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 MARCH 31, 1998
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 May 4, 1998 was 1,747,843.
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
March 31, 1998 and June 30, 1997..........................2
Consolidated Condensed Statement of Income
for the three-month and nine-month periods
ended March 31, 1998 and 1997.............................3
Consolidated Condensed Statement of Changes
in Shareholders' Equity
for the nine months ended March 31, 1998..................4
Consolidated Condensed Statement of
Cash Flows for the nine months
ended March 31, 1998 and 1997.............................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.....16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................18
Item 6. Exhibits and Reports on Form 8-K...............................18
SIGNATURES................................................................19
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
March 31, June 30,
1998 1997
----------------- ----------------
ASSETS
Cash $3,175,854 $2,328,605
Short-term interest bearing deposits 5,782,853 1,294,134
---------------- ----------------
Total cash and cash equivalents 8,958,707 3,622,739
Investment securities available for sale 3,045,000 2,997,500
Investment securities held to maturity
(market value $2,009,210 and $4,824,464) 2,015,782 4,847,519
Loans receivable, net 160,049,761 148,030,991
Real estate owned, net 184,734 0
Premises and equipment 1,892,563 1,520,381
Stock in Federal Home Loan Bank (at cost
which approximates market) 1,047,300 1,047,300
Investment in limited partnerships 4,935,675 1,448,869
Core deposit intangibles and goodwill 829,639 0
Other assets 9,572,443 9,788,410
---------------- ----------------
Total assets $192,531,604 $173,303,709
================ ================
LIABILITIES
Deposits $133,310,809 $121,770,013
Advances from FHLB 10,689,069 8,228,976
Note payable 3,634,406 0
Advances by borrowers for taxes and
insurance 375,645 223,520
Other liabilities 4,956,258 4,015,381
---------------- ----------------
Total liabilities 152,966,187 134,237,890
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--1,773,892 and
1,768,099 shares 9,863,818 10,126,365
Retained earnings 29,677,127 29,074,055
Unrealized gain (loss) on securities available for sale 32,572 (1,961)
Unearned compensation (8,100) (132,640)
----------------- -----------------
Total shareholders' equity 39,565,417 39,065,819
---------------- ----------------
Total liabilities and shareholders' equity $192,531,604 $173,303,709
================ ================
2
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK
CONSOLIDATED CONDENSED STATEMENT OF INCOME
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Interest Income
Loans $ 3,400,099 $ 3,243,805 $ 10,038,485 $ 9,630,046
Mortgage-backed securities 171 7,151 2,505 35,040
Interest-bearing deposits 111,262 74,853 232,310 217,190
Investment securities 77,947 110,488 256,717 376,827
Other interest and dividend
income 20,659 19,131 63,555 58,138
------------ ------------ ------------ ------------
Total interest income 3,610,138 3,455,428 10,593,572 10,317,241
Interest expense
Deposits 1,640,979 1,532,083 4,791,744 4,720,537
Advances from FHLB 162,044 125,671 476,506 334,768
------------ ------------ ------------ ------------
Total interest expense 1,803,023 1,657,754 5,268,250 5,055,305
------------ ------------ ------------ ------------
Net interest income 1,807,115 1,797,674 5,325,322 5,261,936
Provision for losses on loans 7,534 37,250 23,088 47,199
------------ ------------ ------------ ------------
Net interest income after
provision for losses on loans 1,799,581 1,760,424 5,302,234 5,214,737
------------ ------------ ------------ ------------
Other income
Net loan servicing fees 19,566 21,988 58,604 67,081
Annuity and other commissions 27,013 37,573 94,472 127,476
Equity in losses of limited
partnerships (22,500) (60,000) (147,600) (180,000)
Gain on sale of other assets 0 0 0 51,376
Life insurance income and death
benefits 41,251 325,575 133,794 540,337
Other income 53,568 21,663 130,893 59,375
------------ ------------ ------------ ------------
Total other income 118,898 346,799 270,163 665,645
------------ ------------ ------------ ------------
Other expenses
Salaries and employee benefits 681,122 654,896 1,902,142 2,128,202
Occupancy expense 74,053 54,460 180,721 135,225
Equipment expense 27,731 16,576 69,221 44,898
Deposit insurance expense 33,119 16,849 96,409 963,629
Real estate operations, net 85,592 (27,229) 216,372 (16,238)
Data processing expense 60,242 41,010 146,981 109,691
Advertising 27,944 46,871 105,447 112,860
Other expenses 218,598 182,512 568,792 474,325
------------ ------------ ------------ ------------
