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,
1999 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 3, 2000 was 1,356,250.
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, 1999 and June 30, 1999......................2
Consolidated Condensed Statement of
Income for the three-month
and six-month periods ended
December 31, 1999 and 1998...............................3
Consolidated Condensed Statement
of Shareholders' Equity
for the six months ended December 31, 1999...............4
Consolidated Condensed Statement of
Cash Flows for the six months
ended December 31, 1999 and 1998.........................5
Notes to Consolidated Financial Statements...............7
Item 2. Management's Discussion and Analysis of
Financial Condition and
Results of Operations....................................9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.......................................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................18
Item 4. Submission of Matters to Vote of Security Holders .............18
Item 6. Exhibits and Reports on Form 8-K..............................18
SIGNATURES................................................................20
FORWARD LOOKING STATEMENTS
Except for historical information contained herein, the discussion in this Form
10-Q quarterly report includes certain forward-looking statements based upon
management expectations. Factors which could cause future results to differ from
these expectations include the following: general economic conditions,
legislative and regulatory initiatives, monetary and fiscal policies of the
federal government, deposit flows, the costs of funds, general market rates of
interest, interest rates on competing investments, demand for loan products,
demand for financial services, changes in accounting policies or guidelines, and
changes in the quality or composition of the Company's loan and investment
portfolios.
The Company does not undertake and specifically disclaims any obligation to
update any forward- looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
1
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK OF MARION
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL CONDITION
December 31, June 30,
1999 1999
------------- -------------
ASSETS
Cash $ 3,656,412 $ 2,225,804
Short-term interest bearing deposits 2,235,198 6,626,884
------------- -------------
Total cash and cash equivalents 5,891,610 8,852,688
Investment securities available for sale 2,964,669 3,020,000
Loans held for sale 39,968 326,901
Loans receivable, net 165,701,974 165,797,406
Real estate owned, net 63,348
Premises and equipment 1,780,266 2,008,157
Stock in Federal Home Loan Bank (at cost which
approximates market) 1,395,200 1,163,600
Investment in limited partnerships 4,360,675 4,712,675
Investment in other affiliate 650,000 650,000
Core deposit intangibles and goodwill 648,682 698,580
Cash value of life insurance 7,135,616 5,797,666
Other assets 4,113,243 4,073,816
------------- -------------
Total assets $ 194,745,251 $ 197,101,489
============= =============
LIABILITIES
Deposits $ 131,567,979 $ 142,087,269
Advances from FHLB 24,326,490 15,533,732
Other borrowings 2,825,560 3,240,344
Advances by borrowers for taxes and
insurance 207,025 201,919
Other liabilities 4,470,154 4,294,658
------------- -------------
Total liabilities 163,397,208 165,357,922
SHAREHOLDERS' EQUITY
Preferred stock:
Authorized and unissued -- 2,000,000 shares
Common stock, without par value:
Authorized -- 5,000,000 shares
Issued and outstanding -- 1,355,750 and
1,424,550 shares 8,020,048 8,001,048
Retained earnings 23,332,571 23,728,895
Accumulated other comprehensive income (loss) (4,576) 13,624
------------- -------------
Total shareholder's equity 31,348,043 31,743,567
------------- -------------
Total liabilities and shareholders' equity $ 194,745,251 $ 197,101,489
============= =============
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK OF MARION
CONSOLIDATED CONDENSED STATEMENT OF INCOME
Three Months Ended Six Months Ended
December 31, December 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Interest income
Loans $ 3,532,595 $ 3,703,316 $ 7,065,497 $ 7,347,209
Interest-bearing deposits 27,584 33,768 122,690 71,431
Investment securities 48,055 60,176 96,655 134,406
Other interest and dividend income 24,474 22,875 47,937 45,835
----------- ----------- ----------- -----------
Total interest income 3,632,708 3,820,135 7,332,779 7,598,881
Interest expense
Deposits 1,559,220 1,702,269 3,219,575 3,416,598
Advances from FHLB 310,545 233,268 565,967 465,332
----------- ----------- ----------- -----------
Total interest expense 1,869,765 1,935,537 3,785,542 3,881,930
Net interest income 1,762,943 1,884,598 3,547,237 3,716,951
Provision for losses on loans 253,027 6,886 458,027 16,189
----------- ----------- ----------- -----------
Net interest income after provision 1,509,916 1,877,712 3,089,210 3,700,762
Other income
Net loan servicing fees 20,822 18,854 42,043 39,406
Annuity and other commissions 43,151 24,063 87,174 45,520
Losses from limited
