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, 2000
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)
(765) 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 9, 2000 was 1,356,739.
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, 2000 and June 30, 1999.................................2
Consolidated Condensed Statement of Income for the three-month
and nine-month periods ended March 31, 2000 and 1999.............3
Consolidated Condensed Statement of Shareholders' Equity
for the nine months ended March 31, 2000 and 1999................4
Consolidated Condensed Statement of
Cash Flows for the nine months
ended March 31, 2000 and 1999....................................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........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
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
(Unaudited)
March 31, June 30,
2000 1999
ASSETS
Cash $2,493,816 $2,225,804
Short-term interest bearing deposits 4,443,199 6,626,884
-------------------------------------------
Total cash and cash equivalents 6,937,015 8,852,688
Investment securities available for sale 2,972,274 3,020,000
Loans held for sale 357,400 326,901
Loans receivable, net of allowance for loan losses
of $2,246,114 and $2,271,701 164,377,586 165,797,406
Real estate owned, net 205,099 0
Premises and equipment 1,741,498 2,008,157
Stock in Federal Home Loan Bank (at cost which
approximates market) 1,654,900 1,163,600
Investment in limited partnerships 4,177,675 4,712,675
Investment in other affiliate 650,000 650,000
Core deposit intangibles and goodwill 625,235 698,580
Cash value of life insurance 11,322,018 5,887,166
Other assets 4,172,820 3,984,316
-------------------------------------------
Total assets $199,193,520 $197,101,489
===========================================
LIABILITIES
Deposits $129,474,282 $142,087,269
Advances from FHLB 29,526,490 15,533,732
Other borrowings 2,825,560 3,240,344
Advances by borrowers for taxes and
insurance 375,585 201,919
Other liabilities 5,379,508 4,294,658
-------------------------------------------
Total liabilities 167,581,425 165,357,922
SHAREHOLDERS' EQUITY
Preferred stock:
Authorized and unissued -- 2,000,000 shares
Common stock, without par value:
Authorized -- 5,000,000 shares
Issued and outstanding -- 1,356,739 and
1,424,550 shares 8,025,048 8,001,048
Retained earnings 23,595,404 23,728,895
Accumulated other comprehensive income (loss) (8,357) 13,624
-------------------------------------------
Total shareholders' equity 31,612,095 31,743,567
-------------------------------------------
Total liabilities and shareholders' equity $199,193,520 $197,101,489
===========================================
See notes to consolidated condensed financial statements.
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK OF MARION
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
Interest income
Loans $3,518,509 $3,624,006 $10,584,006 $10,971,215
Interest-bearing deposits 49,401 52,533 172,091 123,964
Investment securities 46,004 47,824 142,659 182,230
Other interest and dividend income 30,869 22,377 78,806 68,212
-------------------------------------------------------------------------------------
Total interest income 3,644,783 3,746,740 10,977,562 11,345,621
Interest expense
Deposits 1,542,469 1,651,935 4,762,044 5,068,533
Advances from FHLB 422,126 220,991 988,093 686,323
-------------------------------------------------------------------------------------
Total interest expense 1,964,595 1,872,926 5,750,137 5,754,856
Net interest income 1,680,188 1,873,814 5,227,425 5,590,765
Provision for losses on loans 0 1,400 458,027 17,589
-------------------------------------------------------------------------------------
Net interest income after provision 1,680,188 1,872,414 4,769,398 5,573,176
Other income
Net loan servicing fees 19,150 23,057 61,193 62,463
Annuity and other commissions 42,236 52,743 129,410 98,263
Losses from limited
partnerships (183,000) (35,000) (535,000) (140,500)
Life insurance income and
death benefits 106,204 39,750 904,654 142,250
Gain on sale of branch office 0 0 231,626 0
Other income 119,795 87,110 350,550 261,262
-------------------------------------------------------------------------------------
Total other income 104,385 167,660 1,142,433 423,738
-------------------------------------------------------------------------------------
Other expenses
Salaries and employee benefits 688,046 724,474 2,110,841 2,003,670
Occupancy expense 64,821 69,688 196,081 199,516
Equipment expense 35,652 34,549 105,720 96,849
Deposit insurance expense 18,906 32,855 83,860 99,703
Real estate operations, net 21,483 (1,628) 139,301 (2,875)
Data processing expense 85,529 77,498 236,176 228,632
Advertising 16,392 20,641 52,870 89,944
Amortization of core deposit
intangibles and goodwill 23,446 25,249 73,345 78,755
Other expenses 217,275 204,046 682,881 608,255
-------------------------------------------------------------------------------------
Total other expenses 1,171,550 1,187,372 3,681,075 3,402,449
-------------------------------------------------------------------------------------
Income before income taxes 613,023 852,702 2,230,756 2,594,465
Income tax expense 72,058 328,751 164,738 968,845
-------------------------------------------------------------------------------------
Net income $540,965 $523,951 $2,066,018 $1,625,620
=====================================================================================
Per share
Basic earnings per share $0.40 $0.35 $1.49 $1.04
Diluted earnings per share $0.40 $0.35 $1.48 $1.02
Dividends $0.22 $0.22 $0.66 $0.66
See notes to consolidated condensed financial statements.