Total other expenses 1,208,401 985,945 3,286,085 3,952,592
------------ ------------ ------------ ------------
Income before income taxes 710,078 1,121,278 2,286,312 1,927,790
Income tax expense 189,333 217,912 602,756 233,717
------------ ------------ ------------ ------------
Net income $ 520,745 $ 903,366 $ 1,683,556 $ 1,694,073
------------ ------------ ------------ ------------
Per Share
Basic earnings per share $ 0.29 $ 0.50 $ 0.95 $ 0.93
Diluted earnings per share $ 0.29 $ 0.48 $ 0.93 $ 0.91
Dividends $ 0.22 $ 0.20 $ 0.66 $ 0.60
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 Securities Compensation Shareholders'
Shares Amount Earnings Available for Sale 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 24,793 238,453 238,453
Repurchase of common stock (19,000) (501,000)
Amortization of unearned
compensation 124,540 124,540
Net change in unrealized
gain (loss) on
securities available
for sale 34,533 34,533
Net income for the nine months
ended March 31, 1998 1,683,556 1,683,556
Tax benefit on compensation plans 96,186 96,186
Cash dividends (1,176,670) (1,176,670)
---------- ---------- ----------- ------- ------- -----------
Balances, March 31, 1998 1,773,892 $9,863,818 $29,677,127 $32,572 ($8,100) $39,565,417
========== ========== =========== ======= ======== ===========
4
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
Nine Months Ended
March 31,
------------------------------
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,683,556 $ 1,694,073
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 23,088 47,199
Provision for real estate owned losses 0 (28,668)
Equity in loss of limited partnerships 147,600 180,000
Amortization of net loan origination fees (136,567) (204,957)
Net amortization (accretion) of investment
securities' premiums and discounts 2,957 14,388
Net amortization (accretion) of mortgage-
backed securities and CMO premiums 0 750
Amortization of unearned compensation 124,540 229,825
Amortization of core deposits and goodwill 27,053 0
Depreciation 91,370 61,104
Deferred income tax (70,271) (270,309)
Origination of loans for sale (2,950,851) (3,696,650)
Proceeds from sale of loans 2,950,851 3,696,650
Change in:
Interest receivable (162,349) (98)
Interest payable and other liabilities 940,877 1,119,137
Cash value of insurance (133,793) (540,337)
Prepaid expense and other assets (27,887) (113,332)
------------ ------------
Net cash provided by operating activities 2,510,174 2,188,775
------------ ------------
INVESTING ACTIVITIES
Purchase of investment securities 0 (3,002,125)
available for sale
Proceeds from maturity of investment 0 1,000,000
securities available for sale
Purchase of investment securities 0 (3,000,000)
held to maturity
Proceeds from maturity of investment 2,610,000 9,937,161
securities held to maturity
Contribution to limited partnership 0 (130,000)
Payments on mortgage-backed securities 228,717 1,044,926
Cash received in branch acquisition 11,544,302 0
Net change in loans (11,608,444) (3,568,512)
Proceeds from real estate owned sales 0 30,722
Purchases of premises and equipment (463,552) (127,785)
Premiums paid on life insurance 0 (860,000)
Death benefits received on life insurance 553,793 1,052,842
------------ ------------
Net cash provided by investing
activities 2,864,816 2,377,229
------------ ------------
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (continued)
Nine Months Ended
March 31,
----------------------------
1998 1997
----------- -----------
FINANCING ACTIVITIES
Net change in:
Noninterest-bearing deposits, NOW
passbook and money market savings
accounts 3,159,127 (1,092,860)
Certificates of deposit (4,371,150) (4,026,997)
Proceeds from FHLB advances 6,656,000 5,000,000
Repayment of FHLB advances (4,195,907) (3,008,084)
Net change in advances by borrowers for
taxes and insurance 152,125 (33,025)
Proceeds from exercise of stock options 238,453 73,090
Stock repurchases (501,000) (2,309,480)
Dividends paid (1,176,670) (1,105,965)
----------- -----------
Net cash used by
financing activities (39,022) (6,503,321)
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 5,335,968 (1,937,317)
Cash and Cash Equivalents,
Beginning of Period 3,622,739 7,520,323
----------- -----------
Cash and Cash Equivalents,
End of Period $ 8,958,707 $ 5,583,006
=========== ===========
ADDITIONAL CASH FLOWS AND
SUPPLEMENTARY INFORMATION
Interest paid $ 4,464,777 $ 4,253,247
Income tax paid 596,139 470,879
Loan balances transferred to real
estate owned 1,141,907 124,309
Loans to finance the sale of real
estate owned 1,248,715 292,000
5
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 March 31, 1998, results of operations for the three month and
nine month periods ended March 31, 1998 and 1997, and cash flows for the nine
month periods ended March 31, 1998 and 1997.