partnerships (223,000) (65,000) (352,000) (105,500)
Life insurance income and
death benefits 759,400 61,250 798,450 102,500
Gain on sale of branch office 0 0 231,626 0
Other income 120,561 92,293 230,755 174,152
----------- ----------- ----------- -----------
Total other income 720,934 131,460 1,038,048 256,078
----------- ----------- ----------- -----------
Other expenses
Salaries and employee benefits 764,569 608,654 1,422,795 1,279,196
Occupancy expense 62,550 65,151 131,260 129,828
Equipment expense 33,398 32,058 70,068 62,300
Deposit insurance expense 32,837 32,976 64,954 66,848
Real estate operations, net 117,657 19 117,818 (1,247)
Data processing expense 74,747 76,272 150,647 151,134
Advertising 18,521 41,316 36,478 69,303
Amortization of core deposit
intangibles and goodwill 24,649 26,453 49,899 53,506
Other expenses 242,144 194,720 465,606 404,209
----------- ----------- ----------- -----------
Total other expenses 1,371,072 1,077,619 2,509,525 2,215,077
----------- ----------- ----------- -----------
Income before income taxes 859,778 931,553 1,617,733 1,741,763
Income tax expense (benefit) (85,860) 347,014 92,680 640,094
----------- ----------- ----------- -----------
Net income $ 945,638 $ 584,539 $ 1,525,053 $ 1,101,669
=========== =========== =========== ===========
Per share
Basic earnings per share $ 0.69 $ 0.37 $ 1.09 $ 0.69
Diluted earnings per share $ 0.68 $ 0.37 $ 1.08 $ 0.68
Dividends $ 0.22 $ 0.22 $ 0.44 $ 0.44
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK OF MARION
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
Total
Shareholders'
Equity
-------------------------------
Balances, July, 1 1999 and 1998 $ 31,743,567 $ 37,656,627
Comprehensive income
Net income 1,525,053 1,101,669
Other comprehensive income, net of tax
Unrealized gains (losses) on securities (18,200) 18,616
------------ ------------
Comprehensive income 1,506,853 1,120,285
Exercise of stock options 19,000 40,893
Repurchase of common stock (1,308,413) (3,786,575)
Tax benefit of stock options excercised 0 106,982
Cash dividends (612,964) (703,843)
------------ ------------
Balances, December 31, 1999 and 1998 $ 31,348,043 $ 34,434,369
============ ============
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK OF MARION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
Six Months Ended
December 31,
OPERATING ACTIVITIES 1999 1998
------------ ------------
Net Income $ 1,525,053 $ 1,101,669
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 458,027 16,189
Losses from limited partnerships 352,000 105,500
Amortization of net loan origination fees (106,398) (125,680)
Net amortization of investment securities'
premiums and discounts (15,736) 403
Amortization of core deposits and goodwill 49,899 53,506
Depreciation 96,679 88,267
Deferred income tax (357,969) 20,009
Gain on sale of branch office (231,626) 0
Gain on sale of loans (9,187) (20,840)
Origination of loans for sale (631,746) (5,681,074)
Proceeds from sale of loans 918,679 3,946,464
Change in:
Interest receivable 138,605 197,948
Interest payable and other liabilities 175,496 (429,709)
Cash value of insurance (887,950) (102,500)
Prepaid expense and other assets (83,840) 16,738
------------ ------------
Net cash provided (used) by operating activities 1,389,986 (813,110)
------------ ------------
INVESTING ACTIVITIES
Proceeds from maturity of investment securities
held to maturity 1,000,000 2,000,000
Purchase of investment securities available
for sale (959,070)
Payments on mortgage-backed securities 2,917
Net changes in loans (272,797) (801,328)
Purchases of premises and equipment (28,070) (74,973)
Premiums paid on life insurance (450,000)
Net cash disbursed in sale of branch office (8,593,288)
------------ ------------
Net cash (used) by investing activities (9,303,225) 1,126,616
------------ ------------
(CONTINUED)
FINANCING ACTIVITIES
Net change in:
Interest-bearing demand and savings deposits (1,339,323) (2,298,743)
Certificates of deposit (189,219) 5,011,658
Proceeds from FHLB advances 12,500,000 8,000,000
Repayment of FHLB advances (3,707,242) (6,017,940)
Repayment of other borrowings (414,784) (394,062)
Net change in advances by borrowers for taxes
and insurance 5,106 31,828
Proceeds from exercise of stock options 19,000 40,893
Repurchase of common stock (1,308,413) (3,786,575)
Dividends paid (612,964) (703,843)
------------ ------------
Net cash provided (used) by financing activities 4,952,161 (116,784)
------------ ------------
Net change in cash and cash equivalents (2,961,078) 196,722
Cash and Cash Equivalents, Beginning of Period 8,852,688 5,134,764
------------ ------------
Cash and Cash Equivalents, End of Period $ 5,891,610 $ 5,331,486
============ ============
ADDITIONAL CASH FLOWS AND
SUPPLEMENTARY INFORMATION
Interest paid $ 3,777,183 $ 3,906,877
Income tax paid 397,000 435,000
Loans to finance the sale of real estate owned 42,760 8,500
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, 1999, results of operations for the three-month and
six-month periods ended December 31, 1999 and 1998, and cash flows for the six
month periods ended December 31, 1999 and 1998.