2
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK OF MARION
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Total
Shareholders'
Equity
--------------------------------
Balances, July, 1 1999 and 1998 $31,743,567 $37,656,627
Comprehensive income
Net income 2,066,018 1,625,620
Other comprehensive income, net of tax
Unrealized gains (losses) on securities (21,981) 926
--------------------------------
Comprehensive income 2,044,037 1,626,546
Exercise of stock options 24,000 61,901
Repurchase of common stock (1,308,413) (5,311,296)
Tax benefit of stock options excercised 20,351 106,982
Cash dividends (911,447) (1,032,250)
--------------------------------
Balances, March 31, 2000 and 1999 $31,612,095 $33,108,510
================================
See notes to consolidated condensed financial statements.
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK OF MARION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
OPERATING ACTIVITIES 2000 1999
------------------- -------------------
Net Income $2,066,018 $1,625,620
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 458,027 17,589
Losses from limited partnerships 535,000 140,500
Amortization of net loan origination fees (149,610) (196,806)
Net amortization of investment securities'
premiums and discounts (29,603) 817
Amortization of core deposits and goodwill 73,345 25,249
Depreciation 144,350 135,101
Deferred income tax (389,339) 14,825
Gain on sale of branch office (231,626) 0
Gain on sale of loans (10,478) (20,840)
Origination of loans for sale (1,078,252) (6,743,872)
Proceeds from sale of loans 1,058,231 7,479,681
Change in:
Interest receivable 38,272 174,463
Interest payable and other liabilities 1,145,033 581,521
Cash value of insurance (904,654) (142,250)
Prepaid expense and other assets 197,331 34,584
------------------- -------------------
Net cash provided by operating activities 2,922,045 3,126,182
------------------- -------------------
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) 0
Payments on mortgage-backed securities 0 2,917
Net changes in loans 819,642 (850,747)
Proceeds from real estate owned sales 79,294
Purchase of FHLB stock (491,300)
Purchases of premises and equipment (36,974) (194,124)
Proceeds from life insurance 1,419,803 0
Premiums paid on life insurance (5,950,000) 0
Net cash disbursed in sale of branch office (8,593,288) 0
------------------- -------------------
Net cash (used) by investing activities (12,711,893) 958,046
------------------- -------------------
(CONTINUED)
FINANCING ACTIVITIES
Net change in:
Interest-bearing demand and savings deposits (2,091,090) (1,563,053)
Certificates of deposit (1,590,515) 6,099,053
Proceeds from FHLB advances 19,200,000 8,909,000
Repayment of FHLB advances (5,207,242) (7,412,002)
Repayment of other borrowings (414,784) (394,062)
Net change in advances by borrowers for taxes
and insurance 173,666 225,190
Proceeds from exercise of stock options 24,000 61,901
Repurchase of common stock (1,308,413) (5,311,296)
Dividends paid (911,447) (1,032,250)
------------------- -------------------
Net cash provided (used) by financing activities 7,874,175 (417,519)
------------------- -------------------
Net change in cash and cash equivalents (1,915,673) 4,081,611
Cash and Cash Equivalents, Beginning of Period 8,852,688 5,134,764
------------------- -------------------
Cash and Cash Equivalents, End of Period $6,937,015 $9,216,375
=================== ===================
ADDITIONAL CASH FLOWS AND
SUPPLEMENTARY INFORMATION
Interest paid $4,992,817 $5,014,576
Income tax paid 579,032 585,000
Loans to finance the sale of real estate owned 50,260 8,500
See notes to consolidated condensed financial statements.
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, 2000, results of operations for the three-month and
nine-month periods ended March 31, 2000 and 1999, and cash flows for the nine
month periods ended March 31, 2000 and 1999.
NOTE B: Dividends and Earnings Per Share
On February 22, 2000, the Board of Directors declared a quarterly cash dividend
of $.22 per share. This dividend was paid on March 15, 2000 to shareholders of
record as of March 6, 2000.