NOTE B: Dividends and Earnings Per Share
On February 18, 1998, the Board of Directors declared a quarterly cash dividend
of $.22 per share. This dividend was paid on March 13, 1998 to shareholders of
record as of February 27, 1998.
Earnings per share (EPS) were computed as follows:
Nine Months Ended Nine Months Ended
March 31, 1998 March 31, 1997
--------------------------------------- ----------------------------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Income available to
common shareholders $1,683,556 1,765,161 $ .95 $1,694,073 1,816,267 $ .93
Effect of dilutive securities
RRP program 3,324 6,012
Stock options 41,086 47,342
------ ------
Diluted earnings per share
Income available to
common shareholders
and assumed
conversions $1,683,556 1,809,571 $ .93 $1,694,073 1,869,621 $ .91
--------- --------- -------- --------- --------- --------
6
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
--------------------------------------- ----------------------------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Income available to
common shareholders $520,745 1,770,586 $ .29 $903,366 1,812,982 $ .50
Effect of dilutive securities
RRP program 3,102 5,792
Stock options 36,595 47,292
--------- ---------
Diluted earnings per share
Income available to
common shareholders
and assumed
conversions $520,745 1,810,283 $ .29 $903,366 1,866,066 $ .48
------- --------- --------- ------- --------- --------
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General:
The Company's total assets were $192.5 million at March 31, 1998 compared to
$173.3 million at June 30, 1997. Cash and cash equivalents increased $5.3
million and investment securities decreased $2.8 million or 35.5% from June 30,
1997 to March 31, 1998. Loans receivable were $160.0 million at March 31, 1998,
an increase of $12.0 million, or 8. 1%, 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 $184,734 at March 31, 1998. The
Company held no real estate acquired by foreclosure at June 30, 1997.
Investment in limited partnerships increased by $3.5 million at March 31, 1998
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 $133.3 million at March 31, 1998 compared to $121.8
million at June 30, 1997, a 9.5% increase. This $11.5 million increase
represented a $7,603,000 increase in passbook and transaction accounts and an
approximate $3,938,000 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.
7
Note payable was increased to $3.6 million at March 31, 1998. The note payable
is for amounts due under a limited partnership agreement entered into by the
Company on a low income multi-family 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 increased from $4.0 million at June 30, 1997 to $5.0 million
at March 31, 1998 as a result of normal operational increases.
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 $39.6 million at March 31, 1998, compared to $39.1
million at June 30, 1997. As of March 31, 1998, 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
19,000 shares had been repurchased by March 31, 1998. An additional 26,900
shares have been repurchased subsequent to March 31, 1998.
Net income for the nine months ended March 31, 1998 of $1,683,556 represents a
0.6% decrease in income reported for the same period in the prior year of
$1,694,073. Earnings for the nine months ended March 31, 1997 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 nine months ended March 31, 1997. The after-tax effect on net income was
$469,059 for the nine months ended March 31, 1997. SAIF-insured institutions,
like the Company, are also benefiting from a reduction of FDIC premiums
beginning January 1, 1997. Earnings for the nine months ended March 31, 1998
reflected lower earnings than the earnings in the prior period due to the
following three areas. First, during the nine months ended March 31, 1997, the
Company received $283,000 additional income from key man life insurance
proceeds. This income is not taxable to the company and, therefore, increased
net income by $283,000 in the prior period. Second, during the nine months ended
March 31, 1998, the Company experienced increased real estate operations expense
as it operated a nursing home facility that it acquired by voluntary deed in
lieu of foreclosure during the quarter ended December 31, 1997. The property was
sold in February 1998, at a small gain, but the
8
Company incurred additional expense, prior to the sale, to maintain the
continued operations of the facility, since the cash flow from the nursing home
was insufficient to meet all operational expenses. Third, the Company has
experienced increased operational expenses as the result of operating two
additional branch locations established in the quarter ended December 31, 1997.