NOTE B: Dividends and Earnings Per Share
On November 15, 1999, the Board of Directors declared a quarterly cash dividend
of $.22 per share. This dividend was paid on December 15, 1999 to shareholders
of record as of November 29, 1999.
Earnings per share (EPS) were computed as follows:
Three Months Ended Three Months Ended
December 31, 1999 December 31, 1998
-------------------------------------------- -----------------------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
Basic earnings per share
Income available to
common shareholders $945,638 1,374,512 $.69 $584,539 1,571,252 $.37
==== ====
Effect of dilutive securities
Stock Options 7,363 21,976
--------- ---------
Diluted earnings per share
Income available to
common shareholders and
assumed conversions $945,638 1,381,875 $.68 $584,539 1,593,228 $.37
======== ========= ==== ========= ========= ====
7
Three Months Ended Three Months Ended
December 31, 1999 December 31, 1998
-------------------------------------------- -----------------------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
Basic earnings per share
Income available to
common shareholders $1,525,053 1,399,788 $1.09 $1,101,669 1,605,768 $.69
===== ====
Effect of dilutive securities
Stock Options 7,972 24,578
--------- ---------
Diluted earnings per share
Income available to
common shareholders and
assumed conversions $1,525,053 1,407,760 $1.08 $1,101,669 1,630,346 $.68
========== ========= ===== =========== ========= ====
NOTE C: Reporting Comprehensive Income
The Company adopted Statement of financial Accounting Standards No. 130,
Reporting Comprehensive Income. Comprehensive income includes unrealized
gains(losses) on securities available for sale, net of tax. Accumulated other
comprehensive income and income tax on such income reported are as follows:
Six Months Ended
December 31
-----------------------
1999 1998
-------- --------
Accumulated other comprehensive income
Balance, July 1 13,624 $ 30,332
Net unrealized gains(losses) (18,200) 18,616
-------- --------
Balance, September 30 $ 4,576 $ 48,948
======== ========
Income tax expense(benefit)
Unrealized holding gains(losses) $(11,937) $ 12,210
======== ========
8
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company's total assets were $194.7 million at December 31, 1999 compared to
$197.1 million at June 30, 1999. Cash and cash equivalents decreased $3.0
million and investment securities remained relatively unchanged from June 30,
1999 to December 31, 1999. Net loans receivable were $165.7 million at December
31, 1999, a decrease of $.1 million, or .1%, from June 30, 1999. Cash value of
life insurance increased $1.3 million from June 30, 1999, to December 31, 1999,
as a result of the increased cash surrender value of life insurance on key man
policies. This increase was a combination of purchasing additional policies and
reflecting the increased value as a result of the death of one of the insured
participants.
Deposits decreased to $131.6 million at December 31, 1999 compared to $142.1
million at June 30, 1999, a 7.4% decrease. This $10.5 million decrease was
primarily the result of the Company selling its Decatur branch deposits on
September 3, 1999, to another financial institution. The deposits sold amounted
to $9.0 million. Passbook and transaction accounts decreased by $3.1 million and
certificate of deposit accounts decreased by $7.4 million.