Earnings per share (EPS) were computed as follows:
Three Months End Three Months Ended
March 31, 2000 March 31, 1999
------------------------------------- -----------------------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
Basic earnings per share
Income available to
common shareholders $540,965 1,356,257 $.40 $523,951 1,493,227 $.35
========= ====
Effect of dilutive securities
Stock Options 5,813 17,432
--------- --------- -------- ---------
Diluted earnings per share
Income available to
common shareholders and
assumed conversions $540,965 1,362,070 $.40 $523,951 1,510,659 $.35
======== ========= ==== ========= ========= ====
7
Nine Months Ended Nine Months Ended
March 31, 2000 March 31, 1999
------------------------------------- -----------------------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
Basic earnings per share
Income available to
common shareholders $2,066,018 1,385,383 $1.49 $1,625,620 1,568,802 $1.04
===== =====
Effect of dilutive securities
Stock Options 7,252 22,198
---------- --------- ----------- ---------
Diluted earnings per share
Income available to
common shareholders and
assumed conversions $2,066,018 1,392,635 $1.48 $1,625,620 1,591,000 $1.02
========== ========= ===== =========== ========= =====
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:
Nine Months Ended
March 31
------------------------
2000 1999
-------- --------
Accumulated other comprehensive income
Balance, July 1 $ 13,624 $ 30,332
Net unrealized gains(losses) (21,981) 926
-------- --------
Balance, September 30 $ 8,357 $ 31,258
======== ========
Income tax expense(benefit)
Unrealized holding gains(losses) $(14,417) $ 607
======== ========
8
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company's total assets were $199.2 million at March 31, 2000 compared to
$197.1 million at June 30, 1999. Cash and cash equivalents decreased $1.9
million and investment securities remained relatively unchanged from June 30,
1999 to March 31, 2000. Net loans receivable, including loans held for sale,
were $164.7 million at March 31, 2000, a decrease of $1.4 million, or .8%, from
June 30, 1999.
For the nine months ended March 31, 2000, cash value of life insurance increased
by $5.4 million as the result of the Company purchasing life insurance on key
directors and a key employee in connection with new supplemental retirement
agreements. Effective February 1, 2000, these agreements were designed to
provide benefits at retirement age as set forth in the agreements.
Deposits decreased to $129.5 million at March 31, 2000 compared to $142.1
million at June 30, 1999, an 8.9% decrease. This $12.6 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 $3.8 million and
certificate of deposit accounts decreased by $8.8 million.
Federal Home Loan Bank advances increased by $14.0 million to $29.5 million at
March 31, 2000, compared to $15.5 million at June 30, 1999, a 90.1% increase.
Advances were used primarily to fund the sale of the Decatur branch and to
purchase life insurance on key directors and employees.
Shareholders' equity was $31.6 million at March 31, 2000, compared to $31.7
million at June 30, 1999. During the nine months ended March 31, 2000, 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. These repurchases
primarily account for the reduction in the number of shares outstanding to
1,356,739 at March 31, 2000.
Results of Operations Comparison of Three Months Ended March 31, 2000 and March
31, 1999
Net income for the three months ended March 31, 2000 of $540,965 was a 3.2%
increase from the three months ended March 31, 1999, of $523,951. Net interest
income for the quarter ended March 31, 2000, equaled $1,680,188, a decrease of
10.3% from the quarter ended March 31, 1999, of $1,873,814.
No provision for losses on loans was made for the three months ended March 31,
2000, compared to a $1,400 provision in the same period last year. No loan loss
provision was made during the quarter ending March 31, 2000, as the Company
believes that the loan loss reserves are adequate after reviewing non-performing
loans within its portfolio.
Total other income decreased by $63,275 for the three months ended March 31,
2000, compared to the same period in the prior year. This decrease is primarily
attributable to increased operating losses from investments in limited
partnerships of $148,000 offset by an increase in life insurance income of
$66,454.
9
Total other expenses decreased by $15,822, or 1.3% for the three months ended
March 31, 2000, compared to the same period in the prior year. Real estate
operations expense increased $23,111 as a result of an increase in the number of
property foreclosures. Salaries and employee benefits for the quarter ended
March 31, 2000, decreased by $36,428 from the quarter ended March 31, 1999.
Deposit insurance expense decreased by $13,949 as the result of lower premiums
from the prior period. Other increases reflect normal operating cost increases.
The income tax expense for the three months ended March 31, 2000, amounted to
$72,058, compared to tax expense of $328,751 for the three months ended March
31, 1999. The Company's effective tax rate for the three months ended March 31,
2000, was 12%, compared to 39% tax rate for the comparable period in 1999. 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.
Results of Operations Comparison of Nine Months Ended March 31, 2000 and March
31, 1999.