For the nine months ended March 31, 1998, the Bank made a provision of $23,088
for general loan losses compared to $47,199 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.
Results of Operations Comparison of Three Months Ended March 31, 1998 and March
31, 1997
Net interest income for the quarter ended March 31, 1998, equaled $1,807,115, an
increase of 0.5% over the quarter ended March 31, 1997 of $1,797,674. Net income
for the three months ended March 31, 1998 of $502,745 was a 44.3% decrease from
the three months ended March 31, 1997 of $903,366. The decrease in net income is
primarily related to three areas. First, during the quarter ended March 31,
1997, the Company received $283,000 additional income from key man life
insurance proceeds. This income is not taxable to the company and, therefore,
increased net income by $283,000 in the prior period. Second, during the quarter
ended March 31, 1998, the Company experienced real estate operations expense of
$86,000 as it operated a nursing home facility that it acquired by voluntary
deed in lieu of foreclosure during the quarter ended December 31, 1997. The
property was sold in February 1998, at a small gain, but the Company incurred
additional expense, prior to the sale, to maintain the continued operations of
the facility, since the cash flow from the nursing home was insufficient to meet
all operational expenses. The after-tax effect for the quarter ended March 31,
1998, of these additional expenses was approximately $51,600. Third, the Company
has experienced increased operational expenses as the result of operating two
additional branch locations established in the quarter ended December 31, 1997.
Increase in operating expenses occurred in the following areas: salaries and
employee benefits, occupancy expense, equipment expense, deposit insurance
expense and data processing expenses. Expenses in these categories increased
$92,500 for the quarter ended March 31, 1998, compared to the quarter ended
March 31, 1997. The-after tax-effect for the quarter ended March 31, 1998
amounts to approximately $55,500.
A provision of $7,534 for losses on loans was made for the three months ended
March 31, 1998, compared to a $37,250 provision in the same period last year.
Total other income decreased by $227,901 for the three months ended March 31,
1998, compared to the same period in the prior year. This decrease was
attributed to receiving $283,000 additional income from key man life insurance
proceeds for the three-month period ended March 31, 1997.
Total other expenses increased by $222,456, or 22.6% for the three months ended
March 31, 1998, compared to the same period in the prior year. Real estate
operations expense increased $112,821 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
9
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 March 31, 1998 amounted to
$189,333, a decrease of $28,579 over the three months ended March 31, 1997, as
the result of decreased income. The Company's effective tax rate for the three
months ended March 31, 1998 was 26.7% compared to 19.4% for the comparable
period in 1997.
Results of Operations Comparison of Nine Months Ended March 31, 1998 and March
31, 1997
Net income for the nine months ended March 31, 1998 was $1,683,556 compared with
$1,694,073 for the nine months ended March 31,1997, a decrease of $10,517 or
0.6%. Net income for the nine months ended March 31, 1997, included the FDIC
special assessment previously described. Interest income for the nine months
ended March 31, 1998 increased $276,331 or 2.7% compared to the same period in
the prior year, while interest expense for the nine months ended March 31, 1998
increased $212,945 or 4.2% compared to the same period in the prior year. As a
result, net interest income for the nine months ended March 31, 1998 amounted to
$5,325,322, an increase of $63,386 or 1.2% compared to the same period in the
prior year.
A $23,088 provision for loss on loans for the nine months ended March 31, 1998
was made compared to $47,199 provision reported in the same period last year.
Total other income decreased by $395,482 for the nine months ended March 31,
1998, compared to the same period in the prior year. The prior year period
included $343,000 of death benefits received on key man insurance policies.