Federal Home Loan Bank advances increased by $8.8 million to $24.3 million at
December 31, 1999, compared to $15.5 million at June 30, 1999, a 56.6% increase.
Shareholders' equity was $31.3 million at December 31, 1999, compared to $31.7
million at June 30, 1999. During the six months ended December 31, 1999, the
Company repurchased 70,700 shares of common stock in the open market at a cost
of $1.3 million, or an average price of $18.51 per share. This reduced the
number of shares outstanding to 1,355,750 at December 31, 1999.
Net income for the six months ended December 31, 1999, of $1.5 million
represents a 38.4% increase in income reported for the same period in the prior
year. Earnings for the six months ended December 31, 1999, included an
additional $156,000 in federal income tax credits as compared to the six months
ended December 31, 1998. Also, for the six months ended December 31, 1999, death
benefits proceeds from key man insurance resulted in additional income of
$725,000. This increase of tax credits and the nontaxable proceeds from key man
insurance had the effect of reducing the effective tax rate of the Company from
approximately 37% for the six months ended December 31, 1998, to 6% for the six
months ended December 31, 1999.
Results of Operations Comparison of Three Months Ended December 31, 1999 and
December 31, 1998
Net income for the three months ended December 31, 1999 of $945,638 was a 61.8%
increase from the three months ended December 31, 1998 of $584,539. Net interest
income for the quarter ended December 31,1999, equaled $1,762,943, a decrease of
6.5% from the quarter ended December 31, 1998 of $1,884,598.
9
A provision of $253,027 for losses on loans was made for the three months ended
December 31, 1999, compared to a $6,886 provision in the same period last year.
The additional loan loss provision was made as a result of (1) the Company's
ongoing evaluation of its impaired loans and their net realizable value; (2) a
review of recent charge-offs reflecting a higher loss ratio than in previous
years; and (3) a recent announcement from a local employer of intentions to
close its Marion, Indiana, plant which may have an adverse effect on the local
economy.
Total other income increased by $589,474 for the three months ended December 31,
1999, compared to the same period in the prior year. This increase is
attributable to (1) death benefit proceeds from key man insurance, which
resulted in additional income of $725,000; (2) commissions from sales of
annuities and mutual funds, which increased by $19,088; (3) fee income on
deposit accounts, which increased by $16,403; and (4) other miscellaneous
income, which increased by $11,865. Also, during the quarter ended December 31,
1999, the Company charged off an additional $100,000 on an older limited
partnership investment in excess of normal operating losses. Recent financial
reports indicate a decline in net income produced by the partnership, which thus
reflects a lower residual value of the investment. Equity losses in limited
partnerships increased from $65,000 for the quarter ended December 31, 1998, to
a $123,000 loss for the quarter ended December 31, 1999, as a new limited
partnership began operations.
Total other expenses increased by $293,453, or 27.2% for the three months ended
December 31, 1999, compared to the same period in the prior year. Real estate
operations expense increased $117,638 as a result of an increase in the number
of property foreclosures, plus a $100,000 nonrecurring estimated loss related to
real estate operations. Salaries and employee benefits for the quarter ended
December 31, 1999, increased by $155,915 over the quarter ended December 31,
1998. This increase is primarily due to funding the remaining benefits
associated with the key man death benefits discussed above. Other increases
reflect normal operating cost increases.
The income tax benefit for the three months ended December 31, 1999, amounted to
$85,860, compared to tax expense of $347,014 for the three months ended December
31, 1998. The Company's effective tax benefit rate for the three months ended
December 31, 1999, was 10%, compared to 37% tax rate for the comparable period
in 1998. The decrease in income taxes is due from the nontaxable proceeds from
key man insurance and the increase in federal tax credits from the limited
partnerships. A recent investment has generated new tax credits beginning in
July 1999, and will result in tax credits of approximately $370,000 per year
based upon current projections.
Results of Operations Comparison of Six Months Ended December 31, 1999 and
December 31, 1998.