Net income for the nine months ended March 31, 2000, was $2,066,018 compared
with $1,625,620 for the nine months ended March 31, 1999, an increase of
$440,398, or 27.1%. Interest income for the nine months ended March 31, 2000,
decreased $368,059, or 3.2%, compared to the same period in the prior year,
while interest expense for the nine months ended March 31, 2000, decreased
$4,719, or 0.1%, compared to the same period in the prior year. As a result, net
interest income for the nine months ended March 31, 2000, amounted to
$5,227,425, a decrease of $363,340, or 6.5%, compared to the same period in the
prior year. Earnings for the nine months ended March 31, 2000, included an
additional $360,000 in federal income tax credits as compared to the nine months
ended March 31, 1999. Also, for the nine months ended March 31,2000, death
benefit proceeds from key man insurance resulted in additional income of
$767,000. 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 37% for the nine months ended March 31, 1999, to 7%
for the nine months ended March 31, 2000.
A $458,027 provision for losses on loans for the nine months ended March 31,
2000, was made compared to a $17,589 provision reported in the same period last
year. The increased provision for the nine months ended March 31, 2000, compared
to the prior period was made as a result of the Company's ongoing evaluation of
its impaired loans and their net realizable value; and a review of recent
charge-offs reflecting a higher loss ratio than in previous years.
Total other income increased by $718,695 for the nine months ended March 31,
2000, compared to the same period in the prior year. This increase is
attributable to increased income from loan servicing fees, annuity and other
commissions, and other income of approximately $119,000 over income reported in
the prior period. Also, life insurance income and death benefits increased by
$762,404 over the prior period and gain on the sale of a branch amounted to
$231,626. Also, for the nine months ended March 31, 2000, 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.
10
Total other expenses increased by $278,626 or 8.2% for the nine months ended
March 31, 2000, compared to the same period in the prior year. Salaries and
employee benefits increased $107,171, or 5.3% primarily due to funding
additional benefits associated with key man death benefits. Real estate
operating expense increased by $142,176 for the nine months ended March 31,
2000, 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 nine months ended March 31, 2000, amounted to
$164,738, a decrease of $804,107 from the nine months ended March 31, 1999,
resulting in a decrease in the effective tax rate from 37% for the nine months
ended March 31, 1999 to 7% for the nine months ended March 31, 2000. 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 $2.2 million at March 31, 2000, which was
relatively unchanged from June 30, 1999, after adjusting for charge-offs and
recoveries. Management considered the allowances for loan and real estate losses
at March 31, 2000, 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 nine months ended March 31, 2000.
Allowance For Allowance For Total
Loan Losses REO Loses Allowance
----------- --------- ---------
Balances at July 1, 1999.... $2,271,701 $ 0 $ 2,271,701
Provision for losses........ 458,027 0 471,977
Recoveries.................. 3,381 13,950 3,381
Loans and REO charged off... (486,995) (0) ( 486,995)
----------- --------- ----------
Balances at March 31, 2000.. $2,246,114 $ 13,950 $2,260,064
========== ========= ==========
The loan loss reserves to total loans at March 31, 2000 equaled 1.35% of total
loans outstanding, the same percentage of total loans outstanding at June 30,
1999. Total non-performing assets decreased during the nine months ended March
31, 2000, from $3.3 million at June 30, 1999 to $2.2 million at March 31, 2000.
Non-performing assets at March 31, 2000 consisted of loans delinquent greater
than 90 days of $1,965,000 and real estate owned of $205,000.
Total non-performing loans totaled 1.18% of total loans outstanding at March 31,
2000, compared to 1.98% of total loans at June 30, 1999.
11
The following table further depicts the amounts and categories of the Bank's
non-performing assets.