Annuity and security product sales commissions were down $33,004, or 25.9% for
the nine months ended March 31, 1998, compared to the same period in the prior
year.
Total other expenses decreased by $666,507 or 16.9% for the nine months ended
March 31, 1998, compared to the same period in the prior year. The FDIC special
assessment accounts for $776,717 of the decrease. Salaries and employee benefits
decreased $226,060, or 10.6%, 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 $232,610 for the
nine months ended March 31, 1998, 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 nine months ended March 31, 1998, amounted to
$602,756, an increase of $369,039 from the nine months ended March 31,1997 as a
result of increased taxable income before income taxes.
Allowance for loan losses amounted to $2.0 million at March 31, 1998, which was
unchanged from June 30, 1997 after adjusting for charge-offs and recoveries.
Management considered the allowances
10
for loan and real estate losses at March 31, 1998, 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 nine months ended March 31,
1998.
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...................... 23,088 857 23,945
Recoveries................................ 8,218 23,573 31,731
Loans and REO charged off................. (19,854) (857) (20,711)
---------- ------------- -----------
Balances at March 31, 1998................ $2,042,987 $ 23,512 $2,066,500
========== ========== ==========
The loan loss reserves to total loans at March 31, 1998 equaled 1.26% of total
loans outstanding, compared to 1.35% of total loans outstanding at June 30,
1997. Total non-performing assets decreased during the nine months ended March
31, 1998, from $1.4 million at June 30, 1997 to $1.9 million at March 31, 1998.
Non performing assets at March 31, 1998 consisted of $185,000 in real estate
owned and loans delinquent greater than 90 days of $1.7 million.
Total non-performing loans totaled 1.07% of total loans outstanding at March 31,
1998 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.
11
March 31, June 30,
1998 1997
------ ------
(Dollars in thousands)
Accruing loans delinquent
more than 90 days ......... $ -- $ --
Non-accruing loans:
Residential ............... 1,702 1,238
Multi-family .............. -- --
Commercial ................ 6 139
Consumer .................. 27 34
Troubled debt restructurings ... -- --
------ ------
Total non-performing loans 1,735 1,411
Real estate owned, net ......... 185 0
------ ------
Total non-performing assets $1,920 $1,411
====== ======
Non-performing loans to total
loans, .................... 1.07% .94%
Non-performing assets to
total assets .............. 1.00% .81%
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 March 31
1998 1997
-------------------------------------- -------------------------------------
(Dollars in thousands)
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Total interest-
earning assets $175,316 $3,610 8.24% $163,696 $3,455 8.44%
Total interest-
bearing liabilities 143,532 1,803 5.02% 129,952 1,658 5.10%
------ ------
Net interest income/
Interest rate spread $1,807 3.22% $1,797 3.34%
====== ======
12
Nine Months Ended March 31
1998 1997
----------------------------------- ------------------------------------
(Dollars in thousands)
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Total interest-
earning assets $169,202 $10,593 8.35% $164,107 $10,317 8.38%
Total interest-
bearing liabilities 135,768 5,268 5.17% 129,931 5,055 5.19%
------- -------
Net interest income/
Interest rate spread $ 5,325 3.18% $ 5,262 3.19%
======= =======
Financial Condition
Shareholders' equity at March 31, 1998 was $39,565,417, an increase of $499,598
or 1.3% from June 30, 1997. The Company's equity to asset ratio was 20.55% at
March 31, 1998 compared to 22.54% at June 30, 1997. All fully phased-in capital
requirements are currently met. The following table depicts the amounts and
ratios of the Bank's capital as of March 31, 1998 (in thousands) under each of
the three regulatory capital requirements (tangible, core, and fully phased-in
risk based):
Tangible Core Risk-Based
Capital Capital Capital
------- ------- -------
Amount ...................... $33,870 $33,870 $35,427
As a percent of assets, as
defined .................. 18.5% 18.5% 28.6%
Required amount ............. 2,745 5,490 9,925
As a percent of assets, as
defined ................... 1.5% 3.0% 8.0%
Capital in excess of required
amount .................... $31,125 $28,380 $25,502
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 March 31, 1998, the Bank's
liquidity ratio was 10.4% of which 7.5% was comprised of short-term investments.