Net income for the six months ended December 31, 1999, was $1,525,053 compared
with $1,101,669 for the six months ended December 31, 1998, an increase of
$423,384, or 38.4%. Interest income for the six months ended December 31, 1999,
decreased $266,102, or 3.5%, compared to the same period in the prior year,
while interest expense for the six months ended December 31, 1999, decreased
$96,388, or 2.5%, compared to the same period in the prior year. As a result,
net interest income for the six months ended December 31, 1999, amounted to
$3,547,237, a decrease of $169,714, or 4.6%, compared to the same period in the
prior year. Earnings for the six months ended December 31, 1999, included an
additional $156,000 in federal income tax credits as compared to the six months
ended December 31, 1998. This increase in tax credits and the nontaxable
proceeds from key man life insurance had the effect of decreasing the effective
tax rate of the Company from approximately
10
37% for the six months ended December 31, 1998, to 6% for the six months ended
December 31, 1999.
A $458,027 provision for loss on loans for the six months ended December 31,
1999, was made compared to a $16,189 provision reported in the same period last
year. The increased provision for the six months ended December 31, 1999,
compared to the prior period was made for the same reasons previously described
above.
Total other income increased by $781,970 for the six months ended December 31,
1999, compared to the same period in the prior year. This increase is
attributable to increased fee income from loan servicing fees, annuity and other
commissions, and other fee income of approximately $101,000 over income reported
in the prior period. Also, life insurance income and death benefits increased by
$695,950 over the prior period and gain on the sale of a branch amounted to
$231,626. Also, for the six months ended December 31, 1999, the Company charged
off an additional $100,000 on one of its limited partnership investments in
excess of normal operating losses. Recent financial reports indicate a decline
in net income produced by the partnership which thus reflects a lower residual
value of the investment.
Total other expenses increased by $294,448 or 13.3% for the six months ended
December 31, 1999, compared to the same period in the prior year. Salaries and
employee benefits increased $143,599, or 11.2% primarily due to funding
additional benefits associated with key man death benefits. Real estate
operating expense increased by $119,065 for the six months ended December 31,
1999, compared to the same period in the prior year as a result of a
nonrecurring estimated loss of $100,000 related to real estate operations.
Income tax expense for the six months ended December 31, 1999, amounted to
$92,680, a decrease of $547,414 from the six months ended December 31, 1998,
resulting in a decrease in the effective tax rate from 37% for the six months
ended December 31, 1998 to 6% for the six months ended December 31, 1999. This
change in effective tax rate is the result of nontaxable proceeds from key man
life insurance and an increase in federal income tax credits as previously
described above.
Allowance for loan losses amounted to $2.3 million at December 31, 1999, which
was unchanged from June 30, 1999, after adjusting for charge-offs and
recoveries. Management considered the allowances for loan and real estate losses
at December 31, 1999, 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 for
loan losses for the six months ended December 31, 1999.
11
Allowance For Allowance For Total
Loan Losses REO Losses Allowance
Balances at July 1, 1999 .......... $ 2,271,701 $ 0 $ 2,271,701
Provision for losses .............. 458,027 0 458,027
Recoveries ........................ 3,164 12,962 16,126
Loans and REO charged off ......... (415,931) (262) (416,193)
----------- ----------- -----------
Balances at December 31, 1999...... $ 2,316,961 $ 12,700 $ 2,329,661
=========== =========== ===========
The loan loss reserves to total loans at December 31, 1999 equaled 1.38% of
total loans outstanding, compared to 1.35% of total loans outstanding at June
30, 1999. Total non-performing assets decreased during the six months ended
December 31, 1999, from $3.3 million at June 30, 1999 to $2.4 million at
December 31, 1999. Non-performing assets at December 31, 1999 consisted of loans
delinquent greater than 90 days of $2,338,000 and repossessed assets of $63,000.
Total non-performing loans totaled 1.39% of total loans outstanding at December
31, 1999, compared to 1.98% of total loans at June 30, 1999.
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 uncollectable for any loan past due in
excess of 90 days.