March 31, June 30,
2000 1999
------- -------
(Dollars in Thousands)
Accruing loans delinquent
more than 90 days ........... $ -- $ --
Non-accruing loans:
Residential ................. 486 1,108
Multi-family ................ -- 462
Commercial real estate ...... 1,299 1,585
Commercial loans ............ 152 153
Consumer .................... 28 21
Troubled debt restructurings .... -- --
------ ------
Total non-performing loans ... 1,965 3,329
Repossessed assets, net ......... 205 2
------ ------
Total non-performing assets.. $2,170 $3,331
====== ======
Non-performing loans to
total loans ................. 1.18% 1.98%
Non-performing assets to
total assets ................ 1.09% 1.69%
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
---------------------------------------------------------------------------
2000 1999
---------------------------------- --------------------------------
(Dollars in thousands)
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Total interest-
earnings assets............ $176,598 $3,645 8.26% $175,724 $3,747 8.54%
Total interest-
bearing liabilities........ 157,251 965 5.00% 153,192 1,873 4.89%
------ -----
Net interest income/
Interest rate spread......... $1,680 3.26% $1,874 3.64%
====== ======
12
Nine Months Ended March 31
------------------------------------------------------------------------
2000 1999
----------------------------------- --------------------------------
(Dollars in thousands)
Average Average Average Average
Balance Interest Rate Balance Interest Rate
Total interest-
earnings assets............ $177,188 $10,978 8.26% $176,260 $11,346 8.58%
Total interest-
bearing liabilities........ 155,879 5,750 4.92% 150,421 5,755 5.10%
------- -----
Net interest income/
Interest rate spread......... $5,228 3.34% $5,591 3.48%
====== ======
Shareholders' Equity
Shareholders' equity at March 31, 2000, was $31,612,095, a decrease of $131,472
from June 30, 1999. The Company's equity to asset ratio was 15.87% at March 31,
2000 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 March 31, 2000, the Bank is categorized as well
capitalized and met all subject capital adequacy requirements. There are no
conditions or events since March 31, 2000, that management believes have changed
the Bank's classification.
Capital ratios at March 31, 2000, are as follows:
Required
for Adequate To Be Well
Actual Capitalized
----------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
Total risk-based capital
(to risk-weighted assets) $27,790 19.5% $11,340 8.0% $14,185 10.0%
Tier I risk based capital
(to risk-weighted assets) 26,719 18.8% 11,348 8.0% 14,185 10.0%
Core capital
(to adjusted tangible assets) 26,719 13.9% 5,734 3.0% 11,468 6.0%
Core capital
(to adjusted total assets) 26,719 13.9% 5,734 3.0% 9,557 5.0%
13
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 March 31,
2000, the Bank's liquidity ratio was 8.0%.
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).
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
14
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 March 31, 2000, 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 300 basis points. At March 31, 2000, 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 increase in market rates (which was greater than the interest
rate risk of a 200 basis point decrease) was $1.4 million at March 31, 2000, 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.
March 31, 2000
Net Portfolio Value NPV as % of PV of Assets
Change
In Rates $ Amount $Change %Change NPV Ratio Change
- --------------------------------------------------------------------------------
(Dollars in Thousands)
+300 bp 29,506 -2,726 -8% 15.78% -76 bp
+200 bp 30,800 -1,432 -4% 16.22% -33 bp
+100 bp 31,748 -483 -1% 16.48% -6 bp
0 bp 32,231 16.54%
- -100 bp 32,236 -95 0% 16.34% -20 bp
- -200 bp 31,615 -617 -2% 15.97% -57 bp
- -300 bp 31,233 -998 -3% 15.65% -89 bp
15
March 31, 1999
Net Portfolio Value NPV as % of PV of Assets
Change
In Rates $ Amount $Change %Change NPV Ratio Change
- --------------------------------------------------------------------------------
(Dollars in Thousands)
+300 bp 31,673 -296 -1% 16.89% +30 bp
+200 bp 32,374 -405 1% 17.06% +147 bp
+100 bp 32,455 -486 2% 16.96% +36 bp
0 bp 31,969 16.59%
- -100 bp 31,436 -533 -2% 16.21% -38 bp
- -200 bp 31,216 -752 -2% 15.97% -62 bp
- -300 bp 31,292 -677 -2% 15.85% -74 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.
16
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Bank were, during the three-month period ended March
31, 2000, 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).
10(1) Second Restated Executive Supplemental Retirement Income
Agreement between the Bank and Jackie Noble dated February 29,
2000
10(2) Second Restated Executive Supplemental Retirement Income
Agreement between the Bank and Nora Kuntz dated February 29,
2000
10(3) Second Restated Executive Supplemental Retirement Income
Agreement between the Bank and John M. Dalton dated February
29, 2000
10(4) Second Restated Executive Supplemental Retirement Income
Agreement between the Bank and Larry G. Phillips dated
February 29, 2000
10(5) Executive Shareholder Benefit Agreement for Steve Banks dated
February 1, 2000
10(6) Directors Shareholder Benefit Plan Agreement dated February 1,
2000
10(7) Second Amendment to the Excess Benefit Agreement between the
Bank and John M. Dalton dated March 10, 2000
27 Financial Data Schedule
b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
March 31, 2000.
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 11, 2000 By: /s/ Steven L. Banks
-------------------
Steven L. Banks, President
Date: May 11, 2000 By: /s/ Larry G. Phillips
----------------------
Larry G. Phillips, Vice President,
Secretary and Treasurer
18