13
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 expensed over the next two-to-three year period to have a
material effect on its financial position or results of operations. The amount
expensed in 1997 was immaterial.
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).
14
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 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 85% of its mortgage
loans with adjustable rate features. Management believes that these minimums,
which establish floors below which the loan interest rate cannot decline, will
continue to reduce its interest rate vulnerability in a declining interest rate
environment. For the loans which do not adjust because of the interest rate
minimums, there is an increased risk of prepayment.
The Bank believes it is critical to manage the relationship between interest
rates and the effect on its net portfolio value ("NPV"). This approach
calculates the difference between the present value of expected cash flows from
assets and the present value of expected cash flows from liabilities, as well as
cash flows from off-balance sheet contracts. The Bank manages assets and
liabilities within the context of the marketplace, regulatory limitations and
within its limits on the amount of change in NPV which is acceptable given
certain interest rate changes.
The OTS issued a regulation, which uses a net market value methodology to
measure the interest rate risk exposure of savings associations. Under this OTS
regulation, an institution's "normal" level of interest rate risk in the event
of an assumed change in interest rates is a decrease in the institution's NPV in
an amount not exceeding 2% of the present value of its assets. Savings
associations with over $300 million in assets or less than a 12% risk-based
capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is
used by the OTS to calculate changes in NPV (and the 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,
although it does so voluntarily. Under the regulation, associations which must
file are required to take a deduction (the interest rate risk capital component)
from their total capital available to calculate their risk based capital
requirement if their interest rate exposure is greater than "normal". The amount
of that deduction is one-half of the difference between (a) the institution's
actual calculated exposure to a 200 basis point interest rate increase or
decrease (whichever results in the greater pro forma decrease in NPV) and (b)
its "normal" level of exposure which is 70 of the present value of its assets.
Presented below, as of December 31, 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 December 31, 1997,
15
2% of the present value of the Bank's assets was approximately $3.8 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 $.9 million at December 31, 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.
This data is presented as of December 31, 1997 since data from the most recent
quarter (March 31, 1998) is not yet available from the OTS. Management believes
there had been no significant change in the interest rate risk measures since
December 31, 1997.
Net Portfolio Value NPV as % of PV of Assets
Change
in Rates $ Amount $ Change % Change NPV Ratio Change
- ------------------------------------------------------------------------------------------
(Dollars in Thousands)
+400 bp 37,389 -2,401 -6% 20.28% -41 bp
+300 bp 38,724 -1,066 -3% 20.70% -1 bp
+200 bp 39,686 - 103 -0% 20.96% +27 bp
+100 bp 39,081 291 +1% 20.97% +28 bp
0 bp 39,790 20.69%
- -100 bp 39,138 - 652 -2% 20.26% - 43 bp
- -200 bp 38,936 - 853 -2% 20.01% - 68 bp
- -300 bp 39,064 - 726 -2% 19.90% - 79 bp
- -400 bp 39,468 - 322 -1% 19.90% - 79 bp
As with any method of measuring interest rate risk, certain short comings are
inherent in the methods of analysis presented above. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable rate loans, have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Most of the
Bank's adjustable-rate loans have interest rate minimums of 6.00% for
residential loans and 9.00% for commercial real estate loans. Currently,
originations of residential adjustable-rate-mortgages have interest rate
minimums of 6.00%. Further, in the event of a change in interest rates, expected
rates of prepayments on loans and early withdrawals from certificates could
likely deviate significantly from those assumed in calculating the table.
Finally, the ability of many borrowers to service their debt may decrease in the
event of an interest rate increase although the Bank does underwrite these
16
mortgages at approximately 4.0% above the origination rate. The Company
considers all of these factors in monitoring its exposure to interest rate risk.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Bank were during the quarter ended March 31, 1998,
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 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(1) Financial Data Schedule for Period Ended March 31, 1998
27(2) Restated Financial Data Schedule for Period Ended March 31,
1997
b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended March
31, 1998.
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: May 7, 1998 By: /s/ John M. Dalton
-----------------------------------
John M. Dalton, President
Date: May 7, 1998 By: /s/ Larry G. Phillips
-----------------------------------
Larry G. Phillips, Vice President,
Secretary and Treasurer