December 31, June 30,
1999 1999
------------ --------
(Dollars in Thousands)
Accruing loans delinquent
more than 90 days .............. $ -- $ --
Non-accruing loans:
Residential .................... 522 1,108
Multi-family ................... -- 462
Commercial real estate ......... 1,616 1,585
Commercial loans ............... 161 153
Consumer ....................... 39 21
Troubled debt restructurings ....... -- --
------ ------
Total non-performing loans ...... 2,338 3,329
Repossessed assets, net ............ 63 2
------ ------
Total non-performing assets..... $2,401 $3,331
====== ======
Non-performing loans to
total loans .................... 1.39% 1.98%
Non-performing assets to
total assets ................... 1.21% 1.69%
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
------------------------------------------------------------------------------
1999 1998
----------------------------------- --------------------------------
(Dollars in thousands)
Average Average Average Average
Balance Interest Rate Balance Interest Rate
Total interest-
earnings assets . . . . . . $175,090 $3,633 8.30% $176,858 $3,820 8.64%
Total interest-
bearing liabilities . . . . 152,990 1,870 4.89% 152,063 1,935 5.09%
----- -----
Net interest income/
Interest rate spread. . . . . $1,763 3.41% $1,885 3.55%
====== ======
Six Months Ended December 31
------------------------------------------------------------------------------
1999 1998
----------------------------------- --------------------------------
(Dollars in thousands)
Average Average Average Average
Balance Interest Rate Balance Interest Rate
Total interest-
earnings assets . . . . . . $177,253 $7,333 8.27% $176,470 $7,599 8.61%
Total interest-
bearing liabilities . . . . 155,107 3,786 4.88% 151,311 3,882 5.13%
----- ------
Net interest income/
Interest rate spread. . . . . $3,547 3.39% $3,717 3.48%
===== ======
Shareholders' Equity
Shareholders' equity at December 31, 1999, was $31,348,043, a decrease of
$395,524 from June 30, 1999. The Company's equity to asset ratio was 16.10% at
December 31, 1999 compared to 16.11% at June 30, 1999. There are five capital
categories defined in the regulations, ranging from well capitalized to
critically undercapitalized. Classification of a bank in any of the
undercapitalized categories can result in actions by regulators that could have
a material effect on a bank's operations. At December 31, 1999, the Bank is
categorized as well capitalized and met all subject capital adequacy
13
requirements. There are no conditions or events since December 31, 1999, that
management believes have changed the Bank's classification.
1999
---------------------------------------------------------------------------
Required
for Adequate To Be Well
Actual Capital Capitalized
December 31 Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------
Total risk-based capital
(to risk-weighted assets) $28,452 20.3% $11,184 8.0% $13,980 10.0%
Tier I risk based capital
(to risk-weighted assets) 26,697 19.1% 11,184 8.0% 13,980 10.0%
Core capital
(to adjusted tangible assets) 26,697 14.2% 5,610 3.0% 11,221 6.0%
Core capital
(to adjusted total assets) 26,697 14.2% 5,610 3.0% 9,351 5.0%
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%. At December
31, 1999, the Bank's liquidity ratio was 7.7%.
Year 2000
The Company's lending and deposit activities, like those of most financial
institutions, depend significantly upon computer systems. As of December 31,
1999, the Company is not aware that it has incurred any problems associated with
the possibility that the computers which control its systems, facilities and
infrastructure may not be programmed to read four-digit date codes, causing some
computer applications to be unable to recognize the change from the year 1999 to
the year 2000, and causing computer systems to generate erroneous data or to
fail.
As of December 31, 1999, the Company has completed an inventory of all hardware
and software systems and has made all mission critical classifications. The
Company has implemented both an employee awareness program and a customer
awareness program aimed at educating people about the efforts being made by the
Company as well as bank regulators regarding the Year 2000 issue.
The Company's data processing is performed primarily by a third party servicer.
The Company has completed testing the systems of its primary service provider.
The results from these tests disclosed no significant weakness or problems in
processing and operating beyond December 31, 1999.
The Company also uses software and hardware which are covered under maintenance
agreements with third party vendors. Consequently, the Company is dependent on
these vendors to conduct its business. The Company has contacted each vendor to
request time tables for Year 2000 compliance and the expected costs, if any, to
be passed along to the Company. The responses received disclosed no significant
weakness or problems related to the Year 2000 issue.
14
In addition to possible expenses related to the Company's own systems and those
of its service providers, the Company could be affected by the Year 2000
problems affecting any of its depositors or borrowers. The Company is not aware
of any significant problems experienced by any of its depositors or borrowers
related to the Year 2000 issue that have materially affected or could materially
affect the Company.
Costs associated with Year 2000 issues have been immaterial. Although management
believes it has taken taking the necessary steps to address the Year 2000
compliance issue and is not aware of any problems experienced as of December 31,
1999, no assurances can be given that some problems will not occur or that the
Company will not incur additional expenses in future periods. Amounts expensed
in fiscal 1999 and 1998 were 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).
