decline, will
continue to reduce its interest rate vulnerability in a declining interest rate
environment For the loans which do not adjust because of the interest rate
minimums, there is an increased risk of prepayment.
The Bank believes it is critical to manage the relationship between interest
rates and the effect on its net portfolio value ("NPV"). This approach
calculates the difference between the present value of expected cash flows from
assets and the present value of expected cash flows from liabilities, as well as
cash flows from off-balance sheet contracts. The Bank manages assets and
liabilities within the context of the marketplace, regulatory limitations, and
within its units on the amount of change in NPV which is acceptable given
certain interest rate changes.
The OTS issued a regulation, which uses a net market value methodology to
measure the interest rate risk exposure of savings associations. Under this OTS
regulation, an institution's "normal" level of interest rate risk in the event
of an assumed change in interest rates is a decrease in the institution's NPV in
an amount not exceeding 2% of the present value of its assets. Savings
associations with over $300 million in assets or less than a 12% risk-based
capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is
used by the OTS to calculate changes in NPV (and the relates "normal" level of
interest rate risk) based upon certain interest rate changes (discussed below).
Associations which do not meet either of the filing requirements are not
required to file OTS Schedule CMR, but may do so voluntarily. As the Bank does
not meet either of these requirements, it is not required to file Schedule CMR,
but it does so voluntarily. Under the regulation, associations which must file
are required to take a deduction (the interest rate risk capital component) from
their total capital available to calculate their risk based capital requirement
if their interest rate exposure is greater than "normal." The amount of that
deduction is one-half of the difference between (a) the institution's actual
calculated exposure to a 200 basis point interest rate increase or decrease
(whichever results in the greater pro forma decrease in NPV) and (b) its
"normal" level of exposure which is 2% of the present value of its assets.
Presented below, as of September 30, 1997, is an analysis performed by the OTS
of the Bank's interest rate risk as measured by changes in NPV for instantaneous
and sustained parallel shifts in the yield curve, in 100 basis point increments,
up and down 400 basis points. At September 30, 1997, 2% of the present value of
the Bank's assets was approximately $3.6 million. Because the interest rate risk
of a 200 basis point decrease in market rates (which was greater than the
interest rate risk of a 200 basis point increase) was $1.0 million at September
30, 1997, the Bank would not have been required to make a deduction from its
total capital available to calculate its risk based capital requirement if it
had been subject to the OTS's reporting requirements under this methodology.
15
This data is presented as of September 30, 1997 since data from the most recent
quarter (December 31, 1997) is not yet available from the OTS. Management
believes there has been no significant change in the interest rate risk measures
since September 30, 1997.
Net Portfolio Value NPV as % of PV of Assets
Change
in Rates $ Amount $ Change % Change NPV Ratio Change
- -------------------------------------------------------------------------------------------------------
+400 bp 37,169 -2,946 -7% 21.63% -59 bp
+300 bp 38,585 -1,530 -4% 22.09% -13 bp
+200 bp 39,664 - 451 -1% 22.39% +17 bp
+100 bp 40,208 93 0% 22.45% +23 bp
0 bp 40,115 22.22%
- -100bp 39,470 - 656 -2% 21.75% -47 bp
- -200 bp 39,092 -1,023 -3% 21.40% -82 bp
- -300 bp 39,139 -976 -2% 21.22% -100 bp
- -400 bp 39,418 -697 -2% 21.15% -107 bp
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the methods of analysis presented above. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable rate loans, have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Most of the
Bank's adjustable-rate loans have interest rate levels of 6.00% for residential
loans and 9.00% for commercial real estate loans. Currently, originations of
residential adjustable-rate-mortgages have interest rate minimums of 6.00%.
Further, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates could likely
deviate significantly from those assumed in calculating the table. Finally, the
ability of many borrowers to service their debt may decrease in the event of an
interest rate increase, although the bank does underwrite these mortgages at
approximately 4.0% above the origination rate. The Company considers all of
these factors in monitoring its exposure to interest rate risk.
16
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Bank were during the six-month period ended December
31, 1997, or are as of the date hereof involved in any legal proceeding of a
material nature. From time to time, the Bank is a party to legal proceedings
wherein it enforces its security interests in connection with its mortgage
loans.
Item 4. Submission of Matters to Vote of Security Holders
On October 9, 1997, the Company held its annual meeting of shareholders, at
which time matters submitted to a vote of the shareholders included the election
of two Company directors and the approval and ratification of the appointment of
Geo. S. Olive & Co., LLC as auditors for the fiscal year ending June 30, 1998.
Both director nominees were elected and the appointment of auditors was approved
and ratified by a majority of the 1,773,356 issued and outstanding share votes.
A tabulation of votes cast as to each matter submitted to shareholders is
presented below:
Broker
Director Nominees For Against Abstain Non-Votes
- ----------------- --- ------- ------- ---------
Jon R. Marler 1,537,251 34,521 0 0
Jerry D. McVicker 1,551,471 20,301 0 0
Other Matters
- -------------
Approval and Ratification
of Auditors 1,558,706 10,519 2,547 0
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
3(1) The Articles of Incorporation of the Registrant are 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 the Registration Statement on Form
S-1 (Registration No. 33-55052).
27 Financial Data Schedule (filed electronically)
b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
December 31, 1997.
17
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARION CAPITAL HOLDINGS, INC.
Date: February 13, 1998 By: /s/ John M. Dalton
---------------------------------
John M. Dalton, President
Date: February 13, 1998 By: /s/ Larry G. Phillips
----------------------------------
Larry G. Phillips, Vice President,
Secretary and Treasurer
18