15
Item 3: Quantitative and Qualitative Disclosure 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 86% of its mortgage
loans with adjustable rate features. Management believes that these minimums,
which establish floors below which the loan interest rate cannot decline, will
continue to reduce its interest rate vulnerability in a declining interest rate
environment. For the loans which do not adjust because of the interest rate
minimums, there is an increased risk of prepayment.
The Bank believes it is critical to manage the relationship between interest
rates and the effect on its net portfolio value ("NPV"). This approach
calculates the difference between the present value of expected cash flows from
assets and the present value of expected cash flows from liabilities, as well as
cash flows from off-balance sheet contracts. The Bank manages assets and
liabilities within the context of the marketplace, regulatory limitations and
within its limits on the amount of change in NPV which is acceptable given
certain interest rate changes.
The OTS issued a regulation, which uses a net market value methodology to
measure the interest rate risk exposure of savings associations. Under this OTS
regulation, an institution's "normal" level of interest rate risk in the event
of an assumed change in interest rates is a decrease in the institution's NPV in
an amount not exceeding 2% of the present value of its assets. Savings
associations with over $300 million in assets or less than a 12% risk-based
capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is
used by the OTS to calculate changes in NPV (and the related "Normal" level of
interest rate risk) based upon certain interest rate changes (discussed below).
Associations which do not meet either of the filing requirements are not
required to file OTS Schedule CMR, but may do so voluntarily. As the Bank does
not meet either of these requirements, it is not required to file Schedule CMR,
although it does so voluntarily. Under the regulation, associations which must
file are required to take a deduction (the interest rate risk capital component)
from their total capital available to calculate their risk based capital
requirement of 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 December 31,1999, is an analysis performed by the OTS of
the Bank's interest rate risk as measured by change in NPV for instantaneous and
sustained parallel shifts in the yield curve, in 100 basis point increments, up
and down 300 basis points. At December 31, 1999, 2% of the present value of the
Bank's assets was approximately $3.7 million. Because the interest rate risk of
a 200 basis point increase in market rates (which was greater than the interest
rate risk of a 200 basis point decrease) was $1.6 million at December 31, 1999,
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.
16
Net Portfolio Value NPV as % of PV of Assets
Change
In Rates $ Amount $Change %Change NPV Ratio Change
- -------------------------------------------------------------------------
(Dollars in Thousands)
+300 bp 27,484 -3,064 -10% 15.07% -102 bp
+200 bp 28,955 -1,593 -5% 15.63% -46 bp
+100 bp 30,024 -523 -2% 15.99% -10 bp
0 bp 30,548 16.09%
- -100 bp 30,515 -33 0% 15.94% -15 bp
- -200 bp 30,371 -177 -1% 15.74% -35 bp
- -300 bp 30,407 -141 0% 15.61% -48 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 minimums of 6.00% for
residential loans and 8.50% for commercial real estate loans. Currently,
originations of residential adjustable rate mortgages have interest rate
minimums of 7.50%. 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 2.0% above the origination rate. The Company
considers all of these factors in monitoring its exposure to interest rate risk.
17
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Bank were, during the three-month period ended
December 31, 1999, 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 18, 1999, 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
Olive LLP as auditors for the fiscal year ending June 30, 2000.
Both director nominees were elected and the appointment of auditors was approved
and ratified by a majority of the 1,424,550 issued and outstanding share votes.
A tabulation of votes cast as to each matter submitted to shareholders is
presented below:
Votes
Director Nominees For Against Withheld
- ----------------- --- ------- --------
Steven L. Banks 1,061,350 -0- 83,730
W. Gordon Coryea* 1,072,703 -0- 72,377
Other Matters
- -------------
Approval and Ratification of
Auditors 1,128,400 1,080 15,600
*Mr. Coryea passed away in November 1999.
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).
10(1) Employment Agreement dated January 19, 2000 between the Bank and
Steven L. Banks.
18
10(2) Employment Agreement dated January 19, 2000 between the Bank and
Larry G. Phillips.
27 Financial Data Schedule
b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended December
31, 1999.
19
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 11, 2000 By: /s/ Steven L. Banks
-------------------
Steven L. Banks, President
Date: February 11, 2000 By: /s/ Larry G. Phillips
----------------------
Larry G. Phillips, Vice President,
Secretary and Treasurer
18